Qualys, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Qualys provides cloud-based security and compliance subscriptions, generally billed annually in advance and recognized as revenue over the subscription term.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $34.3 million | $27.7 million | $97.0 million | $78.9 million |
| Gross profit / margin | $26.9 million / 78% | $21.3 million / 77% | $75.6 million / 78% | $60.8 million / 77% |
| Operating income / margin | $3.5 million / 10% | $1.5 million / 5% | $5.0 million / 5% | $2.1 million / 3% |
| Net income | $3.2 million | $1.3 million | $4.5 million | $1.6 million |
| Diluted EPS | $0.09 | $0.04 | $0.12 | $0.04 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $25.1 million | $15.2 million |
Q3 revenue grew 24% year over year; nine-month revenue grew 23%. Nine-month operating cash flow less capital expenditures was approximately $14.8 million, compared with approximately $4.8 million in 2013 (calculated from reported cash flow and capital expenditure figures). Adjusted EBITDA, a non-GAAP measure, was $9.0 million for Q3 (26% of revenue) and $21.0 million for the nine months (22%); the filing cautions that it is not a substitute for GAAP measures.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $88.3 million; short- and long-term investments totaled $63.0 million. Total cash and investments were $151.3 million, including $2.1 million held outside the U.S.
- Total assets were $215.4 million; current assets were $149.6 million and current liabilities $85.3 million. Deferred revenue was $83.3 million, including current and noncurrent amounts.
- No capital lease obligations remained at quarter-end; the filing reports no borrowings. Operating lease commitments totaled $10.0 million.
- Management stated existing cash, investments, and operating cash flow should fund operations for at least the next 12 months.
Changes versus prior comparable periods
- Revenue growth reflected new customer subscriptions and increased purchases by existing customers. Of the Q3 increase of $6.6 million, $4.7 million came from U.S. customers and $1.9 million from foreign customers.
- Gross margin improved by about one percentage point in both comparison periods. Operating expenses grew more slowly than revenue overall, while operating income and net income increased substantially.
- Nine-month operating cash flow rose to $25.1 million from $15.2 million, supported in part by a $6.9 million increase in deferred revenue and noncash expenses. Cash and cash equivalents increased by $45.9 million during the period, including the effect of investment sales and maturities.
- Stock-based compensation increased to $7.1 million for the first nine months from $3.8 million. Nine-month capital expenditures were $10.3 million, broadly similar to the prior-year $10.4 million.
Outlook, commentary, and risks
- The filing gives no specific numerical revenue or earnings guidance. Management expects continued investment in research and development, sales and marketing, and data-center capacity; these expenses are expected to increase in absolute dollars.
- QualysGuard Vulnerability Management generated 82% of nine-month revenue, down from 84% in 2013. Channel partners generated approximately 37% of nine-month revenue, versus 39% a year earlier.
- Key disclosed risks include subscription renewals and customer expansion, dependence on the Vulnerability Management product, competition and product execution, long sales cycles, foreign-exchange exposure, and reliance on third-party data centers. The company said its data centers were not then redundant; added facilities intended to support disaster recovery were expected to be fully operational by early 2015.
- The company used foreign-exchange forwards but did not designate them as hedges. Q3 foreign-exchange losses contributed to other expense. Management said a 10% adverse currency move would not have a material impact, while also identifying currency fluctuations as a business risk.
- A $0.5 million sales-tax liability was accrued; management said it could not estimate possible additional exposure but did not expect a material adverse effect. No material contingency liability was recorded, and the company reported no legal proceedings expected to have a material adverse effect.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting. The company was evaluating the impact of the new revenue-recognition standard.
Important facts for investors to verify
- Whether subscription renewals, bookings, and deferred-revenue growth support continued revenue growth, given ratable revenue recognition.
- Whether Qualys can reduce its reliance on Vulnerability Management and grow sales of its other solutions.
- Whether rising stock-based compensation and outstanding options affect future margins and shareholder dilution.
- Whether planned data-center capacity and disaster-recovery arrangements became operational as expected.
- Whether sales-tax exposure, foreign-currency movements, and customer/channel-partner concentration change materially.