Good day, everyone. Welcome to the Qualys fourth quarter and full year 2015 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 Mr. Don McCauley, CFO of Qualys. Please go ahead, sir.
Well, thank you. Welcome to Qualys fourth quarter and full year 2015 investor conference call. I'm Don McCauley, CFO, and I'm here with Philippe Courtot, our Chairman, President, and CEO. We would like to remind you that during this call, we expect to make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements in this presentation include, are not limited to, the following list. Statements related to our business and financial performance and expectations for future periods, including the rate of growth of our business. Our expectations regarding capital expenditures, including investments in our cloud infrastructure and the intended uses and benefits of those expenditures. Trends related to the diversification of our revenue base.
Our ability to sell additional solutions to our customer base and the strength of demand for those solutions. Our plans regarding the development of our technology and its expected timing. Our expectations regarding the capabilities of our platform and solutions. The anticipated needs of our customers. Our strategy, the scalability of our strategy, our ability to execute our strategy, and our expectations regarding our market position. The expansion of our platform and our delivery of new solutions. The expansion of our partnerships and the related benefits of those partnerships. Our ability to effectively manage our costs. Finally, our expectations for the number of weighted average diluted shares outstanding and the effective GAAP and non-GAAP income tax rates for the first quarter and full year 2016.
Our expectations and beliefs regarding these matters may not materialize. 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 that we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q that we filed on November 5th, 2015. The forward-looking statements in this presentation are based on information available to us as of today. We disclaim any obligation to update any forward-looking statements except as required by law. We also remind you that this call will include a discussion of GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A discussion of why we present non-GAAP financial measures and a reconciliation of the non-GAAP financial measures discussed in this call to the most directly comparable GAAP financial measures are included in our earnings press release issued earlier today. To begin the discussion, Philippe will provide an overview of the company's performance for the fourth quarter and full year 2015. I will cover our financial results and factors that drove the fourth quarter in more detail, as well as our outlook for the first quarter and full year 2016. We will open up the call for your questions. With that, I will now turn the call over to Philippe.
Thank you, Don, and welcome to all of you. The fourth quarter of 2015 was another excellent quarter for Qualys, capping another record year for the company. Don will cover the financial details of our performance for the quarter and full year. I will first start off with an overview of the key factors driving our business and positioning Qualys for even more success in 2016 and beyond. 2015 was a fantastic year for us as we expanded our cloud platform with AssetView, which provide customizable dashboard and Elasticsearch capabilities and with our groundbreaking Cloud Agent technology. The Elasticsearch capabilities allows our customers to search across millions of IT assets in second to create customizable dashboards, while our Cloud Agent allows our customer to perform continuous Vulnerability Management and compliance management on many assets, whether on-premise, in the cloud, or on endpoints.
This without the need of establishing scanning windows and fetching credentials. These, of course, strongly enhance our Vulnerability Management and Policy Compliance offerings and give us a clear differentiator when compared with other solutions. Both the Elasticsearch capabilities and our Cloud Agent platform allows us to introduce a series of new services, and we plan to reveal the details of these new services at the upcoming RSA Conference in San Francisco at the end of this month. In the fourth quarter, we added a number of important new accounts, including Biogen, Boyd Gaming, Capital Group, Chicago Bridge & Iron, CNO Financial Group, Cotiviti, Delphi, Dentons, Discovery Communications, HCA Healthcare, Herbalife, Hindustan Unilever, Jive Software, Kingfisher, Herbalife, National Financial Partners, Norfolk Southern, and University Hospitals Health System. For 2015, we added approximately 1,100 new customers Compared to approximately 1,000 in 2014.
This brings our total customer count now to over 8,800 customers. We continue to expand our partnerships and global distribution channels through leading managed security providers, global consulting organization, and outsourcing providers. This will also remain a big focus for us in 2015. Our industry-leading Vulnerability Management solution grew at approximately 18% in 2015. Our newer service, which include Web Application Scanning, Policy Compliance, and Web Application Firewall, grew at approximately 35%. As we have discussed previously, these growth rates were negatively impacted by the headwinds we have seen from currency fluctuation during the past year. An indication of our continuing success in diversifying our platform offering is that as of December 31st, 2015, 62% of our customers had subscribed to more than one solution, and these metrics stood at 30% at the end of 2013, and 54% at the end of 2014.
