Q2 2024 Qualys Inc Earnings Call

Sumedh Thakar: Thank you, Blair. And welcome to our second quarter earnings call. In Q2, we witnessed organizations increasingly optimize spend within an already tight IT spending environment. Given this dynamic, organizations are standardizing on trusted platforms to consolidate security stacks, leverage automation, and achieve expedient remediation of risk. Qualys has a unique, organically built platform to address this need. Nevertheless, CRISP execution is required to fully capitalize on this opportunity.

Thank you Blair and welcome to our second quarter earnings call in Q2, we witnessed organizations increasingly optimized spend within an already tight it spending environment. Given this dynamic organizations are standardizing on trusted platforms to consolidate security stacks leverage automation and achieve expedient remediation of risk quality.

A unique organically built platform to address this need Nevertheless, crisp execution is required to fully capitalize on this opportunity. While we have made meaningful progress on several fronts, including growing our sales and marketing and building momentum with partners and growing our new business, we have work to do and addressing our upsell execution in the current environment, which resulted.

Sumedh Thakar: While we have made meaningful progress on several fronts, including growing our sales and marketing team, building momentum with partners, and growing our new business, we have work to do in addressing our upsell execution in the current environment, which resulted in lower than expected bookings growth this quarter. With the upcoming departure of our chief product officer later this month, I plan to directly oversee the product and marketing teams to position us for future success.

In lower than expected bookings growth this quarter.

Speaker Change: With the upcoming departure of our Chief product Officer. Later, this month pipeline directly oversee the product and marketing teams to position us for forward success I am confident in our ability to re accelerate growth in the long term with sharper and execution of product led growth and improved alignment between our product messaging and marketing activities to drive operational efficiencies in our go to Mark.

Sumedh Thakar: I'm confident in our ability to reaccelerate growth in the long term with sharpened execution and product-led growth and improved alignment between our product messaging and marketing activities to drive operational efficiencies in our go-to-market strategy. At this time, I'd like to thank Pankaj Shah, our Chief Product Officer, for his contribution during his tenure at Qualys. Although Q2 was a challenging upsell quarter for us with a continued increase in deal scrutiny, we are fortunate that many of our customers have already begun a long-term transformation journey with us. Through the conversations I've had with many CISOs over the past several quarters, their message is clear.

Moshe.

Speaker Change: At this time I'd like to think of English, our chief product officer for his contributions during his tenure at <unk>.

Speaker Change: Although Q2 was a challenging upsell quarter for US, which continued with continued increase in deal scrutiny. We are fortunate that many of our customers have already begun the long term transformation journey with us.

Sumedh Thakar: They are looking to pivot to a natively integrated risk management solution. In the face of the sluggish macro-escalating threat environment and the cybersecurity skill gap, organizations need to reduce complexity and cost while presenting measurable risk reduction initiatives to boards and C-level executives. Against this backdrop, Q2 was another quarter of rapid innovation for Qualys, reflecting our ongoing commitment to technology leadership and customer success. Qualys' mission has been to bring innovative new security solutions to market fueled by customer insights.

Sumedh Thakar: As a result, we have established a strong track record of converting operational challenges into structural competitive advantages while maximizing lifetime value, ensuring frictionless outcomes at scale, and driving immediate ROI on security solutions. For example, Qualys pioneered a patching category for security teams. Building on this success, we commenced development of our TrueRisk Eliminate capability several quarters ago.

Sumedh Thakar: I'm now pleased to announce that some of these increasingly popular solutions amongst our beta customers will soon enable organizations to respond to zero-day threats and mitigate top exploitable vulnerabilities, even when a patch is non-existent or cannot be deployed. This new subset of our broader TrueRisk Eliminate roadmap, which we call TrueRisk Mitigate and TrueRisk Isolate, empowers security teams to apply fixable, automated, and intelligent risk-based response solutions to address cybersecurity risk based on an organization's own unique operational characteristics, remediation timelines, and business objectives.

Sumedh Thakar: With these new capabilities soon going GA, strong customer support, and over 45 million patches deployed year-to-date on Qualys agents, we are increasingly confident that we are once again transforming our customer security operations while further magnifying our competitive differentiation in the market. Continuing our innovation to help our customers address risk coming from the use of latest technologies like AI LLM, we are pleased to announce our newest capability, which we call Qualys Total AI. As organizations rapidly deploy AI LLM technologies, security teams are looking for help to quickly find and comprehensively assess vulnerabilities in these models.

Sumedh Thakar: With seamless AI security posture management integration, new adaptive capabilities discover AI LLM usage within customers' environments, scan for vulnerabilities, and prevent data leakage for comprehensive risk assessment prioritization and remediation across the entire attack surface with a single click of a button. In addition, we are pleased to announce an extension to our Tokyo Cloud CNAP platform, which now discovers and assesses the risk of all known and unknown in-use Kubernetes container images. Leveraging our own AI and ML technology, we are establishing a baseline for normal behavior for each host container, serverless function, and other objects.

Sumedh Thakar: Now, through real-time observation of file system processes and network activity, our newest runtime security tools provide organizations with predictive and threat-based protection to actively detect anomalous activities, prevent zero-day attacks, automate response, and help ensure PCI 4.0 compliance in both containerized and legacy environments. These new container runtime insights, combined with toxic risk factors within a unified actionable dashboard, allow for immediate threat qualification, prioritization, and remediation from code We believe this new capability uniquely sets us apart to enable secure and compliant cloud consumption at scale. Turning to our federal agenda, we recently reduced FedRAMP moderate certification for our Total Cloud CNAP and EDR solutions, marking another key milestone for the company.

Sumedh Thakar: We continue to expect our pending FedRAMP high certification for several key applications later this year, making Qualys the only modern alternative to legacy on-premises scanners for federal, state, and local government agencies at the high impact level. Our investments to establish a public sector presence are starting to yield results, supporting our confidence to address this new vertical and drive incremental growth in the business over time. Finally, with respect to our upcoming enterprise risk management solution, we remain on track for GA later this year. This extension to our platform is currently in private beta with select few design partners.

Speaker Change: Coming enterprise risk management solution.

Speaker Change: Maintaining we remain on track for <unk> later this year. This extension to our platform is currently in private beta with select few design partners the ability to bring first and third party data into our platform holistically detect quantified prioritize and remediate while liberties with automated workflows on a unified dashboard across on Prem cloud and multi cloud environments.

Sumedh Thakar: The ability to bring first and third-party data into our platform to holistically detect, quantify, prioritize, and remediate vulnerabilities with automated workflows on a unified dashboard across on-premises cloud and multi-cloud environments is evolving into the go-to risk management solution for enterprises, especially in the context of a tight spending environment. The early customer feedback we are receiving is very positive, and it's great to see CISOs from around the world actively attend and engage in the many risk quantification workshops we have been conducting over the past several months.

Speaker Change: Is evolving into the go to risk management solution for enterprises, especially with the context of in the context of a tight spending environment.

Speaker Change: The early customer feedback we are receiving is very positive and it's great to see source from around the world actively identify engage and the many many of US quantification workshops, we have been conducting over the past several months.

Sumedh Thakar: These innovative new approaches to cybersecurity risk management, along with several others we have showcased at Black Hat this week, allow our customers to reduce complexity and cost, and, of equal importance, create multidimensional paths for durable, long-term growth in our business. Moving to our business update, we believe that with continued due scrutiny comes larger opportunities for Qualys over the long term, as our natively integrated risk management platform helps customers consolidate technologies and achieve better outcomes within fewer resources and immediate ROI.

Speaker Change: These innovative new approaches to cybersecurity risk management, along with several others. We have showcased at black hat. This week allow our customers to reduce complexity and cost and of equal importance to create multi dimensional parts for durable long term growth in our business.

Speaker Change: Moving to our business update we believe that with continued deal scrutiny comes larger opportunity for quality over the long term as our natively integrated risk management platform house customers consolidate technologies and achieve better outcomes.

Speaker Change: Within less fewer resources and immediate ROI.

