Qualys, Inc. CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 6.13 | About: Qualys (QLYS)

Qualys, Inc. (NASDAQ:QLYS)

Q1 2013 Earnings Conference Call

May 06, 2013 05:00 a.m. ET

Executives

Don McCauley - Chief Financial Officer

Philippe Courtot - Chairman and CEO

Analysts

Sterling Auty - JPMorgan

Philip Winslow - Credit Suisse

Robert Breza - RBC Capital Mart

Rob Owens - Pacific Crest Securities

Steven Ashley - Robert W. Baird

Erik Suppiger - JMP Securities

Michael Kim - Imperial Capital, LLC.

Operator

Good day, everyone, and welcome to the Qualys First Quarter 2013 Investor Conference Call. This call is being recorded. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for asking a question will be given at that time.

I would now like to turn the call over to Don McCauley, CFO of Qualys. Please go ahead, sir.

Don McCauley

Thank you. And welcome to the Qualys first quarter 2013 investor conference call. I'm Don McCauley, the CFO of Qualys, and joining me today on the call is Phillip Courtot, our Chairman and CEO.

Before we get started we would like to remind you that during this call management expects to make forward-looking-statements within the meaning of the federal securities laws. Forward-looking-statements generally relate to future events or our future financial or operating performance. Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance and expectations for future periods; our expectations regarding the growth of the market for security, compliance and vulnerability management solutions; our expectations regarding the introduction of new solutions and enhancements to existing solutions and our expectations regarding customer adoption of these solutions.

Our expectations and beliefs regarding these matters may not materialize and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K that we filed on March 5, 2013. The forward-looking-statements in this presentation are based on information available to us as of today and we disclaim any obligation to update forward-looking statements except as required by law.

We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings release that is available on our website.

To begin, Philippe will discuss the company's performance for the first quarter 2013. Then I will cover our financial results and factors that drove the quarter in more detail as well as our outlook for the second quarter 2013. Finally, we will open up the call up for your questions.

With that, I'd like to turn the call over to Philippe Courtot.

Philippe Courtot

Thank you, Don. And welcome to all of you that are joining us today. The first quarter of 2013 was another very solid quarter and we are pleased to discuss our results with you as we continue to make substantial progress in all aspects of our business. In the first quarter we added many new important accounts, including Verizon, where we significantly expanded our partnership to cover all Verizon managed services and consulting customers; Volkswagen Brazil; Rovi; Universal Music Group; Bank of Tokyo; Wellington Management; Limelight Networks; HSH Nordbank; MAN Diesel & Turbo Brazil; Sony Computer Entertainment; Fair Isaac and Nationwide Insurance.

While Don will go into the details of the quarter let me give you the financial highlights. Qualys generated revenues of 24.9 million in the first quarter of 2013, which represented 17% growth over the same period last year. This was at the top of our revenue guidance range. We are also in the top end of our guidance ranges in both GAAP and non-GAAP earning per share.

In our previous earning call we told you about the slowdown we have seen in our Europe bookings during the last three quarters of 2012, which impacted our revenue growth rate. We did in fact experience a better order flow in Europe in the first quarter and we expect this positive trend to continue into the second quarter as well. That being said we remain cautious in general about the impact of the European economic climate on our business.

Moving now to our product mix, while our vulnerability management solution continues to be the largest component of our business, we continue to make meaningful progress in diversifying our revenue base as VM comprised 85% of total revenue for the first quarter of 2013 compared to 88% in the first quarter last year. This is the result of the continued sales of our Web Application Scanning and Policy Compliance solutions, which we sell to existing and new customers both of which continue to show strong growth.

We can now clearly see that our investment in building the security and compliance cloud platform upon which we can deliver enhancements in new solution is starting to pay off and will enable Qualys to stay ahead of our competition. During our last call, we discussed our virtualized private cloud platform. In the first quarter of 2013, we continued enhancing it by integrating it with VCE, which is the joint venture between -- with the VCE private cloud, Vblock and VCE being the joint venture between VMware, CISCO, and EMC, which allows us to more quickly ship and deploy our private cloud platform to large customers and partners all around the world and have this platform operational within weeks of being shipped.

