Qualys Down 14% After Q4 Earnings

FOSTER CITY, CA —  Qualys, Inc. (NASDAQ: QLYS), a provider of cloud-based security and compliance solutions, announced financial results for the fourth quarter and full year ended December 31, 2018. Shares in the company were down 14% in trading Wednesday following the earnings release.

For the quarter, the Company reported revenues of $74.2 million, net income under United States Generally Accepted Accounting Principles (“U.S. GAAP”) of $14.4 million, non-GAAP net income of $21.3 million, Adjusted EBITDA of $29.1 million, GAAP earnings per diluted share of $0.35, and non-GAAP earnings per diluted share of $0.51. For the full year ended December 31, 2018, the Company reported revenues of $278.9 million, GAAP net income of $57.3 million, non-GAAP net income of $73.4 million, Adjusted EBITDA of $112.4 million, GAAP earnings per diluted share of $1.37 and non-GAAP earnings per diluted share of $1.75.

“We achieved a solid fourth quarter, ending a strong year during which we grew revenues by 21%, produced record margins, saw new solutions contribute 20% of bookings and benefited from increased multi-product adoption. We delivered an impressive suite of new technology and application components to our Qualys Cloud Platform, including our innovative Global IT Asset Inventory application,” said Philippe Courtot, chairman and CEO of Qualys. “We believe that the scalability, accuracy, immediacy and breadth of our Qualys Cloud Platform continues to enable organizations across the globe to build security into their digital transformation initiatives as well as to consolidate their IT, security and compliance stacks.”

Fourth Quarter 2018 Financial Highlights

Revenues: Revenues for the fourth quarter of 2018 increased by 18% to $74.2 million compared to $62.9 million for the same quarter in 2017.

Gross Profit: GAAP gross profit for the fourth quarter of 2018 increased by 17% to $56.7 million compared to $48.5 million for the same quarter in 2017. GAAP gross margin percentage was 76% for the fourth quarter of 2018 compared to 77% for the same quarter in 2017. Non-GAAP gross profit for the fourth quarter of 2018 increased by 18% to $58.6 million compared to $49.5 million for the same quarter in 2017. Non-GAAP gross margin percentage was 79% for the fourth quarter of 2018 compared to 79% for the same quarter in 2017.

Operating Income: GAAP operating income for the fourth quarter of 2018 increased by 33% to $12.9 million compared to $9.7 million for the same quarter in 2017. As a percentage of revenues, GAAP operating income was 17% for the fourth quarter of 2018 compared to 15% for the same quarter in 2017. Non-GAAP operating income for the fourth quarter of 2018 increased by 22% to $22.8 million compared to $18.7 million for the same quarter in 2017. As a percentage of revenues, non-GAAP operating income was 31% for the fourth quarter of 2018 compared to 30% for the same quarter in 2017.

Net Income: GAAP net income for the fourth quarter of 2018 was $14.4 million, or $0.35 per diluted share, compared to $2.9 million, or $0.07 per diluted share, for the same quarter in 2017. Non-GAAP net income for the fourth quarter of 2018 was $21.3 million, or $0.51 per diluted share, compared to non-GAAP net income of $13.0 million, or $0.32 per diluted share, for the same quarter in 2017. Non-GAAP net income benefited from a $2.3 million true-up of the non-GAAP tax rate; without this benefit, non-GAAP net income for the fourth quarter of 2018 would have been $19.0 million, or $0.46 per diluted share.

Adjusted EBITDA: Adjusted EBITDA (a non-GAAP financial measure) for the fourth quarter of 2018 increased by 22% to $29.1 million compared to $23.8 million for the same quarter in 2017. As a percentage of revenues, Adjusted EBITDA was 39% for the fourth quarter of 2018 compared to 38% for the same quarter in 2017.

Operating Cash Flow: Operating cash flow for the fourth quarter of 2018 increased by 12% to $29.0 million compared to $25.9 million for the same quarter in 2017. As a percentage of revenues, operating cash flow was 39% for the fourth quarter of 2018 compared to 41% for the same quarter in 2017.

Adoption of the new revenue recognition standard (ASC 606): As a result of adopting ASC 606 on January 1, 2018, the company capitalizes commission expenses relating to new and upsell business as contract acquisition costs, and amortizes the expense over 5 years. Without the adoption of ASC 606, commission expenses would have been $1.0 million higher in the fourth quarter of 2018.

Fourth Quarter 2018 Business Highlights

Select New Customers:

  • Banco Santander Spain, Castlight Health, Cathay Pacific, Children’s Hospital Colorado, Databricks, Dyson Ltd., Kering, Old Mutual South Africa, Owens & Minor, Inc., Post Holdings, Shoprite Holdings, State of Kansas, Wind Tre S.p.A.

