Good day, everyone, and welcome to Qualys's third quarter 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 Don McCauley, CFO of Qualys. Please go ahead, sir.
Well, thank you, welcome, everyone to Qualys's third quarter 2015 investor conference call. I'm Don McCauley, CFO, 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 generally relate to future events or our future financial or operating performance. 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 and 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, and 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 development operations and support teams in India. The expansion of our partnerships and the related benefits of those partnerships. Our ability to effectively manage costs. Our plans to expand our sales force. Our plans to explore strategic acquisitions. Finally, our expectations for the number of weighted average diluted shares outstanding and the effective GAAP and non-GAAP income tax rates for the fourth quarter and full year 2015.
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 August 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 third quarter 2015. I will cover our financial results and factors that drove the quarter in more detail, as well as our outlook for the fourth quarter and full year 2015. We will open up the call for your questions. With that, I would now turn the call over to Philippe.
Thanks, Don, and welcome to all of you. The third quarter of 2015 was another excellent quarter for Qualys. While Don will cover the financial details of our performance for the quarter, I will share with you why I think these are exciting times for Qualys from both a growth and strategic perspective. First of all, I would like to thank all of you who participated in our Investor Day, as well as in our 15th Qualys User Conference a few weeks ago. Both events were successful, very successful, and allowed investors, partners, customers, and prospective customers to see for themselves the many extensions we have made to our disruptive next-generation cloud security platform. We also discussed a number of exciting new products which will be coming in the near future, and I will highlight several of them in our call today with you.
I will start off with an overview of key highlights that are driving the momentum in our business and discuss in more detail our new product releases. In Q3, we released two groundbreaking extensions to the platform that have been very well received by our customers. Let me start first with the AssetView service that allows enterprises to search across millions of IT assets in real time and in a matter of seconds to find information about these assets and create customizable reports and dashboards that both IT and security teams can use to perform continuous asset inventory and synchronization as well with CMDBs. AssetView is now enabled with agents for our customers to activate for free asset inventory within their IT environments.
Second, we released Cloud Agents, which is now available on Windows and Linux and will become available on Mac by the end of the fourth quarter. We are seeing strong demand from our customers for the agent technology, with a few customers already deploying it at a very large scale on millions of assets, including endpoints and within cloud environments. From such a positive and early adoption of our Cloud Agents within our customer base as well as with new customers, we believe that we have the potential of doubling the revenue of both our vulnerability management and of our Policy Compliance solutions, as we are now able to address endpoints and elastic cloud environments, which we could not address with our traditional scanning technology. We continue to work on our WAF solution to deliver APIs and more customization for enterprise customers.
This enhancement will increase product adoption and facilitate faster traction within large enterprises. We expect to introduce these advanced capabilities for our WAF offering by the RSA Conference in the first quarter of 2016. We completed our integration with Splunk to help customers perform real-time security analytics on Qualys' data for enhanced breach detection and faster incident response. Similarly, we completed our integration with ServiceNow CMDB to help customers synchronize asset information in real time between Qualys and ServiceNow, and push updates for assets and their attributes that are discovered by Qualys into ServiceNow CMDB.
In the third quarter, we added a number of important new accounts, including BBVA, Spain; Criteo; EiQ Networks; IMS Health; GW Associate in China; Markit; Post Office Ltd.; Quintiles; Santander UK; Spectrum Health; State Farm; Texas Instruments; Texas Department of Transportation; T-Mobile; Tropicana Entertainment; Whitbread PLC; and Windstream Hosted Solutions. Our industry-leading vulnerability management solution once again continued to grow at approximately 19%, and this despite some headwinds that we have seen from currency fluctuation this year. We saw approximately 40% growth from our newer services, which include Web Application Scanning, Policy Compliance, and Web Application Firewall. An indication of our continuing success in diversifying our cloud platform offerings is that 61% of our customers have now purchased more than one solution.
