Qualys(QLYS) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information Filing Details This section provides the basic identification and filing details for the Quarterly Report on Form 10-Q for Qualys, Inc. for the period ended September 30, 2021 - The filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2021[2] Filing Details | Detail | Value | | :--- | :--- | | Registrant Name | QUALYS, INC. | | State of Incorporation | Delaware | | Commission File Number | 001-35662 | | Trading Symbol | QLYS | | Exchange | The NASDAQ Stock Market LLC | | Filer Status | Large accelerated filer | | Common Stock Outstanding (as of Oct 28, 2021) | 38,824,104 shares | RISK FACTOR SUMMARY Principal Risk Factors This section summarizes the principal risk factors that could significantly harm Qualys, Inc.'s business, reputation, financial condition, results of operations, revenue, and future prospects - The business is subject to significant risks and uncertainties that could seriously harm its operations and financial condition[8] - Continued spread of COVID-19 could harm business[9] - Quarterly operating results may vary, leading to stock price decline[9] - Failure to anticipate market needs or enhance solutions timely could harm competitiveness[9] - Inability to scale and adapt the platform to customer requirements would harm operating results[9] - Failure to renew existing subscriptions, sell additional solutions, or attract new customers would harm operating results[9] - Market for cloud solutions for IT, security, and compliance not evolving as anticipated could harm revenues[9] - Current R&D efforts may not produce successful products or significant revenue[9] - Platform, website, and internal systems are subject to security incidents, potentially leading to liability and reputational damage[9] - Long and unpredictable sales cycle can cause revenue fluctuations[9] - Adverse economic conditions or reduced IT spending may negatively impact business[9] - Disruption of service at data centers would interrupt delivery and reduce revenues[9] - Intense competition in markets may lead to insufficient resources to maintain competitive position[9] - Solutions failing to detect or incorrectly detecting vulnerabilities could harm brand and reputation[9] - Inability to expand sales force would harm sales and business growth[9] - Reliance on third-party channel partners means failure to expand and manage these channels could lead to revenue decline[9] - International operations expose the company to various risks[9] - Failure to appropriately manage significant business growth could negatively affect operating results[9] - Sales to government entities are subject to specific challenges and risks[9] - Undetected software errors or flaws could harm reputation and decrease market acceptance[9] - Privacy and data handling concerns could result in additional cost and liability[9] - Use of third-party open source software components requires compliance with licenses, failure of which could restrict sales[9] - Reliance on third-party software and data may cause errors or failures[9] - Failure to protect proprietary technology and intellectual property rights could substantially harm business[9] - Assertions by third parties of intellectual property infringement could result in significant costs[9] PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of Qualys, Inc., including the balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, along with their accompanying notes, for the periods ended September 30, 2021 and December 31, 2020 Condensed Consolidated Balance Sheets The condensed consolidated balance sheets provide a snapshot of the company's financial position, showing assets, liabilities, and stockholders' equity as of September 30, 2021, compared to December 31, 2020 Condensed Consolidated Balance Sheets | (in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $145,740 | $74,132 | | Short-term marketable securities | $199,947 | $281,892 | | Accounts receivable, net | $84,267 | $100,179 | | Total current assets | $452,853 | $475,345 | | Long-term marketable securities | $136,124 | $98,458 | | Total assets | $756,180 | $736,819 | | Liabilities | | | | Deferred revenues, current | $237,539 | $213,494 | | Total current liabilities | $284,692 | $255,730 | | Total liabilities | $353,194 | $332,337 | | Stockholders' Equity | | | | Total stockholders' equity | $402,986 | $404,482 | | Total liabilities and stockholders' equity | $756,180 | $736,819 | - Cash and cash equivalents increased significantly from $74.1 million at December 31, 2020, to $145.7 million at September 30, 2021[12] - Short-term marketable securities decreased from $281.9 million to $199.9 million[12] - Long-term marketable securities increased from $98.5 million to $136.1 million[12] - Total assets increased by $19.3 million, from $736.8 million to $756.2 million[12] - Total liabilities increased by $20.8 million, from $332.3 million to $353.2 million[12] - Total stockholders' equity slightly decreased by $1.5 million, from $404.5 million to $403.0 million[12] Condensed Consolidated Statements of Operations The condensed consolidated