Thank you for standing by. Welcome to the Qualys First Quarter 2023 Investor Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Mr. Blair King. Please go ahead.

Thank you, Norma and good afternoon and welcome to Qualys’ first quarter 2023 earnings call. Joining me today to discuss our results are Sumedh Thakar, our President and CEO, and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to future events or our future financial or operating performance. Actual results may differ materially from these statements. Factors that could cause results to differ materially are set forth in today's press release and our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. As a reminder, the press release, prepared remarks, and investor presentation are available on the Investor Relations section of our website. With that, I’d like to turn the call over to Sumedh.

Thanks Blair and welcome to our first quarter earnings call. We’re pleased to announce that we delivered another quarter of healthy revenue growth and industry leading profitability. A number of CISOs I’ve met with over the past several months continue to emphasize four key priorities; identifying all assets in their environments, prioritizing and quantifying cyber risk, finding fast and cost-effective solutions to address risk, and ensuring adequate protection against adversaries. The importance of these priorities were further reinforced by the findings in our 2023 TruRisk Report released by Qualys’ Threat Research Unit after having analyzed 2.3 billion anonymized vulnerability detections in our platform. According to our research findings in the report, the average number of days to weaponize vulnerabilities in 2022 was 19, which is far less than the amount of time taken by IT teams to patch those vulnerabilities. Organizations are looking for platforms that can help them patch prioritized vulnerabilities before they get weaponized and exploited. The message is clear. Legacy technologies available in the market today that purely focus on generating more and more detections and alerts are not enough to help secure organizations. Against a backdrop of accelerating digital transformation and a cyber security skills gap, organizations require further assistance in prioritizing the most severe security findings present in their critical assets and resolving them prior to exploitation. As CISOs look to navigate the current macro and manage increased budget scrutiny, they are recognizing the need for a holistic, risk-based approach to quantify and align cyber risk to their business objectives and thereby, be in a position to communicate effectively with their Board and C-level executives. In terms of platform innovation for years, our mission at Qualys has been to drive continuous innovation to advance these initiatives. In doing so, we believe we’ve built a new…

Thanks, Sumedh, and good afternoon. Before I start, I’d like to note that, except for revenues, all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period, unless stated otherwise. Turning to first quarter results, revenues grew 15% to $130.7 million with channel continuing to increase its contribution, making up 43% of total revenues compared to 41% a year ago. Revenues from channel partners grew 18%, outpacing direct, which grew 13%. By geo, growth in the US of 16% was approximately in-line with our international business, which grew 15%. Looking ahead to the balance of 2023, we expect our US and international revenue mix to remain at roughly 60% and 40%, respectively. In Q1, we saw continued strength in customer dollar retention and upsell in line with expectations with our net dollar expansion rate on a constant currency basis at 109%, flat from last quarter, but down slightly from 110% last year. While there remains room for improvement from smaller customers spending less than $25,000 with us, we are pleased with the strong revenue growth of 18% from larger customers. In terms of new product contribution to bookings, Patch Management and CyberSecurity Asset Management combined made up 10% of LTM bookings and 16% of LTM new bookings in Q1. We attribute this success to an increasingly complex threat environment that highlights the relevance of the Qualys Cloud Platform to holistically assess, manage and remediate risk. Reflecting our scalable and sustainable business model, Adjusted EBITDA for the first quarter of 2023 was $58.7 million, representing a 45% margin, compared to a 48% margin a year ago. Operating expenses in Q1 increased by 20% to $54.1 million, primarily driven by the growth in sales and marketing investments, including higher headcount and related costs. During the remainder…

Thank you [Operator Instructions] And our first question comes from Shrenik Kothari with Baird. Your line is now open. Mr. Kothari, your line is now open. We'll go to the next caller. One moment. Question comes from Matt Saltzman with Morgan Stanley. Your line is now open..

