Don McCauley - Chief Financial Officer Philippe Courtot - Chairman of the Board, President, Chief Executive Officer.

Jackson Ader - JPMorgan Siti Panigrahi - Credit Suisse Chaitanya Yaramada - Robert W. Baird Sterling Auty - JPMorgan Erik Suppiger - JMP Securities Michael Kim - Imperial Capital Rob Owens - Pacific Crest Securities Sanjit Singh - Wedbush Robert Breza - Sterne, Agee.

Good day everyone, and welcome to the Qualys' first quarter 2014 investors conference call. This call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for asking a question will be given at that time.

I would now like to turn the call over to Don McCauley, CFO of Qualys. Please go ahead sir..

Well, thank you. Welcome to the Qualys first quarter 2014 investor conference call. I am Don McCauley, CFO and I am here with Philippe Courtot, our Chairman and CEO. Before we get started, we would like to remind you that during the call, management expects to make forward-looking-statements within the meaning of the Federal securities laws.

Forward-looking statements generally relate to future events or to our future financial or operating performance.

Forward-looking statements in this presentation include, but are not limited to statements related to our business and financial performance and expectations for future periods, our expectations regarding capital expenditures, including investments in our cloud infrastructure, and our expectations regarding the introduction of new solutions and enhancements to existing solutions.

Our expectations and beliefs regarding these matters may not materialize and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K that we filed on February 28, 2014.

The forward-looking statements in this presentation are based on information available to us as of today and we disclaim any obligation to update any forward-looking statements, except as required by law. We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures.

The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release that is available on our website.

Finally, one housekeeping item I would like to point out is that Philippe will be presenting at the Wedbush Transformational Technologies Conference in New York on May 13 at an earlier time than previously posted. He will be speaking at 12:45 PM instead of the 9:45 AM that was previously announced.

Now to begin the discussion, Philippe will provide an overview of the company's performance for the first quarter, then I will cover our financial results and factors that drove the quarter in more detail as well as our outlook for the second quarter and full year 2014. Then we will open up the call for your questions.

With that, I will now turn the call over to Philippe..

Thanks, Don, and welcome to all of you for the first quarter of 2014. It was a very strong quarter for Qualys. We had strong progress in all aspects of our business. Don will cover the financial details of our performance for the quarter and let me first start with an overview of key highlights that are driving the momentum in our business.

In the first quarter, we added many new noteworthy accounts including Alcatel-Lucent, British Broadcasting Corporation, Fujitsu America, ICAP, Infosys Technologies, Kendle International, Sallie Mae, The E.W. Scripps Company, Tribunal de Justica de Sao Paulo Brazil, the World Vision International and Wyndham Worldwide.

Our Vulnerability Management solution remains the largest component of our business. At the same time, we continue to make meaningful progress in diversifying our revenue base. We derived 83% of first quarter revenue from subscriptions to our VM solution, which continues to grow very well, compared to 85% in the first quarter of last year.

This ongoing diversification of our revenues is principally due to increase sales of our Web Application Scanning and Policy Compliance solutions, both of which continue to show robust growth. As you know, we are still in the early days of selling additional solutions into our customer base.

For the most part, betting upon our Vulnerability Management solution. In fact, we are making very good progress with selling new solutions into our installed customer base. At the end of 2012, only 20% of our customers had bought more than one solution from Qualys.

By the end of 2013, that number was 30% and at the end of March, 37% of our customers have now adopted more than one of our solutions. We introduced our new Continuous Monitoring solution for Perimeters during the first quarter.

This groundbreaking technology allows customer to continuously assess the security of Internet-facing systems and application and be alerted when a new vulnerability, misconfiguration or network anomaly is discovered.

We believe this is the new paradigm for vulnerability management as it then empowers customers to take immediate action for mitigating vulnerabilities that can lead to cyber attack. We released our web application firewall or WAF for general availability on Amazon EC2 as well as for on-premise deployment on VMware virtualized platform.

QualysGuard WAF is delivered via our cloud platform integrated with our Web Application Scanning solution. This solution that allows customers to more rapidly deploy robust security for their web application while minimizing administrative efforts and costs thanks to the centralized cloud-based management capabilities of our solutions.