In anticipation of the adoption of our cloud agents and new services to come, as well as the fact that Qualys has become a strategic vendor with many of the Fortune 500, we have expanded our sales force, including several new sales leader. As a result, we have additional sales personnel that are equipped to sell at higher executive level in the enterprise. Before I turn the call to Don, you may have seen on the wire that we have added to our board Todd Headley, which was the former CFO of Sourcefire, which is a great addition to our team. Now for the review of our financial performance and our guidance, I will turn the call over to Don.
Thanks, Philippe. Again, as previously mentioned, our fourth quarter and full year 2015 results were excellent. Revenues grew in the fourth quarter to $44.4 million, which represented 22% growth over the fourth quarter of 2014. Full year 2015 revenues grew 23% to $164.3 million. Our current deferred revenue balance is $98.0 million as of 12/31/2015, which is 21% greater than our balance at December 31st, 2014. Now, a quick review of some other revenue metrics. For the fourth quarter, the U.S. represented 70% of revenues, the same percentage as in the fourth quarter of 2014. Also, we derived 78.7% of fourth quarter revenues from subscriptions to our Vulnerability Management solution, compared to 80% in the fourth quarter of 2014. Annually, we further examine the components of our revenue growth. In 2015, total revenues grew by $30.7 million to the $164.3 million I mentioned earlier.
That $30.7 million increase was comprised of $18.9 million of revenues growth from existing customers and $11.8 million of revenues generated from new customers acquired in 2015. In 2014, the comparable numbers were an increase in total revenues of $25.6 million, comprised of $15.7 million of revenue growth from existing customers and $9.9 million of revenues generated from new customers acquired in 2014. In 2015, the revenue increase from existing customers represented 114.1% of 2014's total revenues, which compares to 114.5% a year ago. GAAP gross profit increased by 22% to $35.4 million in the fourth quarter of 2015 compared to $29.1 million in the prior year period. GAAP gross margin was 80% for the fourth quarter of 2015 compared to 79% in the same period last year. Non-GAAP gross margin was 80% for both fourth quarter periods in 2015 and 2014.
For the full year 2015, GAAP gross profit increased to $130.4 million compared to $104.6 million in 2014. GAAP gross margin was 79% in 2015 compared to 78% in 2014, and non-GAAP gross margin was 80% in 2015 compared to 79% in 2014. Adjusted EBITDA for the fourth quarter of 2015 increased by 53% to $16.4 million compared to $10.7 million in 2014. Adjusted EBITDA as a percentage of revenues increased to 37% in the fourth quarter of 2015 compared with 29% in the same quarter of 2014. For the full year, adjusted EBITDA increased by 79% to $56.7 million compared to $31.7 million in 2014. As a percentage of revenues, adjusted EBITDA increased to 34% for 2015 compared to 24% for 2014. Net cash from operations in 2015 increased by 59% to $66.0 million compared to $41.4 million in 2014.
Free cash flow for 2015 increased by 67% to $45.8 million compared to $27.4 million in 2014. In the fourth quarter of 2015, capital expenditures were $5.2 million compared to $3.6 million in the fourth quarter of 2014. In the first quarter of 2016, we expect capital expenditures to be in the range of $5 million to $6 million. Moving on now to earnings per share. For the fourth quarter of 2015, GAAP EPS was $0.14 per diluted share versus $0.69 for the fourth quarter of 2014. You may recall that in the fourth quarter last year, we recognized $23.7 million or $0.63 per diluted share of U.S. federal and certain state deferred tax assets. The comparison without that one-time item is $0.14 per share in the fourth quarter of 2015, as I just said, compared to $0.06 in the fourth quarter of 2014.