Hi, team. Thanks for taking the questions. So I know that you guys typically guide to revenue growth and not billings, but I do see that billings slowed to single digits in Q1, so when you think about the longer-term growth algorithm, how do you guys anticipate getting back to mid- to high teens growth 20% top line growth over the longer term? Are there any areas of the product portfolio that you're looking to press on, would you potentially look at acquiring other capabilities? Just curious on kind of the growth outgo from here? A – Sumedh Thakar: Thanks for the question. Great question. So I mean, as we mentioned earlier, we will continue to be excited about what we're seeing with CyberSecurity Asset Management, Patch Management, now adding EASM, total cloud coming up. So we feel like there's really interesting areas where our customers are looking to consolidate. And look, Q1 was a tough quarter as you had -- as we had talked about last quarter earnings call that we had made a decision with the CRO change and that decision was really what we focus on implementing through this quarter. Of course, there was a little bit of disruption, but the good thing is that now that transition has been completed as I'm directly involved now with our sales teams and focusing on working directly. Looking at -- so today, we are looking at a growing and maturing pipeline for 2023. We are getting better at improving our sales execution. Compared to last year, we have about 20% more growth in our sales and marketing headcount and early signs right now for Q2, we are optimistic with what we are seeing. I mean, of course, we're cautious about the macro, but looking at our net retention rate, et cetera. I think, overall, we feel healthy about the business, even though we are cautious about the macro. And we're looking at these things plus our new product initiatives coming together so that we can start to get back to that growth rate that we had last year.

And just to add a little bit more color to that. If you take a look at the year-over-year compare, Q1 was a tough quarter. Q2 starts becoming easier. So we do anticipate the bookings growth to tick up for the rest of the year. And like Sumedh mentioned, we have a significant investment in sales and marketing headcount and without the current macro conditions, we would have expected higher return. But with that said, we do anticipate that to kind of generate the type of returns and growth in the longer-term.

Got it. And just as a quick follow-up. I know this quarter, you still lapped some of the benefits of Log4j last year. Are you able to quantify at all what those benefits were from a percent standpoint as it pertains to growth in the first quarter of last year, just so we can kind of look at it on a like-for-like basis?

Yes, last quarter, we did highlight that it wasn't an immediate benefit on Log4j. We did have a strong Q1 last quarter, but not specific to Log4j in particularly.

Got it. Thank you.

Thank you. One moment for our next question. And the next question comes from the line of Brian Essex with JPMorgan. Your line is now open.

Hi. Good afternoon and thank you for taking my question. I was wondering, Sumedh, could you give us a little bit of sense of what you saw from a macro perspective in the quarter maybe relative to 4Q particularly as we see some of your peers have exposure to financial services, it might have been a more challenging maybe mid-market was a little bit more challenging. Would love to get your view on competitively and from a macro perspective, what you're seeing? Thanks.

Sure. I think I don't feel like we saw a really significant change materially in Q1 from what we saw in Q4. I think overall, a lot of cautiousness. Project starts takes were getting pushed out. I think we do see the weakness in the new business like everybody else, and I think especially on the lower end of the market. But as we look at, essentially, people are -- so there's just more layers of scrutiny, et cetera. However, as people are taking a step back from a new business perspective, thinking about one day or if they want to switch, they are also focusing on existing trusted vendors that they really feel they can do more with. And so that's kind of what we are excited about and the conversation that we are having is while new business is kind of where it is right now that everybody is feeling. We do see a lot more conversations happening on instead of going out and buying one scanning solution and another inventory solution and another patch management solution with Qualys, can I do more? I already have you guys, can I consolidate and get the benefit out of that. And so those are the conversations for us there quite encouraging. But other than that, we don't see a material difference in the macro from Q4 to Q1. And we are -- in our guidance as well, we really look at it as the macro stays the same and no improvement happening in the macro. And then, we didn't really have any material difference in exposure from the financial banking issues that we've had. So Joo Mi, you can maybe talk more about that?

Yeah. About 20% of our business comes from financial institutions. And from our side, we haven't seen anything in our discussions or observed anything specifically in our bookings. We don't think it's going to be material for our business, but as things involved and if conditions change in Q2, we will see.