At the recent RSA Conference, we announced QualysGuard Web Application Scanning or WAS 3.0 which now includes malware detection for website and integration with Burp Suite for attack simulation, along with advanced scanning configuration and reporting enhancements. WAS 3.0 is presently used by hundreds of organizations worldwide including Microsoft, ABB, Bank of America, and many others. In fact, the Microsoft Information Security and Risk Management team recently published a case study on its use of WAS to efficiently evaluate the security of hundreds of web applications that come online every year, and you can read the full details about this case study on our website.

For our forthcoming Web Application Firewall or WAF, we will enter our second beta phase in early Q3 with two delivery options, the first one in the Amazon Cloud to protect and secure web applications deployed within Amazon Elastic Compute Cloud or EC2, and the second in an appliance form factor to protect websites.

WAF will come fully integrated with our Web Application Scanning Solution providing automated discovery, scanning, and mitigations of web application vulnerabilities. This is a powerful deployment strategy as more and more applications are moving into the cloud, and we expect to have a first mover advantage as the first WAF solution made available with the Amazon EC2 platform as well as a fully-managed appliance on our cloud platform.

We also upgraded our popular BrowserCheck service to businesses of all size to track and continuously monitor relevant browser software, OS setting, and security patches on users' PC. And we expect to release shortly an enhanced MAC version.

We also enhanced our FreeScan services with new audits for Patch Tuesday vulnerabilities, OWASP threats, and SCAP configuration for both internal and external devices, and it’s important to note that both BrowserCheck and FreeScan have become significant contributors to our lead generation activities, and I encourage all of you to experience them directly to ensure that your browser and all of its plugins are updated to the latest security level.

And as we discussed in our last call, we're continuing to heavily invest in expanding our cloud platform to include significant additional functionalities such as real time big data correlation capabilities, global assets inventory discovery and tagging, and adding new and improved capabilities including secure web gateway, web application log analysis, mobile agent technologies and malware protection service.

We currently expect will be ready for beta testing later this year. We are continuing to expand our outreach by signing a number of new technology and channel partners, such partners include FireMon (Lederman Software) the OISG Group, Verizon we mentioned earlier and others.

For a review of our first quarter financial performances and guidance let me now turn the call to Don.

Don McCauley

Thanks, Philippe. Qualys continues to deliver on our key financial and operating metrics and we are pleased with our first quarter 2013 results. Revenues in the first quarter grew to $24.9 million which represented 17% growth over the same quarter last year.

Full quarter bookings were $105.1 million at March 31, 2013 compared to $90.3 million at March 31 2012. This increase to $14.8 million represented a year-over-year growth of 16%. You may recall that during 2012 there was an increase in our current deferred revenues related to our partner’s conversion of a number of legacy subscriptions from completed annual billing. If we were to subtract out this increase to normalize last year’s full quarter bookings metric and full quarter booking a year ago would have been only $88.9 million and the indicated growth rate now would 18%.

There will be a similar normalization effect in the remaining quarters of 2013 as well. To be more specific our estimate of this normalization effect on the indicated full quarter bookings growth rate of the remaining quarter of 2013 will approximately 1.2% for the second quarter, approximately 0.8% for the third quarter and approximately 0.4% for the fourth quarter.

GAAP gross profit increased to $19.1 million compared to $17.0 million in the first quarter last year. GAAP gross margin were 77% for the first quarter of 2013 compared to 80% in the same quarter last year. Non-GAAP gross profit increased to $19.2 million compared to $17.1 million a year-ago. And non-GAAP gross margin was 77% for the first quarter of 2013 compared to 81% in the same quarter last year. For both of these gross profit measures the year-over-year growth was 12%.

As we have discussed previously the decreases in gross margin is related to the increased depreciation resulting from higher levels of capital expenditures to support our growth new solutions and functionality we're developing as well as the expansion of our datacenters in the U.S. and Europe. This planned additional spending started in the second half of 2011 and continued through the first quarter of this year.

