Qualys, Inc. (NASDAQ:QLYS) Q3 2023 Earnings Call Transcript

Qualys, Inc. (NASDAQ:QLYS) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good day and thank you for standing by. Welcome to the Qualys Third Quarter 2023 Investor Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Blair King. Sir, please go ahead.

Blair King: Thank you, Chris. Good afternoon, and welcome, everyone, to our Qualys’ Third Quarter 2023 Earnings Call. Joining me today to discuss our results are Sumedh Thakar, our President and CEO; and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to future events or our future financial or operating performance. Actual results may differ materially from these statements. The factors that could cause results to differ materially are set forth in today’s press release and in our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. So with that, I’d like to turn the call now over to Sumit.

Sumedh Thakar: Thank you, Blair, and welcome to our third quarter earnings call. In Q3, we continued to deliver strong financial results, reflecting our ongoing commitment to rapid innovation and customer success. We experienced another quarter of steady VMDR adoption, which is now deployed by 54% of our customers worldwide. Key competitive VMDR wins in Q3 included a leading multinational conglomerate, several global financial services, technology and manufacturing companies, a large government agency and multiple new and other existing customers, both down market and in the Global 2000. Adding to these wins, I will take a moment to share a couple of examples of how our customers and partners are expanding their use of Qualys capabilities to further consolidate the security side.

On the customer front, a Fortune 100 biotech company was overwhelmed by the number of security tools it deployed and needed a solution to not only provide better security outcomes, but also consume fewer point products, agents and resources through a unified dashboard in a mid-six-figure booking upsell this customer who already deployed cybersecurity asset management with External Attack Surface management and VMDR expanded its use of VMD TrueRisk to over 290,000 assets, while adding our web application scanning, task management and total cloud CNAP solutions. In doing so, this customer consolidated three competing vendors across on-prem, cloud and multi-cloud environments through an organically integrated platform with our innovative technologies, unmatched platform, effect and focus, reducing our focus on reducing risk and friction.

This win underscores Qualys ability to eclipse pilot solutions and advance our leadership in the industry. Specifically highlighting the momentum we’re seeing with our total cloud CNAP solutions in a highly strategic and competitive mid-6-figure booking cross-sell for its 200 existing VMDR and patch management customers selected for the cloud to scale their container deployments in over 50,000 assets monitoring millions of containers images daily. through its evaluation of competing cloud security promoters, this customer determined that alternative point solutions added complexity to their operations lack integration and missed detections, which hindered the ability to assess the risk and consolidate the security tools. Today, through a highly scalable, natively integrated CNAP solution, the Qualys Cloud Platform provides complete visibility of this customer’s attack surface with advanced AI/ML technologies to uniquely detect zero-day malware while prioritizing and remediating risk at scale in real time.

Our early wins in cloud and container environment are a testament to the extensibility of the Qualys Cloud platform with unified dashboard and our adaptive subscription model. Today, we have over 31 million agents already supporting workloads in the cloud, while this is well armed with organically integrated total cloud CNAP solution that unifies cloud workload protection Cloud Security Posture Management, CSPM, cloud detection and response, infrastructure score and container security powered by AI Threat Detection and Insight Total Cloud was recognized by coupling or — as a strong technology leader in cloud security ahead of several competing modern cloud point solutions and next gen platforms. I’m quite pleased by the early momentum we are experiencing in the market with our total cloud and increasingly encouraging customer feedback.

Additionally, new customers continue to adopt cybersecurity asset management with external attack surface management and patch management alongside the VMDR right out of the gate. We believe this further highlights Qualys’ ability to help customers not only detect but also quantify prioritize and remediate risk across all environments much faster than alternate siloed solutions. On the partner front, in Q3, we continued to advance our evolving ecosystem with two leading global managed service providers, which also expanded their offerings beyond VMDR to include our cybersecurity asset management and patch management capabilities. These partners have indicated they chose Qualys over competing solutions due to the ease of orchestration natively integrated platform and single agent approach to simplify their operations and significantly reduce remediation times for their customers.

In addition, we expanded our relationship with another leading cloud provider, which is now taking the Qualys Cloud platform available in its marketplace. With wins such as this one, I have shared today customers spending 500,000 more with us in Q3 grew 15% from a year ago to 174. With more and more customers beginning to perceive Qualys as a leading risk management platform that consolidates multiple security point solutions across all environments, we remain confident in our ability to drive long-term growth and gain market share especially in light of the recent IDC study highlighting a 403% ROI for customers choosing to partner Qualys with a platform approach. As I have said before, a cornerstone of our strategy is engineering innovation and with the customer-first product-led growth focus, we challenge ourselves every day to lead the industry.

