QUALYS, INC. You should read the following discussion in conjunction with our consolidated
financial statements and the related notes included elsewhere in this Annual
Report on Form 10-
Overview
We are a pioneer and leading provider of a cloud-based platform delivering IT, security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. Our cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on our Qualys Cloud Platform enables our customers to identify and manage their IT assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, recommend and implement remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions to cost-effectively obtain a unified view of their IT asset inventory as well as security and compliance posture across globally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.
We were founded and incorporated in
• IT Security: Vulnerability Management (VM), Vulnerability Management,
Detection and Response (VMDR), Threat Protection (TP), Continuous Monitoring
(CM), Patch Management (PM), Multi-Vector Endpoint Detection and Response
(EDR), Certificate Assessment (CRA), SaaS Detection and Response (SaaSDR),
Secure Enterprise Mobility (SEM);
• Compliance: Policy Compliance (PC), Security Configuration Assessment (SCA),
PCI Compliance (PCI), File Integrity Monitoring (FIM), Security Assessment
Questionnaire (SAQ), Out of-Band Configuration Assessment (OCA);
• Web Application Security: Web Application Scanning (WAS), Web Application
Firewall (WAF);
• Asset Management: Global Asset View (GAV), Cybersecurity Asset
Management (CSAM), Certificate Inventory (CRI); and
• Cloud/Container Security: Cloud Inventory (CI), Cloud Security Assessment
(CSA), Container Security (CS).
We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access each of our cloud solutions. We generally invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. We continue to experience revenue growth from our existing customers as they renew and purchase additional subscriptions, as well as from the addition of new customers to our cloud platform.
We market and sell our solutions to enterprises, government entities and small
and medium-sized businesses across a broad range of industries, including
education, financial services, government, healthcare, insurance, manufacturing,
media, retail, technology and utilities. In 2021, 2020 and 2019, 61%, 63% and
64%, respectively, of our revenues were derived from customers in
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Table of Contents Impacts of COVID-19
In
Key Components of Results of Operations
Revenues
We derive revenues from the sale of subscriptions to our IT, security and compliance solutions, which are delivered on our cloud platform. Subscriptions to our solutions allow customers to access our cloud-based IT, security and compliance solutions through a unified, web-based interface. Customers generally enter into one-year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for our solutions. In some cases, we also provide certain computer equipment used to extend our Qualys Cloud Platform into our customers' private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions.
We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our consolidated balance sheets as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represent the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods.
Cost of Revenues
Cost of revenues consists primarily of personnel expenses, comprised of
salaries, benefits, performance-based compensation and stock-based compensation,
for employees
Operating Expenses Research and Development
Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations.
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Table of Contents Sales and Marketing
Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to significantly invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.
General and Administrative
General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal requirements.
Other Income (Expense), Net
Our other income (expense), net consists primarily of interest and investment
income from our short-term and long-term marketable securities and foreign
exchange gains and losses, the majority of which result from fluctuations
between the
Income Tax Provision
We are subject to federal, state and foreign income taxes for jurisdictions in
which we operate, and we use estimates in determining our income tax provision
and deferred tax assets. Earnings from our non-
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Table of Contents Results of Operations
The following table sets forth selected consolidated statements of operations data for each of the periods presented as a percentage of revenues:
Year Ended December 31,
2021 2020
Revenues 100 % 100 %
Cost of revenues 22 22
Gross profit 78 78
Operating expenses:
Research and development 20 20
Sales and marketing 19 19
General and administrative 18 12
Total operating expenses 57 51
Income from operations 21 27
Total other income, net - 1
Income before income taxes 21 28
Income tax provision 4 3
Net income 17 % 25 %
Comparison of Years Ended
Revenues
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)Revenues$ 411,172 $ 362,963 $ 48,209 13 %
Revenues increased by
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Table of Contents
Cost of Revenues
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Cost of revenues $ 89,439 $ 79,226 $ 10,213 13 %
Cost of revenues increased by
Research and Development Expenses
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Research and development $ 81,289 $ 72,548 $ 8,741 12 %
Research and development expenses increased by
Sales and Marketing Expenses
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Sales and marketing $ 76,487 $ 67,965 $ 8,522 13 %
Sales and marketing expenses increased by
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Table of Contents
General and Administrative Expenses
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
General and administrative $ 76,274 $ 46,570 $ 29,704 64 %
General and administrative expenses increased by
Total other income, net
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Total other income, net $ 1,714 $ 5,383 $ (3,669 ) (68 )%
Total other income, net decreased by
Income tax provision
Year Ended
December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Income tax provision $ 18,437 $ 10,465 $ 7,972 76 %
Income tax provision increased by
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Table of Contents Key Non-GAAP Metric
In addition to measures of financial performance presented in our consolidated financial statements, we monitor the non-GAAP key metric set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.
