10-Q 1 qlys-20240331.htm 10-Q qlys-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2024
oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from          to
Commission file number 001-35662
__________________
QUALYS, INC.
(Exact name of registrant as specified in its charter)
__________________
Delaware77-0534145
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
919 E. Hillsdale Boulevard, 4th Floor, Foster City, California 94404
(Address of principal executive offices, including zip code)
(650) 801-6100
(Registrant’s telephone number, including area code)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par value per shareQLYSThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
xAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No  x
The number of shares of the registrant's common stock outstanding as of April 26, 2024 was 36,939,262.


Qualys, Inc.
TABLE OF CONTENTS
Page
2

RISK FACTOR SUMMARY
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Quarterly Report on Form 10-Q. If any of the following risks actually occurs (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.

Our quarterly and annual operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
If we do not successfully anticipate market needs and opportunities or are unable to enhance our solutions and develop new solutions that meet those needs and opportunities on a timely or cost-effective basis, we may not be able to compete effectively and our business and financial condition may be harmed.
If we fail to continue to effectively scale and adapt our platform to meet the performance and other requirements of our customers, our operating results and our business would be harmed.
If we are unable to renew existing subscriptions for our IT, security and compliance solutions, sell additional subscriptions for our solutions and attract new customers, our operating results would be harmed.
Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future.
Our platform, website and internal systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.
Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.
Adverse economic conditions or reduced IT spending may adversely impact our business.
Our IT, security and compliance solutions are delivered from 14 shared cloud platforms, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.
We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.
If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.
We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.
A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.
If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.
Our business and operations have continued to grow since inception, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.
A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.
Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.
Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.
Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.
We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.
3

PART I. FINANCIAL INFORMATION
Item 1.                                 Financial Statements
Qualys, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
March 31,
2024
December 31,
2023
Assets
Current assets:
Cash and cash equivalents$273,783 $203,665 
Restricted cash 1,500 
Short-term marketable securities179,887 221,893 
Accounts receivable, net of allowance of $1,099 and $778 as of March 31, 2024 and December 31, 2023, respectively
115,629 146,226 
Prepaid expenses and other current assets36,112 26,714 
Total current assets605,411 599,998 
Long-term marketable securities89,693 56,644 
Property and equipment, net30,191 32,599 
Operating leases - right of use asset31,371 22,391 
Deferred tax assets, net66,565 62,761 
Intangible assets, net8,943 9,715 
Goodwill7,447 7,447 
Noncurrent restricted cash1,200 1,200 
Other noncurrent assets20,961 19,863 
Total assets$861,782 $812,618 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$645 $988 
Accrued liabilities48,246 43,096 
Deferred revenues, current332,128 333,267 
Operating lease liabilities, current10,046 11,857 
Total current liabilities391,065 389,208 
Deferred revenues, noncurrent31,311 31,671 
Operating lease liabilities, noncurrent27,784 16,885 
Other noncurrent liabilities7,420 6,680 
Total liabilities457,580 444,444 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock: $0.001 par value; 20,000 shares authorized, no shares issued and outstanding as of March 31, 2024 and December 31, 2023
  
Common stock: $0.001 par value; 1,000,000 shares authorized, 36,962 and 36,909 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
37 37 
Additional paid-in capital610,923 597,921 
Accumulated other comprehensive loss(1,007)(1,704)
Accumulated deficit(205,751)(228,080)
Total stockholders’ equity404,202 368,174 
Total liabilities and stockholders’ equity$861,782 $812,618 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
20242023
Revenues$145,805 $130,683 
Cost of revenues27,198 26,954 
Gross profit118,607 103,729 
Operating expenses:
Research and development27,530 27,795 
Sales and marketing29,408 25,628 
General and administrative16,908 15,128 
Total operating expenses73,846 68,551 
Income from operations44,761 35,178 
Other income (expense), net:
Interest income6,123 2,397 
Other expense, net(1,399)(216)
Total other income, net4,724 2,181 
Income before income taxes49,485 37,359 
Income tax provision9,754 8,254 
Net income$39,731 $29,105 
Net income per share:
Basic$1.08 $0.79 
Diluted$1.05 $0.77 
Weighted average shares used in computing net income per share:
Basic36,95537,068
Diluted37,72337,669
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
Three Months Ended
March 31,
20242023
Net income$39,731 $29,105 
Other comprehensive income (loss), net of tax
Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax(407)1,131 
Net change in unrealized gains (losses) on cash flow hedges, net of tax1,104 (755)
Other comprehensive income, net of tax697 376 
Comprehensive income$40,428 $29,481 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31,
20242023
Cash flow from operating activities:
Net income$39,731 $29,105 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization expense5,239 7,444 
Provision for credit losses193 119 
Stock-based compensation, net of amounts capitalized19,031 16,033 
Accretion of discount on marketable securities, net(1,915)(259)
Deferred income taxes(4,111)(4,241)
Changes in operating assets and liabilities:  
Accounts receivable30,404 19,890 
Prepaid expenses and other assets(10,126)(1,289)
Accounts payable(335)(1,215)
Accrued liabilities and other noncurrent liabilities8,892 (2)
Deferred revenues(1,498)1,228 
Net cash provided by operating activities85,505 66,813 
Cash flow from investing activities:
Purchases of marketable securities(61,340)(46,010)
Sales and maturities of marketable securities71,463 69,709 
Purchases of property and equipment(2,051)(4,037)
Net cash provided by investing activities8,072 19,662 
Cash flow from financing activities:
Repurchase of common stock(18,029)(66,551)
Proceeds from exercise of stock options2,770 2,328 
Payments for taxes related to net share settlement of equity awards(11,808)(5,105)
Proceeds from issuance of common stock through employee stock purchase plan3,608 2,988 
Payment of acquisition-related holdback(1,500) 
Net cash used in financing activities(24,959)(66,340)
Net increase in cash, cash equivalents and restricted cash68,618 20,135 
Cash, cash equivalents and restricted cash at beginning of period206,365 176,419 
Cash, cash equivalents and restricted cash at end of period$274,983 $196,554 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7

