Q2 2019 Earnings Call
As time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions.
For asking a question will be given at that time I would now like to turn the call over to <unk> or <unk>.
Vice President corporate development and Investor Relations. Please go ahead Sir.
Good afternoon, and welcome to quality second quarter 2019 earnings call.
Joining me today to discuss our results.
Please go to our chairman and CEO and Melissa Fisher our CFO .
Before we get started I would like to remind you that the 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 I set forth in today's press release and in our filings with the SEC.
Including the latest Form 10-Q and in Q.
Any forward looking statements that we make on this call a 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 would present, both GAAP and non-GAAP financial measure.
A reconciliation of GAAP to non-GAAP measures is included in todays earnings press release.
As a reminder, the press release prepared remarks, and an accompanying investor presentation are available on our website.
Starting this quarter, they're also providing a supplemental historical financial spreadsheet put up for analysts and investors.
But that I like to turn the call what do they need.
Thank you Britney and welcome everyone to our Q2 earnings call.
So now I am pleased to report another solid quarter in terms of right revenue growth and profitability.
We're also very pleased to report strong acceleration in our cloud agent subscription.
With almost 24 million now 23.6 million to be precise.
As we have discussed before.
Our cloud agent is the underpinning the underpinning of seven security compliance and I to solutions today.
Vernon the management policy compliance, but integrity monitoring indication of compromise touch management.
As such inventory and the upcoming certificates management and more to come.
In 2008, we were one of the first company by the college and patent application and our innovation has been recognized by four issued patents and one pending continuation application.
The four issued patents cover agents, including low footprint, all stood agent or host less agents, which performed food security and compliance assessment and point sugars and cumulative and cumulatively include over 100 claims a varying scope.
As previously discussed.
Our goal is to make our cloud agents ubiquitous and to that effect, we announced on Monday that where we offer our global I T S that discovery and inventory.
To the community as a free service.
So we can order regained the visibility we lost due to.
The fragmented nature of Fiveg rapid growth with biotech and move to the cloud.
We'll be showcasing these revolutionary offering next week at blackout.
Combined with a major awareness campaign.
Since the announcement, we have over 800 sign ups and receive outstanding feedback from our existing customers and industry luminaries.
In fact.
Look what I just it's adventure is one of the biggest challenge if not the biggest.
Organization.
And is the cornerstone of security as you simply cannot effectively secure what you do not know or do not see.
Without a free service companies of all sizes can automatically business. There are global adjusted inventory across on premise and point clouds container and mobile and now mobile environments.
Including in this free offering is all I said discovery capabilities, namely the passive scanning that provide instant visibility of of any device that connects to the network.
Such an integrated offering provides unprecedented and continues reliability of both known and unknown assets.
As an organization download our cloud agent for implementing global Digest that inventory, we make it frictionless to subscribe to our paid apps because no additional infrastructure is required.
In addition to the base solution that I previously mentioned.
Customers utilizing our free assets inventory would have the option to subscribe to additional page features such as the synchronization with the CMDB and full life cycle software in century.
By distributing these free solution from our platform to generate meaningful demand for upgrades up we leverage our cloud model, which is a key element of our profitable growth driving value for both our customers and shareholders.
Furthermore, these multiproduct adoption naturally increases the stickiness of our platform and Thats make us impenetrable offered by our competition, we do not offer the same breadth of solutions.
In terms of newer solution. We saw continued growth this quarter in customers adoption or for fun integrity monitoring solution. As we have now added incidents reporting apiay integration ruled bays alerting an event correlation capabilities.
As well as created a light version for those requiring.
Compliance only with BPCI requirement.
In Q2 for example, a large online travel agency selected our film solution over competing point solution in order to afford it affords us the leverage the Qualys cloud agent that already deployed forward into management and policy compliance and now they can have a single pane of view.
Variabilities configuration and file integrity.
We also have a healthy pipeline in patch management, which will release of very recently, which enabled I T and sick ops teams to quickly talk is critical commentary, but it isn't exposures then deploy the patches across endpoint on premise.
Or cloud assets, and verify remediation or from lung cancer.
We continue to make good progress on another global solution this quarter, including.
The release of our you'll see two point <unk> up into general availability, which provides a quantum leap leap in AOCI detection with muted with new detection investigation and responsibilities that not only identify the near in nearly real time no now you'll see is that also suspicious devices.
Our you'll see 2.0 includes enhance attack detection using commercial fight repetition threat feeds which extend the detection of attacks often missed by onto ours agents by integrating additional threat.
But integrating additions threat feeds directly into the platform.
Second a behavior based scoring in June to prioritize response of malware remediation.
Which factors in that in additional behavior attributes, including final analysis process State and network connection to prioritize response, there's on how the attack is behaving in the network.
Third and your response platform micro service.
Micro services.
Allowing under this too easily configure rules for real time, alerting and action using the same query language.
Q you as that they already use for two seconds searched for visibility and finally apiay integration with third party seems threat intelligence platforms incident, handing response system security orchestration and automated response platform and I ticketing system to automate rapid sharing of wretched formation with security and operational platform. These really brings our you see 2.0.
Really.
As the top.
Solution to identify indication of compromise.
And the launch and finally, the launch of our Qualys convenient cloud platform. The addition of these new location marks another milestone for quite as expanding global operation.
Now includes eight location.
On three continents.
We continue to believe that because our cloud cloud based architecture and the priority we made to invest in the extensibility and capabilities of our platform Qualys is one of the few companies well position in the security market evolution.
As we highlighted last quarter, we see a new generation of the Mississippi emerging to address the security needs of small and midsize customers with hybrid environments. That's why core far systems to the quality management and continuous monitoring capabilities this quarter to integrate into the secure cloud isn't mission services.
We invite you to block up next week to see our new technologies and campaigns, we will hold a product line shown for investors and analysts which would showcase.
