Qualys, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2017. Qualys provides cloud-based security and compliance subscriptions, generally billed annually in advance and recognized over the subscription term. Vulnerability Management solutions accounted for approximately 75% of nine-month revenue.
Financial results
Amounts are in millions, except per-share data and percentages. Comparisons are year over year.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $59.5 | $51.0 | $167.9 | $145.7 |
| Gross profit / gross margin | $46.8 / 78.6% | $39.5 / 77.5% | $130.7 / 77.9% | $114.4 / 78.5% |
| Operating income / margin | $10.8 / 18.2% | $8.0 / 15.7% | $27.5 / 16.4% | $21.3 / 14.6% |
| Net income | $8.5 | $5.0 | $37.6 | $13.3 |
| Diluted EPS | $0.21 | $0.13 | $0.95 | $0.35 |
| Adjusted EBITDA | $23.9 (40% of revenue) | $17.6 (35%) | $61.1 (36%) | $49.5 (34%) |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $81.8 | $54.7 |
| Free cash flow | Not reported quarterly | Not reported quarterly | $55.2 | $35.9 |
- Liquidity: At September 30, 2017, cash and cash equivalents were $90.5 million; short- and long-term investments totaled $252.6 million. Management reported total cash, cash equivalents and investments of approximately $343 million and believes available liquidity and operating cash flow are sufficient for at least 12 months.
- Balance sheet: Total assets were $501.3 million and total liabilities $173.7 million. Current deferred revenue was $132.2 million, with another $16.0 million noncurrent. The filing reports no borrowings or debt balances.
- Cash uses: Nine-month investing cash outflow was $83.2 million, including $26.6 million of property and equipment purchases and $5.8 million for the Nevis acquisition. Financing cash flow was $5.2 million, including $22.8 million from option exercises and $17.6 million of taxes paid on net share settlement of equity awards.
Material changes versus prior comparable periods
- Q3 revenue rose 17% to $59.5 million; nine-month revenue rose 15% to $167.9 million. Management attributed growth to increased subscriptions from existing customers and new customers.
- Q3 net income increased to $8.5 million from $5.0 million; nine-month net income rose to $37.6 million from $13.3 million. Nine-month 2017 results included an $8.6 million income tax benefit, largely reflecting stock-based compensation tax benefits under newly adopted accounting guidance; the prior-year period had an $8.4 million tax provision. This tax effect materially amplifies the reported net-income comparison.
- Nine-month operating income increased to $27.5 million from $21.3 million. Gross margin was slightly lower year to date, at 77.9% versus 78.5%, while operating margin improved to 16.4% from 14.6%.
- Operating cash flow increased to $81.8 million from $54.7 million, supported by net income, noncash expenses and a $17.7 million increase in deferred revenue. Capital expenditures rose to $26.6 million from $18.8 million.
- G&A expense increased 31% in Q3, primarily due to higher stock-based compensation. The company also reclassified certain prior-period IT expenses among expense categories; this did not change total expenses or income.
Outlook, commentary, risks and unusual items
- No specific forward revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in data centers, R&D, sales and marketing, and international expansion, and states liquidity should fund operations for at least the next 12 months.
- Revenue remains concentrated in Vulnerability Management, and approximately 41% of nine-month revenue came through channel partners. Renewal rates, cross-selling, new-customer acquisition and channel performance are important growth factors.
- Management highlights risks including competition and pricing pressure, customer adoption of cloud security, service availability and cyber incidents, the ability to scale data centers and the platform, sales-cycle variability, foreign exchange exposure, and reliance on key employees, third-party providers and channel partners.
- On August 29, 2017, Qualys acquired certain Nevis Networks assets for $5.8 million cash, allocating $5.2 million to technology intangibles and $0.6 million to goodwill. The acquired technology intangible has a five-year estimated useful life.
- Operating lease commitments totaled $48.2 million, including a new headquarters lease with a ten-year term through April 2028 and $38.6 million of total payments. The company recorded an $8.1 million tenant improvement allowance; lease payments for the new site begin May 2018.
- Qualys plans to adopt the new revenue standard on January 1, 2018 using the modified retrospective approach. It expected the most significant effect to involve potential deferral of sales commissions and contract costs; the final impact was still being assessed.
- The filing reports no material legal proceedings or material accrued contingency liabilities. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the 2017 stock-based compensation tax benefits, and how may tax rates vary in future periods?
- Whether revenue growth, renewals and adoption of solutions beyond Vulnerability Management can reduce product concentration.
- Whether growth in deferred revenue and operating cash flow is sustained, and how rising data-center capital spending affects free cash flow.
- The eventual accounting and financial-statement effects of adopting the revenue recognition standard, especially for commissions and contract costs.
- Integration progress and commercial contribution from the Nevis acquisition, alongside execution of the new headquarters lease and other operating commitments.