What is unique about our web solution is that it seamlessly integrates with our Web Application Scanning, which makes it easier for customers to detect and automatically mitigate security gaps in their web applications.

We believe this is a powerful solution, and it is very timely considering that the latest 2014 Verizon Data Breach Investigation Report indicates that breaches from web app attacks grow the fastest to comprise 35% of all breaches in 2013.

As most of you may know from recent press reports, Qualys played a significant role in recent weeks in helping companies identify their exposure to the HeartBleed OpenSSL vulnerability. Our popular free service, Qualys SSL Labs as well as our Vulnerability Management solution have both been instrumental in these efforts.

We experienced tremendous increase above our normal scanning volume during the week as the vulnerability was announced as our customers used our service to detect vulnerable systems, applying the appropriate mitigation measures and then tracking the progress with the new SSL Dashboard feature we recently launched.

We also on track with a new innovation we are implementing to the Qualys platform including the Cloud Agent and the advanced Malware Detection Services with a goal to release new offerings in beta later this year. In this quarter we added key partnerships. The first of which is with Cognizant, a leading global outsourcing company.

The Qualys cloud platform uniquely fits well with the delivery model and as a result, they are now branding security services with our cloud offering. We also announced integration partnership with Risk I/O as well as (inaudible) to further expand the reach of our cloud platform.

I am pleased to say that this quarter we were named by SC Magazine as the Best Security Company. It is an honor we share with our customers and partners. Finally, as many of you know, from the Form 8-K we filed today, we announced that Ann Johnson has decided to leave Qualys after about five months as President and COO.

Ann is a capable executive and we all wish her well in her future endeavors. In the last five months, we have also added several other significant sales executives to our team. A VP and General Manager of Europe, managing directors in the U.K. and Germany, a VP to drive our Federal business, a regional VP to drive our Northeast U.S.

business and a VP to drive our SMB business. In addition, and I am extremely pleased to announce today, that we will promote Earl Porter, who has done a fine job as our Regional Sales VP to become VP of Americas Sales. I wanted to share this detail with you today to let you know how confident we are in the continued improvement of our sales execution.

During this whole period, I have been personally focused on driving our sales force worldwide. We continue to attract and have very capable sales leaders around the world.

In time, when we find another significant sales executives to join our executive team and then (inaudible) I will continue to make sales execution and revenue growth my top priorities every single day.

Given our momentum, which has continued strongly for the first quarter, we are beginning to realize the benefits of our investment in building a security compliance cloud platform upon which we can deliver enhancements and new solutions.

We believe that our cloud platform will continue to play a critical role in enabling Qualys to stay ahead of our competition. Now for a review of our financial performance and our guidance, I would turn the call over to Don..

As Philippe said, Q1 was a strong quarter across our business and this will be evident as we review our results and metrics. Revenues grew in the first quarter to $30.4 million which represented 22% growth over the same quarter last year. For the first quarter, the U.S. represented 70% of revenues, the same as a year ago.

Current deferred revenues are 22% greater than one year ago and total deferred revenues are 21% greater than the comparable figure last year. GAAP gross profit increased to $23.5 million in the first quarter of 2014, compared to $19.1 million for the same quarter last year.

GAAP gross margin was 77% for the first quarter of 2014, same as in the prior year's first quarter. Non-GAAP gross profit in the first quarter of 2014 increased to $23.7 million compared to $19.2 million in the same quarter last year and non-GAAP gross margin was 78% for the first quarter of 2014 compared to 77% in the same quarter last year.

Adjusted EBITDA for the first quarter of 2014 increased by 67% to $4.7 million compared to $2.8 million in the first quarter of 2013.

As a percentage of revenues, adjusted EBITDA increased to 15% in the first quarter of 2014 compared with 11% in the same quarter last year, demonstrating another year of solid progress and profitability even while we are continuing to make strong investments in growing our business. Moving on to earnings per share.

For the first quarter of 2014, GAAP EPS was a loss of $0.01 per diluted share versus a GAAP net loss of $0.02 per diluted share in the first quarter last year. Non-GAAP EPS was $0.05 per diluted share in the first quarter of 2014 compared to $0.01 per diluted share in the first quarter of last year. Turning to balance sheet.

