Qualys' (QLYS) CEO Philippe Courtot on Q4 2015 Results - Earnings Call Transcript

| About: Qualys (QLYS)

Qualys, Inc. (NASDAQ:QLYS)

Q4 2015 Results Earnings Conference Call

February 08, 2016 04:30 PM ET

Executives

Don McCauley - CFO

Philippe Courtot - Chairman, President and CEO

Analysts

Sterling Auty - JP Morgan

Siti Panigrahi - Credit Suisse

Steve Ashley - Robert W. Baird

Dan Bergstrom - RBC Capital Markets

Srini Nandury - Summit Research

Michael Kim - Imperial Capital

John Lucia - JMP Securities

Rob Owens - Pacific Crest Securities

Craig Nankervis - First Analysis

Gur Talpaz - Stifel

Alban Cousin - Arete

Operator

Good day, everyone, and welcome to the Qualys Fourth Quarter and Full Year 2015 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 Mr. Don McCauley, CFO of Qualys. Please go head, sir.

Don McCauley

Well, thank you, and welcome to Qualys fourth quarter and full year 2015 investor conference call. I’m Don McCauley, CFO, and I’m here with Philippe Courtot, our Chairman, President and CEO.

We would like to remind you that during this call, we expect 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 the following list, statements related to our business and financial performance and expectations for future periods including the rate of growth of our business, our expectations regarding capital expenditures including investments in our cloud infrastructure and the intended uses and benefits of those expenditures, trends related to the diversification of our revenue base, our ability to sell additional solutions to our customer base and the strength of demand for those solutions, our plans regarding the development of our technology and its expected timing, our expectations regarding the capabilities of our platform and solutions, the anticipated needs of our customers, our strategy, the scalability of our strategy, our ability to execute our strategy and our expectations regarding our market position, the expansion of our platform and our delivery of new solutions, the expansion of our partnerships and the related benefits of those partnerships, our ability to effectively manage our cost, and finally our expectations for the number of weighted average diluted shares outstanding and the effective GAAP and non-GAAP income tax rates for the first quarter and full year 2016.

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 quarterly report on Form 10-Q that we filed on November, 5, 2015.

The forward-looking statements in this presentation are based on information available to us as of today and we disclaim any obligation to update any 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 press release issued earlier today.

Now, to begin the discussion, Philippe will provide an overview of the Company’s performance for the fourth quarter and full year 2015, then I will cover our financial results and factors that drove the fourth quarter in more detail, as well as our outlook for the first quarter and full year 2016. Then, we will open up the call for your questions.

With that, I will now turn the call over to Philippe.

Philippe Courtot

Thank you, Don, and welcome to all of you. The fourth quarter of 2015 was another excellent quarter for Qualys, capping another record year for the Company. Don will cover the financial details of our performance for the quarter and full year. I will first start off with an overview of the key structures driving our business and positioning Qualys for even more success in 2016 and beyond.

2016 was a fantastic year for us, as we expanded our cloud platform with AssetView which provides customizable dashboard and ElasticSearch capabilities and with our groundbreaking Cloud Agent technology.

The ElasticSearch capabilities allows our customers to search across millions of IT assets in seconds to create customizable dashboard, while our Cloud Agent allows our customers to perform continuous vulnerability and compliance management on many assets whether on-premise, in the cloud or on endpoint, and this without the need of establishing scanning windows and such credentials. So, these of course strongly enhance our Vulnerability Management and Policy Compliance offerings and give us a clear differentiator when compared with other solutions.

Furthermore, both the ElasticSearch capabilities and our Cloud Agent platform allows us to introduce a series of new services, and we plan to reveal the details of these new services at the upcoming RSA Conference in San Francisco at the end of this month.

In the fourth quarter, we added a number of new accounts including Biogen, Boyd Gaming, Capital Group, Chicago Bridge & Iron, CNO Financial Group, Cotiviti, Delphi, Dentons, Discovery Communications, HCA Healthcare, Herbalife, Hindustan Unilever, Jive Software, Kingfisher, National Financial Partners, Norfolk Southern and University Hospitals Health System. For 2015, added approximately 1,100 new customers compared to approximately 1,000 in 2014. And this brings our total customer count now to over 8,800 customers.

