What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-21 compared with 2024-02-22 · 30 added, 32 removed, 199 unchanged (24% of the section changed)

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Factors that could cause such differences include, but are not limited to, those described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

We are a pioneer and leading provider of a cloud-based platform delivering information technology (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 platform address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets.

We are a leading provider of a cloud-based platform delivering information technology (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 platform addresses the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between 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 Qualys' Enterprise TruRisk Platform enables our customers to identify and manage their IT and operational technology (OT) assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, quantify cyber risk exposure, recommend and implement remediation actions and verify the implementation of such actions.

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The uncertainty surrounding macroeconomic factors in the U.S.

and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, financial institution failures and associated uncertainty, labor shortages, significant volatility of global markets, reduced spending and extended sales cycles, and geopolitical conflicts could have a material adverse effect on our long-term business and could lead to further economic disruption and expose us to greater risk as our current and potential customers may reduce or eliminate their overall spending on IT security.

and globally characterized by inflationary pressure, high interest rates, significant volatility of global markets, reduced spending and extended sales cycles, and geopolitical conflicts could have a material adverse effect on our long-term business and could lead to further economic disruption and expose us to greater risk as our current and potential customers may reduce or eliminate their overall spending on IT security.

We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.

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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 shared cloud platforms, 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 expand our shared cloud platform infrastructures and hire additional employees to support our operations, which will increase the cost of revenues in absolute dollars.

We expect to continue to expand our shared cloud platform infrastructures and invest in our customer support and operations teams to support our customers and operations, which in turn, is expected to increase the cost of revenues in absolute dollars.

Operating Expenses

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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.

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, which in turn, is expected to increase the research and development expenses in absolute dollars.

Sales and Marketing

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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.

We expect to continue to invest in sales and marketing teams and also in more marketing programs to support new solutions on our platform, which in turn, is expected to 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.

We expect to continue to invest in our people and incur professional services to support our growth and compliance with legal and regulatory requirements, which in turn, is expected to increase general and administrative expenses in absolute dollars.

Other Income (Expense), Net

Our other income (expense), net consists primarily of interest and returns from our short-term and long-term marketable securities, non-marketable securities gains and losses, and foreign exchange gains and losses.

Our other income (expense), net consists primarily of interest and returns from our cash equivalent, short-term and long-term marketable securities, non-marketable securities gains and losses, and foreign exchange gains and losses.

Income Tax Provision

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We regularly assess the realizability of our net deferred tax assets.

As of December 31, 2023, valuation allowances remain in certain jurisdictions where we believe it is necessary to see further positive evidence, such as sustained achievement of sufficient profits to meet a more likely than not stance that the valuation allowance should be reversed.

If additional positive evidence becomes available in the foreseeable future, we may release all or a portion of the valuation allowance.

As of December 31, 2024, valuation allowances remain in certain jurisdictions where we believe it is necessary to see positive evidence, such as sustained achievement of sufficient profits, to meet a more likely than not stance that the valuation allowance should be reversed.

The exact timing and amount of the valuation allowance release is subject to change based on the level of profitability achieved in future periods.

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Cost of revenues $ 111,482 $ 107,485 $ 3,997 4 %

Cost of revenues increased by $4.7 million in 2023 compared to 2022, due to an increase in personnel costs, including stock-based compensation, of $5.1 million, driven by additional employees hired to support the growth of our business, an increase in shared cloud platform cost of $4.8 million, and an increase in subscribed license and software costs of $1.5 million, partially offset by a decrease in depreciation and amortization expense of $6.7 million resulting from our assets becoming fully depreciated or amortized.

Cost of revenues increased by $4.0 million in 2024 compared to 2023, primarily due to an increase in shared cloud platform cost of $6.0 million, an increase in personnel costs, including stock-based compensation, of $4.6 million, driven by additional employees hired to support the growth of our business, an increase in license expenses and professional service expenses of $1.2 million, partially offset by a decrease in depreciation and amortization expense of $7.8 million resulting from certain of our assets becoming fully depreciated or amortized.

Research and Development Expenses

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Research and development $ 111,852 $ 110,472 $ 1,380 1 %

Research and development expenses increased by $9.3 million in 2023 compared to 2022, due to an increase in personnel costs, including stock-based compensation, of $11.4 million, driven by increased headcount, annual merit increases for eligible employees and refresh grants to eligible employees, partially offset by a decrease in professional service expense of $1.2 million, and a decrease in depreciation and amortization expense in property and equipment of $0.9 million.

Research and development expenses increased by $1.4 million in 2024 compared to 2023, primarily due to an increase in personnel costs, including stock-based compensation, of $2.8 million, driven by increased headcount, partially offset by a decrease in depreciation and amortization expense in property and equipment of $0.8 million, and a decrease in overhead allocation of $0.6 million.

