Qualys Inc (QLYS) 2015 Q4 法說會逐字稿

Good day everyone, and welcome to the Qualys fourth quarter and full year 2015 investor conference call. This call is being recorded.

(Operator Instructions)

I would now like to turn the call over to Mr. Don McCauley, CFO of Qualys. Please go ahead, sir.

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

We would like to remind you that during this call, we expect to make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events, or our future financial or operating performance. Forward-looking statements in this presentation include, but are not limited to, the following list: statements related to our business and financial performance and expectations for future periods, including the rate of growth of our business; our expectations regarding capital expenditures, including investments in our cloud infrastructure, and the intended uses and benefits of those expenditures; trends related to the diversification of our revenue base; our ability to sell additional solutions to our customer base, and the strength of demand for those solutions; our plans regarding the development of our technology, and its expected timing; our expectations regarding the capabilities of our platform and solutions; the anticipated needs of our customers; our strategy, the scalability of our strategy, our ability to execute our strategy, and our expectations regarding our market position; the expansion of our platform, and our delivery of new solutions; the expansion of our partnerships, and the related benefits of those partnerships; our ability to effectively manage our costs; and finally, our expectations for the number of weighted average diluted shares outstanding; and the effective GAAP and non-GAAP income tax rates for the first quarter and full year 2016.

Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission, including our quarterly report on form 10-Q that we filed on November 5, 2015.

The forward-looking statements in this presentation are based on information available to us as of today, and we disclaim any obligation to update any forward-looking statements, except as required by law. We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation, or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures, and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures, are included in our earnings press release issued earlier today.

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

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

Thank you Don, and welcome to all of you.

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

2015 was a fantastic year for us, as we expanded our cloud platform with AssetView, which provides customizable dashboard and elastic search capabilities, and with our groundbreaking cloud agent technology. The elastic search capability allows our customers to search across millions of IT assets in seconds, to create customizable dashboards, while our cloud agent allows our customer to perform continuous [variability] and compliance management on many assets, whether on premise, in the cloud, or on end points.

And this without the need of establishing scanning Windows and searching credentials. So these, of course, strongly enhance our variability management and policy compliance offerings, and give us a clear differentiator, when compared with other solutions. Furthermore, both the elastic search capabilities and our cloud agent platform allows us to introduce a series of new services, and we plan to reveal the details of these new services at the upcoming [RSA] conference in San Francisco at the end of this month.

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

We continue to expand our partnerships and global distribution channels. So we're leading [managed security] providers, global [concentric] organization and outsourcing providers. This will also remain a big focus for us in 2015. Our industry-leading vulnerability management solution grew at approximately 18% in 2015. Our newer service, which includes web application scanning, policy compliance and web application firewall, grew at approximately 35%.

And as we have discussed previously, these growth rates were negatively impacted by the headwinds we have seen from currency fluctuation during the past year. An indication of our continuing success in diversifying our cloud platform offering is that as of December 31, 2015, 62% of our customers have subscribed to more than one solution, and these metrics [do that] 30% at the end of 2013, and 54% at the end of 2014. In anticipation of the adoption of our cloud agents and new services to come, as well as the fact that Qualys has become a strategic vendor with many of the Fortune 500, we have expanded our sales force, including several new sales leaders.

As a result, we have additional sales personnel that are equipped to set up at higher executive level in the enterprise. And before I turn the call to Don, you may have seen on the wire that we have added to our board, Todd Headley, which was the former CFO of Sourcefire, which is a great addition to our team.

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

Thanks, Philippe.

Again, as previously mentioned, our fourth quarter and full year 2015 results were excellent. Revenues grew in the fourth quarter to $44.4 million, which represented 22% growth over the fourth quarter of 2014. Full year 2015 revenues grew 23%, to $164.3 million. Our current deferred revenue balance is $98 million as of December 31, 2015, which was 21% greater than our balance at December 31, 2014.

Now, a quick review of some other revenue metrics for the fourth quarter. The US represented 70% of revenues, the same percentage as in the fourth quarter of 2014. Also, we derived 78.7% of fourth-quarter revenues from subscriptions to our vulnerability management solution, compared to 80% in the fourth quarter of 2014. Annually, we further examined the components of our revenue growth. In 2015, total revenues grew by $30.7 million, to the $164.3 million I mentioned earlier.

That $30.7 million increase was comprised of $18.9 million of revenue growth from existing customers, and $11.8 million of revenues generated from new customers acquired in 2015. In 2014, the comparable numbers were an increase in total revenues of $25.6 million, comprised of $15.7 million of revenue growth from existing customers, and $9.9 million of revenues generated from new customers acquired in 2014. In 2015, the revenue increase from existing customers represented 114.1% of 2014's total revenues, which compares to 114.5% a year ago.

