Qualys Inc (QLYS) 2013 Q1 法說會逐字稿

Good day , everyone, and welcome to the Qualys' first quarter 2013 investor conference call. (Operator Instructions). I would now like to turn the call over to Don McCauley, CFO of Qualys. Please go ahead, sir.

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

Before we get started, we would like to remind you that during this call, management expects to make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or our future financial or operating performance.

Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance and expectations for future periods our expectations regarding the growth of the market for security, compliance and vulnerability management solutions, our expectations regarding the introduction of new solutions and enhancements to existing solutions and our expectations regarding customer adoption of these solution.

Our expectations and beliefs regarding these matters may not materialize and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission, including our annual report on form 10-K that we filed on March 5, 2013.

The forward-looking-statements in this presentation are based on information available to us as of today and we disclaim any obligation to update 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 the 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 that is available on our website.

To begin, Philippe will discuss the Company's performance for the first quarter 2013. Then I will cover our financial results and factors that drove the quarter in more detail and well as our outlook for the second quarter 2013. Finally, we will open up the call up for your questions. With that, I would like to turn the call over to Phillip Courtot.

Thanks, Don, and welcome to all of you are who are joining us today. The first quarter of 2013 was another very solid quarter and we are pleased to discuss our results with you as we continue to make substantial progress in all aspects of our business.

In the first quarter we added many new important accounts including Verizon where we significantly expanded our partnership to cover all Verizon managed services and contributing customers, Volkswagen Brazil, Rovi, Universal Music Group, Bank of Tokyo, Wellington Management, Limelight Networks, HSH Nordbank, MAN Diesel & Turbo Brazil, Sony Computer Entertainment, Fair Isaac and Nationwide Insurance. While Don will go into the details of the quarter, let me give you the financial highlights.

Qualys generated revenue of $24.9 million in the first quarter 2013, which represented 17% growth over the same period last year. These results were at that top of our revenue guidance range. We also in the top end of our guidance ranges in both GAAP and non-GAAP earnings per share.

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

Moving now to our product mix. While our Vulnerability Management solution continues to be the largest component of our business, we continue to make meaningful progress in diversifying our revenue base. As VM comprised 85% of total revenue for the first quarter 2013, compared to 88% in the first quarter last year. This is the result of the continued sales of our Web Application Scanning and Policy Compliance Solutions which we sell to existing and new customers, both of which continue to show strong growth. We can now clearly see that our investment in building a security and compliance club platform upon which we can deliver enhancements and new solution is starting to pay off and will enable Qualys to stay ahead of our competition.

During our last call we discussed our virtualized private cloud platform. In the first quarter 2013 we continued enhancing it by integrating it with VC which is the joint venture between -- with VC private cloud V-Block, and VC being the joint venture between VMware, Cisco and EMC, which allows us to more quickly ship and deploy our private cloud platform to customers and partners all around the world and have this platform operational within weeks of being shipped.

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

For our forthcoming Web Application Firewall or WAF we will enter our second beta phase in early Q3 with two delivery options. The first one in the Amazon Cloud to protect and secure web applications deployed within Amazon Elastic Compute Cloud or EC2. And the second in a appliance form factor to protect websites. WAF will come fully integrated with our Web Application Scanning solution providing automated discovery, scanning and mitigation of web application vulnerabilities. This is a powerful deployment strategy as more and more applications are moving in to the cloud, and we expect a first mover advantage as the first WAF solution made available with the Amazon EC2 platform as well as a fully manage appliance from our cloud platform.

We also upgraded our popular to BrowserCheck service to help business of all size track and continuously monitor relevant browser software, O.S. settings and security patches on users' PCs, and we expect to release shortly an enhanced MAC version. We also enhanced our FreeScan services with new audits for Patch Tuesday vulnerabilities, OWASP threats and SCAP configuration for both internal and external devices. And it isis important to know that both BrowserCheck and FreeScan have become significant contributor to our lead generation activities, and I encourage all of you to experience them directly to ensure that your browser and all of it plug-ins are updated to the latest security lever.

