Philippe Courtot - Chairman and Chief Executive Officer Don McCauley - Chief Financial Officer.

Sterling Auty - JPMorgan Siti Panigrahi - Credit Suisse Matt Hedberg - RBC Capital Markets Rob Owens - Pacific Crest Securities Steve Ashley - Robert W Baird Craig Nankervis - First Analysis Erik Suppiger - JMP Securities Michael Kim - Imperial Capital Robert Breza - Sterne Agee Aaron Schwartz - Macquarie.

Good day, everyone and welcome to the Qualys' fourth quarter and full-year 2014 investor conference call. This call is being recorded. At this time, all participants are in 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..

Welcome to the Qualys fourth quarter and full-year 2014 investor call. I am Don McCauley, CFO and I am here with Philippe Courtot, our Chairman, President and CEO. We would like to remind you that during this 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 our future financial or operating performance.

Forward-looking statements in this presentation include, but are not limited to, the following, statements related to our business and financial performance and expectations for future periods, including the rate of growth of our business, our expectations regarding capital expenditures, including investments in our cloud infrastructure and the intended uses and benefits of such expenditures, trends related to the diversification of our revenue base, our ability to sell additional solutions to our customer base, our plans regarding the development of our technology and the expected timing thereof, our expectations regarding the capabilities of our platform and solutions, the anticipated needs of our customers, the strength of demand for our solutions, our strategy, the scalability of our strategy, our ability to execute such strategy and our expectations regarding our market position, the expansion of our platform, the expansion of our partnerships and the related benefits of such partnerships and our delivery of new 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 we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q that we filed on November 6, 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.

Now to begin the discussion, Philippe will provide an overview of the company's performance for the fourth quarter and full-year 2014. Then I will cover our financial results and factors that drove the quarter in more detail as well as our outlook for the first quarter and full year 2015. Then we will open the call up for your questions.

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

Thanks, Don and welcome to all of you. The fourth quarter of 2014 was a record quarter for Qualys, underscored by the continued acceleration of our revenues, by the impressive acceleration of our free cash flow and increased profitability.

This was a consistent theme for the entire year as Qualys significantly increased both revenues and profitability in 2014. We added over 1,000 new customers in 2014, a significant acceleration over the 550 we added in 2013, ending the year with over 7,700 active subscribers worldwide.

Don will cover the financial details of our performance for the quarter and full year, but let me first start off with an overview of key highlights that are driving the momentum in our business.

In the fourth quarter, we added a number of important new accounts including Associated British Foods, Blue Cross and Blue Shield of Minnesota, Blue Shield of California, Bridgewater Associates, British American Tobacco, Cadillac Fairview, Dimension Data Cloud Solutions in Australia, Gatwick Airport, Graham Holdings, Halliburton, HIS, Inc., Michigan State University, Netflix, QBE North America, Rexam PLC, Siemens AG, The Church of Jesus Christ of Latter Day Saints, Tyco International, UC Health and Yellowpages.com.

On the partnership side, we continued expanding our global partnerships and established significant new strategic partnerships with managed security services providers, including Telstra in Australia, Orange CyberDefense in France and DMI, a federal contractor based in the U.S.

These new partnerships allows us to further expand our reach in both commercial and federal markets across the globe.

These partnerships are unique as they deliver the complete suite of Qualys' security and compliance offerings fully integrated with our managed services which can be seamlessly delivered from either our shared cloud platform or via private cloud.

Orange CyberDefense, for example, expanded their sovereign CyberDefense services with ours, which is allowing Qualys to reach customers and markets we could not serve through our shared platform.

We saw accelerated adoption for our new services, namely Web Application Scanning, Policy Compliance, Continuous Monitoring and Private Cloud Platform as well as continued expansion of our industry-leading Vulnerability Management solution. As a result, at the end of 2014, 54% of our customers have now purchased more than one solution.

This momentum underscores the power of our disruptive cloud platform as well as the rapid adoption of our newer solutions. This is clearly a promising trend as supported by the fact that these metrics stood at 20% at the end of 2012 and 30% at the end of 2013.

In the fourth quarter, we released new versions of our Web Application Scanning, Policy Compliance and Continuous Monitoring for their perimeter. Each of these new releases added new capabilities and workflows with our design to better address the increasing needs of our customers to help them better protect their corporate data from cyber attacks.

Thanks to our cloud delivery model such improvements are delivered transparently to our customers and at no additional cost, allowing us to maintain a very high renewal rates and stickiness as we continue to provide increased value to our customers.

For Continuous Monitoring, we are expanding the solution from the perimeter into internal IT system due to the high demand from our customers. This new service would be available this quarter.

As indicated in our last earning call, we are on track to deliver key extension of our web application firewall or WAF and we are now gearing up to fully launch WAF version 2.0 at the RSA Conference in April with a new automated rules engine that provides customers the ability to do virtual patching for vulnerability in their web applications.

In the fourth quarter, we saw strong demand for our private cloud platform, which allows customers to use our full suite of security and compliance solutions while keeping all data on-premise. Demand is particularly strong in Europe and the Middle East, due to data sovereignty requirements from our partners and customers.

We are now further expanding the reach of our product platform to make it fully disconnected from the Qualys [SOC][ph] for dates and monitoring to address customers in the defense sector and other highly classified environment. We are expecting to deliver our first version of these disconnected platforms in the second quarter.

We are also making great progress with new solutions currently under development, namely the Cloud Agent and the log management and analytics technologies. We demonstrated these groundbreaking capabilities to our customers at our Annual User Conference in Las Vegas and in Europe last October.

