Qualys Inc (QLYS) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the Qualys fourth-quarter 2012 investor conference call. This call is being recorded. At this time all participants are in 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.

Thank you. Welcome to Qualys' fourth-quarter and full-year 2012 investor conference call. I am Don McCauley, the CFO of Qualys, and joining me today on the call is Philippe 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 and Vulnerability Management solutions; our expectations regarding the introduction of new solutions and enhancements to existing solutions; and our expectations regarding customer adoption of our 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 issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission.

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 release that is available on our website.

To begin Philippe will discuss the Company's performance for the fourth quarter and full year 2012, then I will cover our performance and factors that drove the quarter and year in more detail, as well as our outlook for the first quarter and full year 2013. Finally, we will open up the call for your questions. With that's I'd like to turn the call over to Philippe Courtot.

Thanks, Don, and welcome to all of you who are joining us today. 2012 was a very exciting and successful year for Qualys and we are pleased to share these results with you as we continue to make substantial progress in all aspects of our business. In 2012 we added more than 600 new customers bringing our total customer count to over 6,150 across more than 100 countries.

New customers in 2012 included -- Amazon, Citigroup, Colgate-Palmolive, Comcast, Hilton Worldwide, KPMG and Visa. We now have as customers over 50% of both the Fortune and Forbes 100 as well as 39% of the Fortune 500 and 20% of the Forbes Global 2000. We are very proud of our continued ability to attract and win new accounts while customer retention remains high.

Don will go into the details shortly, but to give you the financial highlights, Qualys had revenues of $24.7 million in the fourth quarter of 2012 representing 19% growth over the same period last year. For the full year revenues reached a record $91.4 million or an increase of 20%. For the full year the US represented 68% of revenues compared to 67% in 2011.

While we are very well positioned and executing well globally, the challenging economic environment in Europe and in particular in Germany, France and the UK has slowed order flow of both new and upsell business. As a result our overall fourth-quarter revenue growth decelerated from 19% -- to 19% from the 20% we saw for the nine months ended September 30. Had Europe performed to the levels we saw in the US and the rest of the world revenue growth for the fourth quarter would have been above 20%.

Turning now to our product mix, our Vulnerability Management solution continues to be the largest component of our business comprising 87% of total revenues for 2012 compared to 90% in prior year. This is a result of the strong growth we continue to see from our Web Application Scanning and Policy Compliance solutions, both of which continue to show strong growth as we continue to successfully leverage our Cloud Platform and provide new enhancements and capabilities to these solutions to address the growing needs of our customers.

We are very excited about the prospects for penetration of new markets with our extensible virtualized Private Cloud Platform which we rolled out in Q3 of last year at Amazon. For those of you who don't know, this capability is something we have done for selected customers and partners for many years now. So this is a delivery method we are very well experienced with.

What is new here is our user virtualization which now enables us to more efficiently deploy such a solution. Our virtualized Private Cloud solution allows partners and customers to host and operate security and compliance applications within their own networks, using the same code base and update mechanism as on our shared platform.

We believe this solution is particularly well-suited to enable our penetration into the US federal government sector which, as you may know, is a market that has been slow to adopt our SaaS or cloud model. In addition, there are numerous potential opportunities around the world to meet certain customers and partner requirements to keep data within their own networks which could enable further deployment of our security and compliance solutions.

In Q4 we upgraded the first generation of private platforms installed at Apple, Fujitsu, Microsoft, NTT and Oracle to the new virtualized platform. We also signed a new agreement with du Telecom in Dubai to install our virtualized platform at their data centers where du will offer managed [vertibility] and compliance services to their customers in United Arab Emirates.

Our Web application power solution, which we refer to as [WAP], we completed the beta testing for the QualysGuard WAP engine and now are entering the final beta phase with implementation for Amazon AWS and customers' premises.

We enter full deployment of version 2.0 of our BrowserCheck service which allows individuals and businesses to audit and track missing patches as well as browsers and plug-in updates for their endpoints. This free service will play a significant role in reaching out to new prospects and present the opportunity to introduce potential customers to our broader suite of solutions.

