10-Q 1 xm-20220331.htm 10-Q xm-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 001-39952
QUALTRICS INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Delaware47-1754215
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
333 West River Park Drive
Provo, Utah 84604
(Address, including zip code of principal executive offices)
385-203-4999
(Telephone number, including area code, of principal executive offices)

Title of each classTrading SymbolName of each exchange on which registered
Class A Common Stock, $0.0001 par value per shareXMNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of April 25, 2022, the registrant had 582,325,127 shares of common stock outstanding, consisting of 159,154,517 shares of Class A common stock and 423,170,610 shares of Class B common stock.

1



TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to be profitable;
our ability to grow at or near historical growth rates;
anticipated technology trends, such as the use of and demand for experience management software;
our ability to attract and retain customers to use our products;
our ability to respond to and overcome challenges brought by the COVID-19 pandemic;
our ability to attract enterprises and international organizations as customers for our products;
our ability to expand our network with content consulting partners, delivery partners, and technology partners;
the evolution of technology affecting our products and markets;
our ability to introduce new products and enhance existing products and to compete effectively with competitors;
our ability to successfully enter into new markets and manage our international expansion;
the attraction and retention of qualified employees and key personnel;
our ability to effectively manage our growth and future expenses and maintain our corporate culture;
our anticipated investments in sales and marketing and research and development;
our ability to maintain, protect, and enhance our intellectual property rights;
our ability to successfully defend litigation brought against us;
our ability to maintain data privacy and data security;
the sufficiency of our cash and cash equivalents to meet our liquidity needs;
our ability to comply with modified or new laws and regulations applying to our business;
the impact of geopolitical events, including the ongoing conflict between Russia and Ukraine;
our reduced ability to leverage resources at SAP as an independent company from SAP; and
the increased expenses associated with being an independent public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.



You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
You should read this Quarterly Report on Form 10-Q and exhibits with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.




Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Qualtrics International Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and par value)
(Unaudited)
As of March 31,As of December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$836,448 $1,014,511 
Accounts receivable, net of allowance (1)
366,314 461,830 
Deferred contract acquisition costs, net64,876 60,455 
Prepaid expenses and other current assets76,082 68,887 
Total current assets1,343,720 1,605,683 
Non-current assets:
Property and equipment, net199,392 192,327 
Right-of-use assets from operating leases236,344 227,320 
Goodwill1,119,548 1,118,768 
Other intangible assets, net250,303 264,500 
Deferred contract acquisition costs, net of current portion151,956 145,952 
Deferred tax assets1,301 96 
Other assets28,414 27,577 
Total assets$3,330,978 $3,582,223 
Liabilities and equity (deficit)
Current liabilities:
Lease liabilities$20,870 $18,898 
Accounts payable (1)
70,865 84,053 
Accrued liabilities127,417 167,402 
Liability-classified, stock-based awards2,249 4,519 
Deferred revenue746,328 748,145 
Total current liabilities967,729 1,023,017 
Non-current liabilities:
Lease liabilities, net of current portion274,131 263,307 
Liability-classified, stock-based awards, net of current portion 52 
Deferred revenue, net of current portion9,978 6,698 
Deferred tax liabilities24,539 23,653 
Other liabilities (1)
78,511 78,796 
Total liabilities$1,354,888 $1,395,523 
Commitments and contingencies
Equity (deficit)
Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares; no shares outstanding
  
Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 158,862,119 and 147,309,254 shares as of March 31, 2022 and December 31, 2021
16 15 
Class B common stock, par value $0.0001 per share; authorized 1,000,000,000 shares; issued and outstanding 423,170,610 as of March 31, 2022 and December 31, 2021
42 42 
Additional paid in capital4,727,962 4,645,800 
Accumulated other comprehensive loss(1,692)(1,244)
Accumulated deficit(2,750,238)(2,457,913)
Total equity (deficit)1,976,090 2,186,700 
Total liabilities and equity (deficit)$3,330,978 $3,582,223 
________________
(1) Includes amounts from related parties. See Note 13 for further details
The accompanying notes are an integral part of these condensed consolidated financial statements.
1


Qualtrics International Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31,
20222021
Revenue:
Subscription$280,808 $186,896 
Professional services and other54,839 51,747 
Total revenue335,647 238,643 
Cost of revenue:
Subscription44,774 20,370 
Professional services and other54,493 41,411 
Total cost of revenue99,267 61,781 
Gross profit236,380 176,862 
Operating expenses:
Research and development105,999 62,806 
Sales and marketing218,330 136,181 
General and administrative202,589 174,449 
Total operating expenses526,918 373,436 
Operating loss(290,538)(196,574)
Other non-operating income (expense), net674 (1,740)
Loss before income taxes(289,864)(198,314)
Provision for income taxes2,461 1,540 
Net loss$(292,325)$(199,854)
Net loss per share attributable to common stockholder, basic and diluted$(0.51)$(0.41)
Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholder, basic and diluted575,700,568 482,260,465 
The accompanying notes are an integral part of these condensed consolidated financial statements.
Operating expenses includes:
Stock-based compensation expense(1) as follows:
Three Months Ended March 31,
in thousands20222021
Cost of subscription revenue$4,544 $2,624 
Cost of professional services and other revenue8,066 4,430 
Research and development41,275 21,332 
Sales and marketing49,053 22,777 
General and administrative165,323 151,836 
Total stock-based compensation expense, including cash settled$268,261 $202,999 
________________
(1) During the three months ended March 31, 2022, employer payroll tax on employee stock transactions reported in cost of subscription revenue, cost of professional services and other revenue, research and development, sales and marketing, and general and administrative expense was $0.3 million, $0.4 million, $3.2 million, $2.1 million, and $6.0 million, respectively. Employer payroll tax on employee stock transactions was not material during the three months ended March 31, 2021.