The Cloud Agent delivers the ability to drop a lightweight agent on an IT asset for continuous assessment of its security and compliance posture and keep it up-to-date. Its intelligence is key in securing IT assets in the enterprise, especially in mobile workforce environments or in environments where virtualization is predominant.

This agent technology is designed to scan for millions of devices and therefore we believe it allows us to expand our footprint within the enterprise into areas where our current remote scanning technology doesn't reach. We plan to release the Cloud Agent in beta in Q2 of this year.

The Web Log Management and Analytics solution which will come fully integrated with our Web Application Scanning and Web Application Firewall solutions will help customers improve web log management and increase the protection for their websites through continuous detections of web threats, automated alerting and mitigation.

We plan to release Web Log Management and Analytics in the first beta in Q2 of this year as well. Late last month, our newly formed Qualys Malware and Vulnerability Research Lab discovered GHOST vulnerabilities in Linux GNU C library and released a security advisory.

GHOST is categorized as a high severity vulnerability that allows attackers to remotely take control of an entire system without having any prior knowledge of systems' credentials. The same day we also released detection for these vulnerability, so our customers could immediately start scanning their IT systems and track remediation progress.

Finally, Qualys won three Information Security magazine awards and the SearchSecurity.com 2014 Readers' Choice Award for risk, policy management, vulnerability management and application security. Qualys was also honored by Frost & Sullivan with the 2014 Company of the Year award.

Now for a review of our financial performance and our guidance, I will turn the call now to Don..

Well, as Philippe said, the fourth quarter and full year 2014 were very strong at both the top and bottom lines as our business made significant progress on all fronts. Revenues in the fourth quarter grew to $36.6 million which represented 26% growth over the fourth quarter of 2013. For the fourth quarter, U.S.

represented 70% of revenues, which is the same percentage as a year ago. Our current deferred revenue balance at December 31, 2014 was 20% greater than at the end of 2013. Full-year 2014 revenues grew 24% to $133.6 million. This represents strong revenue acceleration as our revenue growth had been 18% in 2013.

Let's drill down into the full-year revenue growth. In 2014, total revenues grew by $25.6 million to the $133.6 million that I just mentioned. Revenues from customers existing at or prior to December 31, 2013 grew by $15.7 million in 2014 to a total of $123.7 million. This number represented 114% of 2013's total revenues.

This compares to a prior year view where revenues from customers existing at or prior to December 31, 2012 increased by $8.7 million to total of $100.1 million in 2013, which represented 110% of 2012's total revenues.

Revenues from new customers that were added in 2014 contributed $9.9 million to our 2014 revenue growth, compared to a $7.8 million contribution from new customers to our 2013 revenue growth.

So as you can see, Qualys made very good progress on growing revenues from new customers, but the much larger contribution to the 2014 revenue growth came from the expansion of revenues from our existing customer base. Our Vulnerability Management solution continues to grow at an accelerated rate and it remains the largest component of our business.

At the same time, we continue to make progress in diversifying our revenue base. We derived 80% of fourth quarter revenues from subscriptions to our VM solution compared to 84% for the same period in 2013.

this ongoing diversification of our revenues is primarily due to increased sales of our Web Application Scanning and Policy Compliance solutions, which continue to grow by more than 50% year-over-year. GAAP gross profit increased to $29.1 million in the fourth quarter of 2014 compared to $22.5 million for the fourth quarter of 2013.

GAAP gross margin was 79% for the fourth quarter of 2014 compared to 78% in the same quarter of 2013. Non-GAAP gross margin was 80% for the fourth quarter of 2014 compared to 78% in 2013.

For the full-year 2014, GAAP gross profit increased to $104.6 million compared to 83.3 million in 2013 and the GAAP gross margin was 78% for 2014 compared to 77% in 2013. Non-GAAP gross margin was 79% for 2014 compared to 78% for 2013.

Adjusted EBITDA for the fourth quarter of 2014 increased by 139% to $10.7 million compared to $4.5 million in the fourth quarter of 2013. Adjusted EBITDA as a percentage of revenues increased to 29% in the fourth quarter of 2014 compared with 15% in the same quarter in 2013.

For the full-year, adjusted EBITDA increased by 82% to $31.7 million compared to $17.4 million in 2013 and as a percentage of revenues, adjusted EBITDA increased to 24% in 2014 compared to 16% in 2013. Qualys generated impressive cash flows in 2014. Net cash from operations increased by 65% to $41.4 million compared to $25.1 in 2013.

Free cash flow increased by 138% to $27.4 million compared to $11.5 million in 2013. Moving onto earnings per share. The first thing to keep in mind as we discuss GAAP EPS is a one-time benefit of the fourth quarter of 2014 related to the tax benefit recorded for the recognition of deferred tax assets.

For ease of comparisons, we have not included this one-time benefit in our non-GAAP EPS amounts. This adjustment added approximately $0.63 per fully diluted share in the fourth quarter and approximately $0.64 for the full-year 2014. Again, just to our GAAP EPS numbers.

For the fourth quarter of 2014, GAAP EPS was $0.69 per diluted share versus a GAAP EPS of $0.00 per diluted share in the fourth quarter of 2013. Non-GAAP EPS was $0.15 per diluted share in the fourth quarter of 2014 compared to $0.05 per diluted share in the fourth quarter of 2013.

For the full-year, GAAP EPS was $0.81 per diluted share versus GAAP EPS of $0.05 per diluted share in 2013. Non-GAAP EPS was $0.46 per diluted share in 2014 compared to $0.20 per diluted share in 2013.

