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, 20222023
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)
| | | | | | | | |
| Delaware | | 47-1754215 |
| (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 class | Trading Symbol | Name of each exchange on which registered |
| Class A Common Stock, $0.0001 par value per share | XM | Nasdaq 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 filer | ☐☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒☐ | Smaller 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, 2022,27, 2023, the registrant had 582,325,127606,391,893 shares of common stock outstanding, consisting of 159,154,517183,221,283 shares of Class A common stock and 423,170,610 shares of Class B common stock.
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”“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 toaddress and overcome challenges broughtcaused by the COVID-19 pandemic;current economic downturn;
•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;the competitive landscape;
•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 ability to realize cost savings and achieve other benefits related to our restructuring efforts;
•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;security, including compliance with the broad spectrum of relevant laws;
•our ability to remediate our material weakness in our internal control over financial reporting;
•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 impacteffects on our business of geopolitical events, includingrecent volatility in capital markets and lower market prices for our securities (including possible disruptions to the ongoing conflict between RussiaCompany’s operations and Ukraine;customer demands due to the continuation of the COVID-19 pandemic);
•our ability to meet investor and customer expectations and evolving regulations regarding environmental, social and governance issues;
•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.company;
•the ability of the parties to consummate the Merger (as defined herein) in a timely manner or at all;
•the satisfaction (or waiver) of closing conditions to the consummation of the Merger;
•potential delays in consummating the Merger;
•the ability of the Company to timely and successfully achieve the anticipated benefits of the Merger;
•the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the Merger Agreement, including in circumstances that require the Company to pay the Company Termination Fee;
•the Company’s ability to implement its business strategy;
•significant transaction costs associated with the Merger;
•potential litigation relating to the Merger;
•the risk that disruptions from the Merger will harm the Company’s business, including current plans and operations (including risks related to diverting management’s attention from the Company’s ongoing business operations);
•potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger;
•legislative, regulatory and economic developments affecting the Company’s business;
•general economic and market developments and conditions;
•the evolving legal, regulatory and tax regimes under which the Company operates;
•potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger that could affect the Company’s financial performance;
•restrictions during the pendency of the Merger that may impact the Company’s ability to pursue certain business opportunities or strategic transactions; and
•unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as the Company’s response to any of the aforementioned factors.
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 sharenumber of shares and par value)
(Unaudited)
| | | | As of March 31, | | As of December 31, | | | As of March 31, | | As of December 31, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
| Assets | Assets | | | | | Assets | | | | |
| Current assets: | Current assets: | | | Current assets: | | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 836,448 | | | $ | 1,014,511 | | Cash and cash equivalents | | $ | 806,718 | | | $ | 719,892 | |
Accounts receivable, net of allowance (1) | Accounts receivable, net of allowance (1) | | 366,314 | | | 461,830 | | Accounts receivable, net of allowance (1) | | 384,501 | | | 537,037 | |
| Deferred contract acquisition costs, net | Deferred contract acquisition costs, net | | 64,876 | | | 60,455 | | Deferred contract acquisition costs, net | | 88,056 | | | 81,130 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 76,082 | | | 68,887 | | Prepaid expenses and other current assets | | 78,015 | | | 68,224 | |
| Total current assets | Total current assets | | 1,343,720 | | | 1,605,683 | | Total current assets | | 1,357,290 | | | 1,406,283 | |
| Non-current assets: | Non-current assets: | | | Non-current assets: | | |
| Property and equipment, net | Property and equipment, net | | 199,392 | | | 192,327 | | Property and equipment, net | | 223,328 | | | 215,645 | |
| Right-of-use assets from operating leases | Right-of-use assets from operating leases | | 236,344 | | | 227,320 | | Right-of-use assets from operating leases | | 213,616 | | | 216,514 | |
| Goodwill | Goodwill | | 1,119,548 | | | 1,118,768 | | Goodwill | | 1,117,915 | | | 1,117,915 | |
| Other intangible assets, net | Other intangible assets, net | | 250,303 | | | 264,500 | | Other intangible assets, net | | 199,734 | | | 210,415 | |
| Deferred contract acquisition costs, net of current portion | Deferred contract acquisition costs, net of current portion | | 151,956 | | | 145,952 | | Deferred contract acquisition costs, net of current portion | | 189,578 | | | 183,741 | |
| Deferred tax assets | Deferred tax assets | | 1,301 | | | 96 | | Deferred tax assets | | 9,318 | | | 9,625 | |
| Other assets | Other assets | | 28,414 | | | 27,577 | | Other assets | | 36,872 | | | 35,713 | |
| Total assets | Total assets | | $ | 3,330,978 | | | $ | 3,582,223 | | Total assets | | $ | 3,347,651 | | | $ | 3,395,851 | |
| | Liabilities and equity (deficit) | | | |
| Liabilities and equity | | Liabilities and equity | | |
| Current liabilities: | Current liabilities: | | | Current liabilities: | | |
| Lease liabilities | Lease liabilities | | $ | 20,870 | | | $ | 18,898 | | Lease liabilities | | $ | 17,564 | | | $ | 17,081 | |
Accounts payable (1) | Accounts payable (1) | | 70,865 | | | 84,053 | | Accounts payable (1) | | 129,579 | | | 142,293 | |
| Accrued liabilities | Accrued liabilities | | 127,417 | | | 167,402 | | Accrued liabilities | | 130,383 | | | 155,291 | |
| Liability-classified, stock-based awards | Liability-classified, stock-based awards | | 2,249 | | | 4,519 | | Liability-classified, stock-based awards | | 510 | | | 1,053 | |
| Deferred revenue | Deferred revenue | | 746,328 | | | 748,145 | | Deferred revenue | | 848,445 | | | 858,186 | |
| Total current liabilities | Total current liabilities | | 967,729 | | | 1,023,017 | | Total current liabilities | | 1,126,481 | | | 1,173,904 | |
| Non-current liabilities: | Non-current liabilities: | | | Non-current liabilities: | | |
| Lease liabilities, net of current portion | Lease liabilities, net of current portion | | 274,131 | | | 263,307 | | Lease liabilities, net of current portion | | 259,855 | | | 261,097 | |
| Liability-classified, stock-based awards, net of current portion | | — | | | 52 | | |
| Deferred revenue, net of current portion | Deferred revenue, net of current portion | | 9,978 | | | 6,698 | | Deferred revenue, net of current portion | | 14,387 | | | 16,717 | |
| Deferred tax liabilities | Deferred tax liabilities | | 24,539 | | | 23,653 | | Deferred tax liabilities | | 11,228 | | | 12,447 | |
Other liabilities (1) | Other liabilities (1) | | 78,511 | | | 78,796 | | Other liabilities (1) | | 35,884 | | | 27,666 | |
| Total liabilities | Total liabilities | | $ | 1,354,888 | | | $ | 1,395,523 | | Total liabilities | | 1,447,835 | | | 1,491,831 | |
| Commitments and contingencies | Commitments and contingencies | | 0 | | 0 | 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 capital | | 4,727,962 | | | 4,645,800 | | |
| Equity | | Equity | | |
| Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares; no shares outstanding as of March 31, 2023 and December 31, 2022 | | Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares; no shares outstanding as of March 31, 2023 and December 31, 2022 | | — | | | — | |
| Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 183,127,510 and 170,687,065 shares as of March 31, 2023 and December 31, 2022 | | Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 183,127,510 and 170,687,065 shares as of March 31, 2023 and December 31, 2022 | | 18 | | | 17 | |
| 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, 2023 and December 31, 2022 | | 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, 2023 and December 31, 2022 | | 42 | | | 42 | |
| Additional paid-in capital | | Additional paid-in capital | | 5,682,305 | | | 5,428,297 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (1,692) | | | (1,244) | | Accumulated other comprehensive loss | | (4,194) | | | (4,945) | |
| Accumulated deficit | Accumulated deficit | | (2,750,238) | | | (2,457,913) | | Accumulated deficit | | (3,778,355) | | | (3,519,391) | |
| Total equity (deficit) | | 1,976,090 | | | 2,186,700 | | |
| Total liabilities and equity (deficit) | | $ | 3,330,978 | | | $ | 3,582,223 | | |
| Total equity | | Total equity | | 1,899,816 | | | 1,904,020 | |
| Total liabilities and equity | | Total liabilities and equity | | $ | 3,347,651 | | | $ | 3,395,851 | |
________________
(1) Includes amounts from related parties. See Note 1312 for further detailsdetails.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Qualtrics International Inc.
Condensed Consolidated Statements of OperationsComprehensive Loss
(In thousands, except share and per share data)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Revenue: | | | |
| Subscription | $ | 280,808 | | | $ | 186,896 | |
| Professional services and other | 54,839 | | | 51,747 | |
| Total revenue | 335,647 | | | 238,643 | |
| Cost of revenue: | | | |
| Subscription | 44,774 | | | 20,370 | |
| Professional services and other | 54,493 | | | 41,411 | |
| Total cost of revenue | 99,267 | | | 61,781 | |
| Gross profit | 236,380 | | | 176,862 | |
| Operating expenses: | | | |
| Research and development | 105,999 | | | 62,806 | |
| Sales and marketing | 218,330 | | | 136,181 | |
| General and administrative | 202,589 | | | 174,449 | |
| Total operating expenses | 526,918 | | | 373,436 | |
| Operating loss | (290,538) | | | (196,574) | |
| Other non-operating income (expense), net | 674 | | | (1,740) | |
| Loss before income taxes | (289,864) | | | (198,314) | |
| Provision for income taxes | 2,461 | | | 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 diluted | 575,700,568 | | | 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 thousands | 2022 | | 2021 |
| Cost of subscription revenue | $ | 4,544 | | | $ | 2,624 | |
| Cost of professional services and other revenue | 8,066 | | | 4,430 | |
| Research and development | 41,275 | | | 21,332 | |
| Sales and marketing | 49,053 | | | 22,777 | |
| General and administrative | 165,323 | | | 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.