2


Amortization of acquired intangible assets as follows:
Three Months Ended March 31,
in thousands20222021
Cost of revenue$7,572 $266 
Sales and marketing5,527 51 
General and administrative318 47 
Total amortization of acquired intangible assets$13,417 $364 
3


Qualtrics International Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three Months Ended March 31,
20222021
Net loss$(292,325)$(199,854)
Other comprehensive income (loss):
Foreign currency translation gain (loss)(448)(1,786)
Comprehensive loss$(292,773)$(201,640)
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


Qualtrics International Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
(Unaudited)
Three Months Ended March 31, 2022
Class A common stockClass B common stockAdditional paid-in capitalAccumulated other comprehensive lossAccumulated deficitTotal equity (deficit)
SharesAmountSharesAmount
Balance, December 31, 2021147,309,254 $15 423,170,610 $42 $4,645,800 $(1,244)$(2,457,913)$2,186,700 
Stock-based compensation— — — — 270,089 — — 270,089 
Issuance of common stock upon settlement of restricted stock units (RSUs)10,658,728 1 — — (1)— —  
Issuance of common stock upon exercise of stock options123,171 — — — 614 — — 614 
Issuance of common stock for employee stock purchase plan770,966 — — — 20,380 — — 20,380 
Common stock withheld related to net share settlement of equity awards— — — — (208,920)— — (208,920)
Net loss— — — — — — (292,325)(292,325)
Foreign currency translation adjustment— — — — — (448)— (448)
Balance, March 31, 2022158,862,119 $16 423,170,610 $42 $4,727,962 $(1,692)$(2,750,238)$1,976,090 
Three Months Ended March 31, 2021
Class A common stockClass B common stockAdditional paid-in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal deficit
SharesAmountSharesAmount
Balance, December 31, 20206,000,000 $1 423,170,610 $42 $1,126,631 $3,191 $(1,398,767)$(268,902)
Stock-based compensation— — — — 203,544 — — 203,544 
Issuance of common stock upon settlement of restricted stock units (RSUs)1,313,569 — — — — — — — 
Modification of cash-settled stock-based compensation awards into equity-settled awards— — — — 206,313 — — 206,313 
Capital contribution from SAP— — — — 115,000 — — 115,000 
Sales of Class A common stock, net of issuance costs81,968,387 8 — — 2,238,571 — — 2,238,579 
Dividend declared— — — — (2,392,280)— — (2,392,280)
Net loss— — — — — — (199,854)(199,854)
Foreign currency translation adjustment— — — — — (1,786)— (1,786)
Balance, March 31, 202189,281,956 $9 423,170,610 $42 $1,497,779 $1,405 $(1,598,621)$(99,386)

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


Qualtrics International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,
20222021
Cash flows from operating activities
Net loss$(292,325)$(199,854)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization23,355 7,572 
(Gain) loss on disposal of property and equipment(17)129 
Change in fair value of distribution liability for tax sharing agreement(1,500) 
Reduction of right-of-use assets from operating leases7,501 5,704 
Stock-based compensation expense, including cash settled268,261 202,999 
Amortization of deferred contract acquisition costs15,812 11,213 
Deferred income taxes(227)(554)
Changes in assets and liabilities:
Accounts receivable, net95,414 37,072 
Prepaid expenses and other current assets(7,259)(1,138)
Deferred contract acquisitions costs(26,809)(13,519)
Other assets(1,033)(7,415)
Lease liabilities(3,723)(743)
Accounts payable(13,472)(10,855)
Accrued liabilities(40,146)(25,731)
Deferred revenue1,969 (4,208)
Other liabilities(16)1,240 
Settlement of stock-based payments liabilities(2,682)(71,997)
Net cash flows provided by (used in) operating activities23,103 (70,085)
Cash flows from investing activities
Purchases of property and equipment(13,173)(11,149)
Net cash flows used in investing activities(13,173)(11,149)
Cash flows from financing activities
Proceeds from capital contributions from SAP 115,000 
Proceeds from issuance of class A common stock, net of underwriting discounts and commissions 2,244,322 
Payment of costs related to issuance of class A common stock (2,557)
Repayment of promissory note (1,892,280)
Payments for taxes related to net share settlement of equity awards(208,920) 
Issuance of class A common stock through Employee Stock Purchase Plan20,380  
Proceeds from exercise of stock options614  
Net cash flows (used in) provided by financing activities(187,926)464,485 
Effect of changes in exchange rates on cash and cash equivalents(67)(606)
Net (decrease) increase in cash and cash equivalents(178,063)382,645 
Cash and cash equivalents, beginning of period1,014,511 203,891 
Cash and cash equivalents, end of period$836,448 $586,536 
Supplemental cash flow disclosures
Cash paid for income taxes$673 $2,151 
Cash paid for operating leases, net of incentives received$5,662 $800 
Modification of cash-settled stock-based compensation awards into equity-settled awards$ $206,313 
Non-cash investing and financing activities
Capital expenditures incurred but not yet paid$759 $8 
Right-of-use assets obtained in exchange for lease obligations$15,761 $ 
Note payable issued for dividend declared$ $500,000 
Costs related to initial public offering incurred but not yet paid$ $524 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Qualtrics International Inc.
Notes to Condensed Consolidated Financial Statements
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics has built the first experience management platform (“XM Platform”) to manage customer, employee, product, and brand experiences. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services, and engineering services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2022, and the condensed consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to state fairly the Company's financial position as of March 31, 2022 and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for any other future year or interim period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021, included in the Company's Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the standalone selling prices for the Company’s services, deferred contract acquisition costs, the period of benefit generated from deferred contract acquisition costs, valuation of the Company’s equity and cash settled stock-based compensation, valuation of certain intangible assets that were acquired as part of business combinations, valuation of the distribution liability related to the tax sharing agreement with SAP, valuation of deferred income tax assets, uncertain tax positions, contingencies, the determination of whether a contract contains a lease, determining the incremental borrowing rate for the calculation of the present value of lease liabilities and litigation accruals. Actual results could differ from those estimates.
Foreign Currency Transactions
The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date and revenue and expense amounts are translated at the average exchange rate for the period. Foreign currency translation gains and losses are recorded in other comprehensive loss. Exchange rate differences resulting from translation adjustments are accounted for as a component of accumulated other comprehensive loss.
Gains and losses, whether realized or unrealized, from foreign currency transactions (those transactions denominated in currencies other than the entities’ functional currency) are included in other income (expense), net.
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Revenue Recognition
The Company recognizes revenue from its service/product lines when control is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the services. Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue. The Company accounts for revenue contracts with customers by applying the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 – Revenue from Contracts with Customers (Topic 606), which includes the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in a contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied
Classes of Revenue
The Company derives revenue from two service/product lines:
Subscription Revenue
The Company generates revenue primarily from sales of subscriptions to access its XM Platform, together with related support services to its customers. Arrangements with customers do not provide the customer with the right to take possession of the software operating the XM Platform at any time. Instead, customers are granted continuous access to the XM Platform over the contractual period.
The Company’s subscription contracts generally have annual contractual terms while some have multi-year contractual terms. The Company generally bills annually in advance with net 30 payment terms. The Company’s agreements generally cannot be canceled for a refund.
Professional Services and Other Revenue
Professional services and other revenue mainly includes two types of services: research services and professional services. Research services is a solution provided to existing subscription customers with arrangements, which are distinct from subscription revenue services. In addition, the Company provides professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.
Recognition of Revenue
Access to the Company’s XM Platform represents a series of distinct services as the Company continually provides access to and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer.
Revenue from professional services and other revenue related to research services is recognized upon completion because completion and delivery of the results is considered a separate performance obligation satisfied at a point in time. Revenue from professional services and other revenue related to customized software coding is recognized upon completion, because the customer consumes the intended benefit and assumes control upon final completion of the custom coding. Revenue from professional services and other revenue related to implementation and other ancillary services is recognized as the services are performed, because the customer consumes the benefit as the services are provided.
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Judgment is required to determine whether revenue is to be recognized at a point in time or over time. For performance obligations satisfied over time, we need to measure progress using the method that best reflects Qualtrics’ performance.