Our new service developments, while making significant progress on our secure Web Gateway, Web application log and mobile agents technology, which we will be releasing for beta testing in the second half of 2013.

On the partnership side, one significant accomplishment that is worth mentioning is the partnership with Verizon which we significantly expanded to leverage our full suite of cloud solutions for their [consisting] practices and managed services customers worldwide.

Lastly, we are pleased to report that we finished the year with our platform performing over 800 million scans fueled by customer growth and increased up scanning across our entire customer base. For more on how these strategies drove our strong fourth-quarter and fiscal year results I would like to turn the call over to Don.

Thanks, Philippe. Qualys continues to deliver on our key financial and operating metrics and we are pleased with our fourth-quarter and full-year 2012 results. Beginning with the top-line, we drove revenue growth in the fourth quarter to $24.7 million which represented 19% growth over the same quarter last year. For the full year 2012 revenues increased 20% year over year and finished at $91.4 million.

Drilling down into the revenue growth, for the full year 2012 total revenues grew by $15.2 million. Revenues from customers existing at or prior to the beginning of 2011, our prior year, grew by $7.8 million in 2012 compared to $5.8 million in 2011 on the same basis. Revenues from new customers added in 2012 contributed $7.4 million to revenue growth compared to $5 million on the same basis in 2011.

Philippe already mentioned the effect that the European economy had on our revenues. As we had previously discussed, after a solid first quarter in Europe we saw a slowing in bookings for the balance of 2012. This is incorporated into our outlook for the first quarter and fiscal year 2013 which I will discuss later.

As you know, four quarter bookings is one of our key metrics because the vast majority of our business is annual subscriptions which are then amortized into revenue over their terms. We calculate this metric by adding revenues for the preceding four quarters to the change in current deferred revenues over the same period.

At December 31, 2012 four quarter bookings were $101.2 million, which is an increase of 19% over the $85.1 million for the four quarter period ended December 31, 2011.

For the fourth quarter GAAP gross profit increased to $19.7 million which was a 19% increase over the $16.5 million for the same period last year. For the full year GAAP gross profit increased to $73 million or a 16% increase over the $63 million in 2011.

For the fourth quarter non-GAAP gross profit increased to $19.8 million, also a 19% increase over the $16.6 million for the same period last year. For the full-year non-GAAP gross profit increased to $73.3 million, a 16% increase over the $63.1 million for 2011. Non-GAAP gross margin was 80% for the fourth quarter of 2012, the same as the 80% we achieved during that same period last year. Non-GAAP gross margin was 80% for the full year and that compared to 83% in 2011.

As we've discussed previously, this decrease in gross margin on a full-year basis is related to the increased appreciation resulting from higher levels of capital expenditures in the second half of 2011 and for the full year 2012 to support new solutions we are developing and also the expansions of our data centers in the US and Europe.

Adjusted EBITDA for the fourth quarter doubled to $4.4 million from the $2.2 million for the same period a year ago. For the full-year adjusted EBITDA was $13.8 million, an increase of 32% over the $10.4 million in 2011. As a percentage of revenues adjusted EBITDA for the fourth quarter was 18% compared to 11% during the same period last year. For the full year 2012 adjusted EBITDA was 15% of revenues compared to 14% in 2011. This was our seventh consecutive year of positive adjusted EBITDA with each year increasing sequentially.

Our last income statement item to review is earnings per share. For the fourth quarter GAAP EPS was income of $0.03 per diluted share versus a loss of $0.13 per diluted share in the fourth quarter last year. Full-year 2012 GAAP EPS was $0.08 per diluted share, equal to the $0.08 per diluted share in 2011.

Shifting to non-GAAP earnings per share, fourth-quarter non-GAAP EPS was $0.06 per diluted share compared to $0.00 in the same period last year, and full-year non-GAAP EPS was $0.20 per diluted share versus $0.17 per diluted share in 2011.

One thing to note here is the issue around the different share counts used in these periods. For Q4 the number of fully diluted shares outstanding was 35.1 million, but for the full year 2012 the number of fully diluted shares outstanding was only 28.4 million because the IPO shares were only outstanding since October 3.

