Qualys, Inc. (QLYS) Q1 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Qualys First Quarter 2026 Investor Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Blair King, Investor Relations. Please go ahead.

Thanks, Michelle. Good afternoon, and welcome to Qualys' First Quarter 2026 Earnings Call. Joining me today to discuss our results, 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 product capabilities, future events or future financial or operating performance. Actual results may materially differ from these statements and factors that could result -- and factors that could cause results to differ materially are set forth in today's press release 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 now turn the call over to Sumedh.

Thanks, Blair, and welcome to our first quarter earnings call. I'm pleased to report we delivered another quarter of strong revenue growth and profitability. With the accelerated progress of new frontier models, discovering vulnerabilities and writing experts autonomously, the number of detections is going to go up significantly while the exploit window is going to shrink dramatically. The need for organizations to know their true risk to effectively prioritize and auto-remediate riskiest vulnerabilities in less than a day has never been greater. This is why we innovated with the ETM enterprise tourist management platform, which implements an AI rock risk operation center so customers can get the risks remediated instead of relying on dashboard tourism with siloed products that increase their exposure. Given our #1 rating in the GigaOM Patch Management radar with over 150 million patches deployed and over 40 million of these delivered autonomously in the last year with a Six Sigma accuracy organizations are turning to Qualys as the trusted solution to help them move from current broken manual remediation processes to high-impact, low-risk autonomous remediation workflow at scale that go beyond patch management. And that's exactly where we are focused. With exploitable vulnerability volumes surging 6.5x and average time to expect collapsing to under a day as adversaries weaponized vulnerabilities before Patches even exists, security teams focus on theoretical exposure are overwhelmed. Just finding more and more vulnerabilities doesn't equal risk. Real risk is determined by whether an adversity can successfully execute and explore path in an organization's live environment. That's why I'm pleased to report that our most recent addition to our agent AI marketplace agent Vail is now generally available, powered by TruConfirm within our ATM solution agent well delivers closed-loop exploit validation and autonomous remediation directly to the rock. Using autonomous exploit validation at scale, we remove the guest work for customers by running safe exploits over the network to confirm whether attackers will succeed in their breach attempts while enabling security and IT teams to focus on the less than 1% of threats actually exploitable in their production environment. In doing so, we have closed the gap between theoretical and actual exposure and believe set a new adoption standard in the industry, while traditional ETM solutions take days to pull scan telemetry from scanning tools and rely on theoretical risk scores ignoring, mitigating security controls, ETM and its agentic AI workforce takes a fundamental different approach. Inside a continuously functioning loop, it detects vulnerabilities, validates exploit, quantifies real risk, automate remediation and revalidate the exploit, optimize and integrated with leading LLM and SLM this end-to-end approach empowers organizations to be laser-focused on prioritizing only exploitable threats for the next logical step, which is autonomous remediation, leveraging agent era and TruRisk eliminate. Underpinning our risk eliminated solution is our new AI-powered batch reliability score, a model trained our own proprietary data set of hundreds of millions of deployed patches, which predict patch induced outages before they happen, giving customers the confidence to deploy with certainty or positive purpose while setting a new standard for predictive operationally aware patch management. With an umbrella of remediation solutions, including matching and other competing controls, with less than 10% rollback rate. The AI native rock accelerates streamlines and demoralizer security outcomes, so transforming from, we think, to know it's being fixed at machine speed. In the context of the newest frontier AI models giving attackers the ability to soon discover diverse -- zero-day vulnerabilities, generate exploits in near real time and develop autonomous attack agents, unlike anything the industry has seen, the feedback to our get it fixed in our approach from many of the CISOs I met at our decent [ Rocco ] EMEA event in London has been very positive. They shared their excitement about the rapid pace of new capabilities we are delivering their deployment agenda and their ability to now autonomously monitor, measure and confidently remediate actual risk in multi-vendor environment in an era where just generating visibility dashboards is increasingly unacceptable. Our industry-leading capabilities are gaining broader recognition among our customers, partners and third-party analysts. Specifically, our total cloud solution was recognized as a leader in CNAPP in the Q1 2026 Forrester Wave report, and subsequently won the 2026 SC Award for the Best Cloud Security Management solution. Both underscore our capabilities in delivering unified visibility with real-time detection and response at run time across hybrid environments. It was also positioned as a leader in 2026 GigaOM report for cloud and entity and title management and following our dual pan awards late last year, our third research unit has again demonstrated its impact with the discovery of Track Armor uncovering critical app armor vulnerabilities that can lead to root-level compromise and container escape across millions of Linux systems worldwide. This, alongside with our recently released research on the broken physics of remediation further demonstrate Qualys' commitment to fortified security operations and raising the bar on adversaries. The net result is that we have distinctly unified CTM exploit validation cyber risk