Qualys, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Qualys provides cloud-based security and compliance subscriptions, generally billed upfront and recognized as revenue over the subscription term.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $51.0M | $42.5M | $145.7M | $119.8M |
| Gross profit | $39.7M | $33.7M | $114.9M | $95.0M |
| Operating income | $8.0M | $6.9M | $21.3M | $17.1M |
| Net income | $5.0M | $4.1M | $13.3M | $10.4M |
| Diluted EPS | $0.13 | $0.11 | $0.35 | $0.27 |
- Revenue grew 20% year over year in Q3 and 22% for the nine-month period. Management attributed growth to new customers and increased subscriptions from existing customers.
- Gross margin was 78% in Q3 versus 79% a year earlier; nine-month gross margin remained 79%. Operating margin was 16% in Q3 versus 16%, and 15% for nine months versus 14%.
- Nine-month operating cash flow was $54.7M, up from $41.7M. Capital expenditures were $18.8M; reported free cash flow, a non-GAAP measure, was $35.9M versus $26.7M.
- Cash and cash equivalents were $98.3M; short- and long-term investments were $176.6M. Total cash, equivalents and investments were approximately $275M, including $3.8M held abroad. The balance sheet reports no borrowings.
- Current assets were $261.0M and current liabilities $126.8M. Current deferred revenue was $109.0M, with a further $14.4M noncurrent. Deferred revenue increased from $112.6M at year-end 2015 to $123.4M.
- Adjusted EBITDA, a non-GAAP measure, was $17.6M in Q3 and $49.5M for nine months; the nine-month figure includes a $0.7M adjustment for a nonrecurring payroll-tax remittance.
Changes, outlook and risks
- Q3 revenue increased $8.5M year over year; nine-month revenue increased $25.9M. U.S. customers generated about 71% of nine-month revenue. The company says approximately 79% of nine-month revenue came from Vulnerability Management-related subscriptions.
- Operating expenses rose as the company added personnel and invested in product development, sales and marketing, and infrastructure. Nine-month stock-based compensation was $15.1M, compared with $12.7M.
- Management said existing liquidity and operating cash flows should fund operations for at least the next 12 months. It expects absolute spending on research and development, sales and marketing, general and administrative functions, and data-center capacity to continue increasing. The filing provides no specific financial guidance figures.
- On October 14, 2016, after quarter-end, Qualys signed a new headquarters lease with a 10-year term beginning May 2018 and total commitments of $37.8M; it also provided a $1.2M standby letter of credit. The reported $9.0M operating-lease commitment at September 30 does not include this new lease.
- Key disclosed risks include dependence on Vulnerability Management subscriptions, customer renewals and channel partners (42% of nine-month revenue came through channel partners); competition and pricing pressure; execution of new offerings and international growth; foreign-exchange exposure; and service disruption, cybersecurity, privacy, and third-party data-center risks. Substantially all solutions were hosted at four third-party data centers, which the company said were not then redundant.
- The company reported no material legal proceedings and no material accrued contingency liabilities. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether subscription growth, renewals and expansion beyond the core Vulnerability Management offering sustain reported revenue growth.
- Whether rising operating costs and infrastructure investment preserve margins and cash generation; assess stock-based compensation and share dilution alongside non-GAAP measures.
- The effect of the new $37.8M headquarters lease on future commitments, liquidity and operating costs.
- Exposure to channel partners, foreign currencies, data-center availability and security incidents, and any subsequent developments not reflected in this quarterly filing.
- Tax positions: unrecognized tax benefits were $4.2M at quarter-end; management did not anticipate a material change in the next 12 months.