Qualys Inc (QLYS) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Qualys first-quarter 2016 investor conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Sheila Ennis, investor relations for Qualys. Ma'am, you may begin.

Thanks very much. Thank you and welcome to all of you.

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: Statements related to our business and financial performance and expectations for future periods, including the rate of our growth or 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 strengths 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. Our expectations for foreign currency exchange rates. Our plans to pursue arrangements with MSSPs which are multi-year contracts at fixed prices. And finally our expectations for the number of weighted average diluted shares outstanding, and effective GAAP and non-GAAP income tax rates for the second quarter and full year of 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 annual report on Form 10-K, that we filed on February 26, 2016. 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 the 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 press release earlier today.

Joining me for today's call are Philippe Courtot, Chairman, President, and CEO of Qualys; Nancy Hsiang, VP and Corporate Controller; who will run through our financial results from the first quarter, and Melissa Fisher, our newly-appointed CFO. Philippe?

Thanks Sheila, and welcome to all of you. As you have seen by now in our earnings press release, we kicked off the year with an excellent first quarter. We have made great progress, both with customers and with partners, who are shifting away from traditional enterprise security and compliance point solutions, and increasing their commitment to our pure SaaS platform.

In fact, in one interesting development, we have struck a new arrangement with one of our key managed security service providers. This MSSP partner has now committed to a multi-year purchase order with fixed quarterly payments, rather than the prior arrangement, where each resale of Qualys solutions was accounted for separately.

Our first-quarter reported figures were boosted somewhat by the effect of this new arrangement, and I will come back to this in a moment. Excluding this new arrangement, our first-quarter financial results were at the high-end of our revenue guidance, and in excess of our EPS guidance.

We're also very pleased to have announced today the appointment of Melissa Fisher, our new CFO. You will hear from Melissa a bit later in this call, but first, let me share some of the business highlights from the quarter.

I want to underscore that I believe that each of the achievements can be tied directly to the fact that we offer a pure cloud security platform with 100% SaaS business model. Pure cloud solutions are increasingly preferred by enterprises, who understand that they must transition from reactive to proactive approaches. They understand that cloud-based solutions provide a very robust and cost-effective way to handle the massive amount of data involved in making that transition. We believe that our platform strategy is the key driver to the rapid uptake of our newest offerings, which we are beginning to see.

So let's take a look at the results. We reported 23% revenue growth over the first quarter of last year, which includes a positive impact of approximately 200 basis points of the new multi-year MSSP arrangement, effected during the quarter. We also delivered strong improvements in our profitability in the first quarter of 2016, which was reflected in our 35% adjusted EBITDA, which was up from 32% in a year ago quarter.

More importantly, we are beginning to see the economies of scale our platform provides. Being purely cloud-based enabled us to release new features and proximities continuously, and as market needs emerge. We released the Qualys Cloud Agent Platform for Linux in March, and for MacOS in April, adding to the platform's existing support for Windows.

Support for the Linux and MacOS operating systems is key to securing servers, endpoints, and elastic cloud environments where these operating systems are predominant. Adding the ability to see these endpoints increases the size of our addressable market, drives larger revenue commitments from our customers, and these capabilities is a meaningful competitive differentiator.

Our agent technology brings the real-time continuous security that enterprises now require. We have begun to see significant upsales, and we believe that many more of our customers will meaningfully increase their annual spend with us, simply as a result of our ability to manage servers, endpoints, and elastic cloud environments with our single platform.

The excitement about this new offering was quite visible conference at the RSA Conference in early March. In addition to demonstrating the real-time capabilities of our agents, we also unveiled ThreatPROTECT at RSA. This allows the user to visualize and prioritize our aggregation of vulnerabilities, thus minimizing exposure to the most critical threats.

We can achieve this by correlating data from vulnerability scans, and active threat data from multiple sources into a single dynamic dashboard. By providing customers a comprehensive and contextual view of their organization's threat exposure, they can proactively triage and apply their mitigation efforts.

In addition to the expanded MSSP commitment I noted earlier, there are other signs that our platform is enabling us to become a key strategic security vendor to our customers. We announced at the RSA conference a new OEM partnership with HEAT Software to deliver a cloud-based patch management offering to our customers globally. The partnership allows us to embed each software best-of-breed patching technology within the Qualys Cloud Agent to distribute and apply patches.

The single cloud-based console is key to effective patch management, which as many of you know, is often disjunctured, and therefore costly and ineffective process. This patch management offering is currently scheduled for beta release in Q4.

I had the chance to speak with many of our largest customers at this important conference. Let me share with you a particularly interesting conversation I had with the CSO of one of our Fortune Ten customers. He had high praise for the effectiveness of the four Qualys solutions they used today, Vulnerability Management, Policy Compliance, ACI, and Web Application Scanning.