quantification and remediation into a single AI-driven risk fabric that continuously senses alerts reasons and acts across hybrid environments on with these capabilities and growing rock momentum that will soon autonomously trigger ITSM workflows. We remain laser-focused on accelerating ETM adoption throughout our vulnerability management and detection response customer base and positioning Qualys for larger upsell opportunities over time. Turning to our business update. We have established a long history of converting operational challenges into strong competitive advantages demonstrated by customers spending $500,000 or more growing 9% from a year ago to 2021 -- [ 2020 ] months. That's why one of my favorite wins in Q1 was with an existing global 1,500 customer despite strong foundational visibility that teams struggled to operationalize risk reduction across the growing mix of on-prem multi-cloud environment, silo tools fragmented telemetry, a growing population of LLM and millions of vulnerabilities with limited business contacts. This customer recognized the traditional severity-based prioritizing methods were not long -- are no longer sufficient and launched a strategic initiative to unify risk signals across their environment and operationalize the rock. Leveraging AI for security and security for AI, they expanded the Qualys footprint by adopting ETM and total AI in a mid-6-figure annual upsell. By consolidating disparate signals into the Qualys platform, this customer now has a unified orchestration layer that delivers end-to-end visibility across the attack surface, including deep scans on their assets across binaries, open source libraries and dependencies with centralized risk quantification, prioritize remediation workflows and measurable outcomes aligned with business risk tolerance. This win reflects broader ETM momentum as more and more customers turn to Qualys for evidence-based export validation and remediation while benefiting from the efficiency and scale of AI-native -- automation. Partners remain a key pillar for our growth agenda. In addition to a growing list of nearly 2 dozen certified MRO partners beginning to actively launch new services we are seeing momentum build across all geographic theaters with a strong focus on AI and native rock. For example, one of our largest MRO partners is now in the process of bringing the case-ready AI-native rock to market powered by our ETM and automated remediation solutions. Additionally, to our strategic alliances initiatives, we continue to drive deep technology integrations, co-selling opportunities and demand generation programs. to drive innovation in security research through the latest -- models. We have partnered with open AI in their crystal access for cyber program and anthropic in their cyber verification program to advance our vulnerability and threat intelligence and allow customers to ingest these findings into ETM for further detection and remediation. On the cyber insurance side, we are also pleased to announce a new strategic partnership with Converge Insurance, leveraging the quality team solution to help their customers demonstrate strong security hygiene and qualify for meaningful premium reduction, advancing our vision of tying cybersecurity to business outcome for CECL. Further supporting our growth trajectory in Q1, we continue to expand data testing of Flex designed to help customers accelerate and broaden their adoption of the Qualys TTM platform. Based on strong early engagement and positive feedback we're planning to build on this momentum by proactively identifying opportunities to extend [ Keflex ] to select customers and partners with a go-live date planned for later this year. And finally, as the federal government seeks to garnish greater efficiency and replace outdated and costly on-prem deployments from years past with modern cloud-native risk management solutions we are especially excited to host our third annual [ Pedro ] conference in Washington, D.C. towards the end of this month. We have made good progress growing our federal business and advancing our fed ramp high status with large federal agencies, and we continue to believe this market will fuel a new leg of growth for the company over time. In summary, we are pioneering a new category in pre-breach risk management by bringing autonomous exploit validation, risk quantification and zero-day remediation together within a single AI-driven risk fabric that redefines how enterprises operational as cyber risk. Complementing frontier model discover vulnerabilities. Our platform leverages proprietary domain data, real-time telemetry and deep operational context using sensors and agents behind the firewall to continuously discover assets, validate exposures, quantify risks, remediate threats and enforce company-specific policies, which are unavailable in the public domain. This is driven by our 2 decades of processing petrabytes of structured telemetry, combined with industry-leading threat intelligence in a closed-loop system that compounds across thousands of customer environment every day. printer models are powerful and accelerated back path analysis and triage. However, they need to be paired with a highly reliable control plane to consistently enforce accurate policy and compliance outcomes across live hybrid environments. This is where the unique value proposition for Qualys customers live, and it requires deterministic auditable, repeatable and trusted execution with effectively zero tolerance for error with attacks moving and machine speed and increasingly requiring defenses start to learn and respond in real-time closed-loop agents orchestration, driven policy and harness by flexible model choice act as a force multiplier further enabling precise risk quantification, safe remediation and even faster and more doministic outcomes at scale. For Qualys, this means our massive data context, LLM and SLM integration and trusted execution serve as the system of record for pre-beach cyber risk management and translate AI into a packaged Rock automation platform that delivers customers measurable risk reduction, zero-day remediation, government outcomes and immediate ROI. With that, I will turn the call over to Joo Mi to further discuss our first quarter results and outlook for the second quarter and full year 2026.