As we discussed in our last call we are continuing to heavily invest in expanding our platform to include significant additional functionalities that show real-time big data correlation capabilities, global asset inventor discovery and tagging and adding new and improved capabilities including secure web gateway web application log analyses, mobile agent technologies and malwar protection services which we currently expect will be released for beta testing later this year. We are continuing to expand our reach by signing a number of new technology and channel partners. Such partners include FireMon, Lieberman Software, the OISG Group, Verizon we mentioned earlier and others.

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

Thanks, Philippe. Qualys continues to deliver on our key financial and operating metrics and we are pleased with our first quarter 2013 results. Revenues in the first quarter grew to $24.9 million which represented 17% growth over the same quarter last year. Four quarter bookings were $105.1 million at March 31, 2013, compared to $90.3 million at March 31, 2012. This increase of $14.8 million represented a year-over-year growth of 16%.

You may recall that during 2012 there was an increase in our current deferred revenues related to a partners conversion of a number legacy subscriptions from monthly to annual billing. If we were to subtract out this increase to normalize last year's four quarter bookings metric then four quarter bookings a year ago would have been only $88.9 million and the indicated growth rate now would be 18%. There will be a similar normalization effect in the remaining quarters of 2013 as well. To be more specific our estimate of this normalization effect on the indicated four quarter booking growth rate of the remaining quarters of 2013 will be approximately 1.2% for the second quarter, approximately 0.8% for the third quarter and approximately 0.4% for the fourth quarter.

GAAP gross profit increased to $19.1 million compared to $17.0 million in the first quarter last year. GAAP gross margin of 77% for the first quarter of 2013 compared to 80% in the same quarter last year. Non-GAAP gross profit increased to $19.2 million compared to $17.1 million a year ago and non-GAAP gross margin was 77% for the first quarter of 2013 compared to 81% in the same quarter last year.

For both of these gross profit measures the year-over-year growth was 12%. As we have discussed preciously the decreases in gross margin is related to the increased depreciation resulting from higher level of capital expenditures to support our growth, new solutions and functionality we are developing as well as the expansion of our data centers in U.S. and Europe. This planned additional spending started in the second half of 2011 and continued through the first quarter of this year.

Adjusted EBITDA for the first quarter increased by 22% to $2.8 million compared to $2.3 million in the first quarter of 2012. As a percentage of revenues adjusted EBITDA for the first quarter was 11% in both the first quarters of 2013 as well as for 2012.

Moving on to earnings per share. For the first quarter we had a GAAP net lose per diluted shares of $0.02 versus a net loss of$0.05 per diluted share in the first quarter last year. Shifting to non-GAAP earnings per share. The first quarter non-GAAP EPS was $0.01 net income per diluted share compared to $0.02 net income per diluted share in the first quarter of last year.

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

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

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

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

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

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

Very Good. As you recall, Sterling, we had a prior agreement with Verizon but we were more -- it was a resell agreement and the sales force was not really commission on the sales of Qualys. So that was -- today is a big change. We are now the standard, and Verizon is selling Qualys three ways as we speak. One is with their large contract that they have where we become a line item on the contract, that is totally new.

The second thing is they have the program called the SMP. A program providing audit services to corporation, we are now the engine into that program. And third we have now also a reselling relationship whereby now the sales force is fully commissions under Qualys services.

Got you. On the Web Application Scanning how much of the growth is coming from more apps coming online in existing customers and they are increasing their usage versus more new customers?

From all directions in fact. Both we have a significant up take in some large customers like Microsoft and Bank of America also new customers which are now starting with Web Application Scanning and we have also existing customers which are now moving to the Web Application Scanning solution.