If you were to back out the one-time effect related to the tax benefit for the recognition of deferred tax assets, again of $0.63 for the fourth quarter and $0.64 for the full-year, you would see that we significantly grew each GAAP EPS measure over to its 2013 equivalent.

And also, as you can see, it's clear that we exceeded our previously announced guidance ranges with or without the one-time tax benefit. Turning to our balance sheet. We continue to have a strong cash position as we ended 2014 with $167 million in cash and no debt.

In the fourth quarter of 2014, capital expenditures were $3.7 million compared to $3.3 million in the fourth quarter of 2013. For the full-year 2014, capital expenditures were $13.9 million compared to $13.7 million in 2013.

In the first quarter, we expect capital expenditures to be in the range of $5.5 million to $6.5 million as we expand our cloud infrastructure to support more customers and add more solutions and functionality to our shared platforms as well as to prepare for the increasing demand for our private cloud platforms.

Now turning to our guidance for the first quarter and full-year 2015, starting with revenues. For the first quarter, we expect revenues to be in the range of $37.6 million to $38.1 million. At the midpoint, this represents 25% growth over the first quarter 2014 revenues.

For the full-year 2015, we expect revenues to be in the range of $167.3 million to $169.3 million. At the midpoint, this represents 26% growth over 2014 revenues. For earnings per share, we expect GAAP EPS for the first quarter of 2015 to be in the range of $0.04 to $0.06 and non-GAAP EPS to be in the range of $0.10 to $0.12.

Our first quarter EPS estimates are based on approximately 38.0 million weighted average diluted shares outstanding. For the full-year 2015, we expect GAAP EPS to be in the range of $0.22 to $0.27. Non-GAAP EPS is expected to be in the range of $0.50 to $0.55.

Our full year EPS estimates are based on approximately 38.6 million weighted average diluted shares outstanding. And now that we recognized deferred tax assets related to our previous full valuation allowance for income taxes, for the first time we have assumed a normal income tax rate in our EPS guidance for 2015.

For both the first quarter and full year 2015, for GAAP EPS and for non-GAAP EPS, we have assumed an income tax rate of 35% and even with income taxes now taken into account going forward, both our GAAP and non-GAAP EPS estimates are higher than last year's first quarter and full-year GAAP and non-GAAP EPS amounts.

So in summary, what you are seeing in these expectations is a continuation of the strong sales execution that we experienced across our various solutions in sales regions in 2014. Our outlook also reflects the power of the cloud platform that we have built with customers increasingly purchasing multiple products from us.

In short, our land and expand strategy and our business model are working very well. With that, Philippe and I would be happy to answer any of your questions.

Operator?.

[Operator Instructions]. Our first question comes from the line of Sterling Auty with JPMorgan. Your line is now open. Please proceed with your question..

Thanks. Hi guys.

On the strong growth that came from existing customers, how do we think about the balance of that came from increased adoption of VM versus the upsell or cross-sell of the additional solutions?.

Hi, Sterling. This is Don. Pretty balanced. Pretty similar to prior quarters. We are getting both significant upsells from existing customers.

We have seen that for the last four or five quarters on vulnerability management as they expand those programs and we just continue to see more and more strengthening of Web Application Scanning and Policy Compliance. Philippe read you the metric of more and more of our customers are buying multiple solutions. So it's really been pretty balanced..

And then when we roll out forward to looking at 2015 guidance, given the number you added, I think it was north of 1,000 new customers this year, is it really those customers coming back for their second and third purchases that should drive an increase in that metric, so may we see the same dynamic happen in 2015 that we saw in 2014?.

Well, that strong pickup in new customers certainly adds lot more upsell possibilities, but keep in mind that our upsells occurs throughout our customer base. We have done some studies of our customers over time here and they continue to expand over a ten-year period substantially.

But having an extra almost 500 new customers last year certainly gives us a lot more to work with for upsells this year..

And I would to what just Don said, is that, if we look at our existing customers, we have still significant, even with our largest customers, we still have significant upsell opportunity. And with our new customers, what we are seeing today is that the average, if you prefer, deals or annual revenue is significantly greater.

So essentially all the pieces of our business are growing and very naturally. And of course the more services we deliver, the more sticky we become and we bring more value to the customers. They are all looking to have less vendors, not more vendors.

And so you can see really now the effect of our disruptive platform, which is now really starting to show..

Okay and maybe just one last one if I could, Don.

How should we think about the cash flow outlook for 2015 in light of the commentary about taxes and CapEx that you made?.

Yes. So in terms of cash flow, Sterling, there won't be any impact. We are still not a U.S. taxpayer. We have significant operating losses. So we will be recording book taxes and we will actually be starting to use up our net operating losses over the next few years. So really not a cash effect..

Great. Thank you..

Our next question comes from the line of Philip Winslow with Credit Suisse. Your line is open. Please proceed with your question..

Hi. This is Siti Panigrahi. Congrats on a good quarter.

Obviously, you guys are seeing acceleration in your new products adoption and you started expanding your portfolio, as you had, like in the call, how should we think about your go-to-market strategy, both on the direct and channel partner side? And also could you talk about your sales reps hiring this quarter and how should we think about that for 2015?.

So as you just said, our business is expanding and we have signed very powerful partners and we can see today the momentum coming from our partners.

We are becoming more strategic to our partnership than we were in the past because instead of having just to sell one single solution, which was VM, Vulnerability Management solution, today essentially you can bring the entire suite of Qualys to these customers.

I mentioned some of the new agreement we made with Telstra in Australia and so we see our partner business expanding as well as our direct sales business. So for us, we have built a highly scalable model delivering all these different point solutions out of the same platform, centrally managed.