Qualys, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balances at December 31, 202336,909$37 $597,921 $(1,704)$(228,080)$368,174 
Net income— — — 39,731 39,731 
Other comprehensive income, net of tax— — 697 — 697 
Issuance of common stock upon exercise of stock options46— 2,770 — — 2,770 
Repurchase of common stock(105)— (627)— (17,402)(18,029)
Issuance of common stock upon vesting of restricted stock units149— — — — — 
Taxes related to net share settlement of equity awards(66)— (11,808)— — (11,808)
Issuance of common stock through employee stock purchase plan29— 3,608 — — 3,608 
Stock-based compensation— 19,059 — — 19,059 
Balances at March 31, 202436,962$37 $610,923 $(1,007)$(205,751)$404,202 

Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balances at December 31, 202237,362$37 $512,486 $(1,947)$(221,447)$289,129 
Net income— — — 29,105 29,105 
Other comprehensive loss, net of tax— — 376 — 376 
Issuance of common stock upon exercise of stock options61— 2,328 — — 2,328 
Repurchase of common stock(584)— (7,014)— (60,018)(67,032)
Issuance of common stock upon vesting of restricted stock units108— — — — — 
Taxes related to net share settlement of equity awards(43)— (5,105)— — (5,105)
Issuance of common stock through employee stock purchase plan29— 2,988 — — 2,988 
Stock-based compensation— 16,033 — — 16,033 
Balances at March 31, 202336,933$37 $521,716 $(1,571)$(252,360)$267,822 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8

Qualys, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1.                              Description of Business and Summary of Significant Accounting Policies
Description of Business
Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on Qualys' Enterprise TruRisk Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2023, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2024 or for any other future annual or interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 22, 2024.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the condensed consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, allowance for credit loss, the valuation of goodwill and intangible assets, leases, stock-based compensation and income tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
None.
9

Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 requiring enhanced segment disclosures. The ASU requires disclosure of significant segment expenses regularly provided to the chief operating decision maker ("CODM") included within segment operating profit or loss. Additionally, the ASU requires a description of how the CODM utilizes segment operating profit or loss to assess segment performance. The requirements of the ASU are effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company's annual reporting requirements will be effective for fiscal 2024 and interim reporting requirements will be effective beginning with the first quarter of fiscal 2025. Early adoption is permitted and retrospective application is required for all periods presented. The Company is in the process of analyzing the impact of the ASU on related disclosures.
In December 2023, the FASB issued ASU 2023-09 requiring improvements to income tax disclosures. The new ASU requires disclosure of disaggregated information about the effective tax rate and income taxes paid. The requirements of the ASU are effective for annual periods beginning after December 15, 2024 and are to be applied on a prospective basis. Companies can choose to early adopt and apply the guidance retrospectively. The Company is in the process of analyzing the impact of the ASU on related disclosures.
There have been no material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
NOTE 2.                              Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Valuations based on other than quoted prices in active markets for identical assets and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable for substantially the full term of the assets or liabilities.
Level 3 - Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The Company's financial instruments consist of assets and liabilities measured using Level 1 and 2 inputs. Level 1 assets include a highly liquid money market fund, which is valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. Treasury and government agency securities, commercial paper, corporate bonds, asset-backed securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices of identical instruments in less active or inactive markets, quoted prices of similar instruments in active markets, or industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates.
10

The following table sets forth by level within the fair value hierarchy the fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis:
March 31, 2024
Level 1Level 2Fair Value
(in thousands)
Money market funds$11,466 $ $11,466 
Commercial paper 47,317 47,317 
U.S. Treasury and government agencies 178,188 178,188 
Corporate bonds 87,378 87,378 
Asset-backed securities 12,144 12,144 
Foreign currency forward contracts 590 590 
Total assets$11,466 $325,617 $337,083 
Foreign currency forward contracts$ $677 $677 
Total liabilities$ $677 $677 
December 31, 2023
Level 1Level 2Fair Value
(in thousands)
Money market funds$87 $ $87 
Commercial paper 54,279 54,279 
U.S. Treasury and government agencies 208,536 208,536 
Corporate bonds 56,465 56,465 
Asset-backed securities 13,881 13,881 
Foreign currency forward contracts 111 111 
Total assets$87 $333,272 $333,359 
Foreign currency forward contracts$ $1,986 $1,986 
Total liabilities$ $1,986 $1,986 
There were no transfers between Level 1, Level 2 and Level 3 categories during the three months ended March 31, 2024 and 2023.
11

