Good day, everyone, and welcome to the Qualys Fourth Quarter 2012 Investor Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for asking a question will be given at that time. I would now like to turn the call over to Don McCauley, CFO of Qualys. Please go ahead, sir.

Thank you. Welcome to the Qualys fourth quarter and full year 2012 investor conference call. I'm Don McCauley, the CFO of Qualys, and joining me today on the call Phillip Courtot, our Chairman and CEO. Before we get started, 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 statements related to our business and financial performance and expectations for future periods. Our expectations regarding the growth of the market for security and vulnerability management solutions, our expectations regarding the introduction of new solutions and enhancements to existing solutions and our expectations regarding customer adoption of our solution. 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. 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 the 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 release that is available on our website. To begin, Philippe will discuss the company's performance for the quarter and full year 2012. Then I will cover our performance and factors that drove the quarter and year in more detail and well as our outlook for the first quarter and full year 2013. Finally, we will open up the call up for your questions. With that, I'd like to turn the call over to Philippe Courtot.

Thanks, Don, and welcome to all of you who are joining us today. 2012 was a very exciting and successful year for Qualys, and we are pleased to share these results with you as we continue to make substantial progress in all aspect of our business. In 2012, we added more than 600 new customers, bringing our total customer count to over 6,150 across more than 100 countries. New customers in 2012 included, Amazon, Citigroup, Colgate-Palmolive, Comcast, Hilton Worldwide, KPMG and Visa. We now have as customers over 50% of both the Fortune and Forbes 100, as well as 39% of the Fortune 500 and 20% of the Forbes Global 2000. We are very proud of our continued ability to attract and win new accounts while customer retention remains high. Don will go into the details shortly, but to give you the financial highlights, Qualys had revenues of $24.7 million in the fourth quarter of 2012, representing 19% growth over the same period last year. For the full year, revenues reached a record $91.4 million or an increase of 20%. For the full year, the U.S. represented 68% of revenues compared to 67% in 2011. While we are very well positioned and executing well globally, the challenging economic environment in Europe and in particular in Germany, France and U.K. has slowed order flow of both new and (inaudible) business. As a result, our overall fourth quarter revenue growth decelerated to 19% from 20% we saw for the nine-month ended September 30. Had Europe performed to the levels we saw in the U.S. and the rest of the world, revenue growth for the fourth quarter would have been above 20%. Turning now to our product mix, our Vulnerability Management Solutions continues to be the largest component of our business, comprising 87%…

Thanks, Philippe. Qualys continues to deliver on our key financial and operating metrics and we are pleased with our fourth quarter and full year 2012 results. Dealing with the top line, we drove revenue growth in the fourth quarter to $24.7 million, which represented 19% growth over the same quarter last year. For the full year 2012, revenues increased 20% year-over-year and finished at $91.4 million. Drilling down into the revenue growth, for the full year 2012, total revenues grew by $15.2 million. Revenues from customers existing at or prior to the beginning of 2011 or prior year, grew by $7.8 million in 2012 compared to $5.8 million in 2011 on the same basis. Revenues from new customers added in 2012 contributed $7.4 million to revenue growth compared to $5 million on the same basis in 2011. Philippe already mentioned the effect of the European economy had on our revenues. As we had previously discussed, after solid a first quarter in Europe, we saw a slowing in bookings for the balance of 2012. This is incorporated into our outlook for the first quarter and fiscal year 2013, which I will discuss later. As you know, four quarter bookings is one of our key metrics, because the vast majority of our businesses' annual subscriptions which is an amortized into revenue over the terms, we calculate this metric by adding revenues for the preceding four quarters to the change in current deferred revenues over the same period. At December 31, 2012, four quarter bookings were $101.2 million, which is an increase of 19% over the $85.1 million for the four quarter period ended December 31, 2011. For the fourth quarter GAAP gross profit increased to $19.7 million, which was a 19% increase over the $16.5 million from the same period last year.…

Thank you. (Operator Instructions). Our first question comes from Sterling Auty from JPMorgan.

Hi, guys. A couple of questions. First, touching upon the European issue can you just talk about linearity to the quarter, especially when it comes to Europe and where did you see the sluggishness? Is it more just a new customer selling the top of the funnel, or what was the renewal experience like?

Sterling, by linearity, do you mean when deals come in in the quarter?

