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  • Glenn

Qualys: A Growing, Profitable Company.

Opdateret: 30. okt. 2023

I got to know Qualys through the book "The Intelligent Quality Investor" by Long Equity and was surprised to see a company that I had never heard of score high in all metrics. Hence, I decided to investigate the company to see if it is a compounder that I should add to my to my portfolio.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly describe the company and if it has a moat. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Qualys. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. If you want to purchase shares or fractional shares of Qualys, you can do so through eToro. eToro is a user-friendly platform, and you can get started with as little as $50.

Qualys was founded in 1999. Qualys is an American technology company that specializes in cloud security, compliance, and related services. They deliver an integrated suite of IT, security, and compliance solutions through their Qualys Cloud Platform. The United States contributes approximately 60% of their revenue, while revenue from international customers contributes the remaining 40%. Qualys believes that they have competitive advantages because their solutions have been designed to be delivered through the cloud. This means that they can be easily and rapidly deployed on a global scale, enabling faster implementation and lower costs than traditional on-premises software products. Thus, customers do not need to buy or manage hardware. They gain real-time visibility, easy global scanning, seamless scaling, access to up-to-date resources, and secure data storage. Their competitive advantages mean that Qualys has the best margins in the industry, which indicates that Qualys has a brand moat.

Their CEO is Sumedh Thakar. He joined Qualys in 2003 as a software engineer. He held various leadership positions untilhe became the CEO in 2021. He was chosen as a CEO because of his proven ability to execute on a vision and bring together teams and ecosystems. As the Chief Product Officer, he led the transformation of the Qualys Cloud Platform from a single security solution to an evolving portfolio of integrated apps that provide 360-degree visibility across on-premises, endpoints, cloud, containers, and mobile environments. As president of Qualys, he was deeply involved in expanding Qualys' strategy, sales, and customer retention. It means that he has a profound understanding of the entire business, which I believe is crucial when serving as a CEO. When reading through the earnings call transcripts, I appreciate that Sumedh Thakar and the rest of the management team are not afraid to make bold predictions when guiding for the future. It is their neck on the line after all. It is difficult to assess Sumedh Thakar since he has not been the CEO for a long time. However, he has been part of the management team that has delivered great growth over the years, and he has 20 years of experience in the company. Hence, I feel confident in Sumedh Thakar leading Qualys moving forward.

I believe that Qualys has a moat, which is evident by its industry-leading profit margins. I will give management the benefit of the doubt due to their vast experience in the company and their long tenure as part of the management team.Now let us investigate the numbers to see if Qualys lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a ROIC above 10% in all years. As Qualys is a growth company, it is not surprising to see underwhelming numbers in the past, and it shouldn't be concerning. It is nice to see that Qualys has delivered an acceptable return on invested capital (ROIC) since 2017, and it is really reassuring to see that they managed to deliver their best ROIC to date in 2022. If Qualys manages to deliver a ROIC near to what they achieved in 2022, it would be fantastic.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. Qualys managed to grow its equity every year from 2013 until 2022.One reason for the decrease in equity in 2022 was the acquisition of Blue Hexagon's AI/Machine Learning Platform by Qualys. Hopefully, Qualys will be able to increase their equity in 2023.

Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is impressive to note that Qualys, a growth company, has consistently achieved a positive free cash flow for the past ten years. Not only has it been positive, but they have also managed to grow it every year until 2022, along with a high levered free cash flow margin.

Another important aspect to investigate is a company's debt. We need to determine if the business has a manageable level of debt that can be paid off within 3 years. This can be calculated by assessing the long-term debt to earnings ratio. Doing the calculation on Qualys, I can see that Qualys has zero years of earnings in debt, which is great to see. Now not only does this growth company deliver great numbers, but they also have no debt.

Like every other investment, there are risks associated with investing in Qualys. One risk is competition. While Qualys believes that they have some competitive advantages, they are operating in a highly competitive market. In their annual report, Qualys mentions that many of their primary competitors have greater name recognition, longer operating histories, more established customer relationships, larger marketing budgets, and significantly greater resources than Qualys. It means that Qualys may lack sufficient financial or other resources to maintain or improve its competitive position. Macroeconomics. In the annual report, management mentions that economic weakness, customer financial difficulties, supply chain constraints, changes in interest rates, inflationary pressures, and potential recessions could affect their results. This is because their customers may need to reduce IT spending. In a previous earnings call, they mentioned that macroeconomic factors led to discounting pressures from some of their competitors. Unable to renew existing subscribers or add new subscribers. As with all other software-as-a-service companies, it is a risk if Qualys fails to renew existing subscriptions or generate new subscriptions. Qualys' customers purchase a year-longsubscription, and they are under no obligation to renew it. Qualys' growth depends on customers renewing their existing subscriptions and potentially purchasing additional subscriptions, as well as acquiring new customers. Thus, it is a risk that needs to be monitored.

