UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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 | ||||||
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
As of June 30, 2020, the last business day of our most recently completed second fiscal quarter, our common stock was not listed on any exchange or over-the-counter market and, therefore, we cannot calculate the aggregate market value of the voting and non-voting common equity held by non-affiliates as of such date.
As of March 5, 2021, the registrant had 511,237,032 shares of common stock outstanding, consisting of 88,066,422 shares of Class A common stock and 423,170,610 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its 2021 Annual Meeting of Stockholders, or the 2021 Proxy Statement, are incorporated by reference into Part III of this Form 10-K where indicated. Such 2021 Proxy Statement will be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
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TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
•our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to be profitable;
•our ability to grow at or near historical growth rates;
•anticipated technology trends, such as the use of and demand for experience management software;
•our ability to attract and retain customers to use our products;
•our ability to respond to and overcome challenges brought by the COVID-19 pandemic;
•our ability to attract enterprises and international organizations as customers for our products;
•our ability to expand our network with content consulting partners, delivery partners, and technology partners;
•the evolution of technology affecting our products and markets;
•our ability to introduce new products and enhance existing products and to compete effectively with competitors;
•our ability to successfully enter into new markets and manage our international expansion;
•the attraction and retention of qualified employees and key personnel;
•our ability to effectively manage our growth and future expenses and maintain our corporate culture;
•our anticipated investments in sales and marketing and research and development;
•our ability to maintain, protect, and enhance our intellectual property rights;
•our ability to successfully defend litigation brought against us;
•our ability to maintain data privacy and data security;
•the sufficiency of our cash and cash equivalents to meet our liquidity needs;
•our ability to comply with modified or new laws and regulations applying to our business;
•our reduced ability to leverage resources at SAP as an independent company from SAP; and
•the increased expenses associated with being an independent public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K 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 this 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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.
Item 1. Business
Overview
We have pioneered a new category of software, experience management, or XM, which enables organizations to succeed in today’s experience economy. Our XM Platform helps organizations both design and improve the experiences that turn their customers into fanatics, employees into ambassadors, products into obsessions, and brands into religions.
Why It Matters:
The rise of the experience economy has changed the way businesses compete and organizations operate. The cost of switching products or services has become so low that over 70% of consumers are likely to switch brands due to a single poor experience. Over two-thirds of the workforce is disengaged. And while the majority of companies believe they are delivering a superior experience, few of their customers agree.
This is called the experience gap.
Experience management is the business discipline of finding and fixing experience gaps. These gaps––the difference between what businesses believe is happening and what is actually happening––are where poor experiences live. Left unresolved, experience gaps result in customer churn, employee attrition, failed product launches, and eventually, brand irrelevance.
The global pandemic, which has altered the way people work and interact with each other, has surfaced new experience gaps and changed nearly every expectation we have on businesses. Restaurants will need to reinvent. Live events and user conferences will need to be completely overhauled. Face-to-face meetings, sales calls, and employee all-hands will need to be entirely reworked. Organizations that fail to design and deliver a new set of experiences that address the rapidly evolving preferences of customers and employees will struggle to compete in a post-COVID-19 digital world.
The Qualtrics XM Platform is a mission-critical software system that enables breakthrough design and continuous improvement of customer, employee, product, and brand experiences — the four core experiences of every organization. Qualtrics allows all four experiences to be managed on a single, connected platform:
•CustomerXM –– decrease churn, increase engagement, and expand customer lifetime value, or LTV, by listening to customers across all channels and taking action on their feedback.
•EmployeeXM –– drive retention, increase engagement, and improve productivity by continuously listening to employees and delivering better workplace experiences.
•ProductXM –– design products people love, decrease time to market, and increase share of wallet by uncovering and acting on user needs, desires, and expectations.
•BrandXM –– create a bedrock of loyal followers, acquire new customers, and increase market share by ensuring that your brand resonates at each critical touchpoint and attracts target buyers.
Unfortunately, most “experience” offerings in the market do one thing –– use surveys to collect post-transaction feedback to monitor trends in satisfaction scores. The problem with these measurement tools is that they simply report on data about where and when to apologize, resulting in organizations that focus on reacting to complaints instead of designing better experiences and proactively closing experience gaps.
Measurement is not the ultimate goal.
Qualtrics is dramatically different from companies who simply help organizations measure satisfaction scores. Our platform was built from inception as a system of action –– a system that guides users with specific instructions for improvement and automated actions to close experience gaps. It provides each individual employee in an
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organization a powerful, easy-to-use interface that creates everyday habits to find and close experience gaps. It has the power to change organizational behavior and create a culture of action.
The Qualtrics XM Platform allows organizations to both (i) design new breakthrough experiences and (ii) continuously improve broken experiences through identifying issues, addressing the root cause, and then overhauling processes before they manifest as lower trending satisfaction scores.