Sales and Marketing Expenses

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Sales and marketing $ 128,303 $ 111,691 $ 16,612 15 %

Sales and marketing expenses increased by $14.5 million in 2023 compared to 2022, due to an increase in personnel costs, including stock-based compensation, of $13.6 million, driven by increased headcount, an increase in travel and entertainment cost of $1.5 million associated with increased in-person sales meetings and marketing events, and an increase in subscribed license and software costs of $0.7 million, partially offset by a decrease in professional service expense of $1.3 million.

Sales and marketing expenses increased by $16.6 million in 2024 compared to 2023, primarily due to an increase in personnel costs, including stock-based compensation, of $12.9 million, driven by increased headcount, an increase in travel and entertainment cost of $1.8 million, an increase in marketing expenses related to trade shows of $0.7 million, an increase in overhead allocation of $0.7 million, and an increase in subscribed license and software costs of $0.5 million.

General and Administrative Expenses

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General and administrative $ 68,738 $ 61,741 $ 6,997 11 %

General and administrative expenses increased by $3.8 million in 2023 compared to 2022, due to an increase in personnel costs, including stock-based compensation of $5.7 million, driven by increased headcount, annual merit increases for eligible employees and refresh grants to eligible employees and executives, and an increase in subscribed license and software cost of $0.8 million, partially offset by a decrease in professional service expense of $1.4 million, and a decrease in legal expense of $1.3 million.

General and administrative expenses increased by $7.0 million in 2024 compared to 2023, primarily due to an increase in personnel costs, including stock-based compensation, of $6.3 million, driven by increased headcount, annual merit increases and refresh grants to eligible employees and executives, and an increase in subscribed software costs and other expenses of $0.7 million.

Total other income, net

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Total other income, net $ 22,626 $ 15,582 $ 7,044 45 %

Total other income, net increased by $12.4 million in 2023 compared to 2022, due to an increase in interest income of $11.7 million driven by an increase of market interest rates, in addition to a $1.2 million decrease in foreign currency loss, partially offset by an unrealized loss of $0.5 million on a non-marketable equity security.

Total other income, net increased by $7.0 million in 2024 compared to 2023, primarily due to an increase in interest income of $8.9 million driven by an increase in our average daily cash and investment balance, a non-recurring unrealized loss of $0.5 million on a non-marketable equity security recognized during 2023, partially offset by an increase in foreign currency loss of $2.4 million.

Income tax provision

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Income tax provision $ 36,142 $ 27,056 $ 9,086 34 %

On July 21, 2023, the IRS issued a rule change allowing taxpayers to temporarily apply the regulations in effect prior to 2022 related to U.S.

federal foreign tax credits to foreign taxes paid or accrued in years 2022 and 2023.

Additionally, on September 8, 2023, the IRS issued interim guidance on the capitalization and amortization of research and development expenses.

A cumulative tax benefit applicable to prior periods for the rule change and the guidance was recorded in 2023, which reduced the effective tax rate in 2023 compared to 2022.

On December 11, 2023, the IRS extended the temporary relief for U.S.

Federal foreign tax credit until further guidance, which is expected to provide similar tax benefits in future tax years.

Income tax provision increased by $1.3 million in 2023 compared to 2022, primarily due to an increase in pretax income and a decrease in excess tax benefits arising from stock-based compensation compared to the same period in 2022.

The increase was partially offset by higher foreign tax credits and lower net capitalization of research and development expenses for tax purposes than previously estimated, reflecting the rule change and the guidance.

Income tax provision increased by $9.1 million in 2024 compared to 2023, primarily due to the tax effect of an increase in pretax income, increase in foreign withholding taxes, decrease in excess tax benefit from stock-based compensation compared to prior year, and decrease in other discrete tax adjustments.

The increase in tax expense was partially offset by an increase in foreign derived intangible income benefit, an increase in research and development tax credits, and the recognition of an income tax benefit related to uncertain tax positions due to statute lapse.

For the year ended December 31, 2024 , our income tax provision included a benefit of $2.5 million related to an increase in foreign derived intangible income benefit and research and development tax credits associated with our U.S.

income tax return filed during the year.

Key Operating and Non-GAAP Financial Performance Metrics

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Net cash provided by operating activities $ 244,094 $ 244,605

Net cash (used in) provided by investing activities (73,166) 145,068

Net cash used in investing activities

(71,427) (73,166)

Net cash used in financing activities (145,650) (141,493)

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In 2024, we generated $243.9 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to $226.4 million in 2023.