Amortization of acquired intangible assets as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| in thousands | 2022 | | 2021 |
| Cost of revenue | $ | 7,572 | | | $ | 266 | |
| Sales and marketing | 5,527 | | | 51 | |
| General and administrative | 318 | | | 47 | |
| Total amortization of acquired intangible assets | $ | 13,417 | | | $ | 364 | |
Qualtrics International Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Revenue: | | Revenue: | | | |
| Subscription | | Subscription | $ | 339,803 | | | $ | 280,808 | |
| Professional services and other | | Professional services and other | 69,967 | | | 54,839 | |
| Total revenue | | Total revenue | 409,770 | | | 335,647 | |
| Cost of revenue: | | Cost of revenue: | |
| Subscription | | Subscription | 54,671 | | | 44,774 | |
| Professional services and other | | Professional services and other | 68,511 | | | 54,493 | |
| Total cost of revenue | | Total cost of revenue | 123,182 | | | 99,267 | |
| Gross profit | | Gross profit | 286,588 | | | 236,380 | |
| Operating expenses: | | Operating expenses: | |
| Research and development | | Research and development | 108,975 | | | 105,999 | |
| Sales and marketing | | Sales and marketing | 252,772 | | | 218,330 | |
| General and administrative | | General and administrative | 178,672 | | | 202,589 | |
| Total operating expenses | | Total operating expenses | 540,419 | | | 526,918 | |
| Operating loss | | Operating loss | (253,831) | | | (290,538) | |
| Other non-operating income, net | | Other non-operating income, net | 1,655 | | | 674 | |
| Loss before income taxes | | Loss before income taxes | (252,176) | | | (289,864) | |
| Provision for income taxes | | Provision for income taxes | 6,788 | | | 2,461 | |
| Net loss | Net loss | | $ | (292,325) | | | $ | (199,854) | | Net loss | $ | (258,964) | | | $ | (292,325) | |
| | Net loss per share attributable to common stockholder, basic and diluted | | Net loss per share attributable to common stockholder, basic and diluted | $ | (0.43) | | | $ | (0.51) | |
| Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted | | Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted | 599,314,127 | | | 575,700,568 | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | | Other comprehensive income (loss): | |
| Foreign currency translation gain (loss) | | (448) | | | (1,786) | | |
| Foreign currency translation gains (losses) | | Foreign currency translation gains (losses) | 751 | | | (448) | |
| Comprehensive loss | Comprehensive loss | | $ | (292,773) | | | $ | (201,640) | | Comprehensive loss | $ | (258,213) | | | $ | (292,773) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Qualtrics International Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
(Unaudited)
| | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2023 |
| | Class A common stock | | Class B common stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total equity (deficit) | | Class A common stock | | Class B common stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total equity |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| Balance, December 31, 2021 | 147,309,254 | | | $ | 15 | | | 423,170,610 | | | $ | 42 | | | $ | 4,645,800 | | | $ | (1,244) | | | $ | (2,457,913) | | | $ | 2,186,700 | | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | 170,687,065 | | | $ | 17 | | | 423,170,610 | | | $ | 42 | | | $ | 5,428,297 | | | $ | (4,945) | | | $ | (3,519,391) | | | $ | 1,904,020 | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | — | | | — | | | 270,089 | | | — | | | — | | | 270,089 | | Stock-based compensation | — | | | — | | | — | | | — | | | 236,027 | | | — | | | — | | | 236,027 | |
| Issuance of common stock upon settlement of restricted stock units (RSUs) | Issuance of common stock upon settlement of restricted stock units (RSUs) | 10,658,728 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | Issuance of common stock upon settlement of restricted stock units (RSUs) | 10,596,029 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | |
| Issuance of common stock upon exercise of stock options | Issuance of common stock upon exercise of stock options | 123,171 | | | — | | | — | | | — | | | 614 | | | — | | | — | | | 614 | | Issuance of common stock upon exercise of stock options | 116,278 | | | — | | | — | | | — | | | 866 | | | — | | | — | | | 866 | |
| Issuance of common stock for employee stock purchase plan | Issuance of common stock for employee stock purchase plan | 770,966 | | | — | | | — | | | — | | | 20,380 | | | — | | | — | | | 20,380 | | Issuance of common stock for employee stock purchase plan | 1,728,138 | | | — | | | — | | | — | | | 19,965 | | | — | | | — | | | 19,965 | |
| Common stock withheld related to net share settlement of equity awards | Common stock withheld related to net share settlement of equity awards | — | | | — | | | — | | | — | | | (208,920) | | | — | | | — | | | (208,920) | | Common stock withheld related to net share settlement of equity awards | — | | | — | | | — | | | — | | | (2,849) | | | — | | | — | | | (2,849) | |
| Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (292,325) | | | (292,325) | | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (258,964) | | | (258,964) | |
| Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (448) | | | — | | | (448) | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 751 | | | — | | | 751 | |
| Balance, March 31, 2022 | 158,862,119 | | | $ | 16 | | | 423,170,610 | | | $ | 42 | | | $ | 4,727,962 | | | $ | (1,692) | | | $ | (2,750,238) | | | $ | 1,976,090 | | |
| Balance, March 31, 2023 | | Balance, March 31, 2023 | 183,127,510 | | | $ | 18 | | | 423,170,610 | | | $ | 42 | | | $ | 5,682,305 | | | $ | (4,194) | | | $ | (3,778,355) | | | $ | 1,899,816 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Class A common stock | | Class B common stock | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total deficit |
| Shares | | Amount | | Shares | | Amount | | | | |
| Balance, December 31, 2020 | 6,000,000 | | | $ | 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 costs | 81,968,387 | | | 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, 2021 | 89,281,956 | | | $ | 9 | | | 423,170,610 | | | $ | 42 | | | $ | 1,497,779 | | | $ | 1,405 | | | $ | (1,598,621) | | | $ | (99,386) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Class A common stock | | Class B common stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total equity |
| Shares | | Amount | | Shares | | Amount | | | | |
| Balance, December 31, 2021 | 147,309,254 | | | $ | 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 options | 123,171 | | | — | | | — | | | — | | | 614 | | | — | | | — | | | 614 | |
| Issuance of common stock for employee stock purchase plan | 770,966 | | | — | | | — | | | — | | | 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, 2022 | 158,862,119 | | | $ | 16 | | | 423,170,610 | | | $ | 42 | | | $ | 4,727,962 | | | $ | (1,692) | | | $ | (2,750,238) | | | $ | 1,976,090 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Qualtrics International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
| Net loss | Net loss | $ | (292,325) | | | $ | (199,854) | | Net loss | $ | (258,964) | | | $ | (292,325) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | |
| Adjustments to reconcile net loss to net cash provided by operating activities | | Adjustments to reconcile net loss to net cash provided by operating activities | |
| Depreciation and amortization | Depreciation and amortization | 23,355 | | | 7,572 | | Depreciation and amortization | 26,368 | | | 23,355 | |
| (Gain) loss on disposal of property and equipment | (17) | | | 129 | | |
| Gain on disposal of property and equipment | | Gain on disposal of property and equipment | (25) | | | (17) | |
| Change in fair value of distribution liability for tax sharing agreement | Change in fair value of distribution liability for tax sharing agreement | (1,500) | | | — | | Change in fair value of distribution liability for tax sharing agreement | 5,432 | | | (1,500) | |
| Reduction of right-of-use assets from operating leases | Reduction of right-of-use assets from operating leases | 7,501 | | | 5,704 | | Reduction of right-of-use assets from operating leases | 6,626 | | | 7,501 | |
| Stock-based compensation expense, including cash settled | Stock-based compensation expense, including cash settled | 268,261 | | | 202,999 | | Stock-based compensation expense, including cash settled | 231,970 | | | 268,261 | |
| Amortization of deferred contract acquisition costs | Amortization of deferred contract acquisition costs | 15,812 | | | 11,213 | | Amortization of deferred contract acquisition costs | 22,439 | | | 15,812 | |
| Deferred income taxes | Deferred income taxes | (227) | | | (554) | | Deferred income taxes | (971) | | | (227) | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Accounts receivable, net | Accounts receivable, net | 95,414 | | | 37,072 | | Accounts receivable, net | 152,267 | | | 95,414 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | (7,259) | | | (1,138) | | Prepaid expenses and other current assets | (9,752) | | | (7,259) | |
| Deferred contract acquisitions costs | Deferred contract acquisitions costs | (26,809) | | | (13,519) | | Deferred contract acquisitions costs | (34,716) | | | (26,809) | |
| Other assets | Other assets | (1,033) | | | (7,415) | | Other assets | (1,149) | | | (1,033) | |
| Lease liabilities | Lease liabilities | (3,723) | | | (743) | | Lease liabilities | (4,598) | | | (3,723) | |
| Accounts payable | Accounts payable | (13,472) | | | (10,855) | | Accounts payable | 5,540 | | | (13,472) | |
| Accrued liabilities | Accrued liabilities | (40,146) | | | (25,731) | | Accrued liabilities | (25,318) | | | (40,146) | |
| Deferred revenue | Deferred revenue | 1,969 | | | (4,208) | | Deferred revenue | (12,543) | | | 1,969 | |
| Other liabilities | Other liabilities | (16) | | | 1,240 | | Other liabilities | 2,667 | | | (16) | |
| Settlement of stock-based payments liabilities | Settlement of stock-based payments liabilities | (2,682) | | | (71,997) | | Settlement of stock-based payments liabilities | (994) | | | (2,682) | |
| Net cash flows provided by (used in) operating activities | 23,103 | | | (70,085) | | |
| Net cash flows provided by operating activities | | Net cash flows provided by operating activities | 104,279 | | | 23,103 | |
| | Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Purchases of property and equipment | Purchases of property and equipment | (13,173) | | | (11,149) | | Purchases of property and equipment | (21,811) | | | (13,173) | |
| Cash paid for intangible assets | | Cash paid for intangible assets | (2,050) | | | — | |
| Net cash flows used in investing activities | Net cash flows used in investing activities | (13,173) | | | (11,149) | | Net cash flows used in investing activities | (23,861) | | | (13,173) | |
| | Cash flows from financing activities | Cash flows from financing activities | | 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 of tax sharing liabilities to SAP (1) | | Payments of tax sharing liabilities to SAP (1) | (12,119) | | | — | |
| Payments for taxes related to net share settlement of equity awards | Payments for taxes related to net share settlement of equity awards | (208,920) | | | — | | Payments for taxes related to net share settlement of equity awards | (2,849) | | | (208,920) | |
| Issuance of class A common stock through Employee Stock Purchase Plan | 20,380 | | | — | | |
| Issuance of common stock of Employee Stock Purchase Plan | | Issuance of common stock of Employee Stock Purchase Plan | 19,965 | | | 20,380 | |
| Proceeds from exercise of stock options | Proceeds from exercise of stock options | 614 | | | — | | Proceeds from exercise of stock options | 866 | | | 614 | |
| Net cash flows (used in) provided by financing activities | (187,926) | | | 464,485 | | |
| Net cash flows provided by (used in) financing activities | | Net cash flows provided by (used in) financing activities | 5,863 | | | (187,926) | |
| Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | (67) | | | (606) | | Effect of changes in exchange rates on cash and cash equivalents | 545 | | | (67) | |
| Net (decrease) increase in cash and cash equivalents | (178,063) | | | 382,645 | | |
| Cash and cash equivalents, beginning of period | 1,014,511 | | | 203,891 | | |
| Cash and cash equivalents, end of period | $ | 836,448 | | | $ | 586,536 | | |
| Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | 86,826 | | | (178,063) | |
| Cash and cash equivalents as of 1 January | | Cash and cash equivalents as of 1 January | 719,892 | | | 1,014,511 | |
| Cash and cash equivalents as of 31 March | | Cash and cash equivalents as of 31 March | $ | 806,718 | | | $ | 836,448 | |
| | Supplemental cash flow disclosures | Supplemental cash flow disclosures | | Supplemental cash flow disclosures | |
| Cash paid for income taxes | Cash paid for income taxes | $ | 673 | | | $ | 2,151 | | Cash paid for income taxes | $ | 6,460 | | | $ | 673 | |
| Cash paid for operating leases, net of incentives received | Cash paid for operating leases, net of incentives received | $ | 5,662 | | | $ | 800 | | Cash paid for operating leases, net of incentives received | $ | 4,573 | | | $ | 5,662 | |
| Modification of cash-settled stock-based compensation awards into equity-settled awards | $ | — | | | $ | 206,313 | | |
| | Non-cash investing and financing activities | Non-cash investing and financing activities | | Non-cash investing and financing activities | |
| Capital expenditures incurred but not yet paid | Capital expenditures incurred but not yet paid | $ | 759 | | | $ | 8 | | Capital expenditures incurred but not yet paid | $ | 251 | | | $ | 759 | |
| Stock-based compensation capitalized as internal-use software | | Stock-based compensation capitalized as internal-use software | $ | 4,416 | | | $ | 2,193 | |
| Right-of-use assets obtained in exchange for lease obligations | Right-of-use assets obtained in exchange for lease obligations | $ | 15,761 | | | $ | — | | Right-of-use assets obtained in exchange for lease obligations | $ | 1,928 | | | $ | 15,761 | |
| Note payable issued for dividend declared | $ | — | | | $ | 500,000 | | |
| Costs related to initial public offering incurred but not yet paid | $ | — | | | $ | 524 | | |
________________
(1) Includes amounts from related parties. See Note 3 and 12 for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 firstpioneered a new category of software, experience management, platform (“or XM, Platform”)that enables organizations to managefind and fix broken experiences and drive operational improvements to improve customer loyalty, increase employee retention, and become a brand that people love.
The Company’s technology helps organizations find and keep customers, retain and engage employees, and improve their competitive position in their product categories and brand experiences.talent markets. The XM Platform helps organizations listen to their employees and customers, understand their feedback, and then take action in response. 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, 2022,2023, and the condensed consolidated statements of operations, comprehensive loss, stockholders' equity, (deficit), and cash flows for the three months ended March 31, 20222023 and 20212022 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 fairly state fairly the Company's financial position as of March 31, 20222023 and its results of operations and cash flows for the three months ended March 31, 20222023 and 2021.2022. 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, 20222023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 20222023 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, 2021,2022, 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, and 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.assets. 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.
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.
