Qualys (QLYS)

Cybersecurity cloud platform provider Qualys (NASDAQ:QLYS) announced better-than-expected revenue in Q3 CY2025, with sales up 10.4% year on year to $169.9 million. Guidance for next quarter’s revenue was optimistic at $173 million at the midpoint, 2.1% above analysts’ estimates. Its non-GAAP profit of $1.86 per share was 19.2% above analysts’ consensus estimates.

Company Overview

Originally developed to address the growing complexity of IT security in the cloud era, Qualys (NASDAQ:QLYS) provides a cloud-based platform that helps organizations identify, manage, and protect their IT assets from cyber threats across on-premises, cloud, and mobile 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.

Qualys competes with established cybersecurity providers like CrowdStrike (NASDAQ:CRWD), Palo Alto Networks (NASDAQ:PANW), Tenable Holdings (NASDAQ:TENB), and Rapid7 (NASDAQ:RPD), as well as private companies such as Tanium, Wiz, and Axonius that offer various aspects of vulnerability management and security operations solutions.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Qualys grew its sales at a 13.1% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Qualys’s recent performance shows its demand has slowed as its annualized revenue growth of 9.9% over the last two years was below its five-year trend.

This quarter, Qualys reported year-on-year revenue growth of 10.4%, and its $169.9 million of revenue exceeded Wall Street’s estimates by 2.2%. Company management is currently guiding for a 8.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Qualys’s billings came in at $186.4 million in Q3, and over the last four quarters, its growth was underwhelming as it averaged 10.8% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Qualys to acquire new customers as its CAC payback period checked in at 62.3 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Qualys, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Qualys’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 82.4% gross margin over the last year. That means Qualys only paid its providers $17.55 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Qualys has seen gross margins improve by 2.4 percentage points over the last 2 year, which is very good in the software space.

In Q3, Qualys produced a 83.6% gross profit margin, marking a 2.4 percentage point increase from 81.3% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Qualys has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 32.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Qualys’s operating margin rose by 2.3 percentage points over the last two years, as its sales growth gave it operating leverage.

In Q3, Qualys generated an operating margin profit margin of 35.3%, up 6.1 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 63% over the last year.

Qualys’s free cash flow clocked in at $229.5 million in Q3, equivalent to a 135% margin. This result was good as its margin was 97.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Qualys’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 63% for the last 12 months will decrease to 36.8%.

Companies with more cash than debt have lower bankruptcy risk.

Qualys is a profitable, well-capitalized company with $226.5 million of cash and $47.26 million of debt on its balance sheet. This $179.2 million net cash position is 4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Qualys blew past analysts’ billings expectations this quarter. We were also glad its EPS guidance for next quarter trumped Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 7.3% to $130 immediately following the results.

Updated: December 4, 2025 at 9:22 PM EST

When considering an investment in Qualys, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Qualys isn’t a terrible business, but it doesn’t pass our bar. First off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, its ARR has disappointed and shows the company is having difficulty retaining customers and their spending.

Qualys’s price-to-sales ratio based on the next 12 months is 7.7x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $142.56 on the company (compared to the current share price of $149.64), implying they don’t see much short-term potential in Qualys.