When we get to 2013 guidance you will see that while the share count for Q1 is similar to the Q4 share count, the full-year 2013 share count will be significantly higher than the 28.1 million in 2012 because the IPO shares will be outstanding for the full year 2013.

In looking at our balance sheet, we have a strong cash position with the only debt being about $2 million of capitalized leases. Our cash and short-term investments position stood at $118 million at year-end compared to $25 million at the end of 2011. Of this $93 million increase $87.5 million related to our IPO.

In fact, even though we went public in our third quarter, the closing of our IPO occurred in the beginning of the fourth quarter. As a result this is the first balance sheet we have presented with the increased cash and short-term investments as well as revisions to the equity section which now reflect only common stock following the conversion of our preferred stock to come in at the closing of the IPO.

In the fourth quarter spending on capital expenditures was $3.1 million. CapEx for the full year was $11.2 million. And just to repeat our previously stated intention, we plan to spend about $3 million per quarter on capital expenditures over the next two years as we enhance our cloud infrastructure to support more customers and add more to our platform.

Now turning to our outlook for the first quarter and full year 2013 -- we expect revenues to be in the range of $24.4 million to $24.9 million for the first quarter of 2013 and in the range of $106 million to $108 million for the full year 2013.

GAAP EPS for the first quarter this year is expected to be in the range of a $0.02 loss to a $0.04 loss and non-GAAP EPS is expected to be in the range of a $0.01 loss to a $0.01 income. These first-quarter EPS estimates are based on approximately 35.5 million weighted average diluted shares outstanding.

For the full year 2013 GAAP EPS is expected to be in the range of $0.02 to $0.06 and non-GAAP EPS is expected to be in the range of $0.16 to $0.20. And these estimates are based on approximately 35.7 million weighted average diluted shares outstanding for the full year. With that Philippe and I would be happy to take -- answer any questions that you might have. Operator?

(Operator Instructions). Sterling Auty, JPMorgan.

A couple of questions. First, touching upon the European issue, can you just talk about linearity through the quarter especially when it comes to Europe? And where did you see the sluggishness, is it more just in new customers filling the top of the funnel or what was the renewal experience like?

So, Sterling, by linearity to you mean when deals come in in the quarter?

Yes. Even though I know the subscription model doesn't impact revenue, just kind of curious what the buying behavior -- what you saw in terms of demand and kind of how that started the new year so far this quarter?

Yes. So, as far as the past, we didn't see any change in the rhythm or timing of things, we just saw a general slowdown in Europe, decisions are taking longer. I don't think we feel like we're losing business, but our customers are taking a lot longer than we expected to get on with things and to send us orders, both on new business and upsells. The timing has been about the same.

Just to remind anyone on the call, we do -- the rhythm of a quarter from a bookings point of view is about 25, 25, 50 in terms of the spread of how we book orders and that is still the case in Europe. And as far as Q1, maybe Philippe will have some comments. But I'd just tell you that I think we are very encouraged by the pickup we are seeing in our pipelines everywhere including Europe.

Indeed.

And did you see any change in terms of deal sizes? You have talked about 7,500 initial for SMB customers, 75,000 enterprise. Do you see any changes in kind of the customer and deal size metrics this quarter?

No, didn't see any real change there.

Okay and last question and I will jump back in the queue. When you look at how 2013 shapes up in terms of your investment in the operating expenses, how should we think about that layering through the year? Meaning, are you investing more heavily in new sales capacity and marketing and branding exercises early in the year or is it kind of even throughout the year?

I think it is fairly even throughout the year, although you should look to the past to see there is a rhythm to our -- in our sales and marketing. We have a heavier -- our Q1 is a heavy trade show period, that is one of the reasons we project a loss in Q1. That is when RSA is and some of the other really major marketing efforts that we make. So there is a seasonality to when trade shows occur. As far as hiring, I think that is spread pretty smoothly throughout the year.

Yes, and let me add a also, we made a significant enhancement to our BrowserCheck, this enhancement, two major ones. One is the fact that we have now automated the process, so companies can push a very small agent which will automate the process of checking the browsers in their corporation. So what we're going to do now puts a lot of marketing awareness behind that product because it is a fantastic lead generation tool that we (inaudible) dispositions, a fantastic product.

