Qualys, Inc. (NASDAQ:QLYS) Q4 2023 Earnings Call Transcript February 8, 2024
Qualys, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to Qualys Fourth Quarter 2023 Investor Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be question-and-answer session. [Operator Instructions] Please be advised that, today’s conference is being recorded. I would now like to hand the conference over to your speaker today Blair King, Investor Relations. Please go ahead.
Blair King: Thanks, Gigi. Good afternoon and welcome to Qualys’ fourth quarter 2023 earnings call. Joining me today to discuss our results are Sumedh Thakar, our President and CEO, and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to future events or our future financial or operating performance. Actual results may differ materially from these statements. Factors that could cause results to differ materially are set forth in today’s press release and our filings with the SEC, including our latest Form 10-K and 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.
During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. As a reminder, the press release, prepared remarks, and investor presentation are available on the Investor Relations section of our website. With that, I’d like to turn the call over to Sumedh.
Sumedh Thakar: Thank you, Blair, and welcome everyone to our fourth quarter earnings call. 2023 was another strong year for Qualys in terms of product innovation as we expanded our platform capabilities, strategic relevance in the industry, and market opportunity. We introduced Software Composition Analysis in on-prem and cloud environments to identify open-source software across the production environment of virtual images for our customers. We advanced our Custom Assessment and Remediation capabilities into our agent-based VMDR and Policy Compliance solutions, and launched a groundbreaking First Party Software Risk Management solution. We deployed GovCoud, a FedRAMP High Impact level Ready vulnerability and patch management cloud platform that meets President Biden’s Executive Orders and NIST compliance.
We harnessed technology from our acquisition of Blue Hexagon and extended our cloud-scale deep learning AI to discover and identify relationships and patterns within our own highly integrated data lake that are invisible and undetectable in traditional signature-based solutions. We unified Cloud Workload Protection, Cloud Security Posture Management, Cloud Detection and Response, Infrastructure as Code, and Container Security and brought an organically integrated agent and agentless Cloud Native Application Protection Platform to market. And, at QSC in November, we announced our Enterprise TruRisk platform with which we are now embarking on the most innovative advancements to the platform in Qualys’ history. A comprehensive, enterprise-wide initiative aimed at holistically measuring, communicating, and eliminating cyber risk.
The role of CISOs and security leaders is increasingly shifting way from just buying and deploying security point solutions, towards being able to measure and articulate the amount of risk being posed to the business. C-level executives and boards are increasingly looking to monitor cyber risk and the risk reduction ROI from the cyber security spend. The Qualys Enterprise TruRisk Platform is focused on helping security leaders measure, communicate and eliminate cyber risk and become a partner in de-risking their business. The platform aggregates and orchestrates data from over 25 threat intelligence feeds as well as third-party risk signals from non-Qualys products to provide organizations with comprehensive AI-powered insights that translate risk signals into measurable scores and provide optimized remediation actions based on business impact.
This single source of truth within a unified workflow and powerfully integrated dashboard empowers customers to effectively measure and communicate risk, secure cyber spend, add value, prioritize and eradicate threats across on-prem, cloud, and multi-cloud environments and sets a new gold standard in the industry for risk management solutions. Continuing this pace of disruptive innovation on the platform, we’re also extending our remediation capabilities to include AI-powered patch management and several other mitigation solutions, including virtual patching, configuration updates and compensating controls guided by TruRisk quantification functionality. This new combination of capabilities, which we call TruRisk Eliminate, uniquely softens organizational boundaries and enables security teams to apply flexible, automated, and intelligent risk-based response solutions to address cyber risk based on their organization’s own unique operational characteristics remediation time lines and business objectives.
Early customer feedback is quite encouraging and with over 54 million patches deployed on Qualys agents in just the last 12 months alone, we believe this new approach to eliminating cyber risk will not only help our customers transform their security operations, but further magnify our competitive differentiation in the market. Today, we announced a major new upgrade to our TotalCloud CNAPP solution to provide comprehensive vulnerability posture and threat management from development to run time across multi-cloud and SaaS environments. Inclusive in this upgrade is the introduction of TruRisk Insights, which integrates data from our CWP, CSPM, CDR and external asset management solutions to provide organizations through the unified and prioritized view of risk.
Combined with additional newly introduced capabilities such as SaaS, SSPM SaaS Posture Management, open-source software vulnerability detection and multiple-cloud ITSM integration with ServiceNow, we have created what we believe is one of the most comprehensive cloud-native security solutions in the market, with a unified actionable dashboard for immediate prioritization and remediation, the net benefit, faster results, better security outcomes and lower overall cost for our customers. Additionally, I’m pleased to announce that we are enhancing the Qualys Cloud Agent with passive sensor capabilities to help new and existing customers obtain real-time continuous visibility of unknown, unauthorized or rogued assets communicating inside their IT and OT environments.