We continue to expand our partnerships and global distribution channels through leading managed security providers, global consulting organizations, and outsourcing providers. This will also remain a big focus for us in 2016.

Our industry-leading Vulnerability Management solution grew at approximately 18% in 2016. Our new services which include Web Application Scanning, Policy Compliance and web application forward [ph] grew at approximately 35%. And as we have discussed previously, these growth rates were negatively impacted by the headwinds we have seen from currency fluctuation during the past year. An indication of our continued success in diversifying our platform offerings is that as of December 31, 2015, 62% of our customers had subscribed to more than one solution and these metrics stood at 30% at the end of 2013 and 54% at the end of 2014.

In anticipation of the adoption of our Cloud Agents and new services to come as well as the fact that Qualys has become a strategic vendor with many of the Fortune 500s, we’ve expanded our sales force including several new sales leaders, as a result we have additional sales personnel that are equipped to set up at higher executive level in the enterprise.

And before I turn the call to Don, you may have seen on the wall that we have added to our board Todd Headley which was the former CFO of Sourcefire, which is a great addition to our team.

And now for the review of our financial performance and our guidance, I will turn the call over to Don.

Don McCauley

Thanks, Philippe. Again, as previously mentioned, our fourth quarter and full year 2015 results were excellent. Revenues grew in the fourth quarter to $44.4 million, which represented 22% growth over the fourth quarter of 2014. Full year 2015 revenues grew 23% to $164.3 million. Our current deferred revenue balance is $98.0 million as of 12/31/15, which is 21% greater than our balance at December 31, 2014.

Now, a quick revenue of some revenue metrics. For the fourth quarter, the U.S. represented 70% of revenues, the same percentage as in the fourth quarter of 2014. Also, we derived 78.7% of fourth quarter revenues from subscriptions to our Vulnerability Management solution compared to 80% in the fourth quarter of 2014.

Annually, we further examined the components of our revenue growth. In 2015, total revenues grew by $30.7 million to the $164.3 million I mentioned earlier. That $30.7 million increase was comprised of $18.9 million of revenue growth from existing customers and $11.8 million of revenues generated from new customers acquired in 2015. In 2014, the comparable numbers were an increase in total revenues of $25.6 million comprised of $15.7 million of revenue growth from existing customers and $9.9 million of revenues generated from new customers acquired in 2014. In 2015, the revenue increased from existing customers, represented 114.1% of 2014’s total revenues which compares to 114.5% a year ago.

GAAP gross profit increased by 22% to $35.4 million in the fourth quarter of 2015 compared to $29.1 million in the prior year period. GAAP gross margin was 80% for the fourth quarter of 2015 compared to 79% in the same period last year. Non-GAAP gross margin was 80% for both fourth quarter periods in 2015 and 2014.

For the full year, 2015 GAAP gross profit increased to $130.4 million compared to $104.6 million in 2014. GAAP gross margin was 79% in 2015 compared to 78% in 2014. And non-GAAP gross margin was 80% in 2015 compared to 79% in 2014.

Adjusted EBITDA for the fourth quarter of 2015 increased by 53% to $16.4 million compared to $10.7 million in 2014. Adjusted EBITDA as a percentage of revenues increased to 37% in the fourth quarter of 2015 compared with 29% in the same quarter of 2014. For the full year, adjusted EBITDA increased by 79% to $56.7 million compared $31.7 million in 2014. And as a percentage of revenues, adjusted EBITDA increased to 34% for 2015 compared to 24% for 2014.

Net-cash from operations in 2015 increased by 59% to $66.0 million compared to $41.4 million in 2014. Free cash flow for 2015 increased by 67% to $45.8 million compared to $27.4 million in 2014.

In the fourth quarter of 2015, capital expenditures were $5.2 million compared to $3.6 million in the fourth quarter of 2014. In the first quarter of 2016, we expect capital expenditures to be in the range of $5 million to $6 million.

Moving on now to earnings per share: For the fourth quarter of 2015 GAAP EPS was $0.14 per diluted share versus $0.69 for the fourth quarter of 2014. You may recall that in the fourth quarter last year we recognized $23.7 million or $0.63 per diluted share of U.S. Federal and certain state deferred tax assets. So, the comparison without that time item is $0.14 per share in the fourth quarter of 2015, as I just said compared to $0.06 in the fourth quarter of 2014. For the full year 2015, GAAP EPS was $0.42 per diluted share versus $0.81 from the prior year, as deferred tax asset item accounted for $0.64 on a full year basis in 2014. So the comparison excluding that item is $0.42 per diluted share in 2015 compared to $0.17 per diluted share in 2014.