statements of operations detail the company's revenues, expenses, and net income for the three and nine months ended September 30, 2021, compared to the same periods in 2020 Condensed Consolidated Statements of Operations | (in thousands, except per share data) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $104,934 | $93,069 | $301,392 | $268,162 | | Cost of revenues | $22,479 | $20,619 | $65,711 | $58,005 | | Gross profit | $82,455 | $72,450 | $235,681 | $210,157 | | Total operating expenses | $50,478 | $46,147 | $177,047 | $137,915 | | Income from operations | $31,977 | $26,303 | $58,634 | $72,242 | | Total other income, net | $74 | $1,331 | $1,059 | $4,703 | | Income before income taxes | $32,051 | $27,634 | $59,693 | $76,945 | | Income tax provision | $4,282 | $4,891 | $10,554 | $9,189 | | Net income | $27,769 | $22,743 | $49,139 | $67,756 | | Basic Net income per share | $0.71 | $0.58 | $1.26 | $1.73 | | Diluted Net income per share | $0.70 | $0.56 | $1.22 | $1.66 | - Revenues increased by 12.7% for the three months ended September 30, 2021, and by 12.4% for the nine months ended September 30, 2021, compared to the respective prior year periods[14] - Net income increased by 22.1% for the three months ended September 30, 2021, but decreased by 27.4% for the nine months ended September 30, 2021, primarily due to a significant increase in general and administrative expenses (88.1% increase for nine months) driven by accelerated stock-based compensation vesting for the former CEO[14] - Diluted EPS increased from $0.56 to $0.70 for the three-month period but decreased from $1.66 to $1.22 for the nine-month period[14] Condensed Consolidated Statements of Comprehensive Income This statement presents the comprehensive income, which includes net income and other comprehensive income (loss) components, for the three and nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Comprehensive Income | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $27,769 | $22,743 | $49,139 | $67,756 | | Other comprehensive income (loss), net of tax | $1,093 | $(1,360) | $1,312 | $(87) | | Comprehensive income | $28,862 | $21,383 | $50,451 | $67,669 | - Other comprehensive income (loss) significantly improved, moving from a loss of $(1.36) million in Q3 2020 to a gain of $1.09 million in Q3 2021, primarily due to net change in unrealized gains on cash flow hedges[16] - For the nine months, other comprehensive income (loss) also improved from a loss of $(0.087) million in 2020 to a gain of $1.31 million in 2021[16] Condensed Consolidated Statements of Cash Flows This statement provides a summary of cash flows from operating, investing, and financing activities for the nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Cash Flows | (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Cash provided by operating activities | $160,741 | $141,297 | | Cash provided by (used in) investing activities | $19,122 | $(51,480) | | Cash used in financing activities | $(108,255) | $(84,349) | | Net increase in cash, cash equivalents and restricted cash | $71,608 | $5,468 | - Net cash provided by operating activities increased by $19.4 million (13.8%) to $160.7 million for the nine months ended September 30, 2021[18] - Investing activities shifted from a net cash outflow of $(51.5) million in 2020 to a net cash inflow of $19.1 million in 2021, primarily due to higher net sales/maturities of marketable securities[18] - Cash used in financing activities increased by $23.9 million (28.3%) to $(108.3) million, mainly due to increased share repurchases and tax payments related to equity awards[18] - Overall, net increase in cash, cash equivalents and restricted cash was $71.6 million in 2021, a significant increase from $5.5 million in 2020[18] Condensed Consolidated Statements of Stockholders' Equity This statement outlines the changes in each component of stockholders' equity for various interim periods, including net income, other comprehensive income, stock option exercises, share repurchases, and stock-based compensation - Total stockholders' equity decreased from $404.5 million at December 31, 2020, to $403.0 million at September 30, 2021[20][21] - Significant activities impacting equity include net income, other comprehensive income, issuance of common stock from stock option exercises, repurchases of common stock, and stock-based compensation[20][21] - Repurchases of common stock amounted to $(31.6) million for the three months ended September 30, 2021, and $(94.9) million for the nine months ended September 30, 2021[20][21] - Stock-based compensation recognized was $9.5 million for the three months ended September 30, 2021, and $56.2 million for the nine months ended September 30, 2021[20][21] Notes to Condensed Consolidated Financial Statements These notes provide additional information and disclosures to the condensed consolidated financial statements, explaining the company's business, significant accounting policies, and details on various financial statement line items NOTE 1. Description of Business and Summary of Significant Accounting Policies This note describes Qualys, Inc.'s business