Business context and reporting period
Qualys, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. It provides cloud-based cybersecurity, vulnerability management, and compliance subscriptions, generally billed annually and recognized over the subscription term. The company reported more than 12,200 customers and active users in over 130 countries. Vulnerability Management-related solutions generated 74% of 2018 revenue.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $278.9 million | $230.8 million | +21% |
| Gross profit / margin | $212.7 million / 76% | $179.2 million / 78% | Margin down 2 points |
| Operating income / margin | $50.4 million / 18% | $37.2 million / 16% | +35% income |
| Net income | $57.3 million | $40.4 million | +42% |
| Diluted EPS | $1.37 | $1.01 | +36% |
| Adjusted EBITDA (non-GAAP) | $112.4 million; 40% of revenue | $84.9 million; 37% of revenue | +32% |
| Cash from operations | $125.5 million | $107.6 million | +17% |
| Cash, cash equivalents and investments | $365.9 million | $355.6 million | +3% |
Fourth-quarter 2018 revenue was $74.2 million, versus $62.9 million in fourth-quarter 2017. Operating income was $12.9 million versus $9.7 million, and net income was $14.4 million versus $2.9 million. Quarterly figures are unaudited.
At year-end, current assets were $379.0 million and current liabilities were $196.9 million. Current deferred revenue was $164.6 million, with an additional $20.4 million noncurrent. The filing reports a $1.6 million current capital lease liability; it does not report material borrowings. Cash used in investing was $93.5 million, including net investment purchases, $22.8 million of capital expenditures, and $13.6 million for acquisitions and related payments. Cash used in financing was $77.5 million, mainly reflecting $85.0 million of share repurchases.
Material changes versus prior period
- Revenue growth came from both existing customers, whose revenue increased $36.4 million, and customers added in 2018, contributing $11.7 million.
- Gross margin declined from 78% to 76%, as cost of revenue rose 28%, faster than revenue, partly due to staffing, acquired technology amortization, data-center costs, and depreciation.
- Operating margin improved from 16% to 18%; sales and marketing fell from 28% to 25% of revenue, while R&D remained at 19%.
- Deferred revenue increased to $185.0 million total, supporting future revenue recognition.
- Qualys adopted ASC 606 in 2018. Revenue was not materially affected; eligible commissions on new business and upsells are now capitalized and amortized, increasing 2018 income relative to the prior expense treatment. Opening retained earnings increased $2.7 million.
Outlook, risks and unusual items
Management expects continued revenue growth from existing and new customers and plans ongoing investment in R&D, sales and marketing, infrastructure, and data centers. It estimated 2019 capital expenditures of $26–$31 million and said existing liquidity and operating cash flow should fund operations for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
Key risks include dependence on Vulnerability Management subscriptions, customer renewals, and channel partners (41% of revenue); intense competition and pricing pressure; execution in newer product areas; service availability and cybersecurity incidents; privacy and regulatory requirements; foreign exchange exposure; and the ability to scale operations. The company relies on third-party data centers and a sole-source manufacturer for physical scanner appliances. No pending legal proceeding was identified as likely to have a material adverse effect.
Unusual items include 2018 acquisitions of 1Mobility and Layered Insight, with $13.4 million of Layered Insight consideration and up to $4.0 million of additional revenue-milestone consideration; a further $4.0 million of payments tied to continued employment is treated as compensation. A $1.8 million income tax benefit contributed to earnings; the 2017 Tax Act reduced the federal statutory rate, and the company recorded a $10.4 million remeasurement tax expense in 2017. The company repurchased 1.09 million shares for approximately $85.0 million and had about $115.0 million of authorization remaining. Auditors gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether growth and renewals can continue while reducing reliance on VM-related revenue and channel distribution.
- Whether gross-margin pressure from infrastructure, staffing, and acquired-technology costs persists.
- How successfully the newer cloud, container, and other security applications gain adoption and contribute revenue.
- The cash-flow and dilution effects of ongoing repurchases, stock-based compensation, acquisitions, and planned capital spending.
- How ASC 606 commission capitalization and the 2019 lease-accounting change affect comparability and reported balance-sheet liabilities.