Cloud security and compliance software provider Qualys (NASDAQ:QLYS) reported results in line with analyst expectations in Q2 FY2021 quarter, with revenue up 12.2% year on year to $99.7 million. Qualys made a GAAP profit of $21.1 million, down on its profit of $26.3 million, in the same quarter last year.
Qualys (QLYS) Q2 FY2021 Highlights:
- Revenue: $99.7 million vs analyst estimates of $98.9 million (small beat)
- EPS (non-GAAP): $0.79 vs analyst estimates of $0.68 (16.1% beat)
- Revenue guidance for Q3 2021 is $104.1 million at the midpoint, above analyst estimates of $102.9 million
- The company reconfirmed revenue guidance for the full year, at $406.7 million at the midpoint
- Free cash flow of $47.6 million, roughly flat from previous quarter
- Gross Margin (GAAP): 78.3%, up from 77.5% previous quarter
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data from these assets to detect potential vulnerabilities, such as weak security policies, unpatched software, outdated apps, and compromised logins.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 and are becoming exposed to attacks and malware. The growing complexity of corporate IT systems, applications and internet connected devices makes it difficult for teams to be monitoring network security manually. Employees working remotely have also made it harder for companies to keep their networks secure, thereby increasing demand for software that helps protect from 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 solid over the last year, growing from quarterly revenue of $88.8 million, to $99.7 million.
This quarter, Qualys's quarterly revenue was once again up 12.2% year on year. We can see that the company increased revenue by $2.94 million quarter on quarter. That's a solid improvement on the $1.95 million increase in Q1 2021, so shareholders should appreciate the re-acceleration of growth.
Analysts covering the company are expecting the revenues to grow 10.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 78.3% in Q2.
That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, 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 reaches maturity.
Key Takeaways from Qualys's Q2 Results
With market capitalisation of $4 billion Qualys is among smaller companies, but its more than $360.2 million in cash and positive free cash flow over the last twelve months give us confidence that Qualys has the resources it needs to pursue a high growth business strategy.
It was good to see Qualys provide next quarter revenue outlook exceeding analysts’ expectations. And we were also glad to see the improvement in gross margin. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 4.32% on the results and currently trades at $110 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. Although we have other favorites, we understand the arguments that Qualys is not a bad business. However, its revenue growth has been weak. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
Qualys's price to sales ratio based on the next twelve months is 9.9, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. 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.