Qualys, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Qualys provides cloud-based IT security, vulnerability management and compliance subscriptions, generally billed in advance and recognized over the subscription term. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $142.0 | $125.6 | $409.9 | $358.9 |
| Revenue growth, year over year | 13% | — | 14% | — |
| Gross profit / gross margin | $115.3 / 81% | $99.6 / 79% | $329.5 / 80% | $283.8 / 79% |
| Operating income / operating margin | $43.6 / 31% | $33.3 / 26% | $121.6 / 30% | $99.9 / 27% |
| Net income / net margin | $46.5 / 33% | $27.7 / 22% | $111.0 / 27% | $79.7 / 22% |
| Diluted earnings per share | $1.24 | $0.71 | $2.96 | $2.01 |
| Adjusted EBITDA / margin (non-GAAP) | $68.8 / 48% | $54.9 / 44% | $193.3 / 47% | $163.5 / 46% |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $210.8 | $155.0 |
At September 30, 2023, cash and cash equivalents were $208.7 million and marketable securities totaled $252.3 million, for $461.1 million in cash, cash equivalents and marketable securities. The company reported no borrowings; operating lease liabilities totaled $32.0 million. Current assets were $562.2 million and current liabilities were $370.5 million. Current and noncurrent deferred revenue totaled $339.5 million. Total assets were $751.9 million and stockholders’ equity was $322.9 million.
Nine-month investing cash flow was negative $47.5 million, mainly reflecting net purchases of marketable securities and $7.3 million in capital expenditures. Financing cash flow was negative $128.3 million, including $147.7 million of share repurchases. Cash, cash equivalents and restricted cash increased $35.0 million to $211.4 million.
Changes versus the prior comparable period
- Q3 revenue increased 13% year over year; management attributed growth to subscription demand. Existing customers accounted for 96% of the quarterly revenue increase. Direct sales represented 57% of revenue and partners 43%.
- For the first nine months, revenue rose 14%; existing customers contributed 87% of the increase. Partner revenue was approximately 43% of total revenue.
- Profitability improved: Q3 gross margin was 81% versus 79%, operating margin 31% versus 26%, and net margin 33% versus 22%. Nine-month operating and net margins also increased.
- Operating expenses rose year over year, particularly research and development and sales and marketing, primarily due to higher personnel costs, including stock-based compensation. Stock-based compensation was $18.5 million in Q3 and $50.6 million for the nine months.
- Interest income increased as market rates rose. Q3 total other income was $4.4 million, compared with $0.5 million a year earlier; nine-month total other income was $9.5 million versus a $0.6 million expense.
- Nine-month operating cash flow rose to $210.8 million from $155.0 million, supported by higher net income and working-capital inflows, including growth in deferred revenue and lower accounts receivable.
- The company repurchased 1.2 million shares for $147.7 million in the first nine months, compared with 1.6 million shares for $212.8 million in the prior-year period. Shares outstanding were 36.8 million at September 30, 2023.
Outlook, commentary and risks
- Management said it expects revenue growth from new and existing customers to continue, but the filing gives no specific numeric revenue or earnings guidance.
- Remaining performance obligations were $330.7 million at September 30, 2023, including $54.2 million expected in the remaining three months of 2023. This is not a forecast of total revenue and excludes certain short-term contracts and unexercised renewals.
- Net dollar expansion rate declined to 106% from 111% a year earlier, indicating slower expansion within the prior-year customer cohort.
- Management identified macroeconomic uncertainty, reduced IT spending and longer sales cycles as potential headwinds. Other key risks include competition and pricing pressure, customer renewals, reliance on channel partners, cybersecurity incidents, platform availability, product performance, international operations and foreign-exchange movements.
- The Q3 income tax provision was $1.5 million, an effective rate of 3.1%, versus $6.2 million and 18.3% in Q3 2022. The decrease primarily reflected higher foreign tax credits and updated IRS guidance affecting foreign tax credits and R&D expense capitalization; a cumulative adjustment was recorded in Q3. The nine-month effective tax rate was 15.3% versus 19.8%.
- Unrecognized tax benefits were $11.6 million; the company did not anticipate a material change in the next 12 months. Certain valuation allowances on deferred tax assets remain, and any future release depends on additional evidence of sustained profitability in relevant jurisdictions.
- The company stated that existing liquidity and expected operating cash flow should be sufficient to fund operations for the next 12 months and beyond. Approximately $106.8 million remained under its share repurchase authorization. The 1% excise tax on repurchases was described as immaterial for the reported periods.
- No ongoing legal proceeding was considered reasonably likely to result in a material loss as of September 30, 2023. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Investor facts to verify
- Whether revenue growth and customer retention/expansion trends persist, especially given the decline in net dollar expansion rate to 106%.
- How much growth comes from existing customers, new customers and channel partners, and whether partner concentration or discounting affects realized revenue.
- Whether margin gains continue as headcount, cloud-platform costs and stock-based compensation increase; review the company’s non-GAAP Adjusted EBITDA reconciliation alongside GAAP results.
- How operating cash flow compares with net income over time, including the contribution from deferred-revenue growth and collection timing.
- How the updated tax rules, foreign tax credits, deferred tax assets and unrecognized tax benefits affect future effective tax rates and cash taxes.
- Whether share repurchases, remaining authorization and employee equity issuance meaningfully affect cash balances and diluted share count.
- Potential impacts of macroeconomic conditions, extended sales cycles, cybersecurity or service interruptions, competition, foreign exchange and international regulatory requirements.