Hi Multis
As one of the last Potential Multibaggers, Rubrik (RBRK) reported its Q2 results on August 27. The company beat every single guided metric, raised full-year guidance for revenue, ARR, earnings, and free cash flow, and posted its first operating profit as a public company. But the stock is down 18.5% since the earnings.
To be honest, I’m a bit confused at this moment. It could be a buy-the-rumor, sell-the-event thing, based on my superficial look at the earnings. But that’s why I love this work so much. Together with you, I can find out what is really going on. Of course, we know that in the short term, the market is very fickle. Over the long term, the results matter and that’s what I want to assess. Is there real weakness here or not?
Let’s find out together.
Rubrik’s logo, source: the company
The Numbers
Subscription ARR (annual recurring revenue): $1.661 billion, up 33% YoY. Net new subscription ARR of about $96 million, up 35% YoY.
Subscription revenue: $407.2 million, up 37%.
Total revenue: $427.3 million, up 38%, beating consensus by $31.3 million, or 7.5%. Very strong.
Non-GAAP EPS: $0.20, much better than the consensus of $0.04.
Subscription NRR: over 119%.
Customers with $100K+ in subscription ARR: 3,084, up 23%. These customers now make up 88% of subscription ARR. Customers spending over $1 million grew more than 57%.
Non-GAAP gross margin: 81%, versus 81.6% a year ago.
Non-GAAP operating income: $33.5 million, or 8% of revenue, against a $4.4 million loss a year ago.
Free cash flow: $65.7 million, up from $57.5 million, a 15% margin.
Cash: $1.75 billion, against $1.13 billion of convertible debt.
Revenue growth of 38% is great and much better than the consensus. But as I already explained last quarter, it even understates things.
Rubrik used to be a hardware company, although it always intended to switch, but it was just easier to start.
Customers who gave up their right to a free hardware refresh received cloud credit as compensation, and when they use that credit, it appears as a one-time revenue bump. Rubrik calls this “material rights.” This compensation negatively affects revenue, of course, because those customers use credits they got for free. If you exclude the material rights, revenue grew 43%. That’s the third quarter in a row at 43%.
Source: Rubrik’s Q2 earnings slide deck
You can see the reported growth sliding from 51% at the peak last year, but the normalized line, excluding material rights, has been at 43% for three quarters. Very strong.
Net new subscription ARR accelerated to 35% growth. At $1.66 billion of ARR. Founder and CEO Bipul Sinha called it the tenth consecutive quarter of beating guidance since the IPO, and he was very proud of the acceleration:
And this quarter, we accelerated, yes, let me repeat, accelerated net new subscription ARR growth.
He’s right, although the acceleration is minimal, as you can see on this chart.
Rubrik had an operating profit for the first time as a public company. Non-GAAP operating income was $33.5 million, or 8% of revenue.
There were several contributors to this: non-GAAP sales and marketing dropped from 49% of revenue to 44%, R&D from 22% to 21% and general and administrative even dropped in absolute dollars, from $37.4 million to $34.6 million. If revenue then grows by 38%, you know that there’s operating leverage. Management also put this in the slides deck.
Free cash flow was $65.7 million, up 14% YoY. The margin came down from 19% to 15%. But the quarters differ quite a bit and so does the timing of big contracts, so let’s look at the first six months to smooth that out already a bit more. The H1 margin was 17%, up from 15% a year ago. The full-year guidance of $323 to $333 million of FCF means 36% to 40% growth in FCF.
I think you know by now I also like the Rule of 40. If you add FCF margin and revenue growth and it’s above 40, you have a good company. For Rubrik, you add up 15% FCF margin and 38% revenue growth, you get 53%. Without the material rights, that would even be at least 58%. Very strong, in other words.
All in all, very strong results overall. Which leads us to the next question.
Why Did The Stock Drop?
In the earnings slides deck, there’s a chart of cloud net new ARR.
The left panel shows the calculated cloud net new ARR sliding from $101 million in Q1 to $89 million this quarter, with year-over-year growth at minus 4%. Ouch, right? No, not really.
Rubrik has been migrating its legacy self-hosted customers to the cloud platform. Those customers were already paying Rubrik, but the moment they were switched to the cloud, their money got counted as new cloud ARR. That means it boosted the cloud new ARR for a long time.
But that migration is done now and therefore, the numbers look bad. In the right panel, the same two quarters with the migrations removed from both years show the real numbers: 20% growth, just like last quarter.
Cloud ARR is 89% of subscription ARR, exactly where it was last quarter. CFO Kiran Choudary said at the Analyst Day in June that it would stay around 90%.
The non-cloud business, which had been shrinking for years, is growing again. That’s good for margins. Founder and CEO Bipul Sinha explained where the demand comes from:
Given the geopolitics and given all the things that we are seeing around the world in terms of security, every country is now concerned about containing their supply chain and economic infrastructure. And as you can imagine, digital infrastructure and AI infrastructure is an important economic infrastructure. And that’s why folks are working on digital embassies and containing data, containing infrastructure in their own sovereign realm.
Let me recapitulate: the migrations ended, which looks optically bad, but it’s not. The growth that came on top of that, has a better margin and comes from governments, defense and regulated industries. Non-cloud is guided to contribute only low- to mid-single-digit net new subscription ARR in the second half, so this isn’t a meaningful growth engine but the higher margins are good.
So the first reason for the drop is superficial, not a structural weakness. But there’s a second reason. We also dive deeper into Rubrik’s unique position in cybersecurity and why AI is such a tailwind.
You also get my proprietary Potential Multibaggers Quality Score and the valuation and then you know if the stock is a buy or not.
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