GAAP gross profit increased by 22%, to $35.4 million in the fourth quarter of 2015, compared to $29.1 million in the prior-year period. GAAP gross margin was 80% for the fourth quarter of 2015, compared to 79% in the same period last year. Non-GAAP gross margin was 80% for both fourth quarter periods in 2015 and 2014. For the full year, 2015 GAAP gross profit increased to $130.4 million, compared to $104.6 million in 2014. GAAP gross margin was 79% in 2015, compared to 78% in 2014, and non-GAAP gross margin was 80% in 2015, compared to 79% in 2014.

Adjusted EBITDA for the fourth quarter of 2015 increased by 53%, to $16.4 million, compared to $10.7 million in 2014. Adjusted EBITDA as a percentage of revenues increased to 37% in the fourth quarter of 2015, compared with 29% in the same quarter of 2014. For the full year, adjusted EBITDA increased by 79%, to $56.7 million, compared to $31.7 million in 2014. And as a percentage of revenues, adjusted EBITDA increased to 34% for 2015, compared to 24% for 2014. Net cash from operations in 2015 increased by 59%, to $66 million, compared to $41.4 million in 2014. Free cash flow for 2015 increased by 67%, to $45.8 million, compared to $27.4 million in 2014.

In the fourth quarter of 2015, capital expenditures were $5.2 million, compared to $3.6 million in the fourth quarter of 2014. In the first quarter of 2016, we expect capital expenditures to be in the range of $5 million to $6 million. Moving on now to earnings per share. For the fourth quarter of 2015, GAAP EPS was $0.14 per diluted share, versus $0.69 for the fourth quarter of 2014. You may recall that in the fourth quarter last year, we recognized $23.7 million, or $0.63 per diluted share, of US federal and certain state deferred tax assets.

So the comparison without that one-time item is $0.14 per share in the fourth quarter of 2015, as I just said, compared to $0.06 in the fourth quarter of 2014. For the full year 2015, GAAP EPS was $0.42 per diluted share, versus $0.81 in the prior year. That deferred tax asset item accounted for $0.64 on a full-year basis in 2014, so the comparison excluding that item is $0.42 per diluted share in 2015, compared to $0.17 per diluted share in 2014. Non-GAAP EPS was $0.21 per diluted share in the fourth quarter of 2015, compared to $0.15 in the fourth quarter of 2014. For the full year 2015, non-GAAP EPS was $0.70 per diluted share, compared to $0.46 in 2014.

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

As to earnings per share guidance, we expect GAAP EPS for the first quarter of 2016 to be in the range of $0.06 to $0.08, and non-GAAP EPS is expected to be in the range of $0.14 to $0.16. For the full year of 2016, we expect GAAP EPS to be in the range of $0.36 to $0.41, and non-GAAP EPS is expected to be the range of said $0.74 to $0.79. Our first-quarter EPS estimates are based on approximately 38.4 million weighted average diluted shares outstanding, and our full-year 2016 EPS estimates are based on approximately 38.9 million shares outstanding. For the first quarter and full year 2016, we have used an expected effective GAAP tax rate of 37%, and an expected effective non-GAAP tax rate of 36%.

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

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

(Operator Instructions)

Sterling Auty, JPMorgan.

Don, thank you so much. It has been a pleasure working with you all these years, and hopefully, we will get a chance to do so, going forward. Onto the business, I am curious, looking at the revenue results for the quarter and the guidance for the first quarter, it would seem like there is some softness in the business. Looking at the mix, I guess my initial read is, it sounds like it is not vulnerability management, but maybe the rest of the solutions, that perhaps are not growing as robustly as they were, that is causing the trajectory to slow. Is that the right conclusion? And what are you seeing in the marketplace around that?

What we see today is that we are coming up with these [agents], which are starting to come up pretty good, which I think are going to allow us to maintain, even to accelerate, the growth of both the policy compliance and vulnerability management and the policy compliance. The agent technology are really -- are absolutely a game changer, for the reason that I mentioned earlier on the call, in the sense that they expanded the capabilities of vulnerability management significantly

So that is what we see. So of course, we have had big headwinds on the [dollars], which have taken, of course, effect, and we are cautious. We're entering into a period, which, obviously there is a lot of strain everywhere. So I think we are cautious, but the business, as you have seen, we have built a fantastic franchise, with 8,800 customers, a very powerful business model. So there's no fundamental change here.