Adjusted EBITDA for the first quarter increased by 22% to $2.8 million compared to $2.3 million in the first quarter of 2012. As a percentage of revenues adjusted EBITDA for the first quarter was 11% in both the first quarters of 2013 as well as for 2012. Moving onto earnings per share; for the first quarter we had a GAAP net loss per diluted share of $0.02 versus a net loss of $0.05 per diluted share in the first quarter last year. Shifting to non-GAAP earnings per share the first quarter non-GAAP EPS was $0.01 net income per diluted share compared to $0.02 net income per diluted share in the first quarter of last year.

Turning our focus to the balance sheet we have a strong cash position with $125 million in cash and investments and less than $2 million of debt. In the first quarter spending on capital expenditures was $3.7 million compared to $2.9 million in the first quarter of 2012. And just to repeat our previously stated intention we plan to average about $3 million per quarter on capital expenditures spending this year and next as we enhance our cloud infrastructure to support more customers and add more solutions and functionality to our platform. You'll recall that we just reviewed the effect of capital expenditures spending on our gross margins in the first quarter.

Now turning to our outlook for the second quarter of 2013 we expect revenues to be in the range of $25.9 million to $26.4 million. GAAP EPS for the second quarter this year is expected to be in the range of $0.01 loss to a $0.01 income and non-GAAP EPS is expected to be in the range of $0.02 to $0.04. The second quarter EPS estimates are based on approximately 35.4 million weighted average diluted shares outstanding.

And our full year 2013 guidance remains unchanged as we continue to expect revenues to be in the range of 106 million to 108 million. GAAP EPS is expected it to be in the range of $0.02 to $0.06 per diluted share and non-GAAP EPS is expected to be in the range of $0.16 to $0.20 per diluted share based on approximately 35.7 million weighted average diluted shares outstanding for the full year.

With that, Philippe and I’ll be happy to answer any of your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Sterling Auty from JPMorgan. Your line is open.

Sterling Auty - JPMorgan

Thanks. Hi, guys. I was wondering, the expanded relationship with Verizon, can you just review for us what does that give you access to? I know you said it’s all the NSSP customers, but what portion of their business were you missing and how are they incentivizing the use of Qualys?

Philippe Courtot

Very good. So I think – so, we have, as you'll recall Sterling, we had a prior agreement with Verizon, but we were more -- it was a resell agreement and the sales force was not really commissioned on the sales of Qualys. Today, it is a big change, well now we are the standard, and Verizon is selling Qualys in three ways as we speak, one is with a large contract that they have, where we become a line item on this contract, that’s totally new. The second thing is they have a program called the SMP, a program providing audit services to corporations. We are now the engine into that program. And third, we have now also a reselling relationship, whereby now the sales force is fully commissioned on the Qualys services.

Sterling Auty - JPMorgan

Got you. And on the web application scanning, how much of the growth is coming from more apps coming online in existing customers and they are increasing the usage versus more new customers?

Philippe Courtot

From all directions, in fact both we have significant uptake on some large customers like Microsoft and Bank of America but also new customers which are now starting with Web Application Scanning, and we have also existing customers which are now moving to the Web Application Scanning solution.

Sterling Auty - JPMorgan

Okay and last question. It sounds like Europe improved in the quarter for you. Obviously, North America was squishy for a lot of your peers. Do you have a sense as we are looking here in the June quarter, do you feel better about the macro environment and perhaps would you start seeing uptick or is it still too early to tell?

Philippe Courtot

I think one thing that I can say is that we have, as you know, essentially what we saw in Europe is more deals which were taking longer, the budget being tighter, so we have in a way, swallow, one word looking at it is kind of swallow that wave, so I think that’s the reason why we see that improvement. We still remain cautious on the business. Europe, as we all know is in difficult position. While conversely in the U.S., we see big, big, momentum being very strong in the U.S. for our solution.