For the full year 2015, GAAP EPS was $0.42 per diluted share versus $0.81 in the prior year. That deferred tax asset item accounted for $0.64 on a full year basis in 2014. The comparison excluding that item is $0.42 per diluted share in 2015 compared to $0.17 per diluted share in 2014. Non-GAAP EPS was $0.21 per diluted share in the fourth quarter of 2015 compared to $0.15 in the fourth quarter of 2014. For the full year 2015, non-GAAP EPS was $0.70 per diluted share compared to $0.46 in 2014. Turning to our guidance, starting with revenues. For the first quarter of 2016, we expect revenues to be in the range of $44.7 million to $45.4 million. At the midpoint, this represents 20% growth over first quarter 2015 revenues.
For the full year 2016, we expect revenues to be in the range of $195.6 million to $198.6 million. At the midpoint, this represents 20% growth over 2015 revenues. As to earnings per share guidance, we expect GAAP EPS for the first quarter of 2016 to be in the range of $0.06-$0.08, and non-GAAP EPS is expected to be in the range of $0.14-$0.16. For the full year of 2016, we expect GAAP EPS to be in the range of $0.36-$0.41, and non-GAAP EPS is expected to be in the range of $0.74-$0.79. Our first quarter EPS estimates are based on approximately 38.4 million weighted average diluted shares outstanding. Our full year 2016 EPS estimates are based on approximately 38.9 million shares outstanding.
For the first quarter and full year 2016, we have used an expected effective GAAP tax rate of 37% and an expected effective non-GAAP tax rate of 36%. Before I turn the call back to Philippe, I wanted to note that this will be my final earnings call with Qualys. As you've likely seen, I've decided to leave the company as of March 1st. Between now and then, I will oversee the filing and certification of Qualys' 10-K filing. I'd like to say that it has been a pleasure working with Philippe and the team over these past 10 years. With that, Philippe and I would be happy to answer any of your questions. Operator?
Ladies and gentlemen, at this time, if you would like to ask a question, please press star then one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Sterling Auty from JPMorgan. Your line is open.
Yeah, thanks. Hi, guys. Let me start by saying, Don, thank you so much. It's been a pleasure working with you all these years, and hopefully we'll get a chance to do so going forward. Onto the business. I'm kind of curious. Looking at the revenue result for the quarter and the guidance for the first quarter, it would seem like there's some softness in the business. Looking at the mix, I guess my initial read is it sounds like it's not Vulnerability Management, but maybe the rest of the solutions that perhaps aren't growing as robustly as they were that's causing the trajectory to slow. Is that the right conclusion? What are you seeing in the marketplace around that?
Also, what we see today is that we're coming up with these agents which are starting to come up pretty good, which I think are going to allow us to maintain, if not to accelerate the growth of both the Policy Compliance and the Vulnerability Management and the Policy Compliance. These agent technology are absolutely a game changer for the reason that I mentioned earlier on the call, in the sense that they expand the capabilities of Vulnerability Management significantly. That's what we see. Of course, we have had big headwinds on the doors, which have taken, of course, effect. We are cautious. We're entering into a period which obviously there is a lot of strain everywhere. I think we are cautious. The business, as you have seen, we have built a fantastic franchise with 8,800 customers, a very powerful business model.
There's no fundamental change here.
Just maybe as a follow-up, looking at the currency, the currency headwinds have been there for the better part of 2015 for most of the companies in the space, including yourselves. Yet it seems like we're seeing
I guess, an incremental change to the trajectory. Is it that you're seeing customers pausing on decisions as they're trying to make the decision around the agent-based solution? Maybe we're not getting the uptake that perhaps you would have thought in terms of the regular orders until we get enough comfort around the agent, and we start seeing bigger deals, or is it something else?
No, there is another factor also, which is happening today, is that our business, as we said, in fact, in the very beginning when we went public, that gradually we will move from a more direct model to more indirect model, and this is what is happening. We can see today that all the partners that we have established are starting to essentially help us grow the business. Of course, it affects, to some degree, the top line, while being very positive, in fact, on the expense line, because we don't need to build, of course, as big of a direct and expensive sales force that we will have to if we were more direct. We still have the-
Okay, thank you
for another quarter or two.
Got it. Thanks.
Our next question comes from Philip Winslow from Credit Suisse. Your line is open.