The technology around obviously 2.0.
As well as our future data Lake solution.
As well discuss current incidence response solutions are quite complex and costly because they require organizations to collect this bird sets of data from multiple vendors and bringing into their sims.
Which full contextual information, we believe we have a unique advantage in this large market because we're already collect and rich normalized and correlate trillions of data points across on premise cloud and.
Soon mobileye.
And though it environment and I should say and now Mobileye and OTI.
Environments.
We're also pleased to welcome Karen ushered bake a renowned cyber security leader to our Advisory Board God. He is the former vice President of security and privacy engineering at Google and previously as CTO position that so forth Webroot and Qualys.
We look forward to leveraging his unique bhagwan and extensive experience as we continue to grow the qualys cloud platform.
In conclusion.
We are delighted to Africa really to your new free prescription for security.
Accelerating adoption of our cloud agent unlocks a significant revenue opportunity for us and more importantly, so painful problem for our customers, including not having clean uniformed data for a view of the global light assets inventory.
The breadth of our solution across involvement and neighbors.
Us to offer customers greater visibility.
Accuracy and scalability.
While ultimately enabling customers to drastically reduce their overall spend.
With that.
I will turn the call to mind is set to discuss our financial results.
Thanks, Philippe and good afternoon.
Before I start I'd.
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 delighted with our cloud agent adoption, which lays the foundation for future revenue growth and industry leading profitability.
Evidence of our continued progress is also reflected in our accelerated multiproduct adoption and the growth in the number of customers with over $500000 in revenues as well as our strong gross dollar retention rate, which for enterprise customers five products is 99%.
Our Q2 financial and operational highlights include.
Revenues for the second quarter of 2019 grew 16% to $78.9 million.
Platform adoption accelerated as a percentage of enterprise customers with three or more Qualys solutions.
44% from 37%.
And the percentage of enterprise customers for more color solutions increased to 24% from 19%.
Finally turn subscriptions accelerated to 23.6 million over the last 12 months.
Out of which 3.5 million cloud agents for purchase by single cloud platform customer.
This is up from 17.9 million for the 12 months ended in Q1 2019.
New products released its 2015 contributed approximately 25% of total bookings in the quarter up from 15%.
And our average deal size increased 3% influenced by higher growth in the total number of customer orders.
Our scalable platform model continues to drive superior margins and generate significant cash flow.
Adjusted EBITDA for the second quarter of 2019 with $33.4 million, representing a 42% margin versus 39%.
Q2, EPS grew 42%.
And we generated strong free cash flow for the second quarter of 2019 of 31 million and for the first half of 2019 66.3 million representing year to date growth of 25% over the first half of 2018.
In Q2, we continue to invest the cash we generate from operations back into quality, including 5.9 million on capital expenditures, including principal payments under capital lease obligations.
And 16.2 million to repurchase 183948 of our outstanding shares.
We have approximately approximately 91 million remaining in our share repurchase authorization.
We remain confident in our model driven by our foundation of recurring revenues and expanding suite of applications.
We're maintaining the midpoint of our fiscal year 2019 revenue guidance. Our current fiscal year 2019 revenue guidance is now a range of 321 million to 322.5 million.
We are raising fiscal year 2019, non-GAAP EPS guidance from a range of 189 to 194 to a range of two or three to seven.
We are also raising our fiscal year 2019, EBTDA margin expectations to be in the range of 39% to 39.5%.
For the third quarter, we expect capital expenditures to be in the range of 5 million to 6 million.
We are very excited about the acceleration of our cloud agent subscriptions with our innovative technology demonstrated by the issuance of four patents.
Looking forward, we see additional opportunity to accelerate caught agent adoption with a free launch the asset discovering inventory.
Our current agents make it frictionless enable many of our paid subscriptions, which provide us the opportunity to accelerate revenue growth as well as expand margins in the future.
As Philippe mentioned, we look forward to seeing many of you at black hat for a product launch and showcasing our upcoming campaigns.
With that sleep and I would be happy to answer any of your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Howard Smith from first analyst Your question. Please.
Yes. Thank you congratulations on the solid results are kind of two related questions.
Go to market strategy.
First of all historically, you've really kind of showed your customers the products and let them adopt a kind of one at a time.
You have increasingly been going to try and do some sea level selling and now that you have such a sweet and you get five plus adoptions, where are you on that.
Kind of the sea level dictating that where you can in an organization you're going to use qual us and where are you in terms of it it's still being almost all bottoms up product by product. So essentially yes, yes.
Good question so the bug.
The launch and then I hope you could be a blackout, you're going to see the massive.
Campaign that we're doing so this is just the beginning of that the awareness campaign that we're creating which of course at the prison solid bottom up but of course now with the global notices inventory we are.
We have the we have won every CIO.
Needs to have.
And so we are going for us that have already started to go to our existing customers and youre going to see a second leg in that campaign or won't go into all of our customers speaking about.
Value that Bluebird I, just didnt country brings.
And when is the customers from the very top and of course, we're going to make that resonates and essentially engage.
Yeah yields which are not as quite as customers and so that's of course, the second food or that the second leg I should say a fall campaign.
So it's all study.
Great and then in terms of the cloud agent adoption.
Yes. It is it really fair adopting that as you promote that and then they see the applications that enable and start to increasingly.
Contract for those or do you feel the solutions customers are seeing those solutions and same now I need that's my excuse to go back and upgrade to the cloud agent.
It depends it depends so where do we sit today is that finally, the customers have been able to breakthrough I T would you didnt want another agent and now they are really pushing quality.
To essentially now lets say, we need real time.
That's what the agent those instead of the standards scanning so they're now it's essentially we have earned the confidence of our cloud agent with a number of college and Theres no more issue that very non intrusive. So we're breaking the barrier of the IP resistant. This is what is happening now and this is for the on premise. If you prefer while moving now more and more onto onto the endpoints, which in the past we're not there. So that's new the other factor of growth is also on the cloud.