This is another data point on our promising land and expand trend line, as these metrics stood at 30% at the end of 2013 and 54% at the end of 2014. Lastly, we continue to expand our sales force, including the addition of several new sales executives, and as a result, we are even better equipped to sell at higher executive levels in the enterprise. We are keen to continue expanding our sales force aggressively on a global scale so we can meet the increasing demands of the market for expanded offerings. Now for a review of our financial performance and our guidance. I will turn the call over to Don.
Thanks, Philippe. Again, as previously mentioned, our third quarter 2015 results were excellent. Revenues in the third quarter grew to $42.5 million, which represented 24% growth over the third quarter of 2014. Our current deferred revenue balance is $91.9 million as of September 30th, 2015, which is also 24% greater than the balance one year ago. Similar to many other companies, both our revenues and our current deferred revenue balances faced a considerable headwind due to the strengthening of the U.S. dollar compared to last year. Now, a quick review of some other revenue metrics. For the third quarter, the U.S. represented 70.5% of revenues, compared to 70% a year ago. Also, we derived 78.5% of third-quarter revenues from subscriptions to our vulnerability management solution, compared to 81% in the third quarter last year.
GAAP gross profits increased by 25% to $33.7 million in the third quarter of 2015, compared to $26.9 million in the prior year. GAAP gross margin was 79% for the third quarter of 2015, compared to 78% a year earlier. Non-GAAP gross margin was 80% for the third quarter of 2015, compared to 79% in the third quarter last year. Adjusted EBITDA for the third quarter increased by 67% to $15.1 million, compared to $9 million a year earlier. Adjusted EBITDA as a percentage of revenues increased to 36% in the third quarter of 2015, compared with 26% in the same quarter of 2014. Net cash from operations in the first nine months of 2015 increased by 68% to $41.7 million, compared to $24.9 million in the first nine months of 2014.
Free cash flow for the first nine months increased by 82% to $26.7 million, compared to $14.7 million last year. In the third quarter of 2015, capital expenditures were $4.5 million, compared to $3.7 million in the third quarter last year. In the fourth quarter, we expect capital expenditures to be in the range of $5 million to $6 million as we expand our cloud infrastructure to support more customers, add more solutions and functionality to our platforms, and also build out an expanded office facility in India. Moving on to earnings per share. For the third quarter of 2015, GAAP EPS was $0.11 per diluted share versus $0.08 a year ago. Non-GAAP EPS was $0.19 per diluted share in the third quarter of 2015, compared to $0.15 in the third quarter of 2014.
As most of you already know, starting this year, our earnings are fully taxed. Our impressive GAAP and non-GAAP EPS results for this quarter and year to date in 2015 are net of a much larger provision for income taxes in 2015. In fact, our GAAP effective tax rate for the first nine months in 2014 was approximately 13%, compared to this year's GAAP effective tax rate of approximately 38%. Turning to our guidance, starting with revenues. For the fourth quarter, we expect revenues to be in the range of $44.3 million to $44.8 million. At the midpoint, this represents 22% growth over fourth quarter 2014 revenues. With one quarter remaining in 2015, we have adjusted our full year 2015 revenue guidance range to equal the revenues of the first three quarters, plus the fourth quarter revenue guidance range that we just discussed.
We now expect full year 2015 revenues to be in the range of $164.1 million to $164.6 million. At the midpoint, this represents 23% growth over 2014 revenues. Our previous full year 2015 revenue guidance range was $165.0 million to $166.5 million. On to earnings per share guidance. We expect GAAP EPS for the fourth quarter of 2015 to be in the range of $0.08-$0.10, and non-GAAP EPS is expected to be in the range of $0.16-$0.18. Our fourth quarter EPS estimates are based on approximately 38.2 million weighted average diluted shares outstanding. For the full year 2015, we are raising our guidance ranges for both GAAP and non-GAAP EPS. We now expect full year GAAP EPS to be in the range of $0.35-$0.37, an increase from our previous guidance range of $0.22-$0.27.
We now expect non-GAAP EPS to be in the range of $0.65-$0.67, an increase from the previous guidance range of $0.50-$0.55. Our full-year EPS estimates are based on approximately 38.2 million weighted average diluted shares outstanding. With that, Philippe and I would be happy to answer any of your questions. Operator?