How It Works:
Qualtrics XM is a system of action that allows organizations to manage all four core experiences on a single platform. It gives organizations a powerful set of tools to design and continuously improve customer, employee, product, and brand experiences, and uses a collection of smart features and capabilities that make feedback collection, analysis, and action-taking simple enough for any employee to use.
Listening Engine: Capture sentiment across all channels and touchpoints
Qualtrics provides easy-to-use tools to listen to both solicited and unsolicited customer, employee, product and brand sentiment across any channel. Our listening engine allows organizations to engage with stakeholders at the moment it’s most critical via chat, text, Facebook Messenger, WhatsApp, IoT devices such as Alexa or a smartwatch, or any other preferred channel. Organizations can run real-time topic and sentiment analysis during a phone call, or automatically analyze video-based feedback at scale.
Qualtrics XM is an open platform, allowing companies to collect feedback from third-party systems, including survey vendors, and operational systems like customer relationship management, or CRM, human capital management, or HCM, or enterprise resource planning, or ERP.
XM Directory: Centralize all collected experience data in one place
The Qualtrics XM Directory gives the ability to log, organize, access, manage, and update all experience data for the entire organization — in one place. By centralizing all experience data, organizations can create individual experience profiles that represent the emotions, needs, interests, and expectations of customers and employees — helping organizations provide highly personalized experiences at critical moments in the customer and employee journey.
iQ Smart Analysis: Surface alerts and recommend actions
Our powerful analytics suite, Qualtrics iQ, analyzes each piece of feedback collected using deep statistical analysis and machine learning, then generates recommended actions, ensuring teams focus on the changes that drive the highest return on investment. Using a simple interface, alerts can be configured for the most important actions. These alerts could be a manager alert about a shift in employee morale, a change in a product bundle recommendation, or even a shipping process overhaul.
Experience Workflows (xFlow): Eliminate experience gaps by assigning and routing actions to the people in the best position to drive improvement using workflow automation
The Qualtrics XM Platform can automatically route recommended actions to the people in the best position to close experience gaps or close the loop with customers or employees automatically using experience workflow automation. Employees can log into a role-based account and receive alerts relevant to their role and be given specific actions to drive improvement. The system tracks issues, progress, and next steps to help monitor progress and keep managers informed.
Ecosystem: Robust ecosystem of integrations for automating and connecting entire experience management
With Qualtrics, teams are empowered with the ability to build and save experience workflows that can be shared and scaled across departments, retail locations, or global deployments. Built with a completely open API architecture, our highly configurable platform provides a robust ecosystem of integrations for automating and connecting the entire experience management process––from collecting experience feedback from any third-party
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channel, to uncovering hidden trends using native or third-party analysis, to driving activities and action using any operational system that employees already use as part of their existing routines. These automated, expert-built solutions are available out of the box, purpose-built for specific industries, departments, and geographies.
As of December 31, 2020, the Qualtrics XM Platform is trusted by more than 13,500 customers of all sizes, including 85% of the Fortune 100. The broad adoption of our platform is facilitated by a multi-pronged go-to-market model comprised of highly productive inside and field sales teams, joint solution selling with SAP, and our growing QPN of over 200 global member companies that are partnering with us on our platform to help drive breakthrough business outcomes for our customers.
The Qualtrics XM Platform
Our XM Platform serves as a business operating system for Experience Management and consists of purpose-built solutions for Customer experience, Employee experience, Product experience, and Brand experience. Leveraging our Listening, Qualtrics iQ, and xFlow engine, our XM Platform provides our customers with the ability to target the right users in the right moments to glean the insights that they need to drive action.
Key benefits of our platform include:
•Ability to Address Experience Holistically. We provide specific solutions across the key areas that have the highest impact on an organization: customers, employees, product, and brand. Our XM Platform analyzes experiences within each of these areas individually and correlates data across areas to provide insight into how they impact each other. Our XM Platform integrates X-data that we collect with siloed O-data that organizations already have, providing everyone in an organization from the C-suite to employees on the front line with a holistic view of experiences across key areas and constituencies.
•Integrated Analytical Capabilities. Our platform is powered by a proprietary analytics engine that organizations of all types use to address some of the most demanding research projects. Our XM Platform leverages the latest in artificial intelligence and natural language processing to allow users to discover correlations between events, develop predictive models without using third-party tools, identify at-risk customers and employees, and suggest actions to course correct and drive impact. These capabilities are incorporated into our XM Platform through Qualtrics iQ, enabling advanced analytical features to make statistical analysis and insights available to everyone. Our analytical capabilities are tightly integrated with our XM Platform helping drive the instructions for improvement and automated actions within our system of action.