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 invoiceinvoiced amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of March 31, 20222023 were $18.2$22.1 million and $13.7$21.7 million, respectively. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of December 31, 20212022 were $18.1$22.3 million and $14.0$19.9 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 receivethe Company receives 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$30.0 million and $33.0$31.3 million as of March 31, 20222023 and December 31, 2021,2022, respectively and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue and revenue generated from same period billings for each of the Company’s revenue generating solutions:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Subscription revenue: | Subscription revenue: | | | | Subscription revenue: | | | |
| Revenue included in prior period deferred revenue | Revenue included in prior period deferred revenue | $ | 228,216 | | | $ | 164,999 | | Revenue included in prior period deferred revenue | $ | 270,659 | | | $ | 228,216 | |
| Revenue generated from same period billings | Revenue generated from same period billings | 52,592 | | | 21,897 | | Revenue generated from same period billings | 69,144 | | | 52,592 | |
| Total subscription revenue | Total subscription revenue | $ | 280,808 | | | $ | 186,896 | | Total subscription revenue | $ | 339,803 | | | $ | 280,808 | |
| Professional services and other revenue: | Professional services and other revenue: | | | | Professional services and other revenue: | | | |
| Revenue included in prior period deferred revenue | Revenue included in prior period deferred revenue | $ | 23,790 | | | $ | 28,526 | | Revenue included in prior period deferred revenue | $ | 43,069 | | | $ | 23,790 | |
| Revenue generated from same period billings | Revenue generated from same period billings | 31,049 | | | 23,221 | | Revenue generated from same period billings | 26,898 | | | 31,049 | |
| Total professional services and other revenue | Total professional services and other revenue | $ | 54,839�� | | | $ | 51,747 | | Total professional services and other revenue | $ | 69,967 | | | $ | 54,839 | |
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 expected future estimated revenue related to unsatisfied performance obligations as of March 31, 20222023 was $1,766.6$2,135.1 million, of which approximately $1,031.9$1,206.0 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 ourthe Company’s cloud contracts remaining at the balance sheet date and thus, by the timing of contract renewals.
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, | | Three Months Ended March 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| United States | United States | $ | 236,642 | | | $ | 170,549 | | United States | $ | 286,367 | | | $ | 236,642 | |
| International | International | 99,005 | | | 68,094 | | International | 123,403 | | | 99,005 | |
| Total revenue | Total revenue | $ | 335,647 | | | $ | 238,643 | | Total revenue | $ | 409,770 | | | $ | 335,647 | |
No single country outside the United States accounted for 10% or more of revenue during the three months ended March 31, 20222023 and 2021.2022.
Stock-Based Compensation, including cash settled
Equity Awards
The Company records stock-based compensation based on the grant date fair value of the awards andawards. The Company recognizes the fair value of thoserestricted stock awards that do not contain a performance condition 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 probablebased on the probability that 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 ourthe Qualtrics 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.
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.circumstances and expected losses. 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$8.3 million and $1.5$8.6 million as of March 31, 20222023 and December 31, 2021,2022, respectively. Net additions (reductions) charged to badBad debt expense werewas $3.4 million during the three months ended March 31, 2023 and not material during the three months ended March 31, 2022 and 2021.2022. The Company’s allowance for cancellations was $14.1$25.1 million and $17.5$28.8 million as of March 31, 20222023 and December 31, 2021,2022, respectively. During the three months ended March 31, 2023, $(3.4) million of net additions (reductions) were charged to revenue and $(0.3) million of net additions (reductions) were charged to deferred revenue. 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, 20222023 and December 31, 2021.2022. No single customer accounted for 10% or more of total revenue during the three months ended March 31, 20222023 and 2021.2022.
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 capitalized additional deferred incremental costs of obtaining a contract of $26.8$34.7 million and $13.5$26.8 million during the three months ended March 31, 2023 and 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.
Amortization of deferred contract acquisition costs were $15.8$22.4 million and $11.2$15.8 million for the three months ended March 31, 20222023 and 2021,2022, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of operations.comprehensive loss. 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$7.4 million and $3.4$3.9 million related to capitalized internal-use software for the three months ended March 31, 20222023 and 2021,2022, 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 approachcapitalized $17.0 million and $6.8 million of expenses 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
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 authoritiesinternal-use software during the course of an audit,three months ended March 31, 2023 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.2022, respectively.
Recently IssuedAdopted 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 theas of January 1, 2023. The impact will be dependent upon the occurrence and magnitude of any future acquisitions.
2.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
| | | As of March 31, | | As of December 31, | | As of March 31, | | As of December 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Cash | Cash | $ | 246,221 | | | $ | 123,906 | | Cash | $ | 501,081 | | | $ | 589,948 | |
| Money market mutual funds | Money market mutual funds | 590,227 | | | 890,605 | | Money market mutual funds | 305,637 | | | 129,944 | |
| Total cash and cash equivalents | Total cash and cash equivalents | $ | 836,448 | | | $ | 1,014,511 | | Total cash and cash equivalents | $ | 806,718 | | | $ | 719,892 | |
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.hierarchy and are reported at their fair value on the consolidated balance sheets as of March 31, 2023 and December 31, 2022.
Tax sharing liability
SinceFrom the date of the SAP Acquisition, we haveQualtrics has been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, wethe Company deconsolidated from the SAP Tax Group for U.S. federal income tax purposes. We expectThe Company continues to remainbe 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, weQualtrics 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 (current portion) and other liabilities (non-current portion) and as a 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, 20222023 and December 31, 20212022, the Company’s distribution liability for the tax sharing agreement with SAP based on an estimated fair value totaled $70.0$66.0 million and $71.5$65.0 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. We are using an estimated discount rate of 10%, we have utilized the current stock price as of March 31, 2023 as the best estimate of the future vest date value, and we estimate that the deductions will be utilized in the next one to three years based on the Company's current forecasts. 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, 20222023 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, 20212022 | $ | (71,500)(65,000) | |
Change in the fair value reported in other non-operating income, (expense), net | 1,500 (5,432) | |
Payments of tax sharing liabilities based on estimated fair value to SAP (1) | 4,432 | |
Balance as of March 31, 20222023 | $ | (70,000)(66,000) | |
(1) See Note 12 for additional details on the full payment of tax sharing liabilities.
4.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
| | | As of March 31, | | As of December 31, | | As of March 31, | | As of December 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Internal-use software | Internal-use software | $ | 32,755 | | | $ | 29,047 | | Internal-use software | $ | 64,093 | | | $ | 50,488 | |
| Server equipment | Server equipment | 28,265 | | | 28,176 | | Server equipment | 19,058 | | | 19,192 | |
| Leasehold improvements | Leasehold improvements | 82,013 | | | 80,301 | | Leasehold improvements | 108,458 | | | 88,254 | |
| Computer equipment | Computer equipment | 24,258 | | | 21,470 | | Computer equipment | 26,580 | | | 25,999 | |
| Land | Land | 13,383 | | | 13,383 | | Land | 13,383 | | | 13,383 | |
| Buildings | Buildings | 61,346 | | | 61,346 | | Buildings | 61,345 | | | 61,345 | |
| Furniture and fixtures | Furniture and fixtures | 3,021 | | | 2,857 | | Furniture and fixtures | 3,191 | | | 3,158 | |
| Software | Software | 3,252 | | | 3,252 | | Software | 3,034 | | | 3,034 | |
| Construction in progress | Construction in progress | 16,170 | | | 10,717 | | Construction in progress | 10,889 | | | 27,533 | |
| Total property and equipment | Total property and equipment | $ | 264,463 | | | $ | 250,549 | | Total property and equipment | $ | 310,031 | | | $ | 292,386 | |
| Accumulated depreciation and amortization | Accumulated depreciation and amortization | (65,071) | | | (58,222) | | Accumulated depreciation and amortization | (86,703) | | | (76,741) | |
| Property and equipment, net | Property and equipment, net | $ | 199,392 | | | $ | 192,327 | | Property and equipment, net | $ | 223,328 | | | $ | 215,645 | |
The Company recognized depreciation and amortization expense related to its property and equipment as follows:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Cost of revenue | Cost of revenue | $ | 6,097 | | | $ | 5,106 | | Cost of revenue | $ | 9,279 | | | $ | 6,097 | |
| Research and development | Research and development | 1,364 | | | 650 | | Research and development | 1,490 | | | 1,364 | |
| Sales and marketing | Sales and marketing | 2,005 | | | 1,211 | | Sales and marketing | 2,285 | | | 2,005 | |
| General and administrative | General and administrative | 472 | | | 241 | | General and administrative | 383 | | | 472 | |
| Total depreciation and amortization expense | Total depreciation and amortization expense | $ | 9,938 | | | $ | 7,208 | | Total depreciation and amortization expense | $ | 13,437 | | | $ | 9,938 | |
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 less than 1 to 1413 years. Options to extend for up to 10 years have not been included because they are not reasonably certain.certain to be exercised.
The components of lease expense were as follows:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Operating lease cost | Operating lease cost | $ | 7,501 | | | $ | 5,704 | | Operating lease cost | $ | 6,626 | | | $ | 7,501 | |
| Variable and short-term lease cost | Variable and short-term lease cost | 2,449 | | | 3,121 | | Variable and short-term lease cost | 3,378 | | | 2,449 | |
Other information related to leases was as follows:
| | | As of March 31, | | As of
December 31, | | As of March 31, | | As of December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Weighted average remaining lease term | Weighted average remaining lease term | 11.3 years | | 11.9 years | Weighted average remaining lease term | 10.4 years | | 10.7 years |
| Weighted average discount rate | Weighted average discount rate | 2.04 | % | | 2.07 | % | Weighted average discount rate | 2.08 | % | | 2.08 | % |
As of March 31, 2021,2023, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, waswere as follows:
| | | As of March 31, | | As of March 31, |
| in thousands | in thousands | 2022 | in thousands | 2023 |
| Remainder of 2022 | 18,304 | | |
| 2023 | 14,846 | | |
| Remainder of 2023 | | Remainder of 2023 | $ | 7,639 | |
| 2024 | 2024 | 28,811 | | 2024 | 29,880 | |
| 2025 | 2025 | 30,958 | | 2025 | 32,052 | |
| 2026 | 2026 | 31,622 | | 2026 | 32,656 | |
| 2027 | | 2027 | 29,939 | |
| Thereafter | Thereafter | 208,606 | | Thereafter | 178,324 | |
| Total minimum lease payments | Total minimum lease payments | $ | 333,147 | | Total minimum lease payments | $ | 310,490 | |
| Less: imputed interest | Less: imputed interest | (38,146) | | Less: imputed interest | (33,071) | |
| Total | Total | $ | 295,001 | | Total | $ | 277,419 | |
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 issued | 1,059,354 | |
Fair value of stock options assumed | 127,139 | |
Total | $ | 1,267,682 | |
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 thousands | Clarabridge
(October 2021) |
Accounts receivable | 18,538 | |
Prepaid expenses and other assets | 2,888 | |
Property and equipment | 6,414 | |
Customer relationships | 101,160 | |
Developed technology | 151,530 | |
Tradenames | 1,240 | |
Goodwill | 1,065,335 | |
Total assets acquired | 1,347,105 | |
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
finalization of tax related assumptions. The allocation of the purchase price for the Usermind and SurveyVitals acquisitions is as follows:
| | | | | |
in thousands | Usermind and SurveyVitals |
Developed technology | $ | 5,070 | |
Customer relationships | 8,440 | |
Licenses and certifications | 6,350 | |
Tradenames | 100 | |
Goodwill | 47,504 | |
Other assets, net | 1,086 | |
Total assets acquired | 68,550 | |
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 allocations | 780 | |
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.