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question today comes from Sterling Auty with JP Morgan. Your line is now open.
Yeah, thanks. Hi, guys. Wondering, in terms of looking at the results for the quarter and more importantly, the guidance for the December quarter, relative to your previous outlook, what's the area that you're seeing, I guess, slower growth than what you originally anticipated? Is it the newer stuff? Because it looked like the VM growth held in in the quarter, or is there something happening on the VM side relative to what your previous outlook had incorporated?
Yeah. Hi, Sterling, this is Don. Yeah, as Philippe mentioned, our growth of our newer services, which previously had been growing at 50-plus % are now approximately 40%, whereas VM stayed the same at 19.
Is there a particular reason why, in terms of, is it you've reached a certain penetration within your customers that you're starting to see that deceleration, or is there any change in the competitive landscape that's caused that change in trajectory?
No, this is Philippe. This is not the case, in fact. It's more the fact that today we are doing bigger upsells, the timing of these upsells affect, obviously, the growth within the quarter. We're doing between $250 to even a $1 million upsell now on Policy Compliance and on our Web Application Scanning. The timing of those, when they arrive in the quarter, obviously can have an impact. They have an impact, but can have an impact. We don't see any. Nothing to do with the competition. In fact, we see significant opportunity to displace more rapidly solutions like Symantec, CCS, and others of these Policy Compliance application where Qualys is a far better solution. Our agent, by the way, also is extremely well received to precisely displace and compete against these solutions.
Okay. Last question would be on the sales and marketing side. Can you give us a sense of did you hit the headcount hiring plans that you had put into place? Because they came in several million dollars lower than what we anticipated. I didn't know how much of that would be variable comp versus maybe just timing of hiring.
We first of all, we put the emphasis last quarter on expanding our management, this is something that we have done. Rather than hiring more sales people, we strengthened significantly the management in many aspects, both in our enterprise business as well as in our SMB business. We have also, the RSA this year was, of course, in the previous quarter, which is typically a very big expense. We are now gearing up to essentially launch quite significant marketing campaigns on the Cloud Agent.
Okay. Thank you.
Our next question comes from Phil Winslow with Credit Suisse. Your line is now open.
Hi, thanks. Just as a follow-on to Sterling's question, obviously he focused on the new products, but wanted to touch on VM. I know in the year you'd mentioned some deceleration in the business, but it continued to have actually a pretty healthy growth, relatively limited deceleration this quarter, as you mentioned. Just what dynamics are you seeing there? What was the currency effect on that versus the other dynamics that are going on in the space?
Oh, yes. Effectively, the currency has been a significant drag on our VM business because, as you know, our model, instead of being your perpetual license, is a subscription base. Of course, the dollar, the euro and the currency has an impact of a few % to our renewal base. This is quite significant, of course, in term of revenues. We see that marketplace continuing to be very strong with Qualys. I'm sure all of you know that the company with whom we were competing the most fiercely at the very high end of the marketplace, namely the McAfee MVM. McAfee, in fact Intel announced that they are retiring this product. That, in fact, will accelerate, we believe our ability to displace some of the large MVM deployments which still exist. In fact, we're already working on those. That, I think, is a plus.
Of course, generally speaking, we see that VM business totally invigorated by our Cloud Agent, as I mentioned in the introduction. Our customers can now scan the endpoints or the laptops, which where you have significantly more units there than the servers. So we're essentially limited in the past with our traditional scanning technology to servers, essentially. That also expands our ability of both the VM as well as the Policy Compliance application. So no, we see bottom line of the VM continuing to be very strong. We have introduced significant breakthrough products with both the agent and our AssetView, which allows our customers to create customizable dashboard, which are dynamic, so they can essentially have at their fingertips the security and compliance posture of their enterprise at the scale that none of our competitors can essentially follow.
Hey, Phil, I just have a follow-up point on the beginning of your question. Just to clarify for you and everyone else, the growth rate of our VM business hit 20% in the fourth quarter last year. In the quarter before that and the three quarters since that, it's been 19. So this has been basically a stable environment. This is not a declining environment. This is a stable 19% growth environment for four of the last five quarters, including the last three.
