Good day, everyone, and welcome to the Qualys Third Quarter 2016 Earnings 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 Joo Mi Kim, Vice President of FP&A and Investor Relations. Please go ahead, ma'am.

Good afternoon, and welcome to Qualys' third quarter earnings call. We would like to remind you that during this time we expect to make forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements generally relate to future events or our 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 and the strength of demand for those solutions; our plans regarding the development of our technology and its expected timing; our expectations regarding the capabilities of our platform and solutions; the anticipated needs of our customer; our strategy, the scalability of our strategy and our ability to execute our strategy and our expectations regarding our market solutions; the expansion of our platform and our delivery of new solution; the expansion of our partnerships and the related benefits of those partnerships; our ability to effectively manage our costs; our expectations for currency exchange rates; our plans to pursue arrangements with MSSPs, which are multiyear contracts at fixed prices; and finally, our expectations for the number of weighted average diluted shares outstanding and effective GAAP and non-GAAP income tax rates for the fourth quarter and full year 2016. Our expectations and beliefs regarding these matters may not materialize and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission, including our latest Form 10-Q and Form 10-K. The forward-looking statements in this presentation are based on information available to us as of today, and we disclaim any obligation to update any forward-looking statement except as required by law. We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings release issued earlier today. Joining me in today's call are Philippe Courtot, our Chairman and CEO; and Melissa Fisher, our CFO. Philippe?

Thank you, Joo Mi, and welcome to everyone to our Q3 earnings call. We had a very good third quarter where our top line revenue was at the very high end of our guidance and EPS was above, again, reinforcing the value of our cloud-based security platform in the marketplace and our balanced approach between profitability and growth. As you certainly recall, earlier in the year we pointed out our ability to become a key player in the forthcoming consolidation of traditional enterprise security and compliance solutions. This quarter, we put more pieces in place central to this strategy, with continued product innovation and expansion of our strategic partner ecosystem and I would further elaborate on this later. First, let me address what we are seeing from a macro industry level. A few weeks ago, we hosted our 16th Annual Qualys Strategic Conference in Las Vegas. The theme of the conference was centered around the visibility companies must achieve to effectively fend off cyber attacks, and our Qualys cloud platform approach can make this possible. At the conference, I had the opportunity to discuss with quite a few customers their long-term security needs and the state of the industry. They all expressed their need to consolidate the stack of the many security and compliance solutions they currently have as they have become too costly to deploy and maintain, and integrating them is becoming complex and extremely expensive. In fact, our large customers are handling in excess of 30 disparate security and compliance solutions and they simply cannot take on more. Compounding the problem is the fact that they have a hard time finding qualified people to operate that. Such discussions clearly reinforce our belief that Qualys is now very well positioned to address these needs because of the breadth of…

Thanks, Philippe, and good afternoon, everyone. Our strong third quarter performance reflects the continued success our cloud-based security platform is finding in the marketplace. Total revenues in the third quarter were $51 million, which represents 20% growth over the third quarter of 2015. We also see adoption increasing with the number of enterprise customers who purchased three or more Qualys solutions rising to 23%, up from 18% a year ago and up from 21% last quarter. The percentage of total customers with two or more products, including PCI, the prior metric disclosed, was 63% in Q3 up from 61% a year ago and 63% last quarter. In addition, our average deal size increased 22% year-over-year in Q3. The negative impact of FX on our revenues mostly offset the positive impact from the MSSP contract this quarter. Our revenue plus the change in current deferred revenue balance grew 20% year-over-year. As I highlighted last quarter, this calculation will not always mirror our current bookings due to the timing of the actual invoicing, as well as the impact of FX. This quarter, our revenue plus the changing current deferred revenue balance continue to be negatively impacted by those factors as well as the impact from the MSSP contract. In accordance with our prior disclosures, our vulnerability management solutions remained strong, continuing to represent 79% of third quarter revenues in line with results in the third quarter of 2015. Our last 12 months of bookings year-over-year growth rate for Policy Compliance and Web Application Scanning was 23%. Note that this figure does not include newer solutions like our Cloud Agent use for VM, our Private Cloud Platform and ThreatPROTECT. In fact, Q3 bookings from the Cloud Agent platform grew almost 50% sequentially, and from ThreatPROTECT grew 90% sequentially. Before moving to profit and…

Thank you. Our first question comes from Bill Choi with Wunderlich. Your line is open.

Yes. Thank you. I guess if I had to stick to one question it would be more to trying to understand the traction you're getting currently on bookings for the new product. You talked about ThreatPROTECT and the Agent, and yet when we look at your guidance for revenue, understanding maybe there's some FX pressures there, the sequential growth rate here looks weaker than what you normally see into Q4. It's what, 2% to 4% sequential growth. I just wanted to get some sense of when you talk about these new products, how big are they and are they making an impact yet meaningfully to revenue? Thanks.

