Qualys Earnings: Quality Firm Closes Another Strong Quarter Despite Macroeconomic Pressures

We are raising our fair value estimate for narrow-moat Qualys QLYS to $143 from $135 after the firm finished its third quarter with strong sales and profitability. Much like prior quarters, we were impressed with the firm’s emphasis on driving profitable growth as it navigates a tricky macroeconomic environment. We continue to view Qualys as well positioned to serve a variety of security needs faced by its clients, which are typically small and midsize businesses. With the firm expanding solutions beyond its core vulnerability management offering, we view this expansion positively and think that it will provide Qualys with more upselling/cross-selling opportunities in the future. The firm’s shares traded slightly down after-hours and we view them as fairly valued after our fair value estimate increase.

Qualys’ third-quarter revenue clocked in at $142 million, up 13% year over year and in line with our estimate. The firm’s vulnerability management, detection, and response solution continued to gain traction among its clients with 54% of Qualys’ existing customers using its VMDR offering, up from 45% a year ago. We believe that as more customers adopt Qualys’ VMDR offering, the firm can entrench itself into these customers’ ecosystems, opening further upselling/cross-selling opportunities.

The firm’s net retention for the quarter was 106%, down 500 basis points year over year and 200 basis points sequentially. While Qualys’ net retention is lower than other cybersecurity vendors under our coverage, we believe the company’s net retention rate is impressive considering its SMB-leaning customer base, which typically has higher churn rates than the enterprise segment of the market.

Qualys’ margin profile remained strong this quarter with GAAP operating margins clocking in at 31%, up 400 basis points year over year. We attribute this margin expansion to Qualys’ increased focus on driving operating leverage and imposing strong financial discipline throughout the firm.