Thanks, Ned, and good afternoon. Before I start, I'd like to note that except 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 10% to $175.6 million. The channel continued to increase its contribution, making up 52% of total revenue compared to 49% a year ago. Revenues from channel partners grew 17%, outpacing direct, which grew 3%. As a result of our strategic emphasis on leveraging our partner ecosystem to drive growth, we expect this trend to continue. IGO, 15% growth outside the U.S. was ahead of our domestic business, which grew 6%. U.S. and international revenue mix was 55% and 45%, respectively. In Q1, as expected, there was no meaningful movement in our net dollar expansion rate, closing the quarter at 104%, and slightly up from 103% last quarter. More importantly, we'd like to turn to a new metric that we plan to disclose going forward on a quarterly basis. net dollar expansion rate of customers with prior year purchase of ATM or CSAM subscriptions. We believe that this metric is currently the best indicator of success of our ATM strategic initiatives. With ATM innovation having stemmed from strong customer demand. We anticipate ATM adoption to drive higher net dollar expansion rate. However, given that ATM adoption is still in its early stages, we have decided to include CSAM customers in this cohort so that the metric has more wait to it. In addition, as a reminder, ATM is essentially an upgrade from CSAM. So we believe that this is an appropriate baseline to track and measure going forward. In Q1, the net dollar expansion rate of ETM CSAM cohort was 107%. As more customers move into this cohort. We hope to see consistent and meaningful improvement to our overall net dollar expansion rate and thereby driving accelerated revenue growth. Moving on to product mix. Our differentiated new products continue to drive growth. First, ATM, CSAM combined made up 11% of total bookings and 14% of new bookings on an LTM basis in Q1, up from last year's 8% and 9%, respectively. Next, past management made up 8% of total bookings and 15% of new bookings on an LTM basis in Q1. This compares to 7% and 16%, respectively, in Q1 of last year. Lastly, total cloud made up 5% of total LTM bookings in Q1, unchanged from a year ago. We believe that these differentiated products, combined with increased contribution to bookings in 2026 and given our opportunity to increase market share and maximize share of wallet. Reflecting our scalable and sustainable business model, adjusted EBITDA for the first quarter of 2026 was $83.3 million, representing a 47% margin, same as last year. Operating expenses in Q1 increased by 8% to $67.5 million, driven by investments in sales and marketing, which grew 17%. With this strong performance, EPS for the first quarter of 2026 was $1.95 per diluted share and our free cash flow was $93.6 million, representing a 53% margin compared to 67% in the prior year. In Q1, we continued to invest the cash we generated from operations back into Qualys including $1.7 million on capital expenditures and $53.9 million to repurchase $505,000 of our outstanding shares. Please commencing our share repurchase program in February of 2018. We've repurchased 11.2 million shares and returned $1.3 billion in cash to shareholders. As of the end of the quarter, we had $306.6 million remaining in our share repurchase program. With that, let us turn to guidance, starting with revenues. For the full year 2026, we now expect revenues to be in the range of $721 million to $727 million, which represents a growth rate of 8% to 9%. This compares to prior guidance of $717 million to $725 million. For the second quarter of 2026, we expect revenues to be in the range of $177.5 million to $179.5 million, representing a growth rate of 8% to 9%. While we believe our approach to pre-breach, cyber risk management provides some installation and this ongoing macro volatility. This guidance continues to see no material change in our net dollar expansion rate. With moderate growth contribution from new business in 2026. Shifting to profitability guidance. For the full year 2026 we expect EBITDA margin to be in the mid-40s, implying mid-teens increase in operating expenses and free cash flow margin in the low 40s. We expect full year EPS to be in the range of 7.44 to 7.65, up from the prior range of [ 7.97 ] to 7.45. For the second quarter of 2026, we expect EPS to be in the range of $1.73 to $1.80. Our planned capital expenditures in 2026 are expected to be in the range of $8 million to $12 million and for the second quarter of 2026 in the range of $1.2 million to $3.2 million. As the impact of the macro economy is still unfolding, we are closely monitoring the business environment and adjusting our priorities accordingly. That said, considering the long-term growth opportunities ahead of us and our industry-leading margins and plan further room for investment. We intend to continue to responsibly align our product and marketing investments to focus on high-impact initiatives -- driving more pipeline, accelerating our partner program and expanding our federal vertical. As a percentage of revenue, we expect to prioritize an increase in investments in sales and marketing with more modest increases in engineering and G&A. With that -- I would be happy to answer any of your questions.

