Qualys, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Qualys provides cloud-based security and compliance subscriptions; approximately 73% of first-half revenue came from Vulnerability Management (VM) solutions. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $78.9 | $68.2 | $154.3 | $133.0 |
| Gross profit | $61.4 | $51.9 | $119.0 | $100.9 |
| Gross margin | 77.8% | 76.2% | 77.1% | 75.8% |
| Operating income | $16.1 | $10.9 | $30.2 | $19.3 |
| Operating margin | 20.4% | 16.0% | 19.5% | 14.5% |
| Net income | $16.2 | $10.3 | $29.5 | $19.4 |
| Diluted EPS | $0.39 | $0.24 | $0.71 | $0.46 |
- Revenue grew 16% year over year in both Q2 and the first half. Management attributed growth to additional subscriptions from existing customers and new customers. Q2 U.S. revenue was $50.7 million and foreign revenue was $28.2 million.
- Q2 operating expenses were $45.3 million, up from $41.0 million. R&D rose 35% to $17.7 million, while sales and marketing fell 10% to $17.2 million; G&A increased 17% to $10.4 million.
- First-half operating cash flow was $81.3 million, compared with $67.2 million a year earlier. Investing used $7.5 million and financing used $23.4 million. Cash, cash equivalents and restricted cash ended at $92.6 million.
- At June 30, cash, cash equivalents and marketable securities totaled $410.5 million. Current assets were $381.6 million and current liabilities $208.7 million. The filing reports no debt balance; lease liabilities totaled $39.7 million, including operating and finance leases.
- Current and noncurrent deferred revenue totaled $197.4 million. Remaining performance obligations were $109.1 million, excluding eligible contracts of one year or less and unexercised renewals.
- Non-GAAP adjusted EBITDA was $33.4 million (42% of revenue) in Q2 and $64.0 million (41%) in the first half, versus $26.7 million (39%) and $51.4 million (39%), respectively, in 2018. Stock-based compensation was $8.3 million in Q2 and $16.8 million in the first half of 2019.
Changes, outlook and notable items
- First-half revenue growth was balanced between U.S. and foreign customers: increases of $9.2 million and $12.0 million, respectively. Direct-channel revenue grew to $88.7 million for the first half; partner revenue reached $65.6 million.
- Management expects revenue growth from existing and new customers and says existing liquidity and operating cash flow should fund operations for at least 12 months. It also expects spending to increase in areas including R&D, sales and marketing, infrastructure, and data centers. The filing does not provide specific financial guidance figures in the supplied text.
- Qualys adopted lease accounting Topic 842 on January 1, 2019, recognizing a $30.8 million right-of-use asset and $41.6 million lease liability at adoption; prior-year periods were not restated. At quarter-end, operating lease assets were $28.1 million and lease liabilities were $38.8 million.
- In January 2019, Qualys acquired Adya’s assets for $1.0 million, including $0.2 million deferred consideration. The acquisition was described as immaterial to the financial statements.
- The effective tax rate was 12.3% in Q2 and 14.1% for the first half, compared with 12.6% and 9.3% in the corresponding 2018 periods. Unrecognized tax benefits were $7.4 million; the company did not anticipate a material change in the next 12 months.
- The $200 million share repurchase authorization had $90.8 million remaining at June 30, 2020 expiry. First-half repurchases totaled $24.1 million. No material adverse legal proceeding was reported. Management concluded disclosure controls were effective.
Risks and contingencies
- Revenue concentration in VM solutions and dependence on customer renewals create exposure if demand, pricing, or renewal rates weaken. Channel partners generated approximately 42% of first-half revenue.
- Key stated risks include intense competition and pricing pressure; developing and selling newer solutions; cyber incidents, service interruptions and data-center reliance; long sales cycles; hiring and scaling; international operations and foreign exchange; and privacy and regulatory changes, including GDPR and the forthcoming CCPA.
- Operating lease obligations were $46.6 million and finance lease obligations $1.1 million; purchase-order obligations were $18.8 million. The company reported no off-balance-sheet arrangements. Indemnification claims had not resulted in a recorded liability.
Most important facts for investors to verify
- Whether 16% revenue growth and improving operating margins continue, particularly as R&D investment rises and VM remains the dominant revenue source.
- Customer renewal and expansion trends, new-customer contributions, and the sustainability of growth across direct and partner channels and foreign markets.
- Cash generation and liquidity relative to capital spending, lease commitments, repurchases, and any future acquisitions.
- How much reported earnings and adjusted EBITDA are affected by stock-based compensation, acquisition-related items, investment income, and foreign-exchange movements.
- Progress in diversifying beyond VM and managing cybersecurity, service availability, privacy, competition, and international risks.