We continue to have a strong cash position with $145 million in cash and investments and only $500,000 remaining of capital lease obligations. In the first quarter of 2014 capital expenditures were $3.8 million compared to $3.7 million in the first quarter of 2013.

Going forward, we plan to average approximately $3 million per quarter in capital expenditure spending as we continue to expand our cloud infrastructure to support more customers and add more solutions and functionality to our platform. Now turning to our outlook for 2014, starting with revenues.

For the second quarter, we expect revenues to be in the range of $31.3 million to $31.8 million. At the midpoint, this represents 20% growth over the second quarter 2013 revenues. For the full year 2014, our guidance is unchanged as we expect revenues to be in the range of $128.5 million to $130.5 million.

At the midpoint, this represents 20% growth over 2013 revenues. For earnings per share, we expect GAAP EPS for the second quarter to be in the range of negative $0.01 to $0.01, and non-GAAP EPS is expected to be in the range of $0.05 to $0.07.

Our second quarter EPS estimates are based on approximately 37 million weighted average diluted shares outstanding. For the full year 2014, we continue to expect GAAP EPS to be in the range of negative $0.06 to negative $0.02 and non-GAAP EPS to be in the range of $0.22 to $0.26.

Our full year EPS estimates are based on approximately 37.4 million weighted average diluted shares outstanding. With that, Philippe and I would be happy to answer any of your questions.

Operator?.

(Operator Instructions). Our first question comes from Sterling Auty of JPMorgan. Your line is open..

Hi, this is Jackson Ader, standing in for Sterling. I just had one quick question on the reception that you guys mentioned on the Web Application Firewall and constant monitoring products.

How much interest on those products are coming through the channel?.

Well, this is Philippe. So the answer is that today more than 40% of our business is coming from channel. We have signed on we major partnership now with all of the Indian outsourcers. Cognizant was just announced was the very recent one. So we see the interest from both the direct customers as well as the channel partners.

So no really big differentiation. So continuous monitoring is something which was very well received. One where we launched major campaign in the summer. As we deliver one of the very important components which is integration with CMS, so we could automatically now drive the alerts that we provide directly into the thing.

So with that we are going to make a major push. Very strong reception. We absolutely believe that this is a game changer in the vulnerability management. The Web Application Firewall is maturing. As we all know, it takes time to bring security solutions to the market because you need absolutely high-quality.

You want to be best-of-breed in everything you do, which is the (inaudible) of Qualys and delivering that as a single solution. We are very encouraged by the quality of our Web Application Firewall and the same we are expecting in the summer to have some additional key features and really push the product very strongly..

Great, and one quick follow-up on that.

As far as the sales force is concerned, how do you feel about them? How far ramped up are they on being able to sell all the solutions? How should we think about where they are as far as being able to sell all the solutions and how they are going to ramp?.

So first of all, we have a technical sales force, which is very different from your traditional enterprise software, where people are not that technical and rely on assist to do the job. So by nature, they are very much more capable of learning additional modalities.

In addition to that, we have now also SMEs, subject matter experts, which are now based in the field which on Vulnerability Management, Policy Compliance, Web Application Scanning, and now with Web Application Firewall are looking to expand SME capabilities in the field so they could add experts, so our field operation could draw on these experts luckily.

So generally speaking, I think we are very well equipped. The products are very well received. And you could see from the numbers today that we are doing bigger deals, larger upsell because of the fact that we bring best-of-breed technologies in a single platform. That's a huge differentiator that Qualys has today..

Great. Thank you..

Thank you. Our next question comes from Phil Winslow of Credit Suisse. Your line is open..

Hi, guys. This is Siti Panigrahi for Phil Winslow. Congrats on a good quarter.

Just wondering, if you have started to see any kind of impact from your partnership announcement with Accuvant and Lumension earlier this year? Could you give us some color also when you expect Lumension customers to move to Qualys cloud platform?.

I think on the Accuvant side, we already have a good relationship with Accuvant.

Accuvant was in the past was a reseller of Qualys selling the solution, but is very unique and I think this is trend in the marketplace because of the platform that we have now Accuvant is capable of delivering managed security services for VM, for Policy Compliance, for Web Application Scanning and bring these applications, if you prefer, as the Qualys way, to the market and I am absolutely convinced that we will see more of these other traditional security, if you prefer, channels starting to realize that this is a much better market.