More importantly, he stressed how important it is for Qualys to continue to leverage our platform by adding to our suite of solutions. He is in fact eager to reduce the number of security vendors he has under contract, and views Qualys as one of his key strategic vendors. We believe market concerns about putting security solution on the cloud platform are behind us, and this creates a tremendous tailwind for our business, on both the top and bottom line.

As I noted, we have released on schedule and on budget the agent technology that we believe permanently changed the version management landscape. One indicator of the pent-up market demands for approaches is that the uptake of our cloud agent is an order of magnitude faster for any other product released in our history. We believe it is our current technology to lead, as well as the extensibility of our platform, that has prompted MSSPs and outsourcers to feature Qualys products in their offering.

Let me describe the new MSSP arrangement we reached in the first quarter. For the existing days of renewing and customers we share, this MSSP has extended their commitment to Qualys by entering into a multi-year with fixed quarterly payments instead of individual contracts for each customers. We are pleased to report that this improved our revenue flexibility, as revenue that would have been subject to our renewal dates is now on a quarterly program. The streamlined arrangement also reduces our cost.

Expanding the scope of our capabilities also allows customers to standardized on the Qualys platform, while seeing more and more enterprises that adopt multiple solutions in their initial contract with us, who have already shared that the majority of our customers have more than one of our offerings. And we believe that the increasing recurrence of standardization arrangements, both with customers and with partners, will result in our winning a larger share of the security wallet, and allows to outpace the core VM market growth rate, which IDC pegs at 10%.

I will note that these larger contracts and renewals with upsalers can sometimes take a bit longer to growth. At the end of the first quarter, a few renewing customers took longer than we expected to close upsale components of the contract, which delayed the issuance of this purchase order. Most of these POs were received early in the second quarter, so the differential is days, not months. You will note the effect of the timing in lower-than-expected backlog growth and deferred revenues in Q1; however, there is no change to the revenue we expect to recognize from these contracts for the full-year 2016.

With upsales becoming larger, in some cases, multiple of a customer core VM subscription, we have decided to decouple the renewals from the upsale negotiations. Renewals will be executed when they are due, and upsale will be completed separately. We expect this will restore the stability of the renewal revenue streams, however, in general, the timing of larger contracts encompassing multiple products is harder to predict, reducing somewhat our visibility on the timing of revenue streams for new business and upsales.

As it is a sign of our becoming a more strategic vendor to our customers, increasing our shares of our customer spend, this is a trade I'm quite happy to make. We are making terrific progress in our evolution from a single product company to a strategic platform vendor, with multiple integrated solutions.

One key aspect of scaling up is adding talent. I could not be more pleased to introduce our newly appointed CFO, Melissa Fisher, who joined us last week. Melissa is joining Qualys at a pivotal time in our history. She brings a unique blend of tech industry operational experience and Wall Street savvy. She was most recently at Zynga, and before that, at Digital River, an enterprise software company.

Before moving into industry, Melissa built a tremendous amount of public markets experience in the 15 years of investment banking. She worked with technology companies on both M&A and financing for such banks as Goldman Sachs and Bank of America. Melissa will lead all the elements of the Company's financial organization, including finance, accounting, investor relations, treasury, and tax. Welcome to Qualys, Melissa.

Thanks, Philippe. I am thrilled to join the Qualys team at this exciting time, as the Company continue to leverage its cloud-based platform to be a strategic partner to its customers. I have spent most of my career working with software companies, and it's unusual to find a SaaS company so focused on customer success, and yet which developed early on a sustainable scalable business model, with both leading margins and multiple levers of growth in front of it.

I see Qualys is a pioneer and visionary, having built a disruptive offering that eliminates the infrastructure operations and maintenance cost of traditional enterprise security software solutions. Like we have already seen with commercial software, the security industry is ripe for the adoption of cloud-based solutions, and is in much need of vendor consolidation. Qualys is uniquely positioned with its platform to easily enable additional features and applications, fast becoming a one-stop shop for IP security and compliance solutions for its customers, a significant competitive advantage.

This added value can enable higher growth for Qualys as it enlarges its market opportunity by expanding the scope of the solution and coverage to additional devices. I look forward to leading the dialogue with our investors and analysts in the coming weeks about our competitive positioning in the market, our business, and opportunities for growth.

Thanks Melissa. I look forward to working with you. Welcome.

We are indeed at an exciting point in our history. Qualys has evolved from the point solution vendor to a strategic platform. Today, while becoming recognized as the disruptive cloud-based security and compliance platform, delivering centrally managed and self-updating security and compliance solutions.