as a leading provider of cloud-based IT, security, and compliance solutions, outlines the basis of financial statement presentation, discusses risks and uncertainties including the impact of COVID-19, and summarizes key accounting policies such as revenue recognition - Qualys, Inc. is a pioneer and leading provider of cloud-based IT, security, and compliance solutions, enabling organizations to identify security risks, protect IT systems, and achieve compliance[23] - The company's cloud solutions address complexities from dissolving IT infrastructure boundaries, rapid cloud adoption, and dispersed IT assets - COVID-19 has led to business modifications (e.g., remote work, travel restrictions) but has not caused significant disruptions to date; however, future impacts remain uncertain - Revenue is primarily derived from subscriptions to cloud solutions, recognized ratably over contract terms (typically one year) - The company adopted ASU 2019-12 (Simplifying the Accounting for Income Taxes) in Q1 2021 with no material impact NOTE 2. Fair Value of Financial Instruments This note details the fair value measurements of Qualys's financial instruments, including cash equivalents, marketable securities, and derivative foreign currency forward contracts, categorized by the fair value hierarchy (Level 1, 2, and 3 inputs) - The company's financial instruments are primarily measured using Level 1 (quoted prices in active markets) and Level 2 (observable inputs other than quoted prices) inputs[45] Cash and Marketable Securities Fair Value (September 30, 2021) | Category | Fair Value (in thousands) | | :--- | :--- | | Cash and cash equivalents | $145,740 | | Short-term marketable securities | $199,947 | | Long-term marketable securities | $136,124 | | Total | $481,811 | Derivative Financial Instruments (September 30, 2021) | Type | Notional Amounts | | :--- | :--- | | Designated cash flow hedge forward contracts | €25.6 million, £9.3 million, Rs.2,730.7 million | | Non-designated forward contracts | €21.9 million, £9.5 million, Rs.31.0 million, CHF2.0 million | Net Gains (Losses) from Non-designated Forward Contracts and Other Foreign Currency Transactions | (in thousands) | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net gains (losses) from non-designated forward contracts | $748 | $1,792 | | Other foreign currency transactions gains (losses) | $(1,132) | $(2,360) | | Total foreign exchange gains (losses), net | $(384) | $(568) | NOTE 3. Accumulated Other Comprehensive Income (Loss) This note details the components and changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020, primarily related to available-for-sale debt securities and cash flow hedges Accumulated Other Comprehensive Income (Loss) Balances | (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Available-for-sale debt securities | $441 | $1,224 | | Cash flow hedges | $387 | $(1,708) | | Total | $828 | $(484) | - Total AOCI shifted from a loss of $(0.484) million at December 31, 2020, to a gain of $0.828 million at September 30, 2021, primarily driven by a positive change in cash flow hedges - Net change in AOCI for the nine months ended September 30, 2021, was $1.31 million, compared to a loss of $(0.087) million in the prior year period NOTE 4. Property and Equipment, Net This note provides a breakdown of property and equipment, net, including assets under finance leases, and associated depreciation and amortization expenses Property and Equipment, Net (in thousands) | Category | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Computer equipment | $156,042 | $136,286 | | Computer software | $25,806 | $26,164 | | Leasehold improvements | $21,092 | $21,107 | | Scanner appliances | $16,855 | $16,749 | | Furniture, fixtures and equipment | $6,455 | $6,599 | | Finance leases - right of use asset | $— | $3,503 | | Total property and equipment | $226,250 | $210,408 | | Less: accumulated depreciation and amortization | $(162,993) | $(145,558) | | Property and equipment, net | $63,257 | $64,850 | - Property and equipment, net, decreased slightly from $64.9 million to $63.3 million - Depreciation and amortization expenses were $7.0 million for Q3 2021 (vs. $6.7 million in Q3 2020) and $21.2 million for the nine months ended September 30, 2021 (vs. $19.3 million in 2020) NOTE 5. Revenue from Contracts with Customers This note details the company's revenue recognition policies, including deferred revenue, remaining performance obligations, and revenue disaggregation by sales channel Revenue Recognized from Deferred Balances | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue recognized from prior period deferred revenue | $42,100 | $38,300 | $189,100 | $168,000 | Expected Revenue from Remaining Performance Obligations (as of Sep 30, 2021) | Period | Amount (in thousands) | | :--- | :--- | | 2021 (remaining three months) | $35,458 | | 2022 | $116,982 | | 2023 | $76,774 | | 2024 | $16,870 | | 2025 | $2,055 | | 2026 and thereafter | $348 | | Total | $248,488 | Revenues by Sales Channel | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Direct | $61,554 | $54,821 | $178,288 | $156,631 | | Partner | $43,380 | $38,248 | $123,104 | $111,531 | | Total | $104,934 | $93,069 | $301,392 | $268,162 | - Amortization expense for deferred costs to obtain contracts was $1.0 million for Q3 2021 (vs. $0.8 million in Q3 2020) and $2.8 million for the nine months ended September 30, 2021 (vs. $2.2 million in 2020)[66] NOTE 6. Intangible Assets, Net This note provides information on the company's intangible assets, including developed technology and patent licenses, and details a recent acquisition and amortization expenses - On August 19, 2021, Qualys acquired certain developed technology intangible assets of Kandor Soft Labs Private Ltd. (TotalCloud) for $1.2 million cash consideration[68] Intangible Assets, Net (in thousands) | Category | September 30, 2021 (Net Book Value) | December 31, 2020 (Net Book Value) | | :--- | :--- | :--- | | Developed technology | $7,711 | $11,204 | | Patent licenses | $291 | $366 | | Non-compete agreements | $208 | $396 | | Intangible assets not subject to amortization | $40 | $40 | | Total intangible assets, net | $8,250 | $12,006 | - Intangible asset amortization expense was $1.7 million for Q3 2021 (vs. $1.6 million in Q3 2020) and $5.0 million for the nine months ended September 30, 2021 (vs. $4.6 million in 2020) - Expected future amortization expense totals $8.2 million, with $1.7 million remaining in 2021 and $5.1 million in 2022 NOTE 7. Leases This note provides details on the company's operating leases for offices, computer equipment, and data center facilities, including lease expenses and cash flow information - Lease expense was $4.2 million for Q3 2021 (vs. $4.6 million in Q3 2020) and $12.5 million for the nine months ended September 30, 2021 (vs. $13.5 million in 2020) - Cash payments for operating lease liabilities were $10.8 million for the nine months ended September 30, 2021 (vs. $9.2 million in 2020) - The weighted average remaining lease term was 3.4 years (vs. 4.1 years at Dec 31, 2020) and the weighted average discount rate was 4.9% (vs. 4.8% at Dec 31, 2020) as of September 30, 2021 NOTE 8. Commitments and Contingencies This note discusses the company's indemnification obligations, primarily for directors, executive officers, and intellectual property claims from customers or resellers - Qualys enters into contracts that contingently require it to indemnify various parties, including directors, executive officers, and customers/resellers for intellectual property infringement or product defects[74] - To date, the company has not incurred and has not recorded any liability in connection with such indemnifications[74] NOTE 9. Stockholders' Equity and Stock-Based Compensation This note details the company's equity incentive plans, stock-based compensation expenses, and share repurchase program, including significant events like the former CEO's accelerated vesting Stock-Based Compensation Expense | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | $986 | $770 | $2,702 | $1,967 | | Research and development | $2,723 | $3,197 | $7,520 | $9,887 | | Sales and marketing | $1,642 | $1,227 | $4,356 | $4,300 | | General and administrative | $4,112 | $5,295 | $41,640 | $13,776 | | Total stock-based compensation | $9,463 | $10,489 | $56,218 | $29,930 | - Unrecognized stock-based compensation expenses as of September 30, 2021, totaled $15.9 million for options, $52.5 million for RSUs, and $0.5 million for ESPP, to be recognized over weighted-average periods of 2.8, 2.7, and 0.4 years, respectively[80] - The former CEO's resignation due to health issues in March 2021 resulted in accelerated vesting of 127 thousand RSUs, 44 thousand PSUs, and 348 thousand performance stock options, leading to $27.3 million in stock-based compensation expense for the nine months ended September 30, 2021[80][82] - During the nine months ended September 30, 2021, the company repurchased 875 thousand shares for approximately $94.9 million[88] As of September 30, 2021, $106.9 million remained available under the share repurchase program, which was further increased by $200.0 million on November 3, 2021, to a total authorization of $700.0 million[89] NOTE 10. Net Income Per Share This note provides the computations for basic and diluted net income per share, including the weighted average shares used in the calculations and anti-dilutive shares Net Income Per Share | (in thousands, except per share data) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $27,769 | $22,743 | $49,139 | $67,756 | | Basic weighted average shares | 38,925 | 39,238 | 39,077 | 39,171 | | Diluted weighted average shares | 39,938 | 40,764 | 40,147 | 40,843 | | Basic Net income per share | $0.71 | $0.58 | $1.26 | $1.73 | | Diluted Net income per share | $0.70 | $0.56 | $1.22 | $1.66 | - Potentially dilutive shares not included in diluted EPS calculation due to being anti-dilutive totaled 594 thousand for Q3 2021 (vs. 536 thousand in Q3 2020) and 612 thousand for the nine months ended September 30, 2021 (vs. 546 thousand in 2020)[90] NOTE 11. Income Taxes This note explains the company's income tax provision, effective tax rate, and unrecognized tax benefits, highlighting factors influencing these