Got it. That's super helpful. And maybe if I can sneak in a follow-up Sumedh, you commented on CRO changes and that you're kind of taking the range. Maybe just any progress report in terms of where you're shaking out from a hiring perspective? Are you more -- I guess, are you aggressively looking for new CRO? And then how does that lineup with what your plans are for incremental hiring in sales and marketing throughout the year?

Yeah. Look, I think being here for 20 years I have a pretty good sense of the business, the company and everything. I think we do continue to look for a sales leader. However, I'm back like I did in 2021, I'm back hands on working with our second level team, which has been -- they have been great and they've been with us for a long time. So we feel pretty good about that. I think overall, from a sales hiring perspective, pretty happy with what we have seen from last year to this year with the 20% increase. So I think we continue to focus on being prudent, as we move forward with our investment in sales and marketing and may not be the same rate as growth in sales marketing as last year. However, we still continue to anticipate, to grow and throughout the year and get to double-digit growth, again, that's the third quarter. We're pretty excited about the opportunities we see. And so we're going to continue to invest in that area.

Got it. Very helpful. Thank you, Joo Mi as well.

Thank you.

One moment for our next question. And our next question comes from the line of Alex Henderson with Needham & Company. Your line is now open.

Great. Thanks. So I wanted to ask a couple of questions on the North America revenue declining for the first time quarter-to-quarter and the direct revenue, clearly decelerated pretty sharply from to 12% growth from 19% growth last quarter. So I've got some -- I'm wondering is that, there a mix shift in the emphasis of the company that is causing those to occur? And is it a function of the strong 20% growth in the channel that's cannibalizing some of the direct revenues. So, how are you balancing between those? And how measuring it? Thanks.

Yes. Right now, we are investing across globally. And what we're looking at is, given the investments that we're making, we do anticipate the revenue mix between U.S. and international to stay approximately the same current at 60% U.S. and 40% International. In terms of the direct versus indirect, we have been focusing on developing our relationship with and building our relationship with our channel partners. So we do anticipate the mix to be shifting more towards the channel partners, and we have been seeing the ramp-up there, even though compared to the growth rate in Q4, it has declined, right, going from 22%. Right now, 18% is still strong from the channel partners, but it is lower.

So just to be clear, as you look at the very large expansion in your sales capacity in 2022 and continuing in 2023, is that heavily skewed towards supporting the channel, or is it equally split between channel investment and direct channel -- direct sales investments?

There was more on the direct -- on the channel, it's more of an incentive and working closely with our channel partners versus hiring more channel managers per se. So that the dollar investment that we made in the business is more skewed towards the direct sales force.

Thank you so much

Thank you. One moment for our next question. Our next question comes from the line of Rudy Kessinger with D.A. Davison. Your line is now open.

Hey, great. Thank you for taking my question, guys. Joo Mi I want to clarify what you said earlier, I think, you said for the remainder of the year, you compares get a little easier, and you do expect group billings -- excuse me, I think you had said bookings growth to accelerate. But to be clear, in your current calculated billing again, came down to 9% this quarter. Do you expect you're billing towards your current calculated billings growth on a year-over-year basis to accelerate throughout the rest of the year, or do you expect it to stay in the high single digits.

We do expect it to accelerate. So when I said the easier compare, if you take a look at the current billings growth rate last year, and the first half it grew by 20% and 18% and versus 13% and 12%. So it is an easier compare in the second half of this year. So we do anticipate the growth rate in this year to a sole throughout towards the year.

Okay. Got it. That is helpful and then on the I don’t know on the – I don’t on the EBITDA margin front, you guys continue to be pretty impressively there irrespective of the revenue outperformance in the quarter, whether it's small or big. We continue to point us to low 40s EBITDA margins. It seems like it seems conservative. I don't know. Any color to add as to how you guys keep showing such good upside on the EBITDA margins and potentially long term, is mid-40s more of the right go-forward rate, or are you guys very convinced that low 40s is the right rate going forward?

Yes. We [indiscernible] at the low 40s because if you take a look at the year-over-year change, it's been a couple of hundred basis points contraction. So as an example, in Q1, it's 45% EBITDA margin. A year ago, it was 48%. And I know that we ended the year in 2022 with 45% EBITDA margin. We expect that to kind of trend down because of that.

