Good day, everyone and welcome to the Qualys' first quarter 2015 investor conference call. This call is being recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions for asking a question will be given at that time. I would now like to turn the call over to Don McCauley, CFO of Qualys. Please go ahead, sir.

Welcome to the Qualys first quarter 2015 investor call. I am Don McCauley, CFO and I am here with Philippe Courtot, our Chairman, President and CEO. We would like to remind you that during this call, management expects to make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to our future events or future financial or operating performance. Forward-looking statements in this presentation include, but are not limited to, the following, statements related to our business and financial performance and expectations for future periods, including the rate of growth of our business, our expectations regarding capital expenditures, including investments in our cloud infrastructure and the intended uses and benefits of those expenditures, trends related to the diversification of our revenue base, our ability to sell additional solutions to our customer base, our plans regarding the development of our technology and the expected timing thereof, our expectations regarding the capabilities of our platform and solutions, the anticipated needs of our customers, the strength of demand for our solutions including our private cloud platform, our strategy, the scalability of our strategy, our ability to execute our strategy and our expectations regarding our market positions, the expansion of our platform, the expansion of our development operations and support team in India, the expansion of our partnerships and the related benefits of such partnerships, our ability to effectively manage our costs, our plans to expand our sales force, our plans to explore strategic acquisitions, our expectations for the number of weighted average diluted shares outstanding and the effective GAAP and non-GAAP income tax rates for the second quarter and full-year 2015 and our delivery of new solutions. Our expectations and beliefs regarding these matters may not materialize and actual results in future periods are subject to risks and…

Thanks, Don and welcome to all of you. The first quarter of 2015 was a good quarter, which included a number of important product releases and continued growth and success across our business. Don will cover the financial details of our performance for the quarter. These are exciting times at Qualys with the introduction of our Cloud Agent. As I am sure you all have seen already, our first quarter revenue came in just below our expectations and it has a modest impact on our full year revenue guidance. This was due to slightly lower vulnerability management revenues in Q1 than we had expected due to the timing of a few large enterprise deals in the quarter. Although our Q1 revenues came in somewhat less than we expected, we met EPS expectations for Q1 and our EPS guidance for 2015 is unchanged. Don will provide additional details on these. So let me start off with an overview of key highlights that are driving the momentum in our business and discuss in more details our new product releases. During the quarter, we laid the groundwork for three major new services that we launched at the RSA Conference last month. Together, these new services double our addressable market. With first and foremost of these services is our Cloud Agent platform, second the seamless integration of our Web Application Scanning with our Web Application Firewall services, an industry first and third, the extension of our very successful Continuous Monitoring of perimeters solutions to internal networks. We believe that these technological innovation and enhancements provide Qualys with significant competitive advantages and make our solution more strategic to our customers and partners as we have build a highly scalable cloud platform that provides enterprises of all sizes with a unified and continuous view of their…

Our first quarter 2015 financial results were good. As Philippe already indicated, however our first quarter revenue came in just below our expectations due to a couple factors that I will review in more detail. These factors modestly adjust our full year revenue guidance, but importantly, they did not change our full year EPS guidance. First, our core Vulnerability Management business growth declined slightly from 20% year-over-year growth in Q4 to 19% in Q1 and since the solution still represents nearly 80% of our revenues, it did have a noticeable effect on revenue growth this quarter. Second, you may recall from last year that we benefited in the first quarter of 2014 from several of our larger deals coming in earlier in the quarter than was our historical pattern. However, in the first quarter of 2015, several of our larger deals came in later in the quarter than we expected. As a result, our recognized revenues in the first quarter this year were a bit lower than we had expected. This timing difference also had an impact on our cash flow metric comparisons. In 2014, many of the earlier booked deals were collected before the end of the quarter. This year, due to the later booking pattern, those deals are still in quarter-end accounts receivable and not reflected in cash flow from operations or free cash flow in the first quarter. That being said, while we came in just under our first quarter 2015 revenue guidance range, we effectively managed costs and leveraged the strength of our platform to beat our GAAP and non-GAAP EPS targets for the first quarter. Now let's review the quarter in more detail. Revenues in the first quarter grew to $37.5 million which represented 24% growth over the first quarter of 2014. The timing difference…

[Operator Instructions]. Our first question comes from Sterling Auty with JP Morgan. Your line is now open.