So we (technical difficulty) see a lot of visibility on Qualys pushing our brand. And then from there that BrowserCheck also will become a very powerful distribution tool. We support with that BrowserCheck Microsoft MSI which is the Microsoft solution which allows you to push agents. So that will allow us to push our secure wave gateway agent and as well as other agents very, very naturally. So we have already quite a significant base of users of BrowserCheck and this is going to increase significantly.

Okay, thank you.

Phil Winslow, Credit Suisse.

I just had a question in terms of just the ton of business that you saw during the quarter between cross-selling into existing customers versus new customer acquisitions. Then as you look to just 2013 here and build the guidance in terms of just revenue, bookings but also just the expense, how you kind of see the balance between call it new versus existing business?

So, as I mentioned in my remarks, Phil, we saw a pretty nice balance actually between the revenues coming from existing customers and revenues from new. And we continue to see a very balanced approach here.

And what we see is in terms of generating upsell in both these businesses is both our Web Application Scanning and Policy Compliance which are really growing very nicely. And these products have reached maturity and are really the game changer.

Yes, Philippe, just one follow up to that. When you think about the new products that you mentioned for the second half of 2013, wondering if you would just provide us with any sort of just early beta customer feedback on the Web Application firewalling for example?

So the Web Application firewall we have a very good result from. What we did, first of all, is to check the quality of the engines, you know the rules and all the things that you need to an essentially have to provide good firewall capabilities on your Web applications.

Now we are moving to the second phase of our beta with a very unique implementation at Amazon which allowed essentially us to provide not only currently today we provide the ability to identify all your assets on the Amazon platform as well as identifying the vulnerabilities on those assets including the vulnerabilities on the Web Applications.

And what we're now going essentially relatively soon going to beta is the Web Application firewall components. So you could really create an image on Amazon so you can now firewall those applications. That is kind of a very big unique product.

And then the other implementation on Web Application firewall is on our Private Cloud Platform which we are starting to be extremely successful, as I mentioned. Not only we've replace all our full generation of Private Cloud, but now we have -- we can see a very big adoption of that platform, it allows us to enter new markets that were very difficult to enter for us before because of the sensitivity of the data, the fact that people -- some companies prefer to have their data in-house as well as -- as well as in some countries.

So this is going very well. As you know, security are complex applications, so you just kind of turn the switch on admittedly. But we are very pleased with the progress that we have made. Same thing for these other services that we are building, they all leverage the platform, which is quite significant.

Hey, Phil, just to circle back on your initial question just to reiterate in case folks didn't catch it when I said it the first time. Revenues grew by $15.2 million last year and so, out of the $15.2 million, $7.8 million came from existing customers and $7.4 million from new. So a very, very balanced situation in terms of up-sell and cross-sell to existing customers and bringing on new customers.

Perfect. Thanks, guys.

Robert Breza, RBC Capital Markets.

Don, I was just wondering if you could talk a little bit about some of the newer products that you talked about would be released in the second half. Do you think that will contribute meaningfully to revenue this year or should we be thinking a little further out? Thanks.

So I think principally, Rob, we have been talking about Web Application firewall which Philippe mentioned is entering its second beta phase. I think a good way to think about it is principally more the next year. I think we may be -- depending -- we may see some stuff in the second half of the year, but that product won't be released until at least probably made year. And Philippe can add some color on that.

Yes, absolutely. The Web application part this is the heavy lifting. We have other products that we are bringing to market like our customizable questionnaires which are going to go G8 imminently. These will generate revenues, additional revenues. There is another announcement that we would make at our sales well which will be -- which will generate new revenues. And there is our virtual private cloud platform, which is really extremely successful.

We have the experience of doing that. But with the old, if you prefer, architecture now today we have virtualized absolutely all -- in fact all data centers so we can deliver a box in companies like we just did first at Amazon and then retrofitted all these old racks, if you prefer to get the new box. It is all virtualized the same code base. And this is very appealing for a very large corporation for partners around the world, and that will be -- that will generate additional revenues for sure.

Great, thank you very much.

Rob Owens, Pacific Crest.

Along the lines of the success that you are seeing with the virtual boxes, should we see any impact on gross margin as a result?