Cash equivalent and investments
The Company's cash equivalents and marketable securities consist of the following:
March 31, 2024
Amortized CostUnrealized GainsUnrealized LossesFair Value
(in thousands)
Cash equivalents: (1)
Money market funds$11,466 $ $ $11,466 
Commercial paper1,600  (1)1,599 
U.S. Treasury and government agencies53,851  (3)53,848 
Total66,917  (4)66,913 
Short-term marketable securities:    
Commercial paper45,752 1 (35)45,718 
Corporate bonds28,822 8 (111)28,719 
U.S. Treasury and government agencies105,553 7 (110)105,450 
Total180,127 16 (256)179,887 
Long-term marketable securities:
Corporate bonds58,771 94 (206)58,659 
Asset-backed securities12,074 72 (2)12,144 
U.S. Treasury and government agencies18,904 12 (26)18,890 
Total89,749 178 (234)89,693 
Total$336,793 $194 $(494)$336,493 
(1)Excludes cash of $206.9 million.
December 31, 2023
Amortized CostUnrealized GainsUnrealized LossesFair Value
(in thousands)
Cash equivalents: (2)
Money market funds$87 $ $ $87 
U.S. Treasury and government agencies54,620 4  54,624 
Total54,707 4  54,711 
Short-term marketable securities:
Commercial paper54,254 32 (7)54,279 
Corporate bonds23,013 1 (149)22,865 
U.S. Treasury and government agencies144,901 52 (204)144,749 
Total222,168 85 (360)221,893 
Long-term marketable securities:
Corporate bonds33,337 285 (22)33,600 
Asset-backed securities13,785 102 (6)13,881 
U.S. Treasury and government agencies9,116 49 (2)9,163 
Total56,238 436 (30)56,644 
Total$333,113 $525 $(390)$333,248 
(2)Excludes cash of $149.0 million.
12

The following table summarizes the gross unrealized losses and fair value of the Company's marketable securities that were in an unrealized loss position aggregated by length of time:
March 31, 2024
Less than 12 months12 months or longerTotal
Fair valueGross unrealized lossesFair valueGross unrealized lossesFair valueGross unrealized losses
(in thousands)
Commercial paper$44,391 $(36)$ $ $44,391 $(36)
Asset-backed securities  687 (2)687 (2)
Corporate bonds45,533 (233)8,705 (84)54,238 (317)
U.S. Treasury and government agencies142,202 (65)12,864 (74)155,066 (139)
Total$232,126 $(334)$22,256 $(160)$254,382 $(494)
December 31, 2023
Less than 12 months12 months or longerTotal
Fair valueGross unrealized lossesFair valueGross unrealized lossesFair valueGross unrealized losses
(in thousands)
Commercial paper$24,838 $(7)$ $ $24,838 $(7)
Asset-backed securities  1,485 (6)1,485 (6)
Corporate bonds  20,717 (171)20,717 (171)
U.S. Treasury and government agencies43,373 (18)18,172 (188)61,545 (206)
Total$68,211 $(25)$40,374 $(365)$108,585 $(390)
The Company considered the extent to which any unrealized losses on its marketable securities were driven by credit risk and other factors, including market risk, and if it is more-likely-than-not that the Company would have to sell the security before the recovery of the amortized cost basis. At March 31, 2024 and December 31, 2023, the unrealized losses related to its marketable securities were due to rising market interest rates compared to when the investments were initiated. The Company does not believe the unrealized losses represent credit risk, and the Company does not intend to sell any of the securities in an unrealized loss position and it is not likely that the Company would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. Thus, no credit loss was recognized for the Company's marketable securities for the three months ended March 31, 2024 and 2023.
The following summarizes the fair value of marketable securities by contractual maturity:
March 31, 2024
Amortized CostFair Value
(in thousands)
Due within One Year$247,044 $246,801 
Due after One Year through Two Years49,810 49,762 
Mature over Two Years27,865 27,786 
Asset-backed securities12,074 12,144 
Total$336,793 $336,493 
13

Non-Marketable Securities
During the fiscal year ended December 31, 2018, the Company invested $2.5 million in preferred stock of a privately-held company. The fair value of the investment is not readily available, and there are no quoted market prices for the investment. The Company accounts for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment whenever events or changes in circumstances indicate that the fair value of the investment is less than carrying value. During the second quarter of 2023, the Company identified an observable price change in the investment and recognized an immaterial unrealized loss in other income (expense), net of the condensed consolidated statement of operations. The investment is included in other noncurrent assets on the condensed consolidated balance sheets. The Company has not received any dividends from the investment.
Derivative Financial Instruments
Designated cash flow hedges
The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuation from certain forecasted subscription revenue orders billed in British Pound ("GBP") and Euro ("EUR") and operating expenses incurred in Indian Rupee ("INR"), which are designated as cash flow hedges. Hedge effectiveness is assessed at inception and at each reporting period utilizing regression analysis. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in accumulated other comprehensive income ("AOCI") and will be reclassified into revenues or operating expenses, respectively, in the same periods when the hedged transactions are recognized in earnings.
As of March 31, 2024, the Company had designated cash flow hedge forward contracts with notional amounts of €46.1 million, £16.0 million and Rs.4,068.0 million. As of December 31, 2023, the Company had designated cash flow hedge forward contracts with notional amounts of €48.5 million, £14.6 million and Rs.4,042.0 million.
As of March 31, 2024, a net unrealized loss of $0.8 million before tax on the foreign currency forward contracts for GBP and EUR reported in AOCI is expected to be reclassified into revenue within the next 12 months. As of March 31, 2024, an immaterial amount of unrealized loss before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within the next 12 months.
Non-designated forward contracts
The Company also uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities, which are not designated as cash flow hedges. Unrealized foreign exchange gain or losses related to the non-designated forward contracts are recorded in other income (expenses), net and offset the foreign exchange gain or loss on the underlying net monetary assets or liabilities.
As of March 31, 2024, the Company had non-designated forward contracts with notional amounts of €10.7 million, £8.6 million, Rs.990.0 million, and Canadian Dollar ("C$" or "CAD") 1.0 million. As of December 31, 2023, the Company had non-designated forward contracts with notional amounts of €19.2 million, £6.0 million, Rs.440.0 million, and C$1.0 million.
14