As we see more and more people really wanting to move to a SaaS solution rather than your traditional enterprise software solution, this is what is fueling our success in the U.S. and specifically, as you know, we have a strong presence on the VM side, but on the Web Application Scanning, this is very similar to Facebook.com replacing (Sibel Systems). So we are replacing a lot of the more manual enterprise software solutions with Web Application and Policy Compliance which is also becoming a very strong component of our business.

Sterling Auty - JPMorgan

Got it. Thank you.

Operator

Our next question comes from Phil Winslow from Credit Suisse. Your line is open.

Philip Winslow - Credit Suisse

Thanks guys and good quarter. Obviously going from 88% to 85%, you continue to do a good job of upselling away from just obviously what is still your strength and VM. As you are contemplating the guidance for this coming year both in terms of revenue, but also your OpEx and just the go-to-market strategy, how are you balancing what is still very healthy and growing VM business, but also this just expanding portfolio of new services? Thanks.

Don McCauley

Phil, we have seen a pretty steady rhythm of approximately 1% a quarter shift from VM to the non-VM services, and I think we will continue to see that same trend. VM continues to be solid, so that trend will obviously be a lot faster, VM was not a solid business for us, and we have gotten continued really great momentum in Policy Compliance and Web App Scanning, so we have seen for about three or four quarters in a row this, I think for the full year last year, it moved three points and then year-over-year just now it moved three points. So I would expect it to move between three quarters and full point a quarter. For the foreseeable future, it seems to be the path that we are on.

Philippe Courtot

Yeah maybe, let me add here that one important point to note is that we are selling to the same customers, so this is not like selling to another customer. So, I think these are services which are really very good, it strengthened in fact our VM position on one hand, and also gives us new ways to penetrate customers which are not choosing our VM solution. So this is very significant in fact.

Philip Winslow - Credit Suisse

Great, thanks guys.

Operator

The next question comes from Robert Breza from RBC Capital Markets. Your line is open.

Robert Breza - RBC Capital Mart

Hi, thanks for taking my questions. Don, I was wondering if could you talk to us a little bit how you guys look at your hiring plans for the rest of the year and what kind of shape we can think about relative to the sales force as well as other headcounts. Thank you.

Don McCauley

Hi, Rob. Last year, at the end of 2011 just to refresh everyone’s memory, we finished with 80 -- we had 80 folks in our worldwide sales force, and we said it was our intention to add 30 last year, and we did that. We finished the year at 110, and we are still sitting in around the same number, but we have got plans to probably add about 20 or so to that this year, still digesting and training all the new folks. So, we will have continued expansion of the sales force and that is kind of spread around the world, it also includes our channel organization as well.

Philippe Courtot

And I will add here that we also see a strong demand from big potential partners, and now we deliver more services so therefore the value that Qualys brings to them, I think is getting bigger than just selling VM. So, we have that kind of synergetic effect that we see also with our partners, existing ones and potentially new ones.

Robert Breza - RBC Capital Mart

And then maybe as a follow-up. When you look at some of these partnerships and the ability to kind of make the leverage specifically with Verizon, I know recently I think you have made a significant hire from Verizon into your organization to help foster the NSSP side of things. What kind of leverage can you see from those, I mean is that a 2X or 3X kind of return or just trying to understand the partnership returns versus the direct investment into the sales force? Thanks.

Philippe Courtot

It's a little bit early to speak about multiples here of 2X, what is certain is that we have access to Verizon and other partners who are currently in discussion with two accounts that we could not access before, because this company as you know, an essentially, large multi-year contract with organizations and then we become just a line item, albeit -- not an insignificant line item, but a line item. There is also, if you look at Verizon, they've got about 300 people worldwide which especially specialize in security. So that puts more feet on the street and our challenge of course is to educate them, train them, but we will be building a lot of automated tools, a very nice presentation, in fact if you go to our website you can see we have now presentations on VM, on policy compliance, on web application scanning that our partners can repurpose to bring to their sales force and to the customers.

