Qualys Announces Third Quarter 2016 Financial Results

Qualys, Inc. (NASDAQ: QLYS), a pioneer and leading provider of cloud-based security and compliance solutions, today announced financial results for the third quarter ended September 30, 2016. For the quarter, the Company reported record revenues of $51.0 million, GAAP net income of $5.0 million, non-GAAP net income of $8.5 million, Adjusted EBITDA of $17.6 million, GAAP earnings per diluted share of $0.13 and non-GAAP earnings per diluted share of $0.22.
“Our strong third quarter 2016 results continue to underscore the market demand for our cloud-based security and compliance platform with customers worldwide using our services to continuously secure their global IT assets while enabling their digital transformation into the cloud,” said Philippe Courtot, chairman and CEO, Qualys, Inc. “We continue to focus our efforts on a balanced approach to growth and profitability as reflected in our financial performance. Such an approach allows us to continue investing in our platform, expanding our existing offerings and adding new ground-breaking services as we recently demonstrated at our 16^th annual user conference in Las Vegas. Furthermore, this gives us a strong competitive advantage, significantly outpacing the competition and further establishing ourselves as a leader in cybersecurity.”
Third Quarter 2016 Financial Highlights
Revenues: Revenues for the third quarter of 2016 increased by 20.1% to $51.0 million compared to $42.5 million for the same quarter in 2015.
Gross Profit: GAAP gross profit for the third quarter of 2016 increased by 18% to $39.7 million compared to $33.7 million for the same quarter in 2015. GAAP gross margin percentage was 78% for the third quarter of 2016 compared to 79% in the prior year’s third quarter. Non-GAAP gross profit increased by 18% to $40.2 million compared to $34.0 million in the same quarter in 2015. Non-GAAP gross margin percentage was 79% for the third quarter of 2016 compared to 80% in the third quarter of 2015.
Operating Income: GAAP operating income for the third quarter of 2016 was $8.0 million compared to $6.9 million in the same quarter in 2015. Non-GAAP operating income for the third quarter of 2016 was $13.1 million compared to $11.3 million in the same quarter in 2015.
Net Income: GAAP net income for the third quarter of 2016 was $5.0 million, or $0.13 per diluted share, compared to $4.1 million, or $0.11 per diluted share, for the same quarter in 2015. Non-GAAP net income for the third quarter of 2016 was $8.5 million, or $0.22 per diluted share, compared to non-GAAP net income of $7.1 million, or $0.19 per diluted share, for the same quarter in 2015.
Adjusted EBITDA: Adjusted EBITDA (a non-GAAP financial measure) for the third quarter of 2016 increased by 16% to $17.6 million compared to $15.1 million for the same quarter in 2015. As a percentage of revenues, Adjusted EBITDA was 35% for the third quarter of 2016, compared to 36% for the third quarter of 2015.
Third Quarter 2016 Business Highlights
Customers:

• New customers included: Cooper Tire & Rubber Company, Computershare, CSC (Computer Sciences Corp), Domino’s Pizza Enterprises, First Citizens Bancshares, Greatbatch, Inc., HireRight LLC, Nationstar Mortgage, Republic Airways Holdings, The Valspar Corporation, Wake Forest Baptist Medical.

Business Highlights:

• Announced a Global Strategic Partnership with HPE. HPE will add the Qualys Cloud Platform and Qualys Vulnerability Management as part of its MSS, and leverage the Qualys Cloud Agent to enable customers for better visibility of IT assets across hybrid public and private clouds.
• Announced a Strategic Partnership in the US with NTT Security to integrate Qualys’s cloud-based IT security and compliance solutions with NTT Security’s MSS and strategic consulting engagements. The agreement enables NTT Security customers to leverage the Qualys Cloud Platform’s scale for continuous IT security and compliance visibility across all aspects of IT infrastructure, including mobile, cloud or on-premises environments.
• Expanded a Global Strategic Partnership with Wipro. Wipro will leverage Qualys Vulnerability Management, Policy Compliance and Web Application Security solutions in its MSS offerings for its customers, worldwide. As part of the agreement, Wipro will also integrate the Qualys Cloud Platform with its existing managed security services.
• Unveiled two new packages in its popular Qualys Consultant suite with flexible pricing options, enabling consultants to simplify client engagements, increase productivity and reduce cost. With these new packages, this suite now offers multiple comprehensive security assessment tools in a centralized console, allowing consultants to consolidate their current toolsets and eliminate time spent manually installing, managing, and administering them.