We start to see now more and more adoption of our agents in the cloud environment, because the ideal for that as well.
So that's the way it's thoughts and then as you just mentioned is now customers say wait a minute you know that agent I can do these that can do that and there's nothing to really installments already stole everything centrally managed self updating you want that to have addition servers. So now of course, you start to look at the advantage the cost advantage and also the fact that everything comes into unsecured platform. If you commented blackout I strongly urge you to come and see that the more for global latest venture anyone at your fingertips not only you can in 400 millisecond find any devices on on your environment and that defied everything is the open ports everything you get any for everything and as well.
The reality is the indication of compromise.
And all these additional services that all come at your fingertips. So that has been the food to many many years of effort.
Especially we adopted the cloud as you know very early and compare it with our Wyndham tradition competitors. They have to re architect different thing to just got shop to work what is.
Finally, arriving to that to where we wanted to be and that it was a long road, but I think we're very extremely happy.
Great I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Dan Ives from Wedbush. Your question. Please.
Yes. Thanks can you just talk about new products in terms of the trajectory there going into the rest of the year what type of traction do you guys factor in there in terms of even quantitatively or qualitatively.
So I think as we mentioned in the as we mentioned in the press release, our file integrity monitoring that we have added additional divvied up the functionalities is starting to really get very good traction.
And now we also believe that with the detection of indication of compromise what really drove that.
The significant.
New level.
So we are really looking.
Really big pent up demand on the battery management, because again everything is out of the same path sort of you don't have to.
Probably another application and you have the images.
Which was what we offer so we're very happy with the with these new services.
I would say they are coming of age.
And of course, while working on more solutions were also very.
The looking forward the Ondeck issue a compromise we're also moving into the endpoint.
PDR market and Youre going to see a lot of new things coming in 2020 again out of that one single platform and that's really the big differentiation, we have and just to add on to that as I mentioned, our new products as a percent of bookings, 25%. This quarter, we feel very good about.
And we're really excited about the opportunity to accelerate cloud and how to agent adoption.
With the additional features that were added to Stan and I see as well as the release of the free asset discovery and inventory out because as we've said we leave it.
Actually eliminating are eliminating or is essence for my team actually providing an incentive for them to download the cloud agent.
And then it's a frictionless for users to subscribe traditional paid apps so.
You know as I have historically said beginning to show a material contract. We don't assume contribution to revenues from new solutions that are not materially contributing yet and to date most of the new products as a percent of bucket.
Cloud agent policy compliance and threat protection, but we see a great opportunity and I will add you know a passive scanning which is essentially zero.
The component of our discovery.
Or if you prefer do you know the direct competition to forecast to full scale is now in beta will be GA.
Gee on September 15th and with a component of our free offering and then from there we have a significant upside which is.
The.
You know the quarantines your capabilities, which will be a bigger upsells, so by giving something of real value to the market I believe we have created a significant disruption.
In the markets.
Receiving every.
Every hour now messages from.
Industry experts and so what you have done this fantastic and so I think we're very very happy.
Thank you.
Thank you. Our next question comes from the line of Chris.
From Nomura Instinet your question please.
Yes, hey, guys. Thanks for taking the questions.
Well this quarter cloud agents from a net add perspective seems like a pretty big move up relative to the last couple of quarters of just a million.
Or so a quarter.
What did you guys change anything this quarter that kind of drove that increase adoption.
And.
The second part of that.
Once you start to see the cloud agent downloaded what's the.
What's the lag time between downloading the agent and then the greater adoption of further applications.
Sure so.
We're very excited about how our cloud agent subscriptions.
And then what the adoption was this quarter and we actually saw acceleration as I highlighted in my comments.
Adam.
$3.5 million or more for a cloud platform customer, but even without that you would have seen acceleration.
So we really see this what we offer taking hold in the marketplace.
Our customers purchasing agent in conjunction with the solutions that are not downloading needs and separately. It comes at a solution that they're using and you know the time.
It's time in terms of adding additional solutions marry their customers, who are buying multiple solutions that once and their time to add on over time and what we believe is of course by having offer the free global acid century. This is a godsend for our existing customers, which we love it but also it's a very cost effective way of gaining new customers as well because of course once the deployed the agent certainty. They can immediately try all these additional services.
And without having to install anything else and again installing all age and by the way is not difficult to toll and while putting by the way edition packaging to make that much even easier. So people know exactly what they need to do so we're we're I mean, we're put a very big effort on the packaging I've also now a team in India of.
What we call the technical account representative, which all century on borders, which our technical people shop. They are not to sell bundled there to make sure that the customers of this first good experience and if you have any question was also now a robot.
You know.
About.
Which comes automatically as soon as somebody who wants to download something so we can establish a communication with the customer. So as you can see why being.
You know behind the scenes are being gearing for scale, that's essentially what Qualys is all about when you do too that our platform.
You know our platform answers now in 400 million second Aquari. If you want to know anything about a device 400 million seconds later, you've got that.
And that's because we have index 3.3 trillion data point or not or not.
Elasticsearch clusters, we index everything all the data that we capture.
So again this is all about scale.
Ease of deployment and.
The result of that frictionless adoption.
And I think or what we're getting there and just to reiterate what we've said in his prepared remarks, which is a key theme, we've talked about which is the ability to leverage our guest.
Platform as a distribution channel indicate element of our profitable growth and to see the release of the free asset discovering inventory AP as a perfect example of that.
Got it and can you just update us on the percent of the customer base that you're using cloud agent today I think it was an 18% you said last quarter, yes tell it really means opportunity, it's only in 20% as of this quarter and again as we've talked about in the past it's still early.
In the in the sense have deployment on the endpoints to win in our cost within those that 20% of the customer base. So I think there's a meaningful opportunity for expansion and.