Non-GAAP EPS was $0.21 per diluted share in the fourth quarter of ‘15 compared to $0.15 in the fourth quarter of ‘14. For the full year 2015, non-GAAP EPS was $0.70 per diluted share compared to $0.46 in 2014.

Now turning to our guidance, starting with revenues. For the first quarter of 2016, we expect revenues to be in the range of $44.7 million to $45.4 million. At the midpoint, this represents 20% growth over first quarter 2015 revenues. For the full year 2016, we expect revenues to be in the range of $195.6 million to $198.6 million. At the midpoint, this represents 20% growth over 2015 revenues.

As to earnings per share guidance, we expect GAAP EPS for the first quarter of 2016 to be in the range of $0.06 to $0.08 and non-GAAP EPS is expected to be in the range of $0.14 to $0.16. For the full year of 2016, we expect GAAP EPS to be in the range of $0.36 to $0.41 and non-GAAP EPS is expected to be in the range of $0.74 to $0.79.

Our first quarter EPS estimates are based on approximately 38.4 million weighted average diluted shares outstanding, and our full year 2016 EPS estimates are based on approximately 38.9 million shares outstanding. For the first quarter and full year 2016, we have used an expected effective GAAP tax rate of 37% and expected effective non-GAAP tax rate of 36%.

Before I turn the call back to Philippe, I wanted to note that this will be my final earnings call with Qualys. As you have likely seen, I’ve decided to leave the Company as of March 1st. Between now and then, I’ll oversea the filing and certification of Qualys with its 10-K filings. I would like to say that it’s been a pleasure working with Philippe and the team over these past 10 years.

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

Question-and-Answer Session

Operator

[Operator Instruction] Our first question comes from Sterling Auty with JPMorgan. Your line is open.

Sterling Auty

I wanted to start by saying Don, thank you so much; it’s been a pleasure working with you all these years and hopefully we’ll get a chance to do so going forward.

On to the business, I am kind of curious, looking at the revenue results for the quarter and the guidance for the first quarter, it would like seem like there is some softness in the business. Looking at the mix, I guess my initial read is it’s sounds like it’s not Vulnerability Management but maybe the rest of the solutions that perhaps aren’t growing as robustly as they were that’s causing the trajectory to slow. Is that the right conclusion and what are you seeing in the marketplace around that?

Philippe Courtot

What we see today is that work coming up with these agents which are starting to come up pretty good, which I think are going to allow us to maintain and accelerate the growth of both the Vulnerability Management and the Policy Compliance. These agent technologies are really are absolutely a game changer for the reason that I mentioned earlier on the call is a sense that they expanded the capabilities of the vulnerability management significantly. So that’s what we see. So of course, we have big headwinds on the dollars, which have taken of course effect and we are cautious. We’re entering into a period which obviously there is a lot of strain everywhere. So, we are cautious for the business as you have seen we have built a fantastic franchise with type of customers, a very powerful business model. So, there is no fundamental change here.

Sterling Auty

But just maybe, as a follow-up looking at the currency, the currency headwinds have been there for the better part of 2015 for most of the companies in the space including yourselves. But yet, it seems like we’re seeing I guess an incremental change to the trajectory. Is it that you’re seeing customers pausing on decisions as they’re trying to make the decision around the agent based solution, so maybe we’re not getting the uptake that perhaps you would have thought in terms of their regular orders and so we get enough comfort around the agents and we start seeing bigger deals or is it something else?

Philippe Courtot

No, there is another factor also, which is happening today that our business, as we said in fact in the very beginning in public that gradually where we move from a more direct model to more indirect model, and this is what is happening. So, we can see today that all the partners that we’ve established are starting to essentially helps us grow the business. But of course it affects to some degree the top-line while being very positive in fact -- on the expense line, because we don’t need to build of course as big of a direct and expenses thresholds that we’ll have to if we were more direct. And we still have -- or another quarter or two.

