Q2 2021 Qualys Inc Earnings Call
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Thank you for standing by and welcome to the quality, Inc. Second quarter 2021 Investor call. At this time all participants are in a listen only mode. Later, we will come back a question and answer session and instructions will follow at that time, and finally won share their current assistance. During the conference. Please press star zero on your budget on the telephone.
I would now like to turn the conference over to your host Mr. Blair King. Please go ahead Sir.
Thank you Grayson good afternoon, and welcome to close the second quarter 2021 earnings call. Joining me today to discuss our results are Smith, <unk>, President and CEO and Jimmy Kim our CFO.
Before we get started I would like to remind you that our remarks. Today will include forward looking statements generally relate to future events or 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 in our filings with the SEC, including our latest form 10-Q and 10-K.
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 and as a reminder, the press release prepared remarks investor presentation are available on the Investor Relations section of our website, so with that I'd like to turn the call now over to Smith Smith.
Thank you Blair and welcome everyone to our second quarter earnings call.
2 was another solid quarter with more customers upgrading to the MTR and increasing their deployment of our cloud agents on endpoints. We are delighted to share that we have continued to grow and operating effectively through the pandemic and management changes in the company.
Faced with the latest increase in malware and ransomware cyber attacks paired with tightened government scrutiny, our customers are turning to us before.
Our security posture respond faster integrate patching and reduce legacy costs, our highly scalable cloud based platform allow enterprises to deploy multiple applications using a single agent, which differentiate us in the industry.
Furthermore, our scalable platform enables us to handle more than 20 Petabytes of data currently indexing over 9 trillion data points on our elastic search clusters moving more than 28 billion messages a day on our Kafka bus.
And pumping over 1 million rights per second on our Cassandra clusters as a result, our solutions don't need to rely on collecting data from disparate point products to detect and remediate and respond to security threats.
The single agent approach provides better security and user experiences and in turn underpins. The continued acceleration of our cloud agent subscriptions, which grew 51% year over year to 64 million.
To expand the ubiquity of our agent with our <unk> solution, which continues to gain traction in the market with 28% customer penetration as of Q2.
Additionally, validating our solution consolidation approach our top new customers in Q2, not only for <unk>, but also started with a number of additional quality solutions out of the day, such as asset management patch management might be like the Edr file integrity monitoring policy compliance of investigation scanning.
And container security.
We expect to further drive <unk> adoption in the SMB segment with the new pricing and packaging, we recently introduced and given the desire of these smaller <unk> customers to have a single lease among other new management based in remediation.
We recently announced the launch of a very strategic initiative, which is our cyber security asset management see some application.
Accurate and up to date asset management.
As in the continuously changing hybrid environment remains a major challenge for large and small businesses. Despite this.
Being a fundamental building block and compliance requirement organizations struggle with asset management that is focused on cyber security, we believe that quality cloud platform with other multiple sensors and scalable backend Calexico index enriches and categorize this large amounts of data provides the ideal and robust.
<unk> for this challenge.
By combining agent based on agent less data collection active and passive scanning and Apis. The callers cloud platform now provides comprehensive asset discovery across the entire infrastructure, including on Prem cloud container it will be an IL.
To add context for security central visibility.
<unk> of security gaps seemed to be integration alerting and response capabilities.
It was particularly encouraging to see a top tier financial institutions select our see some application just days after its introduction and pursuit of Asian consolidation simplified.
<unk> workflows on a comprehensive review of the financial institutions <unk> infrastructure, either repurchase security architecture for the modern hybrid work environment.
Exhibitor virtually a blackout we were pleased to see an overwhelming reception for this application by large enterprise customers worldwide.
We continued to see customer interest introducing agents relative to single solution for management and search response. So as an example in Q2, a new fortune 100 customer purchase of the MTR policy compliance batch management cloud security and web application scanning and container security together to standardize insecure.
The hygiene on our single agent solution or multiple best of breed point solutions.
In terms of our other newer payer solutions. We saw continued customer interest in our container security solution as well as patch management application in the quarter, several large new and existing enterprise customers selected our patch management application.