Sumedh Thakar: With many of our customers already embracing Qualys to help re-architect and consolidate their stack, Qualys' VMDR solution has translated into an enviable customer base, deep penetration, and significant industry recognition. As recently announced, Qualys' VMDR with TrueRisk was voted the best vulnerability management solution at the 2024 SE Awards Europe for the second consecutive year.

Speaker Change: With many of our customers already embracing quality to help re architect and consolidate their stock <unk> solution has translated into an enviable customer base, a deep penetration and significant industry recognition.

Sumedh Thakar: We believe Qualys' placement as the number one VM solution further validates our investments in the platform and continues to represent the gold standard for securing customer environments today and in the future. Given Qualys' blueprint for delivering greater value to our customers, our VMDR solution with TrueRisk is not only fueling new logo ads but also helping increase platform adoption, especially in the areas of cybersecurity asset management with EASM, patch management, and cloud security.

Sumedh Thakar: Let me share a couple of recent wins with new customers, which illustrate why companies have turned to Qualys to help consolidate their security tools and improve their security posture. In Q2, a large federal government agency became a customer of Qualys. This new customer was previously using multiple legacy and next-gen solutions to manage a variety of risk management use cases across their security IT and DevOps teams. In addition to the complexity of using multipoint products, this government agency was frustrated with the increasing costs associated with on-prem deployments, looking to migrate into a natively integrated cloud-based FedRAMP high-impact level-ready solution that met the CISA BOD guidelines.

Sumedh Thakar: They replaced two of their existing vendors in a high six-figure bookings phase one deployment using multiple Qualys modules right out of the gate. These initial deployments include cybersecurity asset management with EFM, VMDR with TrueRisk, and patch management.

Sumedh Thakar: Through this highly strategic and competitive win, this customer is now able to leverage unified dashboards that provide them with greater insights and automation than many of the competitive products they evaluated while taking full advantage of the speed and scale of an integrated platform. This win is a further testament to the investments we're making to expand our federal business. And we are also very pleased with the turnout and encouraging feedback from many large government agencies at our first public sector cybersecurity conference that we held in May.

Sumedh Thakar: In a second new high six-figure customer win, a hyper-growth cloud-native SaaS business standardizing Qualys' enterprise-first platform, this company's security team struggled with managing multiple consoles, lack of integration, complex workflows, missed detections, and extended remediation times, which restricted their ability to protect themselves. This customer is now consolidating on the Qualys enterprise-first management platform, replacing several competing vendors through a natively-integrated multiproduct solution, including cybersecurity asset management with EASM, VMDR with TrueRisk, patch management, and our total cloud CNAP solution.

Sumedh Thakar: Now, with a comprehensive multi-sensor solution, single user interface, and single platform, they have complete visibility and automated remediation across their endpoints and multi-cloud environment. With seamlessly integrated solutions delivered natively on our platform to solve modern security challenges, more and more Qualys customers are beginning to understand how cybersecurity transformation drives better security outcomes, saves time, and costs less. As a result, customers spending $500,000 or more with us in Q2 grew 18% from a year ago to $199.

Sumedh Thakar: Beyond these wins, we are also increasingly gaining leverage from our partner ecosystem. Our pipeline of business opportunities with partners continues to grow, and our partner-led win rates increased again in Q2. As our market perception and brand awareness continue to strengthen, we anticipate partner integration with our platform will continue to increase, further strengthening our strategic position, expanding our ecosystem, and broadening our reach. In summary, our rapid innovation engine underscores our growing thought leadership and the value proposition we deliver to customers seeking to transform, consolidate, and fortify their security posture.

Sumedh Thakar: Given the large market opportunity in front of us and multiple growth drivers in our business, we anticipate that we can grow at scale long-term, generate cash, and invest in key initiatives that will further extend the gap between Qualys and the competition. With that, I'll turn the call over to Jumi to discuss in more detail our second quarter results and outlook for the third quarter and full year 2024.

Jumi: Thanks, Sumedh, and good afternoon. Before I start, I'd like to note that, except for revenues, all financial figures are non-GAAP, and growth rates are based on comparison to the prior year period, unless stated otherwise. Turning to second quarter results, revenues grew 8% to $148.7 million, with Channel continuing to increase its contribution, making up 46% of total revenues compared to 43% a year ago. As a result of our continued commitment to leverage our partner ecosystem to drive growth, we were able to grow revenues from channel partners by 17%, outpacing Direct, which grew 2%. By Geo, 14% growth outside the U.S. was ahead of our domestic business, which grew 5%.

Jumi: U.S. and international revenue mixed with 58% and 42% respectively. As for Calculated Current Billings, we would like to note that our Q2 Calculated Current Billings were negatively impacted by the sunset of our embedded solution for Microsoft Defender as of May 1. Earlier this year, we announced that we would be retiring our integration with Microsoft Defender and transitioning to a BYOL model.

Jumi: Since this went into effect in Q2, we have been fielding inbound calls from former Qualys and Microsoft Defender users and working closely with them to ensure that they understand the value of our cloud security solution, Total Cloud CNAP. Normalized for this change, our calculated current billing growth would have been 1%. In Q2, with a continued challenging spend environment resulting in lower performance on upsell, our net dollar expansion rate declined to 102% from 104% last quarter.

Jumi: Conversely, we continue to see strong returns on our new business initiative and achieve double-digit new bookings growth for the fourth consecutive quarter. With this momentum and new customer bookings growth, we believe we're building a stronger foundation to drive expansion and share gains over time. In terms of product contribution to booking, patch management and cybersecurity asset management combined made up 13% of LTM bookings and 22% of LTM new bookings in Q2. Cloud Security Solutions, Total Cloud, and DNAT met at 4% of LTM bookings.

Speaker Change: In terms of product contribution to bookings patch management, and cyber security asset management combined made up 13% of LTM bookings and 22% of LTM new bookings in Q2.

Cause the Kitty solution total crowd do not meet our 4% of LTM bookings.

Jumi: Turning to profitability, reflecting our scalable and sustainable business model, adjusted EBITDA in Q2 was $69.9 million, representing a 47% margin compared to a 48% margin a year ago. Operating expenses in Q2 increased by 10% to $59 million, primarily driven by a 22% increase in sales and marketing investments aimed at capturing the market opportunities in front of us. As we continue to increase our investment intensity and focus on sales and marketing enablement, customer success, and productivity, we believe we will be able to drive wallet share and long-term return.

Speaker Change: Turning to profitability.

Speaker Change: Reflecting our scalable and sustainable business model adjusted EBITDA in Q2 was $69 9 million, representing a 47% margin compared to a 48% margin a year ago.

Speaker Change: Operating expenses in Q2 increased by 10% to 15 9 million, primarily driven by a 22% increase in sales and marketing investments.

Speaker Change: Aimed at capturing the market opportunities in front of us.

Speaker Change: As we continue to increase our investment intensity and focus on sales and marketing, enabling customer success and productivity. We believe we will be able to drive wallet share a long term return.

Speaker Change: Okay.

Speaker Change: EPS for the second quarter of 2024 with 1.5 to U.

Speaker Change: And our free cash flow was $48 8 million, representing a 33% margin compared to 37% in the prior year.

Jumi: In Q2, we continue to invest the cash we generate from operations back into Qualys, including $1 million on capital expenditures and $35 million to repurchase 233,000 of our outstanding shares. For the full year 2024, we are now expecting our revenues to be in the range of $597.5 to $601.5 million, which represents a growth rate of 8%.

Speaker Change: In Q2, we continue to invest the cash we generated from operations talking to college, including 1 million on capital expenditures and $35 million to repurchase 233000 of our outstanding shares.

Speaker Change: After the end of the quarter, we had $230 7 million remaining in our share repurchase program.

Speaker Change: Yeah.

Speaker Change: With that let's turn to guidance starting with revenue for.

For the full year 2024, we are now expecting our revenue to be in the range of 597.5 to $601 5 million, which represents a growth rate of 8%.

Speaker Change: This compares to revenue guidance of $6 1.5 to $6 $8 5 million last quarter.