Other intangible assets, net
Other intangible assets, net consisted of the following:
| | | As of March 31, | | As of December 31, | | As of March 31, | | As of December 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Patents | Patents | $ | 751 | | | $ | 751 | | Patents | $ | 751 | | | $ | 751 | |
| Developed technology | Developed technology | 159,670 | | | 159,665 | | Developed technology | 161,920 | | | 159,670 | |
| Customer relationships | Customer relationships | 111,700 | | | 111,965 | | Customer relationships | 111,700 | | | 111,700 | |
| Developed content | Developed content | 400 | | | 400 | | Developed content | 400 | | | 400 | |
| Tradename | Tradename | 1,890 | | | 1,915 | | Tradename | 1,890 | | | 1,890 | |
| Licenses and certifications | Licenses and certifications | 6,350 | | | 6,845 | | Licenses and certifications | 6,350 | | | 6,350 | |
| License agreements | License agreements | 1,500 | | | 1,500 | | License agreements | 1,500 | | | 1,500 | |
| Total intangible assets | Total intangible assets | $ | 282,261 | | | $ | 283,041 | | Total intangible assets | $ | 284,511 | | | $ | 282,261 | |
| Accumulated amortization | Accumulated amortization | (31,958) | | | (18,541) | | Accumulated amortization | (84,777) | | | (71,846) | |
| Other intangible assets, net | Other intangible assets, net | $ | 250,303 | | | $ | 264,500 | | Other intangible assets, net | $ | 199,734 | | | $ | 210,415 | |
The Company recognized amortization expense related to its acquired intangible assets as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| in thousands | 2023 | | 2022 |
| Cost of revenue | $ | 7,358 | | | $ | 7,572 | |
| Sales and marketing | 5,531 | | | 5,527 | |
| General and administrative | 42 | | | 318 | |
| Total amortization of acquired intangible assets | $ | 12,931 | | | $ | 13,417 | |
Estimated amortization expense for intangible assets for the next five years and thereafter consists of the following:
| | | As of March 31, | | As of March 31, |
| in thousands | in thousands | 2022 | in thousands | 2023 |
| Remainder of 2022 | 39,888 | | |
| 2023 | 51,002 | | |
| Remainder of 2023 | | Remainder of 2023 | $ | 39,009 | |
| 2024 | 2024 | 50,885 | | 2024 | 52,009 | |
| 2025 | 2025 | 49,934 | | 2025 | 50,122 | |
| 2026 | 2026 | 41,366 | | 2026 | 41,366 | |
| 2027 | | 2027 | 17,156 | |
| Thereafter | Thereafter | 17,228 | | Thereafter | 72 | |
| Total | Total | $ | 250,303 | | Total | 199,734 | |
8.7.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| | | As of March 31, | | As of December 31, | | As of March 31, | | As of December 31, |
| in thousands | in thousands | 2022 | | 2021 | in thousands | 2023 | | 2022 |
| Accrued wages, bonuses and commissions | Accrued wages, bonuses and commissions | $ | 61,233 | | | $ | 93,021 | | Accrued wages, bonuses and commissions | $ | 71,739 | | | $ | 79,518 | |
| Accrued payroll taxes | Accrued payroll taxes | 5,843 | | | 7,295 | | Accrued payroll taxes | 5,501 | | | 9,087 | |
| Other accrued expenses | Other accrued expenses | 36,173 | | | 44,037 | | Other accrued expenses | 30,236 | | | 32,590 | |
| Employee Stock Purchase Plan (“ESPP”) liability | | Employee Stock Purchase Plan (“ESPP”) liability | 7,128 | | | 18,924 | |
| Accrued income taxes | Accrued income taxes | 24,168 | | | 23,049 | | Accrued income taxes | 15,779 | | | 15,172 | |
| Total accrued liabilities | Total accrued liabilities | $ | 127,417 | | | $ | 167,402 | | Total accrued liabilities | $ | 130,383 | | | $ | 155,291 | |
9.8.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 most current information available at the time of the assessment.available. As additional information becomes available, the
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 theits business, operating results, or financial condition.
Merger Expenses
10.STOCK-BASED COMPENSATION
Cash Awards
As previously disclosed, on March 12, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Quartz Holdco, LLC, a Delaware limited liability company (“Parent”), and Quartz MergerCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Silver Lake (“Silver Lake”). During the three months ended March 31, 2022, less than 0.1 million Qualtrics Rights and Move SAP RSUs vested and were settled for $2.72023, the Company has incurred $16.3 million in cash. DuringMerger-related expenses, $7.1 million of which have been paid. The remaining $9.2 million is included in accounts payable.
9.STOCK-BASED COMPENSATION
Stock-based compensation expense for the three months ended March 31, 2021, 1.7 million Qualtrics Rights2023 and Move SAP RSUs vested and were settled for $72.0 million in cash. The unrecognized expense related to Qualtrics Rights and Move SAP RSUs2022 was $2.4 million and $4.4 millionrecorded as of March 31, 2022 and December 31, 2021, and will be recognized over a remaining vesting period of up to two years.follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| in thousands | 2023 | | 2022 |
| Cost of subscription revenue | $ | 5,063 | | | $ | 4,544 | |
| Cost of professional services and other revenue | 8,593 | | | 8,066 | |
| Research and development | 40,646 | | | 41,275 | |
| Sales and marketing | 52,196 | | | 49,053 | |
| General and administrative | 125,472 | | | 165,323 | |
| Total stock-based compensation expense | $ | 231,970 | | | $ | 268,261 | |
Equity Awards
Qualtrics RSUs
The following table sets forth the outstanding Qualtrics RSUs and related activity for the three months ended March 31, 2022:2023:
| | | Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value | | Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value |
| Outstanding as of December 31, 2021 | 82,164 | | | $ | 43.11 | | |
| Outstanding as of December 31, 2022 | | Outstanding as of December 31, 2022 | 76,673 | | | $ | 34.17 | |
| Granted | Granted | 16,070 | | | 28.74 | | Granted | 15,980 | | | 16.32 | |
| Vested | Vested | (17,617) | | | 37.60 | | Vested | (10,601) | | | 38.53 | |
| Forfeited/Canceled | Forfeited/Canceled | (938) | | | 39.23 | | Forfeited/Canceled | (1,910) | | | 28.71 | |
| Outstanding as of March 31, 2022 | 79,679 | | | $ | 40.14 | | |
| Outstanding as of March 31, 2023 | | Outstanding as of March 31, 2023 | 80,142 | | | $ | 30.18 | |
The total fair value of RSUs that vested during the three months ended March 31, 2023 and 2022 and 2021 was $529.8$176.0 million and $50.2$529.8 million, respectively. As of March 31, 2022,2023, there was $2,674$1,952.4 million of unrecognized stock-based compensation expense related to outstanding Qualtrics RSUs which is expected to be recognized over a weighted-average period of 2.92.4 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, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (in thousands) | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Term (years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding as of December 31, 2021 | 1,855 | | | $ | 4.84 | | | 6.3 | | $ | 56,684 | |
| Exercised | (123) | | | 4.32 | | | | | |
| Forfeited/Expired | (18) | | | 6.21 | | | | | |
| Outstanding as of March 31, 2022 | 1,714 | | | $ | 4.86 | | | 6.0 | | $ | 40,602 | |
| Vested and exercisable at March 31, 2022 | 877 | | | $ | 4.48 | | | 5.9 | | $ | 21,094 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (in thousands) | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Term (years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding as of December 31, 2022 | 1,468 | | | $ | 4.87 | | | 5.1 | | $ | 8,091 | |
| Exercised | (116) | | | 4.27 | | | | | |
| Forfeited/Expired | (6) | | | 6.79 | | | | | |
| Outstanding as of March 31, 2023 | 1,346 | | | $ | 4.91 | | | 4.9 | | $ | 17,388 | |
| Vested and exercisable at March 31, 2023 | 850 | | | $ | 4.68 | | | 4.9 | | $ | 11,173 | |
The aggregate intrinsic value of options exercised was $1.5 million and $3.0 million for the three months ended March 31, 2023 and 2022. 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, 20222023 is based on the
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.date.
As of March 31, 2022,2023, there was $18.4$10.4 million of unrecognized stock-based compensation expense related to outstanding stock options which is expected to be recognized over a weighted-average period of 21.5 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$4.5 million and $2.9$5.1 million during the three months ended March 31, 2023 and 2022, and 2021, respectively. As of March 31, 2023, there was $4.7 million of unrecognized stock-based compensation expense associated with the ESPP, which is expected to be recognized over a weighted-average period of 0.3 years.
10.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.presented:
| | in thousands (except share amount) | in thousands (except share amount) | Three Months Ended March 31, | in thousands (except share amount) | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Numerator: | Numerator: | | | | Numerator: | | | |
| Net loss attributable to common shareholders | Net loss attributable to common shareholders | $ | (292,325) | | | $ | (199,854) | | Net loss attributable to common shareholders | $ | (258,964) | | | $ | (292,325) | |
| Denominator: | Denominator: | | | | Denominator: | | | |
| Weighted-average shares outstanding for basic loss per share | 575,700,568 | | | 482,260,465 | | |
| Basic loss per share | $ | (0.51) | | | $ | (0.41) | | |
| Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted | | Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted | 599,314,127 | | | 575,700,568 | |
| Net loss per share attributable to common stockholders, basic and diluted | | Net loss per share attributable to common stockholders, basic and diluted | $ | (0.43) | | | $ | (0.51) | |
The net loss per share amounts are the same for the Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions, whether through dividends or in liquidation. 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.antidilutive. 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, 2022 | | As of December 31, 2021 | | As of March 31, 2023 | | As of December 31, 2022 |
| Qualtrics restricted stock units | Qualtrics restricted stock units | 79,679,462 | | | 82,163,894 | | Qualtrics restricted stock units | 80,141,929 | | | 76,672,908 | |
| Qualtrics options | Qualtrics options | 1,714,153 | | | 1,854,965 | | Qualtrics options | 1,346,011 | | | 1,467,828 | |
| Qualtrics employee stock purchase program | Qualtrics employee stock purchase program | 361,319 | | | 687,000 | | Qualtrics employee stock purchase program | 494,762 | | | 2,144,827 | |
12.11.INCOME TAXES
The Company has an effective tax rate of (0.8)(2.7)% and (0.8)% for the three months ended March 31, 20222023 and 2021,2022, respectively. The Company has incurred U.S. book operating losses and has minimal profits in its foreign jurisdictions. 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.
In prior years, theThe Company had historically 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
from SAP in the fourth quarter ofduring 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 CompanyQualtrics 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 be reimbursed by SAP in cases of a taxable loss, in the case of reimbursement, thatwhich is included on the consolidated tax returns with SAP, such as certain combined or unitary state returns, subject to adjustments for hypothetical tax attributes and certain simplifying conventions.
TheASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company has evaluatedconsidered all available evidence, both positive and negative, including historical levels of income or loss, legislative developments, expectations, and risks associated with estimates of future taxable income, and prudent and feasible tax planning strategies. The Company has evaluated this evidence and 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 USU.S. deferred tax assets.assets in these entities.
12.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 statementsloss 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 statementstatements of operationscomprehensive loss 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, 20222023 and 2021,2022, the Company recognized revenue of $10.0$8.6 million and $5.2$10.0 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$8.2 million and $11.9$12.0 million during the three months ended March 31, 20222023 and 2021,2022, respectively. Total costs charged from the Company to SAP and its affiliates were $4.8$0.8 million and $4.1$4.8 million during the three months ended March 31, 20222023 and 2021,2022, respectively. As of March 31, 2023, the outstanding receivable and payable with SAP and its affiliates was $10.7 million and $18.0 million, respectively. As of December 31, 2022, the outstanding receivable and payable with SAP and its affiliates was $48.0$19.2 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$15.2 million, respectively.
Because of the SAP Acquisition, weQualtrics had been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, wethe Company deconsolidated from the SAP Tax Group for U.S. federal tax purposes. We expectThe Company continues to remainbe 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, wethe Company will make certain tax sharing payments to SAP. As of March 31, 2023, the Company’s distribution liability for the tax sharing agreement with SAP totaled $78.0 million, consisting of $12.0 million based on our separate tax liability included on SAP Tax Group returns and $66.0 million based on an estimated fair value of the liability related to Pre-IPO Awards. Of the $78.0 million, $57.2 million is recorded within accounts payable and the remaining $20.8 million is recorded within other liabilities on the condensed consolidated balance sheet as of March 31, 2023. As of December 31, 2022, the Company’s distribution liability for the tax sharing agreement with SAP totaled $87.0$84.7 million, consisting of $17.0$7.7 million based on our separate2021 actual tax liability includedreturn activity, $12.0 million based on SAP Tax Group returnsthe Company’s 2022 tax provision and $70.0$65.0 million based on an estimated fair value ofvalue. Of the liability related to Pre-IPO Awards. As$84.7 million, $72.0 million is recorded within accounts payable and the remaining $12.7 million is recorded within other liabilities on the condensed consolidated balance sheet as of December 31, 2021,2022. For the Company’sthree months ended March 31, 2023, the Company made a payment of the distribution tax liability for the tax sharing agreement withto SAP totaled $88.5of $12.1 million, consisting of $17.0which $4.4 million was based on our separate tax liability included on SAP Tax Group returns and $71.5 million based on anthe estimated fair value, of the liability related to Pre-IPO Awards.
In January 2021, andwhich is disclosed in connection with the initial public offering, the Company declared a $2,392 million dividend in the form of 2 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, 2021.3, “Fair Value Measurements”.
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
The Company has relationships with certain of these entities in the ordinary course of business. During the three months ended March 31, 2022,2023 and 2021,2022, revenue and charges from these related parties were immaterial.