Robert Breza - RBC Capital Mart

Okay. Thank you very much.

Operator

Our next question comes from Rob Owens from Pacific Crest Securities. Your line is open.

Rob Owens - Pacific Crest Securities

Great, thank you. Don I don’t know if you gave it but did you give mix of revenues by GL and to that extent I was wondering if you guys can elaborate a little bit more around Europe I know it was challenging in the fourth quarter seems to improve here in Q1 and I think we appreciate your conservatism and the outlook relative to Europe. But just trying to understand maybe what improved, I know there were some logistical changes you guys were making over there and just what the tone has been thus far in the June quarter?

Don McCauley

Yes so we have -- no, I didn’t give it in the remarks but our breakdown of revenues currently is 70-30. 70, U.S., 30 international. A year ago it was 67-33 so that reflects the relatively stronger performance we've seen in the United States and relatively weaker performance we saw in Europe last quarter.

Rob Owens - Pacific Crest Securities

Second, around the trends that you actually saw in Europe in Q1 and kind of how you are looking at Q2 with regard to Europe?

Don McCauley

So we had a much better Q1, we had a good bounce back and we're seeing the same kind of thing and what we’ve done so far this quarter and we feel good about our pipeline for Q2. So as Philippe said some of it is deal slippage from last year whatever but Q1 was good, Q2 looks good and I think anyone would have to be cautious in the longer term.

Rob Owens - Pacific Crest Securities

And then just with regard to kind of the overall business what are you guys seeing in terms of pricing and ASPs right now? You had a list of new customers that you guys had talked about, just curious, are you seeing deal sizes compress here, given kind of the global macroeconomic situation and what are you seeing on ASP basis thanks?

Don McCauley

Rob we haven’t seen any compression in fact we will probably do some study on it at mid-year again. But my instinct says deal price may actually be going up a little bit. We're seeing some (inaudible) due to some large upsells by some of our largest customers and but anyway we're not seeing compression.

Rob Owens - Pacific Crest Securities

Thanks Don.

Operator

Our next question comes from Steve Ashley from Robert W. Baird. Your line is open.

Steven Ashley - Robert W. Baird

Great, I'd just like to think about gross margins and just confirm the 100% of your gross margin decline year-over-year related to depreciation of stores or anything else? How should we think about gross margins going forward?

Don McCauley

Yeah hi Steve most of it is depreciation, we have also increased our staff, we beefed up our operations generally for the new datacenters and the new services that we're offering and so forth. But the larger part is depreciation. And my sense of it is that we are at about the bottoming out level here at 77%. Because we have absorbed now -- I think we have absorbed the lion's share and we're depreciating, if you think about it the last 12 quarters of CapEx. So the thing that hits us is that as the 13th or this quarter drops out it was a small quarter back in 2010, when we had low CapEx and seeing replaced by these quarters where we have been spending around $3 million a quarter.

As far as the staff addition most of them were in last year and that's a pretty stable situation now. So that's just an absorption and of course every quarter the business gets a little bigger so the percentage of that drop goes down.

Steven Ashley - Robert W. Baird

And do you hope that gross margins slip back towards 80% over time?

Don McCauley

Absolutely yes, over time I think that our margins will start to head north again and return to where they were prior to this step-up in CapEx for the reasons that we talked about.

Steven Ashley - Robert W. Baird

Any quick comments on how your channel partners performed in the period?

Don McCauley

Good, we think we have consistent performance there. I think we are still at around 60-40 direct versus indirect and solid performance by channel partners.

Steven Ashley - Robert W. Baird

Thank you.

Operator

Our next question comes from Erik Suppiger from JMP Securities. Your line is open.

Erik Suppiger - JMP Securities

Yeah, first off any comments on how the private cloud product did, with the Vblock any contribution metrics or anything we can gauge its success with?