Well, eventually, Rob. I think not in the short term. We are still digesting the increase in operating costs as we have expanded the platform and replicating our US and European data center capacities and so forth. So we've probably still got a little more digestion to go there.

You know, eventually there is less hardware involved and that is probably what you are getting at. So in future years I think, yes, I think that is definitely possible as we cycle out all of the old hardware versions and end up with principally software.

All right. And then second, Don, maybe you could address just duration in the quarter. I think the shift to long-term deferred was probably a little bit more than usual and a little more than we were expecting. I understand some of the issues in Europe probably leading to a weaker short-term result in the quarter. But just for those existing customers either renewing and/or net new is there a change in buying behavior there that is driving longer term two- and three-year deals?

Yes. So, you might remember, Rob, we saw this -- this is the second year in a row we have seen this. I think if you went back two years ago our long-term deferred revenue was something like $1.7 million. Then it went up to like $4.5 million and now it's almost doubled to eight-point-something-million now.

So what we have seen are -- especially we have seen some new customers, but especially customers on their first renewal -- once they sync up to their budget period, they have installed Qualys, generally -- we are different than other SaaS companies because we are infrastructure and they treat us as infrastructure and they are really looking for budget certainty. So we don't push multi-year deals on our customers, but we certainly react to them and they have been asking for them more and more.

Okay and one more if I may. Just with regard to the Q1 guidance and specifically the revenue guidance, I think you left the door open for the potential for revenue to be down sequentially and somewhat flat at the midpoint. But what factors given the subscription basis of the model could drive that being down on a quarter-over-quarter basis? Thanks.

So, Rob, ask your question again -- I don't want to answer the wrong question here, Rob. You are noting that Q1 is down?

Yes. If you look at the range for Q1, Don, you left the door open for revenue to effectively be down sequentially and I think flat at the midpoint. So just (multiple speakers).

Okay, got it.

Given the subscription nature why that might occur?

Okay. So one interesting note for mathematics stands out there is one of the unique things about Qualys compared to any other security company is our subscription model. And so, we recognize revenue on a daily basis and normally you wouldn't want to get into these kinds of details, but there are two fewer days in Q1 than there were in Q4.

On an average we do $250,000 of recognized revenue per day here. And in Q1 this year there is one fewer day than there was last year's Q1 because last year was leap year. Now this all sounds kind of lame compared to normal analysis, but in our case it is pretty relevant. So it is because of the number of days, Rob, that that is the case.

Thanks for the clarification.

Steve Ashley, Robert W. Baird.

I can start with a housekeeping -- can you give us what percentage of revenue came from the Americas in the fourth quarter this year and the fourth quarter last year?

I believe -- I think it was 67% last year and 68% this year.

And in terms of the trailing 12-month billings metric up 19%, but the prior quarter -- but the third quarter was up 25% and you called it out last quarter that there had been -- that was a wind aided jump, that there was some special extra revenue in there. Can you remind us of that and what that number might have been in a normalized or adjusted (inaudible)?

Right. So there was 2% to 3% of -- that metric was inflated because of -- this was -- one of our resellers had converted a whole bunch of old monthly accounts to annual billing in the beginning of last year which was a great thing for us. But it threw a bunch of -- it threw a lot of deferred revenue that didn't represent new revenues for the Company. And I told you all during the year that that would cycle out. So now it has cycled out. So we are not boosted by that anymore.

And when you look at your 2013 guidance can you qualitatively tell us what you are assuming about Europe?

We are being cautious. We are being cautious, we saw sluggish performance in the back half of the year especially and we don't -- we're optimistic that that will end sometime soon, but we are being cautious in our guidance that it may continue for a while.

Thank you.

Erik Suppiger, JMP Securities.

Yes, can you give us a break out for the fourth quarter for the Vulnerability Management versus the newer services? I think you had said it was 87% for the year. But what was it in the fourth quarter?

I think it was pretty similar, Erik, I think it was pretty similar.

In terms of the weakness that you saw in Europe was that more pronounced on the newer services or was that with the traditional business?

Yes, so, Europe is more predominately a VM business for us at this stage, newer services have tended to take off first in the Americas. So the weakness in Europe is mostly felt in VM so far.

