Qualys Seeds Cloud Computing Trend With Security

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If there's one certainty in business, it's that anytime someone comes up with a new way of doing things, someone else will come up with a new way to rip it off.

Cloud computing is no different. While the cloud has changed the way users can access, share and store data over the Internet, it also has opened up new avenues for hackers and other cybercriminals to ply their trade.

Such risks, in turn, have boosted the need for precautions, opening up new opportunities for companies that make security and compliance applications geared to cloud computing environments.


Qualys ( QLYS ), one such company, has seen demand rise for its solutions as more IT departments seek protection from security breaches that can happen via the cloud.

Broadly, Qualys provides cloud security and compliance solutions designed to help customers identify security risks to their IT infrastructures and protect their systems from cyberattacks.

The firm's QualysGuard Cloud Platform is an integrated suite of solutions that includes vulnerability management, Web application scanning and malware detection as well as policy compliance and payment card industry ( PCI ) compliance features.

Its product lineup also includes Qualys Secure Seal, which lets businesses scan their websites for malware, find network or Web application vulnerabilities and validate the integrity of SSL certificates, which are a key part of secure browsing.

Qualys' revenue has more than doubled in the past five years as rising use of cloud applications has driven greater demand for security products and solutions.

"With the shift to cloud, enterprises are increasingly in need of solutions that can identity and prioritize threats," Rob Owens, an analyst at Pacific Crest Securities, noted following Qualys' third-quarter earnings report last week. "Qualys is well-positioned to capitalize on these secular trends within compliance and application security."

Insights On Risk

The lion's share of Qualys' business comes from subscriptions to its vulnerability management solution. Organizations use it to manage their security with centralized reports, threat remedies and a remediation workflow. The reports let customers identify the severity of their security issues, find out how long it will take to fix them, and understand how they can impact business.

Qualys has ample room to grow its vulnerability management business, Owens says. He notes that "only 20% to 25% of existing customers are fully deployed on (vulnerability management) across their entire infrastructure and 75% own just one Qualys solution."

Meanwhile, Qualys has also taken steps to diversify its revenue stream.

On a third-quarter conference call with analysts, Qualys CEO Philippe Courtot indicated that 84% of the company's revenue through the first three quarters of 2013 came from its vulnerability management solutions. While that's still a pretty big percentage, it is down from 87% the previous year.

"We continue to make meaningful progress diversifying our revenue base ... due to increased sales of our Web application scanning and policy compliance solutions, both of which continue to show strong growth," Courtot said.

With Qualys' Web application scanning tool, clients can test their apps without having to install or maintain software. They can test apps anywhere, including via internal networks or in cloud platforms.

Qualys' policy compliance solutions are designed to let IT security and compliance professionals define policies describing how an organization will provide security and integrity. The solutions also provide documented evidence that compliance lapses have been discovered and fixed.

These and other tools serve a wide variety of different companies and industries.

Big Companies Are Clients

During the third quarter alone, Qualys added new accounts from Fortune 500 firmsAmerican International Group ( AIG ),Humana ( HUM ),Clorox ( CLX ),Barnes & Noble (BKS) andMcGraw-Hill (MHFI), and public entities such as the city of Glendale, Calif., the University of Connecticut Health Center and the University of Cincinnati.

Once clients are on board, they tend to stick around. Analyst Owens says that Qualys has "very stable" recurring revenue.

"Security and compliance spending continue to be a priority with CIOs, and the company's products are well suited to address the massive shifts taking place in IT environments," Owens said in a research note.

Among the solutions Qualys is working on now is an advanced malware protection service that will be built on its cloud platform. This service is designed to give customers protection against malware in extracted documents from inbound network traffic. Qualys expects the service to be released for beta testing in the second quarter of 2014.

The combination of recurring revenue and new products has helped Qualys deliver quarter after quarter of double-digit top-line growth.

On Nov. 4, it reported third-quarter revenue of $27.8 million. That was up 19% from a year earlier and slightly ahead of estimates. Earnings fell 20% to 8 cents a share, topping views for 5 cents.

The EPS decline needs context: Qualys had its initial public offering in September 2012, so its Q3 results this year were being compared to its final quarter as a private company. The share count was much lower then, which is why the per-share earnings were lower this time even though the company's net income rose 9% .

Qualys stock, up 42% this year through Wednesday, touched a high of 23.21 in September. It currently trades near 21.

Analysts are bullish about Qualys' growth prospects. They expect full-year earnings to rise 45% in 2014 and 31% in 2015.

"We remain upbeat on the company's opportunity as a leading provider of cloud-based security and compliance solutions as additional solutions are increasingly adopted by the installed base," RBC Capital Markets analyst Robert Breza noted.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AIG , CLX , HUM , PCI , QLYS

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