On March 12, 2023, concurrently with the execution of the Merger Agreement, the Company and SAP SE (“SAP”) entered into a Separation Agreement (the “Separation Agreement”), which governs, among other things, the terms of the separation of the Company’s business from SAP and its affiliates (other than the Company and its subsidiaries).
The Separation Agreement requires the parties to use commercially reasonable efforts to take certain actions between the signing of the Merger Agreement and the closing of the Merger in respect of separating certain shared operations and resources of the Company and SAP so that the Company can operate on a standalone basis independent of SAP and its affiliates (other than the Company and its subsidiaries) following the closing of the Merger (the “Separation”). If the Separation has not been fully completed prior to the closing of the Merger, the Company and SAP will enter into a customary transition services agreement on mutually agreed terms under which SAP will continue providing certain support services and assistance to the Company on a transitional basis as necessary after closing of the Merger.
In December 2020, Ryan Smith, ourthe Company’s 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 which were amended in Q1 2023, under which we werethe Company was billed $1.2$0.7 million and $1.1$1.2 million during the three months ended March 31, 20222023 and March 31, 2021,2022, respectively.I
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 design and manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for Experience Management.experience management. The Qualtrics Experience Management Platform, or Qualtrics XM Platform, 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$409.8 million and $238.6$335.6 million for the three months ended March 31, 20222023 and 2021,2022, respectively, representing year-over-year growth of 41%22%. For the three months ended March 31, 20222023 and 2021,2022, our net loss was $292.3$259.0 million and $199.9$292.3 million, respectively. The results of our operations for the three months ended March 31, 20222023 and 20212022 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%98% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised 84%approximately 83% of our total revenue for the three months ended March 31, 2022.2023. We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 3%2% of revenue during the three months ended March 31, 2022,2023, and our largest industries by annual recurring revenue, or ARR, as of March 31, 20222023 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.
As of March 31, 2023, we had over 5,300 employees. On January 11, 2023, the Company committed to a plan to eliminate approximately 207 roles across the Company globally that do not align with the Company’s highest priorities for 2023. This represents less than 5% of the Company’s work force. As of March 31, 2023, the Company has incurred non-recurring charges of approximately $7.5 million, primarily consisting of severance payments, notice pay (where applicable), employee benefits contributions and related costs.
Merger Agreement
As previously disclosed, on March 12, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Quartz Holdco, LLC, a Delaware limited liability company (“Parent”), and Quartz MergerCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Silver Lake.
As a result of the Merger, each share of Class A common stock of the Company, par value $0.0001 per share (“Class A Common Stock”), and Class B common stock of the Company, par value $0.0001 per share (“Class B Common Stock” and together with Class A Common Stock, the “Common Stock”) outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (subject to certain exceptions, including shares of Common Stock held in treasury by the Company or owned by any direct or indirect wholly owned subsidiary of the Company and any shares of Common stock owned by Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”)) will, at the Effective Time, automatically be cancelled and converted into the right to receive $18.15 in cash (the “Merger Consideration”), without interest and subject to applicable withholding taxes.
Effective as of 11:59 p.m. Eastern Time on April 24, 2023, the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) expired. The consummation of the Merger remains subject to the satisfaction (or written waiver by each of the Company, Parent and Merger Sub if permissible by law) of other closing conditions, including, but not limited to, clearances or approvals having been obtained or waived under applicable specified foreign antitrust laws and foreign investment laws.
The Board of Directors of the Company, after considering the unanimous recommendation of the independent subcommittee of the audit committee of the Board of Directors of the Company, has approved the Merger Agreement and the transactions contemplated thereby and the necessary stockholder approval has been duly executed and delivered, adopting and approving in all respects the Merger Agreement and the transactions contemplated thereby. Completion of the Merger remains subject to certain closing conditions, including (1) the information statement having been mailed to the Company’s stockholders and at least 20 calendar days having elapsed since the completion of such mailing, (2) the obtainment of regulatory clearances or approvals under certain specified foreign antitrust laws and foreign investment laws, (3) the absence of any law enjoining, restraining or otherwise prohibiting or making illegal the consummation of the Merger, (4) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) compliance in all material respects with the other party’s covenants, agreements and obligations under the Merger Agreement, and (6) no Material Adverse Effect (as defined in the Merger Agreement) having occurred and being continuing since the date of the Merger Agreement. Subject to the satisfaction or waiver of such closing conditions, the parties expect the transaction to close in the second half of 2023.
If the Merger is consummated, Class A Common Stock will be delisted from the Nasdaq Global Select Market and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we will no longer file periodic reports with the SEC on account of Company Class A Common Stock.
Separation Agreement
As previously disclosed, on March 12, 2023, concurrently with the execution of the Merger Agreement, the Company and SAP SE (“SAP”) entered into a Separation Agreement (the “Separation Agreement”), which governs, among other things, the terms of the separation of the Company’s business from SAP and its affiliates (other than the Company and its subsidiaries).
The Separation Agreement requires the parties to use commercially reasonable efforts to take certain actions between the signing of the Merger Agreement and the closing of the Merger in respect of separating certain shared operations and resources of the Company and SAP so that the Company can operate on a standalone basis independent of SAP and its affiliates (other than the Company and its subsidiaries) following the closing of the Merger (the “Separation”). If the Separation has not been fully completed prior to the closing of the Merger, the Company and SAP will enter into a customary transition services agreement on mutually agreed terms under which SAP will continue providing certain support services and assistance to the Company on a transitional basis as necessary after closing of the Merger.
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
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%30% and 29% of our total revenue in the three months ended March 31, 20222023 and 2021,2022, 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 increasedstrong 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.the Qualtrics Partner Network, or “QPN”. Since then, we have built out our partner network to include over 300400 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 continue 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 platformXM 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 2,0602,372 customers with ARR of $100,000 or more as of March 31, 2022,2023, up from 1,9402,262 as of December 31, 2021.2022. The
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, 2022,2023, our net retention rate was 128%116%. Our net retention rate was 120% as of MarchDecember 31, 2021.2022.
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 1312 “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, certainCertain of our financial results have been presented as an operating segment within SAP’s publicly reported financial results. These Euro-reportedEuro currency reported financial results are prepared and presented under International Financial Reporting Standards, or IFRS, and presented on a non-IFRS basis.IFRS. The SAP segment results differ from our standalone financial results primarily due to: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
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 research services 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 implementation services and engineering services 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
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.awareness, including bringing back our in-person X4 Summit event that took place this quarter in March 2023. 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.growth. 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.
Other non-operating income, (expense), net
Other non-operating income, (expense), net consists of other non-operating gains or losses, including those related to changes in the fair value of our distribution liability related to our tax sharing agreement with SAP, interest income, interest expense 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 aan 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 were updated in 2021 to reflect the actual tax attributes available for future use by the Qualtrics tax reporting entitiesentity that filefiles returns separate from aan SAP Tax Group.
Results of Operations
The following table sets forth our results of operations for the periods presented:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (In thousands) | | (In thousands) |
| Revenue: | Revenue: | | Revenue: | |
| Subscription | Subscription | $ | 280,808 | | | $ | 186,896 | | Subscription | $ | 339,803 | | | $ | 280,808 | |
| Professional services and other | Professional services and other | 54,839 | | | 51,747 | | Professional services and other | 69,967 | | | 54,839 | |
| Total revenue | Total revenue | 335,647 | | | 238,643 | | Total revenue | 409,770 | | | 335,647 | |
Cost of revenue(1)(2): | Cost of revenue(1)(2): | | Cost of revenue(1)(2): | |
| Subscription | Subscription | 44,774 | | | 20,370 | | Subscription | 54,671 | | | 44,774 | |
| Professional services and other | Professional services and other | 54,493 | | | 41,411 | | Professional services and other | 68,511 | | | 54,493 | |
| Total cost of revenue | Total cost of revenue | 99,267 | | | 61,781 | | Total cost of revenue | 123,182 | | | 99,267 | |
| Gross profit | Gross profit | 236,380 | | | 176,862 | | Gross profit | 286,588 | | | 236,380 | |
Operating expenses(1)(2): | Operating expenses(1)(2): | | Operating expenses(1)(2): | |
| Research and development | Research and development | 105,999 | | | 62,806 | | Research and development | 108,975 | | | 105,999 | |
| Sales and marketing | Sales and marketing | 218,330 | | | 136,181 | | Sales and marketing | 252,772 | | | 218,330 | |
| General and administrative | General and administrative | 202,589 | | | 174,449 | | General and administrative | 178,672 | | | 202,589 | |
| Total operating expenses | Total operating expenses | 526,918 | | | 373,436 | | Total operating expenses | 540,419 | | | 526,918 | |
| Operating loss | Operating loss | (290,538) | | | (196,574) | | Operating loss | (253,831) | | | (290,538) | |
| Other non-operating income (expense), net | 674 | | | (1,740) | | |
| Other non-operating income, net | | Other non-operating income, net | 1,655 | | | 674 | |
| Loss before income taxes | Loss before income taxes | (289,864) | | | (198,314) | | Loss before income taxes | (252,176) | | | (289,864) | |
| Provision for income taxes | Provision for income taxes | 2,461 | | | 1,540 | | Provision for income taxes | 6,788 | | | 2,461 | |
| Net loss | Net loss | $ | (292,325) | | | $ | (199,854) | | Net loss | $ | (258,964) | | | $ | (292,325) | |
________________
(1)Includes equity and cash settled stock-based compensation expense(a), as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (In thousands) |
| Cost of subscription revenue | $ | 4,544 | | | $ | 2,624 | |
| Cost of professional services and other revenue | 8,066 | | | 4,430 | |
| Research and development | 41,275 | | | 21,332 | |
| Sales and marketing | 49,053 | | | 22,777 | |
| General and administrative | 165,323 | | | 151,836 | |
| Total stock-based compensation, including cash settled | $ | 268,261 | | | $ | 202,999 | |
________________
(a) 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. | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (In thousands) |
| Cost of subscription revenue | $ | 5,063 | | | $ | 4,544 | |
| Cost of professional services and other revenue | 8,593 | | | 8,066 | |
| Research and development | 40,646 | | | 41,275 | |
| Sales and marketing | 52,196 | | | 49,053 | |
| General and administrative | 125,472 | | | 165,323 | |
| Total stock-based compensation, including cash settled | $ | 231,970 | | | $ | 268,261 | |
(2)Includes amortization of acquired intangible assets as follows:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (In thousands) | | (In thousands) |
| Cost of revenue | Cost of revenue | $ | 7,572 | | | $ | 266 | | Cost of revenue | $ | 7,358 | | | $ | 7,572 | |
| | Sales and marketing | Sales and marketing | 5,527 | | 51 | Sales and marketing | 5,531 | | 5,527 |
| General and administrative | General and administrative | 318 | | 47 | General and administrative | 42 | | 318 |
| Total amortization of acquired intangible assets | Total amortization of acquired intangible assets | $ | 13,417 | | | $ | 364 | | Total amortization of acquired intangible assets | $ | 12,931 | | | $ | 13,417 | |
The following table sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (as a % of revenue) | | (as a % of revenue) |
| Revenue: | Revenue: | | Revenue: | |
| Subscription | Subscription | 84 | | | 78 | | Subscription | 83 | | | 84 | |
| Professional services and other | Professional services and other | 16 | | | 22 | | Professional services and other | 17 | | | 16 | |
| Total revenue | Total revenue | 100 | % | | 100 | % | Total revenue | 100 | % | | 100 | % |
| Cost of revenue: | Cost of revenue: | | Cost of revenue: | |
| Subscription | Subscription | 13 | | | 9 | | Subscription | 13 | | | 13 | |
| Professional services and other | Professional services and other | 16 | | | 17 | | Professional services and other | 17 | | | 16 | |
| Total cost of revenue | Total cost of revenue | 29 | | | 26 | | Total cost of revenue | 30 | | | 29 | |
| Gross profit | Gross profit | 71 | | | 74 | | Gross profit | 70 | | | 71 | |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
| Research and development | Research and development | 32 | | | 26 | | Research and development | 27 | | | 32 | |
| Sales and marketing | Sales and marketing | 65 | | | 57 | | Sales and marketing | 62 | | | 65 | |
| General and administrative | General and administrative | 60 | | | 73 | | General and administrative | 43 | | | 60 | |
| Total operating expenses | Total operating expenses | 157 | | | 156 | | Total operating expenses | 132 | | | 157 | |
| Operating loss | Operating loss | (86) | | | (82) | | Operating loss | (62) | | | (86) | |
| Other non-operating income, net | Other non-operating income, net | — | | | (1) | | Other non-operating income, net | — | | | — | |
| Loss before income taxes | Loss before income taxes | (86) | | | (83) | | Loss before income taxes | (62) | | | (86) | |
| Provision for income taxes | Provision for income taxes | 1 | | | 1 | | Provision for income taxes | 2 | | | 1 | |
| Net loss | Net loss | (87) | % | | (84) | % | Net loss | (64) | % | | (87) | % |
Comparison of the three months ended March 31, 20222023 and 20212022
Revenue
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | $ Change | | % Change | | 2023 | | 2022 | | $ Change | | % Change |
| | (In thousands) | | | | (In thousands) | | |
| Subscription revenue | Subscription revenue | $ | 280,808 | | | $ | 186,896 | | | $ | 93,912 | | | 50 | % | Subscription revenue | $ | 339,803 | | | $ | 280,808 | | | $ | 58,995 | | | 21 | % |
| Professional services and other revenue | Professional services and other revenue | 54,839 | | | 51,747 | | | 3,092 | | | 6 | % | Professional services and other revenue | 69,967 | | | 54,839 | | | 15,128 | | | 28 | % |
| Total revenue | Total revenue | $ | 335,647 | | | $ | 238,643 | | | $ | 97,004 | | | 41 | % | Total revenue | $ | 409,770 | | | $ | 335,647 | | | $ | 74,123 | | | 22 | % |
Subscription revenue increased by $93.9$59.0 million, or 50%21%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. This increase was due primarily to increased demand for our solutions from new and existing customers. Of the increase in subscription revenue for the three months ended
March 31, 2022,2023, as compared to the three months ended March 31, 2021,2022, approximately $71.2$35.6 million was attributable to existing customers and approximately $22.7$23.4 million was attributable to new customers. The increase in revenue from existing customers was driven by upgrades of current subscription solutions and the purchase of additional solutions within our platform.XM Platform. Pricing changes were not material to the increase in revenue. Professional services and other revenue increased $3.1$15.1 million, or 6%28%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. This increase was primarily due to an increase in revenue from largelarger customers, who generally require more services.
