QUALYS INC

Previous wording

We are a pioneer and leading provider of a cloud-based platform delivering information technology (IT), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. Our cloud platform addresses the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on Qualys' Enterprise TruRisk Platform enables our customers to identify and manage their IT and operational technology (OT) assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, quantify cyber risk exposure, recommend and implement remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions to cost-effectively obtain a unified view of their internal and external IT and OT asset inventory as well as security and compliance posture across globally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.

Current wording

We are a leading provider of a cloud-based platform delivering information technology (IT), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. Our cloud platform addresses the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on Qualys' Enterprise TruRisk Platform enables our customers to identify and manage their IT and operational technology (OT) assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, quantify cyber risk exposure, recommend and implement remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions to cost-effectively obtain a unified view of their internal and external IT and OT asset inventory as well as security and compliance posture across globally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.

Previous wording

We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. For the three months ended March 31, 2024 and 2023, approximately 59% and 60%, respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed security service providers, leading cloud providers, value-added resellers and consulting firms in the United States and internationally.

Current wording

We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. For the six months ended June 30, 2024 and 2023, approximately 59% and 60%, respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed security service providers, leading cloud providers, value-added resellers and consulting firms in the United States and internationally.

Previous wording

Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our shared cloud platforms and provide support services to our customers. Other expenses include depreciation of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of shared cloud platforms, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to expand our shared cloud platform infrastructures and hire additional employees to support our operations, which will increase the cost of revenues in absolute dollars.

Current wording

Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our shared cloud platforms and provide support services to our customers. Other expenses include depreciation of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of shared cloud platforms, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to expand our shared cloud platform infrastructures and hire additional employees to support our operations, which in turn, is expected to increase the cost of revenues in absolute dollars.

Previous wording

Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. We expect to continue to devote resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses will increase in absolute dollars.

Current wording

Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. We expect to continue to devote resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities, which in turn, is expected to increase the research and development expenses in absolute dollars.

Previous wording

Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.

Current wording

Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which in turn, is expected to increase sales and marketing expenses in absolute dollars.

Previous wording

General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal and regulatory requirements.

Current wording

General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect to continue to add personnel and incur professional services to support our growth and compliance with legal and regulatory requirements, which in turn, is expected to increase general and administrative expenses in absolute dollars.

Previous wording

Comparison of Three Months Ended March 31, 2024 and 2023

Current wording

Comparison of Three and Six Months Ended June 30, 2024 and 2023

Previous wording

Revenues increased by $15.1 million for the three months ended March 31, 2024 compared to the same period in 2023, driven by increased demand for our subscription services by our end customers. Of the total increase of$15.1 million in revenues, 96% was from revenues from customers existing prior to January 1, 2024, and the remaining 4% was from new customers added in the three months ended March 31, 2024. Of the total increase of$15.1 million, 56% was from customers in the United States and the remaining 44% was from customers in foreign countries. Of the total increase of$15.1 million, 33% was from direct customers and the remaining 67% was from partners. In the three months ended March 31, 2024, 55% of total revenue was direct and the remaining 45% was from partners. With our strong market position driving further demand for our solutions, we expect revenue growth from new and existing customers to continue.

Current wording

Revenues increased by $11.5 million for the three months ended June 30, 2024 compared to the same period in 2023, driven by increased demand for our subscription services by our end customers. Of the total increase of$11.5 million in revenues, 94% was from revenues from customers existing prior to April 1, 2024, and the remaining 6% was from new customers added in the three months ended June 30, 2024. Of the total increase of$11.5 million, 35% was from customers in the United States and the remaining 65% was from customers in foreign countries. Of the total increase of$11.5 million, 13% was from direct customers and the remaining 87% was from partners. In the three months ended June 30, 2024, 54% of total revenue was direct and the remaining 46% was from partners.

Previous wording

Cost of revenues increased by $0.2 million for the three months ended March 31, 2024 compared to the same period in 2023, due to an increase in personnel costs, including stock-based compensation, of $1.2 million, driven by additional employees hired to support the growth of our business, an increase in shared cloud platform cost of $1.0 million, partially offset by a decrease in depreciation and amortization expense of $2.0 million resulting from certain of our assets becoming fully depreciated or amortized.

Current wording

Cost of revenues decreased by $0.2 million for the three months ended June 30, 2024 compared to the same period in 2023, due to a decrease in depreciation and amortization expense of $2.0 million resulting from certain of our assets becoming fully depreciated or amortized, partially offset by an increase in personnel costs, including stock-based compensation, of $1.0 million, driven by additional employees hired to support the growth of our business, and an increase in shared cloud platform cost of $0.8 million.