Great. Thanks, guys.
Our next question comes from Steve Ashley with Robert W. Baird. Your line is now open.
Perfect. Thank you very much. I'd just like to ask about the Cloud Agent business. Was there revenue in the period? When you report your VM growth of 19, is the Cloud Agent revenue included in that? Thank you.
We had some revenue in the period. As you know, this is pretty early days for the Cloud Agent. We expect, of course, to see more coming. I think it has been very well received. We have a lot of interest in the product, a lot of trials for the Cloud Agent. These are not insignificant upsell for existing customers as again, because of the volume that I mentioned earlier. To answer your second question, the way we count the Cloud Agent is we have multiple opportunities of revenues on the Cloud Agent. We have the VM components, which of course we charge for, and that goes with the VM. The Policy Compliance component that we also charge for, that goes to the Policy Compliance. There's a slew of forthcoming new services which we expect to bring to market pretty quickly.
First with the File Integrity Monitoring, which is essentially competing against Tripwire. We have a huge demand for that, so that will be part of a new service. We'll introduce early next year the ability to provide indication of compromises, which we'll also charge for as an additional service, and that also will count as new services.
Perfect. One housekeeping. Don, can we get the number of sales reps you ended the period with? Thank you.
We added five more from last quarter. I think that brings us to 144.
Perfect. Thanks.
Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.
Hey, guys, thanks for taking my questions. I wanted to follow up on Sterling's question also. You guys had strong billings performance in the quarter, and I understand, Don, you mentioned that newer product sales are slowing slightly, but this still doesn't make sense why Q4 revenue is guided lower, given the billings in the quarter. I'm curious, was there a change in duration, either quarter or your outlook?
No, there wasn't, Matt. There wasn't a change in duration.
No, it's only the timing of big deals. Of course, if a big deal arrives early in the quarter, it contributes obviously to more revenue than it arrives at the end of the quarter.
Philippe, I guess drilling in on that, is that sort of a commentary in terms of where you think some of the large deals in Q4 may likely come later in the quarter, more of a back-end loaded quarter than maybe we were thinking?
Correct.
Okay. Then I guess, you touched on your analyst day, you brought in a new head of sales and a new head of EMEA. As we look forward to 2016, are there any changes that you guys expect to make given the sales leadership, or should it be more or less sort of what we've come to expect on an annual basis in terms of potential sales changes?
I'm not for sure that I understand the question. You mean changing into the sales organization or changing-
I guess maybe like if territories get reorganized or anything that a new head of sales might do sort of kicking off a new fiscal year.
In fact, we already did that in parallel. The organization changes have already taken place. Today we're essentially done with that. We have the new management. We did all that within Q3, almost in parallel. Today it's sort of about hiring more salespeople. We're very stable and solid in term of management. It's going to be more headcounts both on the new business side as well on the renewal and upsell. Since we have so much opportunities on the upsell side, we're increasing also the headcount there as well.
Got it. Thanks, guys.
Our next question comes from Erik Suppiger with JMP. Your line is now open.
Yeah, thanks for taking the question. On the new services, just to be clear, was it both the web app scanning and the Policy Compliance that decelerated to 40%? Is there any reason why they would have both decelerated simultaneously?
Essentially, just to be very specific, on both cases, there was two large upsell which got delayed.
Say that again. There were two what?
Two large upsells in both categories which were delayed.
Okay. One was in each Web Application Scanning and one was Policy Compliance.
Exactly
compliance?
Absolutely.
Okay. In terms of the McAfee solution, they've partnered with Rapid7. How do you look at your opportunity to capture some of that business given their partnership?
I think the partnership is something which, put yourself in the shoes of the customer, which has essentially have seen McAfee not supporting the product for quite a while, then suddenly recommending another solution. What we see today is that the market is coming. People will go and try to evaluate the solution. At the high end of the marketplace, which is essentially where most of the McAfee was, we have an extremely strong position because we scale unlike our competitors. At the more mid-range of the marketplace, we are now essentially preparing, as I mentioned, we're probably going to launch a replacement campaign anytime soon. This is the way we see the market. All of the large accounts have already connected with us. These companies, they are not going to follow the recommendation of Intel for sure.