Cost of revenue, gross profit, and gross margin
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | $ Change | | % Change | | 2023 | | 2022 | | $ Change | | % Change |
| | (In thousands) | | | | (In thousands) | | |
| Cost of subscription revenue | Cost of subscription revenue | $ | 44,774 | | | $ | 20,370 | | | $ | 24,404 | | | 120 | % | Cost of subscription revenue | $ | 54,671 | | | $ | 44,774 | | | $ | 9,897 | | | 22 | % |
| Cost of professional services and other revenue | Cost of professional services and other revenue | 54,493 | | | 41,411 | | | 13,082 | | | 32 | % | Cost of professional services and other revenue | 68,511 | | | 54,493 | | | 14,018 | | | 26 | % |
| Total cost of revenue | Total cost of revenue | 99,267 | | | 61,781 | | | 37,486 | | | 61 | % | Total cost of revenue | 123,182 | | | 99,267 | | | 23,915 | | | 24 | % |
| | Subscription gross profit | Subscription gross profit | 236,034 | | | 166,526 | | | 69,508 | | | 42 | % | Subscription gross profit | 285,132 | | | 236,034 | | | 49,098 | | | 21 | % |
| Professional services and other gross profit | Professional services and other gross profit | 346 | | | 10,336 | | | (9,990) | | | (97) | % | Professional services and other gross profit | 1,456 | | | 346 | | | 1,110 | | | 321 | % |
| Total gross profit | Total gross profit | $ | 236,380 | | | $ | 176,862 | | | $ | 59,518 | | | 34 | % | Total gross profit | $ | 286,588 | | | $ | 236,380 | | | $ | 50,208 | | | 21 | % |
| | Subscription gross margin | Subscription gross margin | 84 | % | | 89 | % | | Subscription gross margin | 84 | % | | 84 | % | |
| Professional services and other gross margin | Professional services and other gross margin | 1 | % | | 20 | % | | Professional services and other gross margin | 2 | % | | 1 | % | |
| Total gross margin | Total gross margin | 70 | % | | 74 | % | | Total gross margin | 70 | % | | 70 | % | |
Cost of subscription revenue increased $24.4$9.9 million, or 120%22%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021,2022, consistent with the increase in subscription revenue growth over the same period. This increase was driven by an $8.5a $3.5 million increase in amortization of internal-use software, a $3.4 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, a $7.3 million increase in amortization expense, a $5.9$2.7 million increase in server costs, a $1.9 million increase in stock-based compensation expense, and a $0.5 million increase in amortization of internal use software.stock-based compensation expense. Cost of professional services and other revenue increased $13.1$14.0 million, or 32%26%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. This increase was driven by a $5.1$7.9 million increase in professional services vendor costs, a $4.0$5.6 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, and a $3.6$0.5 million increase in stock-based compensation expense.
Our gross margins decreased from 74% during the three months ended March 31, 2021 to 70% during the three months ended March 31, 2022, due primarily to a decrease in subscription gross margins driven by an increase in amortization expense and other expenses discussed above and a decrease in professional services and other gross margins based on the changes discussed above.
Operating Expenses
Research and development
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands) | | |
| Research and development | $ | 105,999 | | | $ | 62,806 | | | $ | 43,193 | | | 69 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | $ Change | | % Change |
| (In thousands) | | |
| Research and development | $ | 108,975 | | | $ | 105,999 | | | $ | 2,976 | | | 3 | % |
Research and development expenses increased $43.2$3.0 million, or 69%3%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. This increase was driven by a $19.9 million increase in stock-based compensation expense, a $17.9$4.1 million increase in employee-related costs from headcount growth
related to our recent acquisitions and hiring as we continue to add to and enhance our products and $1.7 million of restructuring expenses in Q1 2023, partially offset by a $3.2$1.3 million increasedecrease in employer payroll tax on employee stock transactions, a $0.8 million decrease in outside vendor costs, and a $2.2$0.6 million increasedecrease in vendor costs.stock-based compensation expense.
Sales and marketing
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands) | | |
| Sales and marketing | $ | 218,330 | | | $ | 136,181 | | | $ | 82,149 | | | 60 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | $ Change | | % Change |
| (In thousands) | | |
| Sales and marketing | $ | 252,772 | | | $ | 218,330 | | | $ | 34,442 | | | 16 | % |
Sales and marketing expenses increased $82.1$34.4 million, or 60%16%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. The increase in sales and marketing was primarily driven by a $41.2an $18.0 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, a $26.3$4.9 million increase in travel-related expenses, $4.7 million of restructuring expenses in Q1 2023, a $3.5 million increase in marketing spend, and a $3.1 million increase in stock-based compensation expense, a $5.5 million increase in amortization expense, a $4.4 million increase in travel-related expenses, a $2.6 million increase in vendor marketing spend, and a $2.1 million increase in employer payroll tax on employee stock transactions.expense.
General and administrative
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| (In thousands) | | |
| General and administrative | $ | 202,589 | | | $ | 174,449 | | | $ | 28,140 | | | 16 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2023 | | 2022 | | $ Change | | % Change |
| (In thousands) | | |
| General and administrative | $ | 178,672 | | | $ | 202,589 | | | $ | (23,917) | | | (12) | % |
General and administrative expenses increased $28.1decreased $23.9 million, or 16%12%, for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. The increasedecrease in general and administrative expenses was primarily driven by a $13.5$39.9 million increasedecrease in stock-based compensation expense, a $7.5$4.0 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, a $6.0 million increasedecrease in employer payroll tax on employee stock transactions, and a $0.8 million decrease in acquisition-related costs, partially offset by $16.3 million of expenses related to the pending Merger transaction in Q1 2023, a $2.0 million increase in acquisitionemployee-related costs from headcount growth related costs.to hiring, a $1.8 million increase in travel-related expenses, and $1.0 million of restructuring expenses in Q1 2023.
Other non-operating income, (expense), net
Other non-operating income, (expense), net increased $2.4$1.0 million for the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021.2022. This increase was primarily driven by a $1.5$6.6 million non-operating gainincrease in interest income and a $1.3 million increase in net foreign currency transaction gains, partially offset by an increase of $6.9 million related to the change in the fair value of our distribution liability related to our tax sharing agreement with SAP and changes in foreign currency transactions gains and losses.SAP.
Provision for income taxes
Provision for income taxes increased $0.9$4.3 million for the three months ended March 31, 2022,2023, as compared to three months ended March 31, 2021,2022, primarily due to higher foreign net income and a share-based compensation shortfallchanges in the valuation allowance recorded as a discrete item in our U.S. entities.
Our effective tax rate was (2.7)% for the three months ended March 31, 2022.
Our effective tax rate was2023 and (0.8)% for both the three months ended March 31, 2022 as well as the three months ended March 31, 2021.2022.
The difference between the U.S. statutory rate of 21% and our effective tax rate for the quarter is primarily driven by rate adjustments due to foreign taxes and the impact of changes in the valuation allowancesallowance recorded against current year losses in the United States.
Liquidity and Capital Resources
As of March 31, 2022,2023, we had cash and cash equivalents of $836.4$806.7 million. Our cash and cash equivalents consist primarily of cash and money market funds. As of March 31, 2022,2023, we had $29.3$59.5 million of our cash and cash equivalents held by our foreign subsidiaries.
We have financed our operations primarily through cash generated from our operations, equity issuances, and proceeds from capital contributions received from SAP in conjunction with the SAP Acquisition and funding of cash settled stock-based compensation expense. Our principal uses of cash in recent periods have been funding our operations, making capital expenditures, settling liability-classified stock-based awards, and settling equity-basedtax obligations related to stock-based awards.
We believe our existing cash and cash equivalents, together with cash provided by operations, will be sufficient to meet our needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new office spaces, the satisfaction of tax withholding obligations related to the vesting of share-based awards, the settlement of liabilities related to the tax sharing agreement with SAP,future share-based awards, the expansion of sales and marketing and international operation activities, the introduction of new product capabilities and enhancement of our XM Platform, and the continuing market acceptance of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.
As previously disclosed, on March 12, 2023, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Silver Lake. We have agreed to various covenants and agreements in the Merger Agreement, including, among others, agreements to conduct our business in the ordinary course of business between the execution of the Merger Agreement and the closing of the Merger. Outside of certain limited exceptions, we may not take certain specified actions without Parent’s prior consent, which is not to be unreasonably withheld, conditioned or delayed, that could affect our liquidity and capital resource needs or requirements, including (i) acquiring other entities or any assets, properties, or businesses, that are material to the Company, (ii) making capital expenditures above specified thresholds, (iii) incurring additional indebtedness above specified thresholds, (iv) issuing additional securities, or (v) repurchasing or redeeming shares of our Common Stock. We do not believe these restrictions will prevent us from meeting our liquidity and capital resource needs or requirements, including our ongoing costs of operations, working capital needs or capital expenditure requirements.
Our cash flow activities were as follows for the periods presented:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (In thousands) |
| Net cash flows used in operating activities | 23,103 | | | $ | (70,085) | |
| Net cash used in investing activities | (13,173) | | | (11,149) | |
| Net cash flows provided by financing activities | (187,926) | | | 464,485 | |
| Effect of exchange rate changes on cash and cash equivalents | (67) | | | (606) | |
| Net increase in cash and cash equivalents | $ | (178,063) | | | $ | 382,645 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (In thousands) |
| Net cash flows provided by in operating activities | $ | 104,279 | | | $ | 23,103 | |
| Net cash used in investing activities | (23,861) | | | (13,173) | |
| Net cash flows provided by (used in) financing activities | 5,863 | | | (187,926) | |
| Effect of exchange rate changes on cash and cash equivalents | 545 | | | (67) | |
| Net increase (decrease) in cash and cash equivalents | $ | 86,826 | | | $ | (178,063) | |
Operating activities
Our largest source of operating cash is cash collections from our paying customers for subscriptions to our XM Platform. Our primary uses of cash from operating activities are for employee-related costs, infrastructure-related expenditures, and marketing expenses. Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expenses and equity and cash settled stock-based compensation, as well as the effect of changes in operating assets and liabilities.