Previous wording

Research and development expenses decreased by $0.3 million for the three months ended March 31, 2024 compared to the same period in 2023, due to a decrease in professional service expense of $0.3 million, and a decrease in depreciation and amortization expense in property and equipment of $0.2 million, partially offset by an increase in personnel costs, including stock-based compensation, of $0.2 million.

Current wording

Research and development expenses decreased by $0.3 million for the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a decrease in overhead allocation, a decrease in depreciation and amortization in property and equipment, partially offset by an increase in personnel costs, including stock-based compensation, and an increase in shared cloud platform cost.

Previous wording

Sales and marketing expenses increased by $3.8 million for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to an increase in personnel costs, including stock-based compensation, of $3.5 million, driven by increased headcount, and an increase in subscribed license and software costs of $0.3 million.

Current wording

Sales and marketing expenses increased by $9.7 million for thesix months ended June 30, 2024 compared to the same period in 2023, primarily due to an increase in personnel costs, including stock-based compensation, of $7.2 million, driven by increased headcount, an increase in marketing expenses related to trade shows of $1.3 million, an increase in travel and entertainment cost of $0.6 million, an increase in advertising expenses of $0.3 million, and an increase in subscribed license and software costs of $0.3 million.

Previous wording

General and administrative expenses increased by $1.8 million for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to an increase in personnel costs, including stock-based compensation of $2.6 million, driven by increased headcount, refresh grants to eligible employees and executives, and higher expected achievement of the performance metrics related to the PRSUs granted to executives, partially offset by a decrease in professional service expense of $0.5 million, and a decrease in legal expense of $0.3 million.

Current wording

General and administrative expenses increased by $0.9 million for the three months ended June 30, 2024 compared to the same period in 2023, primarily due to an increase in personnel costs, including stock-based compensation, driven by increased headcount, an increase in professional service expense, and an increase in legal expense and other fees.

Previous wording

Total other income, net increased by $2.5 million for the three months ended March 31, 2024, compared to the same periods in 2023, primarily due to an increase in interest income of $3.7 million driven by an increase of market interest rates, partially offset by a $1.2 million increase in foreign currency loss.

Current wording

Total other income, net increased by $3.3 million for the three months ended June 30, 2024, compared to the same periods in 2023, primarily due to an increase in interest income of $2.9 million driven by an increase in market interest rates, and a non-recurring unrealized loss of $0.5 million on a non-marketable equity security recognized during the three months ended June 30, 2023, partially offset by a $0.1 million increase in foreign currency loss.

Previous wording

Income tax provision increased by $1.5 million for the three months ended March 31, 2024 compared to the same period in 2023 due to the tax effect of an increase in pretax income, partially offset by an increase in excess tax benefits arising from stock-based compensation and lower net capitalization of research and development expenses for tax purposes.

Current wording

Income tax provision increased by $1.6 million for the six months ended June 30, 2024 compared to the same period in 2023 due to the tax effect of an increase in pretax income, partially offset by an increase in excess tax benefits arising from stock-based compensation and lower net capitalization of research and development expenses for tax purposes.

Previous wording

Our net dollar expansion rates were 104% and 109% as of March 31, 2024 and March 31, 2023, respectively.

Current wording

Our net dollar expansion rates were 102% and 108% as of June 30, 2024 and June 30, 2023, respectively.

Previous wording

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income, cash flows from operating activities and our financial results presented in accordance with U.S. GAAP. The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2024 and 2023:

Current wording

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income, cash flows from operating activities and our financial results presented in accordance with U.S. GAAP. The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023:

Previous wording

As of March 31, 2024, our principal source of liquidity was cash, cash equivalents and marketable securities of $543.4 million, including $120.5 million of cash held outside of the United States. The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report:

Current wording

As of June 30, 2024, our principal source of liquidity was cash, cash equivalents and marketable securities of $555.3 million, including $97.9 million of cash held outside of the United States. The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report:

Previous wording

During the three months ended March 31, 2024, we generated$58.2 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to$48.2 million during the three months ended March 31, 2023. In addition, we also generated$27.3 million of cash from changes in working capital during the three months ended March 31, 2024, of which$28.9 million was primarily attributed to a decrease in accounts receivable due to the timing of collections and$8.6 million was due to an increase in payables and accrued liabilities, partially offset by a$10.1 million increase in prepaid expenses primarily driven by the timing of payments. During the three months ended March 31, 2023, we generated$18.6 million of cash from changes in working capital, of which$21.1 million was related to a net increase in deferred revenue and a net decrease in accounts receivable as a result of our continued growth in billing and timing of collections, partially offset by$1.2 million due to a decrease in payables and accrued liabilities in line with our cost savings initiatives, and$1.3 million due to higher prepaid expenses.