figures Income Tax Provision and Effective Tax Rate | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Income tax provision (in thousands) | $4,282 | $4,891 | $10,554 | $9,189 | | Effective tax rate | 13.4% | 17.7% | 17.7% | 11.9% | - The decrease in income tax provision for Q3 2021 was primarily due to a tax election to capitalize and amortize certain R&D expenses for U.S. income tax purposes[93] - The increase in income tax provision for the nine months ended September 30, 2021, was primarily due to a reduction in excess tax benefits from stock-based compensation, partially offset by the R&D expense capitalization election[94] - Unrecognized tax benefits were $9.6 million as of September 30, 2021, with $4.9 million favorably impacting the effective tax rate if recognized[95] NOTE 12. Segment Information and Information about Geographic Area This note states that Qualys operates in a single reportable segment and provides revenue and property and equipment data disaggregated by geographic area - Qualys operates in one segment, with the CEO making operating decisions and allocating resources on a consolidated basis[97] Revenue by Geographic Area (based on customer's billing address) | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | United States | $63,599 | $59,152 | $184,722 | $171,130 | | Foreign | $41,335 | $33,917 | $116,670 | $97,032 | | Total revenues | $104,934 | $93,069 | $301,392 | $268,162 | Property and Equipment, Net, by Geographic Area | (in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | United States | $43,994 | $43,791 | | India | $11,287 | $12,465 | | Other | $7,976 | $8,594 | | Total | $63,257 | $64,850 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Qualys's financial condition and results of operations, offering insights into the company's business, key financial components, performance comparisons, and liquidity Overview This overview describes Qualys's core business as a cloud-based IT, security, and compliance solution provider, its SaaS model, the range of Cloud Apps offered, sales channels, and the ongoing impact of the COVID-19 pandemic - Qualys is a pioneer and leading provider of a cloud-based platform delivering IT, security, and compliance solutions, helping organizations identify security risks, protect IT systems, and achieve compliance[103] - The company offers a suite of 'Qualys Cloud Apps' covering IT Security, Compliance, Web Application Security, Asset Management, and Cloud/Container Security[106] - Solutions are provided through a software-as-a-service (SaaS) model with primarily renewable annual subscriptions[107] - Approximately 61% of revenues for the nine months ended September 30, 2021, were from U.S. customers[108] - Sales are conducted through a field sales force for enterprises/government, an inside sales force for SMBs, and a significant portion through channel partners[109] - The COVID-19 pandemic has led to business modifications (e.g., remote work) but has not caused significant disruptions to date; future impacts remain uncertain[110] Key Components of Results of Operations This section explains the primary drivers and components of Qualys's revenues, cost of revenues, operating expenses (research and development, sales and marketing, general and administrative), other income (expense), net, and income tax provision - Revenues are derived from subscriptions to cloud-based IT, security, and compliance solutions, typically invoiced upfront and recognized ratably over the subscription term[111][112] - Cost of revenues includes personnel expenses for data center operations and support, depreciation of equipment, third-party data center costs, and amortization of software/intangibles[113][114] - Operating expenses (R&D, S&M, G&A) are primarily driven by personnel costs (salaries, benefits, stock-based compensation), with R&D focused on product enhancement, S&M on sales force expansion and marketing programs, and G&A on supporting growth and compliance[115][116][117][118] - Other income (expense), net, consists mainly of interest and investment income from marketable securities and foreign exchange gains/losses[119][120] - Income tax provision is determined using an estimated annual effective tax rate, adjusted for discrete items, and is influenced by non-deductible stock-based compensation, state taxes, and federal income tax credits[121] Results of Operations This section provides a detailed comparison of Qualys's financial performance for the three and nine months ended September 30, 2021, versus the same periods in 2020, including revenues, cost of revenues, operating expenses, other income, income tax, and Adjusted EBITDA Selected Condensed Consolidated Statements of Operations Data (as a percentage of revenues) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | 100% | 100% | 100% | 100% | | Gross profit | 79% | 78% | 78% | 78% | | Research and development | 21% | 19% | 20% | 20% | | Sales and marketing | 18% | 18% | 18% | 18% | | General and administrative | 10% | 13% | 21% | 13% | | Total operating expenses | 49% | 50% | 59% | 51% | | Income from operations | 30% | 28% | 19% | 27% | | Net income | 26% | 