Qualys, Inc. (QLYS, Financial) provides cybersecurity software that is delivered through the Internet “cloud.” Unlike nearly all of its competito rs, Qualys earns substantial free cash flow, has a solid balance sheet and earns all of its revenues through recurring subscriptions. Its customers cover the majority of the Fortune 100, and it has an industry leading retention rate. Much of its current business is to provide vulnerability management (VM) services to customers by scanning all of the equipment attached to a network to ensure that software is updated and potential security issues are fixed. This business is growing 18-20% per year. Qualys has about 20% of the VM market, is the only cloud-based provider (which makes updates and software management seamless), and has an opportunity to convert the 60% of the market that is using unsupported legacy software from vendors that are slowly leaving the business. It is also adding new products that scan web applications, provide firewalls for these applications and protect devices that are not always connected to the network (such as mobile devices). This part of the business is growing 40%, leading to topline growth for the whole company of 20–25% per year. Free cash flow is growing 30% plus, and shares trade at only 17 times this year’s and 12 times next year’s free cash flow excluding balance sheet cash. Since the end of the quarter, we have pared our position. While we still believe in our investment thesis, the company’s CFO left rather suddenly in January. Despite the fact that the company reiterated its prior guidance, we would rather not have such a large position in a period of such uncertainty.
From Baron Discover Fund's fourth quarter 2015 commentary.