All judgments and estimates mentioned above can significantly impact the timing and amount of revenue to be recognized.
Contract Balances
The Company bills in advance for annual contracts, and at times enters into non-cancelable multi-year deals. Non-cancelable multi-year deals typically include price escalations each year. The Company recognizes revenue on a straight-line basis over the non-cancelable term and accounts for the difference between straight-line revenue and annual invoice amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of March 31, 2022 were $18.2 million and $13.7 million, respectively. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of December 31, 2021 were $18.1 million and $14.0 million, respectively.
The Company records contract liabilities to deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the customer prior to the related performance obligation being fulfilled. In certain circumstances we receive consideration from customers in advance of a specific service being identified. Total consideration received in advance of a specific service being identified totaled $35.4 million and $33.0 million as of March 31, 2022 and December 31, 2021, respectively and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue for each of the Company’s revenue generating solutions:
Three Months Ended March 31,
in thousands20222021
Subscription revenue:
Revenue included in prior period deferred revenue$228,216 $164,999 
Revenue generated from same period billings52,592 21,897 
Total subscription revenue$280,808 $186,896 
Professional services and other revenue:
Revenue included in prior period deferred revenue$23,790 $28,526 
Revenue generated from same period billings31,049 23,221 
Total professional services and other revenue$54,839 $51,747 
Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Amounts of a customer contract’s transaction price that are allocated to the remaining performance obligations represent contracted revenue that has not yet been recognized. They include amounts recognized as contract liabilities and amounts that are contracted but not yet due. The future estimated revenue related to unsatisfied performance obligations as of March 31, 2022 was $1,766.6 million, of which approximately $1,031.9 million is expected to be recognized as revenue over the next twelve months. The future estimated revenue related to unsatisfied performance obligations as of December 31, 2021 was $1,732.8 million. This estimate is based on the Company’s best judgment, as it needs to consider estimates of possible future contract modifications. The amount of transaction price allocated to the remaining performance obligations, and changes in this amount over time, are impacted by, among others, currency fluctuations and the contract period of our cloud contracts remaining at the balance sheet date and thus by the timing of contract renewals.
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Disaggregation of Revenue
The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use the Company’s cloud platform:
Three Months Ended March 31,
in thousands20222021
United States$236,642 $170,549 
International99,005 68,094 
Total revenue$335,647 $238,643 
No single country outside the United States accounted for 10% or more of revenue during the three months ended March 31, 2022 and 2021.
Stock-Based Compensation, including cash settled
Equity Awards
The Company records stock-based compensation based on the grant date fair value of the awards and recognizes the fair value of those awards as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, the Company recognizes expense using the accelerated attribution method if it is probable the performance conditions will be met.
The Company estimates the grant date fair value of RSUs based on the closing stock price of the Company’s publicly traded Class A common stock on the grant date. The Company estimates the grant date fair value of purchase rights issued under our Employee Stock Purchase Plan, or ESPP, based on the Black-Scholes option-pricing model using the estimated number of awards as of the beginning of the offering periods. The Company estimated the fair value of the converted Clarabridge options based on the intrinsic value of the awards on the acquisition date.
Cash Awards
The Company measures and recognizes compensation expense for stock-based payment cash awards based on the fair value of the awards each quarter until settlement. The fair value of the awards are estimated based on the fair value of the underlying stock price of SAP SE. The fair value of stock-based compensation cash awards that vest solely on a service-based condition is recognized on a straight-line basis over the period during which services are provided in exchange for the award. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring. All awards that were not exchanged into Qualtrics RSUs are paid out in cash upon vesting.
The Company accounts for forfeitures as they occur; therefore, stock-based compensation expense has been calculated based on actual forfeitures in the Company’s consolidated statements of operations.
Net loss per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. As there are no potentially dilutive securities, diluted earnings per share attributable to common stockholders has not been presented. For purposes of calculating earnings per share, the Company uses the two-class method. Because both classes of common stock share the same rights in dividends, basic and diluted earnings per share was the same for both common stock classes.
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Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances. Accounts receivable are typically due within 30 days from the date of invoice. Customer balances outstanding longer than the contractual payment terms are considered past due.
The Company establishes allowances for bad debt and cancellations based on historical collection data and customer specific circumstances. The allowance for bad debt, as needed, is established with a charge to bad debt expense in the consolidated statements of comprehensive loss. The Company’s allowance for bad debt was $1.5 million and $1.5 million as of March 31, 2022 and December 31, 2021, respectively. Net additions (reductions) charged to bad debt expense were not material during the three months ended March 31, 2022 and 2021. The Company’s allowance for cancellations was $14.1 million and $17.5 million as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, $(0.4) million of net additions (reductions) were charged to revenue and $(3.0) million of net additions (reductions) were charged to deferred revenue. During the three months ended March 31, 2021, $(1.3) million of net additions (reductions) were charged to revenue and $(5.5) million of net additions (reductions) were charged to deferred revenue. The allowance for cancellations is established with a reduction to revenue and deferred revenue. In the event of lack of payment due to a bankruptcy or other credit-related issues of a customer, the Company writes off the related accounts receivable with a reduction to the allowance for bad debt. In the event of lack of payment from a customer for issues unrelated to credit risk, the Company cancels the customer’s subscription access or service and writes off the corresponding accounts receivable with reductions to the allowance for cancellations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, and accounts receivable. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. No customer accounted for more than 10% of accounts receivable at March 31, 2022 and December 31, 2021. No single customer accounted for 10% or more of total revenue during the three months ended March 31, 2022 and 2021.
Deferred Contract Acquisition Costs, net
Deferred contract acquisition costs, net is stated at gross deferred contract acquisition costs less accumulated amortization. Sales commissions and related payroll taxes for initial software-as-a-service (SaaS) subscription contracts earned by the Company’s sales force are considered to be incremental and recoverable costs of obtaining a contract with a customer. As a result, these amounts have been capitalized as deferred contract acquisition costs on the consolidated balance sheets. The Company deferred incremental costs of obtaining a contract of $26.8 million and $13.5 million during the three months ended March 31, 2022 and 2021, respectively.
Sales commissions for renewal contracts are not considered commensurate with the commissions paid for the acquisition of an initial SaaS subscription contract, given the substantive difference in commission rates in proportion to their respective contract values. After the conclusion of the initial contract period, commissions paid on subsequent renewals are commensurate year after year. As such, the Company expenses renewal commissions as incurred.
Deferred contract acquisition costs are amortized over an estimated period of benefit of five years. The period of benefit was estimated by considering factors such as estimated average customer life, the rate of technological change in the subscription service, and the impact of competition in its industry. As the Company’s average customer life significantly exceeded the rate of change in its technology, the Company concluded that the rate of change in the technology underlying the Company’s subscription service was the most significant factor in determining the period of benefit for which the asset relates. In evaluating the rate of change in the technology, the Company considered the competition in the industry, its commitment to continuous innovation, and the frequency of product, platform, and technology updates. The Company determined that the impact of competition in the industry is reflected in the period of benefit through the rate of technological change.