Speaker Change: For the third quarter of 2024, we expect revenues to be in the range of 149.8 to 151.8 million, representing a growth rate of 5% to 7%.

Speaker Change: This guidance assumes continued deal scrutiny and no improvement to our net dollar expansion rate through the back half of this year.

Speaker Change: Shifting to profitability guidance for the full year 2024, we expect EBITDA margin of 43% to 44%.

Speaker Change: Our free cash flow margin in the mid to high 30.

Speaker Change: We expect full year EPS to be in the range of $5 four six to 562 up from the prior range of 5.06 to $5 three zero.

Speaker Change: For the third quarter of 2024, we expect EPS to be in the range of 1.28 to 1.36.

Speaker Change: Our planned capital expenditures in 2024 are expected to be in the range of 12 to 16 million for the third quarter of 2024 in the range of 47 million.

Speaker Change: Yes.

Speaker Change: Consistent with prior guidance for the remainder of 2024, we intend to align our product and marketing investments to focus on specific initiatives aimed at driving more pipeline supporting sales, including enhancing our partner program and expanding our federal vertical.

Speaker Change: As a percentage of revenues, we expect to prioritize and increasing investments in sales and marketing as well as related support function system and people with more modest increases in engineering and G&A.

Speaker Change: With Us Tonight, and I would be happy to answer any of your questions.

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to pronounce torturing a question. Please press star one again, please standby, while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of John Slash crime of choice. Your line is now open.

Speaker Change: Hey, Thank you very much for taking the question and congrats Jimmy really great growth internationally, and I guess I might as well can you talk about you know what group International gross and then maybe Jimmy if you can talk about more specifics about some of the investments that youre, making in sales and marketing going forward.

Speaker Change: That would be very helpful. Thank you so much.

Speaker Change: Okay.

Jimmy: Yeah happy to that international grid, we're seeing a stronger demand in that region relative to the U I would that's a U S growth rate is impacted by the Microsoft defender and so that's been a headwind on the U S business as well as the direct business. So we just share the growth rate for them in terms of the sales and marketing investment.

Speaker Change: We feel like it has been doing really well under a higher return on ROI. It's from the investments that we've made on the partner side as you can tell our initiatives when it comes to enhancing our partner relationships and really working with them to revamp how we go to market and further incentivize our partners to understand.

Speaker Change: Why it makes sense for them too.

Speaker Change: Propose and put college as a vendor of choice has been resonating and so for US. It's number one partner and then number two of course, primarily our investment up to it's related to that head count so either targeting and continuing to grow the sales and marketing head count by double digits in 2020 for it and we are on track.

Speaker Change: To meet that school, where were positive with the momentum that we're seeing in the business today.

Andrew: Andrew I'll add to that is you know why do we heard out of absolute or for Q2.

Andrew: I would invite friends I've ever been making in the last few quarters have really given us.

Speaker Change: A lot of positive things that we're excited about as an example, with our new business growing double digits because of.

Julie: The way that we're enabling our sales team because of the way as Julie said, we're investing with our partners and the partners pipeline is increasing our win rates with our partners are increasing as well and pretty excited about our in restaurant that we started last year in the federal space, which again.

Speaker Change: I'm getting a six figure new net new business deal in the federal.

Speaker Change: <unk> for us is exciting.

Speaker Change: It also highlights the opportunity that we have on the federal side.

Speaker Change: And including within our existing customer base as well as our investments in terms of them, taking our learnings from what we have been able to be successful with our new business being able to train our sales teams as well to be more of hunters to enable them in a much better way et cetera has led to.

Speaker Change: Customers were spending $500000 or more with us also growing 18%.

Speaker Change: From last year or in the same quarter.

Speaker Change: So those are you know a lot about things that our investments are leading to positive trends I think earlier when you see an opportunity.

Speaker Change: In this macro environment that we have and the scrutiny that we face from our customers with the aim to really be able to get our sales team to.

Speaker Change: Our product and marketing teams to align breakout on our sales team to execute better on the upsell opportunities that that will come with a new way that customers are looking at their security spend and focusing on risk management and really being able to spend their money from cyber security, where the risk is and that's the big question on a lot of people are not where they will go I'm, sorry, where is your risk.

Speaker Change: Exactly.

Speaker Change: What our IDIOM platform has been built.

Speaker Change: Thank you so much I appreciate it.

Speaker Change: Yeah.

Operator: Thank you. We'll move on to our next question.

Speaker Change: Thank you our next question.

Speaker Change: Yeah.

Speaker Change: Our next question comes from the line of <unk> of Baird. Your line is now open.

<unk>: Hey, guys. Thanks for taking my question so.

Speaker Change: So Jimmy you mentioned of course, the channel revenue.

Speaker Change: Making up 46 per sandwiches.

Speaker Change: Really picking up nicely.

Speaker Change: So can you just help provide some more details on.

Speaker Change: Overall, I would say a breakdown of the contribution of all different types of work or the possible.

Speaker Change: Of course, you highlighted how you guys are trying to partner with us or the cloud provider than market places like AWS or azure or Rocco just just curious if you can provide us some more color in terms of those drivers and then I'll follow up.

Speaker Change: Yes.

Speaker Change: Breaking down that way, but I can tell you that right now.

Speaker Change: Our channel partners, our resellers are definitely working very closely with us and really bring us a lot of the opportunities because they see the comprehensive set of capabilities that we can very rapidly bring to their customers who are currently in the market have a project and have a budget to execute on that so they are sort of the first folks who are working closely with us in the last quarter, we released.

Speaker Change: Our MSP borders so we're seeing traction.

Speaker Change: Service providers, who are continuing to add patch management as a service because just having VM scanning of the service is not a big differentiator and so more and more of them are leveraging flawless for now providing perhaps management as a service and now we're starting to see that same thing from partners on being able to provide services around cloud security deployments as well.

Speaker Change: And we have a really nice strong partnership with OCI on budget TM side, but as well as.

Speaker Change: Working with AWS on the ADP credits with joint customers are some of the areas that we are really seeing good momentum and we don't break it down exactly like that but that should give you a high level sort of view of where we're seeing success with buttons.

Speaker Change: Got it that's very helpful and Julie about the quick follow up.

Julie: Of course.

Julie: So maybe you highlighted the download manav enterprise risk platform kind of helping.

Speaker Change: How are you monetizing that offering just just curious like given on the on the other side. There is aggressive overall pricing in the core we think we are hearing from from other players kind of perhaps undercutting pricing there.

Speaker Change: Just curious like how.

Speaker Change: How are you able to show the upside on the gross margins as well and in this current environment and Kenny will provide us some some corner of insights into.

Kenny: Into that and expected impact of the net.

Speaker Change: Net dollar retention rates as well I appreciate it.

Kenny: Yeah in terms of the gross margin we were very pleased to have posted 84% gross margin up from 82% last year, and then even 83% last quarter, primarily due to our optimization when it comes to our data centers. In addition to the fully depreciated asset that we're seeing right now as you know we have both the.

Julie: Hardware as well as on the cloud asset and we're just leveraging and optimizing to make sure that we're getting the margins and we think makes sense for our business today.

Julie: And then on the <unk> question that you asked look I think we've talked about this for the last many quarters that we.

Speaker Change: <unk> is evolving and customers are really looking to focus on remediation as well and so even when they are looking at scan only solutions that only give them more.

Speaker Change: Things since Cvs to fix when they are looking to optimize their budget for an outcome, they're looking at how to balance the scanning with patch management and that's why our tourist eliminate capably.

Speaker Change: Everybody that we came out with giving customers more solutions. They can buy from us in terms of being able to mitigate the risk is the most important because.

Speaker Change: Today's hybrid budgets are have been tied in the questions that cyber security professionals are getting hospitals, where what's the outcome what how much risk are you introducing and if youre not able to articulate the risk and how much risk you're actually reducing that's really when the phase <unk>.

Julie: And then just with <unk> you get an increase in this budget before not focusing our reputation and so just in the in the first half of this year.

Speaker Change: Getting $45 million purchase deployed by quality agents really highlights that VM per day is about.

