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), Custom Assessment and Remediation (CAR), Context Extended Detection and Response (XDR), Network Detection and Response (NDR); • 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 AssetView (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 2022, 2021 and 2020, 60%, 61% and
63%, respectively, of our revenues were derived from customers in
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Impacts of Current Macroeconomic Environment
The uncertainty surrounding macroeconomic factors in the
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 who operate our shared cloud platforms and provide support services to our customers. Other expenses include depreciation of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of third-party shared cloud platforms and cloud infrastructures, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to make capital investments to expand and support our shared cloud platform and cloud infrastructure operations, which will increase the cost of revenues in absolute dollars.
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. We expect to continue to devote resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses will increase in absolute dollars.
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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 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, 2022 2021 Revenues 100 % 100 % Cost of revenues 21 22 Gross profit 79 78 Operating expenses: Research and development 21 20 Sales and marketing 20 19 General and administrative 12 18 Total operating expenses 53 57 Income from operations 26 21 Total other income, net 1 - Income before income taxes 27 21 Income tax provision 5 4 Net income 22 % 17 %
Comparison of Years Ended
Revenues Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages)
Revenues$ 489,723 $ 411,172 $ 78,551 19 %
Revenues increased by
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Table of Contents Cost of Revenues Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Cost of revenues$ 102,788 $ 89,439 $ 13,349 15 %
Cost of revenues increased by
Research and Development Expenses
Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Research and development$ 101,186 $ 81,289 $ 19,897 24 %
Research and development expenses increased by
Sales and Marketing Expenses
Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Sales and marketing$ 97,221 $ 76,487 $ 20,734 27 %
Sales and marketing expenses increased by
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General and Administrative Expenses
Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) General and administrative$ 57,981 $ 76,274 $ (18,293 ) (24 )%
General and administrative expenses decreased by
Total other income, net Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Total other income, net$ 3,153 $ 1,714 $ 1,439 84 % Total other income, net increased by$1.4 million in 2022 compared to 2021, due to an increase in interest income of$2.9 million driven by continued interest rate increase in 2022, offset by an increase in foreign exchange loss of$1.5 million . Income tax provision Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Income tax provision$ 25,708 $ 18,437 $ 7,271 39 %
Income tax provision increased by
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Key Operating and Non-GAAP Financial Performance Metrics
In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.
Net Dollar Expansion Rate
We evaluate our ability to retain and grow existing customers by assessing our net dollar expansion rate on a last twelve months, or LTM, basis. This metric is used to appropriately manage resources and customer retention and expansion. We calculate the net dollar expansion rate on a foreign exchange neutral basis by dividing a numerator by a denominator, each defined as follows:
Denominator: To calculate our net dollar expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR, from all active subscriptions as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.
Numerator: We measure the ARR for that same cohort of customers representing all active subscriptions as of the end of the reporting period, using the same foreign exchange rate from the prior year.
Our net dollar expansion rates were 109% and 108% for the years ended
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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, 2022 2021 (in thousands) Net income$ 107,992 $ 70,960 Net income as a percentage of revenues 22 % 17 % Depreciation and amortization of property and equipment 28,936 29,236 Amortization of intangible assets 5,686 6,661 Income tax provision 25,708 18,437 Stock-based compensation 53,408 67,579 Total other income, net (3,153 ) (1,714 ) Adjusted EBITDA$ 218,577 $ 191,159 Adjusted EBITDA as a percentage of revenues 45 % 46 % 46
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Liquidity and Capital Resources
As of
Year Ended December 31, 2022 2021 (in thousands) Cash provided by operating activities$ 198,854 $ 200,616 Cash provided by (used in) investing activities 145,068 (29,532 ) Cash used in financing activities (306,031 ) (107,888 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ 37,891 $ 63,196 Operating Activities
In 2022, we generated
Net cash taxes paid, excluding prepaid income taxes, during 2022 were
approximately
Investing Activities
In 2022, we generated
Financing Activities
In 2022, 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 shared cloud platforms. We had fixed operating lease payment obligations of$46.4 million as ofDecember 31, 2022 , with$14.9 million expected to be paid within the next 12 months. • Cash outflow for capital expenditures in 2023 is expected to be in a range of$18.0 million to$25.0 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 shared cloud platforms 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$77.1 million , of which$25.6 million is expected to be paid within the next 12 months.
We expect to continue to use cash to repurchase shares in 2023 under our share
repurchase program authorized by our board of directors on
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), expectations of future income, our interpretation of current tax laws, our business, 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 that could be material in the future.
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. If factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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