QUALYS, INC. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Qualys provides cloud-delivered security and compliance subscriptions, primarily through renewable annual contracts. Revenue is recognized ratably over subscription terms; Vulnerability Management generated 85% of quarterly revenue.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $24.883 million | $21.191 million | +17% |
| Gross profit / margin | $19.088 million / 77% | $17.031 million / 80% | Margin down 3 percentage points |
| Operating expenses | $19.361 million | $17.161 million | +13% |
| Operating loss | $(0.273) million | $(0.130) million | Loss widened |
| Net loss | $(0.603) million | $(0.285) million | Loss widened |
| Adjusted EBITDA, non-GAAP | $2.795 million; 11% of revenue | $2.296 million; 11% of revenue | Increased |
| Cash from operations | $10.059 million | $9.628 million | Increased |
Revenue growth reflected new customers and increased subscriptions from existing customers. U.S. revenue rose by $3.2 million and international revenue by $0.5 million. The gross-margin decline was attributed to greater data-center capacity, infrastructure investment, and related staffing and depreciation costs. Sales and marketing expense rose 10%; general and administrative expense rose 38%, partly due to staffing and public-company costs.
Cash, liquidity and obligations
- At March 31, cash and cash equivalents were $47.1 million; short- and long-term investments totaled $78.1 million. Together, cash and investments were approximately $125.2 million.
- Current assets were $116.0 million and current liabilities $70.0 million. Deferred revenue totaled $66.2 million, including $58.4 million current.
- Capital lease obligations were $1.7 million; disclosed operating lease and maintenance commitments brought total contractual obligations to $13.7 million.
- Operating cash flow was $10.1 million; capital expenditures were $3.7 million. Investing cash flow was $1.7 million, primarily reflecting investment purchases and sales. Cash and cash equivalents increased $12.2 million during the quarter.
- Management said existing cash and operating cash flow should fund operations for at least the next 12 months. It noted future capital needs depend on growth, hiring, R&D, international expansion, data centers, and possible acquisitions.
Material changes, outlook and risks
- Four-Quarter Bookings, a company-defined non-GAAP measure, were $105.1 million, up 16% year over year, compared with 25% growth in the prior-year measure. The filing defines this as trailing four-quarter revenue plus the change in current deferred revenue.
- Management expects cost of revenue, R&D, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company expands infrastructure, develops solutions, grows sales efforts, and supports public-company requirements. The filing provides no specific revenue, earnings, or margin guidance.
- Foreign exchange losses contributed to other expense of $0.260 million, versus $0.077 million of expense a year earlier. Management said a 10% adverse currency move would not materially affect results; the company uses short-term currency forwards that are not designated as accounting hedges.
- Key disclosed risks include limited and inconsistent profitability, reliance on renewals and on Vulnerability Management, competition and sales-cycle variability, scaling and service continuity at two principal data centers, cybersecurity and product defects, international and foreign-exchange exposure, and dependence on channel partners. Channel partners generated approximately 39% of Q1 revenue; Dell accounted for 5%.
- The company accrued $0.4 million for potential sales and other taxes; management said it could not estimate broader potential exposure, if any, but did not expect a material adverse effect. No material legal proceedings or other material contingency liabilities were reported.
- Management concluded disclosure controls were effective at the reasonable-assurance level, with no material Q1 change in internal control over financial reporting. The filing also describes a prior significant control deficiency related to a tax restatement; management said it was not a material weakness.
Investor verification points
- Track whether revenue growth and Four-Quarter Bookings remain durable, particularly as bookings growth slowed from the prior-year comparison.
- Assess whether infrastructure investment and rising operating costs can support growth while restoring gross margin and GAAP profitability.
- Monitor customer renewals, cross-selling beyond Vulnerability Management, and dependence on channel partners.
- Review data-center expansion and disaster-recovery progress, given the disclosed concentration in two facilities and limited ability to move customers rapidly.
- Check subsequent filings for changes in cash and investment balances, capital and lease commitments, tax exposures, foreign-exchange effects, and remediation of the previously identified control deficiency.