Yes. Even though I know the subscription model doesn't impact revenue, just kind of curious what the buying behavior, what you saw in terms of demand and kind of how that started the New Year so far this quarter?

Yes. So, as far as the past, we didn't see any change in the rhythm or timing of things. We just saw a general slowdown in Europe, decisions were taking longer. I don't think we feel like we are losing business, but our customers are taking a lot longer than we expected to get on with things and send us orders both on new business and up-sell. The time has been about the same. Just to remind anyone on the call, we do - the rhythm of a quarter for bookings point of view is about 25-25-50 in terms of the spread of how we book orders and that's still the case in Europe. And as far as Q1 maybe Philippe will have some comment, but I'd just tell you I think we were very encouraged by the pickup we are seeing in our pipeline everywhere including Europe.

Indeed.

Did you see any change in terms of deal sizes? You talked about 7,500 initial for SMB customers, 75,000 enterprise. Do you changes in kind of the customer and deal size metrics this quarter?

No. Didn't see any real change there.

Okay. And last question, I'll jump back in the queue. When you look at how 2013 shapes up in terms of your investment in the operating expenses, how should we think about that layering through the year? Meaning, are you investing more heavily in new sales capacity and marketing and branding exercises early in the year or is it even throughout the year?

I think it's fairly even throughout the year. Although, you should look to the past to see there is a rhythm to in our sales and marketing. Our Q1 is a heavy trade show period. That's one of the reasons we project a loss in Q1. That's when RSA is and some of the other really major marketing efforts that we make, so there is a seasonality to when trade shows occur. As far as hiring, I think that's spread pretty smoothly throughout the year.

Yes. And let me add also, we made a significant enhancement to our BrowserCheck. These enhancements, two major one, one is the fact that we have now automated the process, so companies can push a very small agent which will automate the process of checking the browsers in their corporation. We are working to now put a lot of the marketing awareness behind that product, because it's a fantastic lead generation tool that we have at our disposition, is a fantastic product, so there won't be lot of visibility on Qualys pushing our brand and then from there that BrowserCheck also would become a very powerful distribution tool with support with that BrowserCheck Microsoft and MSI, which is the Microsoft solution which allows you to push agent, so that will allow us to push our secure web gateway agent and as well as other agents very, very naturally. So we have already quite a significant base of users of BrowserCheck and this is going to increase significantly.

Okay. Thank you.

Thank you. Our next question comes from Phil Winslow from Credit Suisse.

Guys, I just have a question in terms of just the ton of business that you saw during the quarter between sort of cross-selling to existing customers versus newer customer acquisitions. Then as you look to the 2013 here, and build the guidance in terms of just revenue bookings, but also just to expense, how are you going to see balance between, call it, new versus existing business?

As I mentioned in my remarks, so, we saw a pretty nice balance actually between revenues coming from existing customers and revenues from new and we continue to see a very balanced approach here.

And what we see in terms of generating up-sell in both businesses is both our web applications, scanning and policy compliance which are really growing very nicely and this product have reached maturity and really is a game changer.

Yes. Philippe, just one follow-up to that; when you about the new products that you mentioned for the second half of 2013, I wonder if can just provide us with any sort of just early beta customer feedback on the web application firewalling for example?

The web application firewall, we had very good results from that. What we did first of all is to check the quality of the engines, the rules and all the things that you need to essentially have to provide good firewall capabilities on your web applications. Now we are moving to the second phase of our beta with a very unique implementation to Amazon, which allows essentially us to provide not only, currently today we provide the ability to identify all new assets on the Amazon platform as well as identifying the vulnerabilities on those assets including the vulnerabilities on the web applications and what we will now going essentially regarding the soon going to beta is the web application firewall [ph] component, so you could really create an image on Amazon so that you can now firewall those applications and that's the kind of very big, unique product and then the other implementation of our web application firewall it's now private cloud platform, which we are selling to the extremely successful as I mentioned, not only we’ll replace all our first generation of private cloud now we can see a very big adoption of that platform that allows us to enter new markets that were very difficult to enter for us before, because of the sensitivity of the data, the fact some companies prefer to have their data in house as well as in some countries, so this is going very well. As you know, security, our complex applications, so you're just going to turn the switch on immediately but we are very pleased with the progress that we have made, same thing for these other services that we are building, they all leverage the platform, which is quite significant.