Yes. Thanks. I wanted to start with the Vulnerability Management and in terms of the deals that slipped, were these new customers or expansion deals with existing customers?

Really both, Sterling. We do a lot of business for our existing customers constantly upselling throughout the periods. So it included upsells from customers as well as new business.

And then the follow-up. I think the big question that I am already getting from people is, okay, you saw a very nice acceleration in vulnerability management through the height of all these data breaches even though the rest of business is growing as it has been and as you are expecting, should we now think that Vulnerability Management will settle back into, let's say, maybe that mid-teen growth as an industry?

No, I think. In fact I think it is going to be the opposite, but specifically because of the announcement that we made with our Cloud Agent technology, which greatly simplifies vulnerability management. As I mentioned in my talk by eliminating the Windows, eliminating the need for authenticated scans and also moving all application to the endpoints, which adds significantly more devices, that servers, all that stuff. So I think we are extremely well positioned for these reasons.

And Philippe, maybe one last one, if I can squeeze it in. The agent approach is very different than the history, the architecture of Qualys. Are there any other implementation challenges or technological challenges that customers will have to overcome to adopt?

Not at all. In fact, it's not a major difference. In fact, it's a huge simplification. The power Qualys is in the backend that we have which is capable of finding significant number of billions of transaction analysis, coordination, et cetera. We are in fact even further continuing to expand the analytics capabilities of our backend. But the fact here is that all of our customers have been asking us for years to be capable of scanning the endpoints and both on Vulnerability Management and on Policy Compliance. As you may recall, we had more than 15 companies which were beta users. There is a huge pent-up demand for that technology. So it's 100% compatible with the way we were doing VM and Policy Compliance in the reports and the data that we gather. So there is absolutely no change in the application that they currently have. The only difference is that now they can, if they want to have agents on their servers, on the desktops and as well on the endpoint which they could not have. So that's a major change with a significant operational efficiency.

Got it. Thank you.

Our next question comes from Philip Winslow with Credit Suisse. Your line is now open.

Hi. Thanks, guys. I just wanted to dig back on the Vulnerability Management side. You mentioned both new and existing customers. Wonder if you are seeing sort of a change in just the competitive landscape there or pricing or just of that's a factor at all the way? Or is there just something changing as far as just the buyer's mentality here and kind of to Sterling's point, the growth rate of this market?

No, the competitive landscape has not really changed, except for the fact that some of our competitors are now moving into the cloud and as well as trying to move into web application scanning as well, which is a recognition, of course, of Qualys, where obviously, we have a significant advance here. What we see today is more again, if you look at the timing of things, we are more sensitive today than we were in the past because we do very big upsells. And so as they sometimes if they come later or earlier in the quarter, it does make a difference in our revenue recognition, because of the size. In the past our business was much more a business of smaller deals, if you prefer, when today we have essentially the opportunity to do well during very, very big upsells which changed the dynamic of the business a little bit.

Got it. All right. Thanks, guys.

Our next question comes from Rob Owens with Pacific Crest Securities. Your line is now open.

Great. Thank you. So I wanted to focus in on just the billings next. I know you gave us your revenue percentage for VM but if we look at the billings and the fact that some of these deals were backend weighted, is the growth in billings relative to Vulnerability Management slowing as well and so that's the reason for the caution in the taking down of the couple points of growth?

Yes. That's correct, Rob.

Okay. And then second, Don, on the sales and marketing line, it was actually down year-over-year. Was that your realization next quarter is coming in backend waited, so there is some discretionary cost held off? Or is this a new level? Can you help me understand why that number --?