Operator

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

Siti Panigrahi

Hi guys. Actually this is Siti Panigrahi. Don, I also extend my thanks. It’s great working with you, and wish you good luck for your future endeavors. I just wanted to focus on the guidance on the earnings side. Your EPS and implied margin seems to be below consensus. Just wondering, as you’re planning to launch new products this year, how much of that due to the investment in sales, marketing versus other factors?

Philippe Courtot

Yes. So, definitely we’re looking on spending a little more money on the marketing side. We’re also looking at attracting additional senior management because we believe we have the opportunity to really build significant company, [ph] now the foundation, the foundation -- they’re extremely strong, both on the technical standpoint with our platform, but of course as well with our financial. So today, we have for example [indiscernible] which is [indiscernible] corporate development and experienced person, so we could focus more on the acquisitions and quite a few other executives that we’re looking at attracting to the company, so that’s what it explains.

Don McCauley

Hey Siti, this is Don, just another quick footnote. Another small factor there is that we’re looking at slightly higher tax rate for this year than last year.

Siti Panigrahi

And then in terms of sales force hiring, last quarter you had you said I think five only. But could you give how many you hired Q4 and what’s your plan for FY ‘16?

Don McCauley

Yes. So, we hired 10 in the fourth quarter bringing up to 20 for the year, which is in line with what we said at the beginning. And I think we’re going to not give an explicit goal going forward. So, we added five in the third quarter and 10 in the fourth quarter.

Operator

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

Steve Ashley

Hi, thanks for taking my question. So, your guidance for the coming year at the midpoint calls for 20% top-line growth. What does that assume about -- what kind of growth in the core VM business?

Philippe Courtot

About the same, if not above we expect -- but again this is looking forward that we’re going to see by year-end probably some, because of the agents even more strength on the VM business because as you may recall, our agents, we count Cloud Agents if they’re for VM into the VM revenue if they are Policy Compliance into the Policy Compliance revenue. And then all these additional services that we are going to release this year will be counted as new businesses -- as new services.

Steve Ashley

Is there any color you could give us on the percentage of the business that is going indirect today and maybe how that compared to a year ago and how that’s changing?

Philippe Courtot

What I could say is that we have -- well, essentially had about 3% of our business moving from direct to indirect.

Don McCauley

And it’s still above 40% indirect, Siti.

Steve Ashley

I am sorry, you are saying that that was up 300 basis points year-over-yearish, is that kind of what…?

Philippe Courtot

Correct.

Operator

Our next question comes from Matt Hedberg from RBC Capital Markets. Your line is open.

Dan Bergstrom

Hi, it’s Dan Bergstrom for Matt Hedberg. Thanks for taking my questions. Don, the change in current first quarter was the largest we’ve ever seen, any color on what’s behind that; is it initial cloud agent uptake?

Don McCauley

In current deferred revenue?

Dan Bergstrom

Yes.

Don McCauley

The fourth quarter is our strongest bookings quarter of the year and deferred revenue balance is about 21% ahead of last year. So, it’s line with all the other metrics. Since that’s fourth quarter, we typically book a little over 30% of our annual bookings in Q4, so that’s the quarter where you see the biggest jump in deferred.

Dan Bergstrom

Okay. And then last quarter, you talked to ramping up the marketing campaigns around Cloud Agent, just wondering if those are underway at this point and anymore…

Philippe Courtot

Yes, we’ve already started and you would see in fact more at RSA. So, we have just started to -- the first campaign around AssetView which now are hitting. Just we hired in fact the VP of Digital Marketing recently. So, we’re already starting to gain big time around these new services.

Operator

Our next question comes from Srini Nandury from Summit Research. Your line is open.

Srini Nandury

Thank you, for taking my call. Philippe, on the press release, you actually mentioned that you released the Cloud Agent software for Windows and you have beta on Linux and Mac OS. What is the time band for the launch of these products? Can you give us a high level run down on the products which you expect to launch at RSA next month?

Philippe Courtot

Yes. So, in fact today, we are almost about to release to GA the Unix agents; it’s a question of days, and then next month it would be Mac OS.

Srini Nandury

I see, okay. If I may, one more question. Philippe, can you talk about your thoughts on your international expansion strategy? You still get 70% of your revenue in the U.S. Is there a structural issue in the Europe and Asia to grow more rapidly there; where would you need to grow there in fact faster?

