Qualys, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Qualys provides cloud-based cybersecurity and compliance software through renewable subscriptions, generally billed at the start of the subscription term and recognized as revenue over the term. It served more than 10,300 customers in over 130 countries. Vulnerability Management-related offerings generated 75% of 2017 revenue, leaving results materially dependent on that product family.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $230.8 million | $197.9 million | +17% |
| Gross profit / margin | $179.2 million / 78% | $154.8 million / 78% | Margin unchanged |
| Operating income / margin | $37.2 million / 16% | $30.1 million / 15% | +24% operating income |
| Net income | $40.4 million | $19.2 million | More than doubled |
| Diluted EPS | $1.01 | $0.50 | More than doubled |
| Adjusted EBITDA | $84.9 million / 37% of revenue | $68.0 million / 34% | Non-GAAP measure |
| Cash from operations | $107.6 million | $68.1 million | +58% |
Revenue growth included $21.5 million from customers already on the books by the end of 2016 and $11.4 million from customers added in 2017. The fourth quarter produced $62.9 million of revenue versus $52.2 million a year earlier; net income was $2.9 million versus $5.9 million.
At year-end, cash, cash equivalents and short-term investments totaled $288.4 million; long-term investments were $67.2 million, for total cash and investments of $355.6 million. Current assets were $369.4 million and current liabilities $165.8 million. The balance sheet reports no borrowings; total liabilities were $194.0 million, including $160.3 million of deferred revenue. Operating cash flow benefited in part from a $29.8 million increase in deferred revenue. Investing activities used $118.2 million, including $67.9 million net investment purchases, $37.8 million of capital expenditures and $12.5 million of acquisition cash payments.
Material changes and unusual items
- Net income rose substantially, but the comparison was significantly affected by tax items: 2017 included a $27.1 million benefit from excess stock-compensation tax benefits and a $10.4 million tax expense from remeasuring deferred taxes under the 2017 Tax Act. The filing describes some Tax Act accounting amounts as provisional.
- Research and development expense increased 17% to $42.8 million; sales and marketing rose 8% to $63.9 million; general and administrative expense rose 21% to $35.3 million. Stock-based compensation increased to $27.0 million from $20.1 million.
- Qualys acquired certain assets of Nevis Networks and NetWatcher for total consideration of $13.5 million, including $1.0 million payable in the future subject to conditions.
- The company moved into its new headquarters in November 2017. The associated lease has a ten-year term and $38.6 million of total committed payments; total operating lease obligations were $48.9 million.
Outlook, risks and contingencies
Management expected revenue growth from existing and new customers to continue, but the 10-K provides no formal revenue or earnings guidance. Planned 2018 capital expenditures were approximately $23 million to $28 million. Management said existing liquidity and operating cash flows should fund operations for at least the next 12 months.
Key risks include reliance on Vulnerability Management subscriptions; customer renewals and expansion; competition and pricing pressure; dependence on channel partners, which generated 41% of 2017 revenue; service availability and third-party data-center resilience; cybersecurity incidents or product errors; international and foreign-exchange exposure; and the ability to develop and sell newer offerings. The company noted that some data centers were not redundant. It reported no material pending legal proceedings or recorded material contingency liabilities. A $100 million share-repurchase program was announced in February 2018; the company was not obligated to repurchase a specified amount.
Accounting changes to be monitored: Topic 606 adoption on January 1, 2018 was not expected to materially change revenue timing or amount, but would change commission accounting, with an estimated $2.7 million cumulative retained-earnings adjustment and expected five-year amortization of capitalized commissions. The company expected the new lease standard, effective for it in 2019, to materially affect its financial statements.
Investor verification priorities
- Separate recurring operating performance from 2017’s unusually favorable stock-compensation tax benefit and Tax Act remeasurement expense.
- Track growth, renewals and concentration in Vulnerability Management, alongside adoption of newer products.
- Assess operating cash generation against deferred-revenue growth, receivables, capital spending and acquisition payments.
- Review channel-partner performance, data-center redundancy and service-continuity plans, and competitive pricing pressures.
- Monitor Topic 606 commission accounting, provisional Tax Act calculations, lease-standard effects and execution of the announced repurchase program.