Well, let me answer that by addressing a couple of points, Bill. So first, Q4 is a big quarter for us. And as in general we've been seeing increasingly larger upsells, we continue to see that in the pipeline for Q4 and so we guide appropriately based on the fact that larger upsells are a little bit less predictable for us in terms of which quarter they're ultimately going to get signed in. We are also, as I mentioned, negatively impacted by FX in Q4 which is actually going to outweigh the positive impact from the MSSP by about – impacting our growth rate to such that it would be 0.5% lower. So those are the data points then. But we are seeing, as you pointed out, good traction early in the new services and it's – again, it's going to take time because of our SaaS ratable revenue model for it to flow through on the revenue line.

And our next question comes from Gur Talpaz with Stifel. Your line is open. Christopher Speros - Stifel, Nicolaus & Co., Inc.: Hi. This is actually Chris Speros on for Gur. Thanks for taking my question. Can you talk about what the pipeline is looking like for the Cloud Agent and the mix of that pipeline in regard to new versus current customers?

So we don't have really the mix between the new and the existing customers. What we can say is that we see a continued adoption, very strong adoption by all of our existing customers, there's no question about that. In fact, (22:15) I gave you some statistics before that. As far as the few – I'm sorry, as far as the new is concerned, we see many more and more of the new business coming with the Agent.

Yeah.

It's very clear that the Agent becomes the differentiator. So I don't have the exact percentage to give you but it's significant.

Yeah. So when we report the Cloud Agent statistics, we are seeing that both from existing customers as well as from new customers, to be clear, and it is going to skew more towards existing because as our renewal base grows, our opportunities for upsell continue to increase, especially with these additional solutions so our business always tends to skew towards existing as well as because of how large our customer base is already.

Thank you. And our next question comes from Craig Nankervis with First Analysis. Your line is open.

Thanks. Good afternoon. Nice quarter, folks. You've had some nice – for two quarters now, some nice growth in your average deal size, which I believe is a bookings metric. Can you talk about that? Is that – here's another existing versus new customer question. Which is influencing that more, is it multi-product sales? Is it larger initial deals? What can you say about these last two quarters and the growth of your average deal size?

It's actually – it's going to be driven more by existing because one thing Philippe and I have discussed that's maybe different in our business model than some other companies is this nomenclature of new versus existing, it's a bit artificial because often we'll get new customers in for – it can be a very small initial dollar volume, it can be a PCI-only customer who then we upsell for close to $1 million. And so it would be – you would see the increase coming more from the existing customer base.

Yeah. No, absolutely. And to give you some colors, for example, we have a large financial institution which was essentially spending about $200,000 a year for Qualys, and the upsell became $1.4 million. So you can see the big advantage we have. In a way, we take our customers young, if you prefer, and then we grow them. So our business would be always tilted toward the upsell. And especially that we have more and more and more services, so you have even that compounding effect.

Right.

And our next question comes from Steve Ashley with Baird. Your line is open. Matt S. Lemenager - Robert W. Baird & Co., Inc. (Broker): Good afternoon. This is Matt Lemenager on for Steve. My question was around the 4Q guidance, and implying the EBIT margins would be down sequentially. And just looking at it the last few years, seasonality has kind of seen an increase in the EBIT margin 3Q to 4Q. And I realize you came in nicely ahead of margins this quarter, so maybe some of it is expenses that pushed to 4Q. And you talked a little bit about extra expenses or investing in R&D and things in the fourth quarter, but I was just wondering if maybe you can comment or provide color on the implied guidance for the fourth quarter around expenses and the implied EBIT margin?

Yeah. That's right, Matt. So we do expect our expenses to sequentially increase as we – as I had highlighted, we had expected for it the Q3 and ended up coming in a little bit lower. But we are investing across all of the functions, R&D and operations, sales and marketing, and G&A and so that's what our guidance is based upon.

Our next question comes from Srini Nandury with Summit Redstone. Your line is open.

Hi, this is Jonathan Kees, I'm actually speaking for Srini. Thanks for taking my questions. I just have two, first one is a follow-up. I guess in regards to that Q4, you talked about the OpEx going up, should we think then that GM will stay relatively flat with Q3, that most of the increase is just going to be in the OpEx line? And then the second question, the more higher level question is that you're talking about providing services as a differentiator, and earlier you mentioned that finding the right personnel with security expertise has been difficult for your clients. Is that something that you're providing and that is going to be something that's going to move the needle for you and how you differentiate relative to your competitors?

No. In fact, on your second question, in fact one of the unique things that Qualys does, because we have adopted that cloud model, the cloud model has allowed us to package our solutions a bit like (27:26) and all these cloud solutions. It's like we don't need all that professional services, and that's one of the other reason of our profitability, in fact we have no professional services, zero, since the inception. What I was referring to you about is our customers today, which have now the big advantage of Qualys today is that the same platform offers you 10 traditional security and compliant solution totally integrated so you need significantly less people to operate. And the complexity to operate is different so solution is also reduced, as opposed to having – if you line up all these different best-of-breed enterprise on-premise security solution, you need to have one infrastructure for that application, another one for the other one, and on and on. So you have to deploy and maintain different architecture and on the top of that, you have to maintain and operate all of these different solutions independently. And then in order to make better sense of your security and to get the overall security posture of your company, you need now to integrate those ones. So you end up now using a different solution – another solution, where you integrate all that information, which again costs a lot of money. You need to find the people for you to be able to do that. So that's what Qualys essentially fundamentally eliminates. And now the first question, which I forgot.