So we see good traction with them. The second question was, I forgot the second question, it was relate to the --.

About Lumension..

With Lumension, we have seen a few of the customers taking to Qualys. This is obviously not as huge of a installed base that they have. So we see some customers, of course, coming, replacing the solution that they had.

They have a Federal component to their business which also give us the opportunity to further accelerate our penetration in Federal, where as I mentioned earlier, when we hired services executive to drive our Federal business..

Good. Thank you..

Thank you. Our next question comes from Steve Ashley of Robert W. Baird. Your line is open..

Hi, this is Chaitanya Yaramada for Steve Ashley. Great quarter, guys. Good to see the billings growth here. My question is on the billings growth.

We saw a nice acceleration this quarter and I was just wondering if you could give us any color on what might have contributed to that strength? Philippe mentioned the HeartBleed bug and we had the Target data breach not too long ago.

So perhaps, were there any one-time events that helped the billings growth in the quarter? Or maybe any larger deals that we should take note of?.

Hi, Chaitanya, this is Don. Not really. No one-time. Those events, though, obviously are all in the press and I think generally contribute to a good environment for security, but our sales cycles are not that short here. So look, Q1 was just a good solid quarter. Philippe hit on the main thing.

We are seeing bigger deals, bigger upsells across the board, in all regions, across all product lines. So no, its just a good solid quarter. No one-time event..

Okay, perfect. And then it was also nice to see the increase in the cross-sell, going from 30%, I believe, at the end of last year to 37% at the end of March.

Is that being driven by a higher attach rate to newer customers or is that increasing success in going back to the existing customer base and maybe cross-selling some of the newer products? And maybe any changes that you made to the go-to-market that is helping to this?.

Well, first of all, thanks for pointing out our new favorite metric this quarter. The 37% from 30% in one quarter is pretty stunning. Really both new and existing. Of course, our existing base is much larger base. So numerically we get lot more from existing customers. But we are seeing more and more new customers.

I can think of a dozen significant deals in the quarter where they didn't just buy Vulnerability Management. They added on one or both of the other services as well. We are seeing more of that as well..

Great, and any changes to the go-to-market or are the sales guys getting more comfortable with the newer products? What's helping that process?.

No change to go-to-market, but I am sure, as I have reported those, as people get to know the products better. We continue to improve the features with more, as a SaaS company, we are constantly, we are continuously releasing additional features and bug fixes and stuff like that. So the product gets better and better.

The sales force, of course, the more they sell it, the more they know about it and they have more reference accounts, et cetera. So I think it builds on itself..

Yes, what it does insight you now that we have more of that (inaudible) coming up as a platform and not anymore as a best-of-breed solution in the VM.

So its really the platform effect that is really playing into our hands and of course the more new services we add to that the more, speaking as we see as a result of that company, not only they go and buy more than one solution from the get-go, they also want to do longer term deals with us, three years type of engagement with Qualys because of course now from CCO standpoint we represent significantly cost reduction because of the administration.

You don't need to have any more expert just for VM running the VM application, your expert for policy compliance and your expert for web application, et cetera. That will have a huge consolidation which eliminates a lot of people that are needed for enterprise software solutions..

Great. No, that's really great to hear. Final question for me is on Europe. You have seen two quarters of very strong growth there.

Just wondering if you can comment on, is that execution, have you had some management changes there recently? And also are you seeing any change in terms of companies' willingness to adopt cloud solutions for security more broadly?.

It's all of the above. In fact, we did expand our managements in Europe with addition of a very seasoned person, as well as some local. The cloud is absolutely much more accepted than it used to be. And, finally, Europe went through a kind of pretty dark outcome now almost two years ago, so we are past that.

So it's the combination of all of these factors that have affected. Europe is back on track very well. So we are very happy with that strong customers, good team. I mean, we are very happy with that..

Great. Thank you very much for taking my questions..

Thank you. Our next question will come from Sterling Auty of JPMorgan. Your line is open..

Thanks, guys.

I just waned to ask (inaudible) maybe more color on Ann Johnson's (inaudible)?.