Financial Performance Outlook
Fourth Quarter 2016 Guidance: Management expects revenues to be in the range of $51.9 million to $52.9 million. GAAP net income per diluted share is expected to be in the range of $0.06 to $0.08, which assumes an effective income tax rate of 37%. Non-GAAP net income per diluted share is expected to be in the range of $0.16 to $0.18, which assumes an effective non-GAAP income tax rate of 36%. Fourth quarter 2016 EPS estimates are based on approximately 39.2 million weighted average diluted shares outstanding for the quarter.
Full Year 2016 Guidance: Management now expects revenues to be in the range of $197.6 million to $198.6 million, up from the previous range of $197.1 million to $198.6 million. GAAP net income per diluted share is expected to be in the range of $0.41 to $0.42, which assumes an effective income tax rate of 38%. This is an increase from our previous GAAP net income guidance range of $0.37 to $0.41 per share, which assumed an effective income tax rate of 38%. Non-GAAP net income per diluted share is expected to be in the range of $0.79 to $0.80, which assumes an effective non-GAAP income tax rate of 36%. This is an increase from our previous non-GAAP net income guidance range of $0.75 to $0.79 per share, which assumed an effective non-GAAP income tax rate of 36%. Full year 2016 EPS estimates are based on approximately 38.5 million weighted average diluted shares outstanding.
Investor Conference Call
Qualys will host a conference call and live webcast to discuss its third quarter 2016 financial results at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time) on Thursday, November 3, 2016. To access the conference call, dial (877) 881-2609 in the U.S. or +1 (970) 315-0463 for international participants with conference ID # 92872769. The live webcast of Qualys’s earnings conference call can also be accessed at https://investor.qualys.com/events.cfm. A replay of the conference call will be available through the same webcast link following the end of the call.
Analysts & Investors Day
Qualys will hold an Analysts & Investors Day at 9am EST on November 17, 2016 at the Four Seasons (57 East 57th Street, New York, NY 10022). The Qualys Executive Team will discuss the company’s vision, strategy, product roadmap and investment highlights as well as showcase forthcoming, ground-breaking new services. Mark Butler, Enterprise Information Security Officer at Fiserv, will present his perspective on the industry and Qualys’s competitive position in the marketplace. Qualys will host a live webcast of the event, which can be accessed at https://investor.qualys.com/events.cfm. A replay of the webcast, along with the accompanying management presentations, will also be available through the same link at the conclusion of the event.
About Qualys, Inc.
Qualys, Inc. (NASDAQ: QLYS) is a pioneer and leading provider of cloud-based security and compliance solutions with over 9,200 customers in more than 100 countries, including a majority of each of the Forbes Global 100 and Fortune 100. The Qualys Cloud Platform and integrated suite of solutions help organizations simplify security operations and lower the cost of compliance by delivering critical security intelligence on demand and automating the full spectrum of auditing, compliance and protection for IT systems and web applications. Founded in 1999, Qualys has established strategic partnerships with leading managed service providers and consulting organizations including Accenture, BT, Cognizant Technology Solutions, Fujitsu, HCL Comnet, HPE, Infosys, NTT, Optiv, SecureWorks, Tata Communications, Verizon and Wipro. The company is also a founding member of the Cloud Security Alliance (CSA). For more information, please visit www.qualys.com.
Qualys, the Qualys logo and QualysGuard are proprietary trademarks of Qualys, Inc. All other products or names may be trademarks of their respective companies.
Legal Notice Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements in this press release include, but are not limited to, statements related to: the growth of our business, including renewals and market share gains, adoption of our existing solutions and our new offerings to both existing and new customers; the capabilities of our platform; the expansion of our certifications and partnerships and the related benefits of such certifications and partnerships; our strategy and our business model, the scalability of our strategy, and ability to execute such strategy; our guidance for revenues, GAAP EPS and non-GAAP EPS for the fourth quarter and full year 2016, and our expectations for the number of weighted average diluted shares outstanding and effective income tax rate for the fourth 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 our ability to continue to develop platform capabilities and solutions; the ability of our platform and solutions to perform as intended; customer acceptance and purchase of our existing solutions and new solutions; real or perceived defects, errors or vulnerabilities in our products or services; our ability to retain existing customers and generate new customers; the budgeting cycles, seasonal buying patterns and length of our sales cycle; our ability to manage costs as we increase our customer base and the number of our platform solutions; the market for cloud solutions for IT security and compliance not increasing at the rate we expect; competition from other products and services; fluctuations in currency exchange rates, unexpected fluctuations in our effective tax rate on a GAAP and non-GAAP basis, our ability to effectively manage our rapid growth and our ability to anticipate future market needs and opportunities; any unanticipated accounting charges; and general market, political, economic and business conditions in the United States as well as globally. The forward-looking statements contained in this press release are also subject to other risks and uncertainties, including those more fully described in our filings with the Securities and Exchange Commission, including our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission on August 4, 2016. The forward-looking statements in this press release are based on information available to Qualys as of the date hereof, and Qualys disclaims any obligation to update any forward-looking statements, except as required by law.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, Qualys monitors operating measures of non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP net income per diluted share. In computing these non-GAAP financial measures, Qualys excludes the effects of stock-based compensation expense and non-recurring expenses. Qualys also monitors Adjusted EBITDA (defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, other (income) expense, net and non-recurring expenses) and free cash flow (defined as cash provided by operating activities less purchases of property and equipment, and capitalized software development costs). Qualys believes that these non-GAAP operating metrics help illustrate underlying trends in its business that could otherwise be masked by the effect of the income or expenses, as well as the related tax effects, that are excluded in non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share and Adjusted EBITDA.
Furthermore, Qualys uses these operating measures to establish budgets and operational goals for managing its business and evaluating its performance. Qualys monitors free cash flow as a liquidity measure to provide useful information to management and investors about the amount of cash generated by the Company that, after the acquisition of property and equipment and capitalized software development costs, can be used for strategic opportunities, including investing in its business, making strategic acquisitions and strengthening the balance sheet. Qualys also believes that non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, non-GAAP net income per diluted share, Adjusted EBITDA and free cash flow provide additional tools for investors to use in comparing its recurring core business operating results over multiple periods with other companies in its industry. Non-GAAP net income per diluted share for the nine months ended September 30, 2016 excludes approximately $0.7 million of non-recurring expenses related to the remittance of payroll taxes from year 2013 through May 2016. During this same period, the Company has not excluded amounts related to other non-recurring items from non-GAAP net income per diluted share because the Company has considered such amounts to be immaterial in any given quarter during such period.
We have not reconciled non-GAAP net income per diluted share guidance to GAAP net income per diluted share because we do not provide guidance on the various reconciling cash and non-cash items between GAAP net income and non-GAAP net income (i.e., stock-based compensation and non-recurring expenses). The actual dollar amount of reconciling items in the fourth quarter and full year 2016 is likely to have a significant impact on the Company’s GAAP net income per diluted share in the fourth quarter and full year 2016, respectively. Accordingly, a reconciliation of the non-GAAP net income per diluted share guidance to the corresponding non-GAAP net income per diluted share is not available without unreasonable effort.
Beginning in 2015, due to the recognition of deferred tax assets in 2014 and in order to provide a more complete picture of recurring core operating business results, the Company’s non-GAAP net income and non-GAAP net income per diluted share include tax adjustments required to achieve the effective tax rate on a non-GAAP basis, which could differ from the GAAP effective tax rate. The Company believes the non-GAAP effective tax rate, which is 36% in 2016, is a reasonable estimate under its global operating structure. The Company intends to re-evaluate the non-GAAP effective tax rate on an annual basis. However, it may adjust this rate during the year to take into account events or trends that it believes materially impact the estimated annual rate. The non-GAAP effective tax rate could be subject to change for a number of reasons, including but not limited to, significant changes resulting from tax legislation, material changes in geographic mix of revenues and expenses and other significant events.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures discussed in this press release to the most directly comparable GAAP financial measures is included with the financial statements contained in this press release. Management uses both GAAP and non-GAAP information in evaluating and operating its business internally and as such has determined that it is important to provide this information to investors.

