Qualys Earnings: Quality Showing as Demand for Solutions Remains Strong

We are maintaining our $115 fair value estimate for narrow-moat Qualys QLYS after the firm reported strong first-quarter financial results to kick off 2023. Sales and earnings marginally exceeded our prior estimates as demand for Qualys’ solutions persisted despite the tough macroeconomic backdrop. We believe Qualys’ financial results, when juxtaposed with the commentary by other cybersecurity vendors, indicate that despite heightened budget scrutiny, customers are continuing to spend on cybersecurity. With the shares up after the release, we believe that the market is accurately valuing Qualys’ business. For investors seeking exposure to high-quality cybersecurity names, we’d point to wide-moat platform vendor Palo Alto Networks and narrow-moat endpoint security leader CrowdStrike, both of which are Qualys’ competitors and trade at a discount to our fair value estimate.

Qualys’ first-quarter sales came in at $131 million, up 15% year over year and marginally ahead of our estimate of $130 million. Encouragingly, Qualys’ VMDR—vulnerability management, detection, and response—solution continues to gain traction among its clients with 50% of existing customers using VMDR, up from 40% a year ago. While the competitive landscape for smaller cybersecurity vendors like Qualys remains tough, we believe the company’s strategy of entrenching itself in its customers’ cybersecurity stacks by offering a variety of solutions is a sound one.

Net retention for the quarter was 109%, down 100 basis points year over year and flat sequentially. While Qualys’ net retention is significantly lower than that of other cybersecurity vendors we cover, we believe the rate is impressive, considering its customer base that leans toward small and medium-size businesses, which typically have higher churn rates than the enterprise segment of the market.