24% | 16% | 25% | Revenue Growth | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $104,934 | $93,069 | $11,865 | 12.7% | | (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $301,392 | $268,162 | $33,230 | 12.4% | - Cost of revenues increased by $1.9 million (9.0%) for the three months and $7.7 million (13.3%) for the nine months, driven by personnel costs and data center/cloud costs[127][128] - Research and development expenses increased by $3.5 million (19.4%) for the three months and $5.0 million (9.2%) for the nine months, primarily due to increased personnel and software costs[129][130] - Sales and marketing expenses increased by $2.5 million (15.6%) for the three months and $4.3 million (8.5%) for the nine months, mainly due to personnel costs and easing of COVID-19 travel restrictions[131][132] - General and administrative expenses decreased by $1.7 million (13.5%) for the three months but significantly increased by $29.9 million (88.1%) for the nine months, primarily due to accelerated stock-based compensation for the former CEO[133][134] - Total other income, net, decreased by $1.3 million for the three months and $3.6 million for the nine months, due to lower interest income and increased foreign exchange loss[136] - Income tax provision decreased by $0.6 million (12.5%) for the three months but increased by $1.4 million (14.9%) for the nine months, influenced by R&D expense capitalization and stock-based compensation tax benefits[137][138] Adjusted EBITDA Reconciliation | (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $27,769 | $22,743 | $49,139 | $67,756 | | Depreciation and amortization of property and equipment | $7,218 | $6,738 | $21,796 | $19,331 | | Amortization of intangible assets | $1,665 | $1,604 | $4,956 | $4,644 | | Income tax provision | $4,282 | $4,891 | $10,554 | $9,189 | | Stock-based compensation | $9,463 | $10,489 | $56,218 | $29,930 | | Total other income, net | $(74) | $(1,331) | $(1,059) | $(4,703) | | Adjusted EBITDA | $50,323 | $45,134 | $141,604 | $126,147 | | Percentage of revenues | 48% | 48% | 47% | 47% | Liquidity and Capital Resources This section discusses Qualys's liquidity position, cash flow generation from operating, investing, and financing activities, and its ability to fund future operations and potential acquisitions - As of September 30, 2021, Qualys's principal source of liquidity was $481.8 million in cash, cash equivalents, and marketable securities, including $45.3 million held outside the U.S[144] - The company believes its existing cash and cash from operations will be sufficient to fund operations for at least the next twelve months[145] - Cash provided by operating activities was $160.7 million for the nine months ended September 30, 2021, primarily from net income, non-cash adjustments, and working capital growth[147] - Cash provided by investing activities was $19.1 million, mainly from net sales/maturities of marketable securities, partially offset by capital expenditures and acquisition of intangible assets[149] - Cash used in financing activities was $108.3 million, primarily due to $94.9 million in share repurchases and $24.2 million in tax payments for equity awards, partially offset by $11.0 million from stock option exercises[151] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section describes Qualys's exposure to market risks, including foreign currency risk and interest rate sensitivity, and the strategies employed to mitigate these risks Foreign Currency Risk Qualys is exposed to foreign currency exchange rate fluctuations, particularly with the Euro, GBP, INR, Canadian Dollar, and CHF, and uses foreign currency forward contracts to hedge these risks - Qualys's results are subject to fluctuations from changes in exchange rates between the U.S. dollar and Euro, GBP, INR, Canadian Dollar, and CHF[160] - As of September 30, 2021, designated cash flow hedge forward contracts had notional amounts of €25.6 million, £9.3 million, and Rs.2,730.7 million[160] - Non-designated forward contracts had notional amounts of €21.9 million, £9.5 million, Rs.31.0 million, and CHF2.0 million[160] - An immediate 10% adverse change in foreign exchange rates is not expected to be material to financial condition, operating results, or cash flows with hedging strategy applied[160] Interest Rate Sensitivity This section addresses the company's exposure to interest rate changes on its cash, cash equivalents, and marketable securities - As of September 30, 2021, Qualys held $481.8 million in cash, cash equivalents, and short-term and long-term marketable securities[161] - A hypothetical 100 basis point increase in interest rates would result in a $2.5 million decrease in the fair value of marketable securities[161] Item 4. Controls and Procedures This section reports on the effectiveness of Qualys's disclosure controls and procedures and confirms no material changes in internal control over financial reporting during the period - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021[163] - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the period[164] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section