To reward investors, a public company must beat expectations. To do that, it should create and sustain so much value for customers that they are eager to buy more of the company’s product over time.
Doe to rapidly changing headwinds and tailwinds — particularly since the pandemic began in 2020 — CEOs must be nimble to sustain expectations-beating growth.
This comes to mind in considering Boston-based Rapid7, a maker of software aiming to make a company’s security operations people feel that they are getting ahead of their security challenges rather than being overwhelmed by them.
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When I first spoke with CEO Corey Thomas in February 2021, he expected the company to be 20% bigger by year end. By the end of 2021, Rapid7’s revenues had increased 30% and its stock ended the year up 36% from February 21 — the day I published my column.
Sadly, Rapid7 has not maintained that growth rate. Technology stocks peaked in early November 2021 and since then Rapid7 stock has lost 70% of its value. In its latest financial report, Rapid7 reported much slower growth and gave a forecast for the second quarter that fell short of analysts’ revenue and earnings expectations.
Is Rapid7 creating so much value for customers that it will exceed investor expectations in future quarters?
With modest analysts’ price targets and significant macroeconomic headwinds, the answer depends on whether Rapid7 can sustain expectations-beating results for the rest of 2023.
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Rapid7’s Mixed First Quarter Report
Rapid7 began 2023 by hiring Goldman Sachs to evaluate acquisition options from private equity firms, according to a February 1 Reuters article. While no deal has been done, Rapid7 stock popped 23% in the wake of the report — on which Rapid7 did not comment.
On May 9, Rapid7 issued mixed results. Its first quarter 2023 performance exceeded expectations, its second quarter 2023 revenue and earnings fell short of analysts’ views, and its full year outlook were better than analysts’ views.
Here are the highlights, according to SiliconAngle:
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- First quarter revenue up 16% to $183.2 million — about $2 million more than the consensus
- First quarter adjusted earnings per share of 16 cents — seven cents per share more than analysts’ forecast
- Second quarter revenue forecast range midpoint: $188 million — slightly below consensus
- Second quarter EPS midpoint: 10.5 cents per share — 7.5 cents below expectations
- Full year 2023 revenue midpoint: $776 million — about $1.5 million more than forecast
- Full year 2023 EPS midpoint: 86 cents a share — two cents a share above consensus
Thomas expressed confidence in Rapid7’s future. “As we continue to focus on delivering better security outcomes to our customers, we are doing so with an intentional focus on ramping our efficiency, which is evident in our strong first-quarter profitability. Looking forward, we remain on track to achieve our full-year growth objectives as we manage the business for long-term profitable growth,” he said in a statement.
Rapid7 stock has not done well since the report — having fallen some 12% between May 8 and May 24.
Will Rapid7 Create More Value For Customers?
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For Rapid7 stock to recover, it will need to post faster than expected growth in future quarters. Based on my May 18 interview with Thomas, Rapid7 offers good solutions to a business problem that matters to customers.
Macroeconomic headwinds could continue to pressure Rapid7 to deliver more to customers at a lower price. In order to exceed investor expectations, Rapid7 may need to win many new customers — which could be challenging unless the company can offer customers much more bang for the buck than competing products do.
Solving a problem that matters to customers
Rapid7 solves an important customer problem well. “The biggest challenge our security operations customers face is that the technology environment is changing faster than they can manage. Customers give us high marks. They love our products,” he explained.
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Yet it strikes me that customers face challenges that are beyond Rapid7’s ability to solve. As Thomas said, “When we ask them, they tell us they are not doing well because they are not meeting their goals. They are always behind — they do not have enough money and can’t keep up with changing security technology.”
Difficult challenge of achieving ambitious goals on a tighter budget
Rapid7 has grand ambitions. As he said, “We are obsessed with customer achievement. We want to be the best at security operations. We help them meet their goals at the lowest marginal cost of operations. We want to [make a similar huge leap in customer value] for cybersecurity operations to what Excel did for spreadsheet analysis.”
Corporate budgets for security remain significant but there is pressure to do more with less. “If enterprises spent $500,000 in 2021, they spent $1 million in 2022 and said they expected to pay $1.8 million in 2023. Now they are increasing their budgets at a slower rate — say, to $1.3 million. They still want the same results that they expected to get for $1.8 million — but they want to pay less for it. We have to streamline our offering so customers can accomplish more with a lower budget,” Thomas argued.
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To keep customers buying, Rapid7 must add more capabilities at a lower cost. “We do this organically and through acquisition. We are going to stay in security operations. We help companies analyze risk, detect attacks, and respond. They want us to find a way to do that without requiring the most highly-skilled, [expensive] people,” he said.
Adapting to macroeconomic headwinds and investing in new growth curves
The macroeconomic environment is slowing down Rapid7’s growth while it has adapted to customers’ shift to the cloud.
“We are growing in the mid-teens and we were in the mid-20s. We have a mixture of mature markets and emerging growth opportunities. Vulnerability on-premises is a maturing core capability. It used to be our bread and butter. Since 2020 we have become best in cloud security. We were operating at a loss. We raised convertible debt and got more efficient. We are getting more sales in the cloud,” he explained.
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Rapid7 has also adapted by offering a bundle of cybersecurity offerings at a competitive price for customers seeking to reduce the number of vendors. “Our solutions lean into this dynamic by offering best-in-class automated capabilities across cloud security, detection response and vulnerability management, while being delivered through new and differentiated pricing and packaging models,” Thomas told investors on May 10.
Customers are also helping Rapid7’s cloud security offering gain traction. As he told investors, the company’s InsightCloudSec provides “posture management, agentless cloud vulnerability assessment, workload protection, cloud detection response and automated remediation.“
Rapid7 aims to increase its sales force productivity. As Thomas told investors, the company’s ability to retain sales people, its growing pipeline of potential new deals, and its ability to close deals in the pipeline give him confidence in Rapid7’s 2023 outlook.
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Avoiding cognitive lock-in and developing leaders
My research suggests that leaders who are constantly striving to learn, expand their horizons, and develop their people — through cognitive hunger — are better able to sustain growth than those who try cognitive lock-in — to force the world to accept their unchanging vision.
Thomas sees the benefit of this approach, “Cognitive hunger is obviously better than cognitive lock-in. The question is ‘How do we have the most elasticity?’ You have to guard against lock-in and never allow yourself to get comfortable. I should surround myself with people who make me uncomfortable. I spend time with different people — students, boards,” he said.
He has developed a process to encourage a deep discussion of opposing views. “I have a process. If there are not contrary views, the process is broken. I want people who continually challenge. I will not let them get away with a high level statement — I want them to be specific,” he said.
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Yet he acknowledges having become more accepting that not everyone has his work ethic. “I learned that I have a cognitive lock-in about work. I grew up poor and I think everyone should have a strong work ethic. People have other aspirations. I should listen to what other people want to do with their lives,” Thomas explained.
He sees thinking about succession is good corporate governance. “My dad passed away last year and there are health issues. I have no interest in going anywhere. I have a model in which I do customers, strategizing, and engagement. I have a chief operating officer — [Andrew Burton became Rapid7’s chief operating officer in 2016] — who has responsibility for execution. We have annual goals. We talk every day about strategy and execution,” he concluded.
Is Rapid7 Stock Primed to Rise?
Investors are modestly optimistic about Rapid7’s upside potential. TipRanks reports that analysts set a 12-month average price target of $48.78 — representing 8.3% upside.
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If Rapid7 exceeds its second quarter and full year guidance, the stock could pass that price target this year.
Read the full article here