I'll take over.

So okay, Melissa will go ahead with the answer.

Yeah. So I was reading about expenses broadly because we don't guide by a functional area. But as Philippe mentioned, he went into some of the details around how we're investing in the operations in the back end. So you can use that guidance for building out your model. Where we've tried to be clear is on the onetime effects of guidance around things like the MSSP contract which as you guys are aware, we share the information about how it's impacted our top line positively. But obviously, we won't have it for 2017 so I'm sure as you're thinking about your models going forward you'll be taking that into account as a headwind as well.

And our last question comes from Sterling Auty with JPMorgan. Your line is open.

Hi, guys. It's Jackson Ader on for Sterling tonight. One really high level question from us and that is are you seeing any either increased demand or interest from customers after some of the recent attacks like Britain (30:15), and I think we're thinking mostly the den (30:12) attack that came out last week.

In fact, I would say – I will not say maybe directly because of that, but this is what we see at a very macroeconomic level. Today, as we all know, most large companies have embarked into what is called a digital transformation. And what is happening today is that now they realize – and we see that spitting up which is essentially using newer technology, retooling their IT infrastructure to gain, to reduce cost and increased agility from a business standpoint. What we see today happening at the macro level is that these divisions in these companies are starting to realize that today securing the current computing environment is becoming more and more and more expensive and diminishing returns. So there's now a demand that we see that favors Qualys significantly and we already have quite a few very significant example about that. They see that if they move it, if they accelerate and work for example that example of a very large bank in Europe, which has publicly announced that they accelerate the additional transformation from the five-year plan down to a three-year plan, and Qualys now is becoming critical for advanced securing the new infrastructure because the current security and compliance solutions were designed for that, if you prefer, client-server typical computing environment and not at all for this now more cloud-based computing environment. So that's where we see the demand for our solutions. That ability that we have today to provide you with that two-second visibility across your entire global IT assets, this is really what differentiates us. And in addition to that, we can now provide you with a continuous view of the security and their compliance. That's quite significant. And next year, as I've indicated it in my introduction here, that we're going to be able to allow you to also detect where you have zero days almost instantly without having you to search. We will tell you exactly where you're exposed to zero days, and we're going to tell you where we have identified assets which have been already compromised or assets which we highly suspect that they're being compromised. And all of that out of one single platform, eliminating significant – for a large corporation, you speak about millions of dollars of cost that we can eliminate. So that's where Qualys is extremely well positioned, and that's what really make us very, very positive about the future of Qualys.

And our last question comes from Stephen Kalche (33:08) with Stephens. Your line is open.

Yeah, hi. I figured I'd sneak in here at the end. This is Stephen (33:16) on for Jonathan. With regards to adoption of the Cloud Agent, is the primary service that benefits from increased adoption, whether it's from a new client or an existing client, is that VM that primarily benefits from that, or are you also seeing the Cloud Agent being utilized for other services? Thanks.

So, yes. So a very good question. So we have, in fact – yes, it does benefit (33:40) very strongly, sorry, VM, because it eliminates to need scanning Windows, it eliminates the need to fetch credentials and it gives you real time. So that's, of course, very important. It also benefits, for the same reason, by the way, the Policy Compliance application, and now what we see is a very strong adoption of our agent or the fourth – the providing the asset inventory. We really believe that today the number one issue that large corporation has is that they do not know what they have, who owns them, where are they. And of course, you cannot secure what you don't know. So there's a new understanding because of the breaches that despite all the billions of dollars that we're pouring into securing that environment, the breaches are not stopping, very clearly. So now there's a very clear conscience that you need to know what you have, which is making, I think, a global and continuous view of your global IT assets. And again, the world is changing so whether you have existing assets on premise, whether it's your end points or again, whether it's your now cloud environment. So again, what we did with that absolutely integration, while pre-install – our Agents now are pre-installed in the Microsoft Azure platform, which is quite significant. And so that's what we offer today. So this is where we see, if you prefer, that demand. So the fact that we see a very strong employment of our Agent, for us this inventory, this is really underscores that capability that we now have.

Thank you. Thank you, everyone, for attending our Q3 earnings call. As mentioned in our press release earlier today, our Analyst and Investor Day will be held in New York on November 17. At that time, we will discuss the company's vision, strategy, product roadmap and investment highlights, as well as showcase our new services. And we are delighted that Mark Butler, Enterprise Information Security Officer Advisor will be with us to present his perspective on the industry and Qualys' competitive position in the marketplace. We look forward to seeing you then.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.