Qualys, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; amounts below are in U.S. dollars. Qualys provides cloud-based IT security and compliance subscriptions, with most subscription revenue recognized over the contract term.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $93.1 million | $82.7 million | $268.2 million | $236.9 million |
| Gross profit / margin | $72.5 million / 77.8% | $65.6 million / 79.3% | $210.2 million / 78.4% | $184.6 million / 77.9% |
| Operating income / margin | $26.3 million / 28.3% | $22.5 million / 27.3% | $72.2 million / 26.9% | $52.7 million / 22.2% |
| Net income | $22.7 million | $19.2 million | $67.8 million | $48.7 million |
| Diluted EPS | $0.56 | $0.47 | $1.66 | $1.17 |
| Adjusted EBITDA, non-GAAP | $45.1 million; 48% of revenue | $38.6 million; 47% | $126.1 million; 47% | $101.4 million; 43% |
For the nine months, operating cash flow was $141.3 million, compared with $126.9 million. Capital expenditures were $22.7 million; operating cash flow less capital expenditures was approximately $118.6 million, a simple derived measure rather than company-reported free cash flow. Investing activities used $51.5 million and financing activities used $84.3 million. Cash, cash equivalents and marketable securities totaled $452.0 million at quarter-end, including $93.0 million in cash and cash equivalents. Current assets were $405.5 million versus current liabilities of $239.1 million (a derived current ratio of about 1.7). Deferred revenue totaled $219.4 million.
The filing reports no borrowings; operating lease liabilities were $60.2 million, including $11.8 million current. Stockholders’ equity was $400.3 million. Management said existing liquidity and operating cash flows should fund operations for at least the next 12 months.
Changes versus comparable periods
- Revenue increased 12.6% year over year in Q3 and 13.2% for the first nine months. Management attributed growth to subscription purchases by existing customers and subscriptions from new customers.
- Q3 gross margin declined to 77.8% from 79.3%, while operating margin rose to 28.3% from 27.3%. For the nine months, gross margin was essentially flat and operating margin improved.
- Net income increased about 18.6% in Q3 and 39.2% for the nine months. Lower effective tax rates—17.7% versus 21.2% for Q3 and 11.9% versus 17.1% for the nine months—partly reflected higher excess tax benefits from stock-based compensation.
- Sales and marketing expense fell 5.6% in Q3 and 2.8% for the nine months, primarily because COVID-19 reduced trade-show and travel spending. General and administrative expense increased 34.2% in Q3, including higher performance-based stock compensation and legal fees.
- Cash and marketable securities increased from $418.4 million at December 31, 2019 to $452.0 million at September 30, 2020. Nine-month share repurchases were $91.9 million; $136.7 million remained authorized.
Outlook, commentary and risks
- Management said it expected revenue growth from existing and new customers to continue, reflecting ongoing demand. The filing provides no specific numerical revenue or earnings guidance.
- Qualys said it had not experienced significant COVID-19 disruption or a material adverse financial impact to date, but could not predict the pandemic’s ultimate effects. Remote work, canceled events and restricted travel affected operations and spending.
- Management expected continued investment in data-center capacity, research and development, sales and marketing, and international expansion; it anticipated these areas would increase in absolute dollars. The company recorded $15.7 million of new operating lease liabilities related to data-center space during the nine months.
- Vulnerability Management-related solutions remained concentrated at 72% of nine-month revenue, down from 73%. Channel partners generated approximately 42% of nine-month revenue. These concentrations make renewals, product diversification and partner relationships important to monitor.
- Key disclosed risks include COVID-19 and economic uncertainty; competition and pricing pressure; dependence on renewals and Vulnerability Management subscriptions; cybersecurity, service availability and data-center disruptions; privacy and regulatory compliance; foreign exchange exposure; and the ability to scale and retain personnel.
- A June 2020 modification to performance-based executive equity awards resulted in $7.5 million of incremental compensation expense expected to be recognized over 12 quarters; $1.1 million was recognized in the first nine months. The company also acquired Spell Security assets for $1.5 million and paid deferred Adya consideration.
- No material legal proceeding was reported. Management concluded disclosure controls were effective at the reasonable-assurance level, and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and customer renewals remain durable, particularly given the 72% revenue contribution from Vulnerability Management-related solutions.
- Whether gross-margin pressure, planned investment and stock-based compensation affect future operating leverage; Q3 stock-based compensation was $10.5 million.
- How channel-partner contribution and concentration evolve, alongside growth in newer product lines.
- Whether COVID-19, data-center expansion, foreign exchange movements or privacy-law changes materially affect costs, demand or service delivery.
- Capital allocation and share-count effects: $91.9 million of nine-month repurchases, $136.7 million of remaining authorization, and 39.1 million shares outstanding at September 30, 2020.