What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-07 · 83 added, 52 removed, 197 unchanged (41% of the section changed)

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• our ability to adapt to changing market conditions;

the impact of the recent COVID-19 coronavirus pandemic and related public health measures on our business;

• the impact of the ongoing COVID-19 pandemic and related public health measures on our business;

• economic and financial conditions, including volatility in foreign exchange rates;

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We cannot provide assurance that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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 a pplications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations.

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 a pplications from ever-evolving cyber-attacks and achieve compliance with internal policies and external

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.

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These Cloud Apps address and include:

• IT Security:

Vulnerability Management (VM), Vulnerability Management, Detection, and Response (VMDR);

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Cloud Inventory (CI), Cloud Security Assessment (CSA), Container Security (CS).

Our VM solutions (including VM, VMDR, CM, TP, Cloud Agent for VM , allocated scanner revenue and Qualys Private Cloud Platform) have provided a substantial majority of our revenues to date, representing 72% and 73% of our revenues for the three months ended March 31, 2020 and 2019, respectively.

Our VM solutions (including VM, VMDR, CM, TP, Cloud Agent for VM , CS, allocated scanner revenue and Qualys Private Cloud Platform) have provided a substantial majority of our revenues to date, representing 72% and 73% of our revenues for the six months ended June 30, 2020 and 2019, respectively.

We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions.

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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 the three months ended March 31, 2020 and the corresponding period of 2019, approximately 64% and 65% , respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses.

In each of the six months ended June 30, 2020 and 2019, approximately 64% of our revenues were derived from customers in the United States based on our customers' billing addresses.

We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force.

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As a result of COVID-19, we have modified certain aspects of our business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal,

state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.

While we have not incurred significant disruptions from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business of our customers and partners.

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Key Components of Results of Operations

We derive revenues from the sale of subscriptions to our security and compliance solutions, which are delivered on our cloud platform.

Subscriptions to our solutions allow customers to access our cloud-based security and compliance solutions through a unified, web-based interface.

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.

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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, information technology, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations.

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.

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The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Revenues 100 % 100 % 100 % 100 %

Cost of revenues 21 22 21 23

Gross profit 79 78 79 77

Operating expenses:

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Provision for income taxes 1 3 2 3

Comparison of Three Months Ended March 31, 2020 and 2019

Three Months Ended March 31,

Net income 30 % 21 % 26 % 20 %

Comparison of Three and Six Months Ended June 30, 2020 and 2019

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

Revenues increased $10.9 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after March 31, 2019 .

Revenues $ 88,830 $ 78,929 $ 9,901 12.5 % $ 175,093 $ 154,272 $ 20,821 13.5 %

Revenues increased $9.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019 .

Of the total increase of $9.9 million, $6.3 million was from customers in the United States and the remaining $3.6 million was from customers in foreign countries.

Revenues increased $20.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due to an increase in the purchase of subscriptions from existing customers and new customer subscriptions entered into after June 30, 2019.

Of the total increase of $20.8 million, $12.6 million was from customers in the United States and the remaining $8.2 million was from customers in foreign countries.

We expect revenue growth from existing and new customers to continue.

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Cost of Revenues

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

Cost of revenues $ 18,891 $ 17,537 $ 1,354 7.7 % $ 37,386 $ 35,246 $ 2,140 6.1 %

Cost of revenues increased $0.8 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 .

The increase was primarily due to a $0.4 million increase in data center costs, $0.4 million increase in licenses and software services, and $0.3 million increase in equipment repair and maintenance expenses due to our continued business growth.

These increases were partially offset by a decrease in depreciation expenses associated with data center equipment.

Cost of revenues increased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The increase was primarily due to an increase in licenses and software services of $0.5 million, an increase in data center costs of $0.3 million to meet growing demand, an increase in personnel expenses of $0.3 million due to our continued business growth and a $0.3 million increase in allocation of overhead costs to the cost of revenue department related to increased leasing expenses for our new office in India.

