Qualys, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement figures below are in millions unless otherwise noted. Qualys sells cloud-based security and compliance subscriptions, generally on renewable annual terms, recognizing subscription revenue over the service period. It reported more than 6,000 customers in over 100 countries.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $23.4 | $19.4 | $66.8 | $55.6 |
| Gross profit | $18.7 | $16.2 | $53.3 | $46.4 |
| Gross margin | 80% | 83% | 80% | 84% |
| Operating income | $1.7 | $1.0 | $1.4 | $2.9 |
| Net income | $1.7 | $0.5 | $1.1 | $2.6 |
| Operating cash flow | Not separately provided | Not separately provided | $10.7 | $11.3 |
- Q3 revenue increased 21% year over year; nine-month revenue increased 20%. Revenue growth reflected new customers and additional subscriptions from existing customers.
- Q3 operating margin was approximately 7%, compared with 5% a year earlier; nine-month operating margin was approximately 2%, compared with 5%. Nine-month net income fell about 58% year over year.
- Non-GAAP Adjusted EBITDA was $4.6 million for Q3, or 20% of revenue, versus $2.8 million, or 14%, a year earlier. For nine months it was $9.4 million, or 14% of revenue, versus $8.2 million, or 15%. The company cautions this measure excludes costs and should be considered alongside GAAP results.
- Four-Quarter Bookings, a company-defined non-GAAP measure, were $98.7 million, up 25% from $78.9 million. The measure comprises revenue for the prior four quarters plus the change in current deferred revenue.
- At September 30, cash was $25.8 million, current assets $55.8 million, and current liabilities $64.0 million. Current deferred revenue of $51.7 million was the largest component of current liabilities; deferred revenue represents billed or collected subscriptions not yet recognized as revenue.
- Nine-month investing cash use was $8.1 million, primarily capital expenditures, up from $4.3 million. Capital lease obligations totaled $2.6 million; $0.3 million of equipment-line borrowings was included in those obligations. The equipment line expired in February 2012 and cannot be redrawn.
Material changes and notable events
- Cost of revenue rose 44% in Q3 and 47% for nine months, outpacing revenue growth. Management attributed the increase mainly to data-center and scanner depreciation, operations staffing, and third-party software costs. Gross margin declined by about three to four percentage points.
- For nine months, sales and marketing expense rose 25% and general and administrative expense rose 35%; research and development expense rose 4%. Management cited sales-force expansion and higher personnel, commission, professional-services, and public-company-related costs.
- On October 3, 2012, after quarter-end, Qualys completed its IPO at $12 per share. The company issued 7,836,250 shares and reported net proceeds of approximately $87.5 million after underwriting discounts and commissions, before estimated offering expenses of approximately $2.5 million. Selling stockholders sold an additional 875,000 shares and received no proceeds for the company.
- Immediately before the IPO, all 17.6 million outstanding preferred shares converted into common stock. The $63.9 million preferred-stock carrying value was reclassified to common stock and additional paid-in capital. Common stock began trading on Nasdaq as QLYS on September 28.
- The December 31, 2011 balance sheet was restated to correct an error in the 2010 tax provision concerning the expiration of a French subsidiary tax-year statute of limitations. The correction reduced noncurrent income taxes payable and accumulated deficit by $0.44 million; it did not change reported operating, investing, or financing cash flows for the nine months ended September 30, 2011.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said existing cash and operating cash flows should fund operations for at least 12 months, and anticipated approximately $20 million of capital expenditures through December 31, 2013, primarily for infrastructure. Management expected continued investment in data centers, research and development, sales and marketing, and public-company operations.
- Management said revenue from customers existing by September 30, 2011 grew $4.0 million to $59.6 million during the first nine months of 2012 and expected this trend to continue. Qualys said its Vulnerability Management solution generated 87% of revenue in that period, creating product-concentration risk.
- The filing identifies risks including customer renewal and sales-cycle variability; competition and dependence on channel partners; service outages and reliance on two nonredundant third-party data centers; security, privacy, product-error and regulatory risks; foreign-exchange exposure; and the possibility of renewed losses. Management noted losses in Q1 and Q2 2012 and Q4 2011 despite profits in the reported three- and nine-month periods.
- Sales and other tax exposure was accrued at $388,000. The company said it could not estimate any additional exposure, though management did not expect the matter to have a material adverse effect. No material adverse legal proceeding or contingency liability was reported.
- A significant deficiency in internal control over financial reporting related to the tax-provision error prompted the restatement. Management concluded it was not a material weakness and reported disclosure controls effective at a reasonable-assurance level as of September 30, 2012.
Investor verification priorities
- Track renewal rates, bookings, deferred revenue, and expansion within the installed customer base against reported revenue growth.
- Assess whether infrastructure investment can stabilize gross margin as depreciation and operating costs rise, and whether the planned capital spending is sufficient for resilience and growth.
- Reconcile the IPO proceeds, post-offering share count and dilution, and the effect of preferred-stock conversion and outstanding options.
- Monitor profitability and cash generation, including the impact of sales-force expansion, stock-based compensation, public-company costs, and taxes.
- Review remediation of the tax-control deficiency, future filings on internal controls, and developments in sales-tax exposure and foreign exchange risk.