While IDC estimates that the vulnerability management market will grow 10% in 2016, we are sustaining top line growth at about twice that rate, by offering a rich set of incremental capabilities such as elastic search, dynamic dashboards, asset view, cloud agents, and ThreatPROTECT, which help our customers deploy state-of-the-art security and compliance at a much lower total cost of ownership.

While seeing strong demand for our agent technology, as we see both our existing and new clients driving rapid uptake rates. We believe our platform provides us with a unique ability to benefit from the trends toward vendor consolidation, which we are beginning to see in our expanding deal sizes and the standardization on Qualys by MSSP and outsourcers.

We have enhanced our management team with the addition of Melissa, as well as new business development, sales, and product marketing talents, which continue to add the executives that we believe are necessary to support our next phase of growth, we could not be more pleased with the talent we are attracting. We are off to an excellent start for 2016.

Nancy will now take you through the details of the first-quarter financials. Nancy?

Thanks Philippe, and good afternoon. Total revenues in the first quarter were $46.2 million, which represented 23% growth over the first quarter of 2015.

As Philippe noted, our first-quarter results include the benefit of the new arrangement with one of our MSSPs. The change resulted in some revenues that would have been recognized over the course of 2016 being additionally recognized in the first quarter. Excluding the effect of this change, our revenue growth would have been at the high-end of our guidance, at 21%.

Our current deferred revenue balance was $102 million at March 31, 2016, 15.5% greater than our balance at March 31, 2015. While there is some negative impact from the new contract terms associated with the MSSP we have mentioned, specifically the effect of quarterly billing instead of annual billing, we also had a few renewals that we expected would close in Q1 push out a few days into Q2.

As Philippe noted, these delays were the result of the longer procurement processes associated with customers purchasing additional solutions, on top of their renewing subscriptions. While the timing impacts our current deferred balance as of March 31, it does not impact our expectations for the contribution from these accounts for the full-year. The US represented 71% of revenues, slightly higher than the first quarter of 2015. Foreign currency continued to present a headwind, which we expect to decline over the course of the year, becoming negligible by year-end.

Moving down the P&L, for the first quarter of 2016, we are reporting both GAAP and non-GAAP results. A full reconciliation of all GAAP to non-GAAP measures is provided in the financial tables of the press release we issued earlier today, and is available on the investor section of our website. To provide investors with additional information regarding our financial results, we disclose adjusted EBITDA, adjusted EBITDA margin, and free cash flows, which are non-GAAP measures. We have provided a full reconciliation table in our press release.

GAAP gross profit increased by 25% to $36.8 million in the first quarter of 2016. GAAP gross margin was 80%, compared to 79% in the same period last year. Non-GAAP gross margin was 80% in both periods.

Adjusted EBITDA for the first quarter of 2016 increased by 35% to $16.1 million, compared to $12.0 million in the first quarter of 2015. Again, the MSSP contract change had a positive effect, since revenues were higher, but excluding this impact, adjusted EBITDA would have still increased over the first quarter of 2015. Adjusted EBITDA margin increased to 35% in the first quarter of 2016, compared to 32% in the prior-year first quarter. Margins are expanding as we add services to our platform and get better at leveraging channel partners.

Net cash from operations in the first quarter of 2016 increased by 71% to $17.1 million, compared to $10.0 million in the same period in 2015. Free cash flow generated in the first quarter of 2016 was $12.8 million, compared to $3.8 million in the comparable period of 2015. This significant change is a strong indicator that our business is scaling up successfully.

In the first quarter of 2016, capital expenditures were $4.2 million, compared to $6.1 million in the first quarter of 2015. In the second quarter of 2016, we expect capital expenditures to be in the range of $5 million to $6 million.

Moving on to earnings per share, for the first quarter of 2016, GAAP EPS was $0.13 per diluted share, versus $0.08 for the first quarter of 2015. Non-GAAP EPS was $0.21 per diluted share in the first quarter of 2016, up from $0.15 in the first quarter of 2015, and also ahead of our guidance of $0.14 to $0.16 per diluted share.

Now turning to guidance, starting with revenues. For the second quarter of 2016, we expect revenues to be in the range of $47.6 million to $48.3 million, at the midpoint, this represents 20% growth over second-quarter 2015 revenues. For the full-year 2016, balancing the effects of the increased revenue from the new MSSP arrangement and the momentum we are seeing in the business with somewhat uncertain timing of increasingly larger contracts, we are reiterating our outlook for 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 second quarter of 2016 to be in the range of $0.06 to $0.08 per diluted share, and non-GAAP EPS is expected to be in the range of $0.15 to $0.17 per diluted share. For the full year of 2016, we are reiterating our expectations for GAAP EPS to be in the range of $0.36 to $0.41, and non-GAAP EPS to be in the range of $0.74 to $0.79.

Our second-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 second 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%.

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

(Operator Instructions)

Siti Panigrahi of Credit Suisse.