It eliminates a lot of costs for our customers, makes it much more deployable and the same for our partners. So what we see with our partners is that they start to realize that Qualys brings them significantly more net margins than your traditional enterprise software solution.

So they are starting to be very interested by us because not only we bring them the recurrent business, but also it's a business which grows over time as Qualys does but also a business which is significantly more profitable than your traditional enterprise software solutions..

Siti, this is Don here. Your last question was about the sales headcount, I think. So in Q4, we had ended Q3 with 124 folks in sales, up from 120 at the end of last year. We added 11 in Q4 and ended with 135..

Thank you..

Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is now open. Please proceed your question..

Yes, guys. Thanks for taking my questions and I offer my congratulations as well on the quarter. Your revenue continues to accelerate but I think what stands out to me also is the profitability. It really looks to be running ahead of schedule here.

Now when you guys went public, we were always under the assumption, kind of a long-term margin between, call it maybe in the mid-20s and you just reported obviously 20% margins this quarter. I think, per our math, you are looking for maybe 18% to 19% margins in 2015.

How should we think about the long-term model now? Have some of your assumptions changed?.

Hi, Matt. No, our assumptions really haven't changed, but as you note, we are getting further along in our progress. I think we still look at, for example, on adjusted EBITDA margin in the range of around 30% over the next several years. And so I think it shows that we are on track is I think what it shows..

Yes. What I would add to that is that you could see how clearly we have much more data points on the curve and what these data points are really telling you is that our business is absolutely is getting very well. And so that's really what the conclusion we can reach now. When we went public, we had fewer data points.

And in fact, some people were estimating that our business would not really generate more than 20% growth, when in fact we knew all along that that would happen. So it's just a question of getting the time to bring these new services, et cetera and expand our partnerships. And this is exactly what has happened now..

That's great. It sounds like there was a question earlier on the channel. It sounds like you added 11 headcount in sales and marketing in Q4.

Should you guys be even hiring even faster? Or is this more about balance growth at this point?.

So what I would say here is that if you really realized today what the business model that we have done. In the early days, Qualys was essentially selling directly. About a few years ago, only 16% of our revenues were coming from indirect channels.

And the reason was, as we discussed in previous earning call, is because our model was not really well accepted at the time by the security professionals. They were really following to the notion of security delivered from the cloud. Over time, that balance has shifted and now today more than 40% of our revenues is coming from partners.

And this continued to accelerate. I mentioned earlier that, in the previous earning call, that today all the Indian outsourcers, Tata, Accenture, Infosys, et cetera, all of them, Tech Mahindra, are not only Qualys users but have become also Qualys partners.

So, all of that naturally accelerates, if you prefer, that trend towards having partners delivering the Qualys services.

And that of course means that we don't need to put as many direct salespeople in front of the market and ultimately it may not, of course when you sell directly you have higher revenues because of the margin we give to the partners, but on the other hand, you have significant cost of sales because you need to have and keep very expensive sales headcount.

So we have a very balanced approach where we clearly see significant pickup from our partners and I would say, for example, if you look at the foreign markets, when you start to have partners like Orange CyberDefense, like Telstra, they have essentially a lock on some portion of this market and they have become much more cost-effective to reach out this kind of markets than to build a direct sales force..

Very helpful, guys. Thanks a lot..

Our next question comes from the line of Rob Owens with Pacific Crest Securities. Your line is now open. Please proceed with your question..

Great. Thanks. Focusing on the VM side of your business, it grew about 19%, 20% this year. As you look at 2015, the acceleration there, what would you expect from that portion of the business, number one? Number two, you mentioned a lot of new customer wins on that front as well.

Are those displacements? And if so, who are you displacing? Or were there some greenfield opportunities out there?.

So to answer the first question, our VM business is very strong and continues to remain strong. It's fueled essentially by more displacements, essentially of our competitors. And the second is also by the fact that our existing customers are further expanding their VM application.

So we see that trend -- the strength of our VM business continuing looking forward. We don't see any de-acceleration of that business at all.

As far as the new customers are concerned, essentially we think it's a combination of displacing of existing enterprise software solution which, of course you know, have problem of scaling, are very expensive to manage, but also we create new opportunities. We are changing the market.

So for example, I will give you a specific example with our Web Application Scanning. We are competing and displacing some of traditional enterprise security software solutions there. But we are also expanding the market considerably.

With your traditional enterprise software solution, you can for example look at the vulnerabilities of maybe hundreds of applications, 200 at the most. With us, we certainly allow our customers to look at their entire web application and now which counts on the thousands. So we make that cost effective. So in that sense we are changing the market.

So it is not so much of a displacement, is becomes a huge expansion of the market that we are creating.

With our Web Application Firewall 2.0, then we have a very interesting solution because now not only you could identify and scan thousands of web applications, but now you are going to have a practical mean of virtual patching or patching these solutions with the forthcoming functionalities of the virtual patching fully integrated with our Web Applications Scanning..

And a quick one for Don.

How much of our business was coming through the service provider channel? And how does that compare year-over-year?.

Yes. So about 40% of our business comes indirectly, Rob, I don't have a metric in front of me of service providers.

By service providers, who exactly do you mean?.

MSSPs..

Yes. I suspect it's at least half of that. But I don't have a metric in front of me. We have never released a metric on that, but it's a significant part of it. We are partners with almost all of the significant MSSPs..

My sense is, that's been one of the better growth areas in that indirect channel.

Correct?.

Not really, because we are seeing today, a you can see, there is a consolidation which is taking place as well, which is very natural with the security consulting firm.