Compute competing solutions given its ability to quickly patch remote endpoints easily and effectively without using the limited bandwidth available on VPN gateway.
And finally, we are receiving positive customer feedback and support for our Edr solution. This application as a natural extension to our highly scalable cloud platform and strategically aligns our vision of a single agent.
Looking into the remainder of 2021, we plan to introduce Xdr, which is our extended detection and response from next generation security analytics and incident response solution, which natively integrate and coordinate security telemetry across the security stack for an end to end platform and like Edr and other natural extinction.
To our excellent. This solution is currently in private EBITDA.
We redesigned our customers and the feedback we're getting has been very encouraging.
As the adoption of cloud applications continues to profit in the industry. We continue to focus on enhancing our cloud native security solutions.
Quickly expanding the power of our platform through organic innovation and targeted acquisitions in this AGM. The total cloud acquisition, we announced today will continue will soon be integrated into several of our cloud platform modules, including our cloud of your application and upcoming xdr solution to strengthen our cloud security plus share management case.
Good day and enable users to easily create automakers, Florida workflows for lapping.
In addition, as I outlined on our last earnings call and other key area of focus for me is on our go to market strategy and sales execution.
We continue to make appropriate investments in our business and I am pleased to say Len Peters, who recently joined <unk> as our new CFO is off to a great start.
Day to have him as part of the team and we're looking forward to continuing our growth of amendment under his leadership.
In summary, we believe quality has a superior competitive position that provides runway for long term revenue growth and profitability, while supporting industry leading performance.
Adoption for our customers and speed of innovation for our R&D efforts paired with the investments that we're making in our go to market and sales enablement activities. We view these advantages as a major contributor to an already favorable competitive environment that the company has benefited from in replacing legacy product declines.
With that I will turn the call over to Julian to discuss our second quarter financial results and guidance for third quarter and full year 2021.
Thanks.
And good afternoon.
I'd like to note that except for 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 another quarter of consistent growth and profitability reflected in the following financial and operational highlights.
Revenue for the second quarter of 2021, 12% from $99.7 million.
As a reminder, last quarter calculated current billings were negatively impacted and this was expected to reverse this quarter do you have a positive impact on Q2.2021 calculated current billings.
As of Q2, LTM calculated current billings growth was 13%.
Paid cloud agent subscriptions increased $64 million will go ask online up from $61 million for the 12 months period ended in Q1.2020 line.
And 47% of non strategic alliance customer.
On the annuity management solution upper when Youre in the quarter purchased the MDI from 34% last quarter.
We're excited by the continued adoption of the MDI with the total customer penetration now at 28%.
Our scalable platform model continues to drive superior margins and generate significant cash flow.
Adjusted EBITDA for the second quarter, 2021 was $46.7 million, representing a 47% margin versus 48% last year.
Non-GAAP EPS for the second quarter 2021 was <unk> 79.
From 74 last year.
Free cash flow for the second quarter of 2021.40.
<unk> 47, 7 million, representing a 48% margin versus 28% last year.
Year to day free cash flow margin was 51% versus 40% for the same period about share.
In Q2, we continue to invest the cash we generated from operations back into quality.
<unk> $6.7 million in capital expenditures.
And $32.2 million to repurchase 316000 of outstanding share.
The weighted average diluted shares outstanding in Q2 was $40.1 million down from $40.9 million last year.
We remain confident in our business model.
<unk> is well positioned to drive growth given the traction we're seeing in newer solution and the overall business momentum.
We are delighted to be raising our full year 2021 guidance for both revenue and earnings.
We are raising the bottom and top end of our revenue guidance for the full year to now being the range of flow.
2 for $7.5 million from the prior range of 4 to 5.
2 for $4.5 million.
We are raising our full year non-GAAP EPS guidance to now be the range of 3 to $3.7 from the prior range at $2.7 to $2.7 Q.
And for the third quarter, we expect revenue to be in the range of $103.8 million to $104.4 million, which represents a growth rate of 12%.
We expect non-GAAP EPS to be in the range of 78 to 80.