discloses information regarding legal proceedings the company may be involved in, stating that no material losses have been incurred from ongoing legal matters as of September 30, 2021 - As of September 30, 2021, there has not been a reasonable possibility that Qualys has incurred a material loss from any ongoing legal proceedings, individually or taken together[166] Item 1A. Risk Factors This section provides a comprehensive discussion of the risks and uncertainties that could materially and adversely affect Qualys's business, operating results, financial condition, or prospects, categorized into business and industry, intellectual property/legal/tax/regulatory, and common stock ownership risks Risks Related to Our Business and Industry This subsection details risks inherent to Qualys's business and the IT security industry, including the impact of COVID-19, operational variability, market adaptation challenges, security incidents, economic conditions, competition, and international operations - The continued spread of COVID-19 could harm business, financial condition, and results of operations due to economic slowdown and supply chain disruptions - Quarterly operating results may vary significantly due to factors like demand, customer renewals, new product introductions, and foreign exchange rates - Failure to anticipate market needs or enhance solutions timely could harm competitiveness - Inability to effectively scale and adapt the platform to meet customer performance requirements would harm operating results - Failure to renew existing subscriptions, sell additional solutions, or attract new customers would harm operating results - If the market for cloud solutions for IT, security, and compliance does not evolve as anticipated, revenues may not grow - Current research and development efforts may not produce successful products or significant revenue - The platform, website, and internal systems are subject to intentional disruption or other security incidents, potentially leading to liability and reputational damage - Long and unpredictable sales cycles require considerable time and expense, causing operating results to fluctuate - Adverse economic conditions or reduced IT spending may negatively impact business - Disruption of service at the seven data centers would interrupt delivery, reduce revenues, and harm operating results - Intense competition from established and emerging vendors may lead to insufficient financial or other resources to maintain or improve competitive position - Sales prices of solutions are subject to competitive pressures and may decrease, reducing gross profits - Failure to help customers achieve and maintain compliance with regulations and industry standards could harm revenues - Solutions failing to detect or incorrectly detecting vulnerabilities could harm brand and reputation - Inability to continue expanding the sales force would harm sales and business growth - Reliance on third-party channel partners means failure to expand and manage these channels could lead to revenue decline - Significant international operations expose the company to risks like foreign currency fluctuations, political instability, and regulatory changes - Failure to appropriately manage significant business growth or improve systems and processes could negatively affect operating results - Dependence on senior management and key employees means their loss could adversely affect business - Inability to hire, retain, and motivate qualified personnel could harm business - Sales to government entities are subject to challenges and risks, including competitive bidding and budgetary cycles - Acquiring and integrating other businesses, products, or technologies may impact financial position and operating results - Reliance on software-as-a-service vendors means any failure could adversely impact business - Delays or interruptions in manufacturing and delivery of physical scanner appliances by the sole source manufacturer may harm business - Incorrect or improper implementation or use of solutions could result in customer dissatisfaction and harm reputation - Revenue recognition over the service period means decreases or increases in bookings are not immediately reflected in operating results - Business is subject to risks of natural disasters and man-made problems like terrorism Risks Related to Intellectual Property, Legal, Tax and Regulatory Matters This subsection addresses legal, tax, and regulatory risks, including those related to software errors, data privacy laws (GDPR, CCPA, CPRA), open source software, intellectual property protection and infringement, export controls, and tax liabilities - Undetected software errors or flaws in solutions could harm reputation, decrease market acceptance, or result in liability - Solutions collecting and storing personal information raise privacy and data handling concerns, potentially leading to increased costs, liability, or inhibited sales due to evolving regulations like GDPR, CCPA, and CPRA - Solutions containing third-party open source software components could restrict the ability to sell solutions if license