There is also a lot of potential for Qualys moving forward. One is a growing addressable market. Qualys is currently serving a $45 billion addressable market, which the company expects to grow to $64 billion by 2026. If we look at the cyber security market alone, Fortune Business Insights believes that it will continue to grow in the future and expects it to have a compound annual growth rate (CAGR) of 13,8% until 2030. Furthermore, during a recent earnings call, management expressed growing confidence in their ability to drive growth and capture a larger market share. Thus, there is plenty of growth for Qualys moving forward. High margins. I have already mentioned that Qualys has the highest profit margins in the sector. In their investor presentation for the fourth quarter earnings of 2022, they revealed that their EBITDA margin was 46%, which is significantly higher than the peer median of 12%. However, it is also worth looking at other margins. The gross profit margin was 79,0 % in 2022, which is higher than the previous four years. The operating margin was 26,2 % in 2022, which was only surpassed in 2020 when it reached 26,6%. However, the decrease is because a increase in headcounts in sales in 2022 is due to management's decision. It is also worth mentioning that revenue is growing by more than 10%each year. If margins also increase, it will boost profitability. Share buybacks. Not many growth companies are buying back shares, but Qualys is. Qualys had 39,379 million shares outstanding in 2018, but by the end of 2022, they had 37,362 shares outstanding. By the end of 2022, Qualys had $154,5million left in their share buyback program. However, it has since been increased by another $100 million, bringing the total amount to $254,5 million.

All right, we have gone through the numbers, potential and risk regarding Qualys, and now it is time for us to calculate a price for Qualys. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 2,74, which is from 2022. I chose an estimated future EPS growth rate of 15% (which is the highest I use but is lower than the consensus analysts' expected growth rate from Finbox). I also chose an estimated futurePE of 30 (which is double the growth rate, as the historical PE for Qualys has been higher). Additionally, we already have the minimum acceptable return rate at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $82,20. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Qualys at a price of $41,10 (or lower obviously), if we use the Margin of Safety price.

Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 199. The capital expenditures were 24. I tried to look through their annual report to see how much of the capital expenditures were used on maintenance. I couldn't find it, though, so as a rule of thumb, you can expect 70% of the capital expenditures to be used on maintenance. This means that we will use 16,8 in our further calculations. The tax provision was 26. We have 37,362 outstanding shares. Hence, the calculation will be as follows:(199 - 16,8 + 26) / 37,362 x 10 = $55,73 in Ten Cap price.

The last calculation is the Payback Time. I also described in "MY STRATEGY". With Qualys' Free Cash Flow Per Share at 4,83 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $76,25.

You could argue that Qualys is a growth company. Thus, it would be better to value the company using a discounted cash flow model. Hence, I have done that too. To do so, I will need some numbers that you can see below. The numbers are the 2022 figures, which I found on Finbox. However, I have determined the perpetuity growth rate and the discount rate myself. The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. I decided to choose the lower middle option at 3%. The chosen discount rate of 12% is because it falls within the typical range of 9-12%. I decided to go with the highest option due to the current market conditions. Remember that all the numbers used in these calculations are in millions.

I also need to determine how much EBIT, Depreciation & Amortization, and Net Working Capital will evolve over the next couple of years. I decided to use an EBIT growth rate of 27%, a Depreciation & Amortization growth rate of 12%,and a Net Working Capital growth rate of 10%, which are the expected growth rates at Finbox. I haven't found a smart way to share my spreadsheet here, but once I did my calculations, I found that the intrinsic value of Qualys is $176. The price with a 50% discount would be $88.

Qualys is a very interesting company. They have delivered impressive results over the past 10 years and are operating in a thriving sector. Qualys does face some short-term and long-term risks, but so far, they have always managed to execute. The CEO is new but has a vast knowledge of the company, which I believe is a benefit for Qualys moving forward. I believe that Qualys has proven itself to be a high-quality company, as it consistently achieves revenue and margin growthyear after year. I'm not sure if it will be possible to obtain Qualys at a 50% discount to its intrinsic value based on my calculations. However, it is worth noting that I have been very conservative in some of my calculations. EPS is expected to grow at a higher pace than the 15% I have used. I would like to add Qualys to the portfolio at $111, it is below the intrinsic value calculated using the Ten Cap price and the intrinsic value of the Payback Time and Discounted Cash Flow calculations. I might consider opening a small position at a higher price.

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