Qualys, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Qualys provides cloud-based security and compliance subscriptions, generally billed in advance and recognized over the subscription term. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $71.7; +20% | $59.5 | $204.7; +22% | $167.9 |
| Gross profit / margin | $55.1 / 77% | $46.8 / 79% | $156.0 / 76% | $130.7 / 78% |
| Operating income / margin | $18.1 / 25% | $10.8 / 18% | $37.4 / 18% | $27.5 / 16% |
| Net income | $23.5 | $8.5 | $42.9 | $37.6 |
| Diluted EPS | $0.56 | $0.21 | $1.02 | $0.95 |
| Adjusted EBITDA (non-GAAP) | $31.9; 44% of revenue | $23.9; 40% | $83.2; 41% | $61.1; 36% |
- Q3 revenue growth reflected increased subscriptions from existing customers and new customers. For the nine-month period, U.S. and foreign customers contributed approximately equal amounts to the $36.8 million increase.
- Operating cash flow for the first nine months was $98.8 million, versus $81.8 million in 2017. Capital expenditures were $19.5 million; investing cash outflow was $48.5 million, and financing cash outflow was $38.9 million.
- Cash, cash equivalents and marketable securities totaled $390.6 million at September 30, 2018, including $9.6 million held outside the U.S. Cash and cash equivalents were $98.0 million. The company reported no conventional borrowings; capital-lease obligations had a $2.3 million present value.
- Current and noncurrent deferred revenue totaled $172.7 million. Remaining performance obligations disclosed were $84.6 million; the company excluded certain short-term contracts from that measure.
Changes, outlook and notable items
- Gross margin declined year over year as cost of revenue grew faster than sales, including higher staffing, data-center, depreciation and acquired-technology amortization costs. Operating margin improved as operating expenses declined as a share of revenue.
- Q3 net income included a $4.2 million income-tax benefit, compared with a $3.1 million tax provision in Q3 2017. The tax swing materially affects the year-over-year net-income comparison. The nine-month period also included a $2.2 million tax benefit, versus an $8.6 million benefit in 2017.
- Qualys adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. The adoption primarily capitalized commissions on new business and upsells. It did not affect revenue; without adoption, Q3 commission expense would have been $0.5 million higher.
- Management expects revenue growth from existing and new customers to continue and expects absolute spending on research and development, sales and marketing, and general and administrative costs to increase. The filing gives no specific numeric financial guidance. Management said existing liquidity and operating cash flow should fund operations for at least the next 12 months.
- Qualys repurchased 567,642 shares for approximately $46.5 million during the first nine months under a $100 million program; $53.5 million remained at quarter-end. An additional $100 million, two-year repurchase program was authorized after quarter-end.
- Acquisitions and investments: Qualys acquired 1Mobility assets in April for $4.0 million in consideration and invested $2.5 million in a privately held company. On October 16, it acquired Layered Insight for $12.0 million in cash, with potential additional payments tied to milestones and employee retention.
- Key business exposures include reliance on Vulnerability Management solutions, which represented about 75% of nine-month revenue, and channel partners, which generated about 46%. The filing highlights competition, customer renewals, cloud-platform availability and security, international operations and foreign exchange, privacy regulation, and execution of product development and acquisitions as risks.
- Lease commitments totaled $46.8 million for operating leases and $2.4 million for capital leases. Most leased space and equipment are expected to be recognized on the balance sheet under the lease standard Qualys planned to adopt in 2019; the company expected a material financial-statement impact.
- A vendor licensing audit was resolved during the first half of 2018, with management accruing for the matter in Q1. Qualys reported no legal proceeding expected to have a material adverse effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of revenue growth is sustained through renewals and upsells, and whether dependence on Vulnerability Management and channel partners changes.
- Whether gross-margin pressure and planned expense growth affect operating leverage and cash generation.
- The comparability of reported earnings given the Q3 tax benefit and ASC 606 commission capitalization.
- Progress and costs associated with Layered Insight integration, potential contingent payments, and the effect of lease accounting adoption.
- Actual repurchases under the existing and additional authorization, and resulting cash balances and share dilution from equity awards.