[Operator Instructions]. The first question will come from Patrick Colville with Scotiabank.

In your prepared remarks, I mean, I think you did a really good job of conveying why risk quantification, I guess, testing whether an asset exploitable with run time context the ability to kind of patch and revalidate all make Qualys at low risk of AI disruption in the enterprise. But what I want to ask, though, is there's a lot of hype around anthropic Claude, [ Midos ], OpenAI, GPT 5.4, Cyber. Are they leading to more inbounds? And if so, like how will those inbounds and that kind of surge of interest translate into the financial model in 2026?

Yes, that's a great question. And I think our customers who are in this day in and day out, they understand pretty well that this is going to lead to more disclosures of patches and vulnerabilities from multiple vendors that they use. And I think the challenge is going to be more about -- as -- I mean on the positive side, I think these models are helping companies get better with finding these vulnerabilities themselves versus waiting for a tapers to find them, but it also means that they're going to lead to more catches being announced by our multiple vendors that the customers will have to deploy. And I think the challenge is going to be more that once the patches come out, attackers leveraging AI can reverse engineer those patches and find the exploits. And so it really becomes a game of how quickly can you apply the patch that the vendor is giving in a matter of hours and not wait for days and weeks as it happens right now? And -- that's where a lot of the conversations that we have had with our customers, we're seeing a lot of CISOs and customers reaching out to understand how our patch management capability and the remediation capability and exploit validation capability is really going to be helpful for them because they all need to provide an update to their Board in terms of how they are going to fight against the AI-induced attacks that are coming from these models getting better and the response cannot be we are going to do more manual remediation. They need to have a response that anchors themselves in fighting autonomous AI attacks with autonomous remediation. And they see us as a trusted vendor having deployed 150 million patches already and 40 million of those already fully autonomously deployed. And so a lot of those conversations are positive right now. But of course, it's in early stage, and we need to work through to see how they take out of the conversations, how they go back to their boards to their IT teams partnered with the IT team. So happy with the activity, but a little too early right now to talk about how the impact is going to be on the pipeline and outlook. As Joo Mi said, we're not considering any change from where we are right now in terms of the guidance. But we are happy to see the engagement that we are seeing from the inbounds that we're getting from customers trying to understand how basically can respond to this.

Very clear. And can I just -- I mean just to touch on that point. So I mean, Joo Mi, you very kindly last quarter provided us a soft guidance for 7% to 8% current billings growth in 2026 is the point you were trying to make in the prepared remarks that remains the case. No change to that level even with the strong 1Q performance and I guess, the positive vibes that Sumedh was just talking to?

Yes, that's correct. I think that if you take a look at our Q1 performance, it was a solid start to the year. We're very pleased with the Q1 outlook as well as what we anticipate for the rest of the year. However, we don't see any material kind of meaningful change for the full year today. So given that the baseline still remains at 7% to 8% for the current billings for the full year.

And our next question will come from Roger Boyd with UBS.

Sumedh, it was a strong quarter from a new customer add perspective, and particularly for 1Q, which is typically seasonally a little bit lower. Can you just talk about what's working right from a new logo perspective? And then everything you just kind of mentioned from a patch management remediation standpoint, to what degree is that sort of impacting the new customer conversation, any metrics you can give around attach rate of patch management or TruRisk eliminate would be great.

Yes, great question. And I think we kind of talked about right now where we are with patch management, sort of 8% of LTM overall bookings and 15% of new bookings, right? And I think definitely good execution by the team. Focused execution is key there. If you kind of recall our what we talked about at RSA, and a little bit before that, our focus on agent I agents as we went into last year. I mean, if you look at today, what everybody is talking about is how can we very quickly autonomously remediate things. And this is not accident that we are here right now. We have been delivering capabilities around patching, going beyond patching the exploit validation. And those messages have been resonating with customers. And so I think -- this is leading to better conversations with customers as they look at. We are encouraged with the conversations we are having around ATM. I mean the thing is, look, at the end of the day, risk measurement and risk management is going to be critical because it's the number of patches that you have to deploy, explores as a company cannot just deploy all the patches. And so anchoring it back to risk is very important. So eliminating the right risk and the minimum amount of risk is important and to be able to get there, so you're not matching and fixing everything, creating more risk from an outage then becomes very important because ETM is the one that does the hyper prioritization. And for ETM to be successful, you need high-quality detection capabilities. I think one of the concerns that customers have brought up after these models have come out has been the question of false negatives, right? If you're using Tier 2 scanners, the time it takes to get signatures out and find the findings versus scanner like Qualys, where we are getting signatures of multiple times a day, we are adding capabilities to detect things to reduce the false negative is becoming very important. And I think that -- those conversations are culminating in positive conversations for ETM, which is still early and ETM and eliminate conversations typically they do go hand-in-hand many times. And so I think while it's still early for ETM, we are encouraged by the conversations that we are having at this point. And so again, we have to work to continue the execution. Very happy with how Q1 went. But we're going to continue to work on executing with the opportunity that's in front of us. And like we said, our partners are working with us closely and we look forward to continuing our partners, bringing us additional sort of new logos and working with our existing customers with the MRO services which can get more value for existing customers through our partners to make sure that our upsell also continues to pick up.

That's really helpful. And then maybe just a quick 1 for Joo Mi. On Q-Flex, you talked about kind of building out this pipeline and identifying a customer pipeline to extend that procurement model to. Can you just talk about kind of the customers that you see as a good fit for Q-Flex, and any thoughts on when that kind of push could start this year?

Yes. So mostly, Q-Flex is targeted towards our enterprise customers who need that flexibility to potentially cover the forecast that they have anticipated for the full year. So as an example, what they're looking for is -- given that we continuously enhance our products and come out with newer products throughout the year, they want the comfort of having to prepurchase or pre-clinic to a higher amount that they might necessarily think that it's absolutely needed for the year. we've been talking with the select group of customers that have the budget that are willing to pre-commit to a higher credit with Qualys, with the ability to swap out different products and offerings and try out newer solutions throughout the year, we're pleased with the momentum that we have today, and we do plan to go GA with Q-Flex later this year.

And I would quickly activate that this is right now with what is happening is a good example of where a Q-Flex model will be helpful for a customer because we didn't have exploit validation earlier last year. But now that we have that, and we have with us driving more focus on patching Q-Flex customers through the year will have more flexibility in being able to use those credits to suddenly pivot towards patching more because there is a particular event that has come up. and not have to sort of keep going back from a procurement perspective. So like Joo Mi said, exciting early conversations with these large customers, and we look forward to working through with them this year and then kind of getting towards the GA by the end of the year.