•Built for Action. Qualtrics xFlow enables organizations to automate experience workflows to drive action natively or by integrating with systems that an organization already uses. For example, with our analytics-driven Smart Routing, our platform can automatically generate a customer ticket and action to resolution when a negative sentiment is expressed on a social media site. In this way, our XM Platform not only helps to identify issues, but also serves as a system of action by automatically directing feedback and recommended actions to the teams are in the best position to make improvements. Or the system can bypass the need for employees to resolve issues and instead automate service recovery so customer or employee issues do not slip through the cracks. xFlow works across our platform and provides automatic notifications, raises tickets and closes experience gaps immediately.
•Comprehensive Data Collection. Our XM Platform enables organizations to personalize their communication with customers, employees, and partners and interact with these groups through the most effective channels. We enable customers to collect data through both active and passive ingestion from a wide variety of channels, including SMS, e-mail, voice, web, in-app, social, chat and operational systems. Through simple integrations, users can incorporate operational data into XM analysis using native or a variety of other formats. Our comprehensive data collection methods allow customers to understand the sentiment of their end users across every engagement point so they can tailor relevant and personalized actions for any situation.
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•Real-time Insight. Our XM Platform is able to extract real-time feedback and provide insights and analysis when and to whom it matters most. This timeliness is necessary to affect outcomes, including reducing churn, increasing sales, preventing employee turnover, increasing engagement, and enhancing brand among others.
•Flexible Configuration to Meet Specific Needs. Our customers have configured our platform to meet diverse needs from preparing PhD dissertations to ensuring successful product launches. Our XM Platform provides all of the tools necessary to enable program design configured to specific needs. Through an intuitive and elegant interface, users can design programs that implement complex logic and advanced workflows. Users can also design, deploy, and alter these programs without help from professional services or IT, leading to faster and more impactful insights. Our XM Platform can deliver these insights through flexible and scalable role-based dashboards to ensure people within an organization can access insight in real time and on any device.
•Democratization of Experience Management Across All Users. We designed our platform so every knowledge worker can make decisions and take actions based on customer and employee input. Users can design a customer and employee feedback program in minutes using simple drag and drop functions with the platform generating easy to consume analysis. This ease of use democratizes the ability for employees throughout an organization to extract business insights from sophisticated research and analysis. This allows every employee in the organization the ability to participate in finding and closing experience gaps for their respective areas of ownership.
•Enterprise Ready. Our XM Platform is scalable and secure. We have built our platform on open-source technologies that are designed to scale horizontally to support large-scale streaming and batch processing. Our customers can depend on our ‘always-on’ infrastructure. As an example of our scalability, up to one million healthcare providers within the Aetna network link customer digital behavior with net promoter score, or NPS, and customer satisfaction, or CSAT, across their 22 million customers. Our XM Platform adheres to the highest standards of security and privacy demanded by the largest organizations in the world. Our XM Platform enables role-based permissioning to ensure that the right people have access to sensitive customer and employee information. We are ISO 27001 certified and enable our customers to be in compliance with General Data Protection Guidelines, or GDPR and SOC2, and we are certified on Health Information Alliance Trust, or HITRUST. We have achieved Federal Risk and Authorization Management Program, or FedRAMP, authorization to deliver services to United States federal government agencies. Additionally, organizations own and retain all their data gathered on our platform.
What Sets Us Apart
Our approach to architecting solutions and how we bring those solutions to our customers has enabled us to strengthen our lead in the experience management category. We have several distinguishing advantages:
•We are the Recognized Leader in Experience Management. We pioneered the experience management category nearly two decades ago and remain a recognized market leader in the category today. We are the leading and largest pure-play XM provider in the market, with broad traction across more than 13,500 customers and 85% of the Fortune 100. Our brand is synonymous with experience management and associated with quality and usability, providing us an advantage with attracting new customers. We are also thought leaders in the market. Through our founding of the XM Institute, we deliver a wide variety of industry-specific content, leadership, training, networking, and research to help experience management leaders develop and excel in their jobs.
•Single Platform. Qualtrics is the only technology offering that allows all four experiences to be managed on a single, connected platform. Organizations power experience management programs across their customer, employee, product, and brand, monitor the health of their entire business through robust analytics and dashboards, and drive action across the entire organization from one common interface.
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•XM Directory. The value our XM Platform delivers to our customers compounds with its use. Our customer data management layer, XM Directory, enables organizations to build a 360 degree view of every customer or employee interaction, capturing feedback, interactions, demographics, operational indicators, and other attributes in a single, unified profile. XM Directory helps to intelligently segment these profiles based on behavior or preferences, provide intelligent analytics on customer journeys, prioritize experience improvements based on deep customer insights, and use those insights to deliver personalized and automated customer outreach at the right moment, with the right message, and via the right channels to drive the most optimal outcomes. Across the Qualtrics customer base, organizations are using the XM Directory to manage more than three billion profiles, with many organizations delivering personalized experiences to hundreds of millions of customers via the XM Directory.