This unique approach to internal asset management enables millions of existing cloud agents to detect many more unmanaged devices with just a single click and eliminate the complexities associated with network appliance-based passive sensing. And this enables organizations to rapidly turn previously unknown assets into security-managed assets with seamless CyberSecurity Asset Management VMDR enablement for comprehensive risk assessment, prioritization and remediation across their attack surface. These innovative new approaches to cybersecurity risk management along with several others on our roadmap for 2024 allow our customers to reduce complexity as they standardize on a trusted platform that delivers an immediate ROI and lower total cost of ownership relative to siloed and detection-only technologies out in the market.
Turning to business update for the go-to-market motion in Q4, we experienced another quarter of steady VMDR adoption, which is now deployed by 56% of our customers worldwide. Key competitive VMDR wins include, a leading health care provider, several global financial services technology and manufacturing companies, and multiple new and other existing customers, both down market and in the Global 2000. Adding to these wins, I will take a moment to share a couple of examples of how our customers and partners are expanding their use of Qualys’ capabilities to further consolidate the security stack. On the customer front, one of my favorite new logo wins in Q4 was with a Fortune 300 media organization. Their organization was frustrated by the high volume of alerts being generated by their legacy security tools and the inability to uniformly contextualize and manage risk across dispersed agencies and environments, which hampered its team’s efficiency and obstructive critical incidents — obscured critical incidents.
Recognizing the increased value, they could gain by modernizing their security stack and consolidating on Qualys’ customer replace several existing vendors and adopted four modules from Qualys including VMDR, CyberSecurity Asset Management with External Attack Surface Management, Web Application Scanning and our newly introduced TotalCloud CNAPP solution in a highly competitive seven-figure new customer bookings win. In another highly strategic and high six-figure of booking upsell example an existing Fortune 200 health care provider expanded its existing relationship with Qualys to standardize on our Enterprise TruRisk Platform. This customer has struggled to communicate the risk posture and list of prioritized risk mediation recommendations to their management, as well as their different IT teams.
The TruRisk platform helps them consolidate risk factors from different Qualys modules into a single score with business context, which led them to purchasing multiple Qualys modules as part of this platform, consolidation and expansion. On the partner front, we continue to advance our evolving ecosystem with two leading global managed service providers, Orange Cyber Defense and Kudelski. Both expanded their offerings beyond VMDR to include our Patch Management capabilities. These partners have indicated they chose Qualys over competing solutions due to our ease of orchestration, natively integrated platform and single-agent approach to simplify their security operations and significantly reduce remediation times for their customers. In addition, we expanded our relationship with Oracle Cloud with OCI, which is now making the Qualys Enterprise TruRisk Platform available in its marketplace.
We also evolved our partnership with Microsoft Azure by sunsetting our vulnerability assessment only integration to provide Azure customers with the full capabilities of VMDR in its marketplace and we’ll start ingesting Defender data into VMDR TruRisk platform. Further continuing our partnership with Microsoft, we are also selected to participate in its Security Copilot leveraging an AI-powered security solutions. Finally, on the partner front we expanded our relationship with Ingram Micro which is now offering a full suite of our CyberSecurity Asset Management VMDR and prioritize remediation workflows to its customers in the APAC region. As evidenced through these wins and several others like them, Qualys is much more than just a Vulnerability Management vendor with more and more companies begin to turn to Qualys to reduce agents security gaps, complexity, and costs, enabling them to transform and consolidate their security stack on the Qualys TruRisk platform.
Largely as a result customers spending $500,000 or more with us in Q4 grew 14% from a year ago to 183. In summary, we believe our natively integrated platform that measures communicates and eliminate cyber risk, brings a highly differentiated value proposition to our customers as they get more security using fewer resources with the Qualys Enterprise TruRisk platform. Looking ahead into 2024, we’ll continue our disruptive innovation, advance our go-to-market investments, and execute our strategic vision with a proven approach to balance growth and profitability. With that, I will turn the call over to Joo Mi to further discuss our fourth quarter results and outlook for the first year — first quarter and full year 2024.
Joo Mi Kim: Thanks Sumedh and good afternoon. Before I start, I’d like to note that except revenue, all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period unless stated otherwise. We’re pleased to report a strong finish to the year, with Q4 revenues in line with expectations and strong earnings beat, delivering 13% revenue growth and 47% adjusted EBITDA margin in 2023. The leverage we generated this year demonstrates the efficiency in our model and enables us to step-up investments in new technologies, sales motion, targeted marketing programs, and people to accelerate long-term growth and further enhance our position in the market as a trusted security partner of choice. Now, let’s turn to fourth quarter results.