So, just to circle back on your initial question to reiterate in case folks didn't catch it when I said it the first time, revenues grew by $15.2 million last year, and so a lot of the $15.2 million, $7.8 million came from existing customers and$7.4million from new, so very, very balanced situation in terms of up-sell and cross-sell to existing customers and bringing on new customers.

Thank you. Our next question comes from Robert Breza from RBC Capital Markets.

Hi. Thanks for taking the question. Don, I was just wondering if you could talk a little bit about some of the newer products that you talked about would be released in second half. Do you think that will contribute meaningfully to revenue this year or should we be thinking a little further out? Thanks.

I think principally, Rob, we've been talking about web application firewall, which Philippe mentioned is entering its second beta phase. I think the good way to think about it is principally the more of the next year, I think maybe depending, we may see some stuff in the second half of the year, but that product won't be released until probably mid-year, and Philippe is going to add some color on that.

Absolutely. The web application firewall, this is a heavy lifting. We have other products that we are bringing to market like our customizable questionnaires which are going to go GA eminently. These will generate revenues, additional revenues as other announcement that (inaudible) says well which will generate new revenues and the results our virtual private cloud platform which is really extremely successful. We had the experience of doing that but with the old - if we prefer architecture, now today we’re virtualized absolutely all of in fact our datacenters, so we can deliver a box in companies that we just did you know first at Amazon and then re-competed all these old racks if you prefer to get new box. It's all virtualized, it’s the same code base and this is very appealing for very large corporations, for partners around the world and that will generate additional revenues for sure.

Thank you. Our next question comes from Rob Owens from Pacific Crest.

Afternoon. Along the lines the successors being with to the virtual box, should we see any impact on gross margin as a result?

Well, eventually, Rob. I not on in the short-term, we are still digesting the increase in operating cost as we have expanded the platform and replicating our U.S. and European data center capacities and so forth. We probably still got a little more digestion to go there, eventually there is less hardware involved, so this probably what you are getting at. So, in future years, I think yes. I think that’s definitely possible as we cycle out all of the old hardware versions and end up with principally software.

All right, and then second, Don, maybe you could address just duration in the quarter? I think the shift of long-term deferred was probably little bit more than usual, little more than we were expecting. I understand some of the issues in Europe probably leading to a weaker short-term result in the quarter, but just for those existing customers either renewing and/or net new. Is there a change in buying behavior there that's the driving longer-term two and three-year deals?

Yes, but as you may remember Rob, we saw that this is the second year in a row we've seen this. I think if you went back two years ago, our long-term deferred revenue was something like $1.7 million and it went up to like $4.5 million and now it's almost doubled to $8.-something million now. So what we are seeing, especially we are seeing some new customers but especially customers on their first renewal. Once they think up to their budget, they've installed Qualys. Generally, we're different than other SaaS companies, because we are infrastructure and they created those infrastructures and they are really looking for budget certainly, so we don't push multi-year deal so on our customers, but we certainly react to them and they've been asking for the more and more.

Okay. Then one more if I may, just with regard to the Q1 guidance and specifically the revenue guidance, I think you left the door open for the potential for revenue be down sequentially and some flat at the mid-point. What factors given a subscription basis of the model could drive that being down on a quarter-over-quarter basis? Thanks.

So, Robbie, ask your question again. I don't want to answer the wrong question here, obviously noting that Q1 is down?

You know its range Q1, Don, you left the door open for revenue to effectively be down sequentially and I think flat at the mid-point, so.

Okay. Got it.

What's the nature? Why that might occur?

Okay. So, one interesting math, a mathematic stands out there, one of the unique things about Qualys compared to any of the security company is our subscription model, and so we recognize revenue on a daily basis and normally you would want to get into the details, but there are two fewer days in Q1 than there were in Q4. On an average we do $250,000 of recognized revenue per day. And in Q1 this year, there was one fewer days than there was last year’s Q1, because last year was leap year. Now that's also kind of lame compared to normal analysis, but in our case it's pretty relevant, so it's because of the number of days, Rob. That's the case.

Thank you. Our next question comes from the Steve Ashley from Robert W. Baird.

I'll just start with a housekeeping; can you give us what percentage of revenue came from the Americas in the fourth quarter this year and fourth quarter last year?

I think it was 67 last year and 68 this year.

And in terms of the trailing 12-month billings metric up 19%, but the third quarter was up 25% and you called it out last quarter that there had been that was a wind aided jump that there was some special extra revenue in there. Can you remind us of that and what that number might have been in a normalized or adjusted?