Current wording

During the six months ended June 30, 2024, we generated$118.2 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to$101.1 million during the six months ended June 30, 2023. In addition, we also generated$17.1 million of cash from changes in working capital during the six months ended June 30, 2024, of which$24.6 million was primarily attributed to a combined result of decreases in accounts receivable and deferred revenue due to the timing of collections and billings, partially offset by a$4.5 million increase in prepaid expenses and a$3.0 million decrease in payables and accrued liabilities primarily driven by the timing of payments. During the six months ended June 30, 2023, we generated$17.2 million of cash from changes in working capital, of which$16.7 million was attributed to the combined result of increases in deferred revenue and accounts receivable due to the growth in billing and timing of collections, and an $8.0 million increase in payables and accrued liabilities, partially offset by a$7.5 million increase in prepaid expenses primarily driven by the timing of payments.

Previous wording

During the three months ended March 31, 2024, we generated$10.1 million of cash from sales and maturities of marketable securities net of purchases, partially offset by$2.1 million of cash used in capital expenditures mainly related to purchases of computer equipment to support our growth and development, as compared to$23.7 million of cash provided by sales and maturity of marketable securities net of purchases, partially offset by$4.0 million of cash used in capital expenditures during the three months ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, we generated$6.4 million of cash from sales and maturities of marketable securities net of purchases, partially offset by$3.1 million of cash used in capital expenditures mainly related to purchases of computer equipment to support our growth and development, as compared to$7.7 million of cash provided by sales and maturity of marketable securities net of purchases, partially offset by$5.5 million of cash used in capital expenditures during the six months ended June 30, 2023.

Previous wording

During the three months ended March 31, 2024, we used$18.0 million of cash for share repurchases,$11.8 million of cash in payment of employee withholding taxes upon vesting of restricted stock units and$1.5 million payment of cash held in escrow as part of the Blue Hexagon acquisition on October 4, 2022, partially offset by$3.6 million of proceeds from issuance of common stock through our ESPP and$2.8 million of proceeds from employee exercise of stock options, as compared to$66.6 million of cash used for share repurchases,$5.1 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units, partially offset by$2.3 million of proceeds from employee exercise of stock options and$3.0 million of proceeds from issuance of common stock through our ESPP during the three months ended March 31, 2023.

Current wording

During the six months ended June 30, 2024, we used$53.0 million of cash for share repurchases,$17.7 million of cash in payment of employee withholding taxes upon vesting of restricted stock units and$1.5 million payment of cash held in escrow as part of the Blue Hexagon acquisition on October 4, 2022, partially offset by$6.0 million of proceeds from employee exercise of stock options and$3.6 million of proceeds from issuance of common stock through our ESPP, as compared to$108.8 million of cash used for share repurchases, and$9.5 million of cash used in payment of employee withholding taxes upon vesting of restricted stock units, partially offset by$7.1 million of proceeds from employee exercise of stock options and$3.0 million of proceeds from issuance of common stock through our ESPP during the six months ended June 30, 2023.

Previous wording

Our material cash requirements include our operating lease obligations to make payments under our non-cancelable lease agreements for our facilities and shared cloud platforms. We had fixed operating lease payment obligations of $43.8 million as of March 31, 2024, with $12.7 million expected to be paid within the next 12 months.

Current wording

Our material cash requirements include our operating lease obligations to make payments under our non-cancelable lease agreements for our facilities and shared cloud platforms. We had fixed operating lease payment obligations of $60.6 million as of June 30, 2024, with $14.0 million expected to be paid within the next 12 months.

Previous wording

We expect to continue to use cash to repurchase shares in 2024 under our share repurchase program authorized by our board of directors on February 5, 2018. On February 7, 2024, we announced that our board of directors authorized an additional $200.0 million to the share repurchase program authorization, increasing the total amount of authorized repurchase to $1.2 billion. As of March 31, 2024, approximately $265.7 million remained available under our share repurchase program. Shares will be repurchased from time to time in privately negotiated transactions or on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act.

Current wording

We expect to continue to use cash to repurchase shares in 2024 under our share repurchase program authorized by our board of directors on February 5, 2018. On February 7, 2024, we announced that our board of directors authorized an additional $200.0 million to the share repurchase program authorization, increasing the total amount of authorized repurchase to $1.2 billion. As of June 30, 2024, approximately $230.7 million remained available under our share repurchase program. Shares will be repurchased from time to time in privately negotiated transactions or on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act.