So you see companies like Accuvant, for example and FishNet specifically merging and that in fact makes us doing business with both of them, I really believe the combination of these two companies together are creating a much more powerful consulting, if you prefer, organization and therefore it's very good for us..

Thanks, guys..

Our next question comes from the line of Steve Ashley with Robert W Baird. Your line is now open. Please proceed with your question..

Thank you. I would just like to drill down on a couple of areas that we have already been talking about.

One, in terms of sales reps added 15 net this last year, what kind of growth might we expect in the coming year 2015?.

Yes. Steve, our plans are to probably hire 20 to 25 this coming year..

And we talked about the indirect business being 40%.

Is the expectation that that will rise as a percentage of your total business going forward?.

I think you should realize here, there is two elements here, what is interesting here is that we are doing bigger and bigger deal with our existing customers and direct customers, which some of them have doubled their subscription. So that upsets, in a way, the growth of our indirect channels.

So you have the, if you prefer, a combination of one upset the other, in some ways.

So I think yes, we are going to see growing our indirect business, but it is going to be in term of revenues is going to be probably gaining a few more points every year and at some point in time, ultimately the business would be very driven through the channel as more and more company would prefer to get the entire delivery from one big partner.

But that will take some time. It's a natural evolution..

And in terms of the fourth quarter for the core VM business, is that growing still in that 19%, 20% area?.

Yes. Steve, it continued to accelerate again to about 20%..

And the expectation baked into your guidance, I am assuming maybe stay at that growth rate or get a little better in 2015?.

Well, we have had about five or six quarters in a row where we have seen a steady acceleration of that metric and usually at Qualys when we see a trend start, it usually is essentially a slow, steady trend. They tend to continue for a while.

So we never take a crazy view in anything going forward, but we feel pretty good about the momentum that we have in that business..

Yes. It's a big base, obviously and I think it's continued to grow pretty healthy. So it think the answer to your question is, yes..

Perfect. Thanks, guys..

Our next question comes from the line of Craig Nankervis with First Analysis. Your line is now open. Please proceed with your question..

Thanks very much. It all sounds very exciting. Philippe interested on virtual private cloud commentary.

Are you starting to, do you believe, see an inflection point here with F form factor? And if so why? Or is more a one-time spike that you saw in the quarter, if we could start there?.

It is a very good question. In fact, we are investing more into making our virtual private cloud even easier for us to build, if you prefer, to deliver, because we see that as a significant, as a very unique delivery model. What is important to understand is that first of all, this is exactly the clone our shared platform.

So this is not another piece of code. It is exactly the same thing, while remotely managing this private cloud. We have about 14 of those today now installed exactly the same way that we manage our shared platform. So the reason why we see an uptake is for two reasons.

Fundamentally, one is from large companies which have, for example, adopted Qualys as their standard vulnerability management solution and now are looking at Qualys as their global compliance solutions. So they are starting to put more data with more, what they call, sensitive data like credential, for example.

So for them to take a virtual private cloud, they have now a bigger reason and also they keep the data into the walls of their enterprise, which may satisfy some compliance requirement that they may have. So that's a natural extension of our business. We don't push it. It just depends on customer demand and their degree of maturity.

So that's very healthy. We have very large customers today like Microsoft and quite a few others which have that private cloud solution, as I mentioned earlier.

Now the second element is essentially driven by that, I would say, initiatives that most foreign governments have and including the U.S., of course as well, of creating a, as we call them, sovereign cyber defense solution.

And of course Qualys comes here with a very attractive proposition because we can deliver, as I mentioned earlier, to a company like Orange CyberDefense our virtual cloud that now they can integrate within their own infrastructure all the level of securities and regulation required by the French, in that case, the ANSI and ASI [ph] and then now deliver in adjunction to all these other services that they bring to the market the Qualys solution.

So we are really absolutely a real match for them and we see that happening, as I mentioned, in France, in Australia, in Saudi Arabia, in Dubai and in Germany.

And of course we are now further expanding that opportunity by working on providing a disconnected version of the same private cloud whereby we could train an operator to operate the Qualys, if you prefer, SOC themselves.

So in that case, we could enter now into market which so far have been markets that we could not absolutely address, which are essentially the defense related market. So whether it's in the U.S. or whether it is abroad..

Do you see you virtual private cloud, if you look out 12 months or maybe 18 months, is virtual private cloud a French contributor to your growth? Or do you expect it to be something more than that?.

So two things. We see that huge a enabler of our growth. In that sense, not so much the subscription for the private cloud itself.

You have to realize that the private cloud drives also additional subscriptions for the VM, the Policy Compliance and Web Addresses Scanning, our forthcoming Web Application Firewall, our forthcoming Malware Protection Service, et cetera. So by themselves, they do not much represent much revenues but they also will amplify and generate more revenue.

So this is a very good driver for our business. Again allowing us to enter markets that we could not really address before, whether it's the federal or whether it is, for example, in France or in Siemens, some companies which are essentially regulated, if you prefer, by these various governments..

Thank you very much. Don, a question for you. Just trying to understand the way the OpEx played out in Q4.

Perhaps somewhat of a seasonally strong quarter yet R&D was basically flat, it was actually flat through the year now, but sales and marketing was flat sequentially and was there one-time issues that enabled you to be so lean in the expanse? What should we take away from that profile?.

Yes. So two different stories for two different line items. On the R&D line, we have been doing much of our expansion of R&D in India which has been a pretty recent initiative at Qualys. So that's enabled us to more efficiency on the R&D line. No less emphasis on R&D here.