Adjusted EBITDA
We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our
financial results and believe that it is useful to investors, as a supplement to
Adjusted EBITDA should not be considered in isolation from, or as a substitute
for, financial information prepared in accordance with
Adjusted EBITDA has limitations as an analytical tool and should not be
considered in isolation from or as a substitute for the measures presented in
accordance with
• Adjusted EBITDA does not reflect certain cash and non-cash charges that are
recurring;
• Adjusted EBITDA does not reflect income tax payments that reduce cash
available to us;
• Adjusted EBITDA excludes depreciation and amortization of property and
equipment and amortization of intangible assets, although these are non-cash
charges, the assets being depreciated and amortized may have to be replaced in
the future; and
• Other companies, including companies in our industry, may calculate Adjusted
EBITDA differently or not at all, which reduces its usefulness as a
comparative measure.
Because of these limitations, Adjusted EBITDA should be considered alongside
other financial performance measures, including revenues, net income, cash flows
from operating activities and our financial results presented in accordance with
The following unaudited table presents the reconciliation of net income to
Adjusted EBITDA for the years ended
Year Ended December 31,
2021 2020
(in thousands)
Net income $ 70,960 $ 91,572
Depreciation and amortization of property and equipment 29,236 26,556
Amortization of intangible assets 6,661 6,289
Income tax provision 18,437 10,465
Stock-based compensation 67,579 40,035
Total other income, net (1,714 ) (5,383 )
Adjusted EBITDA $ 191,159 $ 169,534
Percentage of revenues 46 % 47 %
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Table of Contents
Liquidity and Capital Resources
As of
Year Ended December 31,
2021 2020
(in thousands)
Cash provided by operating activities $ 200,616 $ 180,086
Cash used in investing activities (29,532 ) (80,932 )
Cash used in financing activities (107,888 ) (112,581 )
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 63,196 $ (13,427 )
Operating Activities
In 2021, we generated
Investing Activities
In 2021, we used
Financing Activities
In 2021, we used
We believe our existing cash and cash equivalents, marketable securities and our expected cash flow generated from operations will be sufficient to fund our operations for the next twelve months and beyond. We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. However, if we repatriate these funds, we could be subject to foreign withholding taxes.
Our material cash requirements mainly include the following contractual and other obligations:
• Our operating lease obligations to make payments under our non-cancelable
lease agreements for our facilities and data centers. We had fixed
operating lease payment obligations of $54.2 million as of December 31,
2021 , with $14.5 million expected to be paid within the next 12 months.
• Cash outflow for capital expenditures in 2022 is expected to be in a range
of $25.0 million to $30.0 million . Our future capital requirements will
depend on many factors, including our rate of revenue growth, the expansion
of our sales and marketing activities, the timing, type and extent of our
spending on research and development efforts, international expansion and
investment in data centers and cloud infrastructures. We may also seek to
invest in or acquire complementary businesses or technologies.
• Other non-cancelable purchase obligations related to cloud infrastructures
and other service providers totaled $36.4 million , of which $16.4 million
is expected to be paid within the next 12 months.
We expect to continue to use cash to repurchase shares in 2022 under our share
repurchase program authorized by our board of directors on
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Table of Contents Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with
Income Taxes
Significant assumptions, judgments and estimates are involved in determining our provision for (benefit from) income taxes, our deferred tax assets and liabilities, and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current provision for income taxes include the geographic mix and amount of income (loss), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Our judgments also include anticipating the tax positions we will record in the financial statements before preparing and filing the tax returns. Our estimates and assumptions may differ from the actual results as reflected in our income tax returns and we record the required adjustments when they are identified or resolved. Changes in our business and tax laws or our interpretation of those, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in our results of operations, financial position, or cash flows.
The assessment of tax effects of our uncertain tax positions in our financial statements involves significant judgment in interpreting complex and ambiguous tax laws, regulations, and administrative practices, determining the probability of various possible settlement outcomes, evaluating the litigation process based on tax authority behaviors in similar cases, and estimating the likelihood that another taxing authority could review the respective tax position. These judgments are inherently challenging and subjective because a taxing authority may change its behavior at any time. We must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. We reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax laws, effectively settled issues under audit, the potential for interest and penalties, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
Stock-Based Compensation
We recognize the fair value of our employee stock options and restricted stock units, including performance-based restricted stock units, over the requisite service period. The fair value of each stock option is estimated on date of grant using the Black-Scholes-Merton option pricing model. Determining the appropriate fair value model and calculating the fair value of employee stock options requires the use of subjective assumptions, including the expected life of the stock option and stock price volatility. The recognition of expenses for performance based restricted stock units requires us to estimate the probability that the performance condition will be achieved and the number of awards that will vest are adjusted accordingly at each reporting period. The assumptions used in calculating the fair value of employee stock options and estimating the probability of achievement of performance metrics represent management's best estimates, which require significant judgment and involve inherent uncertainties. While not material to the current year, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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