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

No, there is another factor also, which is happening today, that our business, as we have said, in fact, in the very beginning when we went public. That gradually, we will move from a more direct model to a more indirect model, and this is what is happening. So we can see today, all the partners that we have established are trying to essentially help us grow the business. But of course, it affects, to some degree, the top line, while being very positive, in fact, on the expense line. Because we do not need to build, of course, as big of a direct and expensive sales force, that [after which] we were more direct. (multiple speakers) And we still have (inaudible) for another quarter or two.

Got it, thanks.

Phil Winslow, Credit Suisse.

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

Yes, so definitely, we're looking at spending a little bit money on the marketing side. We're also looking at attracting additional senior management, because we believe we have the opportunity to really build a significant (inaudible), now the foundation. The foundation up there, they are extremely strong, both from a technical standpoint with our platform, but of course, as well, with our financials. So today, we have, for example, [Behard], which is not yet on board. A VP of Corporate Development, and experienced person, so we could focus more on the acquisitions. And quite a few other executives that we're look at attracting to the Company. So that's what explains.

(multiple speakers) Siti, this is Don. Just another quick footnote. Another small factor there is that we're looking at slightly higher tax rates this year than last year.

Okay. And then in terms of [self-serve] hiring, last quarter, you had, you said, I think, five only. But could you give how many you hired in Q4? And what is your plan for FY16?

Yes, so we hired 10 in the fourth quarter, bringing us to 20 for the year, which is in line with what we said at the beginning. And I think we are going to not give an explicit goal, going forward. But anyway, we -- so we added 5 in the third quarter and 10 in the fourth quarter.

All right. Thank you.

Steve Ashley, Robert W Baird.

Your guidance for the coming year, at the midpoint, calls for 20% top line growth. What does that assume about what kind of growth in the core VM business?

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

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

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

(multiple speakers) And it is still about 40% indirect, Steve.

I'm sorry, and you are saying that that was up 300 basis points, year over year, ish? Is that what we're seeing?

Correct.

Okay. Thank you.

Matt Hedberg, RBC Capital Markets.

Hi, it is Dan Bergstom for Matt Hedberg. Thanks for taking my questions. Don, the change in current deferred revenue this quarter was the largest we've ever seen. Any color on what is behind that? Is it initial cloud agent uptake?

In current deferred revenue?

Yes.

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

Okay. And then last quarter, you talked to ramping up the marketing campaigns around cloud agent. Just wondering if those are underway at this point, and any more insight?

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

Great, thanks.

Srini Nandury, Summit Research.

Philippe, on the press release, you actually mentioned that you would release a cloud agent for software for Windows, and you have a beta (inaudible) and Mac OS. What is the time frame for launch of this products? Can you give us a high level run down on the products which you expect to launch at the RSA next month?

Yes, so in fact, today, we're almost about to release, to GA, the UNIX agent. It's a question of days. And then next month, it will be Mac OS.

I see, okay. And if I may, one more question. Philippe, can you talk about your thoughts on your international expand strategy? You still get 70% of your revenue in the US. Is there a structural issue in the Europe and Asia, to grow more rapidly there? Where will you need to grow there, and penetrate faster?

In fact, what is happening today is that in the US, we're doing much bigger deals that we do in Europe, in general. So I think we are very happy with our European operation and international operation, which are growing very well. The big difference is that today, we are doing much bigger up-sells, and much bigger deals in the US. This being said, it's also -- we can see, Europe always lags by about a year to two years, depending to what is happening in the US. So our ability to do bigger up-sells is relatively new. This is something which happened in 2015.

And in Europe, we can see that happening, as well starting to happen now in Europe. So we are very well staffed in Europe, in every country, we have a very strong presence. We made an investment early on. We have 20 little companies worldwide. A total global company, we made the investment. And let's speak again to the scalability of our model. We made that huge investment of being -- we operate in 106 countries. We have 20 small little companies, where we have to declare taxes and pay taxes, which is absolutely -- and do payroll. But we have built that over the years, and we have that. So this is going to help the scale as well, very well.

Michael Kim, Imperial Capital.

Don, likewise, I wish you the best in your next venture, and it has been great working with you the past couple of years. First question was about the delayed large deals in policy compliance, web application scanning. Last quarter, did those close in the current quarter and contribute to the current deferred?

So they didn't contribute to the current deferred. They --

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

Yes. I think last quarter, you highlighted a couple of larger deals, one in policy compliance, one in web app scanning, that was pushed out into the (multiple speakers) quarters?

Yes, I think those are still works in progress, and did not contribute to deferred yet.