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Amortization of deferred contract acquisition costs were $15.8 million and $11.2 million for the three months ended March 31, 2022 and 2021, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.
Leases
Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement based on the present value of the minimum lease payments over the lease term. The Company utilizes certain practical expedients and policy elections available under Topic 842. Leases with a one-year term or less are not recognized on the balance sheet.
Internal-use Software
The Company capitalizes certain development costs incurred in connection with its internal-use software. These capitalized costs are primarily related to the software platforms that are hosted by the Company and accessed by its customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred as research and development costs. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life of 24 months. The Company recognized amortization expenses of $3.9 million and $3.4 million related to capitalized internal-use software for the three months ended March 31, 2022 and 2021, respectively, within cost of subscription revenue.
Income Taxes
Income taxes as presented in the consolidated financial statements of Qualtrics attribute current and deferred income taxes of SAP to the Company’s standalone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes (“ASC 740”). Accordingly, the Company’s income tax provision was prepared following the separate return method prior to deconsolidation in October 2021 for U.S. federal income tax purposes, and the separate return method continues to apply for other jurisdictions where we file returns as part of a SAP Tax Group. The separate return method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a standalone enterprise. As a result of deconsolidation for U.S. federal income tax purposes, we have updated our reported tax attributes in certain jurisdictions to reflect the tax attributes available for future use by the Qualtrics tax reporting entity that files returns separate from a SAP Tax Group.
Certain operations of Qualtrics have historically been included in a consolidated return with other SAP entities. Current obligations for taxes in certain jurisdictions, where the Company files a consolidated tax return with SAP, are deemed settled with SAP for purposes of these consolidated financial statements. Current obligations for tax in jurisdictions where the Company does not file a consolidated return with SAP, including certain foreign and domestic jurisdictions, are recorded as accrued liabilities.
Deferred income tax balances reflect the effects of temporary differences between the financial reporting and tax bases of the Company’s assets and liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets are recorded for net operating loss (“NOL”) and credit carryforwards for Qualtrics International Inc.
A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.
The Company uses a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is
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more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of pre-tax book income or loss. Significant judgment is required to evaluate uncertain tax positions.
Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and results of operations.
Fair Value Measurement
The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Recently Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, which creates an exception to the general recognition and measurement principles of ASC 805. The standard will result in companies recognizing contract assets and liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. The standard is effective for public companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company has not early adopted the standard and the impact will be dependent upon the occurrence and magnitude of any future acquisitions.
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2.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
As of March 31,As of December 31,
in thousands20222021
Cash$246,221 $123,906 
Money market mutual funds590,227 890,605 
Total cash and cash equivalents$836,448 $1,014,511 
3.FAIR VALUE MEASUREMENTS
See Note 1, “Summary of Business and Significant Accounting Policies” for additional details related to fair value measurements.
Cash and cash equivalents
The Company’s cash equivalents with regards to the money market mutual funds are classified within Level 1 of the fair value hierarchy.
Tax sharing liability
Since the SAP Acquisition, we have been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, we deconsolidated from the SAP Tax Group for U.S. federal tax purposes. We expect to remain a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, we will make tax sharing payments to SAP related to certain share based payment awards that existed prior to or were granted at the time of the IPO, the Pre-IPO Awards. Upon deconsolidation from the SAP Tax Group, the initial tax sharing liability was recorded as a distribution payable to SAP in accounts payable and other liabilities and as reduction to additional paid-in capital. Changes in the fair value of the tax sharing liability are recorded through other non-operating income (expense), net. As of March 31, 2022 and December 31, 2021 the Company’s distribution liability for the tax sharing agreement with SAP based on an estimated fair value totaled $70.0 million and $71.5 million, respectively.
The tax sharing agreement liability is estimated based on the estimated future tax benefits associated with the Pre-IPO Awards. The liability is classified within Level 3 of the fair value hierarchy and is based on the discounted estimated future cash flows of the liability. The primary assumptions used in the valuation include the amount of the estimated future tax deductions related to the Pre-IPO Awards, the Company’s estimated future taxable income or loss excluding the Pre-IPO Awards, including the ability and timing of when the Company will be able to utilize the tax deductions from the Pre-IPO Awards using a hypothetical with and without tax calculation, and the estimated discount rate, which is based on current market rates for unsecured liabilities with similar maturities and credit quality. Estimating the tax sharing liability balance requires significant estimates and assumptions which are inherently uncertain and therefore actual results could differ from those estimates. During the three months ended March 31, 2022 the Company had no transfers in and out of Level 3 fair value measurements. The changes in the fair value of the tax sharing liability were as follows:
in thousands
Balance as of December 31, 2021$(71,500)
Change in the fair value reported in other non-operating income (expense), net1,500 
Balance as of March 31, 2022$(70,000)
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4.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
As of March 31,As of December 31,
in thousands20222021
Internal-use software$32,755 $29,047 
Server equipment28,265 28,176 
Leasehold improvements82,013 80,301 
Computer equipment24,258 21,470 
Land13,383 13,383 
Buildings61,346 61,346 
Furniture and fixtures3,021 2,857 
Software3,252 3,252 
Construction in progress16,170 10,717 
Total property and equipment$264,463 $250,549 
Accumulated depreciation and amortization(65,071)(58,222)
Property and equipment, net$199,392 $192,327 
The Company recognized depreciation and amortization expense related to its property and equipment as follows:
Three Months Ended March 31,
in thousands20222021
Cost of revenue$6,097 $5,106 
Research and development1,364 650 
Sales and marketing2,005 1,211 
General and administrative472 241 
Total depreciation and amortization expense$9,938 $7,208 
5.LEASES
The Company has operating leases for corporate offices under non-cancelable operating leases with various expiration dates. There are no finance leases. The leases have remaining terms of 1 to 14 years. Options to extend for up to 10 years have not been included because they are not reasonably certain.
The components of lease expense were as follows:
Three Months Ended March 31,
in thousands20222021
Operating lease cost$7,501 $5,704 
Variable and short-term lease cost2,449 3,121 
Other information related to leases was as follows:
As of March 31,As of
December 31,
20222021
Weighted average remaining lease term11.3 years11.9 years
Weighted average discount rate2.04 %2.07 %
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As of March 31, 2021, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, was as follows:
As of March 31,
in thousands2022
Remainder of 202218,304 
202314,846 
202428,811 
202530,958 
202631,622 
Thereafter208,606 
Total minimum lease payments$333,147 
Less: imputed interest(38,146)
Total$295,001 

6.BUSINESS COMBINATIONS
Clarabridge, Inc.
On October 1, 2021, the Company acquired all outstanding stock of Clarabridge, Inc. (“Clarabridge”), a customer experience management software company headquartered in Reston, Virginia, pursuant to an Agreement and Plan of Reorganization and Merger (“Merger Agreement”). The acquisition was completed to strengthen the Company’s omnichannel conversational analytics and experience management platform.