They all are evaluating the various options for them.
Lastly, on the hiring front, you added five sales reps in the quarter. Given some of the management additions that you've had, do you think you're going to be accelerating the sales rep hiring going forward?
Definitely. We have already started, we're really interviewing significantly as we speak.
Very good. Thank you.
Our next question comes from Srini Nandury with Summit Research. Your line is now open.
All right. Thank you for taking my call. Guys, I just want to understand your federal business a little bit. I know that you just hired Mark Hutnan recently. If I may, can you talk about the IT spending environment from your perspective and more importantly, on the sales cycles? Have you seen any changes in your sales cycles in the last quarter or so? Can you talk about the average deal sizes, if you may?
No.
Thank you.
Yes. In terms of the sales cycle, we have not seen essentially the sales cycle changing. As you know, we are addressing three markets with package of solutions with Express Lite for the SMB, Express for the SME, for the mid-market, and Enterprise for the large enterprise. The selling cycle has been remained about the same in these three categories. The difference, as you alluded to, is the fact that we are now doing significantly bigger deals and bigger upsell. That's the big difference.
All right. Thank you, gentlemen.
Our next question comes from Michael Kim with Imperial Capital. Your line is now open.
Hi. Good afternoon, guys. Just going back to the Cloud Agent platform, hoping you could provide an update on the deployment to some of the customers that you mentioned at the Analyst Day, Visa, Cisco, and the cloud provider, if they've expanded on those deployments. Also, with the trials, are they primarily existing customers looking for an upsell opportunity, or is that an opportunity to capture new customers?
All the company we mentioned, they all have deployed, essentially, very successfully. We're very happy with that. We have, as I mentioned earlier, a lot of trials, both from existing customers as well as new customers. New customers really appreciate the value that we bring for both VM and Policy Compliance. Let me remind you what these values are. With these Cloud Agents, you don't have to worry about scanning windows, which has always been a kind of a pain. You don't have to worry about credentials, so you could identify what you have on the devices and their vulnerabilities. That's another very big advantage. Finally, what you have is the real-time component. With the scanning windows, you are depending on scanning your system every week. In fact, we have today customers, believe it or not, scanning a million IP every day.
Of course, these agents eliminate all of that and give you that ability to fundamentally scan at real time. We anticipate, over time, that most of our customers, wherever they can put an agent, will use our agent as the technology to identify the vulnerabilities on those devices, and only use the scanning technology essentially for those devices like printers, et cetera, where you cannot put an agent. As you may know also, if you were at the conference, we're also introducing in beta what we call the passive scanning. With these 3 technology combined, with the scanning technology, we can look at the device from the outside. With the agent, we can look at the device from the inside. Now with our passive technology, we can look at what's coming in and out of the device.
The beauty of our architecture is that instead of having 3 different application like you find with enterprise software solution, we bring all that data into that 1 central place, which is our cloud platform, which we can deliver either as a shared platform or as an on-premise solution. Now you can correlate all of that information in real time and as well as essentially creating the customizable views and dashboard and alerts. This is what we have done, and this is absolutely well received from all of our customers today, and prospects.
As you're going through some of the trials, have you gotten a little better sense on the pricing that you might be able to see as a premium relative to VM or Policy Compliance?
Currently today, we believe we could sustain about, well, more in the beginning, essentially giving some promotion. Ultimately, we see that we could get a premium on the vulnerability scanning, both for Policy Compliance and for VM, as in fact, we create a significantly more value for the customers. We believe we can maintain about a 20% premium over the traditional scanning solutions.
Got it. Just going back to the core Vulnerability Management business and the consistency in the growth this year. Has that been driven by share gains primarily or scope expansion by existing customers or maybe expansion in use case to Continuous Monitoring?
I think the Continuous Monitoring doesn't really drive that much revenue by itself, it absolutely makes the Vulnerability Management application much more, if you prefer, more effective, as you can now create alerts. The big driver is a combination of a lot of new customers that's starting bigger than in the past. In the past, we're starting, for example, to do the perimeter. It was taking some time for the company to really believe in the model and then adopt us in the inside. Today, we see companies from the get-go which are really taking both inside and the outside, and that obviously makes a bigger deal. It's a kind of a mix of customers.