And the next question will come from Kingsley Crane with Canaccord.

Med, I guess just to start off, I'm kind of curious how important is access to something like Midos preview just for your business at all? And then just in general, talking about the growing marketplace of genetic AI solutions, we've seen a pretty significant jump recently, even with just modeled GPT 4.7. But what is the future of that type of integration with agents for the platform? And like how relevant is inference is a line item for Qualys, if you look like 3 years out?

That's a great question. I think it's less about a particular model and more about the direction that these models are going, right? And so I think for us, it is -- we have been leveraging other open source models as well, and we're excited to now be part of the TAC program from OpenAI, which gives us access to 5.5 cyber, which is an equivalent model for the most parts to Midos as an example and also part of the verification program. And we have -- since we have really been doing a lot of exploit and validity research ourselves, these type of models, whether it be these 2 front end models or other open source models that have been using in my mind, are definitely something that help us do a better job of figuring out exploits that we can safely create for our customer environment. So that the customers can really test the exact scale through the Qualys platform. It also helps us do a much better job at figuring out the right patches or the right mitigations. One of the key things that we have done at Qualys, has really put a lot of research energy into coming up with mitigations that don't need a patch, people whether your patches, but we reverse engineer patches to figure out maybe there are other mitigations that can be leveraged to make sure that these mitigations can help the customer deploy a compensating control on the machine without having to deploy an immediate patch, which is extremely valuable for them. When they only have a few hours to make a decision on mitigating a highly exploitable vulnerability. And that research is definitely what we have been doing, as the models are progressing, these partnerships definitely help us accelerate and cover more and get more options to help our customers go through that. So I see that leveraging these models, either whether it's through research or integrating with them to pull findings from these models, so customers can actually take their core findings and run it through the millions of Qualys agents that they already have installed to find the actual instance of that. or whether it is overall our own Agentic AI solutions, we use different small language models, large language models to optimize the outcomes for whether it's chat, whether it's an AI agent that is taking action, I think that is something that we look forward to continuing to partner with whether it's open source or these frontier models. And I do think that for any solution that is going to be important to make sure that they leverage some form of AI capabilities. It's just that because we uniquely do the exploit validation and patching, we have a very interesting use case for use of these models.

That's really helpful. And for Joo Mi, it's great to see the continued efficiency in the business. You've talked about R&D growing a bit more modestly than sales and marketing this year. So a 2% growth year-over-year, is that about what we should expect for the rest of the year? And just like speaking bigger picture in such a dynamic time for the cybersecurity market, I mean what would get you to invest more in that line item? And then I understood that you're already very efficient there operationally. So I can appreciate that.

Yes. Currently, what we're forecasting is OpEx growth in the mid-teens. Sales marketing continued to grow well, up to 15% mark. Last quarter, it grew by 18% year-over-year. This quarter, 17% year-over-year. So with sales and marketing potentially ramping in the second half of the year, rest of it that we've allocated for the R&D for the most part. We do anticipate a significant investment -- we think that could be justified from a return perspective, especially with the AI investments that we continue to make in the business. So given that, we're guiding to mid-40s EBITDA margin, which is implied by mid-teens growth in OpEx.

And the next question will come from Jonathan Ho with William Blair.

I just wanted to better understand sort of the breach risk management opportunity, how maybe this changes from prior approaches? And what makes maybe Qualys better positioned than other competitors to offer this solution.

Yes, that's a great question, Jonathan. I think it's not that it changes from the prior approach from a Qualys perspective, we have been building and innovating around the ETM platform and the concept of -- Operations Center, the last couple of years almost in preparation for something like this where we will see significant number of vulnerabilities coming our way, but you cannot fix anything in an operation. And you cannot play a vulnerability -- you're trying to jump from one way over to another. So the idea of creating a risk operation center and elementing that with ETM has been to make sure that we are creating an outcome where things are fixed for the customer in a matter of hours. And I think that's an approach that's different than a CSAM solution, which is waiting for collecting data from different scanners and then creating some reasoning, but then they don't actually do the patching. They pass it off to somebody else to do the patching, which again loses time as an example. And so what I think we are seeing is the opportunity here is having created sort of this end to end. I mean what's interesting is you look at our demo that we did at RSA agent well, Agent well went from finding the vulnerability, validating the exploit, applying a mitigation and then revaluating the exploit that it is fixed in under 15 minutes. I don't know if any CSAM solution can really do that where you get an outcome of something being fixed. And then with ETM, we are focused on the CRQ aspect of it as well, right? Just because the vulnerability and patch count goes up significantly, customers still need to think of this in terms of the business and the budget that they've allocated as how much of a risk to the business do these vulnerabilities carry so that they can make better decisions on prioritization. And that's, again, the other aspect of our ETM solution being integrated now with a cyber insurance company, where if you have a good score on your a good score that demonstrates you are actually doing the right cadence of fixing your vulnerabilities. You can actually get a premium reduction for your cyber insurance, which is a positive thing for your business. And so ETM really has been about taking the businesses modification, the CSAM, the traditional CSAM component but also pairing that with extra validation and remediation giving an end to an outcome. I think what we are seeing now more is the customers who have been interested in this are now feeling like this is the time that they really need to look at this more deeply because of the number of liabilities that are going to come their way. They feel like they're looking at a risk operation center ETM and the ability to maybe some of the resistance that people have had in the past against autonomous remediation or patch management. in the initial conversation that we have had in the last couple of weeks, we're seeing a bit of a change in the way people are thinking about this as given that the threat landscape has changed. So in that sense, it's a positive outcome for us to say that instead of other solutions where somebody else is scanning, somebody else is pulling the data and somebody else is patching the ability to go from detecting, validating, fixing and revalidating under 15 minutes is something that is really desirable. And doing that at -- accuracy is very desirable for our customers. So I think it's more that the platform really was innovated and designed for this. And now we're excited to see sort of these early conversations we are having with customers that are more interested in looking at this now because of the push coming from these front-end models, detecting more vulnerabilities.

