Qualys, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Qualys provides cloud-based security and compliance subscriptions, primarily through renewable annual contracts. Revenue is recognized ratably over subscription terms; the core Vulnerability Management solution generated 79% of Q1 revenue.
Financial results
Amounts in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $37.5 | $30.4 | +24% |
| Gross profit / margin | $29.5 / 79% | $23.5 / 77% | Margin +2 pts |
| Operating income (loss) / margin | $4.9 / 13% | $(0.3) / (1)% | Turned profitable |
| Net income (loss) | $3.0 | $(0.4) | Turned profitable |
| Diluted EPS | $0.08 | $(0.01) | Improved |
| Adjusted EBITDA (non-GAAP) | $12.0 / 32% of revenue | $4.7 / 15% | +156% |
| Operating cash flow | $10.0 | $15.1 | Down $5.1 |
| Free cash flow (non-GAAP) | $3.8 | $11.3 | Down $7.5 |
Operating expenses were $24.6 million, versus $23.8 million. R&D rose 12% to $7.2 million; sales and marketing fell 8% to $11.4 million, mainly because of trade-show timing; G&A increased 23% to $6.0 million. Stock-based compensation rose to $3.9 million from $2.1 million. The tax provision increased to $1.8 million from $0.2 million, primarily reflecting U.S. federal tax expense and changes in uncertain tax benefits; the Q1 2015 effective rate was approximately 38%.
Balance sheet and liquidity
- Cash and cash equivalents were $78.0 million; short- and long-term investments totaled $95.8 million. Combined cash and investments were $173.8 million, up from $166.7 million at December 31, 2014.
- Current assets were $195.8 million and current liabilities $100.5 million. Deferred revenue totaled $98.0 million, including $87.9 million current.
- Total liabilities were $111.6 million. The filing reports no outstanding debt; operating lease commitments totaled $8.7 million, with $3.2 million due for the remainder of 2015.
- Cash increased $1.5 million during the quarter. Capital expenditures were $6.1 million, versus $3.8 million a year earlier. The company said existing liquidity and operating cash flow should fund operations for at least 12 months.
Changes, outlook, and risks
- Revenue growth reflected new customer subscriptions and increased purchases from existing customers; U.S. revenue rose $5.0 million and international revenue $2.1 million. Approximately 70% of revenue came from U.S. customers.
- Operating cash flow was lower year over year, with a $5.9 million increase in receivables partly offset by $6.8 million of deferred-revenue growth. Management attributed the receivables increase to the timing of late-quarter orders.
- Management expects continued investment in data centers, R&D, sales staff, marketing, and international expansion; it expects related costs to increase in absolute dollars. The filing provides no specific revenue or earnings guidance.
- Key risks include reliance on Vulnerability Management and customer renewals, competition and execution in newer products, service disruption or cyber incidents, dependence on four third-party data centers and a sole-source appliance manufacturer, international and foreign-exchange exposure, and potential sales-tax obligations. The company had accrued $0.5 million for sales taxes and said additional exposure could not be reliably estimated; management did not expect a material adverse effect.
- Foreign-exchange forwards partially mitigate currency exposure but are not designated as accounting hedges. Q1 forward-contract gains of $0.8 million were more than offset by $0.9 million of foreign-currency transaction losses.
- The filing corrected an immaterial prior-period foreign-currency accounting error. Q1 2014 net loss was adjusted from $0.440 million to $0.431 million; the company stated the correction did not materially affect prior-period trends. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- No material pending legal proceedings or material contingency liabilities were reported. A $3.3 million balance of unrecognized tax benefits remained outstanding.
Important facts for investors to verify
- Whether growth and renewals remain strong, especially given the 79% revenue concentration in Vulnerability Management and 35% of revenue generated through channel partners.
- How bookings, deferred revenue, and receivables trend, since subscription revenue is recognized over time and Q1 cash flow was affected by working-capital movements.
- Whether gross-margin improvement can continue as data-center and infrastructure investment rises, and how elevated stock-based compensation affects per-share results.
- How U.S. tax expense, uncertain tax positions, foreign-exchange movements, and any unquantified sales-tax exposure develop.
- Whether planned data-center expansion reduces service-continuity risk and whether the company can sustain profitability while funding growth investments.