Tag Archives: independent stock research on IPOs

Rapid7 (NASDAQ: RPD)

Rapid7 (NASDAQ: RPD)

Rapid7 (NASDAQ: RPD)Rapid7 (NASDAQ: RPD), based in Boston, Massachusetts, is a recent addition to our Battle Road IPO Review Software sector coverage. The company was founded 15 years ago in New York City, where its founders took the city’s rapid transit train to work in mid-town Manhattan. RPD focuses on IT security software and services, with an emphasis on vulnerability and threat detection. The company recorded revenue of $77 million and a net loss of $33 million in 2014. For 2015 Consensus estimates call for revenue of $104 million and a Loss per Share of $1.53, followed by revenue of $131 million and a Loss per Share of $0.85.

Rapid7 priced its 6.45 million share IPO at $16 per share –above an expected range of $13-15—on the NASDAQ on June 16, 2015 for first trade the following day. All shares were offered by the company. Subsequently the underwriters exercised their over-allotment, enabling the company to raise about $110 million in its IPO. The deal was led by Morgan Stanley, Barclays Capital, KeyBanc Capital Markets/Pacific Crest, William Blair, Raymond James, and Cowen.

Rapid7 is led by Corey Johnson, President and CEO, who has risen through the ranks of the company in the last seven years, and served as Chief Operating officer, prior to his current position. His experience includes five years at Microsoft, where he was a Group Project Manager, with responsibility for the world-wide launch of SQL Server in 2005. Steve Gatloff, CFO, formerly CFO of iPass, held financial roles at United Online, Sterling Commerce, and VeriSign.

Rapid7 provides a portfolio of cloud-based software and managed services to detect and analyze cybersecurity threats for over 4,100 customers across a broad range of industries, including 34 percent of the Fortune 1000. In the last year, RPD added BJ’s Wholesale Club, Boyd Gaming, Dollar Tree, Fastenal, Iowa State University, Johnson Controls, Parker Hannifin, Samsung Electronics, and the Smithsonian to its growing list of business and government customers.

Roughly two-thirds of sales in each of the last three years comes from its Nexpose vulnerability and threat assessment software, which among other things, identifies weak points in a company’s data network, and helps to prevent cyber attacks across computer networks. About 88 percent of sales comes from the US, and the company utilizes a direct salesforce as well as channel partners that account for 41 percent of sales. RPD boasts an 87 percent renewal rate for existing products. The company recognizes about 80 percent of sales each quarter from backlog. At the end of the September 30, 2015 quarter, the company’s DSOs stood at 103, up from 95 in the previous quarter, a level that we consider to be high relative to other software companies that we research.

The market for security threat detection and assessment is a large and competitive one, with IBM, HP, and Intel, through its acquisition of McAfee, quite active in the market. In addition, RPD faces competition from several dedicated security software and services vendors, such as FireEye (NASDAQ: FEYE), Qualys (NASDAQ: QLYS), and others.

GoDaddy: Web Domain Guru

gd_rebrand_ogGoDaddy (NYSE: GDDY), based in Scottsdale, AZ, provides internet services including website creation and hosting, internet domain registration, and software applications such as email marketing to businesses and consumers. Consensus estimates call for revenue of $1.6 billion in 2015, which implies 15 percent growth over 2014, and EPS of $0.97 in 2015. By way of contrast the company recorded a seven percent operating margin in 2014, exclusive of depreciation, amortization, and stock-based compensation.

GoDaddy came public on the New York Stock Exchange on April 1, 2015 in a 26 million share IPO priced at $20 per share, in which the company netted roughly $500 million. Importantly, all proceeds from the IPO went to GoDaddy, which placed a priority on reducing its more than $1 billion debt load at the time of the transaction. Post-IPO, GDDY has roughly $243 million in cash and $850 million in total debt. GoDaddy’s IPO was led by an army of investment banks, both large and small, which included Morgan Stanley, J.P. Morgan Securities, Deutsche Bank, RBC Capital Markets, Citigroup, Stifel Nicolaus, KKR Capital, JMP Securities, as well as Oppenheimer and Piper Jaffray and Company. At a recent share price of $27, GoDaddy’s market cap is roughly $4.2 billion.

Founded in 1997, GoDaddy worked hard to develop a presence in website domain registration, largely in the shadow of Network Solutions, a company which VeriSign purchased in 2000 for $21 billion in stock, in a deal which redefined the definition of “goodwill.” VeriSign sold Network Solutions to Pivotal Private Equity for just $100 million three years later. Network Solutions and GoDaddy had the good fortune of having been one of only one of a few Internet registrars accredited by ICANN, a non-profit group that monitors and to some extent polices the registration of internet domains, under the auspices of governments around the world. GoDaddy’s aggressive advertising and pricing, enabled it to gain market and mind share in the registrar market, which has not been blunted, as far as we can tell, by Web.com (NASDAQ: WWWW), through its purchase of Network Solutions for $560 million in 2011. GDDY currently has over 60 million internet domain names under registration, which make it the largest accredited registrar in the world.

GoDaddy explored the idea of an IPO with Lehman Brothers in 2006 and went as far as filing an S-1 before cancelling the deal. In 2011 the company sold a 65 percent stake to a group of private equity investors, which include KKR and Silver Lake Partners. At the time, the transaction was thought to value GoDaddy at roughly $2 billion.

GoDaddy benefits from a diversified business mix, including web domains, which account for about 53 percent of sales, and are growing by 10 percent; website hosting and presence, 37 percent of sales, and growing in excess of 15 percent, and business applications, including email marketing, which account for 10 percent of sales and are growing faster than 15 percent per year. GoDaddy continues to make numerous acquisitions which requires patience to ascertain its organic growth rate.

We note that the company currently operates at a roughly 64 percent gross margin (exclusive of depreciation expense), and a six percent operating margin, exclusive of SBC. We consider these margins sub-par relative to other internet services providers, and would be reluctant to recommend the stock in the absence of some understanding of how the company intends to improve its operating margins. We note that KKR (which was involved in the IPO), as well as SilverLake Ventures, and Technology Crossover Ventures control a combined stake exceeding 50 percent, post-IPO, and we would be surprised were there not a secondary offering down the road.

To see how GoDaddy screens against a comparable group of over 40 Internet IPOs of the last seven years, please contact Battle Road Research.