As you are well aware, we have many, many projects going, but mostly the growth of engineering as occurred in India. And on the on the sales line, remember, in Q3 is when we have a lot of the big trade shows and stuff. So if we look at sales and marketing together, really nothing going on there unusual.

It's just a question of we had heavier marketing in the prior quarter. We actually had probably heavier sales commissions in the fourth quarter because Q4 is our bigger quarter..

Yes. You could start to see also the partner effect that I was discussing about and in India, we have absolutely expended and we are continuing expanding our engineering effort. We are extremely, extremely happy with our Indian operation, which well by the way also expanding to customer support as well and operations.

So we are really expanding our Pune office out there..

Okay. That's very helpful. Thanks a lot and congratulations..

Our next question comes from the line of Erik Suppiger with JMP Securities. Your line is now open. Please proceed with your question..

Yes. Congratulations on a good quarter..

Thank you..

First off, as you look out into 2015, your revenue growth, 25%, 26%, how would you think bookings would compare for that? Would you expect bookings to be higher, lower, same?.

We would expect them to be higher. Remember, the way our model works, Erik, bookings growth leads revenue growth. So to achieve higher revenue growth, we expect higher bookings..

Okay. Very good. What was last quarter, you had noted that you carried a good project pipeline into the December quarter.

How did that play out this quarter? Did you also have a similar pipeline at the end of the quarter?.

Our pipeline is really growing very well. So I think that's obviously something which is important, but our pipeline is growing very, very well. And so that has been the trend, by the way. If I go back to last year, we had at the end of Q1 with the bigger pipeline, at the end of Q4, et cetera, at the end of Q2 with a bigger pipeline.

We measure our business pretty tightly. And so we have a very good visibility. Of course having a fantastic renewal business which is much more predictable with a big base of customers that we have renewing and expanding the business, it also makes us much accurate in predicting how our pipeline is going to build..

But last quarter it sounded like there was a bit of an anomaly in terms of a good couple of projects that just closed as you entered the new quarter.

Did you have similar dynamics this quarter? Did you have anything near-term? Was it an unusually large again?.

That's a technicality between the time we invoice and so forth. Maybe Don will want to comment about it. That doesn't change the pipeline at all..

Yes. So I think you are referring, we had some of deals that we weren't able to count in deferred revenues last quarter. We didn't get to bill them until a few weeks into the quarter. That doesn't really affect any of the long-term trends, Erik.

We pointed it out because it kind of affected the deferred revenue metric, because we had, it was little less than $2 million, I think, that was not included in deferred revenue, but were orders that we actually billed the customer for in the first or second week of the quarter..

Okay and then lastly on the Continuous Monitoring, it sounds like that's getting a pretty good ramp here.

Can you compare that to either the Policy Compliance or the Web App Scanning and give us a little flavor? Do you think this is quite likely the third leg in terms of the emerging services? Is this one that you think is going to be starting to grow alongside those other two?.

So that's a very good question. In fact, we absolutely measure that to try to see, we have of course historical rates of adoption of our Policy Compliance and Web Application Scanning. So we compare these.

So just to remind you, we interviewed the Continuous Monitoring for the perimeter only where you have much less IPs than you have of course for the internal network. So of course, the dollar being driven by that is not a very significant dollar number. However, we have seen a excellent rate of adoption.

In fact much faster than our Web Application Scanning and Policy Compliance. We are now introducing the Continuous Monitoring, as I mentioned earlier in the call, for the internal network, which have significant more devices and that's because our customers wanted to be careful.

It's a new paradigm that we have been introducing where we changed Vulnerability Management from a more, if you prefer, batch oriented system where you scan your network and then you analyze and then you report to a model whereby we essentially find an anomaly or something and we turn that into an incidence response.

So we didn't want to bring that too quick into the enterprise before we had enough experience on the perimeter. So we are now introducing this month, from the demand of our customers. So we expect that modality to really continued continue, in fact accelerating, now in term of revenues.

Now is that going to be the fastest, one of the bigger ones? I would just say this is going to be a good, a very good addition, which probably would add about 20%, let's say, to give you a number to our VM business. That's about what we would expect for that over time.

We expect the combination of our WAS and Web Application Firewall being this very big driver as well. So again all that feeds into itself and for our customers again, it's out of the same platform, same infrastructure, centrally managed, one single console. So it's very easy for them to try and then of course to buy an then to deploy.

So that's again, the big advantage of that very unique cloud security compliance platform that we have built..

And did you say that that would be attached to about 20% of your Vulnerability Management businesses? Is that what the 20% was?.

No, what I said is that the potential revenue from that Continuous Monitoring solution could be about 20% of the revenues that we have of our installed base, if you prefer, in terms of revenues, not for adoption. I think everybody would adopt that modality. It's just question of time. It's a very natural extension of the VM application..

Okay. Great. Thank you very much..

Our next question comes from the line of Michael Kim with Imperial Capital. Your line is now open. Please proceed with your question..

Hi. Good afternoon, guys.

For the newer or upcoming products, Cloud Agent and Web Log Management, can you give a sense of how long we should expect the betas to last? And then when we might be able to expect those two products to go into general availability?.

Okay. So, very good. So I think today, both Cloud Agent and Web Log Management system, I think we will have a relatively short beta, which is not going to take, probably a few months. We are planning essentially to announce our agent at the RSA in April and in GA, very soon thereafter.

And I think we plan to have also the Log Management and Analytics available two or three months at the latest in GA. We are making very good progress with the solutions. I mentioned also in the call that we are making very good progress on our Malware Protection Service, which we are already planning to launch at Black Hat in July.

So a lot of very good new services coming out of the gate..

And presumably, the Web Log Management solution, that will probably be more easily cross-sold to Web App Scanning customers and Web App Firewall customers.

