What Separates Qualys Inc (NASDAQ:QLYS) From The Crowd?


In the past four or five years, Qualys Inc (NASDAQ:QLYS) has posted strong and consistent revenue growth. Revenue rose from $76.2 million in 2011 to $133.6 million in 2014. Looking ahead, the future of the security vendor is even more promising as it transitions its service offerings to the cloud. Qualys is among the few security vendors to have made an early move to the cloud, and the progress is inspiring. The company has completed shifting its core platform to the cloud, thus freeing up resources to investment in building a more powerful sales organization and product innovation.

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More value from existing install base

There is tremendous growth potential for Qualys to improve from its existing customers by selling them more solutions that they haven’t purchased already. Additionally, Qualys’ leading share in the device Vulnerability Management (VM) market puts it in a much better position to tap significant incremental revenue through new products and enrichment of existing ones. The company serves more than 50% of the Fortune 100 companies and more than 40% of the Fortune 500 companies.

Build-out of core cloud platform complete

Having completed the work on its core cloud platform, Qualys Inc (NASDAQ:QLYS) can now focus spending on expanding and enriching its product portfolio with greater flexibility.  An expanded product portfolio consequently expands the company’s total addressable market (TAM).

One of the new products that Qualys has built in recent times includes Policy Compliance (PC), which is targeted at VM customers as an add-on offering. Web Application Scanning (WAS) is another new product that Qualys has created. Qualys intends to use WAS to deepen its penetration in the small/media business segment.

In the pipeline, Qualys is working on products such as Web Long Manager, Advanced Malware Protection, Web Application Firewall 2.0 and VCE Block among others.

Given that more than 45% of Qualys’ customers haven’t purchased a second product from the company, the new solutions hold promise for Qualys to almost double revenue from its existing install base.

What unique to Qualys?

Unique provisioning: Most of the security vendors with cloud-leaning offerings either have “ground to cloud” security solutions or “cloud to ground” solutions. However, Qualys Inc (NASDAQ:QLYS) is unique in that it renders “cloud to cloud” security solutions. Qualys can leverage its unique provision strategy to lock out rivals in key security markets, thus widen its market lead and expanding growth potential.

High recurring revenue: Qualys is unique in its security offerings because it is not trying to be an all-in-one provider, which can strain profits on a bad day. As such, the company has a more narrowed approach that allows it to avoid potentially challenging businesses while expanding play in high-margin segments. For example, the company doesn’t render professional services because it is a low margin business and revenues there are not recurrent in nature.

Superior cloud platform: Qualys Inc (NASDAQ:QLYS) prides itself as the owner of a superior cloud platform in the client/server security market. Not only does Qualys stand out because of the superiority of its platform, but also because of its attractive rates. For example, the company says it renders lowered cost scanning of IT assets in geographically diverse environment.

Concerns that investors have had about Qualys

Mature market:

Sections of investors have been worried that Qualys operates in a mature market with limited growth potential. Qualys is a leader device Vulnerability Management (VM) market.

Unsustainable growth:

The other concern that investors have expressed in relation to Qualys is that the company’s recent growth has largely been driven by incidents, for instance, a spike in IT spending. In that case, they think that Qualys’ growth is unsustainable.

Rising competition:

It has also been pointed out that Qualys faces intense competition in the VM space. Tanium has been termed as a potential disruption in the VM market, thus complicating matters for Qualys’s growth in the segment.

Slow sales organization build-out:

Qualys’ slow build-out of its sales organizations has also been a matter of concern for many investors. With a strong sales organization, there is fear that Qualys could end up leaving so much money on the table as competition increases in its markets.

The truth of the matter

Although there are genuine fears around Qualys Inc (NASDAQ:QLYS), the truth is that most of the fears are overrated.

  1. The VM market is truly mature, but providers with differentiated products will continue to grow, because customers continue to look for better solutions. Qualys’ superior products should enable it to displace legacy vendors, thus allowing it to accelerate revenue growth. Already, 66% of the Forbes 50 companies are hooked up to Qualys’ VM solutions, and displacement of legacy rivals should open up more growth opportunities.
  1. Although Tanium has been cited as a potentially disruptive competitor, the management of Qualys doesn’t see it that way. If anything, the management of Qualys considers Tanium a passing cloud in the VM market that poses no serious threat to Qualys’ wellbeing.
  1. Slower hiring in the sales department used to be a serious concern, but it no longer is. The company has started beefing up its sales organization with recent hires. To bolster its sales management team, Qualys recently tapped Dan Barahona for the position of EVP in charge of Worldwide Field Operations. Barahona is a highly experienced business development executive, having worked with Sensage, WatchDoc and ArcSight among others.

Qualys also recently hired Simon Azzozpardias the general manager of EMEA. Azzozpardi is another highly experienced executive in his field.

Mark Hutnan and Sandy Hawke will also be joining the ranks of Qualys’ sales management team as VP and General Manager Federal (US) and Product and Content Marketing VP, respectively. Both Hutnan and Hawke are veterans in their fields.

Qualys’ products and their progress

Cloud Agent Platform (CAP): The reception of the solution among enterprise clients has been impressive and Qualys sees long-term potential in the product.

Continuous monitoring: The adoption of the product remains modest, but there is hope for adoption acceleration in the short-term.

Web Application Firewall: Qualys has withdrawn the product and is planning a 2016 re-release after enriching it. The reason for pulling the product from the market was that it didn’t resonate well with enterprise customers.

Pressure point

Dealing with sensitive data:

In order to conduct authorized security scans for customers, Qualys Inc (NASDAQ:QLYS)is entrusted with login credentials to customers’ devices such as switches, routers, servers and more. Any breach on Qualys’ side that leads to loss of these sensitive data can evaporate the trust that customers have on it, sending its business to a downward spiral.

Competition:

As already cited, there is existing competition pressure in Qualys’ field, but such pressure will be both limited in scale and short-lived in nature. The reason Qualys is likely to escape crippling competition is the fact that it continues to get better through product innovation and marketing strategy.

Bottom line

The management of Qualys Inc (NASDAQ:QLYS) expects operating margins to expand to the range of 42% to 46% on revenue of least $500 million over the next five-year period. Looking at the various implementations that the management is currently making, you can buy into this promise.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.
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