Melissa, congratulations on your role as CFO.

Thank you.

Philippe, I just wanted to dig into this billings weakness. How much of that, are the MSSP, are they saying, how much is that as a percentage of your business? And then also, you talk about some of the deals. Did you close all of the deals in Q2? And I have a follow-up.

Essentially, as you just stated, it's a combination of the fact that we went into quarterly payments instead of yearly payment with this large MSSP, that's one factor. The other factor is that, which is a good thing, is that we're seeing larger upsell with our renewals. And some of these renewals which arrive at the end of the quarter drag, because of these additional purchases, which put them back into procurement, and that is a few delays.

So that shifts the business, but as I mentioned in the script, this is not months, this is days, and in fact yes, we did receive the majority, or most of these orders, if not all. We expect to have them all, so this is why we took some measures now to decouple the revenues, the renewals from the upsell, and insisting that our customers renew at the date at which they would renew, and if the upsell comes later, then so be it, instead of having to drag everything together. So that's a new measure that we have implemented with our salesforce.

And then just digging into the VM market, you said that it is growing around 10%. What is the growth rate for you in Q1, and if you could give some color in terms of what you're seeing in the market, in terms of competition or pricing, or anything you are seeing there?

Yes, so in fact, yes, in fact, IDC project that the growth rate of the overall vulnerability management and application is about 10% growth rates, and are essentially growing, and we have been, by the way, growing at that rate for the last eight or nine quarters. Two years.

And we believe can absolutely maintain if not exceed that growth rate, and it's because of the addition of the new services, which now fall into the bucket of VM, which is continuous monitoring, the cloud agents, and now ThreatPROTECT, which by the way went GA, as we had announced, went GA this month, and we are expecting quite a big uptake from ThreatPROTECT to have already the big pent-up demand that Qualys acquired, which I think will turn into purchase orders pretty quickly.

So that is the new dynamic, if you prefer. On VM, as I mentioned also earlier, our cloud agents are not only significant, but there's potential for the VM, but also brings realtime capabilities to VM, and have become a significant differentiator. So while we see our competitors fighting and trying to reduce the price, as they compete on the VM side, we are capable of maintaining our pricing.

Just to clarify, Siti, when we were talking about the market versus our growth rate, we've been growing at double the market rate, and we don't see any reason not to slow down.

Correct.

Thank you.

Steve Ashley of Robert W. Baird.

I'd just like to go back on Siti's question regarding the impact of the slipped deals, and then the one MSSP deal on deferred revenue. Can you give us any idea how many millions of dollars we're talking about associated with those events? Is it a couple million dollars, is it more than that? Any quantification there would be helpful.

Couple of millions of dollars, yes.

It's a combination of both. So excluding the impact of MSSP as well as the slipped deals, deferred revenue growth would have been largely in line with the historical periods.

So a couple million, that is terrific. I was going to ask on the cap business, what was the impact in the period? Meaning was there actually billings, and did you sign deals, and can you tell us a little more color on that?

Yes, we did sign deals. They are part of the billings, and we see significant pent-up demand. So this is something that we expect to accelerate and to continue. Huge success. From, by the way, every component of our business, which means the large enterprise, the midmarket, and the SMB, everybody is taking on the agent. We saw, first of all to begin with more, we see more today an uptake of the agent for the VM, and now we are starting to see an uptake on the agent on the policy compliance application as well.

Perfect, thank you.

Sterling Auty of JPMorgan.

One question, one follow up. It wasn't clear. You usually give vulnerability management as a percentage of the total. What was the percentage this quarter?

The split between VM and non-VM is still largely about 80/20, as we had with previous periods, but we wanted to point out that the characterization is changing. The business, the VM business is evolving, and a lot of our new services are VM related. Continuous monitoring, Cloud Agent, ThreatPROTECT. We expect that VM and non-VM will continue to both grow at similar paces. It may still be 80/20.

And I could add even some more specific, and I think we discussed that as well at the last earnings call. If you look today at the agent, the agent does two things. One is that it increases the value of our existing renewal base, as people are adding the agent to their current devices, that they are currently scanned. That essentially creates an uplift to our subscription, but they also bring us now to both to two new markets for us, which are the endpoints, and as well, the elastic cloud environment.

That's a significant new driver of our business. Other examples, like the continuous monitoring, which we see continuous adoption of the continuous monitoring. Added about 20% of the VM subscription for those who adopt the continuous monitoring. ThreatPROTECT was priced at 30% of the current subscription. So as you can see, we build significant accelerator around our VM business.

And the thing to point out here is that it's an extremely [unleveraged] business. It doesn't cost us significantly more to essentially add, provide these new capabilities to our customers. The purchasing for them is very easy. They do the trial, they like what they see, and then they send us a purchase order. So it's a very efficient and effective model that we build.