Pursuant to the terms of the Merger Agreement, all outstanding shares of Clarabridge capital stock were cancelled in exchange for consideration in the form of shares of Class A common stock of the Company and cash, as provided by the Merger Agreement. The number of shares of Class A common stock issued to the sellers was fixed at 24,142,065 shares (“Acquisition Shares”) valued at $43.88 per share (the Company’s stock price on the acquisition date). The acquisition date fair value of the consideration transferred for Clarabridge consisted of the following:
in thousands
Cash, net of cash acquired$81,189 
Fair value of shares issued1,059,354 
Fair value of stock options assumed127,139 
Total$1,267,682 
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The allocation of the purchase price is preliminary related to income tax balances as the Company is in the process of obtaining and analyzing additional supporting tax related information. Below is the allocation of the purchase price:
in thousandsClarabridge
(October 2021)
Accounts receivable18,538 
Prepaid expenses and other assets2,888 
Property and equipment6,414 
Customer relationships101,160 
Developed technology151,530 
Tradenames1,240 
Goodwill1,065,335 
Total assets acquired1,347,105 
Accounts payable(2,724)
Accrued liabilities(9,455)
Deferred revenue(36,421)
Deferred tax liabilities(26,466)
Other liabilities(4,357)
Total assets acquired, net$1,267,682 
Estimating the fair value of the acquired intangible assets requires significant estimates and assumptions which are inherently uncertain and therefore actual results could differ from those estimates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their fair values, with the exception of deferred revenue, which was reduced to its fair value as of the acquisition date.
The goodwill arising from the acquisition consists largely of the synergies the Company is expected to achieve from combining the acquired assets and operations with its existing operations. Goodwill related to Clarabridge is not deductible for tax purposes.
Other acquisitions
On July 20, 2021, the Company acquired all of the outstanding stock of Usermind, Inc. (“Usermind”) in exchange for cash, net of cash acquired. The acquisition was completed to strengthen the Company’s experience orchestration and management platform. The assets, liabilities, and operating results of Usermind are reflected in the Company’s consolidated financial statements from the date of acquisition.
On December 3, 2021, the Company acquired all of the outstanding stock of SurveyVitals, Inc. (“SurveyVitals”), in exchange for primarily cash, net of cash acquired. The acquisition was completed to strengthen the Company’s healthcare experience offerings. The assets, liabilities, and operating results of SurveyVitals are reflected in the Company’s consolidated financial statements from the date of acquisition.
The aggregate purchase price of these two acquisitions was $61.9 million, net of cash acquired. The allocation of the purchase price for Usermind is subject to adjustments based upon the finalization of tax related assumptions. The allocation of the purchase price for SurveyVitals is based on preliminary information and is subject to adjustments based upon the completion of the valuation of the intangible assets, working capital adjustments, and
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finalization of tax related assumptions. The allocation of the purchase price for the Usermind and SurveyVitals acquisitions is as follows:
in thousandsUsermind and SurveyVitals
Developed technology$5,070 
Customer relationships8,440 
Licenses and certifications6,350 
Tradenames100 
Goodwill47,504 
Other assets, net1,086 
Total assets acquired68,550 
Other liabilities, net(6,607)
Total assets acquired, net$61,943 
Adjustments in purchase price allocations during the three months ended March 31, 2022 related to adjustments to the intangible asset valuation models and decreased intangible assets by $0.8 million with a corresponding increase to goodwill. The goodwill arising from the acquisitions consists largely of the synergies the Company is expected to achieve from combining the acquired assets and operations with its existing operations. Goodwill related to the acquisitions is not deductible for tax purposes.
7.GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Changes in the carrying amount of goodwill were as follows:
in thousands
Balance as of December 31, 2021$1,118,768 
Adjustments in purchase price allocations780 
Balance as of March 31, 2022$1,119,548 
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill and acquired assets and liabilities assumed during the periods in which the adjustments are determined.
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Other intangible assets, net
Other intangible assets, net consisted of the following:
As of March 31,As of December 31,
in thousands20222021
Patents$751 $751 
Developed technology159,670 159,665 
Customer relationships111,700 111,965 
Developed content400 400 
Tradename1,890 1,915 
Licenses and certifications6,350 6,845 
License agreements1,500 1,500 
Total intangible assets$282,261 $283,041 
Accumulated amortization(31,958)(18,541)
Other intangible assets, net$250,303 $264,500 
Estimated amortization expense for intangible assets for the next five years consists of the following:
As of March 31,
in thousands2022
Remainder of 202239,888 
202351,002 
202450,885 
202549,934 
202641,366 
Thereafter17,228 
Total$250,303 
8.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
As of March 31,As of December 31,
in thousands20222021
Accrued wages, bonuses and commissions$61,233 $93,021 
Accrued payroll taxes5,843 7,295 
Other accrued expenses36,173 44,037 
Accrued income taxes24,168 23,049 
Total accrued liabilities$127,417 $167,402 
9.COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred, and the amount of loss or range of loss can be reasonably estimated. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the information available at the time of the assessment. As additional information becomes available, the
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Company reassesses the potential liability and may revise the estimate. The Company is not presently a party to any litigation the outcome of which, it believes, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the business, operating results, or financial condition.
10.STOCK-BASED COMPENSATION
Cash Awards
During the three months ended March 31, 2022, less than 0.1 million Qualtrics Rights and Move SAP RSUs vested and were settled for $2.7 million in cash. During the three months ended March 31, 2021, 1.7 million Qualtrics Rights and Move SAP RSUs vested and were settled for $72.0 million in cash. The unrecognized expense related to Qualtrics Rights and Move SAP RSUs was $2.4 million and $4.4 million as of March 31, 2022 and December 31, 2021, and will be recognized over a remaining vesting period of up to two years.
Equity Awards
Qualtrics RSUs
The following table sets forth the outstanding Qualtrics RSUs and related activity for the three months ended March 31, 2022:
Number of RSUs (in thousands)Weighted-Average Grant Date Fair Value
Outstanding as of December 31, 202182,164 $43.11 
Granted16,070 28.74 
Vested(17,617)37.60 
Forfeited/Canceled(938)39.23 
Outstanding as of March 31, 202279,679 $40.14 
The total fair value of RSUs that vested during the three months ended March 31, 2022 and 2021 was $529.8 million and $50.2 million, respectively. As of March 31, 2022, there was $2,674 million of unrecognized stock-based compensation expense related to outstanding Qualtrics RSUs which is expected to be recognized over a weighted-average period of 2.9 years.
