Good day and thank you for standing by. Welcome to the Qualys Second Quarter 2023 Investor Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Blair King. Please go ahead.

Thanks, Victor, and good afternoon, and welcome to Qualys’ Second 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. The factors that could cause results to differ materially are set forth in today’s press release and in 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. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. So with that, I’d like to turn the call over to Sumedh.

Thank you, Blair. And welcome to our second quarter earnings call. We’re pleased to announce that we delivered another quarter of healthy revenue growth and industry-leading profitability, demonstrating our increasing leadership in cybersecurity risk management and firm foundation to drive future growth. Q2 remained a tough period with customers continuing to scrutinize deals and delay project start dates. Nevertheless, the combination of today’s uneven macro and heightened threat environment is driving the need for security stack consolidation necessary for clear security outcomes, reducing vendor sprawl in customer environments and implementing a long-term security strategy based on cost and value. Our risk management platform positions us well to deliver these outcomes to our customers, and we feel fortunate that many of them are on a long-term transformation journey with us. This was evidenced in Q2 by the steady adoption of our VMDR solution, which is now deployed by 52% of our customers worldwide. Key competitive VMDR wins with TrueRisk include multiple customers, both down market and in the forms 1000. Qualys’ VMDR solution continues to garner significant industry recognition. As recently announced, Qualys VMDR with TrueRisk was voted the Best Risk Management Solution at the 2023 Awards Europe. This award evaluates vendors based on inputs from security practitioners and is held in high esteem. We believe Qualys’ placement as the number one vulnerability management solution further validates our investments in the platform and represents the gold standard for securing customer environment today and in the future. Leveraging our VMDR and single agent approach, we have built a blueprint for delivering greater value to our customers with multiple long-term drivers in our business. Let me highlight a couple of early platform success we’re seeing broader adoption with our customers. In Q2, a Fortune 300 global manufacturing company chose Qualys because of our…

Thanks, Sumedh. And good afternoon. Before I start, I’d like to note that except for revenue, all financial figures are non-GAAP, and growth rates are based on comparisons to the prior year period unless stated otherwise. Turning to second quarter results, revenues grew 14% to $137.2 million. Revenues from channel partners grew 17%, continuing to outpace direct, which grew 12%. Channel revenue contribution remained the same as last quarter at 43%. By geo, growth in the U.S. of 16% was ahead of our international business, which grew 12%. U.S. and international revenue remained the same as last quarter at 60% and 40%, respectively. Although customer dollar retention was largely unchanged in Q2, the selling environment was challenging, with new business down and our net dollar expansion rate on a constant currency basis at 108%, down from 109% last quarter and 110% last year. While there continues to remain room for improvement from smaller customers spending less than $25,000 with us, we remain pleased with the continued strong revenue growth of 17% from larger spend customers. In terms of new product contribution to bookings, patch management and cybersecurity asset management combined made up 10% of LTM bookings, 19% of LTM new bookings in Q2. We attribute this success to our customers’ needs for broader contextualized awareness of their tax service mainly integrated risk management and remediation workflows across all environments on a single platform. Reflecting our scalable and sustainable business model, adjusted EBITDA for the second quarter of 2023 was $65.8 million, representing a 48% margin compared to a 45% margin a year ago. Operating expenses in Q2 increased by 6% to $53.4 million, primarily driven by investments in sales and marketing, including headcount. Although we remain focused on driving growth, with our disciplined approach to investing, we are being mindful…

[Operator Instructions] Our first question comes from the line of Jonathan Ho from William Blair. Your line is open.

Hi, good morning – good afternoon. Just wanted to maybe dig a little bit into your guidance. Can you maybe help us understand some of the assumptions that you’ve now baked in and maybe what’s changed relative to your macro expectations and particularly around sort of the new customer add side?

Yes. I think Joo Mi can provide a little bit more color. But overall, I think we feel like based on what we see right now, the guide is appropriate, and we’re not assuming any improvement in the macro given kind of what we see in the way customers are working through, in some cases, pushing out deals, et cetera. So, we did see additional scrutiny on the upsells this quarter, which was something that we worked through with customers. And while our win rates are down, we are excited about the pipeline that has been generated with some of the investments that we made in making in the last couple of quarters. And now with Dino coming on board, of course, like with any executive coming on board, we’re looking forward to the contribution he’s going to make in the long term, and there probably will be some disruption in the short term there. And so taking all those factors into consideration, really, we feel at this point. We believe the guide is appropriate for what we see.