Philippe Courtot

In fact what is happening today is that in the U.S. we are doing much bigger deals that we do in Europe, in general. So, I think we’re very happy with our European operation and international operation which are going very well. The big difference is that today we are doing much bigger of sales and much bigger deals in the U.S. This being said, it’s also we can see Europe always lag by about a year to two years depending to what is happening in the U.S. So, our ability to bigger sales is related to new. This is something which happened in 2015. And in Europe, we can see that happening as well starting to happen now in Europe. So, we are very well set in Europe, in every country we have a very strong presence. We made an investment early on with 20 leader companies worldwide, toward global company we made investment and that speaks again to the scalability of our model. We made that huge investment of being -- we operate in 106 countries but 20 small these companies that we have to declare taxes and pay taxes which is absolutely -- and do payroll but we have been there over the years with that. So, this is going to help us scale as well very well.

Operator

Our next question comes from Michael Kim from Imperial Capital. Your line is open.

Michael Kim

Hi, good afternoon guys. Hey Don, likewise, I wish you the best in your next venture. And it’s been great working with you past couple of years. First question was about the delayed large deals in Policy Compliance, Web Application Scanning last quarter. Did those close in the current quarter and contribute to the current deferred?

Philippe Courtot

So, they didn’t contribute to the current deferred.

Don McCauley

Say it again Mike, I don’t want to get it wrong.

Michael Kim

I think last quarter you highlighted a couple of larger deals and one in Policy Compliance and one in Web App Scanning that was pushed out into the quarters?

Don McCauley

Yes, I think those are still works in progress and didn’t contribute to deferred, yet.

Michael Kim

Okay. And then just going back to core the VM business, are you trying to see an acceleration to customer conversions or early conversions of former McAfee customers, and what kind of things you are doing to obtain some of those customer conversions?

Philippe Courtot

So, we have to -- you have to make the distinction between the large accounts which have been always just there because of the scalability, unique scalability of our platform and then more of the mid markets. So, we were already engaged into many of these replacement deals that take a bit longer because you don’t repass an application like VM, just like that. McAfee, as you may recall, I’ve committed that they would continue to support for two years and I think that extended for another year after. So, these deals at the high-end are taking a certain amount of time which typically. So, we don’t see an acceleration, what we see is that of course a decision by companies to move away from McAfee, since they are not supporting the product anymore.

On the mid range that’s a little bit different; it’s more dynamic market. And we are competing here against the traditional suspects here which are essentially our traditional competitors and we are doing very well.

Operator

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

John Lucia

This is John Lucia on for Erik. Philippe, early in the call I think you said that in reference to your guide that you are entering a period of strain. And I wanted to understand if you meant that -- that was all related to currency issues or if you are also discussing the spending environment in North America? Just getting and understanding of your take on the spending environment in North America would be helpful?

Philippe Courtot

I think what I would say is that it’s very clear that the days where companies were buying these kind of magical products which were going back I think then to essentially secure find [indiscernible] the companies these days are starting to fail. So that’s for the general tone. And the market conversely I think has favored us very well because what companies are now figuring out is that you cannot secure what you don’t know. So, being capable of doing the full [ph] continuous inventory of your assets is becoming very important; to try to identify their vulnerabilities is also very important. And now with the new services bringing to market, we are going to also help you to identify those vulnerabilities which are prone to be compromised and receives payload. So, this is part of the some of the new announcements that we are going to make very soon.

So, we see that Vulnerability Management is an application which some people say it’s commoditized; we don’t see that at all. We believe this an application which is in fact mostly into a very critical application allowing you want to discover what you have, second to identify your vulnerabilities [ph] prioritize those who could be the most damaging, if you prefer and also going moving with the new things that we are doing into prevention. So, we see in fact Qualys is becoming more and more strategic on one hand and all of large customers, they understand that very well. And second, we are adding -- by adding more and more services, we are becoming the strategic vendors. And we today have been named as the strategic vendors for quite a few a large corporations because they see that Qualys not only allows them to do what I just said, but also we consolidate quite a few of the strategic [ph] point solutions. And by year-end, we will probably -- will be able to consolidate -- currently today we consolidate about five applications; we’ll probably double that by year-end. All of that are the same cloud platforms which as you may recall we can very uniquely deliver as an on-premise solution and we see today that Azure is doing exactly the same thing but providing Azure as an off-premise solution but yet keeping the same core pace. So, we have the scalability from an engineering stand point which allows us to continue to essentially be more -- on the engineering side -- the five goals of engineering time that we invested big time in Pune in India is also paying us a big time. So, we see in fact that our position in the marketplace is strengthening significantly but I think we have to be prudent because today I mean there is macroeconomic factors which as we all know are not very encouraging.