Hi, guys. Actually, this is Siti Panigrahi. Don, I also extend my thanks. It's great working with you and wish you good luck for your future endeavors. I just wanted to focus on the guidance on the earnings side, your EPS and implied margin seems to be below consensus. Just wondering, as you're planning to launch new products this year, how much of that due to the investment in our sales marketing versus other factors?
Definitively, we're looking at spending a little bit more money on the marketing side. We're also looking at attracting additional senior management because we believe we have the opportunity to really build a significant company. We have built now the foundation. The foundation are there. They are extremely strong, both from a technical standpoint with our platform, but of course, as well with our financials. Today we have, for example, Fahad, which is, that's not yet on board, a VP of Corporate Development and experienced person, we could focus more on acquisitions and quite a few other executives that we're looking at attracting to the company. That's what explains.
In terms of-
Hey, Siti, this is Don. Just another quick footnote. Another small factor there is that we're looking at slightly higher tax rates this year than last year.
Okay. In terms of sales rep hiring, last quarter, you said, I think five only, but could you give how many you hired in Q4 and what's your plan for FY 2016?
We hired 10 in the fourth quarter, bringing us to 20 for the year, which is in line with what we said at the beginning. I think we're going to not give an explicit goal going forward. We added five in the third quarter and 10 in the fourth quarter.
All right. Thank you.
Our next question comes from Steve Ashley from Robert W. Baird. Your line is open.
Hi. Thanks for taking my question. Your guidance for the coming year at the midpoint calls for 20% top-line growth. What does that assume about what kind of growth in the core VM business?
About the same. We expect, again, this is looking forward, that we are going to see by year-end, probably because of the agent, even more strength on the VM business. As you may recall, our agent, we count Cloud Agents if they are for VM into the VM revenue, if they are Policy Compliance into the Policy Compliance revenue. All these additional services that we are going to release this year will be counted as new services.
Is there any color you could give us on the % of the business that is going indirect today and maybe how that compared to a year ago and how that's changing?
What I could say is that we have essentially had about 3% of our business moving from direct to indirect.
That's the amount.
On a percentage-wise.
It's still about 40% indirect, Steve.
I'm sorry, you're saying that that was up 300 basis points year-over-year-ish. Is that.
Correct
kind of what we're saying?
Correct.
Okay. Thank you.
Our next question comes from Matthew Hedberg from RBC Capital Markets. Your line is open.
Hi, it's Dan Bergstrom for Matthew Hedberg. Thanks for taking my questions. Say, Don, the change in current deferred revenue this quarter was the largest we've ever seen. Any color on what's behind that? Is it initial Cloud Agent uptake?
In current deferred revenue?
Yeah.
Well, the fourth quarter is our strongest bookings quarter of the year. The deferred revenue bounced about 21% ahead of last year. It's in line with all the other metrics. It's just that the fourth quarter, we typically book a little over 30% of our annual bookings in Q4, so that's the quarter where you see the biggest jump in deferred.
Okay. Last quarter, you talked to ramping up the marketing campaigns around Cloud Agent. Just wondering if those are underway at this point and any more insight.
Yes, we have already started. You will see, in fact, more at RSA. We have just started the first campaign around AssetView, which now are hitting. We hired, in fact, a VP of digital marketing recently. We're really starting to gun big time around these new services.
Great. Thanks.
Our next question comes from Srini Nandury from Summit Research. Your line is open.
Thank you for taking my call. Philippe, on the press release, you actually mentioned that you released a Cloud Agent for software for Windows and you have a beta on Linux and macOS. What is the timeline for the launch of these products? Can you give us a high-level rundown on the products which you expected to launch at the RSA next month?
Yes. In fact, today we're almost about to release to GA the UNIX agent. It's a question of days. Then next month it will be macOS.
I see. Okay. If I may, one more question. Philippe, can you talk about your thoughts on your international expansion strategy? You still get 70% of your revenue in the U.S. Is there a structural issue in the Europe and Asia to grow more rapidly there? Where would you need to grow there and penetrate faster?