Yes, to add a little bit additional color to what Sumedh said, if you take a look at our annual revenue guidance, it hasn’t really changed all that much. We’ve been consistent in emphasizing that we believe that we’ll be able to achieve 13% revenue growth. And so underlying that is our belief that our net dollar expansion rate isn’t going to materially change. It has ticked down by a percentage this quarter, and it could continue to do so, but we don’t think that even with that, our current billings was able to reaccelerate back up to 11% from 9%, and we don’t see that to change in the second half of this year.

Great. And maybe just to dig into that last comment a little bit more around the net dollar expansion, is there a way you could make, so a little bit more color in terms of what's impacting the net dollar expansion. Is there anything on the churn side? Or is there anything on your ability to sort of upsell product that's impacting this? Thank you.

So our retention continues to be strong. So the 1% downtick is due to the headwind and up-sell that Sumedh commented earlier. We are seeing additional deals group extended sales cycles on with existing customers who are looking at revisiting potential cross-sell and up-sell opportunities, and that contributed to the percentage down quarter-over-quarter.

Great. Thank you.

[Operator Instructions] Our next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Hi. This is Anushtha for Matt Hedberg. Thanks for taking my question here. It's good to see current billings accelerate versus last quarter back to double-digit growth. Maybe how should we think about billings growth in the second half of the year? Should we expect billings growth to continue to accelerate? And if so, could it accelerate back to mid- to high teens growth given comps ease in the back of the year?

Yes. We typically don't guide to correct billings because we don't actively manage to that number, and it could fluctuate due to the billing terms for the customer. But with that said, what we're seeing right now in the business is no, at 9% to 11%, we don't see that materially ticking up in the next quarter. I think it will be more or less the same, assuming that there are no significant changes in the billing terms of existing and new customers coming in. Q4 is a little too early to tell, but at the same time we don't see it going down to single digits right now.

Got it. And then you significantly outperforming profitability with 48% EBITDA margin, which is a significant step-up from last quarter. Can you talk about what's driving that outperformance and improved leverage?

It's primarily due to the fact that we've always taken a very disciplined approach to investing. And we've been very flexible because the way we look at investment opportunities, we take a look at initiatives that we have to set plan for the full year, and then we tend to prioritize based on the returns that we see from each of the investments that we've already made. And right now, we just didn't see that there was a reason for us to accelerate and increase investments in multiple different areas, especially because we knew that we were looking for a new CRO. We had planned on finding the right person this year, and we're very fortunate to have Dino on board. So with Dino onboard with us right now, we'll be assessing all the initiatives to understand maybe it makes sense for us to increase investments in Q3 or in Q4. But based on what we see right now, we think that the most likely scenario is ending the full year at EBITDA margin in the 45% range.

Got it. Thank you.

[Operator Instructions] Our next question comes from the line of Rudy Kessinger from D.A. Davidson. Your line is open.

Hi. Guys. Thanks for taking my question. Joo Mi, I just want to maybe clarify on the current calculated billings and maybe the revenue guide. I know last quarter you said you expected current calculated billings growth to accelerate throughout the rest of the year. Obviously, it topped two points here in Q2 over Q1. Just to be clear, you expect current calculated billings growth to remain roughly flat in Q3 and Q4. I just want to make sure that's what you're saying? And then on the guide, again for the full year, growth about the same at the midpoint, but I think exiting the year, the guide now implies growth closer to about 11% versus probably 13-ish percent previously. So it does appear to be a step down of the growth exiting the year. Just want to make sure that there's nothing I'm missing there?

Yes. So in terms of the calculated billings, we knew that even though we don't manage fully we need a 9% Q1 was an anomaly. It wasn't really representative of the business momentum that we were seeing. So that's why we had indicated that it would be higher for the remainder of the year. Looking at 11% in Q3, I don't think that will be materially different. I don't see it kind of ticking down from that 11% right now. Q3 and Q4, I think it will probably be more in line with that 11% achievement that we had in Q2 or potentially higher.

Okay. And then maybe just one last one, the models, gross margins stepped up, good amount Q2 versus Q1, and I think just probably the highest you've shown at least several years. Is that kind of a new go forward far for gross margins? Or was there anything that you benefited from one-time in the quarter?