Business Highlights:

  • Launched the Qualys Container Security solution on the new AWS Marketplace for Containers, enabling customers to gain visibility and security of containerized applications running on Amazon Web Services (AWS), in just a few clicks.
  • Announced an integration with AWS Security Hub, which provides Qualys vulnerability and policy compliance findings within AWS Security Hub, allowing users to prioritize risks and automate remediation using native services such as AWS Lambda.

Full Year 2018 Financial Highlights

Revenues: Revenues for 2018 increased by 21% to $278.9 million compared to $230.8 million for 2017.

Gross Profit: GAAP gross profit for 2018 increased by 19% to $212.7 million compared to $179.2 million for 2017. GAAP gross margin percentage was 76% for 2018 compared to 78% for 2017. Non-GAAP gross profit increased by 20% to $218.8 million for 2018 compared to $181.9 million for 2017. Non-GAAP gross margin percentage was 78% for 2018 compared to 79% for 2017.

Operating Income: GAAP operating income for 2018 was $50.4 million compared to $37.2 million for 2017. Non-GAAP operating income for 2018 was $87.2 million compared to $65.0 million for 2017.

Net Income: GAAP net income for 2018 was $57.3 million, or $1.37 per diluted share, compared to $40.4 million, or $1.01 per diluted share, for 2017. Non-GAAP net income for 2018 was $73.4 million, or $1.75 per diluted share, compared to non-GAAP net income of $43.7 million, or $1.09 per diluted share, for 2017.

Adjusted EBITDA: Adjusted EBITDA (a non-GAAP financial measure) for 2018 increased by 32% to $112.4 million compared to $84.9 million for 2017. As a percentage of revenues, Adjusted EBITDA was 40% for 2018 compared to 37% for 2017.

Operating Cash Flow: Operating cash flow for 2018 was $127.8 million compared to $107.6 million for 2017. As a percentage of revenues, operating cash flow was 46% in 2018 compared to 47% in 2017.

Additional Full Year 2018 Business Highlights

Market Recognition

  • Recognized by IDC for the third year in a row as the market-share leader in the $2.0 billion Worldwide Vulnerability Assessment Market, and as having the fifth largest market share in the $6.7 billion Worldwide Security and Vulnerability Management market.

Products & Features

  • Launched disruptive new solutions and features:
    • Asset Inventory (AI): a new Cloud App with capabilities that provide customers a single ‘source of truth’ for IT assets spread across hybrid environments including on-premises assets, endpoints and clouds, with synchronization capabilities to Configuration Management Databases (CMDBs) to keep asset data up-to-date.
    • Qualys Container Security (CS): A new Cloud App that enables customers to build continuous security into their global container deployments and DevOps processes at any scale, and to integrate the results into one unified view of their global hybrid IT security and compliance posture, breaking down silos and lowering ownership cost.
    • Cloud Inventory (CI) and Cloud Security Assessment (CSA): New Cloud Apps that deliver continuous visibility into public cloud accounts and provide an assessment of the security posture of an organization’s cloud resources against misconfigurations, malicious behavior, and nonstandard deployments.
    • Certificate Inventory (CRI) and Certificate Assessment (CRA): CRI continuously scans global IT assets from a single console to discover internal and external certificates issued from any certificate authority across all enterprise IT assets, both on premises and in clouds. CRA assesses certificates and underlying SSL/TLS configurations and vulnerabilities across global IT assets to prevent downtime and outages, and mitigate risks from expired or vulnerable SSL/TLS certificates and configurations.
    • Web Application Scanning (WAS) 6.0: A new integration with Jenkins, Swagger and a new Chrome Browser Recorder extension further automate web application scanning in DevOps, and streamline REST API testing to help teams automate and operationalize global DevSecOps throughout the Software Development Lifecycle (SDLC).
    • Out-of-Band Configuration Assessment (OCA): a sensor and Cloud App that allows customers to achieve complete visibility of all known IT infrastructure by pushing vulnerability and configuration data to the Qualys Cloud Platform from systems that are otherwise difficult or impossible to assess.
    • Passive Network Sensor (PNS): a new member of the Qualys sensor family that natively integrates network analysis functions into the Qualys Cloud Platform, delivering customers complete IT visibility at scale, while drastically reducing cost and complexity. Currently in beta.
    • New Cloud Security Assessment features for monitoring and assessment for the Center for Internet Security, Inc. (CIS) Microsoft Azure Foundations Benchmark.
    • New functionality in our Security Assessment Questionnaire (SAQ) Cloud App that allows customers to better achieve visibility of data across their own network and supply chain for compliance with the European Union’s General Data Protection Regulation (GDPR).
  • Introduced the Qualys Consulting Edition, a comprehensive offering for consultants, security consulting organizations and managed service providers (MSPs) that brings them the power and scale of the Qualys Cloud Platform in an easy-to-deploy, easy-to-use and cost-effective solution.
  • Delivered three new free groundbreaking solutions:
    • CertView, which helps customers inventory and assess certificates and underlying SSL/TLS configurations and vulnerabilities across external-facing assets to prevent downtime and outages, and to mitigate risks associated with expired or vulnerable SSL/TLS certificates and configurations.
    • CloudView, which delivers customers topological visibility and insight about the security and compliance posture of their public cloud infrastructure for major providers including AWS, Microsoft Azure and Google Cloud.
    • Qualys Community Edition, which gives small organizations unified visibility of their own or their clients’ IT and web assets, allowing users to leverage the Qualys Cloud Platform to automatically gather and analyze security and compliance data from hybrid IT environments.
  • Accelerated technology roadmap with key acquisitions and investments:
    • Acquired the software assets of 1Mobility, Singapore, allowing Qualys to provide enterprises the ability to inventory and assess mobile devices, and quarantine compromised or out-of-compliance devices. It also allows Qualys to extend its PCI certification to mobile devices and to deliver a highly scalable Enterprise Mobility Management (EMM) solution.
    • Acquired container-native security company Layered Insight, enabling Qualys to add runtime defense capabilities and automated enforcement to its current Container Security solution, and to automatically correlate deep runtime behavioral analysis with Qualys’ leading threat protection capabilities — delivering DevOps teams high runtime application protection without added container management complexity.
    • Purchased a minority stake in 42Crunch Ltd. as the first Qualys venture investment and simultaneously signed a distribution agreement. 42Crunch has developed an API security platform enabling organizations to quickly deliver applications built on secure APIs.