It's exactly really simple. They moved RSA from Q1 to Q2.

Okay. Perfect. Thanks, guys.

Our next question comes from Steve Ashley with Robert W Baird. Your line is now open.

Perfect. I would just like to start by asking about the Express Lite product and how that might have performed within the Vulnerability Management world industry?

Both our Express product line and Express Lite are performing extremely well. So it has been a very significant in term of the acceleration of our growth in this market. So the Web Express Lite is more transaction oriented. So we are putting a little more automation in to that product line. So we could essentially take orders online. It is a very successful product line.

And then I would just like to ask about the go-to-market. Your sales force is now going to have a complete portfolio of other products to sell. Do you expect them to lead more with Web App Scanning, Web App Firewall in the future?

Yes. In fact what is happening here is that we have in fact the opportunity, especially with partners. The web application solution that we have done is becoming a platform and we see significant interest in our web application platform, our web application security platform from the Indian outsourcers, which really see the opportunities to really build very powerful services, if you prefer. So it's kind of another new market for us, another new entrance. Our sales force today is essentially focusing on selling the platform and in some cases start with the web application security if it was the customer wants. The endpoints now is a totally new game because it opens up the policy compliance marketplace, which as you may know most of the big dollars were essentially at the endpoints because of the huge volume of endpoints compared to the servers. So this is where McAfee and Symantec CCS were doing bigger deals, very big deals and today, of course, these are markets that opened for us now that we have the solution for the endpoint which again is significantly easier to deploy. It's only 1 megabyte agent. It does exactly the same things and of course reduce review significantly the cost that these solutions needs to manage these endpoints as they need to have many, many servers inside of the enterprise just to collect the data from these endpoints where of course we bring all that data into our cloud platform, whether it's one private cloud, an on-site or whether it is in the cloud.

Great. Thank you.

Our next question comes from Erik Suppiger with JMP Securities. Your line is now open.

Yes. Thank you for taking the question. Philippe, I am still trying to get my hands around the billings. The billings were pretty strong in the quarter. I understand VM slowed a little bit more than anticipated, but clearly you must have had some pretty robust billings for the other services. So if that's a scenario and you have better growth out of the other services, why are you lowering the revenue outlook? Well, answer that, please.

So I think Don probably would give you a more specific answer.

Well, basically, Erik, vulnerability management in our core business is still 80% of our business and seeing it turn in that growth rate and of course we don't know what the future growth rate is and Philippe gave some reasons it could actually go back up. We don't know the next point on the graph, we certainly think it's prudent to bring our revenue guidance down since it represents the lion's share of our business. We have a lot of exciting new products coming out. But as you know, those take a while to hit and to have a positive effect and that could be later this year, early next year. And so I think it's prudent when 80% of our business is showing a sign of slowing that we take that into account and do the right thing.

Yes and one of the reason in the quarter were the non-vulnerability management billings seemed to be pretty strong.

Well, those products continue to do really well. Philippe went through some of them. We probably could do Policy Compliance. We are seeing a lot of interest in that, especially that's an uptick. We expanded that web application security platform now to include the WAF 2.0. So there is a lot of good stuff going on with our new products. Philippe touched on our Express product lines as well, which includes some of that stuff.

Yes. The reason for our prudence is also the fact that as you know, even if we do a very big deal, it's when this big deal is and today we are doing significant deals. It depends on when they are live. Because it's much obviously as we only take the revenues when we deliver the service. So that's also the underlying reason of the prudence here.

Okay. Two other quick questions. One on the hiring. Can you give us the headcount and how was the retention in the quarter in the sales organization in particular?

Yes. So I think we started the year at about 135 and I think we added for net new folks, principally on the new business side of the house. So hopefully that will pay dividends in the future. So we are from 135 to 139. Our expectations, our plan is still to see if we can add a total of 20 to 25 by the end of the year. So we hope to end up at maybe 155, possibly 160.