terms are not complied with - Reliance on third-party software and data that may be difficult to replace or cause errors could lead to lost customers or harm reputation - Failure to protect proprietary technology and intellectual property rights could substantially harm business and operating results - Assertions by third parties of infringement or other violations of intellectual property rights could result in significant costs and harm business - Governmental export or import controls could subject the company to liability if violated or limit its ability to compete in foreign markets - Being required to collect higher sales and use or other taxes could result in liability for past sales and decrease future sales - Changes in income tax provision or adverse outcomes from tax return examinations could adversely affect operating results Risks Related to Ownership of Our Common Stock This subsection covers risks associated with owning Qualys's common stock, such as market volatility, potential discrepancies with financial guidance, concentration of ownership, future stock sales, dividend policy, and anti-takeover provisions - Market volatility may affect stock price and investment value, potentially leading to litigation - Actual operating results may differ significantly from guidance, which is inherently speculative - Concentration of ownership among executive officers, directors, and significant holders (24.5% as of Sep 30, 2021) may prevent new investors from influencing significant corporate decisions - Future sales of shares by existing stockholders could cause the stock price to decline - The stock repurchase program may not be fully consummated or enhance stockholder value, and repurchases could affect stock price - The company does not intend to pay dividends on common stock, limiting returns to stock value - Anti-takeover provisions in charter documents and Delaware law could make an acquisition more difficult and prevent attempts to replace management General Risk Factors This subsection outlines general risks applicable to Qualys, including the potential for disruptive technologies, uncertainty regarding future profitability, inaccuracies in market growth forecasts, reliance on accounting estimates, and the importance of maintaining effective internal control over financial reporting - Disruptive technologies could gain wide adoption and supplant cloud-based solutions, weakening sales - The company may not maintain profitability in the future due to continued investments and unforeseen operating expenses - Forecasts of market growth may prove inaccurate, and business growth may not match forecasted market rates - Financial results are based on estimates and judgments relating to critical accounting policies, which if incorrect, could harm operating results - Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations - Failure to maintain an effective system of internal control over financial reporting could impair the ability to produce timely and accurate financial statements Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides a summary of the company's common stock repurchase activities during the three months ended September 30, 2021, under its publicly announced share repurchase program Common Stock Repurchases (Three Months Ended September 30, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Approximate Dollar Value of Shares That May Yet Be Purchased under the Plan or Program | | :--- | :--- | :--- | :--- | :--- | | July 1 - July 31, 2021 | 105,000 | $102.33 | 105,000 | $127,805,879 | | August 1 - August 31, 2021 | 101,400 | $109.15 | 101,400 | $116,738,373 | | September 1 - September 30, 2021 | 84,000 | $117.32 | 84,000 | $106,883,467 | | Total | 290,400 | | 290,400 | | - The share repurchase program, initially $100.0 million in February 2018, has been increased multiple times, reaching an aggregate authorization of $700.0 million as of November 3, 2021[286][287] The program does not have an expiration date[286][287] Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - None[288] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures to report - None[289] Item 5. Other Information This section states that there is no other information to disclose - None[289] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including certifications and XBRL documents - Exhibit 31.1: Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)[291] - Exhibit 31.2: Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)[291] - Exhibit 32.1: Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350[291] - Exhibit 32.2: Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350[291] - Exhibits 101 INS, SCH, CAL, DEF, LAB, PRE: Inline XBRL documents[291] - Exhibit 104: Cover Page Interactive Data File[291] Signatures This section contains the signatures of the authorized officers, specifically the Chief Financial Officer and Chief Accounting Officer, certifying the filing of the report - The report is signed by Joo Mi Kim, Chief Financial Officer (principal financial officer), and Saikat Paul, Chief Accounting Officer (principal accounting officer), on November 3, 2021[294][295]