John Lucia

Okay, and then I have one follow-up. I think that 62% of customers have purchased more than one product at this point, that’s up from 61% in the prior quarter and then in 3Q, I think the increase was only 1% as well 60% to 61%. I know it gets more difficult as the numbers get larger but are you finding it more difficult to penetrate your customer base now that you have larger customers that have purchased more than one product or what is that dynamic?

Philippe Courtot

That’s a good question about the dynamic because yes, it’s an issue of dynamic here. The large companies are really adapting more than one solution much more than the smaller companies because we have essentially three businesses here. We have the enterprise business, we have mid-market business and we have the small businesses. So, there is much less of sale on the small businesses because we have a tendency to create more work in all in one solution. So, of course in terms of numbers of customers et cetera, we have more smaller businesses than large businesses obviously. So, what in a way reflects the fact that we are not -- there is going to be a point where we probably I would say cannot reach 100%. Now, this being said, we are also shipping additional services, so that of course as additional services give us another penetration capabilities and other upside opportunities, so I think because of that we are going to believe -- I believe that we are going to continue getting more of these customers buying more than one solution.

Operator

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

Rob Owens

Just curious around the growth side of the equation. I think a few months in Las Vegas at your Analyst Day, you laid out a plan for a five-year target model. And if I recall, it was kind of more of a mid-20 separate growth rate. Now you’re guiding to about 20%. I actually believe on my math that the margins go down on a year-over-year basis for ‘16 versus ‘15. So, how are you thinking about balancing growth versus margin? And does the current kind of state of the economy or the industries you’re playing in kind of remove that five year target model?

Don McCauley

Yes. Rob, the five-year target model is still intact and the key to get from here to there is all the new products that Qualys expects to shift over the next year or two. There is a really significant expansion coming off by and large selling three products today and there is quite a few other ones coming. So the five-year plan is really driven by the growth, probably especially the agent which will drive several new products plus extend VM and Policy Compliance as well as number of other new products that Philippe mentioned earlier. So there is not a disconnect, it’s just that the new products are coming this year and next year and will be a big part of that five-year plan.

Philippe Courtot

Annual win on our way to the model also, this is another thing, we are not -- this is we already have built model that shows that visibility.

Operator

[Operator Instructions] Our next question comes from Craig Nankervis from First Analysis. Your line is open.

Craig Nankervis

Thanks. Good afternoon. And Don, I echo the sentiment, so wish you very best in your next adventure, and certainly enjoyed working with you. I guess, as you think about 2016, I’m wondering if you could elaborate a bit on your outlook specifically for Policy Compliance and Web Application Scanning versus how you saw them play out in 2015?

Philippe Courtot

I think on the Web Application Scanning, I think we see the same. One of the things that we’re expecting to see as the driver and as an accelerator of how Web Application Scanning -- our Web Application Firewall and as I mentioned we have to go back to the engineering drawings to make it a little bit better than it was which we’re doing best. And I think we are making very good progress. So that I think we’ll accelerate when we deliver best solution, because it’s both the hands and gloves with Web Application Scanning. As you may recall, the problem with web -- we can discover web applications very well, much better than anybody but then what you do, when you are applying -- vulnerability and the code, you’ve got to think the code and that’s very, very difficult to do. So the solution is really a very good Web Application Firewall in front of it. So that’s we’re continuing working at this one. And once we deliver that I think we would see Web Application Scanning accelerated. So for the moment, the web application continues about the same.

As far as the Policy Compliance, we believe there are two new factors. First of all, the agent really makes the Policy Compliance very effective. So we see that the agent giving a boost to the Policy Compliance. And in addition, we are in fact now -- essentially we have the security assessment questionnaire, [ph] which is another component of Policy Compliance, which I think will be very helpful there. This is in our GA. And then we also are working on File Integrity Monitoring which would come later this year, which would be another expansion of Policy Compliance. So we see very good continued growth on the Policy Compliance application as well.