There is static because we are not hearing you well. This is possibly give more color on Ann Johnson. There is not really more to say than what we just said. So we are expanding our management. This is something that is a priority of mine. In fact, we just hired, a VP of Global Customer Support. So we are continuing to enhancing.

So we are hired also a (inaudible). So we are expanding our management and we will announce, albeit she's a very seasoned executive and we left on good terms, but I think it was just not working out as well as both of us, I would say, would have expected..

I got you, and just a quick back of the envelope calculation. It looks like the 83% from Vulnerability Assessment, it looks like VA grew at the higher end of 15% to 20% range.

Is that from just the solid larger deal upsell into existing customers? Or were you seeing maybe some new sales of the traditional VA solution?.

Hi Sterling, Don. We continue to have a steady drumbeat of new VM customers every quarter but I think it's the increase in the growth rate, which you are correct, in back of the envelope and really came from upsells to existing customers as they are expanding their scope of what they are doing on Vulnerability Management..

Yes, to add to what Don said, it is interesting that what we see today synergies because if you really like policy compliance which essentially allows you to look at the configuration of all your equipment has in fact an interesting effect of driving more scanning of vulnerabilities interestingly enough.

So all of these different applications now they have their own synergistic effect on each other, not only just as a platform because of positive effect that customers want to scan more, to do more. It deploys, it works, its integrated. That's why we see strong growth in our VM..

Last question.

You have a number of new products that have already started to roll out, but can you remind us what the next steps in the product road map for this year are?.

So we just announced our continuous monitoring of the perimeter. We also announced, as you know, the Web Application Firewall going as WAF, and then of course we have now a suite of new services. Our customers have requested it which is a very important extension to our policy compliance application. So this one is on its way as well.

Then this is additional paying services. Essentially you could do your vendor questionnaires as well as internal questionnaires. So you eliminate a lot of manual costs in doing that. The other thing is our cloud agent which we believe is an absolutely groundbreaking solution which allows us to address essentially three elements.

One is making VM realtime, whenever this is possible. Now you could have an agent that will continuously report changes in the configuration or in the variabilities of given systems where you could put that agent.

The second thing is expanding the reach of our policy compliance application for mobile devices as well as providing us the capabilities to start now to do file integrity monitoring. So that's another significant expansion.

Finally a component, an agent which allows us to essentially audit IOCs, indication of compromise, which will fit hands and glove with our Malware Protection Service. So this is something we will, also as I mentioned earlier, we plan to essentially go there before the end of the year.

The other one is malware, I am sorry, our web application log management, which is compliments to our effort around web security, we are now with web application security. We can identify your application. We have cataloged them. We can identify if they have vulnerabilities.

We can then follow those vulnerabilities with our Web Application Firewall and now we can go and look back at the logs for indication of potential compromise as well. So this is also coming.

And finally, we have a few other services that we are also going to announce and the advantage of our platform is that we can take some kind of sub-segment of the market and rally pack a solution that we can deliver very cost effectively. So we are working also on a few others.

All of that shows the leverage that we have with our platform, because once we package a solution, we can now deploy that globally not only to our customers but as well as new markets..

Got it. Thank you, guys..

Thank you. Our next question comes from Erik Suppiger of JMP Securities. Your line is open..

Yes. Congratulations. Very good billings quarter there. On the billings front, I calculate you did about 28% growth and your revenue outlook for the year is maybe slightly better than 20%.

Should we think of this quarter as a bit of an anomaly on the billings front? Or where do you think the trajectory goes from here from a billings perspective?.

We think our trajectory is what our guidance is which is a 20% median. This quarter was strong and in one respect as you know from having followed our company for years, we have some pretty distinct patterns that have emerged in terms of when deals come in, in the quarter.

About half of the deals, from a billings point of view, come in, in the last month of the quarter and the other half is split pretty equally normally between the first two months. In this particular quarter, we actually got most of our big deals done in January which gave us some extra rev rec and really helped spice up the quarter.

That may or may not be a new pattern. I tend to think patterns will revert back to the normal patterns. We had a more front-weighted closing deal quarter in Q1 which was very good for us..

Okay.

Secondly, in terms of Ann Johnson's departure, are you looking for a new President or are you going to replace her with a new head of sales, did you say?.