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
				Three Months Ended								Nine Months Ended
				September 30,								September 30,
				2016				2015				2016				2015
Revenues				$	50,987			$	42,469			$	145,701			$	119,839
Cost of revenues (1)					11,288				8,762				30,796				24,883
	Gross profit				39,699				33,707				114,905				94,956
Operating expenses:
	Research and development (1)				9,405				7,564				26,382				21,919
	Sales and marketing (1)				14,240				12,282				42,624				36,501
	General and administrative (1)				8,067				6,983				24,603				19,426
		Total operating expenses			31,712				26,829				93,609				77,846
Income from operations					7,987				6,878				21,296				17,110
Other income (expense), net:
	Interest expense				(9	)			—				(23	)			(4	)
	Interest income				363				153				903				386
	Other expense, net				(124	)			(307	)			(442	)			(485	)
		Total other income (expense), net			230				(154	)			438				(103	)
Income before income taxes					8,217				6,724				21,734				17,007
Provision for income taxes					3,221				2,601				8,417				6,566
Net income				$	4,996			$	4,123			$	13,317			$	10,441
Net income per share:
	Basic			$	0.14			$	0.12			$	0.38			$	0.31
	Diluted			$	0.13			$	0.11			$	0.35			$	0.27
Weighted average shares used in computing net income per share:
	Basic				35,477				34,119				35,074				33,967
	Diluted				38,712				37,938				38,205				38,202
(1) Includes stock-based compensation as follows:
	Cost of revenues			$	516			$	333			$	1,318			$	1,005
	Research and development				1,585				1,294				4,373				3,584
	Sales and marketing				821				1,015				3,459				2,806
	General and administrative				2,181				1,779				5,972				5,283
		Total stock-based compensation		$	5,103			$	4,421			$	15,122			$	12,678