For the three months ended March 31, 2023, net cash provided by operating activities was $104.3 million, which resulted from net loss of $259.0 million, adjusted for $232.0 million in stock-based compensation expense, additional non-cash charges of $59.9 million and net cash outflow of $72.4 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $26.4 million of depreciation and amortization expense, $22.4 million of amortization of deferred contract acquisition costs, $6.6 million related to the reduction of right-of-use assets from operating leases, and $5.4 million related to the changes in fair value of distribution liability for the tax sharing agreement. The outflow from operating assets and liabilities was primarily due a $19.8 million decrease in accrued liabilities and accounts payable, a $34.7 million increase in deferred contract acquisition costs as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, a $10.9 million increase in prepaid and other assets, and a $12.5 million increase in deferred revenue from advance invoicing in accordance with our customer contracts, partially offset by a $152.3 million decrease in accounts receivable due to billings growth and timing of collections.
For the three months ended March 31, 2022, net cash provided by operating activities was $23.1 million, which resulted from net loss of $292.3 million, adjusted for $268.3 million in stock-based compensation expense, including cash settled stock-based compensation of $2.7 million, additional non-cash charges of $44.9 million and net cash outflow of $4.9 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $23.4 million of depreciation and amortization expense, $15.8 million of amortization of deferred contract acquisition costs and $7.5 million related to the reduction of right-of-use assets from operating leases. The outflow from operating assets and liabilities was primarily due a $53.6 million decrease in accrued liabilities and accounts payable, a $26.8 million increase in deferred contract acquisition costs as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, a $8.3 million increase in prepaid and other assets, and a $2.0 million increase in deferred revenue from advance invoicing in accordance with our customer contracts, partially offset by a $95.4 million decrease in accounts receivable due to billings growth and timing of collections.
For the three months ended March 31, 2021, net cash used in operating activities was $70.1 million, which resulted from net loss of $199.9 million, adjusted for $203.0 million in stock-based compensation expense, including cash settled stock-based compensation of $72.0 million, additional non-cash charges of $24.1 million and net cash
outflow of $25.3 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $7.6 million for depreciation and amortization expense, $11.2 million of amortization of deferred contract acquisition costs and $5.7 million related to the reduction of right-of-use assets from operating leases. The outflow from operating assets and liabilities was primarily due a $36.6 million decrease in accrued liabilities and accounts payable, a $13.5 million increase in deferred contract acquisition costs as our sales commission payments increased due to addition of new customers and expansion of our existing customer subscriptions, a $8.6 million increase in prepaid and other assets, and a $4.2 million increase in deferred revenue from advance invoicing in accordance with our customer contracts, partially offset by a $37.1 million increase in accounts receivable due to billings growth and timing of collections.
Investing activities
Net cash used in investing activities is primarily impacted by purchases of property and equipment, particularly for capital expenditures for our data centers, capitalized software, improvements to existing and new office spaces, and business combinations.
Net cash used in investing activities during the three months ended March 31, 2023 and 2022 and 2021 of $13.2$23.9 million, $11.1$13.2 million, respectively, resulted primarily from purchases of intangible assets and capital expenditures for our XM Platform and office build-outs.
Financing activities
Net cash usedprovided by financing activities of $5.9 million during the three months ended March 31, 2023 was due to $20.8 million in proceeds from the exercise of stock options and issuance of Class A stock under our employee stock purchase plan, offset by $12.1 million in payments of TSA Liabilities to SAP and $2.8 million in payments of payroll withholding taxes to net settle equity awards.
Net cash provided by financing activities of $187.9 million during the three months ended March 31, 2022 was due to $208.9 million in payments of payroll withholding taxes to net settle equity awards, offset by $21.0 million in proceeds from the exercise of stock options and issuance of Class A stock under our employee stock purchase plan.
Net cash provided by financing activities of $464.5 million during the three months ended March 31, 2021 was due to $115.0 million in proceeds from a capital contribution from SAP and $2,244.3 million in proceeds from the sales of our Class A common stock in connection with our initial public offering, partially offset by $1,892.3 million in payments on a promissory note paid to SAP and $2.6 million in payments of costs related to our initial public offering.
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. The aggregate transaction price of remaining performance obligations is expected to be recognized as revenue as follows:
| | | As of March 31, | | As of December 31, | | As of March 31, | | As of December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | (In thousands) | | (In thousands) |
| Next 12 Months | Next 12 Months | 1,031,869 | | | $ | 1,011,768 | | Next 12 Months | $ | 1,206,026 | | | $ | 1,202,260 | |
| Thereafter | Thereafter | 734,683 | | | 721,069 | | Thereafter | 929,035 | | | 972,378 | |
| Total | Total | $ | 1,766,552 | | | $ | 1,732,837 | | Total | $ | 2,135,061 | | | $ | 2,174,638 | |
These amounts are based on our best judgment, as we need 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.renewals, among others. These amounts include contracts with certain government entities and affiliates that may be subject to laws or enact laws that give the contracting entity a right to terminate the contract based on governmental statutes. No government entity or affiliate has exercised such termination rights.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for office space, non-cancelable contracts for cloud infrastructure services and other services, and obligations under our tax sharing agreement with SAP. There have been no material changes in our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2022.
As of March 31, 2022,2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those accounting policies and estimates that are both the most important to the portrayal of our net assets and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates on financial condition or operating performance is material.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and judgementsestimates described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on March 1, 2022.February 24, 2023.
Recent Accounting Pronouncements
Refer to Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about other recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business.
Interest rate risk
We had cash and cash equivalents of $836.4$806.7 million as of March 31, 2022.2023. We hold our cash and cash equivalents for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs, and the control of cash and investments. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Decreases in interest rates, however, would reduce future interest income.
We do not have any long-term debt or financial liabilities with floating interest rates that would subject us to interest rate fluctuations.
A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency. Our revenue is primarily generated in U.S. dollars, Euros, Australian dollars, British pounds sterling, Canadian dollars, New Zealand dollars, Japanese yen, and Singapore dollars. A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound sterling, and Australian dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into
derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.
We recorded $0.3 million in net foreign currency transaction gains in the three months ended March 31, 2023, and $1.0 million in net foreign currency transaction losses in the three months ended March 31, 2022, and $0.7 million in net foreign currency transaction losses in the three months ended March 31, 2021.2022. A hypothetical 10% change in foreign currency rates would not have resulted in material gains or losses for the three months ended March 31, 20222023 and 2021.2022.
Inflation risk32
We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2022.2023. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, of our disclosure controls and procedures as of March 31, 2022, our principal executive officer and principal financial officer have concluded that as of such date,March 31, 2023 our disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described below.
Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses described below, management has concluded that the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.
Material Weakness in Internal Control over Financial Reporting
As previously disclosed, management identified certain deficiencies in the Company’s internal control over financial reporting that aggregated to a material weaknesses related to management’s risk assessment process over information technology general controls, including certain controls over logical access and change management, and process level controls including information used in the execution of those controls that impacted our financial reporting processes.
Management’s Remediation Plan and Status
In response to the material weakness management has taken the following actions:
•engaged a third party subject matter expert to assist in the review of our risk assessment process;
•established a remediation steering committee with key members of management to ensure remediation efforts are aligned to the remediation plan;
•enhanced our controls around the identification of new reports and changes to key reports;
•established training of control owners on the appropriate evidence and documentation for financial reporting controls and IT change management and logical access controls; and
•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment.
While we have taken steps to substantially remediate the identified material weakness and will continue to complete the remediation process as quickly as possible, we cannot at this time estimate how long it will take to remediate this material weakness. The material weakness will not be considered remediated until the reasonable assurance level.controls are designed, implemented, and operate for a sufficient period of time and management has concluded, through independent testing, that these controls are operating effectively. As management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we may take additional measures to address these control deficiencies or modify certain remediation measures described above.
Changes in Internal Control Over Financial Reporting
ThereOther than continuing to make progress on the ongoing remediation efforts described above, there were no changes in ourthe Company’s internal control over financial reporting (as definedidentified in Rules 13a-15(f)connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(f) under15d-15(d) of the Exchange Act)Act that occurred during the quarter ended March 31, 20222023 that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may
deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note 9.8. “Commitments and Contingencies—Legal Matters” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q is incorporated herein by reference.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1a. Risk Factors
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report. There have been no material changes from the risk factors previously disclosed in our Annual Report, except for the following risk factors. The risk factors below should be read in conjunction with the risk factors and other information disclosed in our Annual Report.
Risks Related to Our Business and Industrythe Merger
If we failThe Merger, the pendency of the Merger or our failure to effectively manage our growth,complete the Merger could have a material adverse effect on our business, and results of operations, could be harmed.financial condition and stock price.
We have experienced,As previously disclosed, on March 12, 2023, we entered into the Merger Agreement by and may continue to experience, rapid growth, which has placed,among the Company, the Parent, and may continue to place, significant demands on our management and our operational and financial resources. In addition, we operate globally, sell subscriptions to more than 16,750 customers in more than 120 countries, and have employees in the United States, Australia, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the Netherlands, Poland, Serbia, Singapore, South Korea, Spain, Sweden, Switzerland, and the United Kingdom as well as SAP employees we work with in numerous other countries. We plan to continue to expand our international presence in the future, which will place additional demands on our resources and operations. Given our international presence, it is difficult to anticipate how the varying national responses to the COVID-19 pandemic will continue to affect our customers, employees, and business operations. The COVID-19 pandemic has, and may continue to, put pressure on global economic conditions and may cause our customers or their customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments. These and other potential effects on our business due to the COVID-19 pandemic may be significant and could materially harm our business, operating results and financial condition. Additionally, political developments impacting government spending and international trade, including pandemics such as the COVID-19 pandemic and geopolitical events such as the ongoing conflict between Russia and Ukraine and the related sanctions, may negatively impact our dealings with our international partners. In addition to expanding our global presence, we continue to increase the breadth and scope of our XM Platform and our operations and continue to develop our partner network. Even with the support of SAP, in order to successfully manage our future growth we will need to continue to improve our IT and financial infrastructures, our operating and administrative systems, and our ability to manage headcount, capital, and internal processes in an efficient manner and deepen our industry experience in key verticals. Our organizational structure is also becoming more complex as we grow our operational, financial, and management infrastructure and we must continue to improve our internal controls as well as our reporting systems and procedures. We intend to continue to invest to expand our business, including investing in technology, sales and marketing operations, developing new solutions and featuresMerger Sub, providing for our existing solutions, hiring additional personnel, and upgrading our infrastructure. These investments will require significant capital expenditures and the allocationacquisition by affiliates of management resources, and any investments we make will occur in advance of experiencing the benefits from such investments, making it difficult to determine in a timely manner if we are efficiently allocating our resources. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our results of operations may be adversely affected.
We are continuing to expand our operations outside the United States, where we may be subject to increased business and economic risks that could impact our results of operations.
A key focus of our company is to continue to expand our operations outsideSilver Lake. Completion of the United States. In order to do so, we use a hub-and-spoke sales model, comprised of a centralized inside-sales team surrounded by regional direct sales efforts. We have invested significant effort to building and optimizing our international growth. For the three months ended March 31, 2022, 29% of our revenue is from outside the United States, and we have continued to add employees and offices in new countries. We expect to continue to expand our international operations, which may include opening additional offices in new jurisdictions and providing our XM Platform in additional languages. Any new markets or countries into which we attempt to sell subscriptions to our XM Platform may not be receptive. For example, we may not be able to expand further in some markets if we are not able to satisfy certain government- and industry-specific requirements. If we are not successful in converting our investments in international expansion to additional revenue, our business and results of operations may be harmed. In addition, our ability to manage our business and conduct our operations internationally requires considerable management attention and resources andMerger is subject to the particular challengessatisfaction of supporting a rapidly growingvarious conditions, including (1) the information statement having been mailed to the Company’s stockholders and at least 20 calendar days having elapsed since the completion of such mailing, (2) the absence of any law enjoining, restraining or otherwise prohibiting or making illegal the consummation of the Merger, (3) the expiration or termination of any applicable waiting period under the HSR Act (which occurred on April 24, 2023), and the obtainment of regulatory clearances or approvals under certain specified foreign antitrust laws or foreign investment laws, (4) the accuracy of the other parties’ representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) compliance in all material respects with the other parties’ covenants, agreements and obligations under the Merger Agreement, and (6) no Material Adverse Effect (as defined in the Merger Agreement) having occurred and being continuing since the date of the Merger Agreement. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Furthermore, there are additional inherent risks in the Merger, including the risks detailed below.