At the pre asset inventory and discovery at potentially about salary that.
Got it great. Thanks.
Thank you. Our next question comes from the line of Jonathan Ruykhaver from Baird. Your question. Please.
Yeah, good afternoon, but less so you just mentioned and point it. So I'm wondering if you could help us understand.
Maybe some of the obstacles in terms of adoption there, but I think you've added endpoint application for 18 months or so you can correct me on that.
But just what you've seen how much runway.
But I think more importantly, what are the challenges to adoption.
I think the challenges are I believe are starting to be behind us as I mentioned earlier. The beginning was the fact that if you look at these enterprises like line nine agents as an average today, we see that interestingly enough that some companies today have only now reduced that to two agents, which is or could the crowd strike agent or the quality agent with few examples of those because our agent replace already quite a few agent already and so and of course, we're also moving into the crosswalk space as you will see during.
The early part of next year as well with the iOS see with the enhancements we've made to our you'll see so I think this barrier or are now starting to fall down.
The fact that especially web now an agent on older mobile, which is part of that as that inventory. So in Q4, we will welcome and that's another very big requirement for customers, having the ability to also Luca their mobile devices, essentially tablets and phones. So I think you know that resists under which was huge in the past.
Now today is is is diminishing as Furthermore.
Because that.
Our global light as it does entering service both.
The security and the compliance and the people that they have that that visibility. The three of them of course, they'll look at things differently that the beautiful architecture is that we bring all the information into one place and then from there you can have the I'd view the CKD view at the compliance view.
And out of that one single platform and that's the big difference again, so I think we're very confident that we're going to see acceleration.
Of our of the cloud agent deployment of course that global as that free global I just venture.
Inc., including with the passive scanning capabilities I think is really what what we believe will make that happen.
And I guess that leads to my second question Felipe you know that the feedback around the global asset discovery inventory services has always been very strong and there's a clear need in the market that type of visibility just trying to understand.
It seemed like it was a it was an easy monetization opportunity.
So now that you're getting a free what are the specific paid products that we should look to initially is kinda demonstrating the success of that that free strategy.
Yes, so that's a very good question in fact, and this is really the core of our strategy.
Four on one hand, we know that by giving that a free we really provide a signal. We we have a lot of goodwill in our industry because that's a problem, which was absolutely has never been really was solved.
The second thing if you look now from a business model standpoint, if you look today as I mentioned earlier currently today, our cloud agent enable seven different services and I named.
Very good management policy compliance file integrity monitoring.
Detection of indication of copper wires et cetera. So if you look at the at the cost so to that large case and I'm going to give you numbers like if we or big deployment. So the cost for us to really give the agent free of charge for that global logistics and venture is about 20 cents.
In return the aggregate value of these services.
Would be net again of a dish you know up for storing et cetera.
And the dates et cetera will be about $10. So you haven't effectively 50 times 50 eggs.
Return on your investment in I would say across three or four years at the most and so that's at the end of the day the potential that we have created false sense here with a solution that deploys that is instantly provide you value because whats very unique with our regulators adventure. It is that you the customers I have nothing to do.
It's our solution, which automatically categorized that you are many windows devices you have a win Mag devices. You have I mean data base you have what type of data base. You have also the ability to find and a flight all of your Java instances et cetera. All of that is at your fingertips now we don't give everything free but we give the core component free. So you can have your automatically.
Created your global I, just didnt venture in a very continuous way. So every time, there's a new change automatic it's abated and now you can for a little bit more dollars you can now a grade and synchronized with the CMDB.
Today was the full two way integration with service now and so our goal here is to become the source of truth.
And today and we can earn that.
And again, if you could comment like others that would be very happy to give you a real live demos that youre going to be absolutely fraud.
How much information, we capture how quick it is and our comprehensive beaches.
And just to add on to that I think.
Financial point of view, where you would see that isn't even see that manifest itself in revenue growth and the reason I say it that way because.
You know the adoption of this free after discovering inventory app can accelerate both what I'll call older products as well as new order because again this eliminates the resistance to putting the an agent on endpoints and say that many companies that haven't yet done yammer policy compliance and the endpoint starting to do that but then again it also meet propel.
Solutions being adopted so we have multiple vectors of revenue growth.
No. That's helpful. Thank you. Thank you very much for the insight.
Thank you. Our next question comes from the line of Nick.
From Cowen and company your question please.
Thanks, guys you mentioned a major awareness campaign in the prepared remarks, but are there any more details you can share around just the overall strategy to drive awareness of the free asset inventory out.
Oh, yes, yes, yes, I could be specific so when you will arrive at.
I could tell you that so when you will arrive at a in Las Vegas at the airport, you're going to see huge batter everywhere you are ready to go to your taxes are going to see that.
What we call that new prescription for security.
Every youre going to walk through the olds of blackout youre going to see of course again that campaign and we worked arriving to our booth.
Another thing that I will mention is that there was also a multiple that you should be for legs into that campaign. If you read the press release, you will see that the cloud security Alliance as essentially endorse qualys and now bringing that to the 95000 members because again, it's good for the community. This is just not good for quality is good for the community. So that's the first the first part of the campaign.
Then from there we're going to do a lot of.
I mentioned earlier, we have now a team in India, which can absolutely onboard customers. So were gearing up for large volume I mentioned earlier, the first two days' worth more than 800 sign up.
Essentially to our service.
So we have geared up two out of the technical people behind to ensure that customers are properly onboarded.
And we're also making a big effort on the packaging.
So they could really see very easily outages to download the agent what they need to do et cetera et cetera.
And of course after that Youre going to see more lead generation campaigns. This is the bottom up and there is a.
A question before and you're going to see us doing now doing seminars women are.
You know to go and truck whatever one wants why they starting on Friday.
With about 800.
