Qualys, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Qualys provides cloud-delivered security and compliance subscriptions, generally billed annually and recognized over the subscription term.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $30.4 million | $24.9 million; up 22% |
| Gross profit / margin | $23.5 million / 77% | $19.1 million / 77% |
| Operating expenses | $23.8 million | $19.4 million; up 23% |
| Operating loss | $0.3 million | $0.3 million loss |
| Net loss | $0.4 million; $0.01 per diluted share | $0.6 million; $0.02 per diluted share |
| Adjusted EBITDA (non-GAAP) | $4.7 million; 15% of revenue | $2.8 million; 11% of revenue |
| Cash from operations | $15.1 million | $10.1 million |
Revenue growth reflected new subscriptions and expansion among existing customers. U.S. revenue increased $4.0 million and international revenue $1.5 million. Cost of revenue rose 18%, while gross margin remained flat. Research and development, sales and marketing, and general and administrative expenses increased 21%, 23%, and 25%, respectively, primarily reflecting hiring, higher stock-based compensation, and sales and marketing investment.
Liquidity and obligations: Cash and cash equivalents were $48.3 million; short- and long-term investments totaled $96.7 million, for $145.0 million in cash, equivalents, and investments. Current assets were $131.9 million and current liabilities $82.4 million. Total liabilities were $92.7 million, including $538,000 of current capital lease obligations; no noncurrent capital lease obligation was reported. Deferred revenue totaled $80.3 million. Management said available liquidity and operating cash flow should fund operations for at least the next 12 months.
Operating cash flow benefited from a $6.7 million decrease in accounts receivable and a $3.9 million increase in deferred revenue, as well as noncash depreciation and stock compensation. Investing activities used $10.2 million, including $3.8 million in capital expenditures and net investment purchases. Cash and equivalents increased $5.9 million during the quarter.
Material changes, outlook, and risks
- Vulnerability Management subscriptions generated 83% of revenue, versus 85% a year earlier; management expects the solution to remain the majority of revenue. Channel partners generated approximately 38% of revenue, compared with 39%.
- Stock-based compensation was $2.1 million, up from $0.9 million. Revenue growth therefore coexisted with continued GAAP operating and net losses.
- The filing provides no specific numeric financial guidance. Management expected absolute spending on data-center capacity, research and development, sales personnel, and marketing to increase.
- Management identified customer renewal and expansion, competition, execution of new solutions, international operations and foreign exchange, and the ability to scale the cloud platform as important business risks. Substantially all solutions were hosted at four third-party data centers, which were not then redundant; additional facilities were being built out, with full operation anticipated by year-end 2014.
- Foreign-exchange losses were lower than in Q1 2013, improving other income by $263,000 year over year. The quarter included a $182,000 income tax provision despite a pretax loss; taxes primarily reflected foreign and state taxes. A $500,000 sales-tax liability was accrued, while additional exposure could not be estimated clearly.
- No material pending legal proceeding or material contingency liability was reported. Unrecognized tax benefits were $3.3 million. Management concluded disclosure controls were effective as of March 31, 2014.
Investor facts to verify
- Whether subscription bookings, renewals, and deferred-revenue growth support future reported revenue, given ratable subscription recognition.
- Whether customer growth and expansion beyond Vulnerability Management reduce product concentration over time.
- Whether increased sales and marketing and research and development spending produces durable growth and improved GAAP profitability.
- Progress and costs of completing and operationalizing additional data-center capacity, and the resilience of service delivery.
- Potential sales-tax exposure beyond the accrued $500,000, and the effects of foreign exchange and taxes on results.