I would have expected -- I think it was about 87% VM in Q3, it doesn't sound like you saw a shift towards the newer services though, is that correct?

Well, ex Europe we did.

Is that right?

The softness in Europe is what brings that -- kept that VM the same.

Okay. Any discussions on how the weakness was impacted between your SME business and your large enterprise business?

It was pretty much across the continent and across both of our business segments.

Okay. Renewal rates, in the past you have been -- with upgrades and whatnot you have been around 100%, sometimes over 100%. Any comment on what the renewal rate was for the fourth quarter?

So the main calculation we do, Erik, is on that full-year basis looking at revenues from existing and new customers. And I think on a full-year basis it went from 108% to 109%.

Okay.

On existing (technical difficulty).

Any reason to think the fourth quarter would have been any different from the other three quarters either direction?

If I had to guess I would say it was probably a little less with Europe being softer. But that is really an annual calculation that we do.

Okay. And then on the Private Cloud product, what kind of interest or activity do you have going on with government that is presumably something that is going to get that going. When might we start seeing the government contribution there materialize?

As you very well know, it takes some time especially these days, in fact, with the sequester and some of the budgets that there is on the federal side in the US. There is a lengthy cycle and (inaudible) today there is a lot of uncertainty. In fact, we are going to -- we are establishing partnerships with very big integrators. And one of the reason of this partnership is because of that Private Cloud. It also is helping us, as you just saw, with du Telecom to start to essentially enter markets abroad much more easily with partners.

Might we expect your government contribution by the end of 2013 to be in the low- or mid-single-digits? Is that reasonable?

Yes.

Well, so just for those who don't know, we currently get about 1% of our revenues from the federal government at Qualys. And most security companies have a far greater percentage. I don't think it will happen that fast. Remember our revenue model -- revenues is amortized in over time.

So that may be -- well certainly it will be low-single-digits because we are in the lowest of single-digits now. But we are looking for improvement; I hope we will have improvements to announce this year. And the way our revenue model works then the revenue effect would be later in the year and mostly next year if that were to occur.

Very good, thank you.

Craig Nankervis, First Analysis.

Philippe, on the virtual Private Cloud are you constrained in any way in terms of the pace at which you can deliver this form factor at this point or could you just start rolling these out the door, just set sort of aggressive (inaudible)?

Yes, no, this is a very good question. In fact, there are two things we are doing here, one is that we have now established -- establishing a new SOC in India. So, and one of the main reasons -- there are two reasons. One, it gives us redundancy, a SOC being the place where we remotely manage all of these data centers including ours.

On one hand this is kind of a backup if you prefer and on the other hand it is also because we anticipate being capable of shipping quite a few more of this Private Cloud. So on the management side we have made already -- we are making the investment, we are ready to push them more.

And now what we are doing, in fact, we are essentially putting that virtual cloud in a box. And currently today we can ship at about one Private Cloud in a little bit less than three months. And we expect to be capable of moving that to once a month. That is our rhythm and of course it will accelerate.

And you will be at the once a month by what -- second half of the year or something like that?

Probably yes. Yes. We are also working on a connected version also of our data center which that will totally (inaudible) the military version. And we are anticipating to be in beta for disconnected version by the year end. That means that we will train an entity to really do the managing, so we will pass all the batteries and everything that need to do to update and manage these data centers, we will have to train them. So we are also working on that as well.

And can you give some -- you know, for how (technical difficulty) you are marketing the virtual Private Cloud form factor at this point, or is that something also that you would expect (technical difficulty) later in the year?

No, I think we are starting to market it. In fact, we are very careful and very cautious (multiple speakers) of we are really not pushing it that much because we have to ship three racks out to the (inaudible). And now that everything is virtualized it makes it so much more cost effective and easier to manage, and the (inaudible) very, very if you prefer, careful. And now we are opening up the floodgates as we have now really very well packaged that solution.

Okay, those are all my questions. Thanks for the help.

Joel Fishbein, Lazard Capital.

Just on the 2013 guidance. Based on what you have seen so far in terms of your four quarter billings, can you just go through with us what kind of visibility you have into the 106% to 108% number? It should be pretty strong, but I just want to hear it from your perspective.