CIO isn't cisos of the health care industry or worse, essentially president and essentially are going to advertise the benefits of that Google I just sitting ventures.
So we can essentially go now to the to every CIO.
In the word essentially said them.
You know with now with Qualys, you're going to have the full view of what you are second you can have the continuous assessment of the CPT code plus Porsche those assets you can identify those which are very bridger zero days, those which are compromise overall that we suspect are compromised.
You can essentially quarantined them and then of course, you can consolidate your stock which is what large companies must do now save significant amount of dollars and all the top of that our architecture brings you an edge due to secure digital transformation as well doing that Google with Microsoft with Oracle as you know, they're all our customers and secure their own platform in our building that security into their employment for the customers, who had done extraordinary way with Microsoft and ordering that with everybody. So again. This is did that didn't happen in a week. This is 20 years of effort and we focus.
Not on the growth of the company, we focus on building the platform and essentially building sustainable growth and a highly profitable gold. That's when we went public what we said and I think throughout the years, while demonstrating that now today, we're really put the pieces together and that's you're going to see a very different companies in the in the months to come.
Okay, great and.
Could you discuss that large single cloud agent purchase in terms of the products that customers deploying and then maybe as a follow on to that do you see an opportunity to drive similar sized deals going forward.
Oh, I mean, yeah, we don't really disclose that really much. This this kind of things because as you know our customers are always going to be leery of.
Of telling the world what they do but this is obviously a big cloud providers.
Which is now totally adopted the agent to secure their own platform and now you speak of millions of agents really and so of course, there's more and more cloud providers and there is more and more of those but for US more importantly is all that this is all these additional services that you can build on the top of it.
So again, the beauty of our cloud agent now so happy that were these patents around.
Is that.
They spawn multiple services and it wasn't just at the beginning when we today, we have seven but you can realize that now once you have an agent of course, whoever while moving into OTN aiotv as well you can realize once you have an agent you can now do enforcement you could do or you can go into response, it's all about the game today in security I. We always believe was one unit Jude.
Detect at scale and then second you need to respond annually to eliminate the false positives. So the fact that our agent gives us the context in real time is significant and across again all these different environment. Because you cannot do this oh I just look at what got you know my blogs that doesn't work anymore, you need to read the complete view and so that's again not a walk in the park and this is the reason why we're moving with a data lake because we have a unique advantage of one we collect the data no single no see today on the planet collects the data they got to take the data from multiple different sources, which is very complicated very expensive and also very difficult to normalize because you don't know if that application tells you about the device is that the same device you don't know.
So the big advantage, we have with our architecture gains that we have absolutely food contextual value and that's quite significant so I think we're entering into a new era of Qualys and which we believe.
You know that's what our goal, but I think we're really getting very close.
Great. Thank you.
Thank you. Our next question comes from the line of Erik Suppiger from JMP. Your question. Please.
Congrats on a good quarter.
Couple of questions one.
Discovery services.
Are you sacrificing.
Revenue.
Free.
Oh, that's a good question and by the way Eric You Remember you are the one who really do where in fact, the first one you told US you know to accelerate the cloud agent.
You should really think about giving a one of your services free of charge. So c. So we follow your lead.
And Scott.
I was absolutely, though but I was really waiting the reason why we didn't move.
Because I really want our we were waiting for the cloud agent so we needed to create.
All the libraries and everything so we could automatically grid the create grid inventory because studying the customer to do their inventory themselves. You know that's the problem you have with the CMDB is you've got to do everything yourself. So.
So thats, what we waded Juno to have that piece completed and now we have it so to answer your question. There's a plethora of solutions out there like like Sarah and I can name. Many many other ones. You have arm is you have quite a few the problem with all of them. It's not that they are not good they do the job, but they are myopic. They only look at a certain part of your involvement and if you take your security had on you've got to have the global view you cannot just say Oh I've got that thing Oh I've got it would you are my windows or get my good. These unit you will see pieces together, which is almost impossible under CMDB cannot really do that they were never designed for that.
So that that's really where the differences. So in terms of yes, you could on one on one hand, you could say Oh, we're giving away you know what.
You know the Antara.
You know what forced gardens doing well good giving away what flix, though is doing and you could say maybe this is off the $500 million.
If the more well look at the leverage that we have as I was mentioning earlier with 20 cents.
Then I can get 50 times, the return and the beauty of our solution is that it's automated.
So its old machines, yet I don't need a lot of salespeople I don't need a lot of support people that only this all in.
Platform.
So it's a very effective model and I go back to the early there's a lot of people who should people realize that that.
Very sign was the granddaddy I always say that wasn't granddaddy of stuff. They were the first one to have a really cloud distribution model.
If you look I remember because I know.
There and what I could see that their salespeople.
10 salespeople could do.
Four and a half a million dollars a year.
Of renewals, so and in fact I took some of their model.
That's why we had a model which is so effective you look at the gross margin today.
They are not 70%.
So because again they have leveraged the cloud now what we do is more complex in a way I'm not saying that wet weather doing simple, but we have much more valuable so of course, I'm not saying that we're going to reach 70% gross margin operating margin operating margin yes.
The operating margin story.
Is that because but I can tell you we still have under the foot.
To to be capable of leveraging the model again, it's all about the model and the model is the cloud the the the platform is the distribution channel.
And that's where you cut a lot of cost and that's what the digital transformation is all about eliminating the middleman then.
The increases in between so there's nothing new here.
Okay.
Another quick question.
The.
How'd hosting provider that.
Three agents.
The same one.
About a year ago.
No no it's another one.
Okay.
If we think about the.
Your cloud agent count.
September quarter.
Is that going to be a tough comp because I think it was the September quarter last year.
Yes.
One customer.
Is that going to roll off in which case.
Cloud agent count.
No I mean, we would assume that they would be renewing so to your point, we might not it might not be adding 5 million class in that quarter, but.