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

So we have to -- you have to make the distinction between the large account, which we have been always, over the years, there. Because of the unique scalability of our platform, and then more of the mid-market. So we were already engaged into many of these replacement deals. They take a bit longer, because you don't [reap off] an application like VM just like that. McAfee, as may recall, had committed that they would continue the support for two years. And even, I think, they've extended that for another year after.

So these deals at the high end are taking a certain amount of time. Which typically, we don't see an acceleration, but we see the, of course, the decision by companies to move away from McAfee, since they're not supporting the product anymore. On the mid range, that is a little bit different. It is a more dynamic market. And we are competing here against the traditional suspects here, which are essentially our traditional competitors, and we're doing very well.

Okay, great. Thank you very much.

Erik Suppiger, JMP Securities.

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

I think what I will say is that it's clear that the days where companies were buying these magical products, which we're going -- helping them to essentially secure, find the (inaudible) in their, these days, are starting to fade. So that is for the general tone in the market. Conversely, I think, these favor us very well. Because what companies are now figuring out is that you cannot secure what you do not know. So being capable of doing the [full and] continuous inventory of your (technical difficulty) is becoming very important.

To try to identify the vulnerabilities is also very important. And now, when the new services are bringing to market, we are going to also help you to identify those vulnerabilities which are prone to be compromised and received pay load. So this is part of some of the new announcement that we are going to make very soon. So we see that vulnerability management is an application, which some people say, it is commoditized with, obviously, [that a toll], [with] businesses and application, which is in fact morphing into a very critical application. Allowing you, one, to discover what you are. Second, to identify your vulnerability, prioritize those that could be most damaging, if you prefer.

And also going, moving with the new things that we're doing into prevention. So we see, in fact, Qualys becoming more and more strategic, on one hand. And all of our [lost] customers, they understand that very well. And second, we're adding -- by adding more and more services, we're becoming a strategic vendors. And what today, have been named as a strategic vendors from quite few large corporations. Because they see that Qualys not only allows them to do what I've just said. But also, we consolidate quite a few of these security point solutions.

And by year end, we will probably be able to facilitate. Currently, today, we consolidated about five applications. We will probably double that by year end. All of that on the same cloud platform, which, as you may recall, we can vary uniquely deliver as an on-premise solution. And you see today that Azure is doing exactly the same thing, but providing Azure as an on-premise solution. But yet keeping the same code base. So we have the scalability, from an (inaudible) standpoint, which allows us to continue to essentially be more efficient on the engineering side.

The fact, also, on the engineering side, that we invented big time in (inaudible) India is also paying off, big time. So we see, in fact, that our position in the marketplace is strengthening significantly, but I think we have to be prudent. Because today, there is macroeconomic factors, which we all know are not very encouraging.

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

That is a good question about the dynamic, because yes, it is an issue of dynamic here. The large companies are really adopting more than one solution, much more than the smaller companies. Because we have, essentially, three businesses here. We have the enterprise business, we have the mid-market business, and we have the small businesses. So there is much less up-sell on the small businesses, because we have a tendency to create more the can [roll into one] solution. Of course, in terms of numbers of customers, et cetera, we have more smaller businesses than large businesses, obviously.

So that is what, is in a way, reflects the fact that we are not -- there is going to be a point where we probably, I would say, cannot reach 100%. Now however, this being said, we are also shipping additional services. So that, of course, these additional services give us a neither penetration capabilities and other up-sell opportunities. So I think because of that, we are going to believe -- I believe that we will continue getting more of these customers buying more than one solution.

Okay, thank you.

Rob Owens, Pacific Crest Securities.

Just curious, around the growth side of the equation, I think a few months ago, in Las Vegas, at your analyst day, you laid out a plan for a five-year target model. And if I recall, it was more of a mid-20 separate growth rate. Now you are guiding to about 20%. I actually believe, on my quick math, that the margins go down, on a year-over-year basis, for 2016 versus 2015. So how are you thinking about balancing growth versus margin? And does the current state of the economy, or the industries you are playing in, remove that five-year target model?

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

And we are well on our way to the model, so this is another thing that we're not -- this is -- we already have built a model that shows the scalability.

(Operator Instructions)

Craig Nankervis, First Analysis.

Don, I echo the sentiments. I wish you the very best in your next adventure, and have certainly enjoyed working with you. As you think about 2016, I wonder if you could elaborate a bit on your outlook, specifically for policy compliance and web application scanning? Versus how you saw them play out in 2015?

I think on the web application scanning, I think we see the same. One of the things that we were expecting to see as a driver and as accelerator of our web application scanning, with our web application [forward], and as I mentioned, we had to go back to the engineering drawings, to make it a little bit better than it was, which we are doing that. And I think we are making very good progress with that.