Right. There was 2% or 3% of the, yes, that metric was inflated because of this was one of our resellers had convert a whole bunch of old monthly accounts to annual billing in beginning of last year, which was a great thing, but it threw a lot of deferred revenue that didn’t represent new revenues for the company and I told you all during the year that that would cycle out. Now it's cycled out, and so we are not boosted by that anymore.

When you look at your 2013 guidance, can you qualitatively tell us what you are assuming about Europe?

We are being cautious. We saw sluggish performance in the back half of the year, especially and we are optimistic that that will end sometime soon, but we are being cautious in our guidance that it's may continue for a while.

Thank you. Our next question comes from Erik Suppiger from JMP Securities.

Yes. Can you give us a breakout for the fourth quarters for the vulnerability management versus the newer services? I think you said that it 87% for the year, but what was it in the fourth quarter?

I think it was pretty similar, Erik, pretty similar.

In terms of the weakness that you saw in Europe was that more pronounced on the newer services or was that with the traditional business?

Yes. So, Europe is more predominantly a VM business for business for us at this stage. Newer services have tended to take off first in the Americans, so now the weakness in Europe is mostly felt in VM so far.

I would have expected, I think it was about 87% VM in Q3, doesn't sound like is some a shift towards the newer services though. Is that correct?

Well, ex-Europe we did. The softness in Europe is what brings that, kept that VM the same.

Okay. Any discussions on how weaknesses was impacted between your SME business and your large enterprise business?

It was pretty much across the continent and across both of our business segments.

Okay. Renewal rates. In the past you've been updates and what not, you've been around 100% sometimes over 100% any comment on what the renewal rate was for run for the fourth quarter?

So, the calculation we Erik is on that full year basis looking at revenues from existing and new customers and I think on a full-year basis they went from 108% to 109%.

Any reason to think the fourth quarter would have been any different from the other three quarters either, If I had to guess, I'd say we we'd probably would look with European being softer, but that really an annual calculation that we do.

Okay. On the private cloud in private cloud product what kind of interest or activity do you have going on with government that that's presumably something that's going to get back going with when we start seeing the government contribution there materialize?

As you very well know, it takes sometime especially these days in fact, with the sequester and some of the budgets of these on the federal side in the U.S. there is 90 cycles and currently today there is a lot of uncertainty. In fact, we are going to, we are establishing partnerships with very big integrators and one of the reason of this partnership is because of that private cloud. It's also because as you just so with du Telecom to start to essentially enter markets abroad much more easily with partners.

Might we expect your government contribution by the end of '13 to be in the low or mid single digits is that reasonable?

For those who don't know, we currently get about 1% of our revenues of the federal government at Qualys, and the most security companies have a far greater percentage. I don't it will happened that faster. Remember, our revenue model revenues amortized in over time, so that maybe so there will be low single digits because we're in the low single digits now but we are looking for improvement. I hope we'll have improvements to announce this year, and they way our revenue model works and the revenue effects would be later in the year and mostly next year if that would occur.

Thank you. Our next question comes from Craig Nankervis from First Analysis.

Philippe, on virtual private cloud, are new constraints along the way in terms of the pace at which you can deliver this form factor as this point or could you as you.

I know this is a very good question. If fact there was two things we are doing here. One is that we are now established or establishing a new stock in India, so he one of the main reason you know there’s a reason one give the residency third being the place where we multi-manage all of these data centers including ours on other this is kind of a backup between prefer and on the other hand it's also because we anticipate being capable of shipping quite a few more of these products. So, on the management side, we have made already or making the investment already to boost them more and now what we are doing in fact essentially putting the virtual cloud in the box and currently today we can ship at about one private cloud little less than three months and we expect to be capable of moving that to once a month. That's well recent and of course it will accelerate.

And there will be once-a-month by what second half of the year or something like that?

Probably. Yes. Yes. We're also working on a connected version also datacenter, which is that I told you up under military version and we are anticipating to be in data to disconnected version by the year end and that means that will try and do an entity to really do the managing, so we sold the old batteries and everything they need to do to update and manage these data centers where we would have to kind, but we are also working on that as well.

Can you give feel for how I believe you are marketing the virtual private cloud form factor at this point also or is that you would expect later in the year?

No. I think, we are staring to market and we'll start very careful, very cautious, but we are really not pushing it that much, because we have to ship [three], and now that everything is virtualized it makes it so much cost effective and easier management because we are very, very careful and now the opening of the floodgates as we have now really renewal during very well packaged that solution.