These are based on 12 month rolling subscription, yeah, and what will differentiate with the free agent. We're going to also make sure that we don't because of course, we should have a lot of agents as well, which will come from the free service, but we'll make sure that we essentially do differentiate.
The pain free free versus the paying one.
Thank you very much.
Thank you. Our next question comes from the line of Alex Henderson from Needham Your question. Please.
So.
The primary thing that.
Necessary to get the stock.
Having any kind of.
Acceleration.
The topline growth.
It's about getting to a 20% plus.
At some point.
The guidance in the back half.
It doesn't look like an acceleration.
Fairly much continuation.
So can you talk about a little bit.
Relative to what.
It would be necessary to get your.
To show.
And start to accelerate.
And what the headwinds are.
The macro environment or any other variable.
Holding things back.
That's not the case, but.
Could be.
And what is the slope.
Of that.
To get to the 20% longer term.
Very very gradual pickup.
How do we think about that.
Yeah. So first yes, no absolutely. So first we don't see any headwinds in front of us really.
Of course, we need to continue developing product and so for that there's nothing nothing that we see as a headwind in front of a second I just want to reemphasize again. The fact that we are absolutely 100% subscription base because when you compare when I look at when I look at some of our competitors and so forth when I look at a quarter to quarter growth, which is essentially could be like 3%, 4% that doesn't generate you know.
30%, both so where where's that coming from it's coming from a force, adding a few spoons or sprinkle of perpetual license here and there.
So we don't have any of that so the result is that for us to peak of growth essentially it takes a bit longer and that's essentially out of the way our modeling but of course, the big advantage is that.
Well significantly more profitable and that's something we don't have to.
Didn't know to to do so it takes a little bit more time, so we need a certain patients, but that's what we have been all along and I think we're very confident again that we believe they're working to Pico growth and.
And now with all the things that we've done so with that kind of oppose in our growth.
Because as we discussed last time.
And the time before is that today, we didn't have these new services mature enough and so forth to really start to contribute to the growth. When we have a huge installed base, which has been growing very well but of course it becomes harder now which is the VM or the policy compliance all the web application scanning to generate accelerated growth within your services. So we're very happy to see it and now today, it's 25% the contribution from the new services and this is going to continue and we always say that look look at that adoption. So it's a question of time, but its there I mean, there's no question, we're very strong loyalty from our customers. The other point, which is significant we really believe this college and with makers, what I call naturally sticky as you very we as you may remember with customers that adopted for solution. The gross renewal rate is 99% those who have adopted threes 90 is 97 of those were up to 91.
So of course this cloud agent.
That's free global latest venture, we really are going to make us very sticky so in a way that makes us immune of some of the tactics of some of our competitors, which dropped the price, but they don't have the breadth of solution that we have so we're not losing all sleep atoll.
Yes.
Our guidance for the back half of the year is slower than the growth rate guidance in the first half of the year and it's against easier comps. So I'm still wondering why your growth is accelerating its supposed to do.
Yes, Alex we have a healthy business, we do have a higher negative impact from FX and the second half than we previously expected.
The growth we believe we expect the growth rates to be negatively impacted by about.
On each quarter, but were still maintaining the midpoint of our guidance.
And the reason for the growth rates from where we are where we are today versus as versus last year as Felipe explain why is that as we talked about our previous growth rate had been bolstered by what we call fractionally price solutions for lack of a better term right.
Cloud agent for vulnerability management and policy compliance or a threat protection that were priced at 20 or 30% of its older products now many of the newer.
You know we call started the new news the news your newer solutions coming out there, we expect to see deal sizes, similar or more and then these older products, but today, it's still primarily yen policy compliance cloud agent usage and threat protection, even and title back together, even in a 25% of bookings at some of the new packs Unlockings, it's mostly those newer products. That's why we're so excited about the additional features that were added onto them and see as well as.
The free released an asset discovery in inventory because this potentially will help accelerate the adoption of the cloud agent broadly as well as these newer solutions, where we expect deal sizes to be larger and they can potentially have a bigger impact on our growth rates.
If I could just.
Extend the question a little bit so.
Given.
Indication of 20%.
Thank you might get there and do you think 2020 is an accelerated growth rate versus.
Those are kind of the basic questions.
I think.
We heard every time, we went out on the field to talk about the stock.
Right. So we talked about our long term target, which we generally update our model on an annual basis. Some on the shelf for our spring analyst and Investor Day in New York, but the framework hasn't changed which is asleep reference that the total spend per IP can be 10 times out of a dollar of the EM.
You know this does include the paid version of our.
The free versions of the of after discovery in inventory, but we're also not expecting all customers to adopt all solutions in terms of you know the interim period, you know when we provide guidance for 2020. After Q4 earnings and so you know it would be imprudent right any direction earlier than that.
Okay. Thank you.
Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley . Your question. Please.
Excellent. Thank you guys for taking the question.
Filling in for Monster Frank Here, one question on kind of tax and one on geography on the other side of the equation margins continue to be really impressive and expand really well.
And next we'll still be kind of in line with seasonality, but definitely outperforming target and I just wanted to check in Nike outperformance on Opex.
Because the kind of better leverage you're seeing or as kind of the spending under piece to your projections are that.
You weren't able to get those people up and running and nothing we are unable to or find that started work on the R&D. You guys is there any kind of end up spending less and helping those operating margins. That's question number one and question number two if you look at sort of geographic growth on a year to date basis, Europe's been performing really really well and it's almost like 30% growth U.S. has been a little bit less well at about 10% growth anything in particular that explains that dichotomy. It should have done much better growth overseas.
So I'll start with the Opex keep we're very happy to have you.
On the Opex. So you can see from our guidance, we are guiding to after contracting margins for the second half. So there is an element of.
Yes, Ben that.