Speaker Change: Liberty assessment, but also combining with battery management and ability to mitigate the risk and we see that in the numbers today with our patch management asset management.

Speaker Change: Net new bookings customers when they are coming to us and why we are seeing good success with our new businesses, we offer a unique differentiator in the market. When people are looking to change their scanning solution, because we're offering them patrimony when combined with the scanning solution and Thats really where.

Speaker Change: <unk> management has been evolving and this is nothing new that is why we invest or a few quarters ago, but really focus on the emulation aspect of one Liberty management because.

Speaker Change: There is no <unk>, if you don't actually fix things.

Operator: Got it. Super helpful. Thanks, Sumedh.

Speaker Change: Got it Super helpful. Thanks, Julie.

Operator: Thank you. One more question. Our next question comes from the line of Matt Hedberg of RBC. Your line is now open. Okay.

Speaker Change: Yeah.

Speaker Change: Just one last question.

Speaker Change: Our next question comes from the line of Matt Hedberg of RBC. Your line is now open.

Matt Hedberg: Great. Thanks for taking my questions guys.

Matt Hedberg: It sounds like <unk> down to one or two I think from 104 last quarter I'm curious does that do you feel like thats starting to bottom now.

Speaker Change: Do you think you're perhaps in the second half with a pipeline or or other drivers.

Speaker Change: We could see a rebound there.

Speaker Change: I think it was we work with our customers we're definitely facing.

Speaker Change: <unk> on their own when they have to do additional spend with wallets. So that's where we are working women. This leading to a lot of weight engagements and thats, where we are leading to the more conversations how they optimize their spend how they can balance their spending the scanning side with the spend on the patch management and asset management side, and that's where you see.

Speaker Change: In some cases, they optimize right now for getting some additional solutions from callers.

Speaker Change: Where they can grow in the future.

Speaker Change: I think we will have to.

Speaker Change: Continue to see in the next quarter or how these conversations that we're having this quarter that translate into additional upsells for the customers because as you know in this current environment is a little bit harder to.

Speaker Change: With the scrutineer that the face to know what does the timing of when they will adopt these additional solutions, especially with cloud security et cetera. So we're pretty excited about the opportunity that we see I think.

Speaker Change: You have to watch the next couple of quarters on how this rate.

Speaker Change: Evolves over long term definitely feel like we have.

Speaker Change: All the goods that customers are existing customers are looking to enlist additional lane, which is in my mind Dispatch management cloud security overall sort of risk management and more importantly, now questions coming up about AI AI security and so our new solution that we announced that we're going to get out in September which is really helping customers identify.

Speaker Change: All of that AI LMS.

Speaker Change: Looking at the risk of those are going to be very positive those conversations how they lead into additional upsells on the timing of that is something that we're watching very closely.

Operator: That's great. That's super helpful. And then, in terms of the Microsoft Defender headwinds, can you remind us again when those will abate officially and not become a drag on billings?

Speaker Change: That's great that's Super helpful and then.

Speaker Change: In terms of.

Speaker Change: The Microsoft defender headwinds can you remind us again, when those will abate officially.

Speaker Change: Not become a drag on billings.

Speaker Change: Yes, I think that was effective may <unk>. So it hit us for the first time in Q2, so the biggest impact that.

Speaker Change: We expect to see it in Q2.

Speaker Change: In other words then.

Speaker Change: What youre, saying you mean is that.

Speaker Change: Okay.

Speaker Change: It's not really as big of a headwind in Q3 and Q4 or.

Speaker Change: Just maybe just think about that headwind as we met a couple of quarters.

Speaker Change: That's right that's right, it's not going to be material enough for us to normalizes in Q3, and Q4 Q2 is really the biggest quarter based on the billing schedule and that's why when you take a look at our calculated current billings, a 2% decline normalized for those if it hadn't happened and then it would have been approximately 1%.

Speaker Change: Got it Super helpful. Thanks, guys.

Speaker Change: Thank you our next question.

Operator: Our next question comes from the line of Kingston Green of Kennecourt, Geneway. Your line is now open.

Speaker Change: Our next question comes from the line of Kingston Green of Canaccord Genuity. Your line is now open.

Operator: Hi, thank you. So you've done a remarkable job building out the platform in the past couple years. I just want to ask broadly, how would you describe VM demand at the moment? How cyclical is it? How secular is it? And then why do you view VM as foundational? And then how can you leverage that to expand spend within existing customers?

Speaker Change: Yeah.

Speaker Change: Alright. Thank you so you've done a remarkable job building out the platform in the past couple of years.

Kingston Green: I just wanted to ask broadly how would you describe VM demand at the moment how cyclical is this how secular is this and then why do you view the foundational and then how can you leverage that to expand spend with existing customers. Thanks.

Sumedh Thakar: Yeah, great question. I see that VM continues to be very foundational for any risk management exercise that any organization has. You know, every single cybersecurity standard out there requires regular scanning and patching for VM. I think, as we have talked about, and I have talked about this in a few earnings calls in the past as well, VM is evolving. And so while the overall focus for customers remains on VM, within VM, customers are really focusing on how do we get an outcome of actually being able to reduce the risk by fixing the things that are being discovered by VM.

Speaker Change: Yeah, Great question I see VM continues to be very foundational for any risk management exercise that any organization has if you look at every single cyber security standard out there requires regular scanning and patching for VM I think as we have talked about and I have talked about this in few earnings calls in the past as well as at <unk>.

Speaker Change: Walgreens and so while the overall focus on customers who remains on the BN.

Speaker Change: <unk>, it's really customers are focusing on how do we get an outcome of actually being able to reduce the risk by fixing the things that were being discord by IBM and so what we see with our customer base is that they are with a tight budgets that they have and the scrutiny that they're putting on the conversations they are actually looking to balance between.

Sumedh Thakar: And so what we see with our customer base is that, with the tight budgets that they have and the scrutiny that they're putting on the conversations, they are actually looking to balance between how much they focus on scanning and what's the point of scanning everything if they're not able to actually remediate stuff. And so how do they balance their investment in the VM sector between scanning and patch management and also asset management, as well as how do you expand scanning into the cloud environment?

Speaker Change: How much they.

Speaker Change: Focus on scanning and what's the point of scanning everything and they are not able to actually the immediate stuff and so how do they balance the that investment in the OEM sector between scanning and patch management and also asset management as well as how do you explain the scanning into the cloud environment and so those are the conversations that we hear a lot more I think the.

Sumedh Thakar: And so those are the conversations that we hear a lot more about. I think VM as a key part of risk management for the organization continues to be a key priority for all the customers that we talk to. So I think we, as they are working with tight budgets right now and looking to balance that, I think we see this as a good opportunity for us because it is giving us the opportunity to get our additional products like patch management, cybersecurity, asset management, seeded in with these customers as they're buying smaller amounts. But in the future, this could lead them to cover more of the estate that they currently have with us through scanning.

Speaker Change: The VM.

Speaker Change: A key part of risk management for the organization continues to be a key priority for all the customers that we talked about so I think we as they are working with tight budgets right now and looking to balance that I think we see this as a good opportunity for us because it is giving us opportunity to get our additional products like Weizmann measurements of <unk> asset management.

Speaker Change: Seeded in with these customers, thereby buying smaller amounts, but in the future of this quarter lead them to cover more of their stake that they currently have with us with scanning.

Operator: Great, that's that's well said. And then there is one more.

Speaker Change: Great. That's all set and then one more so I wanted to just talk about dynamics, one selling cloud security, whether thats total cloud sooner or something individual IC SPN.

Sumedh Thakar: So I want to just talk about dynamics when selling cloud security, whether that's total cloud CNAP or something individual like CSPM. Post CrowdStrike outage, vendor concentration has been widely discussed, rightly or wrongly. You know, so big picture, how do you think the outage will play out specifically in cloud security, given how nascent the space is and, you know, how much of an opportunity you see?

Speaker Change: Post crowd strike outage vendor concentration has been widely discussed rightly or wrongly.

