Qualys, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless stated otherwise. Qualys provides cloud-based IT security, vulnerability management and compliance subscriptions.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $130.7 million | $113.4 million | +15% |
| Gross profit / margin | $103.7 million / 79% | $89.4 million / 79% | Gross profit +16% |
| Operating income / margin | $35.2 million / 26% | $33.5 million / 29% | Operating income +5% |
| Net income / margin | $29.1 million / 22% | $25.4 million / 22% | +15% |
| Diluted EPS | $0.77 | $0.64 | +20% |
| Cash from operations | $66.8 million | $79.0 million | Down $12.2 million |
- Adjusted EBITDA, a non-GAAP measure, was $58.7 million, or 45% of revenue, versus $54.3 million, or 48%. Stock-based compensation was $16.0 million, up from $11.7 million.
- At March 31, 2023, cash, cash equivalents and marketable securities totaled $378.4 million, including $89.5 million held outside the United States. Current assets were $464.7 million and current liabilities $353.0 million.
- The filing reports no borrowings or outstanding debt. Operating lease liabilities totaled $38.8 million, including current and noncurrent portions.
- Cash used in financing was $66.3 million, primarily reflecting $66.6 million of share repurchases. The company had $187.9 million remaining under its $1.0 billion repurchase authorization.
Changes and business trends
- Revenue growth was attributed to subscription demand. Management said 97% of the $17.3 million increase came from customers existing at or before March 31, 2023; 3% came from new customers. Growth was evenly split between direct and partner sales, while total revenue was 57% direct and 43% partner.
- Operating expenses rose 23% to $68.6 million. Research and development increased 20%, sales and marketing 27%, and general and administrative 20%, mainly reflecting higher personnel costs and stock compensation. Operating margin declined from 29% to 26%.
- Net dollar expansion rate was 109%, compared with 110% a year earlier. Revenue by geography was $78.0 million in the United States and $52.7 million internationally.
- Operating cash flow fell year over year despite higher net income; management attributed cash generation partly to working-capital changes, including billing and collections. Capital expenditures were $4.0 million, versus $7.6 million.
Outlook, risks and contingencies
- Management expects revenue growth from new and existing customers to continue and says cash, investments and expected operating cash flow should fund operations for the next 12 months and beyond. The filing provides no specific numerical revenue or earnings guidance.
- Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company invests in infrastructure, product development and personnel.
- Risks highlighted include uncertain economic conditions and possible reductions in customer IT-security spending; competition and pricing pressure; customer renewals and sales-cycle variability; reliance on channel partners and third-party cloud facilities; cybersecurity incidents, product errors and privacy regulation; and foreign-exchange exposure. Management stated a hypothetical 10% adverse currency move would not be material with hedging in place; a 100-basis-point interest-rate increase would reduce securities’ fair value by about $0.7 million.
- The company reported no material loss reasonably possible from ongoing legal proceedings as of March 31, 2023. It had $10.7 million in unrecognized tax benefits and did not anticipate a material change in the next 12 months. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- Macroeconomic uncertainty cited includes inflation, higher interest rates, financial-institution failures, labor shortages, market volatility and geopolitical conflict. Results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether revenue growth and the 109% net dollar expansion rate persist, particularly given the small contribution from new customers in the quarter.
- Whether rising operating expenses and stock-based compensation continue to pressure operating and Adjusted EBITDA margins.
- Why operating cash flow declined year over year and whether working-capital contributions are sustainable.
- Cash and investment composition, marketable-securities valuation and exposure to foreign exchange and interest-rate movements.
- Share-repurchase pace and remaining authorization, alongside dilution from equity awards and the company’s capital-allocation priorities.
- Developments in customer IT spending, channel-partner contribution, cybersecurity and service availability, and any material legal or tax matters.