Qualtrics Options
On October 1, 2021, in connection with the acquisition of Clarabridge, Inc., the Company assumed the outstanding Clarabridge stock option plans and converted all outstanding stock options into Qualtrics options. The following table sets forth the outstanding common stock options and related activity for the three months ended March 31, 2022:
Number of Options (in thousands)Weighted-Average Exercise Price per ShareWeighted-Average Remaining Term (years)Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 20211,855 $4.84 6.3$56,684 
Exercised(123)4.32 
Forfeited/Expired(18)6.21 
Outstanding as of March 31, 20221,714 $4.86 6.0$40,602 
Vested and exercisable at March 31, 2022877 $4.48 5.9$21,094 
The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option. The intrinsic value of options as of March 31, 2022 is based on the
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market closing price of the Company's Class A common stock on that date.The aggregate intrinsic value of options exercised was $3.0 million for the three months ended March 31, 2022.
As of March 31, 2022, there was $18.4 million of unrecognized stock-based compensation expense related to outstanding stock options which is expected to be recognized over a weighted-average period of 2 years.
Qualtrics Employee Stock Purchase Plan (ESPP)
In December 2020, the Company's board of directors approved the ESPP, which became effective in January 2021. Each employee who is a participant in the ESPP may purchase shares by authorizing contributions at a minimum of 1% up to a maximum of 20% of his or her compensation for each pay period. Accumulated contributions will be used to purchase shares on the last business day of the purchase period at a price equal to 85% of the fair market value of the shares on the first business day of the offering period (our initial public offering price) or the last business day of the offering period, whichever is lower, provided that no more than a number of shares of Class A common stock determined by dividing $15,000 by the fair market value of the shares on the first business day of the offering period (or a lesser number as established by the plan administrator in advance of the purchase period) may be purchased by any one employee during each purchase period. The Company recognized compensation expense associated with the ESPP of $5.1 million and $2.9 million during the three months ended March 31, 2022 and 2021, respectively.
11.NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the calculation of basic net loss per share attributable to common stockholders during the periods presented.
in thousands (except share amount)Three Months Ended March 31,
20222021
Numerator:
Net loss attributable to common shareholders$(292,325)$(199,854)
Denominator:
Weighted-average shares outstanding for basic loss per share575,700,568 482,260,465 
Basic loss per share$(0.51)$(0.41)
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented:
As of March 31, 2022As of December 31, 2021
Qualtrics restricted stock units79,679,462 82,163,894 
Qualtrics options1,714,153 1,854,965 
Qualtrics employee stock purchase program361,319 687,000 
12.INCOME TAXES
The Company has an effective tax rate of (0.8)% and (0.8)% for the three months ended March 31, 2022 and 2021, respectively. The Company has incurred U.S. operating losses and has minimal profits in its foreign jurisdictions.
In prior years, the Company had calculated the income taxes in its consolidated financial statements on a separate return basis. However, the Company was in actuality included in the consolidated, combined or unitary U.S. federal and state income tax returns with SAP America, Inc. and its affiliates. As a result of deconsolidation
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from SAP in the fourth quarter of 2021, net operating losses and credits were updated to reflect actual attributes available for use by the Company. The Company is now required to file separate U.S. federal tax returns for each of its U.S. taxable entities. The Company is subject to a tax sharing agreement with SAP that requires the Company to reimburse SAP, or be reimbursed by SAP, for the Company's taxable income, or loss in the case of reimbursement, that is included on consolidated tax returns with SAP, such as certain combined or unitary state returns, subject to adjustments for hypothetical tax attributes and certain simplifying conventions.
The Company has evaluated all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and has determined that it is more likely than not that the net deferred tax assets for some of the Company’s U.S. entities will not be realized. Due to uncertainties surrounding the realization of the deferred tax assets in these entities, the Company maintains a full valuation allowance against its net US deferred tax assets.
13.RELATED PARTY TRANSACTIONS
Since the SAP acquisition in 2019, SAP and its affiliates are related parties to the Company. The Company has entered into certain arrangements for services and products with SAP and its affiliates.
The consolidated statements of operations and comprehensive income statements include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. The condensed consolidated statement of operations also includes expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. The Company directly charges SAP for certain functions provided to SAP, including sales support. These charges were determined based on actual expenses incurred on Qualtrics’ or SAP’s behalf or by usage.
During the three months ended March 31, 2022 and 2021, the Company recognized revenue of $10.0 million and $5.2 million, respectively, from SAP and its affiliates in exchange for services and products. Total costs charged from SAP and its affiliates to the Company were $12.0 million and $11.9 million during the three months ended March 31, 2022 and 2021, respectively. Total costs charged from the Company to SAP and its affiliates were $4.8 million and $4.1 million during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the outstanding receivable and payable with SAP and its affiliates was $48.0 million and $11.3 million, respectively. As of December 31, 2021, the outstanding receivable and payable with SAP and its affiliates was $42.0 million and $13.3 million, respectively.
Because of the SAP Acquisition, we had been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, we deconsolidated from the SAP Tax Group for U.S. federal tax purposes. We expect to remain a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, we will make certain tax sharing payments to SAP. As of March 31, 2022, the Company’s distribution liability for the tax sharing agreement with SAP totaled $87.0 million, consisting of $17.0 million based on our separate tax liability included on SAP Tax Group returns and $70.0 million based on an estimated fair value of the liability related to Pre-IPO Awards. As of December 31, 2021, the Company’s distribution liability for the tax sharing agreement with SAP totaled $88.5 million, consisting of $17.0 million based on our separate tax liability included on SAP Tax Group returns and $71.5 million based on an estimated fair value of the liability related to Pre-IPO Awards.
In January 2021, and in connection with the initial public offering, the Company declared a $2,392 million dividend in the form of two promissory notes payable from Qualtrics International Inc. to SAP AMERICA, INC. Promissory Note 1 was issued with a principal amount of $1,892 million and paid in full on February 1, 2021. Promissory Note 2 was issued with a principal amount of $500 million and interest rate of 1.35% compounded semi annually. The outstanding principal of $500 million and accrued interest related to Promissory Note 2 was paid in full on November 9, 2021.
Certain Board members of the Company and certain Supervisory Board and Executive Board members of SAP SE currently hold, or held within the last year, positions of significant responsibility with other entities. We have
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relationships with certain of these entities in the ordinary course of business. During the three months ended March 31, 2022, and 2021, revenue and charges from these related parties were immaterial.
In December 2020, Ryan Smith, our Founder and Executive Chair, acquired a majority interest in the Utah Jazz basketball franchise, the associated venue, and certain related sports teams and operations and business interests. In 2019, the Company entered into multi-year agreements with the Utah Jazz related to ticket purchases, advertising, sponsorships, and the Utah Jazz Five for the Fight Campaign, under which we were billed $1.2 million and $1.1 million during the three months ended March 31, 2022 and March 31, 2021, respectively.I
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We created the first experience management platform to manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for Experience Management. The Qualtrics Experience Management Platform, or Qualtrics XM, is a system of action that helps companies design and improve the experiences they provide to their many constituents across these four core experiences.
Our revenue was $335.6 million and $238.6 million for the three months ended March 31, 2022 and 2021, respectively, representing year-over-year growth of 41%. For the three months ended March 31, 2022 and 2021, our net loss was $292.3 million and $199.9 million, respectively. The results of our operations for the three months ended March 31, 2022 and 2021 were impacted by equity and cash settled stock-based compensation expense.