Okay. Got it. That's it for me. I'll get back in the queue. Thank you.

Thank you. One moment for our next question. Question comes from the line of Josh Tilton with Wolf Research. Your line is now open.

Hey, guys thanks for taking my question. I just want to follow up on the last one. I'm just going to ask it very straightforward to us with imperfect information, card billings is kind of the best indication of what your future revenue growth is going to be and you just grew billings 9% or current billings 9%. I understand the investments to kind of improve the future growth algorithm. But is there anything you can give us to help us understand the confidence you have in reiterating the revenue growth for this year in light of the current billings coming in at 9% growth in 1Q?

And the assumption is that current billings will accelerate. So we are seeing a current billing that will be higher than 9% in Q2 in Q3 and Q4. And one of the reasons is because it isn't easier compared to last year, especially because we had a tougher period in the second half of last year, with the current billings of the second half of last year coming in at 13% and 12%. And then, as far as the big assumption that we have made is -- despite the macro, we did increase the sales and marketing investments significantly last year. In 2022, we grew our headcount by over 20% compared to only by 3% in 2021. Now, most of this hiring was back half weighted in 2022. So even if the sales productivity is lower in 2023, they do add -- they do increase the foot on add -- in terms of the distribution and out there and be able to sell. And then perhaps Sumedh had mentioned that we have growing pipeline that's maturing. So even with the lengthened sales cycle, we do expect that to help grow the bookings growth and consequently the billings.

Okay. And then, just a follow-up on that. Maybe my math is little incorrect here, but it looks like your partner sales, they did grow nicely year-over-year in 1Q. But on a dollar basis, they actually ticked down slightly from 4Q. What kind of visibility do you have into that part of the business? How does that compare to the visibility you have into the direct sales? And how should we think about that partner sales growth trending for the rest of the year?

Yes. We made last year and around the same time frame, we decided to kind of roll out this partner program, which is fairly new to us in the way that we have been working with our partners, working from incentive perspective, aligning channel managers that we didn't have before with these partners. And so, of course, most -- a lot of these deals, our channel managers or technical account managers to work hand-in-hand with the partner. And so, as we are going through this motion and getting better at working with the partners, we do get a certain amount of visibility, because we are actively working with those partners on a bunch of these deals, especially the -- in enterprise and to some extent the mid-market as well. And so, I think we anticipate that we are going to continue that investment on the partner side. And we do think that the mix will pivot more towards partners just not -- we're not targeting any specific number at this point so --

Thank you, guys.

Thank you. One moment for our next question. And our next question comes from Mike Walkley with Canaccord Genuity. Your line is open.

Hey, guys. Good afternoon. It’s Daniel on for Mike. Thanks for taking the question. So I guess with the release of the VMDR packages for the SMB, just curious if you could provide us with some color on how this is being received by some of your smaller customers. Obviously, there's some pressure in this segment of your business on management any details would be helpful.

Yes. I think we launched them a couple of months ago. So it's still early from tracking specific numbers, but the conversations with our sales team have been very positive. They feel like they have been able to really streamline the conversations, move these packages quicker than what they would have to do, the fact that the sales execution is improving in terms of not having to quote multiple line items, especially around patch management, selling it as a single package and being able to position it. We've got pretty positive feedback. And so we're optimistic of how that's actually going to impact us over the next few quarters, but we're tracking that. And we are looking to see if we need to do any additional packages as well, given the response that we've had with different – at different numbers as well. So I think, overall, I would say, I'm pretty positive about what we're seeing. And then we'll continue to track how much of an impact and how that's actually having an impact in that segment as we move forward. But early indications definitely quicker – are closing quicker because the value prop is much clearer and it's a single line item.

Great. Thank you very much for the color.

Thank you. One for our next question. And our next question comes from Shrenik Kothari with Baird. Your line is now open. Mr. Kothari, are you there?

At this point, I'm showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone have a wonderful day.