You know, it's just really a timing issue. So you know we did come in basically lower on head count expense in operations and sales and marketing. Some of that is you know hires or we didn't find the right person and sell it in a week.
We expect to see that the hiring pick up on that was in the second half somewhat. It was also we just spent less on trade show is then we needed.
And third party consultants and marketing costs and not to make sleep less being you know for example, we'll get our campaign and you know a lot of it was driven by my our multi multi talented CEO . So that helps save us dollars chairs today, there's also leverage.
Absolutely, Yeah, I know and other geography I mean this is just a very natural evolution of the market. When you have to do of course, we have a very strong penetration in the U.S. as compared to the June Europe's or what it was in Europe is that not sure to expansion in Europe of people.
That's something we again, we're very very optimistic with our new services and see accelerated adoption.
It took us a little bit longer of course, you know too because you need to essentially bring all these new services at the level like that that we need it takes time and and we also want to make sure we get the right products and we don't push.
Transitioning to our customers. That's also the other very important thing in our model and I will repeat again.
We cannot be absolutely if we start to have our customers consuming more so we don't incentivize our sales force to do bigger deals and what the customer can really swallow. The reason is because if not that were not renewed at some point in time and then we'll have to push more and now. This is the way enterprise software works of course, there's always the music stops at some point in time, but it takes a long time for customer support to synergy run out of new customers or new country of it into them and create a lot of.
You know, there's shelf, where it without with a pure subscription model like ours, you will see that much quicker because then the start.
Down selling which is exactly what you want to avoid.
So these are the dynamics essentially.
Excellent. Thank you.
Thank you. Our next question comes from the line of Matt Hedberg from RBC capital markets. Your question. Please.
Hi, guys. Thanks.
Moshe I know you reference bookings in your in your prepared remarks in prior calls. So we are getting quite a few questions on short term billings I think it grew 13%.
This quarter could you talk about sort of the trends in short term deferred I think it grew a little bit less this quarter sequentially than it did last year I mean, how should how should we think about short term deferred as this model progress isn't and we look for revenue to accelerate.
Yes, thanks, Matt So we had a good quarter and we have a healthy outlook as we've discussed tells me of an out all the time there are multiple scenarios in which the renewal does not happen at the same time as the anniversary date, so it's hard to normalize for comparison purposes.
This is why we point to the trajectory of our annual revenue guidance as the best proxy for business momentum because column packing certainly inform our guidance.
As I mentioned, we do have some FX headwinds are maintaining the midpoint of our guidance.
And we're also thinking about introducing air our next year because it should reduce the volatility you see associated with current billings metric.
Got it thanks, and then maybe Felipe.
Thinking about the capital one breach.
This week it looks like it was a miss configured laugh I'm sort of curious can you talk about that as a broader issue.
And maybe how you guys can help prevent that from happening to others.
I mean this is as you know I think this is a complicated situation here and because as you know there is more there is it kind of in cider whenever you deal with insider.
That's the most difficult thing to combat because theyve of course inside knowledge of your configuration that they could either find ways to get credentialed. This should know that that's the snowden case or they could.
Or they could essentially find or identify variabilities that because they were just there and so that's the tricky part so it's very difficult to combat insider threats.
As we all know so but again I go back to its all about aging so that's where according to shines because we can help you absolutely identified during the bid season on your environment at the huge scale across all these different environment. So that's again whats behind behind the decision that we made to do that we made to make the global latest incident free for charge discussing with our with our advisory board with our large customers.
The idea came.
As well to make that one free.
You know from on one that I mentioned, Erik Suppiger say by the way you would adopt but then we've also the customers telling US look this is such a pain point that we encourage you.
If you could do something here and that will give you the visibility you need because.
How could you if you don't know what you have as you kind of even identify the variabilities.
So.
So that's I gene is the if you look at every is if you look at the Verizon Bridge reports et cetera, Yes, we put a lot of these shiny objects around and this and that but if you don't do your visibility. If you don't configure your system properly. If you don't know that that camera. For example is still connected to your network and and anybody can have access to it. If you don't then youre going to get bridge and it's that simple and is becoming very critical in our own in that environment, where now everything is becoming connected with everything whether you like it or not.
And so and we're entering now wait until Fiveg arrives or my God. This is so that visibility is crucial everybody will tell you the experts.
I'm, 100% visibility on offering for example, there's one thing that we do.
Surprised to see how many devices connect to your network via Bluetooth So of course, we'll introduce that shortly.
But you need 100% visibility and that's that's the one thing you've got to do and then making sure that youre very carefully with a deep with our contractors and we extend that visibility to your to your ecosystem as well.
So it's a it's a lot of work done without visibility.
You Youre going to get bridge.
Got it thanks a lot.
Thank you. Our next question comes from the line of Rob Owens from Keybanc Capital. Your question. Please.
Great and thanks for taking my question and most I appreciate the commentary around short term deferred and.
Deals that didnt move between one quarter and another but if I look at three of the last four quarters, you've grown at this consistent 13% and.
With the business setting up to inflect.
Achieve that 2021 target of low to mid Twentys growth at what point do we see that and does that actually come through in that short term deferred kind of as a velocity based metric. Thanks.
Yes, thanks, Rob So ultimately 2021 revenue growth will be based on performance bookings performance and 2020.
You know there is a change in deferred revenue, but as we talked about many times in for example.
The correlation between a quarterly billings and quarterly bookings is not always the same and that's why you know where we are looking to improve how we communicate externally with you guys and as I mentioned, we're thinking about introducing air are for next year.
Sure.
I understand that but I mean, you have got to three out of four quarter history of that that 13%, which.
Few radically suggest kind of a.
Downward draft in that revenue, so even overtime that becomes an unreliable metric. If we look at again three of the last four quarters.
No no.
Sorry, I was going to say I mean, if you look at LTM LTM billings Thats kind of me you know much closer proxy too.