So that, I think, will accelerate, when we deliver that solution, because it goes hand-in-glove with web application scanning. As you may recall, the problem with web -- we can discover web applications very well, much better than anybody. But then what do you do, when you find vulnerabilities in the cold? You've got to fix the code, and that is very, very difficult to do. So the solution is really a very good web application forward, in front of it. So that is -- we are continuing working at this one. And once we deliver that, I think we would see web application scanning accelerating.

So for the moment, the web application continues about the same. As far as the policy compliance, we believe there is two new factors. First of all, the agent really makes the privacy compliance very effective. So we see that the agent giving a boost to the policy compliance. And in addition, we are, in fact, now essentially, we have the security assessment questionnaire, which is another component of policy compliance, which I think will be very helpful there. This is now GA.

And then, we have, also, are working on the [fallibility] monitoring, which would come later this year, which will be another extension of policy compliance. So we see very good continued growth on the policy compliance application, as well.

Do you differentiate in your view, across your three products, if you are looking at this year, do you have a similar outlook for vulnerability management, and the other two we just discussed? Or do you see some reasonable difference, for one or two of them, versus the other? Just your outlook for them?

It's a little bit difficult to say, because they are, especially, I would say they're about the same. It is a little bit difficult, because once we, for example, [shape] the fallibility monitoring, it is a more expensive application. But you deliver that across less servers, essentially. You just typically do that on the critical servers, or on the endpoint.

So the endpoint is also a totally new game for us, because we could not access the endpoints, and that is really where we see a big boost for both VM and policy compliance, now that we can essentially, very successfully, address the endpoint. Finally, with the agent, there is another thing that we could not do before. Now today, with the agent, we are able now to address the security of these elastic cloud, the configuration, that is totally green field for us. We have a very successful company, like Amazon, which we're working very closely with. So that is a new expansion for Qualys, as well.

Gur Talpaz, Stifel.

Last quarter, you noted a greater emphasis on attacking via the government verticals. Hoping you can give us an update on any sort of progress you've made? And what your thoughts are, regarding the public sector, as we look towards 2016?

Yes, so we are very committed to the federal market today. We're really expecting to be FedRAMP certified relatively soon. We have, in fact, the SEC, the Securities and Exchange Commission, as our sponsor. We have, in fact, provided everything. So I think once we have that certification, which we are expecting that any time now, that will really make us, essentially, one of the first, if not, I think, the second cloud service to be FedRAMP certified. And that will really give us what we need to really help us penetrate the market.

In the meantime, what we're doing is beefing up our team, knocking on doors, to essentially accelerate our market penetration there. Let me remind you that the federal market was only representing about less than 1% of our revenues. So we have got, of course, there, a significant upside. And the federal government is finally moving into cloud solutions, so there is much less resistance of the cloud. I mentioned that we're now a disconnected version, which will allows us to do [a DOD]. The disconnected version works very well at Siemens. Today, we consider that we are protection-ready there. And we have also the ability to provide private clouds for the agencies, as well.

So I think we have got the tools, and now it's a question of essentially knocking on the doors. And as you know, it takes time. The federal market, this is not something that you have got the business. Admittedly, it takes some time. (inaudible)

That's good color. I had one more question, if I might. You've noted Amazon. I was hoping to get your thoughts on Amazon's bigger organic push into security, and they just launched their own (inaudible) solution. There's talks of other solutions, potentially. How do you feel about Amazon, and even Microsoft, getting more in the security game themselves, with native solutions?

This is a very good question. And in fact, this is what makes Qualys very unique. Because with our architecture, as working with Amazon, we can really help these companies to secure the core infrastructure. This is what we're doing with Amazon and with other companies, similar companies like that. So I have always believed that, when you look at the cloud, security wants to be absolutely, if you prefer, embedded into the cloud offering, and making that transparent to the customers.

Now, this being said, you have a huge issue of scale. You start now to (inaudible) vulnerability management on these cloud infrastructure, you cannot do it with the standard scanning technology. You need to have our agent technology, essentially, to do that. And that is where Qualys is going to play, I believe, a very big role in helping these large companies securing their infrastructure.

Great, thank you.

Alban Cousin, Arete.

Just want to have a clarification on the guidance. According to my math, it looks like the margin is going down. I was just wondering whether that is the case? And if so, what are the investments that you are doing?

Philippe mentioned, Alban, making more investment in sales, and especially marketing, with al the new products. That is one initiative. I mentioned earlier, we also have a higher tax rate this year than last year. That contributes a little bit, and those are the main things.

Yes, and more senior management, as well, which, of course, they don't come cheap.

Okay, thanks.

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

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

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