The following summarizes the fair value of derivative financial instruments as of March 31, 2024 and December 31, 2023:
March 31,
2024
December 31,
2023
(in thousands)
Assets
Foreign currency forward contracts designated as cash flow hedge$552 $63 
Foreign currency forward contracts not designated as hedging instruments38 48 
Total$590 $111 
Liabilities
Foreign currency forward contracts designated as cash flow hedge$544 $1,502 
Foreign currency forward contracts not designated as hedging instruments133 484 
Total$677 $1,986 
The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. However, under the master netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The potential offset to both assets and liabilities under the right of set-off associated with the Company's foreign currency exchange contracts are immaterial as of March 31, 2024 and December 31, 2023. The derivatives held by the Company are not subject to any credit contingent features negotiated with its counterparties. The Company is not required to pledge nor is entitled to receive cash collateral related to the above contracts. The counterparties to these derivatives are large, global financial institutions that the Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material.
The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense), net in the condensed consolidated statements of operations:
Three Months Ended
March 31,
20242023
(in thousands)
Net gains from non-designated forward contracts$512 $259 
Other foreign currency transactions losses(1,941)(425)
Total foreign exchange losses, net$(1,429)$(166)
15

NOTE 3.                              Accumulated Other Comprehensive Income (Loss)
The components and changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2024 and 2023 were as follows:
Available-for-sale debt securitiesCash flow hedgesTotal
(in thousands)
Balances at December 31, 2023$108 $(1,812)$(1,704)
Change in unrealized gains (losses) during the period(436)1,222 786 
Amount reclassified into income during the period 218 218 
Tax effect29 (336)(307)
Net change during the period(407)1,104 697 
Balances at March 31, 2024$(299)$(708)$(1,007)
Balances at December 31, 2022$(2,705)$758 $(1,947)
Change in unrealized gains (losses) during the period1,131 (443)688 
Amount reclassified into income during the period (534)(534)
Tax effect 222 222 
Net change during the period1,131 (755)376 
Balances at March 31, 2023$(1,574)$3 $(1,571)
The effects on income before income taxes of amounts reclassified from AOCI to the condensed consolidated statements of operations were as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Reclassification of AOCI - Cash flow hedges
Revenues$(279)$1,136 
Cost of revenues15 (139)
Research and development37 (383)
Sales and marketing3 (23)
General and administrative6 (57)
Total$(218)$534 
There was no reclassification of AOCI to other income (expense), net related to Available-for-sale debt securities during the three months ended March 31, 2024 and 2023.
16

NOTE 4.                              Property and Equipment, Net
Property and equipment, net, consists of the following:
March 31,
2024
December 31,
2023
(in thousands)
Computer equipment$180,860 $179,002 
Computer software26,139 26,133 
Leasehold improvements20,924 20,924 
Scanner appliances18,449 18,369 
Furniture, fixtures and equipment6,712 6,699 
Total property and equipment253,084 251,127 
Less: accumulated depreciation and amortization(222,893)(218,528)
Property and equipment, net$30,191 $32,599 
As of March 31, 2024 and December 31, 2023, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had a net carrying value of $9.6 million and $10.1 million, respectively, including assets that had not been placed in service of $6.1 million and $6.4 million, respectively.
Depreciation and amortization expenses relating to property and equipment were $4.5 million and $6.5 million for the three months ended March 31, 2024 and 2023, respectively, which were mainly recorded in cost of revenues in the condensed consolidated statements of operations.
NOTE 5.                              Revenue from Contracts with Customers
The Company records deferred revenue when cash payments are received or due in advance of its performance obligations offset by revenue recognized in the period. Revenues of $131.0 million and $113.8 million were recognized during the three months ended March 31, 2024 and 2023, respectively, which amounts were included in the deferred revenue balances of $364.9 million and $317.2 million as of December 31, 2023 and 2022, respectively.
The Company's payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. In certain circumstances, based on the credit quality of the customer, the Company requires payment before the products or services are delivered to the customer.
The following table sets forth the expected revenue from all remaining performance obligations as of March 31, 2024:
(in thousands)
2024 (remaining nine months)$163,231 
2025141,528 
202663,966 
20277,421 
2028496 
2029 and thereafter110 
Total$376,752 
Revenues allocated to remaining performance obligations represents the transaction price of noncancelable orders for which service has not been performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less.
17

From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. The Company concluded that these contracts did not contain a financing component.
Revenues by sales channel are as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Direct$80,126 $75,093 
Partner65,679 55,590 
Total$145,805 $130,683 
The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 11, "Segment and Geographic Area Information" for disaggregation of revenue by geographic area.
Deferred costs to obtain contracts are as follows:
March 31,
2024
December 31,
2023
(in thousands)
Current$6,052 $5,858 
Noncurrent$12,141 $11,844 
For the three months ended March 31, 2024 and 2023, the Company recognized $1.6 million and $1.4 million, respectively, of amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the condensed consolidated statements of operations. During the same periods, there was no impairment loss related to the deferred costs to obtain contracts.
As of December 31, 2022, the net carrying value of the Company’s accounts receivable, current deferred revenues, and noncurrent deferred revenues were $121.8 million, $293.7 million and $23.5 million, respectively.
NOTE 6.                              Intangible Assets, Net
Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.
18