How about for Cloud Agent? Does that span more widely for the cross-sell opportunity?.

Absolutely. So the Cloud Agent essentially, just to remind all of you about he functionalities, one it is the natural extension of the VM application to all of these mobile devices, your laptops, essentially but on the Windows, Mac or UNIX platform. So we have here a very significant opportunity because that's where you have the largest number of IPs.

So it's a national extension of the MV. It is also natural extension of the Policy Compliance. So that's absolutely a no-brainer. What also that agent does is, it is also providing now essentially real-time capabilities. So you don't have to scan.

If you put the agent on the device, let's say a critical device, internally, you will not have to scan it anymore. So that could be a replacement, in a way, of our existing internal scanning of these servers by a solution which is much more effective and that we will also get additional value out of it.

The second version of our agent which will come with our Malware Protection Service will be also capable of identifying on those servers or clients indication of compromises. But that we come later. But the first release is absolutely an extension of our VM and Policy Compliance. They are one megabyte agent. They are extremely easy to deploy.

They are in demand from all of our customers. They all want to get that thing. They are currently in first beta with one very, very large and very prestigious customer wanting to expand the second beta program now as we speak. So this is looking very good..

Great and then just a brief one on Web Application Firewall.

Did that have a meaningful contribution in the quarter to the revenue line? And is it your expectation that version 2.0 post RSA, you might see a possible inflection in that adoption rate?.

Yes. So we have not really pushed the Web Application 1.0 because it was essentially missing the key functionalities and a couple of other ones which is that virtual patching. So what we did conversely that we received a very good acceptance. We have an engine which is extremely good. That is all the feedback we are getting from our customers.

This is with that Web Application Firewall 2.0, that's when I think we have the solution to the problem that every company have today. I need to know how many web application I have. I need to know their vulnerabilities and I need to find a way to essentially protect them or, if you prefer, mitigate those vulnerabilities.

And today, nobody has the solution that Qualys is coming up to market. So we expect then, as you said, that that will be a pretty quick uptake of our solution..

And pricing is pretty similar to the Web App Scanning? Or can you give us a relative sense?.

Yes. This is a bit different because here you are asking, in the case of the web app. Yes, because we essentially charge per application that you protect. Yes, it's about similar..

Okay. Great. Very good. Thank you very much..

Our next question comes from the line of Robert Breza with Sterne Agee. Your line is now open. Please proceed with your question..

Hi. Thanks for taking my questions. Don, I was wondering if you could just help us understand a little bit of the dynamics around deferred revenue? And obviously the revenues has been outpacing deferred.

Just help us understand the dynamics going forward as we think about our billings model?.

Well, Rob, one of the things we noticed this quarter was that deferred revenues are only up 20% over a year ago, even though revenues and bookings and our guidance, everything else is more than 25%, 26% range. And the reason for that is, we have seen a lot of upsells from our customers, especially in Q4, where you do get budget flush and so forth.

But a lot of upsells from customers, they co-term their subscription with their existing subscription, which means that their initial order for the upsell say, on average might be more like a six-month order to co-term it with their subscription.

So what goes in the deferred revenues in that case isn't a full 12 months worth of revenues sitting deferred revenue, but it does represent the beginning of the same exact revenue stream.

So when that I happens, deferred revenues will lag for the effect of these partial years upsell subscriptions that customers are tagging on to their, mostly the Vulnerability Management, subscription. So we look at that really granularly to come up with our guidance and so forth to make sure that we know what we are dealing with here..

So would there be a metric or have you thought about taking an annual recurring revenue if people are doing that six-month versus 12 months, where we only get, we as in the investment community, get a six-month view? Is there a way to think about that like --.

Rob, I don't think we are going to be issuing any new metrics. I think our metrics are really simple.

Recurring revenue here, if you took last quarter's revenue and multiplied it by four, that's kind of the current revenue rate and if you look at the revenue growth from quarter-to-quarter, you could start to almost plot out the next quarters yourself using similar growth rates. So you really just take the revenues and extrapolate them.

We will continue to give the deferred revenues, because I do think it's meaningful, but we did see, for example, when I was going through earlier on the call, I pointed out that we have a lot more of the revenue growth this year from existing customers expanding than we did from new and just by definition, when they expand, they frequently give us less than a full year's order as that initial order.

So it's all good news. It just didn't hit that metric as hard as you would expect, if it was, for example, all brand-new business..

Prefect. Thank you very much..

Our next question comes from line of Aaron Schwartz with Macquarie. Your line is now open. Please proceed with your question..

Good afternoon. Thank you. Just a follow-up on the last question.

Is there any way you can provide an average duration or an average age on the deferred?.

Yes. Our average contract length, Aaron, is about 1.15 years. [Multiple Speakers] That has been pretty constant. We haven't delved into, you are saying, like within a quarter to give something like that..

Yes. Well, I guess a lot of people focus on deferred for subscription models and just given when you talked about, certainly that's impacting it.

I just didn't know you are starting to see the average duration and if the six-month contracts, if you will, have been enough to actually pull that duration down a little bit?.

No. We haven't seen that at all. Well, I will give some thought to it, Aaron. We didn't think about it for today. But we will take a look at it..

Okay and then secondly, just on the OpEx. I think someone asked about this. But I thought the Q4 OpEx was actually abnormally low for seasonal trends. Historically that's increased about 10% on average sequentially and so it was far below that.

Is most of that just the off shoring of R&D? Or maybe you could walk through how you are balancing this higher growth rate with your reinvestment plan? And then secondly, on that question, understanding all the comments on the partner channel and the leverage you are seeing out of that, where are you today with sales force productivity? It seems by all metrics that it's pretty, that it's been growing nicely.

