Qualys, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Qualys provides cloud-based security and compliance subscriptions. The filing is unaudited. Its VM solutions generated 73% of Q1 revenue.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $75.3 million | $64.9 million | +16% |
| Gross profit / gross margin | $57.6 million / 76% | $49.0 million / 75% | Margin +1 percentage point |
| Operating income / margin | $14.1 million / 19% | $8.4 million / 13% | +67% income |
| Net income | $13.3 million | $9.1 million | +45% |
| Diluted EPS | $0.32 | $0.22 | +45% |
| Adjusted EBITDA (non-GAAP) | $30.6 million; 41% of revenue | $24.6 million; 38% | +24% |
| Operating cash flow | $44.3 million | $43.0 million | +3% |
Revenue growth reflected higher subscription purchases from existing customers and new customers. Foreign customers contributed $6.2 million of the $10.5 million revenue increase, versus $4.3 million from U.S. customers. Direct-channel revenue was $43.0 million and partner-channel revenue was $32.3 million; partner sales represented approximately 43% of revenue.
Liquidity, cash flow and obligations
- Cash, cash equivalents and marketable securities totaled $394.5 million at March 31, 2019, including $8.8 million held outside the U.S. Cash and cash equivalents were $93.1 million; marketable securities were $301.3 million.
- Operating cash flow was $44.3 million, supported in part by $9.9 million of growth in deferred revenue. Capital expenditures were $8.6 million. Investing cash flow was positive $15.4 million, primarily reflecting net sales and maturities of marketable securities.
- Financing activities used $7.6 million, including $7.9 million of share repurchases, partly offset by $4.0 million of option-exercise proceeds.
- The filing reports no conventional borrowings. Lease liabilities totaled $41.7 million, including operating and finance leases. Contractual obligations also included $15.2 million of purchase orders; total listed obligations were $65.4 million.
- Current deferred revenue was $174.5 million and noncurrent deferred revenue was $20.5 million. Remaining performance obligations were $100.5 million, subject to the filing’s stated exclusions, including short-term contracts and unexercised renewals.
Changes, outlook and notable items
- Operating margin improved as revenue grew faster than operating expenses. R&D expense increased 26% to $15.8 million, while sales and marketing rose 7% to $17.3 million; G&A declined 11% to $10.4 million.
- The effective tax rate rose to 16.2% from 5.3%, primarily because of higher pretax income and a lower tax benefit from excess stock-based compensation deductions.
- Management expects revenue growth from existing and new customers and states that current liquidity and operating cash flow should fund operations for at least the next 12 months. It also expects absolute spending on R&D, sales and marketing, G&A and data-center capacity to increase. The filing provides no specific quarterly or full-year financial guidance.
- Qualys acquired Adya’s cloud application management platform on January 10, 2019, for approximately $1.0 million; the acquisition was deemed immaterial for pro forma presentation.
- Qualys adopted the new lease standard on January 1, 2019, recognizing an initial $30.8 million right-of-use asset and $41.6 million lease liability. Prior periods were not restated.
- The board’s $200 million repurchase authorization remained active through October 30, 2020; approximately $107.1 million remained available at quarter-end. Management reported effective disclosure controls and no legal proceeding expected to have a material adverse effect.
Principal risks and investor verification points
- Revenue remains concentrated in VM subscriptions; verify renewal trends, pricing and progress diversifying revenue through additional products.
- Assess partner-channel dependence, competition, sales-cycle variability and the ability to scale the platform and data-center capacity while maintaining service reliability.
- Monitor international exposure, foreign-exchange movements, privacy and data-protection compliance, and the concentration of employees in India; the company reported that 57% of employees were in Pune.
- Review the sustainability of margins and cash generation, including stock-based compensation, investment needs, working-capital movements and non-GAAP Adjusted EBITDA adjustments.
- Confirm the effect of lease commitments, purchase obligations, repurchases and any future acquisitions on liquidity. The company says foreign cash repatriation could incur withholding taxes.
- Track tax-rate variability and unrecognized tax benefits of $6.9 million, as well as execution risks around new products, customer retention, cybersecurity incidents, third-party providers and regulatory changes.