Speaker Change: So big picture, how do you think the outage will play out specifically in cloud security, given how Nathan with spaces and how much of an opportunity you see.

Sumedh Thakar: Look, I think the questions customers are asking are obviously valid in terms of how do you balance the risk of the security solution being deployed itself versus the risk it is mitigating, right? And I think the advantage, I think, for Qualys is that we are not concentrated on the agent as being the foundational way to deliver a service, a security service, to the customer like some of the other providers where, you know, the agent is the main and the only way that they can deliver services.

Speaker Change: Look I think the question is customers are asking or obviously valid in terms of how they balance the risk of the security solution that being deployed itself versus the risk of different mitigating right and I think the.

Speaker Change: <unk> for the call is that we're not concentrated on the Asia and that's been the foundational way to deliver service security service to the customer likes some of the other provides us with the <unk>.

Speaker Change: <unk> is the main and the only way that they can then with services, we have a pretty comprehensive capability of delivering security services that match, the customers' operational appetite of deploying different ways to assess risk and so we have Adrian Atlas Scabbing. The snapshot scanning we have agent based scanning offsite scudding. So there's many different ways and so what.

Sumedh Thakar: We have a pretty comprehensive capability of delivering security services that match the customer's operational appetite for deploying different ways to assess risk. And so we have agent-less scanning, we have snapshot scanning, we have agent-based scanning, we have offsite scanning, so there are many different ways. And so what we see with customers, obviously, we get a lot of questions around, you know, what are the best ways that Qualys is, of course, ensuring that we are testing, we are very confident about the way we roll out our updates for different technologies, but also the fact that they can actually, with their licensing, balance their risk of where they want to deploy agent-less scanning versus where they want to deploy agent-based scanning.

Sumedh Thakar: And we give those options to them, which they are pretty happy about, because they don't have to really take that big risk of only having an agent and that's the only way to deliver the service. And so in the cloud, I think the advantage is that you can do a good amount of assessment of CSP by just using APIs without deploying a particular way of scanning. And so this is why, about a year ago, when we released our FlexScan, which is a part of our TokenCloud CNAP solution, the license actually includes the ability for customers to do four types of different scans on the same asset, and they can pick and choose.

Speaker Change: We see with customers, we obviously got a lot of questions asked around what.

Speaker Change: What are the best ways that while this is of course ensuring that.

Speaker Change: We are.

Speaker Change: Testing, we are very confident.

Speaker Change: Confident about the way we roll out our update for different technologies, but also the fact that they can't actually licensing balanced there.

Speaker Change: The risk of where they wanted to deploy.

Adrian: Adrian let scanning versus where they wanted to deploy agent based scanning and we give those options to them, which they are pretty happy about that they don't have to really take that big risk of only having an agent and that's the only way to deliver the service and so in cloud I think the advantage is that you can do a good amount of assessment with CSB I'm, just using Apis without deploying.

Speaker Change: Particular way of scanning and so.

Speaker Change: This is why about a year ago, when we released our flex scan, which is a part of our Coca Cola Sin <unk> solution.

Speaker Change: <unk> actually includes the ability for the customers to do four types of different scans on the same asset and they can pick and choose so they want they can do in API assessment with absolutely nothing installed on the workloads they can use a.

Sumedh Thakar: So if they want, they can do an API assessment with absolutely nothing installed. On the workload, they can use an agent that is installed automatically. They can use an automatic network scanner in that environment, or they can use a snapshot scan of an image that is not actually live. So I do see that in cloud security, questions will come up. It's not so much about, in my mind, vendor concentration.

Speaker Change: Agents to be installed automatically they can use an automatic network scanner.

Speaker Change: That environment or they can use a snapshot scan of image that does not actually life.

Speaker Change: So I do see that in cloud security. We're in the questions will come up it's not so much about in my mind the vendor concentration it's really about.

Sumedh Thakar: It's really about the sensor concentration, in my mind, which is, is your vendor providing you with multiple different ways to assess your environment by leveraging basically the different types of risk profiles that you might have on different apps?

Speaker Change: The sensor concentration in my mind, which is is your vendor providing you multiple different ways to assess your environment in leveraging basically the different types of risk profile that you might have on different assets.

Operator: All right, agreed with that. Thanks again and congrats. Thank you very much.

Speaker Change: Alright, I agreed with that thanks, again and congrats.

Speaker Change: Of course.

Operator: Thank you. We'll move on to our next question. Our next question comes from Lionel Yun Kim of Luke Capital. Your line is now open.

Mr <unk>: Thank you Mr <unk>.

Speaker Change: Question.

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Our next question comes from the line of Yung Kim <unk> capital. Your line is now open.

Sumedh Thakar: Okay, great. Sumedh, on the Microsoft Defender headwind, I am assuming you planned for that. Clearly, there was some execution issue that you did not anticipate. If you can elaborate on that a bit, and then also, what are the products that were directly affected by the lower attach rate related to Microsoft Defender?

Speaker Change: Okay great.

Matt Hedberg: So Matt.

Matt Hedberg: On the Microsoft defender headwind.

Speaker Change: Im assuming you plan for that clearly there was some execution issues that you did not anticipate.

Yung Kim: If you can elaborate on that a bit and then also what are the products got it more directly affected by the lora attach rate related to Microsoft defender.

Sumedh Thakar: Microsoft was leveraging, you know, our very basic sort of scan-only legacy capability, right, which was not VMDR, so those customers, and we did not have access to those customers to be able to work with them to upsell them on all the other things that our current customers upsell to, whether it's cybersecurity asset management, whether it's patch management, whether it's cloud assessment, or now with the new AI scanning that we are releasing So, for us, you know, it was customers in that environment that only used scan-only solutions from us. And, as we all see right now, what's happening in the market is really customers are looking for a more holistic, comprehensive outcome of their VM solution, which includes actual fixing and reduction of risk and not just more scanning.

Speaker Change: Microsoft was leveraging.

Speaker Change: Our very basic sort of scandal, Lee legacy capability, right, which was that it was not to be MTR. So.

Speaker Change: Those customers that we did not have access to those customers to be able to work with them to upsell them to all the other things that our current customers to upsell to whether it's cyber security ethical management, whether it's a patch management wherever it is.

Speaker Change: Total cloud assessment or now with the new.

Speaker Change: Scanning that we are using so for us.

Speaker Change: Was customers in that environment, we're only using the scan only solution from us and as we all see right now what's happening in the market is really customers are looking for a more holistic comprehensive outcome of their VM solution, which includes actual fixing introduction of risk and not just more scanning and so.

Sumedh Thakar: And so, that's really where we see the opportunity. Customers don't just want more CVE reporting. They want a way to say, these are the things you should fix that will reduce the risk, and then a solution that can fix those. And so, that's where we see the opportunity. If these customers come to us, we can focus on helping them see the bigger picture of how they can reduce the risk from their vulnerabilities rather than just, you know, keep looking at them and not doing anything about them.

Speaker Change: That's really where we see the opportunity is customers don't just want more CBE reporting they wanted to wait to say. This is the these are the things you should fix that will reduce the risk and then a solution that can fix that and so that's where we see the opportunity. If these customers come to us we can focus on helping them see.

Speaker Change: Bigger picture of how they can reduce the risk from the vulnerabilities that rather than just you know.

Speaker Change: Keep keep looking at them and not doing anything about them.

Jumi: Okay, great. Thanks for that answer. Jumi, anything that we should be aware of in regard to pricing, especially with the second half renewal season coming up?

Speaker Change: Okay, great. Thanks for that answer Julien.

Speaker Change: Anything that we should be aware of in regard to pricing, especially with second half renewal season coming up.

Speaker Change: Yeah.

Jumi: No change from our perspective, from a competitive standpoint, and no change from our own pricing.

Julien: No change from our perspective from a competitiveness standpoint, and there are no changes from our own pricing.

Operator: Okay, great. Thank you so much.

Speaker Change: Okay, great. Thank you so much.

Speaker Change: Okay.

Operator: Thank you one moment for the next question. Our next question comes from the line of Jonathan Ho of William Blair. Your line is now open.

