Cloud security and compliance software provider Qualys (NASDAQ:QLYS) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 17.2% year on year to $113.4 million. The company expects that next quarter's revenue would be around $117.4 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Qualys made a GAAP profit of $25.4 million, improving on its profit of $228 thousand, in the same quarter last year.
Qualys (QLYS) Q1 FY2022 Highlights:
- Revenue: $113.4 million vs analyst estimates of $112.9 million (small beat)
- EPS (non-GAAP): $0.89 vs analyst estimates of $0.80 (11.7% beat)
- Revenue guidance for Q2 2022 is $117.4 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $485.2 million at the midpoint
- Free cash flow of $71.4 million, up 100% from previous quarter
- Gross Margin (GAAP): 78.8%, up from 77.5% 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data from these assets to detect potential vulnerabilities, such as weak security policies, unpatched software, outdated apps, and compromised logins.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).
As you can see below, Qualys's revenue growth has been mediocre over the last year, growing from quarterly revenue of $96.7 million, to $113.4 million.
This quarter, Qualys's quarterly revenue was once again up 17.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.64 million in Q1, compared to $4.84 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Qualys is expecting revenue to grow 17.7% year on year to $117.4 million, improving on the 12.2% 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 17.6% over the next twelve months.
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 78.8% in Q1.
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. 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 follow 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 $71.4 million in Q1, up 38.3% year on year.
Qualys has generated $195.9 million in free cash flow over the last twelve months, an impressive 45.7% 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 $5.23 billion Qualys is among smaller companies, but its more than $457.1 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.
We struggled to find many strong positives in these results. 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 currently trades at $124 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. There are a number of reasons why we think Qualys is a great business. Its revenue growth has been weak, but at least that growth rate is expected to increase in the short term. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.
Qualys's price to sales ratio based on the next twelve months is 11.0x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Qualys's qualities as a business really stand out and we still like it at this price.
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