Okay. And last question it sounded like Europe improved in the quarter for you. Obviously North American was squishy for a lot of your peers. Do you have sense as we looking here in the June quarter, do you feel better about the macro environment and perhaps we could start to see an up tick or is it still too early to tell?

One thing I can say is we are as you know essentially what we saw in Europe is more the deals taking longer, the budget being tighter. We have in a way swallow, one word looking at it, is swallow that wave. So I think that is the reason why we see that improvement. We still remain caution on the business. Europe as we all know is in difficult position while conversely in the U.S. we see big, big momentum being very strong in the U.S. for our Web Application Scanning solution.

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

Got it. Thank you.

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

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

Phil, we have seen a pretty steady rhythm of approximately 1% a quarter shift from VM to the non VM services, and I think we will continue to see that same trend. VM continues to be solid, so that trend would obviously be a lot faster if VM was not a solid business for us, and we have gotten continued really great momentum in Policy Compliance and Web App Scanning. We have seen for about three or four quarters in a row this -- I think for the full year last year it moved 3 points and then year-over-year just now it moved 3 points. So I would expect it to move between three-quarters and a full point a quarter for the foreseeable future. That seems to be the path we are on.

Maybe let me add one important point to note is that we are selling to the same customers. So this is not like selling to another customer. So I think these new services which are really very good is strengthen our VM position on one hand and also give us new ways to penetrate customers who are not using our VM solution. So this very synergistic in fact.

Great. Thanks,guys.

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

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

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

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

And maybe as a follow-up, when you look at some of these partnership and the ability to make the leverage presumably with Verizon I know recently you made a significant hire from Verizon into your organization to help foster the MSSP side of things. What kind of leverage can you see from those? Is it a 2x or 3x kind of return? Just trying to understand the partnership return versus the direct investment into the sales force? Thanks.

Is a little early to speak about the multiples here, of 2X. What is certain is that we have access to Verizon and the other partners we are currently in discussion with to accounts that we could not access before, because this companies as you know have essentially large multi year contracts with organizations and then we become just a line item albeit a significant line item but a line item. There is also if you look at Verizon they have about 300 people worldwide which essentially specialized in security so that puts more feet on the street.

And our challenge, of course, is to educate them, train them but we will be using a lot automatic tools, very nice presentation. In fact if you go to our website, you will see a presentation on the VM, on Policy Compliance, on Web Application Scanning that our partners can repurpose to bring to the sales force and to customers.

Great. Thank you very much.

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

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

Hi, Rob. No, I didn't give it in our remarks, but our breakdown of revenue is currently 70% 30%, 70% U.S., 30% International. A year ago it was 67%, 33%, so that reflects the relatively stronger performance we have seen in the United States and the relatively weaker performance we saw in Europe last year.

Checking around the trends that you actually saw in Europe in Q1 and how you are looking at Q2 with regard to Europe.

We had a much better Q1. We had a good bounce back. We are seeing the same kind of thing in what we have done so far this quarter and we feel good about our pipelines for Q2. As Phillip said some of it may be deal slippage from last year whatever, but Q1 was good, Q2 looks good and I think anyone would have to be cautious in the longer term.

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

Rob, we haven't seen any compression. In fact we will probably do some study on it midyear again, but my instincts says deal size may actually be going up a little bit. We are seeing some -- Phillip eluded to some large up sells by some of our largest customers. At any rate we are not seeing compression.

Thanks, Don.

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

Great. I would just like to circle back to gross margin and just confirm is 100% of the gross margin decline year-over-year related to depreciation or is there anything else, and how should we think about gross margins going forward?

Hi, Steve. Mostly it is depreciation. We have also increased our staff. We beefed up our operations generally for the new data centers and the new services we are offering and so forth. The largest part is depreciation. My sense of it is that we are at about the bottoming out level year here at 77%. Because we have absorbed the now -- I think we have absorbed the lion's share. We are depreciating if you think about the last 12 quarters of CapEx.