Speaker Change: Thank you Juan for next question.

Speaker Change: Our next question comes from the line of Jonathan Ho of William Blair. Your line is now open.

Jonathan Ho: Hi, good afternoon. I just wanted to maybe dig in a little bit more in terms of understanding the need to balance profitability with some of the investments that you've been making on the channel side. Can you give us a sense of whether the, you know, initial investments have sort of paid off the way that you've expected? I know it takes a little bit of time to translate into, you know, billings, and ultimately to revenue, but, you know, or has it been disappointing? Has it been, you know, sort of, yeah, just want to get a sense of how you're thinking about that?

Jonathan Ho: Hi, Good afternoon, I just wanted to.

Jonathan Ho: Maybe digging a little bit more in terms of understanding the need to balance profitability with some of the investments that you've been making on the channel side can you give us a sense of how did the <unk>.

Speaker Change: Initial investments sort of paid off the way that you've expected I know it takes over time to translate into billings and ultimately the revenue, but or has it been disappointing has it been sort of just wanted to get a sense of how youre thinking about that.

Sumedh Thakar: Great question, Jonathan. Look, when we embarked on this journey a couple years ago, really, we've been focusing on a few different things, and some of them sometimes work, and some of them don't. But overall, like I said, we are pleased with the investment really bringing us that improvement in four straight quarters of double-digit growth for new business, which we have not had as much in the past, and then just looking at opportunities coming from partners, looking at partner opportunities having better close rates, looking at continuing our $500,000-plus customers actually increasing in this tough environment by 18%.

Speaker Change: Great question, Jonathan look when we embarked on this journey a couple of years ago really we have been focusing on a few different things and.

Speaker Change: Some of them, sometimes where some of them don't but overall like I said, we are pleased with the investments really bringing us.

Speaker Change: Is that an improvement in our fourth straight quarter of double digit growth for new business, which if you have not had as much in the past and then just looking at opportunities coming from partners looking at partner opportunities, having better close rates looking at continuing our $500 plus customers.

Speaker Change: Actually increase in this tough environment by 18%.

Sumedh Thakar: So I do think that different things that we have done in terms of training our new business sales reps in terms of investment channels have brought us those sorts of opportunities. And now, in the coming quarters, we need to focus on working through those opportunities, closing through those opportunities, and continuing to invest additionally with our channel partners. But like we said, we are in a fairly unique position this year to continue to actually invest in our sales and marketing because we see the opportunity when most companies are really cutting down on their sales and marketing investment.

Speaker Change: So I do think that.

Speaker Change: Different things that we have done in terms of training, our new business sales.

Speaker Change: Sales reps in terms of into essentially channel.

Speaker Change: US those sort of opportunities and now in the further quarters, we need to focus on working through load upwardly chimneys clothing through those opportunities continuing to invest Additionally, with our channel partners, but like we said.

Speaker Change: Sure.

Speaker Change: In a fairly unique position this year to continue directly listing of our sales and marketing again, because we see the opportunity than most other companies are really cutting down on their sales marketing investment and I think that's really what we look for in the fourth quarter of this stream improvements in our upsell rates and very similar to what we're seeing with our new business.

Sumedh Thakar: And I think that's really what we look for in the next quarters, improvements in our upsell rates, similar to what we're seeing with our new business, and really continuing our investment on the federal side and also the investment we have made in being FedRAMP moderate. But more importantly, we're just really, really anticipating and waiting for the FedRAMP High certification, which we are looking forward to getting at the end of this year. And I think that investment over the next couple of years should give us a really significant advantage because there's no other FedRAMP High platform that has so many different capabilities and modules that go in together with that.

Speaker Change: And really kind of getting our investment on the federal side like I said just getting.

Speaker Change: A good six figure deal in the federal net new business is on the federal side.

Speaker Change: So very promising for us because of the investments, we're making with the team that we have the marketing investment we made this year.

Speaker Change: Actually host.

Speaker Change: <unk>.

Speaker Change: Conference just specifically for federal which are the first one and then also the investment we have made in being federal moderate but more importantly, we are just really really anticipating and waiting for the fed ramp certification, which we are looking forward to getting end of this year and I think that investment over the next couple of years should give us some really significant add one base because there is no.

Speaker Change: Other fed ramp high platform that has so many so.

Speaker Change: So many different capabilities and modules that going to be.

Sumedh Thakar: And so I think there are certain – these are some of the things that have worked and continue to work, and we're looking now to take the learnings from the new business improvements and apply those to our existing business so that our post-sales farmers learn how to do a little bit of hunting and be able to find some of these deals in a tough macro environment and be able to bring additional opportunities by working closely with the partner side on the upsell, just as the way we are working on the partner with the partners on the new business as well.

Speaker Change: With that and so I think there are certain.

Speaker Change: These are some other things that have worked and continue to work and we're looking now to take the learnings from the new business improvements and apply those to our existing business so that our wholesales.

Speaker Change: Farmers learn how to do a little bit of hunting and be able to find some of these deals in a tough macro environment and enviable to refurbish.

Speaker Change: There are opportunities we are working closely with the partner side on the upsell.

Speaker Change: As the way we are working on the partner with the partners on the new business as well.

Operator: Excellent. Just a quick follow-up. So as you take on additional Chief Product Officer responsibilities, can you help us understand where you see the biggest opportunities? Is this narrowing of the product focus? Is this approaching new areas? I'm just trying to understand how you think about sort of taking on these additional responsibilities and what you see as the opportunity. Thank you.

Speaker Change: Excellent.

Speaker Change: Just a quick follow up so as you take on additional chief product officer responsibilities.

Speaker Change: Help us understand where you see the biggest opportunities is this narrowing of the product focus as you know approaching new areas I'm just trying to understand.

Speaker Change: How you think about sort of.

Speaker Change: Youre taking on these additional.

Speaker Change: Sponsored abilities and what you see as that opportunity. Thank you.

Sumedh Thakar: Yeah, look, you guys, you know my history. It's a little bit hard to get the chief product officer out of me. It's always there somewhere.

Speaker Change: Yes look at any of you guys. You know my history, it's a little bit hard to get the chief product officer out of them, even it's always there somewhere but if you look we for US we have always been innovation, driven really listening closely to our customers and bringing.

Sumedh Thakar: But for us, we have always been innovation-driven, really listening closely to our customers and bringing solutions to the market. For example, we do patch management. Those are all about operational efficiency, which is what the security teams are looking at. And so, as I look forward to the next couple of years, if you look at the current environment, the challenges cybersecurity professionals are facing, when you look at the almost flat budget increase for cyber overall, it is because of not being able to articulate the question, well, how much risk is cyber bringing to our business?

Speaker Change: Solutions to market like we do patch management goes all of our operational efficiency, which is let's say.

Speaker Change: The security teams are looking at and so as I look forward to the next couple of years. There. If you look at the current environment. The challenges of cyber security professionals are facing when you look at the.

Speaker Change: Almost flat budget increase in cyber overall.

Speaker Change: Is because of not being able to articulate the question well how much risk is cyber bringing door business and so because without that you cannot really if you don't know how much risk you have you can articulate that risk in dollar value you cannot decide on exactly how much do you spend which is the appropriate amount of take down that risk.

Sumedh Thakar: And so, without that, you cannot really, if you don't know how much risk you have, you cannot articulate that risk in dollar value. You cannot decide on exactly how much you should spend, which is the appropriate amount to take down that risk. And that's really what I'm excited about with our ATM platform that we're coming out with and some of our beta partners that are there. It's not that there are multiple different security controls we can implement to reduce risk, but let's first focus on being able to identify and articulate the risk in dollar terms to the business.

Speaker Change: That's really what I'm excited about with our ATM platform that we're coming out with some of other beta partners that are there it's not that our multiple different security controls are going to implement that reduce risk, but let's first focus on being able to identify being able to articulate the risk in dollar terms to the business and from there you can decide which are the most effective security controls.

