Qualys (NASDAQ:QLYS) Reports Q1 In Line With Expectations

Cloud security and compliance software provider Qualys (NASDAQ:QLYS) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 15.2% year on year to $130.7 million. The company expects that next quarter's revenue would be around $135.7 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Qualys made a GAAP profit of $29.1 million, improving on its profit of $25.4 million, in the same quarter last year.

Founded in 1999 as one of the first subscription security companies, Qualys (NASDAQ:QLYS) provides organizations with software to assess their exposure to cyber-attacks.

The cyberattack surface has expanded rapidly in recent years. The digitization of business processes and the shift of enterprise resources to the cloud have led to the explosion of IT applications and systems. To secure their systems and stay compliant with the latest regulations, organizations need to adopt a security platform to efficiently monitor all their assets.

Qualys helps organizations prevent and detect cyber threats using its vulnerability management software, which scans and discovers all the IT assets owned by a company. Its software automatically collects and analyses data from these assets to detect potential vulnerabilities, such as weak security policies, unpatched software, outdated apps, and compromised logins. Then, it prioritizes these issues based on severity and provides recommendations on how they can be remediated. Qualys is also capable of automating the full threat detection process so that security analysts can focus on the most dangerous threats.

For example, due to the scale of their network infrastructure eBay needed a solution that would automatically find the most recent vulnerabilities without requiring constant research by security specialists. It also needed to make sure that the networks of its business partners are not posing a risk. Qualys is able to automatically scan eBay’s and its partners networks, provide detailed inventory of all apps and devices and alert the information security team on any vulnerabilities, saving them time and cost.

Beyond automation, Qualys has been investing in the endpoint security space to cover the detection and prevention of threats on devices such as laptops, servers, mobile phones, as well as cloud environments.

The demand for cybersecurity is growing as more and more businesses are moving their data and processes into the cloud, which along with a major increase in employees working remotely, has increased their exposure to attacks and malware. Additionally, the growing array of corporate IT systems, applications and internet connected devices has increased the complexity of network security, all of which has substantially increased the demand for software meant to protect data breaches.

Other companies with similar capabilities as Qualys include Rapid7 (NASDAQ:RPD), Tenable (NASDAQ:TENB) and cloud security innovators such as CrowdStrike (NASDAQ:CRWD) and FireEye (NASDAQ:FEYE).

Sales Growth

As you can see below, Qualys's revenue growth has been decent over the last two years, growing from quarterly revenue of $96.8 million in Q1 FY2021, to $130.7 million.

This quarter, Qualys's quarterly revenue was once again up 15.2% year on year. But the revenue actually decreased by $166 thousand in Q1, compared to $5.29 million increase in Q4 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.

Guidance for the next quarter indicates Qualys is expecting revenue to grow 13.2% year on year to $135.7 million, slowing down from the 20.3% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 12.8% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Qualys's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 79.4% in Q1.

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Qualys to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Qualys is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Qualys's free cash flow came in at $62.8 million in Q1, down 12.1% year on year.

Qualys has generated $174.9 million in free cash flow over the last twelve months, an impressive 34.5% of revenues. This robust FCF margin is a result of Qualys asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Qualys's Q1 Results

With a market capitalization of $3.98 billion Qualys is among smaller companies, but its more than $333.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

Zooming out, we think this was a decent quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 2.31% on the results and currently trades at $105.75 per share.

Is Now The Time?

When considering Qualys, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Qualys is a good business. However, its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. But on a positive note, its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

The market is certainly expecting long term growth from Qualys given its price to sales ratio based on the next twelve months is 7.1x. There is definitely a lot of things to like about Qualys and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $126.7 per share right before these results, implying that they saw upside in buying Qualys even in the short term.

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