Cloud security and compliance software provider Qualys (NASDAQ:QLYS) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 10.5% year on year to $144.6 million. The company expects next quarter's revenue to be around $145.5 million, in line with analysts' estimates. It made a non-GAAP profit of $1.40 per share, improving from its profit of $1.01 per share in the same quarter last year.
Qualys (QLYS) Q4 FY2023 Highlights:
- Revenue: $144.6 million vs analyst estimates of $144.6 million (small miss)
- EPS (non-GAAP): $1.40 vs analyst estimates of $1.24 (12.5% beat)
- Revenue Guidance for Q1 2024 is $145.5 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for the upcoming financial year 2024 is $605 million at the midpoint, missing analyst estimates by 2% and implying 9.1% growth (vs 13.3% in FY2023)
- Free Cash Flow of $32.32 million, down 64.3% from the previous quarter
- Gross Margin (GAAP): 81.2%, up from 78.8% in the same quarter last year
- Market Capitalization: $6.50 billion
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data from these assets to detect potential vulnerabilities, such as weak security policies, unpatched software, outdated apps, and compromised logins.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).
As you can see below, Qualys's revenue growth has been mediocre over the last two years, growing from $109.8 million in Q4 FY2021 to $144.6 million this quarter.
Even though Qualys fell short of analysts' revenue estimates, its quarterly revenue growth was still up 10.5% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $2.57 million in Q4 compared to $4.79 million in Q3 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Qualys is expecting revenue to grow 11.3% year on year to $145.5 million, slowing down from the 15.2% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $605 million at the midpoint, growing 9.1% year on year compared to the 13.2% increase in FY2023.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.2% in Q4.
That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Qualys's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Qualys's free cash flow came in at $32.32 million in Q4, down 20.9% year on year.
Qualys has generated $235.8 million in free cash flow over the last 12 months, an eye-popping 42.7% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from Qualys's Q4 Results
We struggled to find many strong positives in these results. Its full-year revenue guidance was below expectations and its suggests a slowdown in demand. Overall, this was a mixed quarter for Qualys. The company is down 7.4% on the results and currently trades at $163.99 per share.
Is Now The Time?
Qualys may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Although Qualys isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last two years, and analysts expect growth to deteriorate from here. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, unfortunately, its customer acquisition is less efficient than many comparable companies.
Qualys's price-to-sales ratio based on the next 12 months of 10.9x indicates that the market is definitely optimistic about its growth prospects. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Qualys doesn't trade at a completely unreasonable price point.
Wall Street analysts covering the company had a one-year price target of $169.78 per share right before these results (compared to the current share price of $163.99).
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