Nothing to call out, I think the one change that we did make this year is Employee PDP on merit cycle was done a little bit later. So that will hit in Q3 versus Q2. But if you take a look at the gross margin of 82%, we expect to hover around that 81% to 82%. We are getting some cost savings just because we are getting a disciplined approach, making sure that we're getting the efficiency where we think that we can. So it's nothing material to call out there. We think that will hover around that range.

Great. Thanks for taking my questions.

[Operator Instructions] Our next question will come from the line of Mike Walkley from Canaccord Genuity. Your line is open.

Hi, thanks. I wanted to ask maybe about the GovCloud introduction. How is the early feedback from the Fed and government customers? And are you seeing that maybe Fed customers might be more or less slowing towards consolidation in your enterprise base?

Yes, that's a great question. It's really been exciting for us to see the conversations that we are having with the federal customers. I think these are one of the best conversations I've seen since I've taken over. And so I think that's very encouraging for us. We had a couple of good wins last quarter. We highlighted that as well from the federal side, and we have a good pipeline that's developing. And primarily because when you talk about FedRAMP high ready and the fact that the platform can do patch management and vulnerability management, all of it in one, there's no other vendor right now that help that FedRAMP patch management as an example. And so the engagement really becomes very comprehensive. It's not just about can you scan and give me a FedRAMP high scanner. So those conversations become more holistic in nature. And what's also interesting is that the FedRAMP high and the GovCloud conversation is also driving commercial customers that want to also provide FedRAMP high services to the government to have these conversations with us because they want their clouds to be – their solutions to be FedRAMP high. So it's not just the pipeline building from the federal government, but also the pipeline that we're encouraged to see the early signs from commercial customers who are saying, we need to go for FedRAMP high, and Qualys is one of the only platforms that is providing that kind of a risk management side of the house, which has the FedRAMP high status.

Great. That's good to hear and helpful. And just for my follow-up question, congratulations on adding Dino DiMarino to the team. Just to clarify on OpEx, is it area you've slowed in the near term as you wait for him to kind of formulate a plan and that's the higher profitability? Or is it just overall cautiousness given the macro backdrop? Thank you.

It's more of the former because we really believe that we are focused on balancing growth and profitability. We think that there's a huge upside and opportunity ahead of us. But then again, we want to make sure that we time it so that we maximize the return. So right now, we are just reassessing, regrouping to make sure we understand and we can justify some of the investments that we're going to double down on.

Great. That makes sense. Thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Yun Kim from Loop Capital Markets. Your line is open.

Okay. Great. Thank you. Just following-up on that question; congrats on the hiring of the new CRO. Should we expect any change to the go-to-market motion in the second half of the year? And what are some of the investments around go-to-market that you were initially planning in second half that you plan on laying into next year?

I think one of the reasons why we were so excited to have Dino really have that product-led growth mindset and so I think which really jells well with the culture here at Qualys, given all the capabilities that we have on the platform and so many opportunities that we have, as you saw today, even with the first quarter risk assessment capability. And so I think if you look at some of the investments that we have been driving even before Dino came on board, pretty excited to see that some of those investments that we have in marketing and partner are actually showing some good early signs with a strong pipeline build, good interaction with our partners, et cetera. And then there are other areas where sales involvement, et cetera, where we're continuing to invest. And those – some of those are going to continue because I think we have strong conviction in the go-to-market notion around building the pipeline. And then as Dino comes on board and he is sort of looking at how the sales team is structured and how we're going to address larger accounts that are spending $25,000 or more versus the smaller accounts that are $20,000 [ph] or less, there are certain areas where we are looking at where do we make the investments? Where we optimize the investments that we already made, right? So we have a good growth in investments last year relative to the year before. And some of those investments you need to optimize them to make sure we're getting the value out of those. And so Dino will coming as he's on board now, he will look at some of those areas as well and then will formulate an overall thesis. But I'm involved on a day-to-day basis every day with the business. And so Tim and I are going to partner to make sure that we continue our focus on growth and profitability, even balancing those while looking at additional opportunities to improve our execution in sales as well as rest the GTM and improvement in partner motion, et cetera, so that we can set ourselves up for the longer-term growth that we believe that we can bring.

