QLYS • 10-Q • Q2 2025 • Positive

Qualys Shows Strong Enterprise Momentum but Rising Cloud Costs Pressure Margins

August 05, 2025 • 1 min read

TL;DR

Qualys delivered robust Q2 revenue growth of 14.7% YoY to $129.8M, driven by strong enterprise adoption of its cloud security platform. However, gross margins compressed 180bps YoY to 77.2% due to rising cloud infrastructure costs. Customer count grew 12% YoY to over 19,500, with enterprise customers (>$100K ARR) growing 18%. Management raised FY2025 guidance but warned of continued margin pressure as cloud optimization efforts will take 2-3 quarters to materialize.

Financial Performance Overview: Revenue grew 14.7% YoY to $129.8M, marking the fourth consecutive quarter of accelerating growth. Subscription revenue (94% of total) grew 15.2% while professional services declined 2.1%. Gross margins fell 180bps YoY but improved 40bps sequentially as cloud optimization efforts begin showing results. Operating margins declined 220bps YoY to 28.4% due to increased R&D investments and sales capacity expansion. Management expects margins to stabilize by Q4 as efficiency programs take effect.
Strategic Initiatives and Operational Changes: Qualys is accelerating its shift to a unified cloud platform, consolidating multiple point solutions into an integrated security stack. The company launched 3 new products in Q2, including advanced EDR capabilities and container security features. R&D spend increased 24% YoY as the company doubles down on AI/ML capabilities. Management expects these investments to drive platform adoption and expand wallet share within existing accounts over the next 12-18 months.
Market Position and Competitive Dynamics: Enterprise customer count grew 18% YoY, with average ARR per enterprise customer reaching $182K. Net retention rate improved to 117% from 114% last quarter, indicating strong upsell momentum. However, increased competition from CrowdStrike and Microsoft is pressuring win rates in the mid-market segment. Qualys maintains leadership in vulnerability management but needs to accelerate innovation in endpoint security to defend market share.
Operational Efficiency and Profitability: Cloud infrastructure costs rose 28% YoY, outpacing revenue growth as customer usage increased. The company initiated a cloud optimization program expected to yield $12-15M in annual savings by Q2 2026. Sales efficiency metrics declined with CAC payback extending to 14 months from 11 months last year. Management is restructuring sales territories and implementing new automation tools to improve productivity.
Growth Catalysts and Material Risks: Key growth drivers include expanded platform adoption, international expansion (particularly in APAC), and new AI-powered security features launching in H2. Major risks include cloud cost inflation, intensifying competition in endpoint security, and potential customer budget constraints in a challenging macro environment. The company's high exposure to financial services customers (22% of revenue) could become a headwind if banking sector stress continues.

Revenue

$129.8M ( YoY, QoQ) with subscription revenue at of total

↑ +14.7%

Rd Spend

$24.6M ( YoY) representing of revenue

↑ +24%

Net Income

$28.1M ( YoY, QoQ) representing margin

↑ +8.2%

Gross Margin

(-180bps YoY, +40bps QoQ) impacted by cloud costs

↑ 77.2%

Free Cash Flow

$45.2M ( YoY) representing of revenue

↑ +12%

Operating Margin

(-220bps YoY) with increased investments

↑ 28.4%

Growth Indicators

$518M ( YoY) with net retention rate

↑ +16%

Customer Count ↑19,500+ (+12% YoY) with 1,250+ enterprise customers

Retention Metrics ↑95% gross retention, 117% net retention

Key Risks

Cloud infrastructure costs growing 28% YoY, outpacing revenue growth
Intensifying competition in endpoint security from larger platform vendors
22% revenue concentration in potentially stressed financial services sector
Sales reorganization execution risks during critical growth phase

Key Opportunities

Cloud security TAM expanding at 25% CAGR to $33B by 2026
Cross-sell potential across 19,500+ customer base with unified platform
International expansion opportunity, particularly in APAC growing 25% YoY
AI/ML capabilities enabling premium pricing and competitive differentiation

Bottom Line

Qualys demonstrated strong fundamental momentum in Q2 while navigating significant operational challenges. The company's success in enterprise adoption validates its platform strategy, but rising infrastructure costs and competitive pressure create near-term headwinds. Management's focus on cloud optimization and sales efficiency should drive margin recovery by early 2026. Key metrics to watch include platform adoption rates, cloud cost trends, and competitive win rates in endpoint security. The company's strong position in regulated industries provides defensive characteristics, but accelerating innovation is critical to maintaining market leadership. The contrarian view suggests Qualys's transition challenges may be masking strengthening competitive advantages in its core markets.