In fact, what is happening today is that in the U.S., we are doing much bigger deals that we do in Europe in general. I think we're very happy with our European operation and international operation, which are growing very well. The big difference is that today we are doing much bigger upsells and much bigger deal in the U.S. This being said, we can see Europe always lagged by about one year to two years, depending to what is happening in the U.S. Our ability to do bigger upsells is relatively new. This is something which happened in 2015. In Europe, we can see that happening as well, starting to happen now in Europe. We're very well staffed in Europe. In every country, we have a very strong presence. We made an investment early on. We have 20 little companies worldwide.
We're a tall global company. We made the investment. That speak again to the scalability of our model. We made that huge investment. We operate in 106 countries. We have 20 small little companies where we have to declare taxes and pay taxes and do payroll. We have built that over the years, and we have that. This is going to help us scale as well, very well.
Thank you.
Our next question comes from Michael Kim from Imperial Capital. Your line is open.
Hi, good afternoon, guys. Hey, Don. Likewise, I wish you the best in your next venture, and it's been great working with you the past couple of years. First question was about the delayed large deals in Policy Compliance, Web Application Scanning last quarter. Did those close in the current quarter and contribute to the current deferred?
They didn't contribute to the current deferred. Say it again, Michael, I don't want to give you wrong-
Yeah. I think last quarter, you highlighted a couple of larger deals and one in Policy Compliance, one in Web App Scanning, that was pushed out into the recent quarters.
Right. Yeah, I think those are still works in progress and didn't contribute to deferred yet.
Then just going back to the core VM business, are you starting to see an acceleration in customer conversions or early conversions of former McAfee customers? What kind of things are you doing to obtain some of those customer conversions?
You have to make the distinction between the large account, which we have been always over the years there, because of the unique scalability of our platform, then the more of the mid-market. We were already engaged into many of these replacement deals. They take a bit longer because you don't repath an application like VM just like that. McAfee, as you may recall, had committed that they would continue the support for two years, and even I think they've extended that for another year after. These deals at the high end are taking a certain amount of time, which typically, so we don't see an acceleration, but we see, of course, a decision by companies to move away from McAfee, since they are not supporting the product anymore. On the mid-range, that's a little bit different, is the more dynamic market.
We're competing here against the traditional suspects here, which are essentially our traditional competitors. We're doing very well.
Okay, great. Thank you very much.
Our next question comes from Erik Suppiger from JMP Securities. Your line is open.
Hey, guys. Thanks for taking my question. This is John Lucia on for Erik. Philippe, early in the call, I think you said that in reference to your guide that you're entering a period of strain, I wanted to understand if you meant that if that was all related to currency issues or if you're also discussing the spending environment in North America. Just getting an understanding of your take on the spending environment in North America would be helpful.
I think what I would say is that it's very clear that the days where companies were buying these kind of magical products, which were helping them to essentially secure, find the malware in their companies these days are starting to fade. That's for the general tone in the market. Conversely, I think this favor us very well because what companies are now figuring out is that you cannot secure what you don't know. Being capable of doing the full continuous inventory of your assets is becoming very important to try to identify the vulnerabilities. It's also very important. Now with the new services that we're bringing to market, we're going to also help you to identify those vulnerabilities which are prone to be compromised and receive payload. This is part of the sum of the new announcement that we're going to make very soon.
We see that Vulnerability Management is an application which some people say, "Oh, it's commoditized." We don't see that at all. We believe this is an application which is in fact morphing into a very critical application, allowing you, one, to discover what you have, second, to identify your vulnerability, prioritize those who could be the most damaging, if you prefer, and also moving with the new things that we're doing into prevention. We see, in fact, Qualys is becoming more and more strategic on one hand, and all of our large customers, they understand that very well. Second, by adding more and more services, we're becoming a strategic vendor.
We today have been named as the strategic vendors for quite a few large corporations because they see that Qualys not only allows them to do what I've just said, but also we consolidate quite a few of these security point solutions. By year-end, we will probably be able to consolidate. Currently today, we consolidate about five applications. We'll probably double that by year-end. All of that are the same cloud platform, which, as you may recall, we can very uniquely deliver as an on-premise solution. You see today that Azure is doing exactly the same thing, but providing Azure as an on-premise solution, but yet keeping the same code base. We have the scalability from an engineering standpoint, which allows us to continue to essentially be more efficient on the engineering side.