Great. Thank you for that. Joo Mi, there's a huge sequential increase in the long-term deferred revenue. Is there like a concerted effort to sign longer-duration deals? Or was that just a couple of larger deals that just tend to have a bigger deals in the quarter?

It's the latter. We're happy to have multiyear prepays, but it's not something that we were actively seeking.

Okay. Great. So it's not something that changed this past quarter, the strategy around those deal contracts linked?

No.

Okay. Great. Thank you.

[Operator Instructions] Our next question will come from the line of Josh Tilton from Wolfe Research. Your line is open.

Hey this is Patrick on for Josh. Thanks for taking my question. First on the billings in the quarter, linearity seems strong. Did you all see any benefit from deals that may have slipped out of 1Q and into 2Q? And then with the adjusted EBITDA commentary moving up to the 45% range for the full year does that change the commentary around the low- to mid-30s free cash flow margin expectations for the full year? Thanks.

Yes. I will answer the EBITDA margin and the free tax flow margin guide, we're guiding to midpoint of 40 for the EBITDA, and then free cash flow will be in the mid-30s now, not low 30s because of that.

Okay. Great. And then on the billings, did you all see any benefit from deals that may have slipped out of 1Q?

Not particularly. We typically call out if there's a large deal that impacted current billings. We didn't really see anything in Q1 or Q2 to call out. But naturally, there's always slippage, right? Sometimes we have some benefits, and we have some ticks.

Okay. Great. Thank you.

[Operator Instructions] And our next question will come from the line of Matt Saltzman from Morgan Stanley. Your line is open.

Great. Thank you. So I'm just curious around any potential contributions from the MOVEit Hack intra-quarter. I know you mentioned still a tough period with deal scrutiny and delayed starts. But I'm curious if you saw kind of any incremental demand related to the hack and if so, if you're just able to maybe quantify what the potential benefit was?

No, nothing meaningful change from that perspective. And I think it's the same pattern that we saw even back with SolarWinds or whatever as our customers typically and prospects they engage to understand and come out with a more long-term strategy around addressing these things rather than a jerk reaction of having to find and deploy sort of immediately more licenses, et cetera. So we really didn't see any impact in Q2 of that. Of course, it continues to highlight the importance of vulnerability management and patching these vulnerabilities in time because that was one of the biggest things was not just that the longevity was there. It was actually being exploited pretty rapidly. And the conversation from our customers that we had were more around, can you help us fix it and patch it, not just can you detect that with a scanner. And so I think what we're seeing is just continued engagement. We are Vulnerability Management and Risk Management around that. It is a strong focus for customers, but nothing to call out from a contribution in this quarter.

Got it. Thanks. And just as a quick follow-up on the announcement around risk assessment for first-party apps. I'm curious if the plan is to directly monetize this and that it will have an incremental ASP uplift? Or is this more about just bolstering the overall VMDR platform and making it sticky or making it more attractive for customers to adopt multiple solutions? Thanks.

Yes, I think that's always what I dream of every night I go to sleep and wake up is continued adoption and how all of these things will contribute towards better retention of VMDR. However, look, the way we look at this is the third-party risk assessment with CVE has been something that Qualys and others have been providing for a while. But today, what we have is software running on servers, et cetera, is homegrown software and that does not have a good way to create signatures and find vulnerabilities that are very specific to each individual customer. And so for us, providing this additional capability will be an add-on to the VMDR platform that customers will have to purchase. But what we do see is that because it then brings their third-party and first-party vulnerabilities and misconfiguration into a single view and with the initial conversations that I've had with about seven CISOs in the last couple of days. We're quite excited about the initial feedback that we are getting where they really don't have good tools right now, whereas a lot of them are writing their own scripts by hand. And so if they can just leverage the deployment of Qualys that they already have on the same asset to also look for their own custom vulnerabilities. A lot of them really want to take a look at it and evaluate it and it will be an additional revenue that we will look for. However, it's too early at this point to call out for how that traction of embracing that will be from our customers under adoption, et cetera. But we'll continue to look at it and monitor it. And just like we've done for Patch Management and Fiber Security Asset Management, we will continue to look at this in total cloud as the additional new areas that we're getting good feedback on and see how they will start to contribute towards the ASV.

Got it. Thank you.

Thank you. And with that, we'll end our Q&A Session. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Goodbye.