Got you, and then as a follow-up. If I add a couple million into the revenue push, change in deferred revenue. I'm still seeing a pretty healthy deceleration. I want to connect the dots between that -- along with sales and marketing, I imagine was a little bit light as some commission expenses probably slipped into the second quarter on the timing of those deals, but also the commentary about deal sizes growing, and some of the factors that would intimate that maybe we're seeing some acceleration in the fundamental business.

I'm not sure I understand your meaning, the acceleration that you mean. I'm not sure I understand exactly the point here.

If I put in, if I add $2 million into, if I look at revenue plus a change in deferred, if I add $2 million to account for the MSSP deal and the slipped deals, it would put a proxy for billings at about $50.3 million, which would be up about 14% as compared to most of last year, it was growing anywhere between 20% and 29%. I didn't know if there was other structural changes, in terms of the billings on other contracts that just aren't showing up in deferred revenue, because I wonder what's going to be the better indication of the top line revenue growth sustainability. Is it what's the top line growing today, or is the revenue plus change in deferred maybe a leading indicator of perhaps some slowdown in revenue growth, as we move through the year?

I think the couple million is actually a little low. The combination of both the MSSP deal, plus the slipped deals into Q2, is a little bit more than that. I think the other thing that we should be considering as well is that historically, we've had a lot of annual -- most our subscriptions have had annual billings. This MSSP deal specifically was a quarterly billing arrangement. So that changes a little bit of how we look at deferred revenue.

I will add also that we have a very healthy pipeline. As we see, we still a very strong business. I think this is more the fact that today's timing is becoming a much bigger element than it used to be in the past, and I think we discussed that also, earlier on. The timing of big deals, when they arrive, whether they arrive at the end, in the beginning, or in the middle of the quarter. All of that is starting to be significant. As we do $1 million of sales for example, today, which was a year ago, was essentially extremely rare. Our business has changed in many ways, and for the better. We have a very strong pipeline, so we see the market fundamentally coming our way.

And let me reemphasize again, that we don't see our VM market going down, as some people have predicted. We see the market growing up significantly, the VM market is becoming very strategic, and for one very simple reason. Today, companies are realizing that you cannot secure what you don't know. What vulnerability management does is allow you to identify all of your global ITSes, and Qualys does that better than anybody else, and from there, you want to ensure that you have a good view of the security and compliance of those assets, that you understand the vulnerabilities, and now ThreatPROTECT -- allows you to prioritization the remediation according to the threats of there, so that's another significant enhancement.

It's totally native, our current customers today can only do that by either buying additional solution, or just putting the data into [stack], and doing the correlation themselves. Now, all of that is native on Qualys, and that's what I mentioned earlier, that we see a significant pent-up demand for the solution, Cloud Agent and ThreatPROTECT.

Okay, thank you.

Michael Kim of Imperial Capital.

Welcome, Melissa, to the appointment to your new position.

Thank you.

In regards to the MSSP channel, do you see an underlying shift towards multi-year and quarterly billings, away from annual? And more broadly, with the indirect channel, are you continuing to see that become a larger portion of the mix?

So in fact, the MSSP channel, we like it very much, and as you may recall, we have already significant share of the MSSPs, and we believe we are going to continue adding more. For us, we're becoming very strategic for them, because it's a natural complement. The services we provide are natural complement of their business. We also add additional profitability, and that's the reason why we see them more and more looking, instead of having like they were doing in the past, buying a customer at a time, they are really coming to us to essentially negotiate longer-term contract, which of course, again, some preferable treatment in terms of pricing that gives us significantly more profitability.

And I would say adds exclusivity also to our contract, because of course, they are not going to provide any other solutions than Qualys. So we see that as the recognition, one, of the fact that we are out-of-the-box, essentially highly scalable. We deploy globally, we integrate it very easily with our services, so that's a huge position of strength, and of predictability. So it's also very cost-effective for us, because we don't need, of course, to have salespeople up there pushing our solution, as they come with the managed security service provider's offering. And they have a huge sales force, as well.

We see that same trend now happening with the outsourcers, which see Qualys as a very strategic component. And to finish on the channel, we see the traditional enterprise channel, which are very much interested in Qualys, because now of the breath of product, and because of the platform. So we see also the traditional channel coming our way.

So bottom line, as I mentioned earlier, we do anticipate to see more, and we have been seeing an increased market, increased volume from our channels. Now we don't see that yet, that much on the revenue side, because we, as I mentioned earlier, are doing very big upsell with our current and large customers, so that's in a way, masked the fact that a lot of new business, for example, is coming out through our channel partners. But of course it's not yet enough volume growth there to compensate for the big large upsells that we are seeing with our current install base, which again, direct bonus, which again, is quite sizable, as we have 60% of the Fortune 100 today.