LTM bookings because you have much more normalization and tell you know what we've had today is the fact that our growth has been supported by.
Ah These fractionally price solutions as opposed to generating an impact from.
More of the higher price solutions, which are things like kind of fan and I see patch management et cetera.
And so that's really where the opportunity is as well as again as we've talked about expansion onto the endpoints that could fuel even kind of what else that other products in terms of driving future revenue growth.
Great. Thanks for the color Melissa.
Thank you. Our next question comes from the line of Gur Talpaz from Stifel. Your question. Please.
Hi, This is actually Chris fears on for Gore.
On the call you mentioned that the free asset inventory service already has eight.
Keith.
A couple of the group in regards.
It's a mixture is it's a combination of the of small customers mid customers, an even larger customers. So.
We could give you the breakdown, but the we're just at the beginning so essentially we're targeting the entire.
For us we can service more customers, we can serve a very very large customers about the largest customers.
In the words I mean, we've got 70% of the fortune.
Of the Fortune 102 days, so so they come from all walks of life and again that global licenses and venture is really a need for everybody. The last company because they have no visibility and the small companies because they have only very few people.
And so therefore for for them the desire for them to to to the cataloguing or for their application and what they have you. Even is there vis more network. They are very little people to do it. So the Goodyear the pool I know you guys that do I see the new security in the smaller companies now that to the to the cloud and with the mobilize and with this it's an absolute nightmare.
And so I think that's a good sign for all of them small or large.
Yes.
Thats, great color, there, but where I was going with that question was can you just talk about the makeup of the group in regard to the proportion had already deployed.
Cloud agent relative to the proportion that represents a net new cloud agent.
Deployments.
Well I would say in general the cloud agent has been more adopt in the enterprise and SMB SMB today, you know we don't.
I mean on the kind of at a check exactly every quarter, where the net new adds are we kind of look at it overall for the business.
But what's and this is whats revolutionary about what we're doing with the release of the free asset discovery and inventory App is that again it provides an incentive for many prospects.
In the lower end, let's say to adapt how an agent and then it's a frictionless and subscribe to paid applications.
Yes, but what I guess, what im asking is the percentage of it.
The 800.
Customers that have signed up.
What percentage of this group had have had already deployed the cloud agent and were just signing up for the asset inventory versus the percentage of customers that.
The that the deployment of the asset inventory would lead them to deploy.
Cloud agent.
Got it got it that's a great question, we haven't gone through all the data entry and just announcing on Monday. So its something we can get back to you with Chris.
All right.
Hey, guys I appreciate it.
Thank you our final question for today comes from the line of Sterling Auty from JP Morgan Your question. Please.
Yes, Thanks, Hi, guys I want to I want to clarify or understand in terms of the cloud agent are the cloud agents included just in the core VM pricing what portion are or maybe you know paid subscription versus what portion are now part of the.
What appears to be the free program I want to make sure I'm not mixing apples and oranges here.
Yes, so the numbers that we've really so let me say and 23.6 million cloud agents subscriptions that are all paid subscriptions associated with the product because you don't you don't just it was described today and just for it to be an agent.
Now you can use on the VM you can you give us what I'll call you know that traditional scanning technology and that's not using an agent right and you wouldn't need for can you can't do that with endpoints because the laptops leave their network. So.
If you want to give them an on an endpoint on a laptop you'd have to use the agent.
And so we have like when I think about our existing customer base rate. We have a lot of customers who are still using traditional scanning and then many of them rolled over a portion or all of their VM subscriptions into using the cloud agent for VM, because not only can you spend an extended endpoints, but also because in cloud environments and gives you more real time information because you're not just relying on the scanning windows.
Let me pause and see if that answers.
Yes.
Okay that definitely helps and then in terms of the procurement of the new New solutions is there an expectation of what you think kind of moves first so is it going to be stem and then followed by inventory do you think you're going to in terms of both the timing of GA as well as the customer traction or do you think theres simultaneous in terms of the uplift.
Well, so inventory, we announced it's going to be GA September 1st off David Sam has been out, but we've added new solutions ioseight or adding new features sorry, I assume we went into GA with new features and terms have yeah, the timing of adoption of like which.
Which ones do people subscribed in those first.
It's difficult to predict because we have new data points have for newer solutions are enough not enough.
Substantial I would say sleeping do yes, and they all offer a little bit different because seem is more typically for rate regulated industries. Rather then because they have to do it. So this is a different.
Read them. So they are little bit different at the end of the day.
What what what we can see to the patch management, which is a new service revenue pretty big demand and patch management already.
So I think finfet mistaking of butter management will take off I, we really believe that these but new generation that new version of what you'll see is good too really rock the word because unlike anybody as we can identified a suspicious devices. So instead of just the big advantage of our solution. If I use is that as you give us an oversea instantly we continue without spending anything just squaring our backend we continue where ever you. We you are compromised.
And then because we have classified them outerwear into families. We can now identify the family match with doesn't really give us 100%.
Assurances that this is a real compromise, but then of course with the passive scanning we can look at what's coming in and out of the device and identify that if this is a behavior, which is suspect than we could the absurdity now take action in quite some time, which will come in Q4 and that of course not only we can also put the device on watch because as you know the matter where it can be dormant in that sense, you don't see anything.
And so we I think we are bringing out you'll see two to its next level. So we are very well received by our customers as was something that we'd also as the adoption.
Of our agent.
As well because again you need you need the agent to do these agencies.
As what.
Got it thank you.
So we feel we're in good shape.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Ralph for any further remarks.
Thank you all for attending a second quarter 2019 earnings call as sleeping Melissa mentioned, we are holding a credit luncheon for analysts and investors during black hat on Wednesday August seven from 11 am to one PM and registration is available on our website.
You also look forward to seeing you at Citi Global Technology Conference in New York in September .
Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.