Cost of revenues increased $2.1 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The increase was primarily due to an increase in licenses and software services of $0.9 million, an increase in data center costs of $0.8 million and an increase in equipment repair and maintenance expense of $0.6 million.

Research and Development Expenses

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

Research and development $ 18,058 $ 17,695 $ 363 2.1 % $ 36,041 $ 33,532 $ 2,509 7.5 %

Research and development expenses increased $2.1 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , primarily due to an increase in stock-based compensation expense of $1.2 million driven by additional employees hired to support the growth of our business and $0.9 million increase in allocation of overhead costs to the research and development department related to increased leasing expenses for our new office in India.

Research and development expenses increased $0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a $0.7 million increase in allocation of overhead costs to the research and development department mainly caused by an increase in leasing expenses for our new office in India, an increase in stock-based compensation expense of $0.6 million driven by additional employees hired to support the growth of our business and an increase in depreciation and amortization expenses of $0.2 million as a result of increased purchase of computer equipment.

These increases were partially offset by a decrease in acquisition-related expense of $1.1 million.

Research and development expenses increased $2.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in stock-based compensation expense of $1.7 million driven by the headcount increase to support the growth of our business, an increase in allocation of overhead costs to the research and development department of $1.5 million mainly caused by an increase in leasing expenses for our new office in India and an increase in depreciation and amortization expenses as a result of increased purchase of computer equipment of $0.4 million.

These increases were partially offset by a decrease in acquisition-related expense of $1.2 million.

Sales and Marketing Expenses

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

Sales and marketing $ 15,783 $ 17,165 $ (1,382) (8.1) % $ 34,013 $ 34,480 $ (467) (1.4) %

Sales and marketing expenses increased $0.9 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , primarily due to an increase in stock-based compensation expense of $0.5 million and an increase in personnel expenses of $0.4 million driven by additional employees hired to support the growth of our business.

Sales and marketing expenses decreased $1.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a decrease in trade show costs of $1.3 million driven by rescheduling or cancellation of events or changing to online events and a decrease in travel related expenses of $1.0 million due to the COVID-19 pandemic, partially offset by an increase in commission expense of $0.6 million and an increase in stock-based compensation expense of $0.5 million due to additional employees hired to support the growth of our business.

Sales and marketing expenses decreased $0.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a decrease in trade show costs of $1.0 million driven by rescheduling or cancellation of events or changing to online events, a decrease in travel related expenses of $0.8 million and a decrease in customer acquisition costs of $0.2 million.

These decreases were partially offset by an increase in stock-based compensation expense of $0.9 million and an increase in personnel costs of $0.5 million, driven by additional employees hired to support the growth of our business.

General and Administrative Expenses

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

General and administrative $ 10,590 $ 10,424 $ 166 1.6 % $ 21,714 $ 20,855 $ 859 4.1 %

General and administrative expenses increased $0.7 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , primarily due to $0.3 million increase in legal fees and $0.3 million increase in taxes and penalties.

General and administrative expenses increased $0.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to an increase in legal fees of $0.3 million and $0.3 million increase in personnel costs due to additional employees hired to support the growth of our business, partially offset by a decrease in miscellaneous expense of $0.3 million.

General and administrative expenses increased by $0.9 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in legal fees of $0.7 million and an increase in personnel costs of $0.5 million driven by an increase in headcount, partially offset by a decrease in miscellaneous expense of $0.3 million.

Total Other Income, Net

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

Total other income, net $ 1,586 $ 2,401 $ (815) (33.9) % $ 3,372 $ 4,187 $ (815) (19.5) %

T otal other income, net for the three months ended March 31, 2020 remained consistent with the three months ended March 31, 2019 .

T otal other income, net decreased by $0.8 million for each of the three and six months ended June 30, 2020 compared to the same periods ended June 30, 2019, primarily due to a decrease in interest income and accretion of discount from our marketable securities portfolio.