The carrying values of intangible assets are as follows:
March 31, 2024
(in thousands)Weighted Average Life (Years)CostAccumulated AmortizationNet Book Value
Developed technology4.6$40,141 $(31,368)$8,773 
Patent licenses14.01,387 (1,346)41 
Assembled workforce2.0359 (270)89 
Total intangibles subject to amortization$41,887 $(32,984)$8,903 
Intangible assets not subject to amortization40 
Total intangible assets, net$8,943 
 December 31, 2023
(in thousands)Weighted Average Life (Years)CostAccumulated AmortizationNet Book Value
Developed technology4.6$40,141 $(30,667)$9,474 
Patent licenses14.01,387 (1,322)65 
Assembled workforce2.0359 (223)136 
Total intangibles subject to amortization$41,887 $(32,212)$9,675 
Intangible assets not subject to amortization40 
Total intangible assets, net$9,715 
Intangible asset amortization expense was $0.8 million and $0.8 million for the three months ended March 31, 2024 and 2023, respectively. Intangible asset amortization expenses were primarily recorded in cost of revenues in the condensed consolidated statements of operations.
As of March 31, 2024, the Company expects amortization expense in future periods to be as follows:
(in thousands)
2024 (remaining nine months)$2,132 
20252,556 
20262,477 
20271,738 
Total expected future amortization expense$8,903 
NOTE 7.                              Leases
The Company leases certain offices, computer equipment and its shared cloud platform facilities under non-cancelable operating leases for varying periods through 2029. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was $3.8 million and $4.0 million for the three months ended March 31, 2024 and 2023, respectively.
19

