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Qualys (NASDAQ: QLYS) is a leading cybersecurity platform offering cloud security and compliance solutions. The company was founded in 1999 and had its IPO in 2012. Since then the stock price has risen more than 938% despite a rocky ride uphill for investors. This is a testament to the strategy of holding quality stocks for the long term and benefiting from growing earnings. Qualys recently beat revenue and earnings estimates for the second quarter and it has a long growth runway. In this post, I’ll break down the company’s business model, its financials, and valuation, let’s dive in.
Secure Business Model
Qualys is a leading cloud security and compliance platform. The company offers a cloud-native SaaS solution that allows businesses to consolidate the use of multiple security vendors. For example, an enterprise might use SentinelOne for IT security, Tenable for Compliance, Invicti for Web app security, ServiceNow for asset management, and then Palo Alto networks for cloud/container security. Whereas Qualys covers all these products in a single solution, which lowers the cost and lowers the overhead of managing the platform.
A Platform (Qualities)
The Total addressable market in these various security segments is expected to expand 1.42x by 2025 and reach a staggering $51 billion. So if Qualys could only capture 5% of this market that would be worth over $2.5 billion in revenue, which is significantly higher than the $600 million in revenue generated today.
TAM (Gartner, Qualys data)
The digital transformation industry is forecast to grow at more than 19% Compounded Annual Growth Rate until 2026. Therefore, many companies will need a new cloud-based security and compliance solution, which also works well with hybrid IT setups, Qualys is ready to fill this gap.
The company aims to accomplish this by creating a best-in-class product that includes over 20 integrated IT, Security, and compliance Apps. Its flagship Vulnerability Management Detection and Response [VMDR] The platform allows users to manage cybersecurity risk, get pre-emptive alerts on potential attacks and even automate “remediation” that allows rapid containment of threat.
VMDR 1 (investor presentation)
Its VMDR platform has 4.4 out of 5 stars in Gartner reviews. Positive comments include “vulnerability scanning in the blink of an eye.” But there are some negative comments about the long waiting time for technical support.
The company has already achieved strong traction for its product where it has been adopted by 66% of the Forbes Global 50, 46% of the Global 500, and 25% of the Global 2000. More than 10,000 of these customers are on a subscription , which means predictable recurring income is standard. Its customers include big names like Apple, Amazon, Alphabet/Google, Ford, McDonald’s, Costco, Cisco, Microsoft, Netflix, Mastercard, Visa, and more. The high quality of its customer base is an important testament to its product quality.
Customers (Quallys Investor Presentation Q2)
The company grew its customer base through a two-pronged Go to Market strategy. This includes 59% of sales coming directly from Enterprises and mid-market businesses. In addition, with 41% of sales generated through partnerships with leading consultancies such as Accenture, Deloitte, BT, Verizon, AT&T and many more. This is a very smart approach as many businesses will turn to a consultancy, when undergoing a digital transformation and so Qualys is a step ahead.
Go to Market (Investor Presentation)
Qualys also runs a series of events such as its 10-city roadshow the Qualys Security Conference [QSC] covering London, Chicago, New York and San Francisco.
Growing Finances
Qualys generated strong financials for the second quarter of 2022. Revenues were $119.9 million which was up 20% year over year and beat analyst expectations by $2.36 million. With $233 million in year-to-date revenue as seen in the chart below. This is amazing considering full year 2018 revenue was only $279 million.
Qualys Revenue (Q2 Earnings Report)
Its revenue was boosted by a strong number of larger customers with 139 businesses now spending $500,000 or more with the company, up 23% over the past 4 years. Its Patch Management solution achieved a blistering growth of 50% Y/Y and contributed to 5% of first-time bookings and 9% for new customers.
Qualys’ average deal size increased 17% year-over-year, as customers use the platform to secure Internet of Things (IoT) devices and applications in the cloud, containers, and on-prem. Total VMDR customer penetration also expanded to 43%, from 28% in the corresponding period last year.
VMDR Penetration (Q2 Earnings Report)
Qualys generated a solid gross profit of $94.8 million, which grew 21% year over year. As a SaaS company, it has a very high Gross Margin of 79%, which has increased by 1% year-on-year.
Earnings Per Share came in at $0.67 beating analyst estimates by $0.20. Operating Income also expanded to $33 million, up 12% year over year. Adjusted EBITDA also increased 16% year over year to $54.4 million, and a 45% margin. From the chart below you can see the Adjusted EBITDA [year to date] was $109 million, which is the same as the full year of 2018, which is good to see.
Adjusted EBITDA (Q2 Earnings Report)
Operating Cash flow was down 38% year over year to $33.8 million. The company invested $3.5 million in capital expenditures and repurchased $71.2 million worth of shares, which is a positive sign.
Qualys has a fortress balance sheet with $419.1 million in cash and short-term investments, with only $42.9 million in debt.
Bullish Guidance
Forward management raised its revenue guidance for the full year to between $488 million and $489.5 million, which would be a 19% year-over-year increase.
Management also raised its profitability guidance to full-year earnings per share expected to be between $3.50 and $3.55.
Advanced Valuation
To value Qualys, I plug the latest financials into my advanced valuation model that uses the discounted cash flow method of valuation. I forecast 19% revenue growth per year for the next 5 years. This is based on industry growth rates and analyst estimates.
Qualys stock valuation 1 (created by author Ben at Motivation 2 Invest)
I predict that the company’s operating margin will increase from ~32% to 37% over the next 7 years. As the company benefits from cross-sells and continues to grow its larger customer base. For added precision, I capitalized the company’s R&D expenses, this made the operating margin higher in my model.
Qualys stock valuation (created by author Ben at Motivation 2 Invest)
Given these financial inputs I get a fair value of $138/share, the stock is trading at $146/share at the time of writing and is thus slightly overvalued.
As an additional datapoint, Qualys trades on a PE Ratio [forward] = 41.61 which is 5% cheaper than its 5-year average.
Risks
Competition
The cybersecurity industry has many competitors that include SentinelOne (S), CrowdStrike (CRWD), Palo Alto Networks (PANW), Okta (OKTA) and many others. I believe Qualys has a strong offering in the enterprise space because it acts as a vendor consolidator that greatly simplifies the management process for companies.
Recession
Many analysts are predicting a recession and so even if they are wrong, the expectation of a recession may cause a temporary setback in IT spending.
Final Thoughts
Qualys is a rare cybersecurity company in that it is both fast-growing and highly profitable. I believe the company’s profitability and the quality of its customers mean it deserves to trade at a premium to the market. Therefore, I would mark this stock as a “Buy”. However, cautious investors may want to set up buy alerts and wait for a pullback before entering. The stock price is notoriously volatile and is trading at just $122 per share with strong support in July, so the buy point may offer a greater margin of safety.