Right, so, with our subscription model we have approximately 50% of our revenues for the full year are already on our balance sheet and will just be amortized in over the year. And of the remaining 50%, 40% relates to existing customers and what they do, renew, upsell, et cetera. And only 10% relates to brand new customers that will come on during the year.

And remember we only -- for a new customer in 2013 on average we will only be recognizing a half a year's worth of revenue. So compared to almost any other company we have very good visibility into that, Joel.

Thank you.

(Operator Instructions). Sterling Auty, JPMorgan.

Just a couple of quick ones. Don, can you give us an update -- how many customers did you finish the year with?

Round number 6,150 -- that's about 600 more than last year.

Okay. And when you look at that -- the customer additions, especially in the fourth quarter, the mix of the larger customer versus the smaller, how would you qualitatively describe that? And how would you describe it as the quarter went along? Would you say that those numbers would have been higher albeit for Europe?

Well, first of all, I think as far as the makeup, the mix and the demographics of it -- same, no change there. And sure, I think if Europe was not as sluggish we certainly would have had a few more customers.

And you mentioned the pickup in the multi-year, but you didn't give kind of a percentage. Can you give us a sense of what percentage of the deals that you did in the quarter were multi-year versus just one year?

Percentage is probably about the same. But it added up during the year, I mean if you -- when we model it it's about the same percentage actually. But with our growing business it has had an effect. When you only see the deferred component on the balance sheet it's a pretty good step up just because of the growth of the business generally. But no, I wouldn't say it was really different.

Okay. And last question area, for the fourth quarter what was the -- or looking at the business now what is the direct versus indirect mix, just to remind everybody? And kind of where are you putting more emphasis to start 2013 in terms of your channel management?

Right. So the direct/indirect mix is 60/40 -- 60 direct, 40 indirect. And I will let Philippe comment on where we are putting our efforts.

Yes, so we have expanded our -- what we call our strategic analysis group. So we are focusing more on the partners today because, again, I think with the Private Cloud I think we have really a significant opportunity to generate new partnerships and global partnerships. So that's the focus of our business.

Also what we see is that the channels are starting to appreciate the fact that we provide them with a very predictable and profitable business as they -- the benefits are recurring. So it gives them better contact with the customers and a recurring model as well.

So if in the early days the other channel was very antagonistic to Qualys, I think today we see the channel is coming our way. We see our business growing with all of our partners.

Got it, thank you.

Erik Suppiger, JMP Securities.

Yes, I just want to understand -- I don't think you gave four quarter bookings guidance for 2013. Conceptually can you discuss -- if we are looking for a deceleration in revenues I think midpoint of your guidance is maybe 17% or so, does the billings decelerate faster because you have a lagging effect on the revenues? Or how do we think about the billings growth for next year -- or for this year rather?

Good question, Erik. Remember revenues lag billings, not the other way around. So when we have, as we said -- mentioned, Europe was slow, especially in the back half of the year. That is now flowing through revenues and that affects our guidance on revenues. We don't give guidance on four quarter bookings.

But as I mentioned earlier, we are encouraged by what we are seeing in our sales pipelines including Europe. I mean we are seeing -- good activity and improved activity in the first half of this year compared to the second half of last year. And if that comes to pass then we will see improvement in those metrics.

Talk a little bit about the timing. It seems like it was Q4 that you saw the deceleration in the bookings or did you start seeing evidence of that in Q3?

Yes, no, we talked about it on the Q3 call; we had seen it in Q3. And we actually had seen it in Q2 a little bit as well. But we talked about it on the Q3 call.

Okay.

Thank you. I would now like to hand the conference back over to Mr. Philippe Courtot.

Okay, so thank you all for joining us today. We were very excited by what 2013 has to offer and believe that we are well positioned to deliver best of class security and compliance solutions to our customers and partners and continue to expand to our Cloud Platform and solution set.

So should you have any follow-up questions, Don and I are available. Otherwise we are looking forward to speaking with you next quarter. And thank you very much.

Thank you. And once again, ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. It you may all disconnect and have a wonderful day.