We generate revenue by selling subscriptions to our XM Platform and integrated solutions, as well as professional services. Over 99% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised 84% of our total revenue for the three months ended March 31, 2022. We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 3% of revenue during the three months ended March 31, 2022, and our largest industries by annual recurring revenue, or ARR, as of March 31, 2022 were financial services, professional and business services, education, technology, government, and healthcare. ARR is calculated by annualizing subscription revenue in the last month of a period.
We price and package our software subscriptions solutions based on the capacity, use case, and functionality needs of our customers. This pricing and packaging includes volume of expected responses, number of users accessing our platform, number of employees, and level of functionality provided, such as dashboards, iQ functionality, and integrations. We have also recently begun to offer use case pricing that simplifies pricing for customers seeking to address specific needs. Our customers often expand their subscriptions as they increase volume of responses, add solutions and integrations, grow users and employees, and increase features and workflows within each solution.
Our professional services consist primarily of research services, through our DesignXM offering, which allows customers to gain market intelligence by procuring a curated group of respondents and returning actionable results, while conforming to best-practice design and methodology, as well as implementations, configurations, and integration and engineering services to help customers deploy our XM Platform. Other professional services revenue consists of consulting and training fees.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.
Customer Acquisition and Expansion
We are focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. Our customers include businesses of all sizes, academic institutions, and government organizations. We define the
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number of customers at the end of any particular period as the number of parties or individual legal entities that have entered into a separate subscription contract with us. For avoidance of doubt, international subsidiaries of parent entities are not separately counted, but business units, brands, and academic institutions are counted if they are distinct legal entities. A single organization or customer may have multiple paid business accounts.
Our business model relies on rapidly and efficiently landing new customers and expanding our relationship with them over time. We have a history of attracting new customers, driving expanded use through upselling our XM Platform across the enterprise, and cross-selling through the subsequent deployment of additional solutions throughout the enterprise. Our relationship with SAP has resulted in greater access to enterprise customers and increased cross-sell opportunities through SAP’s customer base.
Investing for Growth
Our investment for growth encompasses multiple critical areas, including international growth, enterprise sales, and product expansion.
Our revenue outside of the United States represented 29% and 29% of our total revenue in the three months ended March 31, 2022 and 2021, respectively. We initially started our expansion outside of the United States in English-speaking countries, such as Ireland, the United Kingdom, Canada, and Australia, as we were able to leverage our core technologies and go-to-market motion. Since opening our first international office in Dublin, Ireland in 2013, we now have over 25 sales offices in countries around the globe.
We continue to evolve our technology to ensure that we are best serving our customers’ needs. We believe this will lead to continued increased retention and positive customer referrals that will continue to generate expansion within current customer organizations and business from new customers. Since 2015, we have established offices in Seattle and Poland to expand our engineering headcount. We continue to invest in research and development to drive product innovation and development.
Strategic Partnerships
In 2018, we announced the launch of QPN. Since then, we have built out our partner network to include over 300 global member companies partnering with us on our platform to help drive breakthrough business outcomes for joint customers. Since the SAP Acquisition in 2019, we have also developed joint go-to-market and product integrations with SAP. We expect our partnerships to extend our sales reach and provide implementation leverage both domestically and internationally, as well as product and technology integrations that will accelerate our product roadmap.
Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Large Customers
We define our large customers as those spending more than $100,000 in ARR on our XM Platform. We believe that our ability to increase the number of large customers is an indicator of our market penetration, strategic demand for our platform, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and its broad range of capabilities, coupled with the mainstream adoption of cloud-based technology, has expanded the diversity of our large customer base to include organizations of different sizes across virtually all industries.
We continue to increase the number of customers who have entered into larger subscriptions with us. We had 2,060 customers with ARR of $100,000 or more as of March 31, 2022, up from 1,940 as of December 31, 2021. The
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number of customers with ARR of $100,000 or more indicates the strategic importance of our platform for enterprise customers and our ability to both initially land significant accounts and grow them over time.
Net Retention Rate
We calculate our dollar-based net retention rate to measure our ability to retain and expand subscription revenue from our existing customers and is an indicator of the value our platform delivers to customers and our future business opportunities. Our net retention rate compares our subscription revenue from the same set of customers across comparable periods and reflects customer renewals, expansion, contraction and churn.
We calculate our net retention rate on a trailing four-quarter basis. As of March 31, 2022, our net retention rate was 128%. Our net retention rate was 120% as of March 31, 2021.
To calculate our net retention rate, we first calculate the subscription revenue in one quarter from a cohort of customers that were customers at the beginning of the same quarter in the prior fiscal year, or cohort customers. We repeat this calculation for each quarter in the trailing four-quarter period. The numerator for net retention rate is the sum of subscription revenue from cohort customers for the four most recent quarters, or numerator period, and the denominator is the sum of subscription revenue from cohort customers for the four quarters preceding the numerator period.
SAP Acquisition
The results of our operations include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. Our results also include expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. We expect this revenue and these cross charges to continue in the near future. These amounts may fluctuate from period to period based on the nature and extent of the indirect benefits received and provided. See Note 13 “Related Party Transactions” for further details in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
SAP Segment Reporting
Since the SAP Acquisition, certain of our financial results have been presented as an operating segment within SAP’s publicly reported financial results. These Euro-reported financial results are prepared under International Financial Reporting Standards, or IFRS, and presented on a non-IFRS basis. The SAP segment results differ from our standalone financial results primarily due to: differences in reporting currency, differences between IFRS and GAAP, differences in the reporting of certain related party transactions between Qualtrics and SAP, SAP’s reporting of expenses related to certain corporate overhead functions, and differences in the reporting related to the SAP Acquisition.
Response to COVID-19
In response to the COVID-19 pandemic, we took broad actions to mitigate the impact of this public health crisis on our business. We implemented, among other measures, a COVID-19 task force, a temporary work from home policy across all offices globally, new operating guidelines for our offices based on local conditions, restrictions on work-related travel, and additional wellness benefits for employees, all of which have the potential to result in disruptions to how we operate our business. We have begun relaxing some of these measures in certain offices where possible, in compliance with local restrictions and orders, but many of them are ongoing. Our employees’ health and safety is our top priority, and we continue to monitor local restrictions across the world, the administration of vaccines, and the number of new cases, as well as the evolving and competing legal requirements around COVID-19 protocols and vaccine mandates in the United States and elsewhere. Our customers and partners have similarly been impacted. Our XM Platform enables customers to focus on managing their customer, employee, product, and brand experiences, which is increasingly important in a digitally connected world. Although we believe our business is well-suited to navigate the current environment, the ultimate duration and extent of the COVID-19 pandemic cannot be accurately predicted at this time, and the direct and indirect impact on our business, results of
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operations, and financial condition will depend on future developments that are highly uncertain. We have experienced, and may continue to experience, an adverse impact on certain parts of our business. The conditions caused by the pandemic have adversely affected or may in the future adversely affect, among other things, demand, spending by new customers, renewal and retention rates of existing customers, the length of our sales cycles, sales productivity, the value and duration of subscriptions, supply of goods and services provided by third parties, collections of accounts receivable, our IT and other expenses, our ability to focus time and attention on our core business, our ability to recruit, and the ability of our employees to travel, all of which could adversely affect our business, results of operations, and financial condition.