Yes. We have also increased our headcount in the strategic alliance group, which are managing our partner business, our big partners which today are the team of five major accounts, if you prefer, or strategic accounts business managers. And this is also again because of the significant, the strategic alliance that we have expanded with the Indian outsourcers. What is interesting here is that they all have essentially focused a lot of the energy in cybersecurity that essentially all created a division, focused on products which happens to in the $200 million to $300 million range already. And they see that as very strategic for them and of course Qualys. We have a relationship with them and then we have the platform. So this is something we believe they are expecting to see the significant differentiation, partnering with them in the future.

Okay. And then lastly, I think you had mentioned that you seeing some of the competitors coming into the cloud. What were you referring to when you mentioned that?

Yes. I made two comments specifically. Tenable have announced essentially the fact that they want to move into the cloud and in fact they are looking for, from what we heard, some additional investment in capital so they we could build their cloud solution and we saw recently, in fact today, the announcement of Rapid7 acquiring NT OBJECTives on the web application scanning. It's very clear that the marketplace wants a consolidation which Qualys has essentially already done and the market is very now much more open to cloud delivery solution than the old enterprise software solution, which are becoming extremely costly even to maintain.

Very good. Thank you.

Our next question comes from Michael Kim with Imperial Capital. Your line is now open.

Hi. Good afternoon, guys. Talking back to the guidance, can you clarify the assumptions around the continuous monitoring of internal networks and the potential for contribution as we exit the year and bringing the VM business above the 20% range? And then I have follow-up question.

Hi, Michael. We are not going to get more granular about the calculations of our guidance. We just released continuous monitoring for the inside network which I think you are leading to, which goes on top of continuous monitoring for the perimeter that we did a year ago. So we have a lot of customers interested in those products and hopefully they will give us an uplift later, but I can't comment on any of the specific metric we would of used for that product in particular.

Okay. Fair enough. And then switching gears on the fully disconnected private cloud platform. Can you talk a little about the sales cycle or anticipated sales cycle? And presumably, the federal and defense markets maybe a little bit longer but do you have some opportunities that might have a much shorter sales cycle, especially internationally?

No. That would be a long sales cycle this one because really what we need to do now, by the way we are very close to have our first totally disconnected solution accepted. In other words, we have now trained this entity which is a very large German corporation, which I think I mentioned last time in the call. So after that, of course, we are going to look for partners, specifically in the federal space and we have of course to discuss with them, selected then and then train them and then it takes some times you to get the delivery. So this will have a big impact next year. I don't anticipate much this year. Because obviously, if you look at our agent technology, the way we have priced it and I think we are expecting a significantly shorter selling cycle because we have already for example the contract with many of the large banks and then for us to essentially provide endpoint security is becoming, we don't have to negotiate the contract. It's just about deploying this agent which are, by the way, extremely easy to deploy and essentially for $1 that we add, let's say, of VM we essentially are expecting to collect about $1.25 or $1.30 as a comparison. So as you can see, these agents have bring significantly more value and as a result of that we have been able to price them at a slightly higher point of volume than our traditional scanning technology for both VM and policy compliance.

Got it. Great. And then, Don, a quick question for you is that, did the Policy Compliance and Web App Scanning see similar growth rates, north of 50%?

Yes, they did.

Okay. Great. Thank you much.

Our next question comes from Aaron Schwartz with Macquarie. Your line is now open.

Hi. Good afternoon. Thank you. I was wondering if you could talk to sales productivity in particular with the existing customer base. That's always been a big part of the revenue here. I am just trying to better understand if this was just a couple larger deals that maybe the timing was a little uncertain on and that's why you are prudent with the guidance? Or do you need to start to see productivity from some of sales hires with new customer additions? Is there a degree of difficulty in expanding VM within your installed base getting a little bit harder?