Supplemental cash flow information related to operating leases was as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Cash payments included in the measurement of lease liabilities$3,621 $3,905 
Lease liabilities arising from obtaining right-of-use assets$12,347 $ 
The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows:
March 31,
2024
December 31,
2023
Weighted average remaining lease term (years)4.13.1
Weighted average discount rate6.7 %5.2 %
Maturities of the Company's operating lease liabilities as of March 31, 2024 are as follows:
(in thousands)
2024 (remaining nine months)$9,402 
20259,862 
20268,586 
20278,532 
20285,644 
2029 and thereafter1,741 
Total minimum lease payments43,767 
Less: interest(5,937)
Present value of net minimum lease payments$37,830 
The operating lease payments in the table above exclude approximately $19.4 million of legally binding minimum lease payments for a lease signed during the three months ended March 31, 2024 that has yet to commence.
NOTE 8.                              Commitments and Contingencies
Indemnifications
The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.
The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors.
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NOTE 9.                              Stockholders' Equity and Stock-based Compensation
Equity Incentive Plans
Restated 2012 Equity Incentive Plan
On June 8, 2022 ("Effective Date"), the Company's stockholders approved the Amended and Restated 2012 Equity Incentive Plan (the "Restated 2012 Plan"). Under the Restated 2012 Plan, the Company is authorized to grant to eligible participants incentive stock options, nonstatutory stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights, performance units and performance shares. Pursuant to the relevant plan provisions, 3,072 thousand shares were available for grant under the Restated 2012 Plan on the Effective Date. In addition, any outstanding awards or options granted under the previous version of the 2012 Equity Incentive Plan (“Previous 2012 Plan”) will be added back to the shares available for grant under the Restated 2012 Plan if they expire unexercised or are otherwise forfeited after the Effective Date. Any remaining shares available for grant under the Previous 2012 Plan as of the Effective Date were no longer available for future grants under the Restated 2012 Plan.
As of March 31, 2024, 1,660 thousand shares were available for grant under the Restated 2012 Plan.
2021 Employee Stock Purchase Plan
On June 9, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”). A total of 600 thousand shares were authorized for issuance to eligible participating employees upon adoption of the ESPP. The ESPP provides for consecutive 6-month offering periods beginning on or about August 16 and February 16 of each year. Eligible employees who elect to participate can contribute from 1% to 15% of their eligible compensation through payroll withholding. During any offering period, contribution rates cannot be changed. However, eligible employees may withdraw from the current offering period. Any contributions made prior to each purchase date in the case of withdrawal or termination of employment will be refunded. On each purchase date, eligible participating employees will purchase the shares at a price per share equal to 85% of the lesser of (i) the fair market value of the Company's stock on the first trading day of the offering period or (ii) the fair market value of the Company's stock on the purchase date (i.e., the last trading day of the offering period).
During the three months ended March 31, 2024, 29 thousand shares were issued in connection with the purchase of common stock by participating employees. As of March 31, 2024, 465 thousand shares were available for future purchases.
Stock Options
Stock options granted under the Restated 2012 Plan and Previous 2012 Plan (collectively, the Plans) generally vest based on continued service over four years and expire ten years from the date of grant.
A summary of the Company’s stock option activity during the three months ended March 31, 2024 is as follows:
Outstanding OptionsWeighted Average Exercise
Price
Weighted Average Remaining
Contractual Life
Aggregate Intrinsic Value
(in thousands)(Years)(in thousands)
Balance as of December 31, 20231,447$97.98 6.5$142,302 
Granted89$168.24 
Exercised(46)$60.33 
Canceled(26)$119.79 
Balance as of March 31, 20241,464$103.02 6.6$93,624 
Vested and expected to vest as of March 31, 20241,293$98.39 6.3$88,616 
Exercisable as of March 31, 2024771$74.64 4.7$71,126 
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Restricted Stock Units
RSUs granted under the Plans generally only contain a service-based vesting condition that is typically satisfied over four years.
Performance-based Restricted Stock Units ("PRSUs") granted under the Plans contain both service-based and performance-based vesting conditions. During the three months ended March 31, 2024, the Company granted PRSUs to its executive officers and certain other members of its senior leadership team. The performance-based vesting condition is satisfied upon the achievement of certain Company annual performance targets, including revenue growth and adjusted EBITDA margin, set by the Compensation and Talent Committee of the board of directors of the Company. The target PRSUs are scheduled to vest in three equal annual installments over a three-year period. Each annual installments at 200% of the annual target will be considered granted when the performance targets for the corresponding performance year is determined and approved. The actual number of the PRSUs earned and eligible to vest ranges from 0% to 200% of the annual target number of PRSUs granted based on the weighted-average achievement of such Company annual performance metrics set for the corresponding annual performance period. The vesting and release of the first and second installment is capped at 100% of the target number at the end of the first and second year, respectively, with cumulative achievement over 100%, if any, to be vested and released at the end of the third year, together with the vesting of the third installment. For PRSUs granted under the Plans, any unvested PRSU award may be accelerated in part or in full upon the occurrence of certain events, such as death or disability, or a change in control, as defined in the grant agreement.
A summary of the Company’s RSU activity, inclusive of PRSU activity, during the three months ended March 31, 2024 is as follows:
Outstanding RSUsWeighted Average Grant Date Fair Value
Per Share
(in thousands)
Balance as of December 31, 20231,074(1)$133.60 
Granted187(2)$168.24 
Vested(149)(3)$143.89 
Forfeited(86)(4)$135.63 
Balance as of March 31, 20241,026(5)$140.47 
Outstanding and expected to vest as of March 31, 2024815$138.10 
(1)Included 139 thousand PRSUs granted to certain executive officers in 2023, 2022 and 2021.
(2)Included 156 thousand PRSUs granted to certain executive officers in the three months ended March 31, 2024.
(3)Included 64 thousand PRSUs granted to certain executive officers in 2023, 2022 and 2021.
(4)Included 59 thousand PRSUs granted to certain executive officers in 2023, 2022 and 2021.
(5)Included 172 thousand PRSUs granted to certain executive officers in 2024, 2023, 2022 and 2021.
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Stock-based Compensation
The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of operations:
Three Months Ended
March 31,
20242023
(in thousands)
Cost of revenues$2,020 $1,592 
Research and development5,303 4,960 
Sales and marketing3,739 2,454 
General and administrative7,969 7,027 
Total stock-based compensation, net of amounts capitalized (1)$19,031 $16,033 
(1)Total stock-based compensation expense capitalized was de minimis during the three months ended March 31, 2024.
Of the total stock-based compensation expense in the table above, the Company recognized stock-based compensation expenses related to all PRSUs of $2.8 million and $1.3 million during the three months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, the Company had unrecognized stock-based compensation expenses of $23.7 million, $85.9 million, $11.9 million, and $0.8 million related to options, RSUs, performance-based RSUs, and ESPP purchase rights, respectively, which are expected to be recognized over weighted-average periods of 2.5 years, 2.6 years, 0.9 years, and 0.4 years, respectively.
Share Repurchase Program
The Company's share repurchase program was authorized by the board of directors as follows:
Announcement DateAuthorized Dollar Value
(in millions)
February 12, 2018$100.0 
October 30, 2018100.0 
October 30, 2019100.0 
May 7, 2020100.0 
February 10, 2021100.0 
November 3, 2021200.0 
May 4, 2022200.0 
February 9, 2023100.0 
February 7, 2024200.0 
Total as of March 31, 2024$1,200.0 
Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act. All share repurchases have been made using cash resources. Repurchased shares are retired and reclassified as authorized and unissued shares of common stock. On retirement of the repurchased shares, common stock is reduced by an amount equal to the number of shares being retired multiplied by the par value. The excess amount that is retired over its par value
