Qualys, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; comparisons are with the three and nine months ended September 30, 2014, unless otherwise stated. Qualys provides cloud-based security and compliance subscriptions, generally billed annually in advance and recognized ratably. Vulnerability Management generated 79% of revenue in the first nine months of 2015, down from 82% in the prior-year period.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $42.5m | $34.3m | $119.8m | $97.0m |
| Gross profit / margin | $33.7m / 79% | $26.9m / 78% | $95.0m / 79% | $75.6m / 78% |
| Operating income / margin | $6.9m / 16% | $3.5m / 10% | $17.1m / 14% | $5.0m / 5% |
| Net income | $4.1m | $3.1m | $10.4m | $4.3m |
| Diluted EPS | $0.11 | $0.08 | $0.27 | $0.12 |
| Adjusted EBITDA (non-GAAP) | $15.1m | $9.0m | $40.2m | $21.0m |
Revenue increased 24% in both the quarter and nine-month period. Management attributed growth to new customer subscriptions and increased purchases by existing customers. Nine-month operating cash flow was $41.7m, versus $24.9m; free cash flow, as defined by the company, was $26.7m, versus $14.7m. Capital expenditures were $14.9m, plus $0.1m of capitalized software costs.
At September 30, cash, cash equivalents and investments totaled $199.9m, including $94.8m cash and equivalents. Current assets were $225.3m and current liabilities $105.4m. Deferred revenue totaled $101.8m, including $91.9m current. The balance sheet reports no borrowings; operating lease commitments were $7.6m. Stock-based compensation was $12.7m for the first nine months, up from $7.1m.
Changes, outlook and risks
- Operating margin improved as revenue growth exceeded the increase in operating expenses; sales and marketing declined as a share of revenue. R&D and G&A spending increased, with higher personnel, stock-based compensation and professional-services costs among the drivers.
- The nine-month tax provision rose to $6.6m from $0.6m, mainly reflecting U.S. federal income taxes after the company had maintained a valuation allowance on U.S. federal and state deferred tax assets in the prior-year period. The reported effective tax rate for 2015’s first nine months was approximately 38.6%.
- Management said existing liquidity and operating cash flows should fund operations for at least the next 12 months. It expects continued investment in R&D, sales and marketing, infrastructure, data centers and international expansion; the filing provides no specific financial guidance.
- Principal risks include subscription renewals and customer expansion, dependence on Vulnerability Management and channel partners, competition, security incidents or service interruptions, scaling data-center capacity, foreign-exchange exposure, and the ability to develop and sell newer solutions. About 36% of nine-month revenue came through channel partners. One channel partner represented more than 10% of accounts receivable at quarter-end.
- The company disclosed an October 2015 five-year office lease with approximately $1.7m in minimum commitments, subsequent to quarter-end. It recorded a $0.4m sales-tax liability and said it could not estimate exposure, if any, beyond accrued amounts; management did not expect a material adverse effect. No material legal proceedings or contingency liabilities were reported.
- Comparative 2014 results were adjusted for an identified immaterial foreign-currency accounting error, including a reduction in reported nine-month 2014 net income from $4.5m to $4.3m. Management concluded disclosure controls were effective as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track subscription bookings, deferred-revenue growth and renewal/expansion trends; revenue is recognized over subscription terms and may lag changes in demand.
- Assess whether newer products are reducing dependence on Vulnerability Management, and whether customer and geographic concentration are changing.
- Reconcile operating cash flow and free cash flow, including the effects of deferred revenue, receivables, capital spending and stock-based compensation.
- Monitor the higher U.S. tax burden, uncertain tax positions and potential sales-tax exposure.
- Review execution of data-center expansion and service resilience, channel-partner dependence, and the new lease commitment.