Qualys: Quality at an Unreasonable Price

Updated: Mar 4

Qualys is a leading provider of integrated cyber security and compliance software that, according to the 2019 annual report, allows customers to:

  • Identify and manage their IT assets across on-premises, endpoints, cloud, containers and mobile environments.

  • Collect and analyze large amounts of IT security data.

  • Discover and prioritize vulnerabilities.

  • Recommend and implement remediation actions.

  • And lastly, to verify the implementation of such actions.

Qualys is an integrated software provider — what I mean by this is that usually critical software is purchased to do a specific task, but the benefit of using Qualys is that all the solutions above are rolled into a cloud-based platform that allows ease of use for the customer, whilst being more affordable to source through one provider. Approximately 74% of revenues are derived from Qualys’ Vulnerability Management segment (VM), for which it is an industry leader and has recently received recognition from Gartner and SC awards for its leadership in the VM business.

Qualys has exhibited an enviable set of operating results for the last few years. It has earned a name for itself in the quality investor sphere with industry leading adjusted EBITDA margins of 47% in 2020 and operating margin of 27% in the same period. The latest earnings call on the 10th of Feb alluded to an equally prosperous 2021 with expectations for industry leading margins and 10-11% revenue growth. In the recent quarter, almost 100% of revenue was from a recurring source, further adding to the company’s quality profile.

So, why is the stock down 12% after publishing its recent quarterly result?

Well, firstly it is worth mentioning that Qualys’ CEO and major shareholder Philippe Courtot wasn’t present on the call due to illness, and Qualys company veteran Sumedh Thakar has stepped into the hot seat for the interim. Although, this is unlikely to be a reason for the stock selling off.

In my opinion, the market was paying too much for shares in Qualys prior to the earnings release. The cyber security space has been a hot area of the stock market in recent years, and justifiably so. It seems there is a constant threat of cyber-attacks, a perpetual shift to the cloud and many companies are beefing up their security systems in order to keep up with these technological shifts. This has led to explosive growth in revenue for some cloud-based cyber security names such as Zscaler, Crowdstrike and Okta. Whilst Qualys may be classed as a more mature operator than these newer fast growing upstarts, Qualys benefits from its industry leading margins. But herein lies the problem. All the positivity for the sector had pushed Qualys stock up to $145, reflecting a price to earnings ratio of 55x expected earnings in 2021. This seems pretty expensive given the price is roughly more than double the price of your average S&P500 company. So the announcement of only 10-11% growth in 2021, a decline from a 13% growth in 2020, wasn’t exactly what the market was looking for.

The story detailed on the earnings call was positive. New contract wins with large blue-chip clients, investment in research and development leading to new product offerings and an expansion of the global sales and marketing team to scale up the business. Combining this positive story with all the aspects of Qualys business — high margins, long scope for growth, secular tailwinds and a large 13% ownership of stock by the CEO — makes for a business I would be very interested in owning. However, at the current price (after the 12% drop in the stock post-earnings), Qualys trades on a PE of 40. Still a little too expensive for the level of revenue growth on offer. I will be sitting on the sidelines for a better price, or a change in the level of growth, before considering making an investment.

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