Some existing customers, for example, who have a big bank which is moving from the outside to the inside, that, of course, will create a big upsell, as well as I mentioned earlier, new customers which are starting both for the perimeter and for the inside at the same time.
Okay, great. Thank you very much.
Our next question comes from Mike Sekos with Macquarie. Your line is now open.
Hi, guys. Question for you on the two larger upsells that were delayed, one for the WAS product and one for the PC. Were you expecting both of those upsells to close during the third quarter or the fourth quarter? Have those upsells now closed at this time?
We had, in fact, one of each in a way. None of them have closed at this time.
I'm sorry, you expected both of those to close, you said, or just one of those?
No. What I mentioned is one we were expecting to have in the previous quarter, and the other one in the current quarter, and they both have not closed yet.
Okay. This is the second time you guys have had to take down your full-year revenue guidance, and both of them we can attribute in part to the FX, but also to when these larger deals are starting to come in. I guess the question then is: are you guys rethinking or changing your approach to guidance now, just so that way you guys don't have to keep coming out and doing this? Is there any change in the process that you guys have for when you set your guidance?
Yeah. No, Mike, there's no change in the methodology that we use. We have a very granular bottoms-up approach to look at our business and forecast it out.
Okay. Just the last question, if I could, was regarding the pricing of the Cloud Agents. I know you had said you expect that you can command a premium for these agents, let's call it 20%, compared to the traditional scanning solutions. I guess the question is: are these Cloud Agents being priced on a per device basis or a per IP address?
It's the same because it's per device, but it's equivalent to per IP. Yes.
Okay. Thank you.
Our next question comes from Robert Breza with Wunderlich. Your line is now open.
Hi. Thanks for taking my questions. Most of my questions have been asked already. Just, Don, real quickly, when you look out to FY 2016, you did mention taxes in your prepared remarks. Can you just talk to us on a non-GAAP basis how you're thinking about taxes? Thanks.
Yeah. At this point, Rob, I don't have any reason to think that the rates we're using right now are going to change.
Perfect. Thank you.
Yeah.
Our next question comes from Gur Talpaz with Stifel. Your line is now open.
Hi, guys. This is Chris Spiros on for Gur. First of all, thanks for taking our question. Second of all, in regards to your continuous monitoring cloud service, could you guys highlight some recent successes and describe the overall state of the pipeline?
The Qualys Continuous Monitoring is an extension to the VM. It allows customers to define a certain kind of circumstances where they believe it's the combination of, for example, a port being open with the severity number 5, that creates an alert. With these alerts, we move that alert into their incident response system. It's a very natural extension of our vulnerability management. Currently today, we see customers have been using it much more for the perimeter, and we're starting to see an adoption for doing the same thing for your internal devices.
All right. Sounds good. Thank you, guys.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Again, that is star one on your telephone keypad. Our next question comes from Rob Owens with Pacific Crest. Your line is now open.
Hey, guys, this is Ben on for Rob. Thanks for taking my questions. First question I had was just around. You talked about a deal getting pushed from Q3. I wanted to ask about the linearity of business for the rest of the business throughout Q3. Was it pretty linear relative to what you've seen in the past, or did you see some shifts on when deals were coming in?
It was a normal quarter, Ben, in terms of the pattern of business.
Okay, great. I also wanted to I know in the past you've talked about some of your existing customers coming up and asking for upsells to the point where it kind of surprised you to the degree of what they wanted to buy as far as additional VM solutions. I wondered if you could talk a little bit as far as what type of visibility you're seeing into these VM upsells. Are you easily able to telegraph which customers are looking for broader deployments? Are you actually seeing a significant amount of upsells that are coming as kind of a surprise, they're coming to you?
