Qualys, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Qualys provides cloud-based IT security and compliance subscriptions, generally recognized over subscription terms. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $86.3 | $75.3 | +14.5% |
| Gross profit / margin | $67.8 / 78.6% | $57.6 / 76.5% | Margin +2.1 percentage points |
| Operating income / margin | $20.4 / 23.7% | $14.1 / 18.7% | Margin +5.0 percentage points |
| Net income | $18.7 | $13.3 | +40.9% |
| Diluted EPS | $0.46 | $0.32 | +43.8% |
| Adjusted EBITDA, non-GAAP | $38.2; 44% of revenue | $30.6; 41% of revenue | +24.7% |
| Operating cash flow | $52.4 | $44.3 | +$8.1 |
Revenue growth reflected increased subscriptions from existing customers and new customers; $6.3 million of the increase came from the U.S. and $4.6 million from foreign markets. Vulnerability Management-related subscriptions accounted for 72% of revenue, versus 73% a year earlier. Partner-channel revenue was $36.3 million, about 42% of total revenue.
At March 31, cash, cash equivalents and marketable securities totaled $434.7 million, including $25.0 million held outside the U.S. Cash and cash equivalents were $147.6 million; current and noncurrent marketable securities totaled $287.2 million. The company reported no borrowings or other financial debt in the presented balance sheet. Total liabilities included $49.5 million of operating lease liabilities. Management said existing liquidity and operating cash flows should fund operations for at least the next 12 months.
Deferred revenue was $223.7 million, up from $213.1 million at year-end 2019. Remaining performance obligations were $135.8 million, subject to the filing’s stated exclusions for short-term contracts and unexercised renewals. Q1 investing cash flow was positive $36.8 million, principally reflecting net sales and maturities of securities, offset by $7.3 million of capital expenditures. Financing used $29.2 million, including $28.9 million of share repurchases.
Material changes and notable items
- Operating expenses increased 8.6% to $47.3 million, slower than revenue growth. Research and development rose 13.6%, sales and marketing 5.3%, and general and administrative 6.6% year over year.
- Gross margin improved as revenue grew faster than cost of revenue. Operating margin increased to approximately 24% from 19%.
- Share repurchases increased to 346,250 shares for $28.9 million, compared with $7.9 million in Q1 2019. About $99.6 million remained authorized at March 31. On May 7, 2020, the board authorized an additional $100 million, bringing total program authorization to $400 million.
- Stock-based compensation was $10.0 million, versus $8.4 million. The diluted weighted-average share count declined to 40.8 million from 41.5 million.
- Effective tax rate was 15.9%, compared with 16.2%. Unrecognized tax benefits totaled $8.1 million; the company did not anticipate a material change over the next 12 months.
Outlook, risks and contingencies
Management reported no significant business disruption from COVID-19 through the period, but said its ultimate effects were not predictable. The company restricted travel, shifted employees to work from home, and canceled some events and meetings. It warned that a prolonged outbreak or resulting economic slowdown could affect customers, partners, demand, operations and financial results. The filing provides no specific numerical revenue or earnings guidance for the remainder of 2020.
Management expects to continue investing in data-center capacity, research and development, and sales and marketing; these investments may increase expenses. Key disclosed risks include dependence on renewals and Vulnerability Management subscriptions, competition and pricing pressure, channel-partner reliance, cybersecurity or service interruptions, foreign-exchange exposure, privacy and regulatory requirements, and the uncertain COVID-19 impact. A 10% adverse currency move and a 10% interest-rate move were each assessed as not material to financial condition, results or cash flows. The company uses foreign-exchange forwards to hedge exposures.
The filing states that no pending legal proceeding was expected to have a material adverse effect. It disclosed customary indemnification commitments but no recorded liability for them. Management assessed disclosure controls as effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth, renewals and deferred revenue remain strong, particularly given the 72% revenue concentration in Vulnerability Management-related offerings.
- How COVID-19 and broader economic conditions affected customer purchasing, renewals, collections and partner activity after March 31.
- Whether improving margins persist as the company expands hiring, product development and data-center investment.
- The pace and terms of subsequent share repurchases, including use of the additional authorization approved May 7, 2020.
- Liquidity composition and investment-portfolio risk, and the company’s ability to maintain operating cash generation.