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is first allocated as a reduction to additional paid-in capital based on the original cost of additional paid-in capital per share of identified issuances. The remaining amount is allocated to accumulated deficit.
During the three months ended March 31, 2024 and 2023, the Company repurchased 105 thousand shares and 584 thousand shares of its common stock for approximately $18.0 million and $66.6 million, respectively. As of March 31, 2024, approximately $265.7 million remained available for share repurchases pursuant to the Company's share repurchase program.
Excise tax on stock repurchases net of issue was immaterial to the Company's financial results and cash flows for the three months ended March 31, 2024 and 2023 and the Company's financial position as of March 31, 2024 and December 31, 2023.
NOTE 10.                            Income Taxes
The Company's income tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company's quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pretax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company does business, tax law developments and possible outcomes of audits. The Company's estimated effective tax rate for the year differs from the U.S. statutory rate of 21% primarily due to non-deductible stock-based compensation expense, state taxes, the benefit of U.S. federal income tax credits, the impact of mandatory capitalization of research expenses for U.S. tax purposes, and the benefits related to foreign-derived intangible income deduction.
The Company recorded an income tax provision of $9.8 million and $8.3 million for the three months ended March 31, 2024 and 2023, respectively, resulting in an effective tax rate of 19.7% and 22.1%, respectively. The increase in income tax provision for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, was primarily due to tax effect of an increase in pretax income, partially offset by an increase in excess tax benefits arising from stock-based compensation and lower net capitalization of research and development expenses for tax purposes.
As of March 31, 2024, the Company had unrecognized tax benefits of $11.2 million, of which $6.5 million, if recognized, would favorably impact the Company's effective tax rate. As of December 31, 2023, the Company had unrecognized tax benefits of $11.9 million, of which $6.1 million, if recognized, would favorably impact the Company's effective tax rate. The Company does not anticipate a material change in its unrecognized tax benefits in the next 12 months.
NOTE 11.                            Segment and Geographic Area Information
Under ASC 280 Segment Reporting, operating segments are defined as components of an entity about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in one segment and has only one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. All of the Company’s principal operations and decision-making functions are located in the United States.
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Revenue by geographic area, based on the customer's billing address, is as follows:
Three Months Ended
March 31,
20242023
(in thousands)
United States$86,436 $78,016 
Foreign59,369 52,667 
Total revenues$145,805 $130,683 
Long-lived assets, which consist of Property and equipment, net and Operating leases - right of use asset, by geographic area, are as follows:
March 31,
2024
December 31,
2023
(in thousands)
United States$39,325 $42,622 
India20,223 9,952 
Rest of world2,014 2,416 
Total Long-lived Assets$61,562 $54,990 
NOTE 12.                            Net Income Per Share
The computations for basic and diluted net income per share are as follows:
Three Months Ended
March 31,
20242023
(in thousands, except per share data)
Numerator:
Net income$39,731 $29,105 
Denominator:
Basic weighted average shares36,955 37,068 
Effect of potentially dilutive shares:
Stock options471 489 
Restricted stock units292 110 
Employee stock purchase plan5 2 
Diluted weighted average shares37,723 37,669 
Net income per share:
Basic$1.08 $0.79 
Diluted$1.05 $0.77 
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Potentially dilutive shares not included in the calculation of diluted net income per share because doing so would be anti-dilutive are as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Stock options325990
Restricted stock units365
Employee stock purchase plan14
Total anti-dilutive shares3251,369
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Item 2.                                  Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with (1) our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report, and (2) the audited consolidated financial statements and the related notes and section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, it is possible to identify forward-looking statements because they contain words such as “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “future,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projects,” “seek,” “should,” “target,” or “will,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our financial performance, including our revenues, costs, expenditures, growth rates, operating expenses and ability to generate positive cash flow to fund our operations and sustain profitability;
anticipated technology trends, such as the use of cloud solutions;
our ability to adapt to changing market conditions;
economic and financial conditions, including volatility in foreign exchange rates, inflation concerns, rising interest rates, recessionary fears, financial institution failures and associated uncertainty, significant volatility of global markets, reduced spending and extended sales cycles, and geopolitical conflicts;
our ability to diversify our sources of revenues, including selling additional solutions to our existing customers and our ability to pursue new customers;
the effects of increased competition in our market;
our ability to innovate and enhance our cloud solutions and platform and introduce new solutions;
our ability to effectively manage our growth;
our anticipated investments in sales and marketing, our infrastructure, new solutions, research and development, and acquisitions;
maintaining and expanding our relationships with channel partners;
our ability to maintain, protect and enhance our brand and intellectual property;
costs associated with defending intellectual property infringement and other claims;
our ability to attract and retain qualified employees and key personnel, including sales and marketing personnel;
our ability to successfully enter new markets and manage our international expansion;
our expectations, assumptions and conclusions related to our income tax provision, our deferred tax assets and our effective tax rate;
our expectations regarding the performance of, and our future trading activity with respect to, the marketable securities we hold;
our expectations regarding our share repurchase program; and
other factors discussed in this Quarterly Report on Form 10-Q in the sections titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The results, events and circumstances reflected in these forward-looking statements are subject to risks, uncertainties, assumptions, and other factors including those described in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the U.S. Securities and Exchange Commission (SEC). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements used herein. We cannot provide assurance that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
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Overview
We are a pioneer and leading provider of a cloud-based platform delivering information technology (IT), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. Our cloud platform addresses the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between IT infrastructures and web environments, the rapid adoption of cloud computing, containers and serverless IT models, and the proliferation of geographically dispersed IT assets. Our integrated suite of IT, security and compliance solutions delivered on Qualys' Enterprise TruRisk Platform enables our customers to identify and manage their IT and operational technology (OT) assets, collect and analyze large amounts of IT security data, discover and prioritize vulnerabilities, quantify cyber risk exposure, recommend and implement remediation actions and verify the implementation of such actions. Organizations use our integrated suite of solutions to cost-effectively obtain a unified view of their internal and external IT and OT asset inventory as well as security and compliance posture across globally-distributed IT infrastructures as our solution offers a single platform for information technology, information security, application security, endpoint, developer security and cloud teams.
We were founded and incorporated in December 1999 with a vision of transforming the way organizations secure and protect their IT infrastructure and applications and initially launched our first cloud solution, Vulnerability Management (VM), in 2000. As VM gained acceptance, we introduced additional solutions to help customers manage increasing IT, security and compliance requirements. Today, the suite of solutions that we offer on our cloud platform and refer to as the Qualys Cloud Apps help our customers detect, measure, prioritize and remediate cyber risk spanning a range of assets across on-premises, endpoints, cloud, containers, and mobile environments.
