Qualys, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Qualys provides cloud-based security and compliance subscriptions; its Vulnerability Management (VM) solutions generated 74% of first-half revenue. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $68.2 | $55.3 | $133.0 | $108.4 |
| Gross profit / margin | $51.9 / 76% | $43.1 / 78% | $100.9 / 76% | $84.0 / 77% |
| Operating income / margin | $10.9 / 16% | $9.0 / 16% | $19.3 / 14% | $16.7 / 15% |
| Net income | $10.3 | $7.2 | $19.4 | $29.1 |
| Diluted EPS | $0.24 | $0.18 | $0.46 | $0.74 |
| Adjusted EBITDA (non-GAAP) | $26.7 / 39% of revenue | $20.4 / 37% | $51.4 / 39% | $37.2 / 34% |
Q2 revenue increased 23% year over year, supported by existing-customer subscription growth and new customers. First-half revenue also increased 23%. Operating expenses rose with hiring, product development, sales and marketing, infrastructure, and acquisition-related costs. Gross margin declined by about 2 percentage points in Q2 and 1 point for the first half.
First-half net income fell year over year mainly because the 2017 comparison included an $11.7 million income tax benefit; 2018 recorded a $2.0 million tax provision. Effective tax rates were 9.3% in first-half 2018 and negative 66.7% in first-half 2017.
Cash, liquidity, and obligations
- Cash, cash equivalents, and marketable securities totaled $386.7 million at June 30, 2018, including $7.8 million held outside the United States. Restricted cash of $1.2 million is separate.
- First-half operating cash flow was $67.2 million, versus $48.9 million in 2017. The 2018 period benefited in part from an $11.9 million decrease in accounts receivable, attributed to customer-payment timing.
- Investing cash outflow was $50.1 million, including net marketable-security purchases, $13.2 million of capital expenditures, the 1Mobility acquisition, and a $2.5 million private-company investment. Financing cash outflow was $16.9 million, including $19.4 million of share repurchases.
- The filing reports $2.7 million of present-value capital lease obligations, including $1.7 million current; it does not report conventional borrowings. Total stated operating and capital lease commitments were $52.9 million.
- Current deferred revenue was $151.4 million and noncurrent deferred revenue was $13.3 million. Management said existing liquidity and operating cash flow should fund operations for at least the next 12 months.
Changes, outlook, and notable items
- Revenue grew 23% in both the quarter and first half. First-half revenue from foreign customers was $42.9 million, up from $31.9 million; partner-channel sales represented approximately 44% of first-half revenue.
- Operating income increased 21% in Q2 and 16% in the first half. Adjusted EBITDA is a company-defined non-GAAP measure; Q2 and first-half 2018 figures exclude $1.6 million and $1.9 million, respectively, of acquisition-related compensation expense.
- ASC 606 adoption on January 1, 2018 did not affect revenue. It changed commission accounting: certain commissions on new business and upsells are capitalized and amortized over five years. Adoption increased opening retained earnings by $2.7 million; Q2 commission expense would have been $0.5 million higher without adoption. Prior-year comparisons were not restated.
- Qualys acquired 1Mobility’s assets on April 1 for $4.0 million, including $0.6 million deferred consideration. It also invested $2.5 million in a privately held company.
- The board authorized a $100 million share-repurchase program; $80.6 million remained available at quarter-end. The filing provides no numerical financial guidance. Management expects revenue growth from existing and new customers and expects continued investment in R&D, sales and marketing, and infrastructure.
- Risks highlighted include reliance on VM subscriptions, customer renewals and channel partners; competition and pricing pressure; service availability and cybersecurity; international and foreign-exchange exposure; privacy regulation, including GDPR; and execution of acquisitions and growth. The company disclosed no legal proceedings expected to have a material adverse effect. A vendor licensing audit was resolved in Q2; management had accrued for it in Q1, with no amount specified here.
Important facts for investors to verify
- Whether subscription growth, renewals, and sales of products beyond VM can sustain reported revenue growth.
- How much of the apparent operating-performance trend reflects ASC 606 commission capitalization, stock-based compensation, or acquisition-related costs.
- Whether the decline in gross margin and higher operating costs persist as the company invests in growth.
- How customer-payment timing and deferred-revenue trends affect future operating cash flow.
- The eventual tax effects of the 2017 Tax Act and the company’s remaining provisional tax analysis; management reported $5.6 million of unrecognized tax benefits.
- The cash impact of lease commitments, planned repurchases, capital investment, and future acquisitions.