With regards to the upsells, can you characterize what is driving the larger upsells? Is it primarily folks on VM, are they taking on additional Qualys solutions, policy compliance, or web app scanning? Any color would be helpful.

It's a combination of everything. First of all, as we mentioned many times, we are still being penetrated fully with all of our customers. For example, we have some customers, large financial institutions that deployed Qualys, and representing seven times the initial VM subscription. So it has been a long process to get to this huge deployment, the advantage of Qualys here is that we deploy at the scale that no companies are going to follow us, so that's very good for us.

So we have very large upsell on VM, but also of course, some customers are now certainly adding the policy compliance, the vulnerability management application, again the Cloud Agent, and very soon, the ThreatPROTECT. All of that creates naturally large upsell on the customer base, which today is pretty big. Very good upsells on the enterprise market, on the mid market, much less upsells of the low end of the marketplace, the SMB, because this more like an all-in-one solution, but on this, the enterprise, we see a very healthy business of upsells.

Great, thank you very much.

Rob Owens of Pacific Crest.

Curious how the quarter played out from a linearity standpoint.

So in Q1, it actually was okay. Excluding the impact of MSSP and these large deals, our revenue actually ended up in the high end of the guidance, anyway, so the activities this quarter really didn't have a huge impact on linearity. It does a little bit going forward, the timing of when these larger deals are closed will have an impact, but in Q1, it didn't have much.

To that point, though, Nancy, what happened to DSOs, because they seemed to slip quite a bit, and I would think given your relationship with the MSSP and the payment terms associated with that, you would have shown better DSO, but given that slippage, it points to weaker linearity, so I'm just trying to understand the two different comments.

I have to take a look at the DSOs, but from a revenue standpoint, it didn't really have an impact. I think we have had continued work to do on the collections side of things that carried over a little bit from year-end, that you are probably still seeing a little that impact, or you'll still seeing some of that in the March 31 balance sheet.

Okay, great. And then in terms of the growth, the 20% year-over-year, could help me understand what's coming from existing customers in terms of real upsell, or expanded opportunities, versus new customers, and what they are driving in terms of growth? I know it's not something you historically split out, but any color would be helpful. Thanks.

What I would say here, this is part of maybe a much bigger discussion here, as it's very clear that some of the guidance that we provided, we have to revise that, because they do not represent any more really the Qualys business. One example of that is the number of customers which have more than one solution, which is around 62%, if I remember correctly. That doesn't represent at all anymore the adoption.

We know that most of our customers, the majority are adopting our new solution, but the SMBs, again, being an all-in-one, there's not much upsell there, and they do represent the fastest growing segment of our customer base. So we do not (technical difficulty) have provided the mix between existing customers and new customers, but I think now with Melissa coming on board I think one of her tasks would be to really sit down and absolutely look at what is the guidance, the color that we should be providing with you.

Great, thanks for taking my question.

Gur Talpaz of Stifel Nicolaus.

Great, this is actually Chris Speros on for Gur. Can you talk about the traction you are seeing with your secondary solutions, specifically the WAF, and are customers outside of your VM install base expressing interest in those products?

The WAF specifically, as we discussed last time on the earnings call, is doing well. We are expecting that component of the marketplace to accelerate with the combination of our WAP. If you recall, we had introduced the WAF, the web application firewall, quite a while ago, and we put it back because we wanted to do some more engineering work on it. We still believe that we're on track to bring that at the end of the summer. And I think the combination of WAS and WAF will essentially bring us into defining a new configurator, which will be the web application security, instead of making the distinction between web application scanning on one hand, which is to identify the vulnerabilities on your web application, and Qualys does that at the scale that again none of our competitors follow, then adding the WAF which is the remediation, so having essentially WAS and WAF together, and that I think will really provide us very strong offering in the marketplace.

Great, and one follow-up, if you don't mind. Are you seeing any benefit from McAfee's discontinuing of their VM product?

Significant. In fact today, we have been in fact replacing gradually the large installation of McAfee, so I could divide the McAfee market into two, the large accounts and the more smaller accounts.

So on the large accounts Qualys was always especially the market dominant, but it was taking time, because to displace this solution, once it has been established, takes time. Now of course, with the fact that they have thrown down the gauntlet, abandoned that marketplace, this is in fact accelerating the demand for the Qualys solution for the large accounts. There we are very uniquely positioned against competition because of scale, again.

The midmarket, that's where we are competing more actively with our competitors, there. So for us, it's very good news because it accelerates the adoption of Qualys by these large McAfee accounts, since they have abandoned them, and we are currently bidding quite a few of them.

Thank you.

Srini Nandury of Summit Research.

