Cloud security and compliance software provider Qualys (NASDAQ:QLYS) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 11.6% year on year to $145.8 million. On the other hand, next quarter's revenue guidance of $145.8 million was less impressive, coming in 3.1% below analysts' estimates. It made a non-GAAP profit of $1.45 per share, improving from its profit of $1.09 per share in the same quarter last year.
Qualys (QLYS) Q1 CY2024 Highlights:
- Revenue: $145.8 million vs analyst estimates of $145.8 million (small beat)
- EPS (non-GAAP): $1.45 vs analyst estimates of $1.31 (11.1% beat)
- Revenue Guidance for Q2 CY2024 is $145.8 million at the midpoint, below analyst estimates of $150.5 million
- Gross Margin (GAAP): 81.3%, up from 79.4% in the same quarter last year
- Free Cash Flow of $83.45 million, up 158% from the previous quarter
- Market Capitalization: $6.29 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data from these assets to detect potential vulnerabilities, such as weak security policies, unpatched software, outdated apps, and compromised logins.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.
Vulnerability Management
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 mediocre over the last three years, growing from $96.76 million in Q1 2021 to $145.8 million this quarter.
This quarter, Qualys's quarterly revenue was once again up 11.6% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $1.24 million in Q1 compared to $2.57 million in Q4 CY2023. 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 6.3% year on year to $145.8 million, slowing down from the 14.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 9.2% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.3% in Q1.
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. 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. It's also comforting to see its gross margin remain stable, indicating that Qualys is controlling its costs and not under pressure from its competitors to lower prices.
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 $83.45 million in Q1, up 32.9% year on year.
Qualys has generated $256.5 million in free cash flow over the last 12 months, an eye-popping 45% 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 Q1 Results
Strong free cash flow was a big positive for Qualys this quarter, on the other hand its revenue guidance for next quarter missed analysts' expectations and so did billings. Overall, this was a mediocre quarter for Qualys. The stock is flat after reporting and currently trades at $165 per share.
Is Now The Time?
When considering an investment in Qualys, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although Qualys isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been uninspiring over the last three years, and analysts expect growth to deteriorate from here.
Qualys's price-to-sales ratio of 10.1x based on the next 12 months indicates the market is definitely optimistic about its growth prospects. We can find things to like about Qualys, and there's no doubt it's a bit of a market darling, at least for some. However, we think there are better opportunities elsewhere right now.
Wall Street analysts covering the company had a one-year price target of $168 right before these results (compared to the current share price of $165).
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