Revenues grew 10% to $144.6 million at the midpoint of our guidance. Growth from channel partners outpaced direct at 16% versus 6% growth from direct. With continued investment in our channel, our revenue contribution mix has shifted slightly over the past year, with the channel making up 44% of revenues in Q4 versus 42% a year ago. We expect a similar trend to continue in 2024. By geo, 13% growth outside of the US, was ahead of our domestic business, which grew 9%. Looking ahead to 2024, we expect our US and international revenue mix to remain roughly at 60% and 40% respectively. As for calculated current billings, although, we don’t focus on or manage to this metric, anticipating questions related to bridging this LTM calculated current billings growth to revenue growth guidance, we would like to note that our Q4 calculated current billings was positively impacted by the timing of invoicing of multiyear prepaid subscription and large early renewal.
Normalized for this, LTM calculated current billings growth would have been approximately 12%. Turning to land-and-expand results. With customers confirming their prioritization of security within IT budgets, we anticipate the selling environment in 2024 to remain stable with ongoing budget scrutiny being the new normal for many organizations. In Q4, we are pleased to see improvements in the new business although the upsell environment remained challenging with our net dollar expansion on a constant currency basis at 105%, down from 106% last quarter. While there continues to remain room for improvement from smaller customers, LTM revenues from customers spending $25000 or more with us increased by 12%. In terms of product contribution to bookings, Patch Management and CyberSecurity Asset Management combined made up 12% of total bookings and 22% of new bookings in 2023.
In 2023, the increased adoption of these products resulted in over 50% growth on a combined basis. Our Cloud Security solutions made up 5% of 2023 bookings, led by our natively integrated TotalCloud CNAPP offering. Turning to profitability. Adjusted EBITDA for the fourth quarter of 2023 was $65.8 million representing a 46% margin, compared to a 42% margin a year ago. Although operating expenses in Q4 were largely unchanged up only 2% to $59.5 million. Sales and Marketing expenses increased by 12% with us, closing out the year with 438 Sales and Marketing headcount, up 16% from last year. EPS for the fourth quarter of 2023 was $1.40 and our free cash flow was $32.3 million. Free cash flow for the full year 2023 was $235.8 million, representing a 43% margin compared to 37% in the prior year.
In Q4, we continued to invest the cash we generated from operations back into Qualys including $1.5 million on capital expenditures and $23.1 million to repurchase 140,000 of our outstanding shares. As of the end of the quarter, we had $83.7 million remaining in our share repurchase program. We’re pleased to announce that our Board has authorized an additional $200 million share repurchase program, bringing the total available amount for share repurchases to $283.7 million. With that, let us turn to guidance, starting with revenues. For the full year 2024, our revenue guidance is $600 million to $610 million, which represents a growth rate of 8% to 10%. For the first quarter of 2024, we expect revenues to be in the range of $144.5 million to $146.5 million representing a growth rate of 11% to 12%.
This guidance includes an estimated 1% reduction to revenue growth in 2024 from sunsetting our embedded solution for Microsoft Defender, effective May 1. Earlier this year, Microsoft Defender for Cloud users using Qualys solutions were notified that we will be retiring our integration on Microsoft Defender and transitioning to BYOL model. With this change these customers will be able to leverage Qualys TotalCloud CNAPP to effectively manage their security risk for cloud and container workloads. Although this strategic shift is estimated to result in a short-term negative impact to revenues, we believe it will be key to delivering long-term value to consumers. Normalized for this change, our revenue guidance for the full year 2024 would have been 9% to 11%.
Shifting to profitability guidance. For the full year 2024, we expect EBITDA margin to be in the low 40s, implying approximately 20% to 25% increase in operating expenses similar to increase in investments in 2022 and free cash flow margin in the mid-30s. We expect full year EPS to be in the range of $4.95 to $5.27. For the first quarter of 2024, we expect EPS to be in the range of $1.27 to $1.35. Our planned capital expenditures in 2024, are expected to be in the range of $15 million to $20 million and for the first quarter of 2024, in the range of $3 million to $5 million. In 2024, we plan to align our product and marketing investments to focus on specific initiatives aimed at driving more pipeline, enhancing our partner program, expanding our federal vertical and supporting sales while maintaining a disciplined approach to unit economics.
As a percentage of revenue, we expect to prioritize an increase in investments in sales and marketing as well as related support functions systems and people with more modest increases in engineering and G&A. As we increase our focus on sales and marketing enablement customer success and productivity in response to a more stable selling environment, we believe we will be able to drive wallet share and long-term returns while balancing growth and profitability. In conclusion in 2023, we delivered a healthy top line growth and industry-leading profitability in the wake of a challenging macroeconomic environment. We continue to lead with product innovation and announced an exciting new roadmap for the Qualys Enterprise TruRisk Platform. We are confident in our ability to deliver on our growth opportunity long term, and remain committed to maximizing shareholder value.
With that, Sumedh and I would be happy to answer any of your questions.
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