Philippe Courtot

On the Vblock specifically not yet, but we have already shipped the virtualized version, it's already shipping. We have retrofitted all of our existing private cloud, which were the non-virtualized. So we retrofitted all of them, about 10 of them, if I recall correctly, for setting virtualized. We also shipped the new virtualized one, but not under VCE platform, we are now finishing the full integration with VCE. We are hoping to be pre-certified in fact under the VCE platform and in fact so this ongoing but it's almost finished and we are now planning to start shipping the VCE block.

Erik Suppiger - JMP Securities

On the renewals what is the normal seasonality that you see in the June quarter versus say the March quarter, is there any seasonal effect on your gross?

Don McCauley

No, no discernible difference Q2 versus the other quarters.

Erik Suppiger - JMP Securities

Okay, all right. That's it, all my question. Thank you.

Operator

(Operator Instructions). Our next question comes from Michael Kim from Imperial Capital. Your line is open.

Michael Kim - Imperial Capital, LLC.

Hi, good afternoon guys. Could you talk a little about the contribution from customers that take on multiple services, I think a while back you guys provided metrics, somewhere around 80% of the customer base now hitting something like one solution. Just curious if you can provide some more color on customers taking more than one solution?

Don McCauley

Yeah, so hi, Michael this is Don. So we are seeing consistent performance here. We keep taking on lot of new customers. So the ratio I think is still around 80-20. And but that's because we keep adding lot of new customers as well. And a lot of our customers in the pipeline, many of them are -- Philippe was alluding to existing customers now are looking, at web app scanning and policy compliance and so I think we have a good chance for that to pick up as we move through the year, but at the moment it's still 80-20.

Michael Kim - Imperial Capital, LLC

Great and then specific to web app scanning and policy compliance is that driven primarily by existing customers converting or new customers coming in, -- to that are they still predominantly more oriented towards VM at this point?

Don McCauley

So policy compliance I would characterize as principally an upsell from customers that have VM. I think we only have a couple of instances of customers that have come here and done policy compliance as their first thing. Web app scanning on the other hand is quite balanced. While many of our existing customers taking Web app scanning we have got hundreds of customers that have come abroad where web app scanning is the first thing and at the moment the only thing they have bought from Qualys. So we are seeing a very good mix on that front and across our entire customer base as well.

Philippe Courtot

And as you may recall once a customer does a web application scanning he has already the Qualys platform, in fact which allows that person to touch on the other service VM and policy on -- without having to essentially install anything else. So it's very easy for them now to try the other services. And they are fully integrated.

Michael Kim - Imperial Capital, LLC

And then lastly can you talk a little about the firewall, so Web App Firewall, any initial feedback at this point and how you are feeling about the feature set relative to comp at this stage.

Philippe Courtot

I think we feel very good so when we did if you recall we touched first of all on the engine itself. So I think this is done. Now what we are seeing, well, very soon we will enter into the testing of the delivery and these two configuration one at Amazon, we will continue the same thing that we did currently with our Web Application, with our VM, where we are pre-authorized on Amazon, we are now currently in fact going through the motions to be pre-authorized on our web applications scanning and then of course we will go through the beta testing of our WAF at Amazon and then its pre-authorization as well. That will give a very powerful solution, fully integrated.

And then we are now building another delivery mechanism which is like Qualys the physical model of having an appliance that now we can put in enterprise, appliance fully remotely managed by Qualys, like we do with our VM solution, like we do with our web application thing. So once you have installed the box Qualys then manages this for the (inaudible) essentially. So these are two new delivery model that do not exist in the market and I think with that and the integration with our web application and planning component, and with our malware detection I think that gives us a significant competitive advantage.

Michael Kim - Imperial Capital, LLC

Great, thank you very much.

Operator

This concludes our Q&A session. I will turn it back to Philippe Courtot for closing remarks.

Philippe Courtot

Okay, thank you. Thank you all for joining us today. We continue to be excited for what 2013 has to offer and believe that we are well positioned to deliver integrated best of cloud security and compliance solutions as we just discussed today to our customers and partners, as we continue to expand our cloud platform and solution set. Should you have any follow-up questions Don and I are always available and we look forward to speaking with your next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.

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