QUALYS, INC. 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk We have domestic and international operations and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by collecting subscription fees in advance. Foreign Currency Risk Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, GBP, and INR, the currencies of countries where we currently have our most significant international operations. A portion of our invoicing is denominated in the Euro, GBP, Canadian Dollar and Japanese Yen. Our expenses in international locations are generally denominated in the currencies of the countries in which our operations are located. The cash flow effects of our derivative contracts for the six months ended June 30, 2020 and 2019 were included within net cash provided by operating activities on our condensed consolidated statements of cash flows. As of June 30, 2020, we had 39 open designated cash flow hedge contracts with notional amounts of €21.8 million , £9.2 million and Rs.1,590 million . During the six months ended June 30, 2020 and 2019, we recorded unrealized foreign currency translation gains of $0.1 million and unrealized foreign currency translation losses of $0.2 million (before taxes), respectively, in AOCI related to these contracts. As of December 31, 2019, we had 26 open designated cash flow hedge contracts with notional amounts of €24.2 million and £9.7 million. The effect of an immediate 10% adverse change in foreign exchange rates would not be material to our financial condition, operating results or cash flows. Interest Rate Sensitivity We had $445.3 million in cash, cash equivalents and short-term and long-term marketable securities at June 30, 2020. Cash and cash equivalents include cash held in banks, highly liquid money market funds and commercial paper. Marketable securities consist of fixed-income U.S. and foreign government agency securities, corporate bonds, asset-backed securities and commercial paper. We determine the appropriate balance sheet classification of our marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. We classify our marketable securities as either short-term or long-term based on each instrument's underlying contractual maturity date. The primary objectives of our investment activities are the preservation of principal and support of our liquidity requirements. We do not invest for trading or speculative purposes. Our marketable securities are subject to market risk due to changes in interest rates, which may affect the interest income we earn and the fair market value. We do not believe that a 10% increase or decrease in interest rates would have a material impact on our operating results or cash flows. 37 Table of Contents