Qualys, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Qualys provides cloud-based security and compliance subscriptions, generally billed annually in advance and recognized over the subscription term.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $39.9 | $32.3 | $77.4 | $62.7 |
| Gross profit / margin | $31.7 / 79% | $25.1 / 78% | $61.2 / 79% | $48.6 / 78% |
| Operating income / margin | $5.3 / 13% | $1.8 / 6% | $10.2 / 13% | $1.5 / 3% |
| Net income | $3.3 | $1.7 | $6.3 | $1.2 |
| Diluted EPS | $0.09 | $0.04 | $0.16 | $0.03 |
| Adjusted EBITDA, non-GAAP | $13.1 | $7.2 | $25.1 | $11.9 |
- Cash flow: H1 operating cash flow was $25.6 million, compared with $15.2 million. Capital expenditures were $10.4 million and capitalized software costs $0.1 million; company-defined free cash flow was about $15.0 million versus about $8.7 million.
- Liquidity: At June 30, cash, cash equivalents and short- and long-term investments totaled $187.1 million, including $84.1 million cash and equivalents. Current assets were $205.5 million and current liabilities $99.1 million. Management said available liquidity and operating cash flow should fund operations for at least 12 months.
- Debt and commitments: The filing reports no outstanding borrowings; interest expense was immaterial. Operating lease obligations totaled $7.8 million. Deferred revenue totaled $97.1 million, including $87.4 million current.
- Other balance-sheet items: Total assets were $282.0 million and stockholders’ equity $172.2 million at June 30, 2015.
Material changes versus the prior comparable period
- Revenue grew 23% in both Q2 and H1, driven by new customer subscriptions and increased purchases by existing customers. H1 revenue growth was $14.7 million: $10.6 million from U.S. customers and $4.1 million from customers outside the U.S.
- Operating income rose to $5.3 million in Q2 from $1.8 million and to $10.2 million in H1 from $1.5 million. Operating expenses grew more slowly than revenue overall; H1 sales and marketing expense was nearly flat, while R&D and general and administrative expenses increased.
- Net income improved, but the income-tax provision increased substantially: H1 provision was $4.0 million versus $0.4 million, primarily reflecting U.S. federal taxes after the company had maintained a valuation allowance on U.S. federal and state deferred tax assets in the first half of 2014. The H1 effective tax rate was approximately 38.6%.
- Cash and cash equivalents increased $7.6 million during H1. Operating cash generation benefited from higher net income and a $5.9 million increase in deferred revenue; investment purchases and capital spending were principal uses of cash.
- The company corrected an immaterial prior-period foreign-currency accounting error and adjusted 2014 comparative results. The filing states the correction did not materially affect individual prior-period presentations or the trend of results.
Outlook, commentary, risks and unusual items
- No specific financial guidance for future quarters or the full year is provided in this filing. Management expects continued investment in R&D, sales personnel and marketing, data-center capacity, and international expansion; these investments may increase expenses.
- Qualys introduced its Cloud Agent Platform in 2015. Management described continued demand for existing and newer solutions, while noting the need to keep developing the platform and scaling infrastructure.
- Business concentration remains notable: Vulnerability Management generated 79% of H1 revenue, down from 82% a year earlier. Channel partners generated approximately 36% of H1 revenue, versus 37% in 2014.
- Key disclosed risks include customer renewals and subscription demand, competition and pricing, dependence on the core Vulnerability Management product, execution of newer products, service availability and cybersecurity incidents, reliance on four third-party data centers that were not then fully redundant, and dependence on a sole manufacturer for physical scanner appliances.
- Foreign exchange exposure includes foreign-currency revenue and expenses; the company uses short-term forward contracts but does not designate them as hedges. Management stated that an immediate 10% adverse exchange-rate move would not have a material impact. Sales-tax exposure was accrued at $0.6 million, but additional exposure could not be estimated; management did not expect it to have a material adverse effect.
- The company reported no material pending legal proceedings or material contingency accruals. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
- Qualys expected to cease being an emerging growth company on December 31, 2015 and anticipated additional compliance costs and auditor attestation requirements thereafter.
Important facts for investors to verify
- Whether revenue growth and renewals remain strong, and whether newer products reduce reliance on Vulnerability Management.
- Whether margins and cash generation can hold up as infrastructure, R&D, sales, and compliance spending increase; assess non-GAAP Adjusted EBITDA alongside GAAP results and stock-based compensation.
- How the higher U.S. tax burden and uncertain tax positions affect the effective tax rate and net income in subsequent periods.
- Whether the company expands data-center redundancy and manages service, security, third-party-provider, and sole-source hardware risks.
- Potential additional sales-tax liabilities, foreign-exchange effects, and the timing and cost of losing emerging-growth-company exemptions.