Qualys, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Qualys provides cloud-based security and compliance subscriptions; vulnerability-management-related solutions generated approximately 73% of nine-month revenue. Results are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $82.7 million | $71.7 million | $236.9 million | $204.7 million |
| Gross profit / margin | $65.6 million / 79% | $55.1 million / 77% | $184.6 million / 78% | $156.0 million / 76% |
| Operating income / margin | $22.5 million / 27% | $18.1 million / 25% | $52.7 million / 22% | $37.4 million / 18% |
| Net income | $19.2 million | $23.5 million | $48.7 million | $42.9 million |
| Diluted EPS | $0.47 | $0.56 | $1.17 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $39.2 million | $31.9 million | $103.2 million | $83.2 million |
- Revenue grew 15% in Q3 and 16% for the nine-month period, with growth from existing and new customers. Nine-month U.S. revenue was $152.5 million and foreign revenue $84.5 million; partner sales represented about 42% of revenue.
- Operating income increased as revenue growth outpaced operating-expense growth. Research and development expense rose 35% in Q3 and 32% year to date; management cited hiring, stock compensation, overhead and acquisition-related costs.
- Q3 net income declined year over year despite higher operating income, primarily reflecting a $5.2 million tax provision versus a $4.2 million tax benefit in Q3 2018. The comparable nine-month periods also shifted from a $2.2 million tax benefit to a $10.0 million provision.
- Nine-month operating cash flow was $126.9 million, versus $98.8 million in 2018. Investing used $17.4 million and financing used $75.0 million, including $73.9 million of share repurchases.
- At September 30, cash, cash equivalents and marketable securities totaled approximately $399.0 million, including $19.8 million held outside the U.S. Current assets were $379.8 million and current liabilities $213.7 million. The filing reports no borrowings; operating and finance lease liabilities totaled $38.2 million.
- Deferred revenue was $200.5 million, current and noncurrent combined. Remaining performance obligations were $112.1 million, subject to the filing’s exclusions for short-term contracts and unexercised renewals.
Changes, outlook and risks
- Revenue growth was broad-based: Q3 increases were $5.8 million from U.S. customers and $5.2 million from foreign customers. For the first nine months, increases were $15.0 million U.S. and $17.2 million foreign.
- Qualys adopted the new lease standard on January 1, 2019 without restating prior periods, initially recording a $30.8 million operating lease right-of-use asset and $41.6 million lease liability. This affects balance-sheet comparability.
- Management said it expected revenue growth from existing and new customers to continue, but this 10-Q provides no specific numerical guidance. It expected continued investment in research and development, sales and marketing, and data-center capacity.
- Key disclosed risks include reliance on vulnerability-management subscriptions, customer renewals and channel partners; competition and pricing pressure; cybersecurity, service availability and data-center disruptions; privacy regulation, including the CCPA taking effect January 1, 2020; foreign-exchange exposure; and execution of product expansion and growth. The company reported no legal proceedings expected to have a material adverse effect and said disclosure controls were effective.
- The board authorized an additional $100 million for the repurchase program on October 24, 2019, after quarter-end. At September 30, approximately $41.1 million remained under the then-current authorization. The nine-month repurchases totaled 881,455 shares for $73.9 million.
Investor verification points
- Check whether subscription growth and renewal trends support continued revenue growth, especially given the 73% revenue concentration in vulnerability-management-related solutions.
- Assess the quality and sustainability of operating cash flow, including deferred-revenue growth, working-capital timing, and stock-based compensation.
- Reconcile the sharp year-over-year tax swing and monitor the effective tax rate; unrecognized tax benefits were $8.0 million, with no material 12-month change anticipated.
- Review lease commitments, purchase-order obligations and planned infrastructure spending against liquidity; contractual obligations disclosed totaled $67.8 million.
- Track channel-partner contribution, international growth and foreign-exchange exposure, as well as execution on newer products and privacy compliance.