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Rapid7 (NASDAQ: RPD)
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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.

DAVIDsTEA (NASDAQ: DTEA)
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DAVIDsTEA (NASDAQ: DTEA)

DAVIDsTEA (NASDAQ: DTEA)DAVIDsTEA (NASDAQ: DTEA), a Canadian tea and tea merchandise retailer, was founded by David and Herschel Segal in 2008 in Montreal, Quebec, Canada, where it is headquartered today. The company’s President, CEO and Director is Sylvain Toutant, and its CFO is Luis Borgen. The consensus EPS estimate for 2015 is $0.37, up considerably from a nearly $6.00 per share loss in 2014. The Consensus revenue estimate for 2015 is $174 million, up 47 percent from $118 million in 2014.

DAVIDsTEA debuted on the NASDAQ on June 5, 2015 at a price of $19.00 per share. Three million shares were offered by the company and another 2.1 million shares were offered by selling shareholders for a total of 5.1 million shares offered. DAVIDsTEA shares are currently trading near $11 per share, and its market cap is roughly $270 million. The offering was led by Goldman Sachs, J.P. Morgan, Bank of America/Merrill Lynch, Pierce, Fenner & Smith, with BMO Capital and William Blair & Company acting as co-managers.

The mission of DAVIDsTEA is to make tea fun and accessible. In each of the company’s store locations appears the “Tea Wall,” which displays every flavor of tea at every store, along with gift items, and their teal logo color, aimed to attract younger people. DAVIDsTEA’s goal is for their stores, averaging about 850 square feet in size, to become community fixtures. Curiously, however, not all of their stores include places to sit or congregate. That said, DAVIDsTEA supports local causes and charities, and sponsors local events and sports teams. The company releases new products continuously, resulting in approximately 30 new tea blends introduced per year. In 2015, DAVIDsTEA expects to open 25-30 new Canadian stores, and 10-15 stores in the United States. Long term, DAVIDsTEA plans to open 30-40 new stores each year.

DAVIDsTEA was founded on the premise of peoples’ growing focus on their health and wellbeing by emphasizing the health benefits of tea. DAVIDsTEA has been successful in identifying this as a good business platform, and now has 161 locations. Of these 161 locations, 136 are in Canada, and 25 are in the United States. These stores include very large markets in both Canada and the United States including Montreal, Toronto, Vancouver, Boston, New York, Chicago and San Francisco.

DAVIDsTEA’s fan base includes Oprah Winfrey who has promoted the brand. Using these loyal customers as a springboard, DAVIDsTEA launched a customer loyalty rewards program called “Frequent Steeper”. If a person is a ‘Frequent Steeper”, he or she receives rewards for their purchases in the form of points. Once enough points are earned, “Frequent Steepers” receive free 50 gram, or 2 ounce, packages of tea. DAVIDsTEA also has a very strong social media presence, again with the goal of attracting younger tea drinkers.

Among the many challenges faced by DAVIDsTEA is that of successfully breaking into the US market, which has been a tougher nut to crack for tea retailers, particularly now that Starbucks appears on nearly every corner, and through its ownership of Teavana can tee-up is own lineup of freshly brewed tea. DAVIDsTEA must also compete in the market for in-store personnel, against the likes of Starbucks and other chains. Unclear at this juncture is whether the consumption of tea will become as popular in the US as it is in Canada.