Provision for Income Taxes

Three Months Ended March 31,

Three Months Ended June 30, Change Six Months Ended June 30, Change

2020 2019 $ % 2020 2019 $ %

(in thousands, except percentages)

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Effective tax rate 2.9 % 12.3 % 8.7 % 14.1 %

We recorded an income tax provision of $3.5 million and $2.6 million for the three months ended March 31, 2020 and 2019 , respectively.

The increase in income tax provision for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 , is primarily due to an increase in pre-tax income in the current period.

We recorded an income tax provision of $0.8 million and $2.3 million for the three months ended June 30, 2020 and 2019, respectively, and $4.3 million and $4.8 million for the six months ended June 30, 2020 and 2019, respectively.

The decreases in income tax provision for the three and six months ended June 30, 2020 compared to the same periods ended June 30, 2019 were primarily due to higher excess tax benefits from stock-based compensation in the current period.

Key Non-GAAP Metric

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Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance.

We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

We also believe that Adjusted

EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S.

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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 U.S.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

(in thousands, except percentages)

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Percentage of revenues 48 % 42 % 46 % 41 %

The following unaudited table presents the reconciliation of net income to adjusted EBITDA for the three months ended March 31, 2020 and 2019 :

Three Months Ended

The following unaudited table presents the reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2020 and 2019:

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

(in thousands)

Net income $ 26,319 $ 16,232 $ 45,013 $ 29,498

Depreciation and amortization of property and equipment 6,366 6,354 12,593 12,769

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Other income, net (1,586) (2,401) (3,372) (4,187)

Acquisition-related expense (1) (2)

Acquisition-related expenses (1) (2) (3)

— 1,059 20 1,253

Adjusted EBITDA $ 42,838 $ 33,376 $ 81,033 $ 64,001

(1) For three months ended March 31, 2020, includes $0.02 million of compensation related to acquisitions in 2019 and 2018.

(2) For three months ended March 31, 2019, includes $0.3 million, $1.27 million and $0.01 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively, offset by $1.4 million of reversals of previous obligations.

(1) For six months ended June 30, 2020, includes $0.02 million of compensation related to acquisitions in 2019 and 2018.

(2) For three months ended June 30, 2019, includes $0.1 million, $0.9 million and $0.04 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively.

(3) For six months ended June 30, 2019, includes $0.5 million, $2.1 million and $0.1 million of compensation related to acquisitions in 2019, 2018 and 2017, respectively, offset by $1.4 million of reversals of previous obligations.

Liquidity and Capital Resources

At March 31, 2020 , our principal source of liquidity was cash, cash equivalents, and marketable securities of $434.7 million , including $25.0 million held outside of the United States.

We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

At June 30, 2020 , our principal source of liquidity was cash, cash equivalents, and marketable securities of $445.3 million, including $29.3 million held outside of the United States.

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.

We generated positive cash flows from operations during each of the three months ended March 31, 2020 and 2019 .

We generated positive cash flows from operations during each of the six months ended June 30, 2020 and 2019.

We believe our existing cash, cash equivalents, marketable securities, and cash from operations will be sufficient to fund our operations for at least the next twelve months.

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We may also seek to invest in or acquire complementary businesses or technologies.

While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, the future impact of the pandemic cannot be predicted with certainty and may increase our costs of capital and otherwise adversely affect our business, result of operations, financial condition and liquidity.

The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report:

Three Months Ended

Six Months Ended

(in thousands)

Cash provided by operating activities $ 81,649 $ 81,275

Cash provided by investing activities

Cash used in investing activities $ (10,371) $ (7,547)

Cash used in financing activities $ (44,928) $ (23,373)

Operating Activities

For the three months ended March 31, 2020 , cash flows from operating activities of $52.4 million primarily resulted from our net income of approximately $18.7 million , as adjusted for non-cash items including stock-based compensation of $10.0 million and depreciation and amortization expense of $7.7 million ;

and cash flows from working capital of $14.1 million mainly attributable to the continued growth in our deferred revenues and timing of collection from customers.

For the three months ended March 31, 2019, cash flows from operating activities of $44.3 million primarily resulted from our net income of approximately $13.3 million, as adjusted for non-cash items including stock-based compensation of $8.4 million and depreciation and amortization expense of $7.9 million;

and cash flows from working capital of $13.5 million mainly attributable to the continued growth in our deferred revenues.