Q3 capital expenditures are expected to be in the range of 6 million to $7 million.
With that net and I are happy to answer any other questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number 1 key on your telephone.
Question has been answered or you wish to remove yourself from the queue. Please press <unk>.
Your first question comes from the line of Hamzah <unk> from Morgan Stanley. Your line is open Sir.
Hi, everyone. This is calvin on for Hamzah. Thanks, again for taking my question.
I think first I would like to start out with Alan Peter's enough 3 months into the role have you seen or do you anticipate any further kind of productivity improvements and I know last quarter, you mentioned sales enablement and new business is a focus can you tell us how much progress you've made there.
Yes, I mean as I.
Let's come on we have been working together on figuring out what are the right investments that we need to make in working at Allen has continued to focus on sales enablement.
Productivity in terms of process improvements prospecting, bringing on more solution architects so.
And you can see some of the early indications of dive in our guidance that we've provided so I think.
These other things that we're working on and as we continue to focus investments, we'll be making goes through the rest of the year.
Awesome. Thank you for the additional color and then from.
My second question.
Can you kind of talk a little bit more about the recently announced partnership with with deep auction, what that kind of means for the company and potential go to market motion.
Yeah.
We've talked about this in the positive as more and more managed service providers are looking to modernize their platforms.
We want to be able to get the benefit of being able to provide.
<unk>, where they can provide better expertise on top of the platforms, which they have been building themselves, which obviously have not been able to keep our flow.
On top of the changing and evolving cyber security posture and Thats a quality outside 1 basically force. These managed service providers as they look at.
Focusing more on using a platform that already provides them a lot of the security context.
Asset information, while over DSS meant from a risk mitigation perspective for lighting intelligent.
MSB like deepwater <unk> signed a partnership with and we look forward to working with them. They are looking to leverage more wallet capabilities. So that they can consolidate their own stack and then focus our resources on providing there.
Customers with secure the expertise at other than spending the resources I'm trying to bid.
Third point solutions into their own stack, so that they can provide us as it would be so from.
Go to market perspective, we're going to be working together.
They will be taking those to bear.
Existing customers as well too.
And average quality as they are solution from a liberty management perspective.
They continue to bring on more sort of security automation focused customers onto our platform.
Awesome. Thank you very much.
Thank you and your next question comes from the line of Brian <unk> from Goldman Sachs. Your line is open Sir.
Alright. Thank you for taking the question. This is Hannah <unk> on for Brian Essex.
Up on that previous question or the first 1 rather can you give us an idea of how much you plan to grow sales and marketing head count this year, perhaps maybe quota bearing reps in particular, thank you.
Yeah. So last year, we ended the year with sales and marketing head count of approximately 300, we havent disclosed a quota carrying rep head count.
And with Alan Peter's onboard and we are planning to onboard a new CMO. Later this month, we will be reassessing kind of the right profiles and the team members to add to the team. So we although we don't have a specific number target we are planning to Anders Nilsson and marketing professionals and grow that team.
Okay. Thank you and then I guess another follow up there. So <unk> grew about 17% in the quarter year over year. This quarter do you plan to follow a similar trajectory. After the past I don't know if junior 4 quarters of declines in growth.
You are planning to increase our investment in sales and marketing with that in terms of the timing of when that investment will actually translate into our P&L and the impact on margin so a little bit difficult to say since Alan is still very much Neil and we do have other executives including.
Not just the CMO, but also with the CIO that we are looking for Enzo with Tonight at the hub in his new position as we are planning to work very closely together as an executive team to figure out when is the right timing and what is the right amount of investment this year and then continue on next year.
With that said 1 other things that we are very optimistic about net current trend and the business momentum as you can see.
On the revenue guidance, we've always said that the trajectory of our annual revenue guidance is the best proxy for the business momentum you can see.
See that with our annual revenue guidance now increasing to 12% year over year growth and our current quarter at 12% growth next quarter, we're guiding to 12% and what that implies that Q4 will also be 12% you can see kind of with current billings increasing at a faster rate than revenue, we're very optimistic about the potential re access.