Sumedh Thakar: And from there, you can decide which are the most effective security controls that you can put in place to bring down that risk. And it may not be the exact same control in every environment. In some cases, maybe zero trust is a better security investment, given how much risk you have, versus in other cases, maybe a better patch management solution is enough to reduce the risk.

Speaker Change: That you can put in place to bring down that risk and it may not be the exact same controlling every environment and in some cases, maybe a zero trust is a better security investment given how much of the skew higher versus in other cases, maybe a bigger patch management solution is enough to reduce the risk and so as I look at from a product perspective.

Sumedh Thakar: And so, as I look at it from a product perspective, first, I'm glad that Dino has built a good team, and they're taking more and more focus on the GTM side, so it gives me an additional opportunity to focus and work with our product and marketing teams to not only look at the future products that we are coming up with, especially on risk management and risk articulation, but also, in the short term, the opportunity, given what Being able to align my product management and product marketing teams together so we can execute better on marketing or total cloud solutions and be able to create additional opportunities. So some of those things are really what I'm looking forward to as I look into this chip product officer role. Great, thank you.

Speaker Change: First I'm glad that Dino and political team and they are taking more and more focus on the GTS side. So it gives me an additional opportunity to focus and work with our product and marketing teams to not only look at the future products that we're coming up with especially on risk management risk the condition, but also in the short term the opportunity.

Speaker Change: Given what we are seeing with our total cloud solution.

Speaker Change: A solution the conversations that we're having with customers.

Speaker Change: Being able to align my product management and product marketing teams together. So we can execute better on marketing our programs, our solutions and being able to create additional opportunities. So some of those things are really what im looking forward.

Speaker Change: Welcome to this two broke over several years.

Speaker Change: Great. Thank you.

Operator: Thank you one moment for our next question. Our next question comes from the line of Rudy Kessinger of D.A. Davidson. Your line is now open.

Speaker Change: Thank you William for next question.

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Our next question comes from the line of Woody Kissinger of D. A Davidson your line is now open.

Rudy Kessinger: Hey guys, thanks for taking my question. I guess it's just on the tough upsell environment. You know, your net expansion rate's down to 102%, but it's almost down to basically no upsell. I guess, are you seeing contractions with... You know, any sizable portion of your customer base, not customers who churn but customers who are staying with you? Are they reducing their footprint? Or, I guess, just where could that bottom? Obviously, we would think it would bottom at 100%, but it could potentially go lower than that.

Woody Kissinger: Hey, guys. Thanks for taking my question I guess just in this tough upsell environment.

Speaker Change: Your next spansion rates down to 102% right.

Speaker Change: It's almost down to basically know upsell I guess are you seeing contractions with.

Speaker Change: Any sizable portion of your customer base.

Speaker Change: Customers, who churn for customers, who are staying with you or they are reducing their footprint or I guess, where does that bottom.

Speaker Change: We would think of as sort of about a 100% but it.

Speaker Change: Could essentially you can go lower than that.

Speaker Change: Yeah.

Sumedh Thakar: Great question, Rudy. So, as we mentioned, overall, our gross retention has stayed the same at around 90 percent. And so, I think for us, it's really about customers, as I mentioned earlier, looking to balance the set of solutions that they have from Qualys, looking at how they can have a better impact by adopting additional solutions from Qualys, like batch management, cybersecurity, and asset management. And sometimes, based on, you know, they may decide that in this particular environment, I would rather take those licenses and focus more on batch management in my server environment because, currently, budgets are tight.

Speaker Change: Good question <unk>, so as we mentioned or what are lower gross retention of stays the same at around 90% and so I think for us it's really about customers as I mentioned earlier are looking to balance the.

Speaker Change: The type of solutions that they have from callers looking at how can they have a better impact by adopting additional solutions from quality like perhaps management cyber security effectiveness and sometimes based on they may decide that this particular environment I would rather.

Speaker Change: Take those licenses and focus more on patch management, and my server environment and because currently the budgets are tight so what we're seeing is right now.

Sumedh Thakar: So, what we are seeing is that right now, you know, our overall gross retention continues to be about the same. It's more about customers looking at optimizing and balancing their spend between the different capabilities and, as part of that, adopting additional capabilities, which may not, in the immediate term, mean an immediate upsell from a total amount perspective in that particular opportunity, but it also creates an opportunity in the future for us to increase the accounts there.

Speaker Change: Overall gross retention continues to be about the same it's more about customers.

Speaker Change: Looking at optimizing and balancing the spend between the different capabilities and as part of adopting additional capabilities, which may not in the immediate term.

Speaker Change: Yes.

Speaker Change: Upsell from a total.

Speaker Change: Among perspective in particular.

Speaker Change: Opportunity, but it also creates less fortunate in the future that we can increase the the comments there and so again I think this is sort of the.

Operator: And so, again, I think this is sort of a tough quarter for us on this. Overall, the industry, you know, expansion rates are coming down, but we're going to... Take the conversations that we are having because of this right now and see how those conversations are leading to opportunities to close in the next couple of quarters. So, again, we look forward to improving our net expansion rate over the next few quarters. When that happens, the timing of that exactly, that's something we are also keeping a close eye on.

Speaker Change: EMEA is a tough quarter on this overall industry.

Speaker Change: Expense ratio coming down, but we're going to.

Speaker Change: The conversations that we're having because of this right now and see how they're going to those conversations are leading to opportunities will close in the next.

Speaker Change: A couple of quarters.

Speaker Change: Again, we are of course, we look forward to improving our net expansion rate over the next few quarters when the timing of that exactly is something we're also keeping a close eye on.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Thank you our next question.

Operator: Thank you one moment for our next question. Our next question concerns the line of Rob Owens from Piper Stanley. Your line is now open. Hi, this is Aidan on...

Speaker Change: Our next question comes from the line of Rob Owens with Piper Sandler Your line is now open.

<unk>: Hi, This is <unk> on for Rob Owens. Thank you for taking my question can you provide more color on the economic back drop in the quarter related to deal scrutiny and also what did you see related to demand from enterprise and SMB customers into queue. Thank you.

Sumedh Thakar: I think the macro generally continued to be the same as we had expected. We are, you know, it's, it's, the budgets are generally flat, and we are seeing, you know, customers trying to think about, in some cases, cybersecurity versus AI, which is why we're excited about the AI security product. Overall, I think the macro has stayed the same; we faced, you know, additional scrutiny this quarter from customers just looking to say, well, should we continue to, you know, adopt different solutions while keeping the overall spend the same?

Speaker Change: I think the macro generally continue to be the same as you would expect there to be or you know it's it's.

Speaker Change: Budgets are generally flat, we are seeing customers trying to think about.

Speaker Change: In some cases cyber security versus AI, which is why we're excited about our security products. Overall I think the macro has stayed the same we faced.

Speaker Change: Traditional <unk> I would say this quarter.

Speaker Change: From customers, just looking to say where should we continue to.

Speaker Change: Adopt different solutions, while keeping the overall spend the same or should we just keep as is and not expand too much. So I would say that for us. It's really about I don't think we saw any measure.

Sumedh Thakar: Or should we just keep as is and not expand too much? So I would say that for us, it's really about, and I don't think we saw any major difference between the enterprise versus the SMB segment from the last, you know, from what we've been seeing in the last few quarters. And so I think the environment continues to be tough, and we continue to face, or at least this quarter, we face additional scrutiny on the project.

Speaker Change: The difference between the enterprise versus SMB segment from Gloucester.

Speaker Change: From what we've been seeing the last few quarters and so I think the environment continues to be tough and we continue to face.

Speaker Change: At least this quarter, we faced additional scrutiny on the project.

Speaker Change: Yeah.

Operator: Thank you, Wong Wen, for the next question. Our next question comes from the line of Joshua Tilton of Wolf Research. Your line is now open.

Speaker Change: Thank you our next question.

Speaker Change: Yes.

Speaker Change: Our next question comes from the line of Joshua Tilton of Wolfe Research. Your line is now open.

Operator: Hey, this is Patrick. I'm for Josh.

