Business context and reporting period
Qualys, Inc. (NASDAQ: QLYS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company provides cloud-based security and compliance subscriptions, generally billed at the start of annual terms and recognized as revenue over the subscription period.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $48.5 | $39.9 | $94.7 | $77.4 |
| Gross profit / margin | $38.4 / 79% | $31.7 / 79% | $75.2 / 79% | $61.2 / 79% |
| Operating income / margin | $5.7 / 12% | $5.3 / 13% | $13.3 / 14% | $10.2 / 13% |
| Net income | $3.5 | $3.3 | $8.3 | $6.3 |
| Diluted EPS | $0.09 | $0.09 | $0.22 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $15.7 | $13.1 | $31.9 | $25.1 |
Q2 revenue grew 22% year over year, reflecting new customer subscriptions and higher purchases from existing customers. H1 revenue also rose 22%. Gross margin remained 79%; Q2 operating margin declined by about 1 percentage point as operating expenses grew faster than revenue, while H1 operating margin increased by about 1 point. H1 adjusted EBITDA margin was 34%, versus 32% a year earlier; Q2 was 32%, versus 33%.
For H1, operating cash flow was $34.5 million, compared with $25.6 million; free cash flow, a non-GAAP measure, was $25.5 million, compared with $15.0 million. Capital expenditures were $9.0 million. Cash and cash equivalents rose to $118.2 million from $91.7 million at year-end 2015. Cash, cash equivalents and short- and long-term investments totaled approximately $260.9 million. The balance sheet reports no borrowings; current liabilities were $126.5 million, including $103.8 million of current deferred revenue. Current assets were $262.4 million.
Material changes and key balance-sheet items
- Q2 net income increased 7% year over year; H1 net income increased 32%. H1 diluted EPS rose from $0.16 to $0.22.
- H1 operating expenses increased 21%, led by R&D (+18%), sales and marketing (+17%), and general and administrative (+33%). G&A included higher legal, accounting and consulting costs.
- Total deferred revenue was $116.8 million at June 30, 2016, compared with $112.6 million at December 31, 2015. H1 deferred revenue increased $4.2 million.
- Property and equipment, net, increased to $40.0 million from $31.3 million, reflecting investment in data-center and other equipment.
- Stock-based compensation was $10.0 million for H1, versus $8.3 million. Share-based compensation is a significant noncash expense and contributes to dilution.
Outlook, risks and unusual items
The filing provides no specific numerical financial guidance. Management expects continued investment in R&D, sales and marketing, infrastructure and data centers, and says these costs are expected to increase in absolute dollars. It believes existing liquidity and operating cash flow will fund operations for at least the next 12 months. Results may vary, and interim results are not necessarily indicative of full-year performance.
- A one-time payroll-tax remittance expense of approximately $0.7 million related to fiscal 2013 through May 2016 was recorded in Q2 G&A and added back in adjusted EBITDA.
- Approximately 79% of H1 revenue came from Vulnerability Management subscriptions, and approximately 41% came through channel partners, creating product and distribution concentration risks.
- Key risks include customer renewals and expansion, competition and pricing, product development, cloud-platform scaling and availability, cybersecurity incidents, reliance on third-party data centers and software, and international and foreign-exchange exposure. Management disclosed that its data centers were not currently redundant and that customers could not be rapidly moved between centers.
- H1 revenue included approximately 29% from customers outside the United States. Foreign exchange movements affected results; the company used short-term forward contracts but did not designate them as accounting hedges.
- Operating lease commitments totaled $9.5 million. The company reported no material contingency accruals and no legal proceedings expected to have a material adverse effect.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check subsequent results for renewal rates, bookings or deferred-revenue trends, and whether customer expansion continues to support reported revenue growth.
- Assess progress in diversifying revenue beyond Vulnerability Management and reducing reliance on channel partners.
- Track operating-expense growth, margins, stock-based compensation and dilution, including the effect of the payroll-tax item.
- Review cash conversion and capital spending, and monitor the adequacy and redundancy of data-center capacity.
- Confirm whether management later provides numerical guidance and whether identified cybersecurity, competition, tax and foreign-exchange risks change.