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
					Three Months Ended								Nine Months Ended
					September 30,								September 30,
					2016				2015				2016			2015
Net income					$	4,996			$	4,123			$	13,317		$	10,441
	Available-for-sale investments:
		Change in net unrealized gain (loss) on investments, net of tax				(58	)			15				140			25
		Less: reclassification adjustment for net realized gain (loss) included in net income				(38	)			(5	)			87			2
		Net change, net of tax				(96	)			10				227			27
			Other comprehensive income, net			(96	)			10				227			27
Comprehensive income					$	4,900			$	4,133			$	13,544		$	10,468

Qualys, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
				September 30, 2016				December 31, 2015
Assets
Current assets:
	Cash and cash equivalents			$	98,299			$	91,698
	Short-term investments				111,678				87,268
	Accounts receivable, net				41,910				42,325
	Prepaid expenses and other current assets				9,072				7,945
		Total current assets			260,959				229,236
Long-term investments					64,930				43,277
Property and equipment, net					40,670				31,329
Deferred tax assets, net					15,141				16,079
Intangible assets, net					1,080				1,360
Goodwill					317				317
Other noncurrent assets					1,939				1,916
		Total assets		$	385,036			$	323,514
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable			$	1,491			$	2,368
	Accrued liabilities				16,324				11,786
	Deferred revenues, current				109,026				98,025
		Total current liabilities			126,841				112,179
Deferred revenues, noncurrent					14,416				14,564
Other noncurrent liabilities					2,386				1,205
		Total liabilities			143,643				127,948
Stockholders’ equity:
	Common stock				36				34
	Additional paid-in capital				255,509				223,228
	Accumulated other comprehensive income (loss)				16				(211	)
	Accumulated deficit				(14,168	)			(27,485	)
		Total stockholders’ equity			241,393				195,566
		Total liabilities and stockholders’ equity		$	385,036			$	323,514

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
						Nine Months Ended
						September 30,
						2016				2015
Cash flows from operating activities:
	Net income					$	13,317			$	10,441
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization expense					12,364				10,424
		Bad debt expense					152				629
		Loss on disposal of property and equipment					39				9
		Stock-based compensation					15,122				12,678
		Amortization of premiums and accretion of discounts on investments					617				429
		Excess tax benefits from stock-based compensation					(4,832	)			(315	)
		Deferred income taxes					931				5,105
		Changes in operating assets and liabilities:
			Accounts receivable				263				(5,512	)
			Prepaid expenses and other assets				(1,196	)			(2,143	)
			Accounts payable				(877	)			(3,606	)
			Accrued liabilities				6,763				2,735
			Deferred revenues				10,853				10,612
			Other noncurrent liabilities				1,188				182
				Net cash provided by operating activities			54,704				41,668
Cash flows from investing activities:
	Purchases of investments						(180,161	)			(88,694	)
	Sales and maturities of investments						133,708				73,340
	Purchases of property and equipment						(18,809	)			(14,865	)
	Capitalized software development costs						—				(99	)
				Net cash used in investing activities			(65,262	)			(30,318	)
Cash flows from financing activities:
	Proceeds from exercise of stock options						12,529				6,594
	Excess tax benefits from stock-based compensation						4,832				315
	Payments for taxes related to net share settlement of equity awards						(202	)			—
				Net cash provided by financing activities			17,159				6,909
Net increase in cash and cash equivalents							6,601				18,259
Cash and cash equivalents at beginning of period							91,698				76,504
Cash and cash equivalents at end of period						$	98,299			$	94,763
Non-cash investing and financing activities:
	Vesting of early exercised common stock options					$	—			$	16
	Purchases of property and equipment included in accrued liabilities and accounts payable					$	2,606			$	—