Executing against this agenda we will unveil our new platform approach at our upcoming Qualys Security Conference in Orlando from November 6 to November 9. This new approach will seamlessly integrate any number of third-party security tools in the Qualys Cloud platform. Regardless of the variety of when we utilized within an organization’s infrastructure Qualys will soon harness automated insights into critical areas of risk spanning on-prem cloud and multi-cloud assets to uniquely enable comprehensive remediation wise risk posture assessment with new groundbreaking remediation capability. At this conference, our product and engineering teams will further showcase additional innovations on the cloud platform, including our advancements in delivering ML and AI-based predictive insights, first-party vulnerability and discontinuation detection response, the integration of software supply chain security into continuous integration and delivery CI/CD pipelines and more.

Additionally, you can hear our customers speak first time about how our continuous innovation on the platform enables organization simultaneously reduce complexity and risk in their environment as they standardize our trusted platform that delivers an immediate ROI and lower total cost of ownership relative to siloed traditional detection-only technologies. We have over 900 people registered to attend and look forward to seeing many of you there. In summary, we are delivering strong profitability and cash flow while building business momentum in both our core and cloud expansion market, as companies uniformly recognized security transformation is fundamental to combat in today’s heightened threat and regulatory environment. As a result, customers are increasingly looking to reduce their risk exposure through the adoption of until integrated risk management platform spanning all environment instead of deploying a collection of disparate point solutions for different environments and hiring more people to manage those.

We believe that our organically integrated cloud-native platform built to solve modern security challenges, Qualys is laying a foundation for future growth and well positioned to drive long-term shareholder value with a balanced approach to growth and profitability. With that, I will turn the call over to Joo Mi to further discuss our third quarter results and outlook for the fourth quarter and full year 2023.

Joo Mi Kim : Thanks, Sumedh, and good afternoon. Before I start, I’d like to note that except for revenue all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period unless stated otherwise. Turning to third quarter results. Revenues grew 13% to $142 million, with growth from channel partners outpacing direct at 17% versus 10% growth from direct. Channel revenue contribution remained the same as last quarter at 43%. By geo, growth in the U.S. of 14% was ahead of our international business, which grew 11%. U.S. and international revenue mix remained the same as last quarter at 60% and 40%, respectively. In Q3, we started to see some indication of stabilization in the selling environment with customers confirming their prioritization of security with an IT budget, but believe ongoing budget scrutiny will linger for the foreseeable future.

Reflecting the sentiment, our gross retention rate has remained largely unchanged at approximately 90%, and but our net dollar expansion rate came in lower at 106%, down from 108% last quarter. While there continues to be room for improvement from smaller customers, larger customers spending $25,000 or more with us, grew 15%. In terms of new product contribution to bookings, cost management and cybersecurity asset management combined made up 11% of LTM bookings and 19% of LTM new bookings in Q3. In addition, we’re pleased to share that we’re seeing an increase in interest net cloud security solution, TotalCloud CNAPP. Cloud Security Solutions made up 5% of LTM bookings in Q3, showing a return on the acquisition of TotalCloud and Blue Hexagon.

Since 2021, we acquired TotalCloud, a cloud workflow management and no-code automation platform and Blue Hexagon, AI ML innovator, a cloud threat detection and response solutions to augment our cloud security solutions. It’s exciting to see our continued innovation and investment in our platform is driving adoption are starting to change the market perception of Qualys as a risk management platform that can help customers consolidate multiple security point solutions. We look forward to serving as a strategic partner to our customers as they evaluate their security vendor consolidation strategy. Now turning to profitability, reflecting our scalable and sustainable business model, adjusted EBITDA for the third quarter of 2023 was $58.8 million, representing a 48% margin compared to a 44% margin a year ago.

We roughly maintained our operating expenses in Q3 only up by 2% to $55.1 million. Sales and marketing was up by 9%, same growth as what we saw in Q2. While we believe some investments in response to the business climate and arrival of our new CRO in July, we achieved greater operational efficiency through focused efforts on optimizing investment. This led to EBITDA margin exceeding our expectations in Q3 and further demonstrates our ability to maintain high operating leverage, remain capital efficient while continuing to innovate and invest in our long-term growth initiatives. With this strong performance, EPS for the third quarter of 2023 was 1.51%, which came in higher than expected, partly due to the change in our tax estimates. In Q3, we recorded a 15% tax rate, but if the tax rate has remained unchanged by 24%, EPS would have been 1.37.