The fact also on the engineering side that we invested big time in Pune, India, is also paying off big time. We see, in fact, that our position in the marketplace is strengthening significantly, I think we have to be prudent because today, there's macroeconomic factors, which, as we all know, are not very encouraging.
Okay. I had one follow-up. I think you noted 62% of customers have purchased more than one product at this point. That's up from 61% in the prior quarter. In 3Q, I think the increase was only 1% as well, 60%-61%. I know it gets more difficult as the numbers get larger, are you finding it more difficult to penetrate your customer base now that you have a lot of your customers that have purchased more than one product? Or what is that dynamic?
No, that's a good question about the dynamic because yes, it's an issue of dynamic here. The large companies are really adopting more than one solution much more than the smaller companies, because we have essentially three businesses here. We have the enterprise business, we have the mid-market business, and we have the small businesses. There's much less upsell on the small businesses because we have a tendency to create more of that can-all-in-one solution. Of course, in term of numbers of customers, et cetera, we have more smaller businesses than large businesses, obviously. That's what, in a way, reflects the fact that there's going to be a point where we probably, I would say, cannot reach 100%. Now, however, this being said, we are also shipping additional services. That, of course, these additional services give us another penetration capabilities and other upsell opportunities.
Because of that, I believe that we're going to continue getting more of these customers buying more than one solution.
Okay. Thank you.
Our next question comes from Rob Owens from Pacific Crest Securities. Your line is open.
Great. Thank you for taking my question. Just curious around the growth side of the equation. I think a few months ago in Las Vegas at your analyst day, you laid out a plan for a five-year target model. If I recall, it was more of a mid-20s type of growth rate. Now you're guiding to about 20%. I actually believe on my quick math that the margins go down on a year-over-year basis for 2016 versus 2015. How are you thinking about balancing growth versus margin? Does the current kind of state of the economy or the industries you're playing in kind of remove that five-year target model?
Good question.
Yeah. No, Rob, the five-year target model is still intact. The key to get from here to there is all the new products that Qualys expects to ship over the next year or two. There's a really significant expansion coming of, by and large, we're selling three products today, and there's quite a few other ones coming. The five-year plan is really driven by the growth, probably especially the Agent, which will drive several new products plus expand VM and Policy Compliance, as well as a number of other new products that Philippe mentioned earlier. There's not a disconnect, it's just that the new products are coming this year and next year and will be a big part of that five-year plan.
We're well on our way to the model also. This is another thing. We already have built a model that shows that scalability.
Okay, great. Thank you.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone telephone. Our next question comes from Craig Nankervis from First Analysis. Your line is open.
Thanks. Good afternoon. Don, I echo the sentiments. I wish you the very best in your next adventure, and I certainly enjoyed working with you. I guess, as you think about 2016, I wonder if you could elaborate a bit on your outlook specifically for Policy Compliance and Web Application Scanning versus how you saw them play out in 2015.
I think, on the Web Application Scanning, I think we see the same. One of the things that we were expecting to see as a driver and as an accelerator of our Web Application Scanning was our Web Application Firewall. As I mentioned, we had to go back to the engineering drawings to make it a little bit better than it was, which we are doing that, and I think we are making very good progress toward that. That I think will accelerate when we deliver that solution because it goes hand in glove with Web Application Scanning. As you may recall, the problem with web, we can discover web applications very well, much better than anybody. What do you do when you find vulnerabilities in the code? You've got to fix the code, and that's very, very difficult to do.
The solution is really a very good Web Application Firewall in front of it. That's what continuing working on this one. Once we deliver that, I think we will see our Web Application Scanning accelerating. For the moment, the web application continues about the same. As far as the Policy Compliance, we believe there's two new factors. First of all, the agent really makes the Policy Compliance very effective. We see that the agent giving a boost to the Policy Compliance. In addition, we are, in fact, now, essentially, we have the Security Assessment Questionnaire, which is another component of Policy Compliance, which I think will be very helpful there. This is now GA. Then, we have also are working on the File Integrity Monitoring, which would come later this year, which will be another extension of Policy Compliance.
We see very good continued growth on the Policy Compliance application as well.