The thing that hits us as the 13th oldest quarter drops out, it was a small quarter back in 2010 when we had low CapEx since being replaced by these quarters were we have been s spending around $3 million a quarter. As far as the staff additions most of them were in last year, and that is a pretty stable situation now so that is just an absorption and of course, every quarter the business gets a little bigger so the percentage of that cost goes down.

Would you hope that gross margins get back towards 80% over time?

Absolutely. Over time I think that I'll margins will start to head north again and return to where they were prior to this step up in CapEx for the reasons that we talked about.

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

Good. We have consistent performance there. I think we are still around 60%, 40%, direct versus indirect. So solid performance by channel partners.

Thank you.

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

First off any comments on how the private cloud product did with the V-Block? Any contribution metrics or anything we can gauge it successful?

On the V-Block specifically not yet, but we have already shipped the virtualized version, it's already shipping. We have retrofitted all of our existed private clouds which were on the non virtualized, so we retrofitted all of them. About 10 of them if I recall correctly which have been virtualized. We also shipped the new virtualized one, but not on the VC platform. We are now finishing the full integration with VC. We are going to be pre certified in fact on the VC platform. So this is ongoing, but it is almost finished and we are now planning to start shipping VC-Block.

Okay. On the renewals what is the normal seasonality that you see in a June quarter versus the March quarter? Is there any seasonal effect on renewals?

No, Erik, no discernable difference in Q2 versus the other quarters.

All right. That takes care of my questions. Thank you.

(Operator Instructions). Michael Kim from Imperial Capital. Your line is open.

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

Hi , Michael. This is Don. We are seeing consistent performance here. We keep taking on a lot of new customer, so the ratio I think is still around 80%, 20%, but that is because we keep added a lot of new customer as well. And a lot of our customers in the pipeline, many of them, are as Philippe was eluding are existing customers now looking at Web App Scanning and Policy Compliance. So I think we have a good chance for that to tick up as we move through the year, but at the moment it is 80%, 20%.

Great. And then specific to Web App Scanning and Policy Compliance is that driven primarily by existing customers converting or new customers coming in straight for that or are they still predominately more oriented towards VM at this point?

Policy Compliance I would characterize as principally an up sell from customers that have VM. I think we only have a couple of instances of customers that have come here and done Policy Compliance as their first thing. Web App Scanning on the other hand is quite balances. While many of our existing customers are taking Web App Scanning, we have hundreds of customers that have come aboard where Web App Scanning is the first thing and at the moment the only thing they have bought from Qualys. So we are seeing a very good mix on that front and across our entire customer base as well.

As you may recall once the customer has Web Application Scanning he has already the Qualys platform in fact, which allows the person to test on the other service VM and Policy Compliance without having to essentially install anything else, so it is very easy for them now to try the other services and they are fully integrated.

Lastly can you talk little about the priors for Web App Firewall? Any initial feedback at this point, and how you are feeling about the feature set relative to comps at this stage?

I think we feel very good. What we did, if you recall, we tested first of all the engine itself, so I think is done. Now we very soon we will enter into the testing of the delivery and the two configuration, one at Amazon. We are going to do the same thing that we did currently with our web application -- with our VM where we are pre authorized on Amazon.

We are currently ,in fact, going through the motions to be pre authorized on our Web Application Scanning. And then, of course, we will go through the beta testing of our WAF at Amazon and then its pre authorization as well. That will give a very powerful solution, fully integrated, and then we will be building another delivery, mechanism which is like Qualys the physical model of having an appliance that now we can put in the enterprise appliance solely, remotely managed by Qualys like we do with our VM solution , like we do with our Web Application Scanning.

Once you have installed the box, Qualys is then manages is automatically essentially. So these are two new delivery models that do not exist in the market, and I think with that and the integration with our Web Application Scanning component and with our malware application I think that is going to give us a significant competitive advantage.

Great, thank you very much.

This concludes our Q&A section. I will turn it back to Phillip Courtot.

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

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