Qualys, Inc.
RECONCILIATION OF NON-GAAP DISCLOSURES
EBITDA AND ADJUSTED EBITDA
(Unaudited)
(in thousands)
			Three Months Ended							Nine Months Ended
			September 30,							September 30,
			2016				2015			2016				2015
Net income			$	4,996			$	4,123		$	13,317			$	10,441
	Depreciation and amortization of property and equipment			4,426				3,741			12,035				10,131
	Amortization of intangible assets			110				97			329				293
	Interest expense			9				—			23				4
	Provision for income taxes			3,221				2,601			8,417				6,566
EBITDA				12,762				10,562			34,121				27,435
	Stock-based compensation			5,103				4,421			15,122				12,678
	Other (income) expense, net			(239	)			154			(461	)			99
	One-time tax related expense			—				—			716				—
Adjusted EBITDA			$	17,626			$	15,137		$	49,498			$	40,212

Qualys, Inc.
RECONCILIATION OF NON-GAAP DISCLOSURES
(Unaudited)
(in thousands, except per share data)
			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2016				2015				2016				2015
GAAP Cost of revenues			$	11,288			$	8,762			$	30,796			$	24,883
	Less: Stock-based compensation			(516	)			(333	)			(1,318	)			(1,005	)
Non-GAAP Cost of revenues			$	10,772			$	8,429			$	29,478			$	23,878
GAAP Gross profit			$	39,699			$	33,707			$	114,905			$	94,956
	Plus: Stock-based compensation			516				333				1,318				1,005
Non-GAAP Gross profit			$	40,215			$	34,040			$	116,223			$	95,961
GAAP Research and development			$	9,405			$	7,564			$	26,382			$	21,919
	Less: Stock-based compensation			(1,585	)			(1,294	)			(4,373	)			(3,584	)
Non-GAAP Research and development			$	7,820			$	6,270			$	22,009			$	18,335
GAAP Sales and marketing			$	14,240			$	12,282			$	42,624			$	36,501
	Less: Stock-based compensation			(821	)			(1,015	)			(3,459	)			(2,806	)
Non-GAAP Sales and marketing			$	13,419			$	11,267			$	39,165			$	33,695
GAAP General and administrative			$	8,067			$	6,983			$	24,603			$	19,426
	Less: Stock-based compensation			(2,181	)			(1,779	)			(5,972	)			(5,283	)
	Less: One-time tax related expense			—				—				(716	)			—
Non-GAAP General and administrative			$	5,886			$	5,204			$	17,915			$	14,143
GAAP Operating expenses			$	31,712			$	26,829			$	93,609			$	77,846
	Less: Stock-based compensation			(4,587	)			(4,088	)			(13,804	)			(11,673	)
	Less: One-time tax related expense			—				—				(716	)			—
Non-GAAP Operating expenses			$	27,125			$	22,741			$	79,089			$	66,173
GAAP Income from operations			$	7,987			$	6,878			$	21,296			$	17,110
	Plus: Stock-based compensation			5,103				4,421				15,122				12,678
	Plus: One-time tax related expense			—				—				716				—
Non-GAAP Income from operations			$	13,090			$	11,299			$	37,134			$	29,788
GAAP Net income			$	4,996			$	4,123			$	13,317			$	10,441
	Plus: Stock-based compensation			5,103				4,421				15,122				12,678
	Plus: One-time tax related expense			—				—				716				—
	Less: Tax adjustment			(1,575	)			(1,455	)			(5,109	)			(4,239	)
Non-GAAP Net income			$	8,524			$	7,089			$	24,046			$	18,880
Non-GAAP Net income per share:
	Basic		$	0.24			$	0.21			$	0.69			$	0.56
	Diluted		$	0.22			$	0.19			$	0.63			$	0.49
Weighted average shares used in computing non-GAAP net income per share:
	Basic			35,477				34,119				35,074				33,967
	Diluted			38,712				37,938				38,205				38,202

Qualys, Inc.
RECONCILIATON OF NON-GAAP DISCLOSURES
FREE CASH FLOWS
(Unaudited)
(in thousands)
			Nine Months Ended
			September 30,
			2016				2015
GAAP Cash flows provided by operating activities			$	54,704			$	41,668
	Less:
	Purchases of property and equipment			(18,809	)			(14,865	)
	Capitalized software development costs			—				(99	)
Non-GAAP Free cash flows			$	35,895			$	26,704