Is that sort of -- or where would you characterize that? Is that getting near full? how much of the forward growth here is dependent on continued productivity versus new reinvestments? Thanks..

Okay. I will try to back to the first part and you can prompt me if I don't remember what everything about the second part was. Aaron, I think one of the things about our sequential expense thing is think maybe you guys are all underestimating the power of our model. Our expenses dropped 6% sequentially.

And the only one of them that really was less in Q4 is marketing because of the trade show thing. I was mentioning that we had more trade shows in the prior quarter. But things like R&D and G&A for example, R&D was up 8% sequentially, our G&A was up 14% sequentially. So what you are seeing is the power of our model here.

We are able to generate significant additional revenues without pouring a ton of additional expenses in because of a lot of things Philippe talked about in the model with more coming through partners to power the platform and all of that. So really nothing unusual here.

You are just seeing the company start to really hit the stride and showing how this business model can perform..

That sequential growth, are you looking at GAAP or is that non-GAAP on the OpEx?.

I was looking at GAAP..

Okay and then lastly, with just that the sales productivity. Where you think you are on? I am understanding you talked about the partners side. So that's a different dynamic there but just interested in the productivity for what you have on the direct side..

Well, I will ask Philippe handle this in a second. My opinion is, I think there is plenty of room for increased productivity on the sales side and on the channel side. We are just starting to hit stride here. We certainly had a nice pickup in the last year or so here, but we are not overachieving. I think we are to starting to hit our stride..

Yes and just to add to what Don said, remember just to go back at our phased model where we have a new business sales force and the renewal sales force. On the new business sales force, what drives the productivity of our salesforce is that, as I mentioned earlier, we are doing much bigger deals.

Companies buying multiple solutions from the get-go or even one application which is deployed much more quickly. So that naturally drive the productivity because it doesn't take you more sales effort to sell $0.5 million deal than to sell $1 million deal.

The beauty of our model, as Don mentioned earlier, when you look now at the renewal salesforce, same story all over ever again. Today we find that, for example today we can manage with one renewal person we can manage, let's say, 40 accounts, for example. But these accounts are growing.

So we start to see today our renewal team managing multimillion dollar revenues in their territory. So you have again another model here that scales very well. when now you start to layer the partners on the top of it.

So for example today when we have deal coming from our engine outsourcers partners, these deals are typically part of a five-year or seven-year deals that they do with our large customers.

And so that business is now served by our post sales technical account manager, as we call them, which means I don't have any expense really at that time except the margin I give to the partners to essentially deliver this new business. And of course after that, it's all about renewing and upselling during the period.

So we have built an incredibly scalable business model from sales standpoint. So using matrix, if you prefer traditional matrix of enterprise software, doesn't really fit with us. Because we have absolutely leveraged that cloud model that we have, I think from the sales standpoint extremely well.

And if you like, you know, we would be very happy to go into the details of that and you will see how really that builds a significant momentum in the business..

Thank you very much..

We have a follow-up question from the line of Sterling Auty with JPMorgan. Please proceed with your follow-up..

Yes, thanks. Don, in your prepared remarks, the CapEx, I think you talked about, I don't know was it $5 million, $6 million of CapEx in the first quarter.

Is that of one-time item and then it should fall back from those levels? Or were you suggesting that was going to be more the quarterly run rate? In other words, what should we be thinking for CapEx for 2015?.

Well, Sterling, of course, you are exactly right and we said it was for Q1. So we didn't mean to say any of those other things. It probably will fall back. But we are giving a view for the quarter that we are in. CapEx was reasonably consistent the last two years.

In fact we had guided a higher amount in Q4 than we actually did and some of that just is getting done in Q1 instead of Q4. So I suspect it will come down somewhat.

But on the other hand, as Philippe mentioned, we are seeing so much increase in demand for our, especially our private cloud solutions, that that maybe high-class problem that we will talk to you about next quarter. But probably it will come down. If we had guidance for Q2, we would give it to you..

Should we think about, I think the last couple of years, you spent about 12% or 13% of revenue in CapEx for 2012 and 2013. Seeing 2014 is more like 10%.

Given that shift out of Q4 into Q1, if we are to normalize that shift, do you think that kind of CapEx level as percentage of revenue would have been pretty consistent with what you have done over the last couple of years?.

I think so. Well, I do think over the next several years, it will come down to more like 7% or 8% of revenues, but we are still under a growth spurt here with more applications, more data centers and especially this private cloud solution, which is becoming so popular.

But yes, I think over time, it should come down, but in the short run, we have a lot to do..

Yes. Plus new appliances as well for our Web Application Firewall, our Malware Protection service, all of that of course, carries a CapEx component..

Got you. Thank you..

Okay..

Thank you. And with no further questions in the queue, I would like to turn the call back over to the host for closing remarks..

Okay. So thank you all for joining us today. We are very pleased with our strong performance and continued momentum in the marketplace as demonstrated by another strong quarter, which wrapped up a fantastic year for Qualys.

Our results demonstrate the differentiation and sustainability of our unique cloud platform for IT security and compliance solutions.

The scalability, as we discussed, of our go-to-market model and our ongoing growth potential with existing solutions and the new offerings we plan to launch in 2015, we believe we are well positioned to deliver best of class security and compliance solutions to our customers and partners as we continue to expand our cloud platform and deliver more innovative solutions.

Should you have any follow-up questions, Don and I are available to you and we look forward to speaking with you next quarter. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a good day, everyone..