Business Development

  • Provided an integration with the Cloud Security Command Center (Cloud SCC) for Google Cloud Platform (GCP), providing security teams a single pane for security features, policies, and insights across Google Cloud platform, and adding vulnerability management and threat data for compute engine instances within a GCP project.
  • Delivered an integration with Illumio’s solutions to deliver the industry’s first vulnerability-based micro-segmentation, which enables organizations to visualize vulnerabilities across data centers and clouds through a real-time global vulnerability map.
  • Expanded our partnership under which Carahsoft will proactively market, sell and distribute the FedRAMP-authorized Qualys Gov Platform to federal agencies as well as state and local governments.
  • Deepened the existing relationship with IBM X-Force Red to leverage the Qualys Cloud Platform as part of its Vulnerability Management Services (VMS), deploying the Qualys Cloud Agent and Qualys Cloud Apps into client environments as part of a programmatic vulnerability management approach to identify, prioritize and remediate clients’ most critical vulnerabilities.
  • Announced a new integration with Microsoft Azure Stack that provides a single-pane view of the security and compliance posture of Microsoft Azure infrastructure and user workloads, allowing Azure customers to assess the vulnerability and compliance posture of Azure Stack’s control plane infrastructure, and get the advisory published by Microsoft Azure.
  • Announced a joint solution, the Healthcare Cloud Security Stack (HCSS) for Microsoft Azure, which allows healthcare entities to build security into their data-driven healthcare decision-making applications as they migrate workloads to the cloud.

Financial Performance Outlook

First Quarter 2019 Guidance: Management expects revenues for the first quarter of 2019 to be in the range of $74.5 million to $75.2 million, representing 15% to 16% growth over the same quarter in 2018. GAAP net income per diluted share is expected to be in the range of $0.16 to $0.18, which assumes an effective income tax rate of 26%. Non-GAAP net income per diluted share is expected to be in the range of $0.41 to $0.43, which assumes an effective non-GAAP income tax rate of 22%. First quarter 2019 earnings per share estimates are based on approximately 41.6 million weighted average diluted shares outstanding for the quarter.

Full Year 2019 Guidance: Management expects revenues for the full year 2019 to be in the range of $320.0 million to $323.0 million, representing 15% to 16% growth over 2018. GAAP net income per diluted share is expected to be in the range of $0.90 to $0.95, which assumes an effective income tax rate of 26%. Non-GAAP net income per diluted share is expected to be in the range of $1.84 to $1.89, which assumes an effective non-GAAP income tax rate of 22%. Full year 2019 earnings per share estimates are based on approximately 42.1 million weighted average diluted shares outstanding.