Excellent. Just 1 quick follow-up. Does Mitas potentially expand the number and types of assets that you would also cover as well as maybe accelerating sort of this adoption of more products on the platform to deal with increased complexity?

Yes. I think these models will be able to find vulnerabilities in any core base, right? And so I think that's where the comprehensive nature of the Qualys sensors, whether it is detecting vulnerabilities on network assets, right, like, let's say, the traditional assets which have agents on laptops and other servers, expanding that into network assets or network-based assets like firewalls and VPN devices or cameras that are on the network or IoT devices. We already covered that. And then of course, we also cover cloud and container security and a lot of these. And so I think what we are going to -- what we are seeing right now is that customer interest in covering as much as possible more natively so that they can get quick scan results and not have to wait for hours to pull these scandals -- if they can do more and more of those natively. So I think given that the threat, whether your server is running on-prem or in a data center or if the server is running as a container in the cloud, the threat from a quick vulnerability exploitation coming your way, is similar the conversations do lead themselves to -- and in a way, the way team is designed, it is designed to pull data from all kinds of different capabilities, whether it's cloud or containers or others. And so there is more willingness from customers to say, today, they are doing dashboard tourism. They have a separate dashboard for cord scanning, a separate dashboard for cloud, a separate dashboard for on-prem separate dashboard for endpoint. If there is a way to operationalize and consolidate all of these different types of assets into more of a unified workflow where agent AI is looking at it and making autonomous decisions by looking at the previous enterprise context and then minimizing and then executing the minimum remediations, that is really where the focus of the customers is. So I think, again, how these conversations proceed will be interesting, but it does lead customers to say I don't have necessarily the time now to go to look at 8 different individual risk management dashboards when it comes to previous bridge management, if there is a way for me to pull different things, normalize all of that and quickly focus on the ones that matter the most and then actually validate with exploits and remediate those. That is the ideal solution.

And our next question is going to come from Rudy Kessinger with D.A. Davidson.

I guess I'm curious just on the ETM sales so far. Are you getting that full $1 uplift on those early sales so far? And then if we think about the 107% net expansion rate with those customers, I feel a little foggy on that you're saying that includes customers who purchased ETM in the past. I guess, does that expansion percentage include the upsell from the purchasing ETM? Or if you could just break down that number a bit further?

Yes. It's a little too early for us to comment on how much of the uplift actually is illustrative dollar uplift is based on more of a list price, the cohort of customers that have subscriptions to ETM is too small today. And so given that, what we decided to do was, the number that we disclosed, 107% that actually includes customers who purchased CSAM or ETM. And so the way that we calculate that number is 1 year ago from today, so Q1 of 2025, which customers had ETM or CSAM subscriptions. We took those customers and then the revenue that they generated in June of 2025. So that would be the denominator, but the same cohort of customers in Q1 of 2026 and looked at the revenue contribution from that group. And so we calculate that percentage, it doesn't just include the ETM or CSAM subscription. It's a total spend spent by those customers. So what we're thinking is our hypothesis is these customers theoretically whether they have CSAM and then eventually later upgrade to ETM because ETM is essentially an upgrade from CSAM or they start to purchase ETM, these Florida customers will help to drive the total net dollar expansion rate eventually because they see the value in it they'll be stickier with us, and then they will -- a higher upsell. So that's part of the reason why we're tracking this metric internally to make sure that. one, we're successfully upgrading CSAM customers to the ETM consumers. And two, is that really generating the type of upsell that we're looking for.

Got it. That's really helpful. I must have misheard it earlier on. And then secondly, how should we what does sales productivity look like? How has that been trending in the last few quarters? And just given the increases in sales and marketing expense outpacing the revenue growth, is there a lot more marketing dollars in there? Or where is that investment going in sales and marketing?