Patrick: Hi, This is Patrick on for Josh. Thanks for taking my question I wanted to dive a little deeper on the customers impacted by the sunsetting of the Microsoft partnership you mentioned that you were having conversations with those customers throughout the quarter. So can you just talk about your updated expectations for those customers moving over to quality to use their salon.

Operator: Thanks for taking my question. I wanted to dive a little deeper on the customers impacted by the sunsetting of the Microsoft partnership. You mentioned that you were having conversations with those customers throughout the quarter. So can you just talk about your updated expectations for those customers moving over to Qualys to use your solutions directly? And then also, what does the size of that opportunity look like?

Patrick: <unk> correctly, and then also what does the size of that opportunity to look like.

Sumedh Thakar: I think, as Juni said, right, the sunset actually happened just recently in May when the actual sunset happened. I think for us, it's... We did not have access to those customers, so we can't, you know, we couldn't work HR for them, as we had mentioned earlier. I think it is about as customers are sort of transitioning to a different solution or have the option they're looking at, and sometimes they come and talk to us.

Speaker Change: I think as Julie said right.

Speaker Change: Until actually happened just in recently in May when the actual something happened I think for us it's.

Speaker Change: We did not have access to those customers. So we can we grow where can you talk to them. As we have mentioned earlier I think it is about as customers are sort of transitioning to a different solution or have the option theyre looking at and sometimes they come and talk to us. So we've had a few customers coming back to US we may not always know that they are coming from Microsoft thing.

Sumedh Thakar: So we've had a few customers come and talk to us. We may not always know that they are coming from that Microsoft thing because a lot of times they might have an additional footprint already with Qualys, and they may just expand and buy additional licenses for their Azure environment instead of what they were doing with Qualys with the Azure integration. I don't think at this point we're thinking of that opportunity as anything that could be a material thing in Q3, Q4. I think we'll continue to see how the conversations evolve and see how many of those actually continue to come to us, but we're not assuming any additional benefit in the guidance that we've given coming from that opportunity.

Speaker Change: Because a lot of times, they might have or additional footprint already with quality and they may just expand and buy additional licenses for their azure environment and sort of.

Speaker Change: What they what they were doing with quality with Azure integration.

Speaker Change: I don't think at this point, we're thinking of that opportunity.

Speaker Change: Anything that from what we see as a material thing in Q3 Q4, I think we'll continue to see how those conversations evolve and see how many of those actually continued to come to us, but we're not assuming any additional benefit in the guidance that we've given from from coming from that opportunity.

Operator: Okay, thanks, and then just a quick follow-up. Is there any color you can give us on how you expect billings growth to trend for maybe 3Q or the full year? Yeah, we have.

Speaker Change: Okay. Thanks, and then just a quick follow up.

Speaker Change: Is there any color you can give us on how you expect billings growth trend for maybe <unk> or the full year. Thanks.

Jumi: Yeah, we don't guide to current billing, but we did indicate that the annual current billing growth will be more or less along the lines of the same as revenue growth rate. So, I would assume the same for the second half; the revenue growth guidance will be more or less in line with current billing.

Speaker Change: Yeah, We don't guide to <unk>, we did indicate that that on your current billings growth will be trend more or less along the lines of the same AD revenue growth rates I would assume the same for the second half.

Speaker Change: Revenue growth guidance will be more or less in line with the current billing.

Speaker Change: Helpful. I appreciate it.

Speaker Change: Thank you Ron for next question.

Operator: Thank you, one more for our next question. Our next question comes from the line of Brian Essex of J.P. Morgan. Your line is now open.

Speaker Change: Our next question comes from the line of Brian <unk> of Jpmorgan. Your line is now open.

Operator: Great, thank you for taking the question. I was wondering if you could maybe dig in a little bit on customers spending more than $500 and overall customer count in aggregate. How should we think about that fast growing large customer cohort versus the smaller customers and puts and takes there that maybe give us an indication of where you're focusing your efforts from a sales and marketing perspective?

Brian <unk>: Great. Thank you for taking my question I was wondering if you could maybe dig in a little bit on.

Brian: Customer spending more than 500 and overall customer count.

Speaker Change: In aggregate, how should we think about.

Speaker Change: That faster growing large customer cohort versus the smaller customers and puts and takes there that.

Speaker Change: Maybe give us an indication of where you're focusing your efforts from our sales and marketing perspective.

Sumedh Thakar: From a sales and marketing perspective, we are focused more on the enterprise. It's just because that's where we've seen more success. And as you can tell by our larger customers who continue to increase their spend with us, and we've seen success there, we are continuing to see some headwinds on the smaller end, the smaller customers or the SME and SMB space.

Speaker Change: For this you have a marketing perspective, we are focused more on the enterprise of just because that's where we've seen more success and as you can tell by our larger customers, who continue to increase their spend with us and we've seen success. There. We are we have continued to see some headwind on the smaller and smaller.

Speaker Change: Customers and SME in F&B space.

Sumedh Thakar: And those 500 plus customers, is it revenue from those customers that is growing 18%, or is it the customer count that's growing?

Speaker Change: And those 500 plus customers is that revenue from those customers that are growing 18% or is that the customer count that's growing 18%.

Sumedh Thakar: The customer count and the dollar amount are growing both at 18%. So the 18% that we referenced is the customer count, but the dollar amount is about the same.

Speaker Change: The customer count and the dollar amounts are.

Speaker Change: Growing both at 18% actually.

Speaker Change: The 18% that was referenced as a customer count, but the dollar amount is about the same.

Operator: Got it. That's helpful. Thank you.

Speaker Change: Got it that's helpful. Thank you.

Speaker Change: Yeah.

Operator: Thank you one moment for our next question. Our next question comes from the line of Hamza Fodderwala of Morgan Stanley.

Speaker Change: Thank you Bob for next question.

Speaker Change: Our next question comes from the line of Hamzah firewall <unk> of Morgan Stanley. Your line is now open.

Operator: I thank you for putting me back here. I'm sorry, Hamza, you're having a hard time hearing me.

Speaker Change: Yeah.

Speaker Change: Hi, Thank you for fitting me back in here.

Speaker Change: Yes.

Bill: Go ahead bill.

Speaker Change: Apologies if this was.

Bill: Earlier, but.

Bill: Having a hard time period.

Speaker Change: Hi can you hear me better.

Operator: breaking up your audio. Let's try again.

Speaker Change: Breaking up.

Bill: Let's try again.

Bill: Okay.

Operator: But just a question on the current billings for Jumi. I think, so down 2% this quarter. I believe you mentioned the Microsoft headwind. Without that, it would have been up 1%. Anything else that I'm, if you could get, from the Microsoft customer, should I say Microsoft as a partner as well as a customer, any changes in the conversation?

Operator: We couldn't quite hear the last part. Can you repeat the last part of our?

Speaker Change: Probably but.

Speaker Change: Just a question on.

Speaker Change: The current billings.

Speaker Change: Jimmy I think it was down 2% or I believe you mentioned, the Microsoft headwind without that it would've been up 1%.

Speaker Change: Anything else.

Speaker Change: Yes.

Speaker Change: You could get.

Operator: relationship. If Microsoft remains a customer, any changes in the conversation there? No, no change. No change.

Speaker Change: The Microsoft customer please.

Speaker Change: Yes.

Speaker Change: The partner as well as the color any any changes in Congress.

Speaker Change: We couldnt quite hear the last part can you repeat the last part of arc.

The customer: The customer.

Speaker Change: Ladies and shifts off.

Speaker Change: If Microsoft remains a customer.

Speaker Change: Changes in commerce isn't there.

Operator: No, no change. So it's as expected with respect to the impact on our top line from both Microsoft Azure and Microsoft Customer for this year.

Speaker Change: No no change no choice.

Speaker Change: With that too.

Speaker Change: The impact on our top line from both Microsoft Azure and Microsoft customer for this year.

Speaker Change: Okay. Thank you.

Operator: Thank you. I'm sure there are no further questions at this time.

Speaker Change: Thank you I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Speaker Change: Goodbye.

Speaker Change: Okay.

Speaker Change: [music].