Other Asian and booking.
Got it thank you.
Thank you. Your next question comes from the line of <unk> Kim from Loop capital markets. Your line is open.
Thank you congrats on a solid quarter.
Shang Julie Smith.
I'm sorry, that's net.
Strong beyond the MBR MBR upgrade rate for the quarter can you just talk about whether.
There was not much of an uplift.
Are you seeing in terms of the overall multi product adoption when someone's going to the MBR and any kind of.
Update that youre seeing in the overall deal size.
When a customer I'm pleased with the MTR.
So I think BMD other enables a lot of additional capabilities for the customer and it does take some time for them to absorb those as part of that environment to operationalize those but what we do see.
We've gone up in some other examples of that is.
Those were looking at <unk> also looking at asset management, and cyber security asset management. They are looking at patching in some way or the other they're looking at.
File integrity monitoring so we as I mentioned in the call.
The new customers that youre, bringing them onboard they look at it the MBR to be are also purchasing.
These additional solutions as part of that and so we've got to see that interest and traction.
Traction.
From.
Not just looking at VM will actually starting to look at the broader portfolio, even for customers, who are bringing state of the.
Of the bad when you bring them onboard they're actually looking at multiple different capabilities and I think thats definitely encouraging for us to see and then with the existing customers. We continue to work with them now as they get the agents under deploying the agents.
And we operationalize those agents in the existing environment that does.
Potentially open us up for opportunity to go and start the flow patch management Edr and other solutions. So.
We do see that in some other examples that we mentioned.
Our year end growth.
Okay, that's good to hear.
So net you mentioned MSP from your earnings press release can you just update us on your traction from the MH.
B.
Market.
So yes.
Yes, yes, yes, we see that.
The reason why they are looking at quality and why they are leveraging qualities because we see that with a single platform. They can get.
10, 15 different pieces of security information that they need to provide services to their customers. So as we work with them we get to these partnerships onboard Ed there is going to be a time as they work through getting wallets and just start as part of their platform based services around that and so today, what we see as we worked through with.
Is that there is definite interest in potential and we're working with some of these managed service providers that we recently signed up to get us integrated into those types of battery they can take us much more seamlessly into.
<unk> into their customer base and provide additional services around that and.
And Thats kind of where we are right now.
Flow reward.
We expect to see.
That will be more production from the momentum service providers.
Okay, great to hear.
<unk>.
Our favorite question for you can you at least qualitatively talk about any ASP increase in the quarter.
Yeah. So what we've historically shared was if you take a look at the average deal size and we share the last quarter. It grew 9% year over year, but of course that does tend to fluctuate answer that it's not really indicative of how our customers are really sharing with us.
In Q2 that percentage was 17% year on year. So obviously on that that's.
Net positive because he didn't think other what's that mean for our indicative we decided to not not included in the earnings growth at this time.
Okay, and then just lastly.
International revenue growth came in very strong how much of that was FX driven.
Some but FX impact as a whole for our business is not that huge is because we hedged both revenues and expenses.
Okay, great. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Mike cycles from Needham <unk> Co. Your line is open.
Hey, guys, Mike Cecos on the line here from Needham.
Just had a question for you if I'm thinking about the guidance and the results you guys just put up in Q2 here. It looks like most of this upside is coming from lower than expected opex and I'm trying to determine.
I guess should we anticipate a larger.
Ramp as we look out to calendar 'twenty, 2 or are you behind it.
In any of your expenditures, whether it's ramping sales force or hiring engineers. Your R&D team can you help us think about those are those different expense buckets.
I'm happy to so I assume that earlier this year when we had at first day and share the annual revenue guidance as well as the EPS guidance for a little bit different we are going through some change in management, including with <unk> who's been with us for a decade, but obviously Houston and you realize the CEO and Alan.
<unk>, we haven't had a CR or before he joined for the first time this year and that's been a fairly recent our new CMO, who will be joining later this month and so with that said on that timing other investment has been a little bit pushed out and as we're working together as a team we're not exactly sure in terms of when that will translate into actual.
On P&L and Todd and the margin contraction. So I think it is fair to say that there's some other investments that we were planning to do to make this year has been pushed out to next year, but also keep in mind that we are seeing the business momentum and turnaround.
On bookings kind of indicated by our current billings growth, even without a significant investment and expenses, whether it be sales and marketing or R&D or G&A or cost of revenue for that matter and so we don't see that changing but I think it is fair to say that next year, we will continue to be an investment year for us.
Understood. Okay, and then just 2 other questions if I could the first on your <unk> or uptake.
I think the adoption that you guys cited was 47%.
Which I know is above the mid Thirty's that you guys were running in recent quarters and so the first question on <unk> could you help us understand what's driving the improved adoption rates. There and then the second items I know it's still early days you are in beta with a few customers on your ex Dr solution or if I'm just thinking about the overall ex deal.
Xdr market it.
It seems like there are real players there and I'm just wondering how you guys anticipate differentiating your solution or more effectively competing there versus some of the other vendors.
So with respect to the <unk>, let me address that first so what we have said the penetration rate that we've been disclosing previously what percentage of VM customers that are up for renewal in the specific quarter, just because we launched <unk> at the end of Q1 last year. So what we're focused on is take a look at the <unk> customers that are up for when you want.
In that specific quarter and see.
What subset of customers and makes sense for them to early adopt the MTR that percentage, we knew would fluctuate from quarter to quarter, so that percentage being 34% slightly lower than I know that some people were expecting and a 47% which is higher than I'm sure that some people were expecting it wasn't necessarily as the price to us because it's really up to the cut.
<unk>.
And this is actually 1 other reasons, what does kind of hitting the first full quarter of <unk>, we did disclose that percentage customer penetration, which is 28% to 28% is slightly different because thats out of the total number of paid customers that day.
That we have and that has been also trending up which has been.
Meaningful metric for us to track and that was last quarter, 24% and now it's up to 28%.
And I would add to that.
<unk> adoption definitely.
We put this worker and deal quite happy with the weighted spending.
It's been a combination of obviously.
The MBA has been out there for you.
Customers, who are coming up for renewal they seemed a flexible software they are you'd like to see that other talk to other folks from the industry will used OEM.
Some of that on some of our back.
But what other banks that were seeing are pushing more towards.
How do you get remediation much faster in the MBR is very unique from that perspective.
It combines that ability to get quick remediation done.
And that is that combined with some of the packaging changes also that we are doing from SMB perspective. So that's been a focus for us as we combined.
The combination of a few different things that we are pushing.
To get that adoption going up but mostly its really just customers seeing the value and as they are.
Budgeting or their renewals are coming up their budgeting for the upsells that are required for the MBR.
<unk>.
We hope to continue to see this moving forward from <unk>.
The other adoption perspective.
And then I would say on the ex the auto side.
We're getting positive feedback from current customers and I think the biggest differentiator for us.
Unlike a lot of xdr vendors, which are sold from radiation of Sim.
Black funds typically do require a lot of development team. The data collection will be done by the other solutions that the customer warehouse or deploy them into the edr solution.
And that's where we see ourselves and our customers are deploying within the quality journeys and collecting all of EBITDA lower inventory of as long as it is about edr about filing dignity.
Cloud containers information about non Ivy.
The assets of.
When you cannot have an agent as we do a lot of scanning so Iot device sales to being able to get printers, all kinds of different infrastructure information into the platform.
That's.
Different because all of that is already collected by quality and now we're just picking some additional data points from firewall and a few other.
Solutions to bring that additional context versus what we see otherwise for the most part it's Dr solutions.
Data collection Capably default, maybe 1 aspect, but then they still require customers to deploy multiple other solutions. So that they can see the log data from those solutions into that and that's really the big day.
A differentiator that we see is we will be going into the market those customers as they continue to standardize on multiple solutions from quality with them being able to enable XD items, the same platform and see the value quickly.
It shouldn't be much quicker than them, having to type a big license out of other symptoms.
Great. Thank you guys.