Philippe, can you talk about the competitive landscape for a moment, and how do see Rapid7 and Tanium in the market and do see them in your accounts? And could you talk about your win-loss rate, if you are competing against them? And in general can you also talk about your [deal cycle/win rate], have you seen any venting of the deals over the past one year? Thank you.

What was the last question? If I see the deals increasing?

The deal cycles.

The deal cycles. So to speak about the competition, today we see Rapid7, they are strong where they have always been strong, which is in the midmarket, and we compete actively against them, and I would say successfully. And we do not see them being really capable of moving into the cloud, because that's a huge undertaking.

They're made, as I'm sure you know, published by them, they're trying to move more into analytics as a Company, so that's the direction they take. And so ultimately, I think this is their call, the company against [blank]. Of course, this is not the direction that we have taken.

Regarding, you mentioned Tanium. Tanium is trying to enter the security market, so Tanium is not really a security play. Tanium was a replacement of BigFix, where instead of having to build these enterprise, if you prefer, infrastructure, to deliver the BigFix agent, they went with a peer-to-peer architecture, which makes it much easier to deploy patches, and also to query these agents to identify what are the searching across your inventory.

So we compete extremely well now with Tanium with our AssetView capabilities so we can give enterprises two second visibility on their global IT assets, so we're entering their market essentially. And on the vulnerability management and policy compliance side, we have a far better solution than Tanium, where they are trying to enter our market, but I think we do not see them ultimately as a long time, as a long-term competitor there.

And we have essentially another competitor, which is Tenable, which is non-public, which is trying to move into the cloud, but that's a huge undertaking for them. They are not also very present in the large enterprise, which is a marketplace that we dominate, and we compete with them much more on the consulting side, and as well, on the federal side, which for us is a very new market that we are entering. As we indicated earlier, we are not counting on much revenues from the federal side in 2016, but we are very now focused at essentially getting our share of the federal market.

What about the deal sizes?

The deal sizes have increased significantly. We start to really do deals which from the get-go are $0.5 million and up, which is something relatively new with Qualys. And as far as the selling cycle, I think it's about the same. I don't see the selling cycle having changed much. It varies, of course, depending on the large enterprise, to be clear, one year selling cycle, and on the midmarket, it's about less than six months, and on the SMB market, it's less than three months.

Thank you very much for the detailed explanation.

Jack Andrews of D.A. Davidson.

You announced the addition of a new Chief Marketing Officer during the quarter. I was just wondering if you could talk a little bit about what his priorities and strategic initiatives are going to be focused on?

Today, as I mentioned earlier, we have been working to the positioning of Qualys, as much more as a platform. The philosophy of Qualys has been always that we don't advertise things until we have reached a point where we can really claim it. So today as you will see essentially a new positioning of Qualys as the strategic -- as the disruptive cloud security and compliance platform. Which essentially consolidates today about six security and compliance enterprise solutions, and of course, more to come. So that's the new positioning that we are taking, which we are going to see starting at the Gartner conference, and that's where we are focusing essentially on the position of Qualys.

Then all of that will be followed by a reach-out to the CIOs, as today we can essentially answer the question that any CIO asks, which are this straight question, we can give them the global view of their asset inventory, second we can we can provide them with a continuous view of the security compliance portion of those assets, and third, we can essentially help them in their vendor consolidation efforts and save them millions of dollars, because we eliminate a lot of these enterprise, security solution, security compliance solution, which have their own infrastructure that you need to deploy -- companies have to deploy and to maintain. So I think we are extraordinarily well positioned here, as we mentioned earlier.

Thank you, and just as a quick follow-up, you mentioned that foreign-exchange was a modest headwind in the quarter. Are you able to quantify that at all?

No, we didn't say it was a modest effect. In fact, whether you prefer last year, because we have a very strong presence in Europe today, so we had a big foreign-exchange headwind last year, and it continues essentially in Q1 and Q2, and will gradually disappear by the end of the year. That's where we are and we are talking here about a little bit less now than a couple of percent.

Thank you.

Matt Hedberg of RBC Capital Markets.

Thanks, this is actually Matt Swanson on for Matt. You talked a lot about the strong customer reaction of ThreatPROTECT. Could you maybe go over some of the key features that are making that such an attractive solution? And then with that large pipeline, maybe how you see that materializing throughout the year?

So yes, one of the challenges we had before, if you look at our customers, the number one challenge at especially large customers, it's a little less true or a bit still there for the smaller customers. But large customers, you are now dealing with millions of vulnerabilities, in some cases hundreds of thousands, and you need to prioritize. You cannot do anything at once. Anything which can help customers prioritize the remediation of their vulnerabilities, is something which is absolutely needed.