During the period prior to the closing of the Merger, our business in an environmentis exposed to certain inherent risks due to the effect of multiple languages, cultures, customs, legalthe announcement or pendency of the Merger on our business relationships, financial condition, operating results and regulatory systems, alternative dispute systems, and commercial markets. International expansion has required, and will continue to require, investment of significant funds and other resources. In addition, in certain ways it was easier for us to expand internationally as a previously wholly-owned subsidiary of SAP, given SAP’s significant global presence, than it is as a majority-owned subsidiary of SAP. Operating internationally subjects us to new risks and may increase risks that we currently face, including risks associated with:business, including:
•recruitingpotential uncertainty in the marketplace, which could lead current and retaining talentedprospective customers, retailers and capable employees outside the United States and maintaining our company culture across all of our offices;distributors to purchase products from others or delay purchasing from us;
•providing our XM Platformthe possibility the Merger or the Separation will harm or disrupt the Company’s business, including current plans and operating our business across a significant distance, in different languages and among different cultures, including the potential need to modify our XM Platform and features to ensure that they are culturally appropriate and relevant in different countries;operations;
•compliance with applicable international laws and regulations,potential business uncertainty, including laws and regulations with respectchanges to privacy, data protection, consumer protection, and unsolicited email, andexisting business relationships that could affect the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance;Company’s financial performance;
•management of an employee base in jurisdictionsthe inability to retain and hire key personnel, and the possibility that may not give usour current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the same employment and retention flexibility as does the United States;Merger;
•operating in jurisdictions that do not protect intellectual property rightsthe inability to pursue certain business opportunities or strategic transactions pending the same extent as doescompletion of the United States;
•compliance by us and our business partners with anti-corruption laws, import and export control laws, tariffs, trade barriers, economic sanctions,Merger, and other regulatory limitationsrestrictions on our ability to provideconduct our XM Platform in certain international markets;business;
•foreign exchange controls that might require significant lead time in setting up operations in certain geographic territories and might prevent us from repatriating cash earned outsideour inability to solicit other acquisition proposals during the United States;
•political and economic instability in countries where we may operate, including the potential effectspendency of the current COVID-19 pandemic and the ongoing conflict between Russia and Ukraine;
•double taxation of our international earnings and potentially adverse tax consequences due to changes in the income and other tax laws of the United States or the international jurisdictions in which we operate;
•higher costs of doing business internationally, including increased accounting, travel, infrastructure, and legal compliance costs; andMerger;
•other events or factors, including thosepotential adverse reactions or changes to business relationships resulting from warthe announcement or completion of the proposed Merger;
•the significant amount of transaction costs, fees, expenses and charges related to the Merger Agreement and the Merger; and
•other developments beyond our control, including, but not limited to, changes in legislative, regulatory , domestic or global economic development that may affect the timing or success of the Merger.
The Merger may be delayed, and may ultimately not be completed, due to a number of factors, including:
•the failure to obtain regulatory clearances or approvals from various governmental entities (or the imposition of any conditions, limitations or restrictions on such asclearances or approvals);
•potential future stockholder litigation and other legal and regulatory proceedings, which could delay or prevent the ongoing conflict between Russiaconsummation of the Merger; and Ukraine, incidents of terrorism, natural disasters, disease, global pandemics such as COVID-19, or responses to these events.
Compliance•the failure to satisfy the other closing conditions to the consummation of the Merger, including the possibility that a Material Adverse Effect on our business would permit Parent not to close the Merger.
If the Merger does not close, our business and stockholders would be exposed to additional risks, including:
•to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, the price of our common stock could decrease if the Merger is not completed;
•investor confidence could decline, stockholder litigation could be brought against us, relationships with lawsexisting and regulations applicable to our global operations substantially increases our cost of doingprospective customers, distributors, retailers, service providers, investors, lenders and other business in international jurisdictions. Wepartners may be adversely impacted, we may be unable to keep currentretain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending Merger; and
•the requirement that we pay a termination fee of $311.5 million if the Merger Agreement is terminated in certain circumstances.
Even if successfully completed, there are certain risks to our stockholders from the Merger, including:
•the amount of cash to be paid per share under the Merger Agreement is fixed and will not be adjusted for changes in lawsour business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
•the fact that receipt of the all-cash per share merger consideration under the Merger Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and regulations as they change. Although we have implemented policies and procedures designed
•the fact that, if the Merger is completed, our stockholders will forego the opportunity to support compliance with these laws and regulations, there can be no assurance that we will always maintain compliance or that allrealize the potential long-term value of the successful execution of our employees, contractors, partners, and agents will comply. Any violations could resultcurrent strategy as an independent public company.
While the Merger Agreement is in enforcement actions, fines, civil and criminal penalties, damages, injunctions, or reputational harm. Ifeffect, we are unable to comply with these laws and regulations or manage the complexity of our global operations successfully, our business, results of operations, and financial condition could be adversely affected.
We are subject to governmental export and import controls, economic sanctions, and anti-corruption laws and regulations that could impairrestrictions on our ability to competebusiness activities.
While the Merger Agreement is in international markets and subject us to liability ifeffect, we are not in full compliance with applicable laws.
Ourgenerally required to conduct our business activities are subject to various restrictions under United States export controls and other similar laws and regulations, including the United States Department of Commerce’s Export Administration Regulations, or the EAR, and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets Controls, or OFAC. The United States export control laws and United States economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to United States embargoed or sanctioned countries, governments, persons and entities. In addition, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide our customers access to our XM Platform or could limit our customers’ ability to access or use our XM Platform in those countries. Import and export control regulations in the U.S. and other countriesordinary course. We are subject to change and uncertainty, including as a result of geopolitical developments and relations between the United States and Russia and the ongoing conflict between Russia and Ukraine.
While we take precautions to prevent our products and servicesrestricted from being exported in violation of these laws, including geoblocking and other screening checks, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. If we are foundtaking certain specified actions without Parent’s prior consent, which is not to be in violation of U.S. economic sanctionsunreasonably withheld, conditioned or export control laws in the future, it could result in substantial fines and penalties for us and for the individuals working for us. We may also be adversely affected throughdelayed. These limitations include, among other penalties, reputational harm, loss of access tothings, certain markets, or otherwise.
In addition, in July 2018, we filed initial notifications of Voluntary Self-Disclosure with OFAC regarding the provision of services to some customers in apparent violation of U.S. economic sanction laws, and the U.S. Department of Commerce’s Bureau of Industry and Security, or BIS, regarding the export of software to some customers prior to submitting required filings to BIS. We supplemented the initial notifications with final reports to OFAC and BIS in December 2018. In August 2019, BIS notified us that it had completed its review and closed the matter with the issuance of a warning letter. In December 2019, OFAC notified us that it had completed its review and closed the matter with the issuance of a cautionary letter. Although no monetary penalties or other sanctions were imposed by either agency in connection with their investigations, our compliance history, including the issuance of a warning letter or cautionary letter, may be considered an aggravating factor in any future investigations by or disclosures to these agencies.
In addition, various countries regulate the import and export of certain encryption and other technology, including by imposing permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our platform or could limit our users’ ability to access our products and services in those countries. Changes in our products or services, or future changes in export and import regulations may prevent our users with international operations from utilizing our products and services globally or, in some cases, prevent the export or import of our products and services to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our products and services by, or in our
decreased ability to export or sell subscriptions to our platform to, existing or potential users with international operations. Any decreased use of our products or services or limitationrestrictions on our ability to exportamend our organizational documents; acquire other businesses and assets; dispose of material property or sellassets; make investments; repurchase, reclassify or issue securities; make loans; pay dividends; incur indebtedness; make capital expenditures; enter into certain contracts; change accounting policies or procedures; settle litigation; change tax classifications and elections; or take certain actions relating to intellectual property of the Company. These restrictions could prevent us from pursuing strategic business opportunities and taking actions with respect to our products or services would likelybusiness that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial results.
We are also subject to various domestic and international anti-corruption laws, such as the United States Foreign Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies and their employees and intermediaries from authorizing, offering, providing, or accepting improper payments or benefits for improper purposes. These laws also require that we keep accurate books and records and maintain compliance procedures designed to prevent any such unlawful activities. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.
General Risk Factors
Our quarterly and annual results of operations may vary and may be difficult to predict. If we fail to meet the expectations of investors or securities analysts, our stock price and the value of your investment could decline.
Our quarterly and annual billings, revenue, and results of operations have fluctuated in the past and may vary in the future due to a variety of factors, many of which are outside of our control. Our financial results in any one quarter should not be relied upon as indicative of future performance. We may not be able to accurately predict our future billings, revenue, or results of operations. Factors that may cause fluctuations in our quarterly results of operations include, but are not limited to, those listed below:
•fluctuations in the demand for our XM Platform, and the timing of sales;
•our ability to attract new customers or retain existing customers;
•the budgeting cycles and internal purchasing priorities of our customers;
•the payment terms and subscription term length associated with our XM Platform sales and their effect on our billings and free cash flow;
•our ability to anticipate or respond to changes in the competitive landscape, including consolidation among competitors;
•the timing of expenses and recognition of revenue;
•the timing of our recognition of equity and cash settled stock-based compensation expense for our equity awards, particularly in cases where awards covering a large number of our shares are tied to a specific date;
•the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;
•the timing and success of new product features and solutions by us or our competitors;
•actual or perceived security breaches;
•increases or decreases in inflation rate;
•changes in laws and regulations that impact our business;
•macroeconomic conditions and the economic impact of the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine; and
•general economic and market conditions.condition.
IfRisks Related to our billings, revenue,Business
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect the Company’s current and projected business operations and its financial condition and results of operations fall below the expectations of investors or securities analysts in a particular quarter, or below any guidance that we may provide, the price of our Class A common stock could decline. Our quarterly and annual financial results may fluctuate due to theseoperations.
Actual events involving limited liquidity, defaults, non-performance or other factors,adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and we do not believemay in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that ourall depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial results in any one quarterinstruments with SVB, Signature Bank or any other period shouldfinancial institution that is placed into receivership by the FDIC may be relied upon by investors as indicativeunable to access undrawn amounts thereunder. In addition, if any of our futurecustomers, suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial performance.
Uncertaintyinstitution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closure of SVB and uncertainty remains over liquidity concerns in the globalbroader financial services industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediately liquidity may exceed the capacity of such program. Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.
Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the Company, the financial institutions with which the Company has credit agreements or arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, and social and political instability caused by state-based conflicts, terrorist attacks, civil unrest, war, or international hostilities could lead to disruptionsconcerns or negative expectations about the prospects for companies in our business.
As a global company, we are influenced by multiple external factors that are difficult to predict and beyond our influence and control. Any of thesethe financial services industry. These factors could have a significant adverse effect oninvolve financial institutions or financial services industry companies with which the global economy as well as on our business.
We are subject to risks and associated consequences inCompany has financial or business relationships, but could also include factors involving financial markets or the following areas, among others:financial services industry generally.
•General economic, political, social, environmental, public health, and market developments, and general unrest;
•
Prolonged deterioration of global economic conditions or budgetary constraints of national governments;
•Diplomatic confrontations, frictions, trade or tariff conflicts, with potential global implications as indicated by a prolonged and widespread economic slowdown;
•Financial market volatility episodes, global economic crises and chronic fiscal imbalances, slowing economic conditions, or disruptions in emerging markets;
•Higher credit barriers for customers, reducing their ability to finance software purchases;
•Increased number of foreclosures and bankruptcies among customers, business partners, and key suppliers;
•The ongoing conflict between Russia and Ukraine, including impacts of government sanctions and other trade controls;
•Terrorist attacks or other acts of violence, civil unrest, global pandemics such as COVID-19, or natural disasters, impacting our business; and
•Regional conflicts, which may affect data centers as critical infrastructure assets.
Any of these events could limit our ability to reach our targets, as they could have a material adverse effect on our operating results and financial position.
Item 6. Exhibits
| | | | | | | | |
| Exhibit Number | | Description |
| | |
| 2.1* | | |
| 2.2* | | |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104* | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
________________
* Filed herewith.
** The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 4th1st day of May, 2022.2023.
| | | | | |
| QUALTRICS INTERNATIONAL INC. |
| |
| By: | /s/ Zig Serafin |
| Zig Serafin |
| Chief Executive Officer (Principal Executive Officer) |
| | | | | |
| By: | /s/ Rob Bachman |
| Rob Bachman |
| Chief Financial Officer (Principal Financial and Accounting Officer) |