At the moment, I am only looking for talent than titles, quite candidly here. So I have been involved in sales in Qualys since the beginning. So this is something I know almost everybody, all the customers.

So currently and of course, I would want to replace myself there but we need to find somebody that really can grow the business much faster when opportunities of whether it is going to be an EVP of Worldwide Sales or President will depend on the candidate..

Okay.

Can tell us whether or not your web app scanning and your policy compliance services were still growing in excess of 50% year-on-year in terms of billings?.

Yes, Eric. We can confirm it. Yes, that's true..

Okay, and then coming back to the first question.

If it was an unusual quarter, do you think that your ability to continue selling bundled or multiproduct or multiservices, do you think 37% was unusually high or can you continue to expand beyond that as we look at the next couple of quarters?.

Well, based on the way the metric could behave, it went from 20% to 30% in a year, we are all partly surprised that it grew 37% in one quarter. Eventually, Eric, I don't think that's going to be an important metric in the long run. I think eventually we should have a 90% to 100% of our customers buy multiple services.

Recognizing that a lot of new customer start out with one, so maybe it will never get to 100%. Clearly, so we have set up a platform company now and not just a single solution company. So I think I would look for continued steady growth in that metric. I can't predict it but it should, in the long run, in my opinion, hit 80%, 90%..

Okay. Great, and then last quick one.

Did you say what your head count was?.

No.

Would you like to know?.

I would love to know. Thank you..

Yes. We ended the quarter at 414 and one other little note on headcount. We have said at the beginning of the year, we intended to increase the sales force by about 25 to 30 headcount this year. We added seven in the quarter. So the pace that we set..

Very good. Thank you..

Thank you. Our next question comes from Michael Kim of Imperial Capital. Your line is open..

Hi. Good afternoon, guys. I just wanted a better sense of expansion of the business internationally. What you are doing to build out the channel in the EMEA and also in APAC? Secondarily, I think Philippe, you mentioned adding a VP in the SMB sector.

Curious how much you are doing there and your expectations for that opportunity?.

Okay. So to start with the EMEA, we are considering expanding our channel in EMEA. Our business in EMEA is more channel driven than it is in the U.S. So we are expanding our partnerships with companies like Orange Business Systems and a few others, strong partners. So it is more of the same.

As far as APAC is concerned, now that we are a package, APAC is a marketplace which is a bit different than Europe, already Europe is fragmented but it is more for cultural reasons. In the APAC marketplace, you don't have that large companies with large network. It is much more an SME, SMB marketplace from a product standpoint.

So now that we have absolutely packaged our SME, SMB solutions very well with an SMB offering which we call Express Lite with an SME offering with less price.

Part of that major push of the continuous monitoring that we are going to do in the summer are really going to be very aggressive, and essentially pushing the solution into the Asia PAC marketplace. So there we have a good presence everywhere. It is all about, more for the SME, SMB market.

So we want to bring in fact more automation to our business there. And that leads me to speak about the SME, SMB business. That packaging that we did is now bearing its fruits. We have very good growth rates on our SME, SMB business. We are taking a lot of these away from the competition. And I think we are prime to really push it into Asia PAC.

We can localize it also as well because now it is really global wide, so we have a lot of things to play with and of course we have the power of the platform which allows us to very cost effectively continue our strategy of try and buy. So you have nothing really to install and so it's very effective.

Then I think Asia PAC is now also warming up to the cloud, when in the past they were like Europe was, like the U.S. was, always now I want to have the software in-house. So today the cloud everybody realizes the cloud is obviously is where you want to go..

Great, and then switching gears to the HeartBleed vulnerability.

Just given how extensive that vulnerability is, can you talk about how much that drove increase and perhaps expanded the sales pipeline? And are you already seeing that translate into business for VM side of your revenues?.

In terms of the product itself, that detection tool that we provided to our customers which is now totally integrated with our QualysGuard offering, that's where you see the power of the cloud.

It allows customers to immediately find out where they are going and what to do with and compared to some of these other competing solutions that we have seen, the quality of our detection has been far superior and so extremely well received by all of our customers. We are not charging for that, of course.

We created the Dashboard, which really essentially allows you to not only drive that just vulnerabilities but also to control much better your digital certificates. You have the issue that most company have today is that they don't have a rally good solutions to make sure that their digital certificates are up to date.