Do you differentiate in your view across your three products? If you're looking at this year, do you have a similar outlook for Vulnerability Management and the other two we just discussed, or do you see some reasonable difference for one or two of them versus the other, just your outlook for them?
It's a little bit difficult to say because they are, especially, I would say that about the same. It's a little bit difficult because once we, for example, ship the File Integrity Monitoring, it's a more expensive application, but you deliver that across less servers, essentially. You just typically do that on the critical servers, or on the endpoint. The endpoint is also a totally new game for us because we could not access the endpoints, and that's really where we see a big boost for both VM and Policy Compliance now that we can essentially very successfully address the endpoint. Finally, with the agent, there's another thing that we could not do before. Today, with the agent, we're able now to address the security of this elastic cloud, the configuration that's a totally green field for us.
We have a very successful company like Amazon, which we're working very closely with. That's a new expansion for Qualys as well.
Thank you.
Our next question comes from Gur Talpaz from Stifel. Your line is open.
Great. Thanks for taking my question. Last quarter, you noted a greater emphasis on attacking the government vertical. I was hoping you could give us an update on any sort of progress you've made and what your thoughts are regarding the public sector as we look towards 2016. Thank you.
Yes. We are very committed to the federal market today. We are really expecting to be FedRAMP certified relatively soon. We have, in fact, the SEC, the Securities and Exchange Commission, as our sponsor. We have, in fact, provided everything. I think once we have that certification, which we are expecting that any time now, that will really make us essentially one of the first, if not, I think the second cloud service to be FedRAMP certified. That will really give us what we need to really help us penetrate the market. In the meantime, what we're doing is beefing up our team, knocking on doors to essentially accelerate our market penetration there. Let me remind you that the federal market was only representing about less than 1% of our revenues. We've got, of course, there significant upside.
The federal government is finally moving into cloud solutions. There's much less resistance of the cloud. I mentioned that when our disconnected version, which will allow us to do at DoD, that disconnected version works very well at Siemens. Today, we consider that we are production ready there, and we have also the ability to provide private clouds for the agencies as well. I think we've got the tools, and now it's a question of essentially knocking on the doors. As you know, it takes time. Federal market, this is not something that you got the business immediately. It takes some time.
Sure.
We're all right.
That's good color. I had one more question, if I might. You just noted Amazon. I was hoping to get your thoughts on Amazon's bigger organic push into security. They just launched their own WAF solution that talks of other solutions, essentially. How do you feel about Amazon, even Microsoft, getting more into the security game themselves with native solutions? Thank you.
This is a very good question, and in fact, this is what makes Qualys very unique because with our architecture, as well as with Amazon, we can really help these companies to secure the core, the infrastructure. This is what we are doing with Amazon and with other similar companies like that. I've always believed that when you look at the cloud, security wants to be absolutely, if you prefer, embedded into the cloud offering and making that transparent to the customers. Now, this being said, you have a huge issue of scale. You start now to suddenly do Vulnerability Management on this cloud infrastructure. You cannot do it with the standard scanning technology. You need to have our agent technology, essentially, to do that. That's where Qualys is going to play, I believe, a very big role in helping these large companies secure their infrastructure.
Great. Thank you.
Our next question comes from Alban Cousin from Arete. Your line is open.
Hi. Thanks for taking my question. Just wanted to have a clarification on the guidance. Yeah, according to my math, it looks like the margin is going down. I just was wondering whether that's the case, and if so, where are the investments that you're doing?
Well, Philippe mentioned, Alban, that we're making more investments in sales and especially marketing with all the new products. That's one initiative. I mentioned earlier we also have a higher tax rate this year than last year. That contributes a little bit. Those are the main things.
Yeah, more senior management as well, which of course-
Right. Okay.
they don't come cheap.
Okay. Thanks.
At this time, I'm showing no further questions. I would like to turn the call back over to Philippe Courtot for closing remarks.
Thank you, operator. Thank you all for attending our Q4 and year-end earnings call. To end our call on a personal note, I just want to again thank Don McCauley for his great contribution to Qualys over the past 10 years. We all wish him well in the future, and we look forward to speaking with you next quarter. Thank you very much.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.