For the six months ended June 30, 2020, cash flows from operating activities of $81.6 million primarily resulted from our net income of approximately $45.0 million, as adjusted for non-cash items including stock-based compensation of $19.4 million and depreciation and amortization expense of $15.6 million.

Net working capital changes were not material during the six months ended June 30, 2020.

For the six months ended June 30, 2019, cash flows from operating activities of $81.3 million primarily resulted from our net income of approximately $29.5 million, as adjusted for non-cash items including stock-based compensation of $16.8 million and depreciation and amortization expense of $15.8 million, and cash flows from working capital of $16.9 million mainly attributable to the continued growth in our deferred revenues and the timing of customer payments.

Investing Activities

For the three months ended March 31, 2020 , cash provided by investing activities of $36.8 million was attributable to $44.1 million of sales and maturities of marketable securities, net of purchases, offset by $7.3 million of cash used for capital expenditures, including computer hardware and leasehold improvements to support our growth and development.

For the three months ended March 31, 2019, cash provided by investing activities of $15.4 million was attributable to $24.8 million of sales and maturities of marketable securities, net of purchases, offset by $8.6 million of cash used for capital expenditures, including computer hardware and software for our data centers to support our growth and development, and to purchase physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions.

Additionally, we paid $0.9 million in cash in connection with our acquisition of the assets of Adya.

For the six months ended June 30, 2020 , cash used in investing activities of $10.4 million was mainly attributable to $11.6 million of cash used for capital expenditures, including computer equipment and leasehold improvements to support our growth and development, slightly offset by an increase of $1.2 million from sales and maturities of marketable securities, net of purchases.

For the six months ended June 30, 2019, cash used in investing activities of $7.5 million was mainly attributable to $14.1 million of cash used for capital expenditures, including computer hardware and software for our data centers to support our growth and development and the purchase of physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, and $1.9 million cash paid in connection with our acquisition of the assets of Adya and acquisition-related holdback payment.

These decreases were partially offset by $8.4 million cash obtained from sales and maturities of marketable securities, net of purchases.

Financing Activities

For the three months ended March 31, 2020 , cash used in financing activities of $29.2 million was attributable to share repurchases of $28.9 million and the payment of employee payroll taxes related to the net share settlement of equity awards of $5.0 million , which were partially offset by the proceeds from the exercise of stock options of $4.7 million .

For the three months ended March 31, 2019, cash used in financing activities of $7.6 million was attributable to share repurchases of $7.9 million, the payment of employee payroll taxes related to the net share settlement of equity awards of $3.4 million, and principal payments under finance lease obligations of $0.4 million.

These decreases were offset by the proceeds from the exercise of stock options of $4.0 million.

For the six months ended June 30, 2020 , cash used in financing activities of $44.9 million was attributable to share repurchases of $54.2 million and the payment of employee payroll taxes related to the net share settlement of equity awards of $11.1 million, which were partially offset by the proceeds from the exercise of stock options of $20.4 million.

For the six months ended June 30, 2019, cash used in financing activities of $23.4 million was attributable to share repurchases of $24.1 million, the payment of employee payroll taxes related to the net share settlement of equity awards of $7.4 million, and principal payments under finance lease obligations of $0.8 million.

These decreases were partially offset by the proceeds from the exercise of stock options of $9.0 million.

C ontractual Obligation and Commitments

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Our contractual obligations consist of operating leases, purchase commitments, and other contractual obligations.

There have been no material changes to these obligations outside the ordinary course of business during the three months ended March 31, 2020 as compared to the contractual obligations disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

During the six months ended June 30, 2020, we recorded lease liabilities of approximately $7.0 million related to leasing of new data center space.

There have been no material changes to these obligations outside the ordinary course of business during the six months ended June 30, 2020 as compared to the contractual obligations disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

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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-Q

Item 2. Management’s Discussion and Analysis