Qualys, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial amounts below are in millions of U.S. dollars unless otherwise stated.
Business context and reporting period
Qualys provides cloud-based IT security and compliance subscriptions. Revenue is generally recognized ratably over subscription terms, typically one year. The company operates as one reportable segment. Vulnerability Management-related subscriptions represented 72% of first-half 2020 revenue, versus 73% a year earlier. Channel partners generated approximately 42% of first-half revenue; U.S. customers accounted for approximately 64%.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $88.8 | $78.9 | $175.1 | $154.3 |
| Gross profit | $69.9 | $61.4 | $137.7 | $119.0 |
| Gross margin | 78.7% | 77.8% | 78.7% | 77.1% |
| Operating income | $25.5 | $16.1 | $45.9 | $30.2 |
| Operating margin | 28.7% | 20.4% | 26.2% | 19.5% |
| Net income | $26.3 | $16.2 | $45.0 | $29.5 |
| Diluted EPS | $0.64 | $0.39 | $1.10 | $0.71 |
| Adjusted EBITDA (non-GAAP) | $42.8 | $33.4 | $81.0 | $64.0 |
For the six months ended June 30, operating cash flow was $81.6 million, compared with $81.3 million in 2019. Investing cash outflow was $10.4 million and financing cash outflow was $44.9 million. Capital expenditures were $11.6 million. Share repurchases used $54.2 million, partly offset by $20.4 million of stock-option exercise proceeds.
At June 30, cash and cash equivalents were $113.9 million; short- and long-term marketable securities totaled $331.4 million. Together these were $445.3 million, including $29.3 million held outside the U.S. Current assets were $448.1 million and current liabilities $235.1 million. The filing reports no borrowings; total liabilities of $299.2 million include deferred revenue and lease liabilities. Deferred revenue totaled $218.8 million. Management said available liquidity and operating cash flow should fund operations for at least 12 months.
Material changes versus the prior comparable period
- Q2 revenue increased 12.5%; first-half revenue increased 13.5%, reflecting subscriptions from existing and new customers.
- First-half operating income rose to $45.9 million from $30.2 million, as revenue growth outpaced expense growth. Operating expenses were 53% of first-half revenue, versus 57% in 2019.
- Sales and marketing expense declined 8.1% in Q2, primarily due to fewer in-person events and lower travel costs during the pandemic. The decrease was partly offset by higher commissions and stock compensation.
- First-half operating cash flow was nearly unchanged year over year, despite higher net income; 2019 benefited more from working-capital inflows, including deferred revenue and customer payment timing.
- First-half repurchases rose to $54.2 million from $24.1 million in 2019. The company increased its aggregate repurchase authorization to $400 million; $174.4 million remained available at June 30, 2020.
Outlook, risks, contingencies and unusual items
- Management said it expects revenue growth from existing and new customers, but the filing provides no numerical financial guidance. Results are not assured, and management cautioned that COVID-19’s full effects were uncertain. It reported no significant COVID-related business disruption to date; travel restrictions, remote work, and event cancellations had changed operations.
- Key risks include the pandemic and broader economic conditions; reliance on Vulnerability Management subscriptions; customer renewals and sales execution; competition and pricing pressure; cyber incidents or service interruptions; privacy and regulatory changes; foreign exchange; and dependence on channel partners and third-party data centers.
- On June 10, 2020, the board modified performance targets for certain 2018 and 2019 executive awards. The change resulted in an estimated $7.5 million of incremental compensation expense to be recognized over 12 quarters; the estimate may change with actual performance. The modification did not materially affect Q2 or first-half results.
- After quarter-end, on July 24, 2020, Qualys acquired certain Spell Security intangible assets for $1.5 million in cash, including deferred consideration subject to possible adjustment.
- The company reported no legal proceedings expected to have a material adverse effect, no material changes to contractual obligations outside the ordinary course, and effective disclosure controls as of June 30, 2020.
Important facts for investors to verify
- Whether subscription demand, renewals, and growth beyond Vulnerability Management sustain the reported revenue trajectory.
- How COVID-19, customer budgets, sales cycles, and reduced in-person selling affect bookings and future revenue, given ratable subscription recognition.
- Whether higher profitability is sustainable after pandemic-related event and travel savings, and how stock-based compensation affects reported results and dilution.
- Cash deployment, including future repurchases, capital investment, and acquisitions; also monitor deferred revenue and remaining performance obligations ($152.7 million at June 30, 2020).
- Potential changes in privacy and cross-border data-transfer requirements following the July 2020 EU court decision invalidating the EU-U.S. Privacy Shield.