Yes. Majority of the increase in sales and marketing is still driven by headcount. So if you take a look at our headcount growth, it was over 10% for the sales and marketing the ETM side last year. A part of the reason is because we do see a huge upside in the business. And because we are focused on moving the business from direct to indirect, as we work closely with our partners, we have different sales teams, whether it be a sales team focused on direct sales or sales team focused on ETM sales or sales teams that they are really focused on the channel management or relationship there. And so we do anticipate continued growth and continued investment in that team. And so as a result, the productivity is not necessarily the traditional SaaS feel of it, it's not exactly where we think it will be in the future. We're working on it right now. There's room for increase in efficiency. I'm not seeing it there yet, like you pointed out, especially because we do see this is a time for us to invest more versus making sure that we scale that based on the productivity metric that we see today.

And our next question will come from Joseph Gallo with Jefferies.

I believe you mentioned that your guidance today reflects NRR kind of stays flat. The ETM NRR is 107% and expected to grow. So how should we think about the potential time line for acceleration of total NRR? And is there any pressures or offsets that we should think through that might keep that number flat over the next couple of quarters?

Yes. Our NRR has been around the 103%, 104% range for the last couple of quarters. And the reason why we're still assuming for the baseline, that to be the case, it's because ETM is still in the early stages. We don't anticipate a significant ramp in terms of the adoption of ETM that will result in the total company and our ROE to be ticking on materially this year. So for this year, our baseline is that taking into consideration the macro factors, geopolitical conditions today, we do see some potential headwinds could be fully offset by the tailwinds that Sumedh had mentioned earlier, with the increase in demand given that our customers are willing to spend more with us increase in cybersecurity risk that we can definitely help to remediate. But with that said, all in all, our guidance assumes baseline case growth more or less in line, definitely from the current billings perspective, revenue, we've increased slightly just because of the beat that we saw in Q1. But overall, nothing has changed from the case that we saw earlier in February.

No, that's super helpful. And just as a follow-up. I mean you mentioned kind of geopolitic pensions. I think you made a comment in your opening remarks about closely monitoring the business environment and adjusting priorities accordingly. Is there any way to quantify, I guess, what you're seeing, is that mostly related to the war? Is there anything in terms of customer budgets and they're prioritizing AI spend today and not necessarily cyber. I'm just kind of curious what the actual math was behind some of those comments you made on macro? And if anything has changed over the last 90 days?

Yes. The way we're monitoring the situation is basically stemming from the conversations that we're having from our existing customers as well as new prospects. So when we're discussing potentially coming over to call us as a new customer or increasing their spend with us, whether in quarter cycle or at a quarter cycle. There could be disruptions during that discussion. So as an example, I would say that any announcement from OpenAI or entropic could be a disruption as we're talking through it. It could be a factor. Now that could result in increase in sales from us, but it could increase the sales cycle. And so that's why we're taking a look at the scenario, there will be puts and takes. There will be some gains. There will be some offsetting factors. And that's why we thought that the baseline if you model it , the way we view it today is more or less fall in that range that we had calculated at the beginning of the year.

Yes. So far in terms of budgets, we haven't seen any real changes there from customers or any conversations directly when it comes to cyber, I think it's stayed roughly the same. But as Joo Mi said, just being prudent at sort of what potentially could -- we should look at in the future.

And the next question come from Shrenik Kothari [indiscernible].

Yes. Thanks -- so in light of the Frontier AI, a cache explosion and now at agent Vail to more broader remediation, you also emphasize the pathways patching which are -- remember, we've been specializing in and talking about in the past. So I know you talked about early customer conversations. Just really appreciate if you would let me point to some anecdote some proof points, how that can -- or it's become a real budgeted sort of operating priorities for customers over and above, typically as the products customers like conceptually, but just what's really changing and anything you can point to and I had a quick follow-up.

Yes. Like I said, I think I gave that example of we had -- we have been having quite a few customer conversations in the last few days, and I had a CEO a very large bank in Canada sort of got on the call and is like to basically look our challenge right now is to get things quickly key scanner right now and how -- who should we partner with for patching. And when I was able to explain to them we already do the eliminate part immediately, he was excited about that so that he would go talk to his board that they're partnering with a solution that is going to help them have the ability as needed to rapidly fix and patch things and not wait for the teams patching solution to take days and weeks to patch things. And so that led to an immediate conversation of starting an immediate POC as an example, right? So again, it's early days. That's an anecdotal example. But we are seeing that pushback or resistance that we had for integrated patching and autonomous patching. In the early conversations is coming with -- like where they are asking, hey, do you have a patchy capability because that's what I need to be able to explain not that I'm finding more and scanning more or I'm taking my scanning and I'm passing it off to some other patching solution, which is taking even longer. So that is an example of a good conversation that we had where our customers quite excited to have the ability to quickly find remediate -- quickly find exploit it verify it, patch it. in a matter of hours and be done so they can show that level of success rather than just finding more things. So that would be an example of just something that happened 2 days ago.

Great. That's super helpful, Sue. And just July, a quick follow-up. Just following up to Joe's question on NRR. And I just wanted to hear your thoughts on what sort of moves the needle for kind of this next leg of growth? I mean it still appears to be guiding off sort of a base case with no real assumed NRR movement, you, of course, have agent Vail and GA, there's better ETM mix, the continued strength in channel, international. So can you help us understand, is it mainly just prudent about the sales cycles as you mentioned, and you still need more proof points on monetization? Or there's also some legacy mix drag, which is playing a role in addition to you accelerating higher value attach or?