So all of what we provide here is a one place where you can really look at all of your digital certificates and control them much better. So as far as driving, yes it is driving a lot of new business. There is no question about that. And again for us, it is just one functionality.

It is not a business on its own but its feature that Qualys has demonstrated that we can deliver to the market extremely quickly in a record time. We are the first one out there to have the tool. We have the best quality that you could ever think which is again a match for Qualys.

The probability, quality, the enemy of security, and what makes security very difficult is you have to eliminate false positive and false negatives. This is like when you do mammography, you have to absolutely make sure that you can detect if there is a tumor or that, of course, you want to make sure that you don't miss one.

So you don't want the false positive. You don't want the false negative. And that's what we have done very well with that specific instance of vulnerability..

Have you found that most organizations have already patched the vulnerability?.

No. You mean to-date? Our customers, we know from our customers, of course, they put a huge priority into that.

In fact, we got praises from the fact that it was very easy to do with Qualys, with organization like the state of Colorado, for example, so that's what we bring to the market, and of course it enhanced the trust that our customers have in us, because we delivered a solution that works and deployed.

But that's a very good case, if you prefer, for Qualys..

Great. Thank you very much..

Thank you. Our next question comes from Rob Owens of Pacific Crest Securities. Your line is open..

Great, and thanks for taking my questions. Don, I wanted to drill down on the guidance just a little bit for the second quarter and for the year. If I look at the sequential ramp at the midpoint, I think it's a little bit less than you have seen actually in the each of the last five quarters.

You mentioned how Q1 benefited from the kind of early closing of deals in the month of January.

Can we assume from your guidance then, that April wasn't quite what January was and you should see that go back to normal linearity? And then second, given the beats of the high end of the range in Q1, why not increment guidance for the year?.

So working backwards, I think the more important question is the second one. It's just too early in the year. We had a good first quarter. We will keep an eye on guidance as we work our way through the year, but its only Q1.

Again we did the 22% which, as I said, we benefited a little bit by some early rev rec, which is a good thing, but not something I am counting on. To get to the first part of your question. I think April was a normal first month of the quarter.

We have had, as you know Rob because you have followed us for a long time, our historical patterns are pretty steady. So nothing negative and going back to the established pattern but we had a little better pattern than usual in Q1 which gave us that extra little boost of revenue growth which was good, but I am not counting on it going forward..

And if you dissect Q1, was there any particular vertical? Obviously, a lot of focus on the retailers here as of late?.

It was the most balanced growth quarter I have ever seen here across product lines and regions and verticals. It was amazingly well balanced..

Okay, and then on the pricing side.

What are you guys seeing? Are you seeing itself hold? I know there was some, I won't say newer, competition, but it seems like some of the competitor's are getting more aggressive at this point?.

So we saw Rapid7 just to name a company. In the few years ago, being very, very aggressive in terms of pricing to try to displace because if you look at these companies, where can they go? They have to go, of course trying to gain market share, and they were very aggressive. We resisted very well.

We see today pricing pressure, but we stand very well because of our platform. Because when you start to add even if one of these competitors give away their products, we come back and say, yes, but by the way we have all these other solutions here and they all work together, it's all integrated.

So we do TCO analyses which favor us significantly because of the cost that we eliminate. So I think we can resist the pricing pressure for some of our competitors.

We did that very well with Rapid7 and now, as you know, if we see anybody else doing it, none of them have the solution that we have as a platform or integrated or delivered as cloud service..

Great. Thanks, Philippe. Thanks, Don..

You are welcome..

Thank you. (Operator Instructions). Our next question comes from Sanjit Singh of Wedbush. Your line is open..

Congrats, Don and Philippe, on a great quarter. My question is on renewal rates.

Don, if you can update us on the metrics there both on SMB and enterprise, if you saw any changes on the renewal rates?.

No, we continue to see high 90% renewal rates in the enterprise and about 10% less at SMB. Steady, solid renewal rates..

Great, and then Philippe, I know a couple quarters ago we were talking about Federal government and I wanted to get what your expectations on what you think the federal government could look like this year? Not necessarily from a quantitative point of view, but maybe from a go-to-market standpoint, are you making progress in Federal as you look to the September quarter?.