No, not really. In fact, you know, we anticipate to expand VM significantly in our user base with the capabilities of addressing the endpoints with our agent technology. If you look at typically the pattern for one devised on the perimeter, you have about 10 device on the inside, on the service side then you have at least 100 on the endpoint. So we are anticipating in fact that we are expanding the VM addressable marketplace for us big time. And the selling cycle, we believe should be shorter. This also should help us to have several displacement of existing solutions because now we have really provided a full solution for essentially Vulnerability Management, for Policy Compliance and for Web Application Scanning. So there is a huge displacement power and we see that already happening, which in return allows us to now bid much, much bigger deals than we were doing in the past.

Okay. And then Don, I just want to make sure I understood it correctly, did you say that obviously the linearity you covered, but that some of the adjustment maybe in your expectation for the VM growth rate was a couple of deals that maybe just slipped out of Q1, if I heard you correctly. Have those closed at all yet?

Yes, in fact.

Yes. Hopefully, Philippe can give insight more closely thank I do.

Yes, absolutely all closed. Absolutely within [indiscernible].

But you still -- I guess I am just trying to reconcile there what's in your expectation that billings is getting adjusted a little bit lower, but if it still did close maybe in the month of April?

Well, to be fair, they closed in Q2, not Q1.

So its just a chunk of throughput a year?

You are correct.

Yes, correct.

Okay. And then just any updates on the questions from last quarter about some of the shorter term deals that got in deferred in Q4? Have you started to see those annualize yet? Or are they later in the year that you would start to expect that?

I actually didn't study the individual deals, but the median deal would close around June 30. So we fully expect all those deals as they come up to their renewals to, they have locked-in a new higher level and that will renew. So no real comment on Q1 in particular, but I think most of those deals were probably Q2, Q3, but it won't really show up on our numbers in particular because now we have established a new higher revenue level and those will just be renewing straight across now from the level they have established when they did those upsells back in December.

Okay. Thank you.

Thank you. [Operator Instructions]. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

Thanks, guys. I am curious and I just wanted to ask on the geographic side. Were some of these deals that slipped, where they all U.S. based? Or were there kind of a mixture of U.S. and international?

In fact, they were essentially more U.S. based.

Probably about the percentage of our business, we have 70% U.S. based map. So that's probably a fair write-down.

Okay. And then, I know in the past you guys have talked about looking at M&A a little bit more on the smaller tuck-in size and you mentioned a competitive deal in the space recently. Could I get your updated thoughts on that with the growing cash balance?

So we are actively looking effectively for position. Of course, we are, as we discussed at the last earning call, one, we are looking at companies which essentially could either accelerate some of our foreign development cycles or help us move into adjacent market, but we do that carefully and it's about trying to find the right company who can do that. So there is a lot of enterprise software, security software solution on the market. But this is something that we are not really interested in doing because we will have to essentially on solution and rewrite the code so we could integrate the solution into our platform. Since we have already a large customer base, we are not really going out and looking at customer acquisition per se. So we believe [indiscernible] of watching and doing so, but we always actively looking at them. What we see is a lot of new startup which are all coming up with essentially a cloud architecture in mind. So I see this ability to acquire younger companies much more, you know that will make much more sense for us.

Got it. Thanks, guys.

Thank you. I am showing no further questions. I would now like to turn the call back to Philippe Courtot, CEO, for closing remarks.

Okay. So thank you all for joining us today. With all of our new products and features to our existing products, Qualys has never been better strategically positioned to play an important role in security and compliance market. As you all know, enterprise IT is shifting more and more to mobility and cloud architectures and our new Cloud Agent platform has the potential to disrupt this market as it would allow our customers to effectively deal with this key transition in their IT environment. And we already see that with a huge demand for that. Finally, with the expansion of our platform and the well received launch of the new services, we are expanding our sales force as we discussed and partnership as well globally accelerating the buildup of our development government operation and support in India which is already very successful, where we have passed in fact 100 people and are looking for strategic acquisition as we just discussed to further accelerate the development of existing and new services as well as to enter new adjacent markets. Should you have any follow-up questions, Don and I are available to you and we look forward to speaking with you next quarter. Thank you very much.