So in the past, because we didn't have elastic search, sifting through large volumes of vulnerabilities and matching that, correlating that with threats, which are known out there, like for example, we know there is a there is an exploit, leveraging vulnerability XYZ. For us to do that natively to Qualys was very difficult, because we didn't have that built into our platform -- elastic search capabilities.

Now what our customers were doing, they were essentially going two solutions, either to go to solutions, like we are providing these capabilities by extracting the data from Qualys, correlating the data from threat sources, and then providing them the ability to sort through, that was one way, which of course added dollars, significant dollars to their subscription, plus the fact that having to maintain another application, another database, et cetera. The other way they could do it was to go to Splunk and take the data off Qualys, put that into Splunk, and then bring into Splunk the threat information, and then them doing the correlation of that information. Again another additional cost, significant additional cost, as well as having to maintain and [now all of that].

Now all of that is native on Qualys, so needless to say customers were already using the solution that I mentioned, are very eager to switch to Qualys, so that is an easy sell. It's almost [within our eye] that we can make here, and new customers are very attracted to that, because again it is native to the platform. We have today, we know that for a fact, we have a big demand. It went GA at the end of this month, and we are expecting to see orders materialize. Of course it is too early for us to give some trend. I mentioned earlier that we charge about 30% of the VM subscription of our customers, so that's another significant upsell, but still at that pricing is more cost-effective than using Qualys than going through other solutions.

So it's safe to say at this point it's not included in any guidance?

We never typically do in our guidance include any kind of new services, so we just tried -- we are cautious about that, because until we have enough data points -- it's much more difficult to predict the curve, and then of course from ASV translate that into revenues. As you know, that's one of the disadvantage of the SaaS model is that we just don't take the revenue up front like enterprise software, we just take the revenue across. All that makes in terms of translating into revenues, it take some time.

All right, thank you for your time.

Erik Suppiger of JMP.

A couple of questions on this MSSP. Can you explain the -- how the nature of that relationship changed? Did they become a much bigger MSSP customer, or is it just that you wanted a more consistent revenue stream? And how much was the impact -- first I will let you answer that. And I've got a follow-up.

The answer to the question is both. Yes it gives us more predictability. It is a win-win for both. This was at their request by the way. That is not us coming to them, it is them coming to us. Essentially, they see Qualys more strategic, so they are coming to us, so they believe they can essentially grow more business. And so I think it's a win/win for both.

Was the impact from the MSSP, in terms of the deferred revenue, was the impact from the MSSP bigger or smaller than the impact from the deals that had slipped?

Smaller.

That was a smaller portion? Okay. Can you give us any sense for what the growth was with you traditional emerging products? The web app scanning and the policy compliance?

We have been essentially growing the VM in the 20% range, and these other ones around 30% growth rate.

Okay.

Again, it varies today, because today because we do big upsells today, it varies, well not anymore again, this is a business which has become, which is a good thing. Which has become a little bit more lumpier in the sense that we do these bigger upsells, both in WAS, both in policy compliance et cetera. It varies from quarter to quarter now.

Robert Breza from Wunderlich Securities.

Nancy, I was wondering if you can help us reconcile the EPS beat, if we take your guidance, you beat by about $0.06. You had left the full-year unchanged, so essentially, it would tell me that you are expecting those costs that you were able to avoid in the first quarter to occur throughout the remainder of the year. Can you help us reconcile the $0.06 beat and not passing that beat on through to the full-year number? Thanks.

So the revenue guidance for full-year hasn't changed. And we still expect to increase our expenditures in [absolute] dollars sequentially in the rest of the year. So really, at this point, we're still relatively early in the year, we've got a new CFO onboard, and we just thought it would be best -- better judgment to maintain our EPS guidance for a full-year.

Okay, and then maybe as a follow-up, I think it's -- given the commentary and the questions around the MSSP, and the quantity, can you just quantify what the MSSP impact was to the quarter and the full-year?

No, that's not something that we are going to provide in detail, because we talked about it having an impact in Q1, and it's going to have an impact on the rest of the year, as well. But given the momentum of the business, the uncertainty of timing on larger deals, we have left our revenue guidance as is, as well. This is something like, as I said, we are still relatively early in the year, and we will look at this as the year progresses.

Thank you.

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

Thank you very much, so again, we are looking -- we have a very strong pipeline. As I mentioned in the last call, we are now seriously looking at some potential acquisitions or partnerships, or OEM relationships, so we could accelerate some of the engineering developments that we currently have, or accelerating our entrance into new markets. [Part of our] corporate development.

So I thank you for attending our Q1 earnings call, and we look forward to seeing you, all of you in early June, at the D.A. Davidson Technology Forum in New York City. At the Bank of America Technology Conference in San Francisco and the Robert Baird conference in New York City. And with that, good afternoon. Thank you.

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