QUALYS, INC. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Qualys sells cloud-based security and compliance subscriptions, primarily on annual renewable terms; subscription revenue is recognized over the service period. Vulnerability Management generated 84% of nine-month revenue, down from 87% in the prior-year period.
Financial performance
Amounts below are in millions of U.S. dollars unless noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $27.75 | $23.38 | $78.92 | $66.76 |
| Gross profit | $21.33 | $18.75 | $60.79 | $53.34 |
| Gross margin | 77% | 80% | 77% | 80% |
| Operating income | $1.50 | $1.72 | $2.09 | $1.38 |
| Net income | $1.31 | $1.67 | $1.58 | $1.11 |
| Adjusted EBITDA (non-GAAP) | $5.67 | $4.60 | $12.94 | $9.36 |
| Operating cash flow | Not stated for quarter | $15.19 | $10.67 |
Revenue grew 19% in Q3 and 18% for the first nine months, attributed to new subscriptions and expansion among existing customers. Q3 net income fell year over year; nine-month net income increased. Q3 operating margin was approximately 5%, compared with 7% a year earlier; nine-month operating margin rose to approximately 3% from 2%. Diluted EPS was $0.04 in Q3 versus $0.06, and $0.04 for the nine months versus $0.04. Share-count and preferred-stock conversion changes make per-share comparisons less straightforward.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $42.1 million; short- and long-term investments were $83.6 million. Total cash, cash equivalents and investments were $125.7 million at September 30, 2013, including $2.5 million held abroad.
- Operating cash flow was $15.2 million for the nine months, supported in part by a $4.7 million increase in deferred revenue and noncash depreciation and stock compensation. Capital expenditures were $10.4 million; cash increased $7.2 million.
- Capital lease obligations totaled $1.1 million, all current. Contractual obligations listed were $12.7 million, chiefly operating leases ($11.2 million), plus capital leases and maintenance commitments. No other funded debt is identified in the provided filing text.
- Management said existing cash and operating cash flows should fund operations for at least the next 12 months.
Changes, outlook and risks
- Cost of revenue rose 38% in Q3 and 35% year to date, outpacing revenue growth; gross margin declined by 3 percentage points. Management attributed the pressure to investment in data-center capacity, disaster recovery, personnel and software maintenance.
- Four-Quarter Bookings, a company-defined non-GAAP measure, increased 15% to $113.3 million, versus 25% growth in the comparable prior-year measure. Current deferred revenue increased to $61.4 million from $51.7 million at the start of the four-quarter period.
- Management expected research and development, sales and marketing, general and administrative expenses, and data-center investment to increase in absolute dollars. The filing provides no specific numerical revenue or earnings guidance.
- Key business risks include dependence on subscription renewals and Vulnerability Management, competition and uncertain adoption of cloud security, execution of new products, foreign-currency exposure, and service interruption or cybersecurity incidents. At filing, substantially all solutions were hosted at four third-party data centers; these facilities were not redundant, and planned additional disaster-recovery capacity was expected to be fully operational in 2014.
- The filing records a $0.4 million sales-tax liability while noting potential exposure beyond the accrual could not be estimated; management did not expect a material adverse effect. No material legal proceeding or other material contingency was reported. Foreign exchange losses were a notable offset to other income for the nine-month period.
- Disclosure controls were assessed as effective at a reasonable-assurance level. The filing also describes a prior significant control deficiency involving a tax-provision restatement; management said it was not a material weakness. No material change in internal control was identified in the quarter.
Important facts for investors to verify
- Whether bookings and deferred-revenue trends sustain growth, particularly given bookings growth slowed to 15%.
- Whether infrastructure spending and data-center depreciation continue to weigh on gross margin, and whether planned disaster-recovery facilities become operational on schedule.
- Customer renewal and expansion trends, and progress diversifying revenue beyond Vulnerability Management.
- Potential sales-tax exposure beyond the recorded $0.4 million, and developments in unrecognized tax benefits ($3.1 million at quarter-end).
- Cash generation, capital spending and future operating expenses against management’s stated minimum 12-month liquidity outlook.