Craig Nankervis

Do you differentiate in your view across your three products? You looking at this year, do you have a similar outlook for Vulnerability Management on the other two, we just discussed or do you see some reasonable difference for one or two of them versus the other, just your outlook for them?

Philippe Courtot

It’s a little bit difficult to say, because they are specially -- I would say about the same. It’s a little bit difficult because once we, for example ship the File Integrity Monitoring, it’s a more expensive application but you deliver that in less, across less servers essentially; you just typically do that on the critical servers or on the endpoint. So, the endpoint is also totally new game for us, because we could not access the endpoint and that’s really where we see a big boost for both VM and Policy Compliance now that we can essentially very successfully have the endpoint.

Finally with the agent there is another thing that we could not do before. Now today with the agent we’re able now to address the security of these elastic cloud; the configuration that’s totally greenfield for us. We have a very successful company like Amazon which we’re working very closely with. So that’s a new expansion for Policy as well.

Operator

Our next question comes from Gur Talpaz from Stifel. Your line is open.

Gur Talpaz

Great, thanks for taking my question. So, last quarter you noted a great emphasis on attacking I think government verticals. I was hoping you can give us an update on any sort of progress you’ve made and what your thoughts regarding the public sector as you look towards 2016? Thank you.

Philippe Courtot

Yes. So, we’re very, very committed to the federal market today. We are really expecting to be spreading certified realty [ph] very soon. We have in fact the SEC, the Securities and Exchange Commission as a sponsor. We have in fact provided everything. So, I think once we have that certification, which we are expecting to have anytime now, that will really make us essentially one of the first if not -- I think the second cloud service to be certified and that’s what really gives us what we need to really penetrate the market. In the mean time what we are doing is beefing up, our team, knocking on doors to essentially accelerate our market penetration there.

Let me remind you that the Federal market was only representing about less than 1% of our revenues. So, we’ve got of course their significant upside and the Federal government already moving into cloud solution. So, there is much less resistance of the cloud, I mentioned were now at disconnected version, which allows us to do at DoD; [ph] the disconnected works very well at Siemens. Today, we consider that we are prediction ready there and we have also the ability to provide private clouds for the agencies as well. So, I think we’ve got the tools and now it’s a question of essentially knocking on the doors. And as you know, it takes time. Federal market, this is not something that you’ve got the business immediately; it takes some time.

Gur Talpaz

That’s good color. I have more one question if I may. You just noted Amazon, I was just hoping to get your thoughts on sort of Amazon’s bigger organic push into security and they just launched their blast [ph] solutions, talks of other solutions essentially. How do you feel about sort of Amazon stuff getting more sort of the security game installs with native solutions? Thank you.

Philippe Courtot

This is a very good question and in fact this is what makes Qualys unique because with our architecture as working with Amazon, we can really help these companies to secure the core of their infrastructure; this is what we are doing with Amazon and with other companies, similar companies like that. And I always believe that when you look at the cloud, security wants to be absolutely, if you prefer embedded into the cloud offering and transparent to the consumers. Now, this being said, you have a huge issue of scale. You start now to certainly do vulnerability management on this cloud infrastructure, you cannot do it with the standard scanning technology, you need to have our agent technology essentially to do that. And that’s what Qualys is going to play I believe a very big role in helping these large companies securing their infrastructure.

Operator

Our next question comes from the Alban Cousin from Arete. Your line is open.

Alban Cousin

Hi, thanks for taking my question. I just wanted to have a clarification on the guidance. So according to my math, it looks like the margin is going down. I just was wondering whether that’s the case and if so, why are the investments that’s you are doing?

Don McCauley

Well, Philippe mentioned Alban we’re making more investments in sales especially in marketing rather than new products that’s one initiative. I mention earlier, we also have a higher tax rate this year than last year that contributes a little bit. And those are the main things.

Philippe Courtot

Yes, most senior management as well [Multiple Speakers].

Alban Cousin

Okay, thanks.

Operator

At this time, I am showing no further questions. I would like to turn the call back over to Philippe Courtot for closing remarks.

Philippe Courtot

Thank you, operator. And thank you all for attending our Q4 and year-end earnings call. And to end our call on a personal note, I just want to again thanks, Don McCauley for his contribution to Qualys over the past 10 years. We all wish him well in the future and we look forward to speaking with you next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day.

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