Okay. That answer all my question. Thanks for your help.

Thank you. Our next question comes from Joel Fishbein from Lazard Capital.

Just on the 2013 guidance. Based on what you've seen so far in terms of your fourth quarter billings, can you just go through with us what kind of visibility you have into that 106 to 108 number? It should be pretty strong, but I just want to hear it from your perspective.

Okay. With our subscription model we have approximately 50% of our revenues for the full year are already on our balance sheet will just be amortized in over the year, and of the remaining 50%, 40% relates to existing customers and what they do renew, up-sell, et cetera, and only 10% relates to brand new customers that will come on during the year and remember we only for new customers in 2013, on average we'll only be recognizing a half years worth of revenue. So, compared to almost any of the company we have very good visibility into that Joel.

Thank you. (Operator Instructions). We have a follow-up question from Sterling Auty from JPMorgan.

Yes. Thank you, just a couple of quick ones. Don, can you give us an update, how many customers did you finished the year with?

Round number 6,150 and it's about 600 more than last year.

Okay. When you look at that customer addition especially in the fourth quarter , the mix of the larger customer versus the smaller, how would you qualitatively described that and how would you describe as the quarter went along. Would you say that those numbers would have been higher out the year for Europe?

Well, first of all, I think as far as to make up the mix and the demographics of it same no change there. And, sure, I think if Europe was not a sluggish, we certainly would have had few more customers.

You mentioned the pickup in the multi-year, where you didn't give kind of percentage. Can you give us a sense of what percentage of the deals that you did in the quarter were multi-year versus just one-year?

Percentage was probably about the same, but it added up during the year. When we model it, it's about the same percentage actually, but with our growing business it's have been affected and we only the deferred component of the balance sheet is a pretty good step up just because of the growth of the business generally, I wouldn't it was fully different.

Okay. And last question area, sort of fourth quarter what was the - or looking at the business now, what's the direct versus indirect mix just to remind everybody and kind of where are you putting more emphasis to start 2013 in terms of your channel management?

So, the direct, indirect mixes 60-40, 60 direct, 40 indirect, and I'll let Philippe comment on where we are putting our efforts.

Yes. We expanded our, what we call, our strategic alliance group, so we are focusing more on the partners today, because again I think with a private cloud, I think we have really significant opportunity to generate new partnerships and global partnerships, so that's the focus of our business. Also, what we see is that channels to appreciate, the fact that we provide them with a very predictability and profitable business. As you know the benefit of the recurring, but given the better contact with the customers and the recurrent models as well, so it's in the early days. The channel was very active when you speak to Qualys; I think today we see the channels coming away. We see our business growing with all of our partners.

Thank you. We have another follow-up question from Erik Suppiger from JMP Securities.

Yes. I just want to understand. I don’t think you gave four quarter bookings guidance for 2013. Conceptually, can you discuss if we're looking for a deceleration in revenues, in think mid-point of your guidance is maybe 17% or so. Does the billings decelerate faster, because you have a lagging effect on the revenues or should we think about the billings growth for this year rather?

All right, so good question, Erik, so remember revenues like billings not the other around, so when we have a as I said we mentioned if Europe would slow especially in the back half of the year, that's now flowing through revenues and that affects our guidance on revenues. We don't give guidance on four quarter bookings, but as I mentioned earlier we are encouraged by what we are seeing in our sales pipelines, including Europe. I mean, we are seeing good activity and improved activity in the first half of this year compared to the second half of last year. And, if that comes to pass, then we'll see improvement in those metrics.

A little bit about the timing. It seemed like it was Q4 that you saw the deceleration in the bookings or did you start seeing evidence of that in Q3?

We talked about it on the Q3 call. We had seen it I Q3 and we actually had seen it in Q2 a little bit as well, but we talk about it on the Q3 call.

Okay.

Thank you. I would now like to hand the conference back over to Mr. Philippe Courtot.

Thank you all for joining us today. We are very excited for our 2013 and believe that we are well positioned to deliver best of cloud security and compliance solutions to our customers and partners and continue to expand through our cloud platform and solution set. So, should we have any follow-up question, Don and I are available. Otherwise, we are looking forward to speaking with you next quarter. Thank you very much.

Thank you. And once again, ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. You may all disconnect and have a wonderful day