In addition, we also generated $18.2 million of cash from working capital change in 2023, of which $22.7 million was related to a net increase in deferred revenue and accounts receivable due to the growth in billing and the timing of collections, partially offset by a $1.1 million decrease in payables and accrued liabilities and a $3.4 million increase in prepaid expenses primarily driven by the timing of payments.

In 2022, we generated $177.2 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes, as compared to $169.6 million in 2021.

In addition, we also generated $21.7 million of cash from working capital change in 2022, of which $11.8 million was related to a net increase in deferred revenue and accounts receivable as a result of our continued growth in billing and the timing of collections, and $9.9 million was due to lower prepaid expenses and an increase in payables and accrued liabilities primarily due to timing of payments.

In addition, we also generated $0.2 million of cash from working capital change in 2024, of which $11.7 million was related to the

increases in accounts receivable and deferred revenue due to the timing of collections and growth in billings, a $3.2 million increase in payables and accrued liabilities driven by the timing of payment, partially offset by a $14.7 million increase in prepaid expenses.

In 2023, we generated $226.4 million of cash from our net income, as adjusted for non-cash items mainly related to stock-based compensation expense, depreciation and amortization expense and deferred taxes.

In addition, we also generated $18.2 million of cash from working capital change in 2023, of which $22.7 million was related to the net increase in deferred revenue and accounts receivable due to the growth in billing and the timing of collections, partially offset by a $1.1 million decrease in payables and accrued liabilities and a $3.4 million increase in prepaid expenses primarily driven by the timing of payments.

Investing Activities

In 2023, we used $64.4 million of cash for purchases of marketable securities net of sales and maturities, and used $8.8 million of cash in capital expenditures mainly related to computer equipment to support our growth and development, as compared to $169.0 million of cash generated from net sales and maturities of our marketable securities, $15.4 million of cash used in capital expenditures mainly related to computer equipment to support our growth and development and $8.6 million of cash used to acquire certain technology assets in 2022.

In 2024, we used $59.1 million of cash for purchases of marketable securities net of sales and maturities, and used $12.3 million of cash in capital expenditures mainly related to computer equipment to support our growth and development and leasehold improvement for expansion of our office spaces and shared cloud platform facilities, as compared to the use of $64.4 million of cash for purchases of marketable securities net of sales and maturities, and the use of $8.8 million of cash in capital expenditures mainly related to computer equipment to support our growth and development in 2023.

Financing Activities

In 2023, we used $170.8 million of cash for share repurchase and $22.3 million of cash in payment of employee withholding taxes upon vesting of restricted stock units, partially offset by $45.6 million of proceeds from employee exercise of stock options and $6.1 million of proceeds from issuance of common stock through our employee stock purchase plan ("ESPP"), as compared to $317.3 million of cash used for share repurchase and $17.6 million of cash in payment of employee withholding taxes upon vesting of restricted stock units, partially offset by $24.5 million of proceeds from employee exercise of stock options and $4.4 million of proceeds from issuance of common stock through our ESPP in 2022.

In 2024, we used $139.9 million of cash for share repurchases and $28.4 million of cash in payment of employee withholding taxes upon vesting of restricted stock units and $1.5 million payment of cash held in escrow as part of the Blue Hexagon acquisition on October 4, 2022, partially offset by $17.3 million of proceeds from employee exercise of stock options and $6.9 million of proceeds from issuance of common stock through our employee stock purchase plan ("ESPP"), as compared to $170.8 million of cash for share repurchase and $22.3 million of cash in payment of employee withholding taxes upon vesting of restricted stock units, partially offset by $45.6 million of proceeds from employee exercise of stock options and $6.1 million of proceeds from issuance of common stock through our ESPP in 2023.

Material Cash Requirements

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We expect to continue to use cash to repurchase shares in 2025 under our share repurchase program authorized by our board of directors on February 5, 2018.

As of December 31, 2023, our board of directors had authorized an aggregate amount of $1.0 billion for repurchases under our share repurchase program, of which approximately $83.7 million remained available.

Shares will be repurchased from time to time in the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act.

As of December 31, 2024, approximately $143.4 million remained available under our share repurchase program.

Shares will be repurchased from time to time in privately negotiated transactions or on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act.

On February 6, 2025, we announced that our board of directors authorized an additional $200.0 million under the share repurchase program, increasing the total amount of authorized repurchase to $1.4 billion.

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GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Our significant accounting policies are described in Note 1 - The Company and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Our significant

accounting policies are described in Note 1 - The Company and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

On an ongoing basis, we evaluate our estimates and assumptions based on historical and anticipated results and trends that we believe represent our best estimate under the circumstances.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis