Security Standout Qualys Scans For Ways To Grow More

O nline security vendor Qualys is enhancing products and cross-selling more of its services to broaden and deepen a global customer base continuously more cognizant of intensifying cybersecurity threats, the company's CEO tells IBD.

The goal is to keep the company on the cutting edge of a business environment permeated with concerns about hackers and data breaches. But as analysts note, whileQualys ( QLYS ) boasts its share of success, it operates in a crowded field of technology companies that want a piece of the corporate security spending pie, leaving it with evolving competitive challenges.

A Double-Digit Earner

Qualys, founded in 1999, went public in 2012 and has been on a tear. Despite some volatility, its stock is up 84% over the past 52 weeks and hit an all-time high of 50 on March 5. That punctuated a run that followed Qualys' latest -- and strongest -- quarterly results.

Fourth-quarter 2014 revenue of $36.6 million was up 26% from a year earlier, Qualys reported in February. The company tripled earnings per share with 15 cents, beating the consensus view of analysts polled by Thomson Reuters by 6 cents.

For 2014, Qualys produced revenue of $133.6 million, up by 24% year over year, and EPS rose 130% to 46 cents. It added more than 1,000 customers in 2014 to reach about 7,700 active customers in more than 100 countries.

Qualys forecasts top-line growth of 25% to 27% for 2015 and EPS of 50 cents to 55 cents.

CEO Philippe Courtot says about two-thirds of revenue is generated in the U.S. and that likely will continue to be the case this year, as domestic companies are on the forefront of tech security investments. But he said Qualys is "totally global" and its reach extends deep into Europe and parts of Asia, where the company anticipates long-term growth. It counts most of the Fortune 100 as customers.

"Cybersecurity has clearly become front and center. It's on the minds of boards and CEOs as well as security people, because it needs to be," Courtot said. "We are extremely well-positioned to help them."

Qualys, part of IBD's Computer Software-Security industry group, has a best-possible IBD Composite Rating of 99.Symantec ( SYMC ),Check Point Software ( CHKP ) andPalo Alto Networks ( PANW ) are the group's largest by market cap.

Infiltrations of major companies such asJPMorgan Chase ( JPM ),Home Depot (HD),Sony (SNE) andTarget (TGT) have amplified worries about data breaches and drawn heightened attention to services provided by the likes of Qualys. A survey by Bank Director in January found that 82% of 149 bank executives and directors think cybersecurity is the chief risk that their institutions face this year. "Cybersecurity remains an emerging, nuanced and constantly evolving issue," Bank Director President Al Dominick said in an emailed statement.

Courtot says cybercriminals are active across industries from retail to high-tech to health care. Health insurer Premera Blue Cross said this month that it had been infiltrated by cyberattackers who might have gained access to medical and financial data of 11 million customers.

"We are living in an interconnected world, and this has opened the door for the bad guys to try to penetrate our defenses," Courtot said. "The problem has become acute."

Increasingly sophisticated and frequent cybercrimes are expected to motivate steady investment in online safeguards over the next five years, according to a March report from Ireland-based Research and Markets. It predicts that the global security and vulnerability management market will grow about 10% annually between 2014 and 2019.

All of that is scary for business executives, but it amounts to expanding opportunity for Qualys. In terms of the need for security services, "it's a great space that they are in," analyst Richard Williams of Summit Research told IBD.

The flagship Qualys Cloud Platform is a service that, according to Courtot, capitalizes on the speed and flexibility of the Internet to provide faster and more thorough security checks and responses than services not in the cloud. The platform and integrated applications serve a range of functions, from attack monitoring and web application scanning, to policy compliance and website security testing, to firewalls and malware detection.

On-Demand Advantage

Unlike traditional in-house enterprise software security, Qualys says its Internet-based service can provide security intelligence on demand, via constantly updated data, while also automating auditing, compliance and protection for IT systems and web applications.

This, Courtot said, makes Qualys unique and explains why its customer base is continually expanding. Its cloud-based services are both more comprehensive and faster than most in-house security systems, he added, enabling high-end service at a lower cost than what most companies can create by themselves.

While cost-efficient, as the scale of the problems that the company is combating swells, Qualys is selling more applications and boosting the amount of revenue it generates per client. A few years ago, Courtot said, a $100,000 annual subscription would have been big for the company, but now Qualys has several multimillion-dollar deals.

It has eight of the 10 largest global banks as customers, also tech powers such asAmazon (AMZN) andMicrosoft (MSFT). And it has partnerships with managed-service providers and consulting firms such asIBM (IBM),Verizon (VZ) and Symantec.

Courtot says Qualys steadily enhances and expands its products and services to keep pace with customer needs. This year it rolled out a more comprehensive web-application-scanning product and soon will debut a new malware protection offering, among others, he said.

"We are continuing to expand our reach," he said, adding that the increasing demand and its advancing suite of products and services should fuel top-line growth.

While most analysts polled by Thomson Reuters call Qualys stock a hold, views are generally optimistic on the company for this year. "They are very fortunate that their core vertical" -- the cloud platform -- "is still growing at a pretty good clip," Williams said.

Plenty Of Rivals

There are some concerns about competition and its impact on future earnings, he said, as well as the valuation of the stock, given its climb over the past year.

While unique in what it provides, Williams said, Qualys is competing in a world saturated with tech companies trying to win IT dollars, with security only one piece of the pie. And while many companies are increasing tech spending, most firms are very careful about committing to new expenses. "It's tough to differentiate yourself in such a highly competitive space," he said.

In a March research note, Williams wrote: "There's much to like about Qualys," emphasizing that its vulnerability assessment scanning solution has proved very accurate at detecting security issues.

"Customers clearly like this technology and execution, based on renewal rates of virtually 100% over several years," he said.

But, he noted, with the broader security market projected to grow around 10% over the next several years, and with new competition popping up regularly and making it challenging to expand market share, "we believe that market factors may prevent Qualys from growing north of 20%" beyond 2015. Slowing future growth, he told IBD, would minimize room for the stock to continue to climb.

Frederick Ziegel, a Topeka Capital Markets analyst, said in a February report that Qualys "delivered a spectacular" fourth quarter, which "added further evidence that the product portfolio is broadening (and will continue to do so)." While the latest quarter may not serve as a baseline going forward, he said, Qualys is proving that it can bolster its offerings to win business and that it is gaining momentum.

Qualys "has two powerful trends driving" it forward, Ziegel wrote: "an expanding customer base" and "deeper penetration of the base."

Courtot said he is confident that each of those trends will continue to develop in Qualys' favor for years to come. He said the company has strong free-cash-flow levels for its size and no debt. He also noted that no single client accounts for more than 3% of revenue, showing that demand for Qualys' services is diverse.

"I think the need for security is almost everywhere," he said.

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

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

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