We provide our solutions through a software-as-a-service model, primarily with renewable annual subscriptions. These subscriptions require customers to pay a fee in order to access each of our cloud solutions. We generally invoice our customers for the entire subscription amount at the start of the subscription term, and the invoiced amounts are treated as deferred revenues and are recognized ratably over the term of each subscription. We continue to experience revenue growth from our existing customers as they renew and purchase additional subscriptions, as well as from the addition of new customers to our cloud platform.
We market and sell our solutions to enterprises, government entities and small and medium-sized businesses across a broad range of industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology and utilities. For the three months ended March 31, 2024 and 2023, approximately 59% and 60%, respectively, of our revenues were derived from customers in the United States based on our customers' billing addresses. We sell our solutions to enterprises and government entities primarily through our field sales force and to small and medium-sized businesses through our inside sales force. We generate a significant portion of sales through our channel partners, including managed security service providers, leading cloud providers, value-added resellers and consulting firms in the United States and internationally.
Impacts of Current Macroeconomic Environment
The uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the inflationary pressure, rising interest rates, financial institution failures and associated uncertainty, significant volatility of global markets, reduced spending and extended sales cycles, and geopolitical conflicts could have a material adverse effect on our long-term business and could lead to further economic disruption and expose us to greater risk as our current and potential customers may reduce or eliminate their overall spending on IT security. We will continue to evaluate the nature and extent of the impact to our business, financial position, results of operations and cash flows.
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Key Components of Results of Operations
Revenues
We derive revenues from the sale of subscriptions to our IT, security and compliance solutions, which are delivered on our cloud platform. Subscriptions to our solutions allow customers to access our cloud-based IT, security and compliance solutions through a unified, web-based interface. Customers generally enter into one-year renewable subscriptions. The subscription fee entitles the customer to an unlimited number of scans for a specified number of devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. Our physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for our solutions. In some cases, we also provide certain computer equipment used to extend our cloud platform into our customers' private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions.
We typically invoice our customers for the entire subscription amount at the start of the subscription term. Invoiced amounts are reflected on our condensed consolidated balance sheets as accounts receivable or as cash when collected, and as deferred revenues until earned and recognized ratably over the subscription period. Accordingly, deferred revenues represent the amount billed to customers that has not yet been earned or recognized as revenues, pursuant to subscriptions entered into in current and prior periods.
Cost of Revenues
Cost of revenues consists primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for employees who operate our shared cloud platforms and provide support services to our customers. Other expenses include depreciation of shared cloud platform equipment, physical scanner appliances and computer hardware provided to certain customers as part of their subscriptions, expenses related to the use of shared cloud platforms, amortization of software and license fees, amortization of intangibles related to acquisitions, maintenance support, fees paid to contractors who supplement or support our operations center personnel and overhead allocations. We expect to continue to expand our shared cloud platform infrastructures and hire additional employees to support our operations, which will increase the cost of revenues in absolute dollars.
Operating Expenses
Research and Development
Research and development expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation, for our research and development teams. Other expenses include third-party contractor fees, software and license fees, amortization of intangibles related to acquisitions and overhead allocations. We expect to continue to devote resources to research and development in an effort to continuously improve our existing solutions as well as develop new solutions and capabilities and expect that research and development expenses will increase in absolute dollars.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel expenses, comprised of salaries, benefits, sales commissions, performance-based compensation and stock-based compensation for our worldwide sales and marketing teams. Other expenses include marketing and promotional events, lead-generation marketing programs, public relations, travel, software licenses and overhead allocations. Sales commissions related to new business and upsells are capitalized as an asset. We amortize the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. We expense sales commissions related to contract renewals as incurred. Our new sales personnel are typically not immediately productive, and the resulting increase in sales and marketing expenses we incur when we add new personnel may not result in increased revenues if these new sales personnel fail to become productive. The timing of our hiring of sales personnel, or the participation in new marketing events or programs, and the rate at which these generate incremental revenues, may affect our future operating results. We expect to continue to invest in additional sales personnel worldwide and also in more marketing programs to support new solutions on our platform, which will increase sales and marketing expenses in absolute dollars.
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General and Administrative
General and administrative expenses consist primarily of personnel expenses, comprised of salaries, benefits, performance-based compensation and stock-based compensation for our executive, finance and accounting, IT, legal and human resources teams, as well as professional services, fees, software licenses and overhead allocations. We expect that general and administrative expenses will increase in absolute dollars, as we continue to add personnel and incur professional services to support our growth and compliance with legal and regulatory requirements.
Other Income (Expense), Net
Our other income (expense), net consists primarily of interest and returns from our cash equivalent, short-term and long-term marketable securities, non-marketable securities gains and losses, and foreign exchange gains and losses.
Income Tax Provision
We are subject to federal, state and foreign income taxes for jurisdictions in which we operate, and we use estimates in determining our income tax provision and deferred tax assets. Earnings from our non-U.S. activities are subject to income taxes in the local countries at rates which are generally similar to the U.S. statutory tax rate. We regularly assess the realizability of our net deferred tax assets. As of March 31, 2024, valuation allowances remain in certain jurisdictions where we believe it is necessary to see further positive evidence, such as sustained achievement of sufficient profits, to meet a more likely than not stance that the valuation allowance should be reversed. If additional positive evidence becomes available in the foreseeable future, we may release all or a portion of the valuation allowance. The exact timing and amount of the valuation allowance release is subject to change based on the level of profitability achieved in future periods. Release of the valuation allowance would result in the recognition of deferred tax assets and a corresponding decrease to income tax expense in the period the release is recorded.
Results of Operations
The following table sets forth selected condensed consolidated statements of operations data for each of the periods presented as a percentage of revenues:
Three Months Ended
March 31,
20242023
Revenues100 %100 %
Cost of revenues19 21 
Gross profit81 79 
Operating expenses:
Research and development18 21 
Sales and marketing20 20 
General and administrative12 12 
Total operating expenses50 53 
Income from operations31 26 
Total other income, net
Income before income taxes34 28 
Income tax provision
Net income27 %22 %
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Comparison of Three Months Ended March 31, 2024 and 2023
Revenues
Three Months Ended
March 31,
Change