We have also experienced, and may continue to experience, certain positive impacts on other aspects of our business, including an increase in sales of our platform to state, local, and federal governments and non-profit organizations to help them navigate through the pandemic as well as sales of vaccine and testing verification solutions on our XM Platform. Moreover, we have seen a reduction in certain operating expenses due to reduced business travel, reduced office use, deferred hiring for some positions, and the virtualization or cancellation of customer and employee events. Additionally, we believe that the COVID-19 pandemic could also accelerate customer transformation into digital businesses, which we expect will generate additional opportunities for us in the future.
The global impact of COVID-19 continues to rapidly evolve, including as a result of new variants of the virus and the rapidly changing legal landscape, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations. In particular, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our revenue until future periods. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition. For additional details, see “Risk Factors.”
Components of Our Results of Operations
Revenue
We generate revenue from sales of subscriptions to our XM Platform and related professional services.
Subscription revenue is recognized ratably over the related contractual term, generally beginning on the date that our XM Platform is made available to our customer. Our subscription agreements generally have annual contractual terms, with a growing number having multi-year contractual terms. Our agreements generally cannot be canceled for a refund. We primarily bill in advance for our annual contracts and annually in advance for our multi-year contracts. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Subscription revenue as a percentage of total revenue may fluctuate period to period.
Professional services and other revenue consists primarily of research services, implementation services, and engineering services. Research services revenue is recognized upon completion of the project. Our agreements generally cannot be canceled for a refund. We typically bill in advance for research services projects, with a number of customers purchasing annual retainers to fund future projects. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Implementation services and engineering services include fees associated with new and expanding customers requesting implementation, integration, customization, consulting, and other services. We price these services on a fixed fee basis. Our agreements generally cannot be canceled for a refund. We typically bill in advance for professional services and other revenue. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. We continue to increase deployment of partners to fulfill certain of these services, especially implementation services, and we generally expect professional services and other revenue to decrease as a percentage of total revenue in the long term, although this percentage may fluctuate from period to period.
Cost of revenue and gross margin
Cost of revenue. Our cost of subscription revenue includes expenses related to operating our XM Platform in data centers, depreciation of our data center equipment, and the amortization of our capitalized internal-use software
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and acquired technology. Subscription cost of revenue also includes employee-related costs associated with our customer support and XM Platform operations organizations. Our cost of professional services and other revenue includes vendor costs and employee-related costs associated with the delivery of these services. Additionally, we make allocations of certain overhead costs, primarily based on headcount, to each of these costs of revenue. Allocated overhead includes costs such as facilities, including lease expense, utilities, depreciation on leasehold improvements, and shared information technology costs. We expect our cost of revenue will increase in absolute dollars in future periods as we continue to invest in our business.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period based on the timing of capital expenditures and the related depreciation expense, or other changes in equity and cash settled stock-based compensation, employee-related costs, infrastructure costs, revenue mix, timing of completion of professional services projects, as well as revenue fluctuations. Excluding the impact of equity and cash settled stock-based compensation expense, we generally expect our gross margin to remain relatively consistent in the near term and to increase modestly in the long term, although our gross margin may fluctuate from period to period depending on the interplay of all of these factors.
Operating expenses
Research and development. Our research and development expenses consist primarily of employee-related costs for our engineering, product, and design teams, and allocated overhead.
We plan to continue to hire employees for our engineering, product, and design teams to support our efforts to enhance the functionality and improve the reliability, availability, and scalability of our XM Platform. Excluding the impact of equity and cash settled stock-based compensation expense, we expect our research and development expenses to increase in absolute dollars in future periods, to remain relatively consistent as a percentage of our revenue in the near term, and to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Sales and marketing. Our sales and marketing expenses relate to both inside and outbound sales activities, as well as expansion efforts with our current customers. The expenses consist primarily of employee-related costs, marketing programs and events, lead generation fees, indirect benefits received from SAP net of indirect benefits we provide to SAP, and allocated overhead. Sales commissions earned by our sales team and the related payroll taxes, that we consider to be incremental and recoverable costs of obtaining a contract with an organization, are deferred and amortized over an estimated period of benefit of five years.
We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns. Excluding the impact of equity and cash settled stock-based compensation expense, we expect that sales and marketing expenses will increase in absolute dollars in future periods; however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
General and administrative. Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people operations, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support our growth as well as our transition to being a publicly traded company. Excluding the impact of equity and cash settled stock-based compensation expense, we expect that general and administrative expenses will increase in absolute dollars in future periods. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
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Other non-operating income (expense), net
Other non-operating income (expense), net consists of other non-operating gains or losses, including those related to interest income and foreign currency transaction gains and losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes related to the U.S. and other foreign jurisdictions in which we conduct business. We maintain a full valuation allowance against our deferred tax assets in certain entities as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Other entities do not have a valuation allowance, as they are, and are expected to be taxable in the future. Our effective tax rate is affected by tax rates in both U.S. and foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.
Income taxes as presented in our consolidated financial statements attribute current and deferred income taxes of SAP to our standalone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes, or ASC 740. Accordingly, our income tax provision was prepared following the separate return method prior to deconsolidation in October 2021 for U.S. federal income tax purposes, and the separate return method continues to apply for other jurisdictions where we file returns as part of a SAP Tax Group. The separate return method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a standalone enterprise. As a result of deconsolidation for U.S. federal income tax purposes, our reported tax attributes in certain jurisdictions were updated in 2021 to reflect the actual tax attributes available for future use by the Qualtrics tax reporting entities that file returns separate from a SAP Tax Group.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
Three Months Ended March 31,
20222021
(In thousands)
Revenue:
Subscription$280,808 $186,896 
Professional services and other54,839 51,747 
Total revenue335,647 238,643 
Cost of revenue(1)(2):
Subscription44,774 20,370 
Professional services and other54,493 41,411 
Total cost of revenue99,267 61,781 
Gross profit236,380 176,862 
Operating expenses(1)(2):
Research and development105,999 62,806 
Sales and marketing218,330 136,181 
General and administrative202,589 174,449 
Total operating expenses526,918 373,436 
Operating loss(290,538)(196,574)
Other non-operating income (expense), net674 (1,740)
Loss before income taxes(289,864)(198,314)
Provision for income taxes2,461 1,540 
Net loss$(292,325)$(199,854)
________________
(1)Includes equity and cash settled stock-based compensation expense(a), as follows:
Three Months Ended March 31,
20222021
(In thousands)
Cost of subscription revenue$4,544