Thank you and your next question comes from the line of Jonathan <unk> from Baird. Your line is open Sir.
Yes, hi, good afternoon.
So Matt I'm wondering if you could talk about the demand trends.
Vulnerability management, particularly in light of the constant barrage of announcements regarding known vulnerabilities.
And have you seen an uptick in I guess volumes and scope of <unk>.
Scanning within enterprise customers and if so does that lend itself to expansion opportunities at renewal at renewal or is that not the case.
Yes, I think thats, a multiple different things happening other great question I think what we see.
Now everybody is surprised with it on some other facts right. So organizations there so probably from the reason there are surprises.
They are always owned that asset that had built up as they have not have the visibility.
And the way that they would have liked so that they didn't know that like look there didn't have the inventory of that asset or the we're not clear that these assets have well or reduce our day 1.
So other dice properly.
They were then they were not cash properly and so I think that's the.
A big reason why the risk is being evaluated a lot you are having or other conversations with our customers as they're looking to say how do I get that visibility. So I can be ahead and try to fix these issues before.
Bankers are getting that visibility right and so at least conversations but what it W..2 is more of a holistic conversation on not just a knee jerk reaction of should I just buying more of those are more of that what they are looking at would.
<unk>.
How is quality and with patch management combined how does that provide them much better visibility into being on top of that assets that end of life. There. While other deals that are being our top actively prioritizing those being able to batch them much quicker than traditional IV set of any other go through my takeaway from <unk>.
<unk> re architect their VM programs to be a lot more automated a lot more nimble and those conversations we do see are happening in.
Honestly, even day to those customers are ready to.
Expand the scope of the MDI <unk> EBITDA.
In some cases and again, we don't choose other customers push them to do that in some cases. They are working on a new architecture that they're going to deploy over the next few months and so they are getting more understand but like I said in that 1 other examples of new customers that are coming on to <unk>.
<unk> <unk> at a few of those right off the bat. So we do see that as were looking customers are looking at getting a new solution a new architecture.
We're buying a few things from callers right off the bat because they see the value of having all of that going to simple platform.
Okay. So you are seeing the opportunity to really drive a higher <unk> because of the value and the broader platform.
Right.
The other question so if you.
You look at the U S growth lagged international I think since the beginning of 2020 can you just talk about the reasons for that relative difference is there anything specific around competition or execution.
Right.
No nothing in particular, it's really driven by our sales reps and their ability to kind of penetrate and land new customers as well as expand our existing and there is a lot.
Smaller numbers with EMEA and APAC still being a smaller percentage of our total business versus America, but nothing notable to highlight there.
Yes.
Just to clarify that so you're suggesting that it's more new customer growth is driving the strength internationally.
No no, it's both new and existing so what I was highlighting is.
There's both a new renewal and upsell bookings that we see across the board, but nothing notable in terms of our competitive advantage our onto our positioning across different regions or territories and it.
It has more to do with the fact that EMEA and APAC I would say a compare to America. Thank you Ed.
A pretty emerging countries or territories that we havent really fully penetrated at this point and there is some.
Smaller numbers there.
We're also seeing that guy is in the U S. The largest large customers have.
Entrenched architecture was a year or so as they are working to change that move towards more modern architectures.
Theres some of that lag we see at times between the 1 day, 1.2 and when they can actually make it happen in the U S more so.
Internationally.
<unk> have not so much of our entrance legacy architecture and tend to sometimes be able to even a little bit faster.
Some of these things so it's a combination of different things that we see.
Alright understood. That's helpful color. Thank you.
Thank you I'm showing no further questions at this time I would now like to turn the conference back to our CEO, Mr. <unk> for any closing remarks Sir.
Alright, Thank you for attending our earnings call and your questions. We believe our integrated platform is very well positioned to respond to customers increasingly could be taking the immediate issues at.
Increasingly the Opex base looking ahead, we're focused on executing our growth strategy encompassing.
Innovation and advancing our go to market motion to be accelerated growth, while driving increased value for our customers and shareholders. Thank you again.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may all disconnect.
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Growth.
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Moving forward.
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