I think in the Federal, first of all, we are not expecting significant new revenues in 2014. However, now on served contracts, we are looking at expanding our partnerships. Again the Federal government now is much more receptive to cloud solutions with our private cloud that give us the capabilities to answer the need much better.

So we hired a very seasoned executive and I am very happy with the way we are approaching the market. So that market should start to really represent business for us in 2015..

Great. Thank you. In terms of new product roll-outs. I know Web Application Firewall just was available for GA in recent weeks and you have a whole slew of other products coming out.

From a revenue perspective, which of the products do you think is your nearest term opportunity? Is it going to be continuous monitoring or maybe the Web Application Firewall from a revenue perspective?.

Historically, as we discussed, all of these new services take some time to reach maturity. So that's the pattern again, securities looking for best-of-breed. So it doesn't immediately ramp up. Continuous monitoring, it's a huge differentiator which I think will generate new business.

So in terms of add-ons to existing customers, its not meant to represent significant amount of revenues, however I think it's a significant wedge in to having new customers. The Web Application Firewall, we need again to mature that solution a little bit more, policy compliance is getting stronger and stronger.

Web application scanning is getting stronger and stronger. So it all works on its own but we need to have representation because you have to be best-of-breed and as well as integrated and that's not a technological thing easy to do. As we very well know, McAfee tried to do that by acquiring companies and integrating all of that with APO.

Symantec tried to do the same thing. And of course, with enterprise software, it's extremely difficult. Delivering that as a cloud architecture makes it possible but it is still hard to do, which I believe is a huge barrier to entry that we have cleared here..

Thank you for that answer. And my last question relates to the overall environment. Q1 saw a lot of these big headlines that caused a lot of attention.

I guess my question is, did these headlines, are they creating a burst of spending right now and that's something that would potentially subside going forward? Or are you seeing more broader strategic conversation with your customers that would imply a more sustainable environment going forward?.

That's a very good question. It's a very good question. It did effectively create a burst for certain category vendors which say that they got the solution for the problem, where the problem is acute. But customers, security people, they really understand that this is not an easy fix. Security is not one single bullet.

So it's good, I think, for our customers, because again, they get more budget which had always the par of security. This being said, you need to have solutions that deploys, that's cost effective, you need to have people who know how to manage it. So it is not that easy.

So to answer your question, it did create a burst for certain number of vendors which have a specific solution to the problem we see. But ultimately I think it is creating a very strong trends and customers are really looking, very large ones, they have got to get a really great platform. Likewise, we are hearing that from all of our customers.

So the platform play is crucial for every security companies looking forward..

Great. Thank you so much. Congrats.

Thank you. Our next question comes from Robert Breza of Sterne, Agee. Your line is open..

Hi, thanks for taking my question. Most of my questions have been answered but, Don, I know you talked about the sales capacity and the head count. Can you talk about the general hiring trends as you think about them through the year just for the other components? Thanks..

Thanks, Rob. We have never been able to predict. It just depends on finding the right people at the right time but we are pretty much one fourth of the way through in one quarter. So it looks like a well oiled machine at this point. We should just march right through the year, right.

We hope to add, like I said, 25 to 30 through the year, and I don't know the pace exactly. We are interviewing people constantly and trying to find the right ones..

And one thing I would like to add to what Don just said. We are significantly expanding our operation in India, where our engineering operation, our ops, our operation team in India as well and we are able to really recruit very, very top people there.

So this is also encouraging, because as you all very well know, the cost of acquiring an individual in India is still far than it is in the U.S., but what drives us is not the cost. Let me share about that. It's the quality of the people. So we have a very strong engineering team now in India and now operations.

We are also going to expand our customer support capabilities there as well..

Thank you..

Thank you. I am not showing any further questions in queue. I would like to turn the call back over to Philippe Courtot for any further remarks..

So thank you all for joining us today. We are pleased with our strong performance and continued momentum in the marketplace as we work our way through 2014.

We believe that we are well positioned to deliver best of cloud security and compliance solutions to our customers and partners as we continue to expand our cloud platform and deliver more innovative solution, as I have just to mention during our Q&A session. Should you have any follow-up question, Don and I are available to you.

And we look forward to speaking with you next quarter. Thank you very much..

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..