Yes. It's based on a historical track record of what we've been able to see. One of the reasons why we thought that this was the best metric that we could share with the investors today is because if you people look at our historical products, whether it be CSAM or otherwise, it does take a bit of time for our newer product to take to our customers. So as an example, CSAM wasn't actually launched in 2021. And if you take a look at the percentage contribution to bookings, ETM plus CSAM, currently make up 11% of bookings on an LTM basis. So you can understand that looking at the CSAM conversion or upgrade to ETF will likely take some time since ETM just went live, and it's been in GA for a little over a year. So given that, we're assuming that this will take time for more of our customers to adopt ETM, and that will translate to increase in spend that's meaningful enough for the total revenue growth.

And the next question will come from Brian Essex with JPMorgan.

I guess maybe one for you, Sumedh, on the back of the increased capabilities of foundation models in the security space, and thinking about where you're seeing vulnerabilities across the spectrum where you have operating systems, infrastructure, both package as well as custom applications and then OT environments. The spectrum of flexibility, if you will, across those different types of areas is -- can be materially -- particularly for hardware, some of it can't be patch it might have to be replaced, custom apps that have to be maybe need to be refactored. From your experience and what you're seeing from the foundation model companies, where is their expertise best placed for vulnerability discovery and potential exploitation? And how does that change the risk profile of your customers and how they may utilize your platform to mitigate those risks?

Yes. Great question. I think helping software developers find more vulnerabilities in their code is definitely one of the key things there that these models bring and which will definitely lead to more disclosure. But in theory, right, you could say that, well, if all software developers are able to find these vulnerabilities using the models, then you kind of don't necessarily have a 0-day problem because all these software developers who find them the code themselves before the attackers do and they will create patches, right? And then customers just have to focus on applying those patches. I think the other capability, the frontier models are doing well is the ability to change low-level vulnerability exploits that maybe have a lower CVSS score and the customer might not have fixed those in the past because their score was low, but being able to chain a few of those to create an exploit. And that's where the advantage of the TruRisk platform is very solid because our true risk scoring, and we have demonstrated this multiple times that we are actually scoring low-level CVS vulnerabilities as very high, about 40 days before they get added into CSAM as an example. So having the customers have that intelligence that we are bringing and to the environment to say, look, this is a low-level vulnerability, but it is prone to be used in an attack and making sure that, that is mitigated becomes important. Now the third piece of what you mentioned is, I think it's perfectly fine to say that I'm not going to patch this because my risk is low. And that's a very individual organization level conversation that needs to happen, which, again, with ETM in the tourist platform, we are helping customers understand the context in their environment, understand the exploitability and make the determination that maybe it's perfectly valid to say we're not going to pass this because we have mitigating controls in place. And that's where we were, again, ahead of the curve when a couple of years ago, we introduced the concept of patch list patching is the ability to deploy mitigations for some of these environments where, yes, you cannot necessarily patch an OT asset immediately like you would normally do, but maybe -- or even the regular assets with operating systems and packages but providing them a way to say, look, I think if you just delete this old DLL, which our agent can do for you. Deleting a DLL or making a change to a registry key or something simple like that can actually prevent exploit from running in that particular environment. And so that is the third piece of it, which is perfectly valid with ETM to say a lot less than 1% of the vulnerabilities that are actually exploitable in your environment. And then these are the ones we don't need to fix because we validate it, they're not exportable, but then to also be able to say we actually have a way to mitigate this with a compensating control without deploying a patch makes it very interesting. In fact, one of the popular ones with our customers is we provide them the ability to see that the package that has the vulnerability is actually not being used on an asset for the last 18 months. So on installed is actually a better option than trying to patch it. So it's -- that's why I call it the eliminated buffet, which gives customers multiple different choices because that's the goal is not a patch. The goal is to remediate and eliminate the risk. That's why the TruRisk eliminate with prioritization validation becomes so important.

Great. That's super helpful. And maybe if I could squeeze one in for Joo Mi on Q-Flex. It sounds like that the program is targeted at large enterprise customers are already spending a meaningful amount on the platform. But are you -- is there any potential for existing customers who may be ripe for migration to ETM where you could actually accelerate that migration by offering them Q-Flex as well?

There is. And so we are working with customers today. So we are working with a solid group of customers to -- so that they have an option of adopting Q-Flex today. And so it's not stopping. It's just that we are planning to go broadly GA with it by the end of the year. So we think that there is definitely a potential where that could help us to drive growth.

And we do have those conversations with customers who are looking to do ATM. We start the conversation with Q-Flex, which is well received, especially given this environment where so many new capabilities are coming, things are changing fast and they need the flexibility, even if you're not the largest enterprise you still need the flexibility to be able to move things around pretty quickly. And in fact, enterprises that don't necessarily have a cyber budget that is the size of the GDP for a small country actually have the most value in many times from being able to do these kind of automations and say like, I don't need to fix all these things because I've validated they're not relevant in my environment, no matter what different your model says.

Right. Makes a lot of sense.

This is all the time that we have for questions. We want to thank you for your participation. This will conclude today's conference call, and have a good evening.