Our tax rate guidance for both Q4 and full year 2023 is 21%. Our free cash flow for the third quarter of 2023 was $98.6 million, representing a 64% margin in the quarter and 50% year-to-date. In Q3, we continued to invest the cash we generated from operations back into quality, including $1.8 million on capital expenditures and $38.9 million to repurchase $273,000 of our outstanding shares. As of the end of the quarter, we had $106.8 million remain a share repurchase program. With that, let’s turn to guidance, starting with revenue. For the full year 2023, we expect revenues to be in the range of $554 million to $555 million, representing a growth rate of 13%. For the fourth quarter of 2023, we expect revenues to be in the range of $144.1 million to $145.1 million, representing a growth rate of 10% to 11%.

With respect to margins, factoring in the better-than-expected profitability to date, we expect full year 2023 EBITDA margin in the mid-40s and free cash flow margin in the mid-30s with full year EPS in the range of $5.04 to 5.14%, up from the prior range of $4.50 to $4.6. For the fourth quarter of 2023, we expect EPS in the range of $1.18 to $1.28. In Q4, we expect to spend $2 million to $3 million in capital expenditures, implying approximately $9 million to $10 million in total for the full year. We remain confident in our differentiated technology and ability to deliver on our growth opportunity long term while investing to maximize shareholder value. With that, Sumedh and I would be happy to answer any of your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment, please, for our first question. And our first question will come from Mike Walkley of Canaccord Genuity. Your line is open.

Mike Walkley: Great, thanks for taking my questions and congrats on the strong profits. I guess with 54% of your customers now adopting VMDR, can you just help us think about net dollar retention trends going forward? I know it’s early, but maybe you can share how some of your customers are reacting to your new solutions such as context XDR and TotalCloud that could help drive net dollar in the future?

Sumedh Thakar: Thanks for that question and as we talked about earlier, I think we’re pretty excited about some of the things that we are releasing, especially with cloud, et cetera. Of course, the environment continues to be challenging today. And so as our customers that we are working with, they look at a platform, of course, they look at their current optimization of what they’re buying from different vendors from Qualys. We continue to have great conversations. We continue to see opportunities. We continue to be happy with how CSAM patch management are becoming part of the bookings and entering new bookings. And the opportunities that we see in the future with, especially as everybody’s sort of moving into the cloud and the opportunities for a truly natively built cloud platform to be an area where customers will continue to work with us to deploy our solutions to expand their VMDR offerings.

So VMDR customers as they move into the cloud with all the Cloud CNAPP capabilities get not only VMDR but additional capabilities to really have one single pane of glass view for their entire cloud security. And this is the driving factor of many conversations that we are having now as they look forward to 2024 and looking into cloud security. And some of the early events that we are seeing is encouraging. And so I think the customers adopting VMDR and that is a pleased to see that continue to pick up and get to 54%. And that of course gives us the ability to have our agents deployed in more environments. And those agents being deployed does give the opportunity for us to do additional ops on CSAM, patch management, EDR, et cetera. But also now with 31 million agents running in the public cloud environments.

The opportunity for us to work with them on total cloud is something that we’re excited about.

Mike Walkley: Great. Thanks. Just a follow up question. Oaybe on OpEx, just with the new CRO, I know you paused as you revisited the go-to-market strategy. How should we think about with your strong margins, maybe starting to invest in sales capacity as we exit this year or into next year, I guess, another way that I’m trying to balance the macro-backup with the opportunity to maybe add sales capacity?

Joo Mi Kim: With Zeno on board, we are looking at all our investment opportunities for the remainder of this year as well as next year. We think that based on what we see today, our sales and marketing expense to be relatively in line in terms of the growth year-over-year in Q4 as in Q3. So you’re looking at, like, 9%, 10% around that kind of range ending the year. And then for next year, we are going through the planning cycle right now to understand — will we think that we should double down on investment and accelerate versus kind of put on hold. But with that said, given the under investment that we had this year, based on the ROI that we estimated, we do expect an acceleration and sales and marketing investments next year.

Mike Walkley: Great. Thank you very much.

Operator: Thank you. One moment please for our next question. Our next question will come from the line of Matt Hedberg of RBC Capital Markets. Your line is open.