In fact, we have a very good visibility of those upsell on the VM side. The reason is because, again, you have some customers which are still only doing the perimeter. This one, it's obviously a question of time before they go and expand Qualys inside, which are typically much bigger deals. On the other customers, it's essentially much more their growth. This is also more statistically predictable because we can know how much of their total environment they are currently scanning, and we can, of course, discussing with them, understanding their plan of expansion. This is very predictable, both of them. What is not predictable And we have quite a few of those is when a company today acquire another company, now suddenly there's an opportunity of having now Qualys being used in the new company they've acquired.
There's been a lot of big mergers. Because we have a large percentage already of the high-end of the marketplace, and this is where essentially a lot of that activity is taking place, this is really favoring us.
Great. Thank you.
Our next question comes from Alvin Cousin with RIT Research. Your line is now open.
Hi. Thanks for taking my question. I may have missed that earlier. Don, will it be possible to spell out the effect of FX? Some of your peers have been able to say that the euro weakness may have impacted their top line by 300 bps also.
Yeah.
I was wondering whether you could do the same for Qualys.
Yeah, we could do that. For Q3 revenues, our forecast of Q4 revenues and also our deferred revenue balance at September 30th, approximately 2.5% impact.
Thanks.
Our next question comes from John Lucia with JMP Securities. Your line is now open.
Hey, guys. Thanks for taking my questions. The first question is, I think you said that 60% of your customers have purchased more than one solution at this point. That stood at 54% at the end of 2014 and 30% at the end of 2013. It seems to be slowing from the pace that you had in 2014 going into this quarter. Can you just talk about what's causing that slowdown in terms of upsells?
Yeah. Hey, John, this is Don. Hey, we actually mentioned this a quarter ago on our call kind of preemptively. Today, waiting for the agent and File Integrity Monitoring and some of these other products to kick in, which is just getting started. Revenues comprise principally of Vulnerability Management, Policy Compliance, and Web Application Scanning. Numerically, we give this metric, we're counting customers. Our SMB customers, by and large, don't buy compliance very much. Compliance is more of an enterprise-focused product. The smaller customers generally aren't too compliance-oriented. Kind of naturally, until we get some other products joining the mix, it's inevitable that the metric will start to level off.
Okay. That makes sense. I have one more question. What was total headcount in the quarter? Did hiring come in below, in line with, or ahead of your expectations, also the same for turnover?
Yeah. Our total headcount was 497 in the quarter. I already gave the sales headcount. I don't think we really get into what we budget and so forth. We're always looking for good people. I don't think we've previously given headcount targets or turnover figures. Nothing unusual going on this quarter, though. We're always looking for good people, and we were able to add quite a few this quarter.
Okay.
One point that I could add is that we're also expanding big time in India, as Don mentioned. We're moving into new, beautiful offices in Pune. We have a unique ability to really attract a lot of good talent there, and we're very happy. That allows us to continue investing in our R&D while maintaining, if you prefer, our cost structure. If not, in fact, improving our cost structure.
Okay. Makes sense. Thank you.
Our next question comes from Jeff Cardon with Wasatch Advisors. Your line is now open.
Hi. Thank you. I just want another clarification on the deals that won't come through in the fourth quarter. Are they in the backlog number now, and that's one of the reasons the backlog accelerated, or have they not been signed yet?
Yeah. You're talking about deferred revenues?
Yeah. Sorry.
Yeah. Deferred revenues are actually deals that closed that we billed the customer for. When we say a deal closed, it would be in deferred revenues. These are not in deferred revenues at September 30th.
Have they been signed?
As I mentioned earlier, no, not yet, as I mentioned earlier.
Okay. Thank you.
I'm not showing any further questions at this time. I would now like to turn the call back to Philippe Courtot, CEO of Qualys, for closing remarks.
Okay. Thank you, operator. In summary, our new offerings, including AssetView and Cloud Agents, are a game-changer for Qualys. They significantly expand our market opportunity and allow us to play a very important role in the convergence of IT and security. We are now better equipped than ever to capitalize on our scalable business model and outstanding team, which together allows us to continue accelerating the adoption of our offerings on a global scale. Thank you for attending our earnings call today. Should you have any follow-up questions, Don and I are available to you. We are looking forward to speaking with you next quarter. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.