Qualys, Inc. — Q3 2022 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; dollar amounts below are in millions except per-share data. Qualys provides cloud-based IT security, vulnerability management and compliance subscriptions, sold directly and through channel partners.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $125.6 | $104.9 | $358.9 | $301.4 |
| Gross profit / margin | $99.6 / 79.3% | $82.5 / 78.6% | $283.8 / 79.1% | $235.7 / 78.2% |
| Operating income / margin | $33.3 / 26.6% | $32.0 / 30.5% | $99.9 / 27.8% | $58.6 / 19.5% |
| Net income | $27.7 | $27.8 | $79.7 | $49.1 |
| Diluted EPS | $0.71 | $0.70 | $2.01 | $1.22 |
| Adjusted EBITDA / revenue | $54.9 / 44% | $50.3 / 48% | $163.5 / 46% | $141.6 / 47% |
Q3 revenue grew 19.7% year over year, primarily from renewals and expansion sales to existing customers. Nine-month revenue increased 19.1%. Q3 net income was nearly flat year over year, while operating margin declined as operating expenses grew faster than revenue. Nine-month net income improved substantially, in part because the prior-year period included $27.3 million of accelerated stock-compensation expense related to the former CEO’s disability-related departure.
Cash flow and liquidity: Operating cash flow for the first nine months was $155.0, compared with $160.7 a year earlier. Capital expenditures were $12.4. Investing activities provided $99.7, mainly reflecting net sales and maturities of marketable securities. Financing activities used $198.1, including $212.8 of share repurchases. At September 30, cash and cash equivalents were $193.9 and marketable securities were $262.4, or $456.3 combined; $42.2 of cash was held outside the U.S. Current assets were $522.7 and current liabilities $334.0. No borrowings or funded debt are presented on the balance sheet; lease liabilities are reported separately.
Other indicators: Deferred revenue was $303.1, including $278.9 current. Remaining performance obligations were $259.2, excluding certain short-term contracts and unexercised renewals. Approximately 42% of nine-month revenue was generated through partners; 60% came from U.S. customers.
Material changes and notable items
- Q3 operating expenses increased 31.2% year over year to $66.2. Sales and marketing rose 34.9%, R&D 19.4%, and G&A 48.5%; management attributed increases mainly to headcount and greater sales, marketing and development activity.
- For the nine-month period, G&A expense fell 34.7% to $41.7, primarily because prior-year expense included the CEO-related accelerated stock compensation. Excluding that comparison effect, reported nine-month operating-income growth should be interpreted with this unusual item in mind.
- Foreign-exchange losses contributed to nine-month other expense of $0.6, versus other income of $1.1 in the prior-year period. The company uses currency forwards to hedge certain exposures.
- Marketable securities had $3.7 of net unrealized losses at September 30. Management stated it intended and was able to hold securities in unrealized-loss positions until recovery and did not identify the declines as credit-related.
- On October 4, 2022, after quarter-end, Qualys acquired certain Blue Hexagon assets for $10.0 in cash to add AI and machine-learning capabilities. Purchase accounting was not complete when the filing was prepared.
Outlook, risks and contingencies
Management said it expected revenue growth from new and existing customers to continue, citing demand and renewals, but this filing does not provide specific numerical guidance. It believes cash, cash equivalents, marketable securities and operating cash flow will fund operations for the next 12 months and beyond. The company expects continued investment in infrastructure, R&D and sales and marketing.
Management reported no significant business disruption from COVID-19 to date and did not expect a significant impact for the remainder of 2022, while noting continuing uncertainty. It highlighted macroeconomic risks including inflation, rising interest rates, labor shortages, supply-chain conditions, market volatility and geopolitical conflict, which could lead customers to reduce IT-security spending. Other disclosed risks include competition and pricing pressure, subscription renewals and sales-cycle variability, reliance on channel partners and third-party cloud platforms, cyber incidents, foreign-exchange exposure, and privacy and regulatory obligations. The company had suspended service to customers in Russia and Belarus effective March 2022; related revenue was not material for the periods reported.
There was no material loss contingency identified for ongoing legal proceedings as of September 30, 2022. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. The filing states that future share repurchases may be affected by a 1% U.S. excise tax beginning in 2023.
Key facts for investors to verify
- Whether revenue growth and renewal/expansion momentum continue, including trends in deferred revenue and remaining performance obligations.
- Whether expense growth—particularly sales and marketing and R&D—supports growth without sustained erosion in operating and adjusted EBITDA margins.
- How much of nine-month earnings improvement reflects underlying operations versus the prior-year CEO-related stock-compensation charge, and how stock-based compensation affects dilution and cash generation.
- The pace and price of repurchases: $212.8 spent in the first nine months, with approximately $259.0 of authorization remaining at quarter-end.
- Execution and integration of the Blue Hexagon asset acquisition, including final purchase accounting and any future costs or benefits.
- Exposure to foreign-exchange movements, interest-rate changes, customer IT-spending reductions and disruption at third-party cloud platforms.