•xFlow. Our platform helps organizations build a culture of action through a software layer called xFlow. These experience workflows allow organizations to use a low code / no-code interface to create automated workflows to close experience gaps at scale.
•Easy Adoption and Rapid Time to Value. Our technology is designed to be easy to deploy, configure, use, and scale. By making the complex capabilities of our XM Platform simple to use, we allow customers of all types and sizes to generate value quickly. In addition, the modularity of our platform allows our customers to deploy one or more of our solutions initially and then adopt additional modules as their use cases grow and evolve. As initial deployments generate valuable X-data and the value of that data compounds over time, we see many customers adding additional functionality as the power and influence of experience management insights spread throughout their organizations.
•Powerful and Multi-Pronged Go-to-Market Model. Our powerful go-to-market model enables us to land both small and large customers initially and expand those relationships significantly over time. The broad adoption of our platform is facilitated by a multi-pronged go-to-market model comprising highly productive field and inside-sales teams, a joint development and solution selling partnership with SAP, and our robust and growing QPN. QPN has over 200 global member companies partnering with us on our XM Platform to help drive breakthrough business outcomes for joint customers. The Qualtrics Developer Platform, or QDP, a core element of QPN, provides deep technical capabilities that enable companies to build robust XM extensions and deliver automated workflows to drive action. For the year ended December 31, 2020, over 60% of our customers used XM Extensions to connect Qualtrics with other business systems and workflows.
Our Growth Strategies
Key elements of our growth strategies include:
•Drive New Customer Sales. We believe that our market opportunity remains largely underpenetrated. We will continue to invest aggressively in our direct and indirect sales and marketing capabilities to continue to acquire new customers, including continued growth in the number of enterprise customers. We plan to continue to acquire new customers with our powerful multi-pronged go-to-market model.
•Expand Within Existing Customers. Our customer base of more than 13,500 organizations as of December 31, 2020 represents a significant growth opportunity for us. There is opportunity to expand both the number of users and use cases within an organization. As users start to focus more deeply on specific experiences, they often look to add integrated solutions, Customer Experience, Employee Experience, Product Experience, and Brand Experience. We offer a flexible pricing model that helps further expand our presence within organizations as they increase volume of responses, add solutions and integrations, grow users and employees and increase features and workflows within each solution. Our goal is to increase the number of customers that standardize on our XM Platform within their organization, increasing the number of our organization-wide deployments and creating opportunity for expanded use cases.
•Expand Our Global Presence. A key focus of our company is to continue to penetrate unaddressed global markets. Constituents can provide feedback in 74 languages, and our core admin user interface supports 14 languages. To penetrate markets outside North America, we have developed a hub-and-spoke sales model
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comprised of centralized inside-sales teams surrounded by regional direct sales groups. Our first two hubs outside North America were in Dublin, Ireland and Sydney, Australia. We have opened sales offices in additional countries, including France, Germany, India, Japan, the Netherlands, Sweden, Spain, Singapore, and the United Kingdom. To address data sovereignty concerns amongst our international customers, we have built data centers in Canada, Germany, and Australia. We believe that this investment should further increase our international expansion opportunities. For the year ended December 31, 2020, 28% of our revenue came from markets outside the United States, and we believe that there is significant opportunity for continued growth in the global markets.
•Continue to Innovate and Enhance Our XM Platform. As we add to our customer base, we use our technology to draw insights and ensure that we are best serving our customers’ needs. These insights lead to innovative features, such as XM Solutions for creating faster time-to-value, XM Benchmarks to derive deeper insights, XM Automated Actions to quickly close identified experience gaps, and improvements in our iQ product features to drive intelligent action taking. These innovations lead to a greater value proposition for our customers and increased adoption of our XM Platform by both new and existing customers. In 2015, we built out our Seattle office to function as an engineering center focusing on product innovation and development, including our artificial intelligence and machine learning capabilities. Since then, the office has grown to over 650 employees and in 2019 we announced further expansion of our Seattle office with Qualtrics Tower. In 2018, we launched our Krakow, Poland office as our European engineering center, focused on core research and development, or R&D, investments in our EmployeeXM and CustomerXM products. That office has now grown to over 100 employees. Both of these growing locations support our goal of continuously enhancing our XM Platform and providing the best technology for our customers.
•Grow Revenue from Key Industry Verticals. While our XM Platform is industry-agnostic, we have made a number of industry-specific investments that will accelerate our adoption within certain verticals, including government, education, healthcare, technology, and financial services. We have developed Certified XM Solutions, leveraging partners’ expertise, and embedding industry-specific content into our products. Our Certified XM Solutions are packaged projects and programs with expert content, workflow, and automation. In every key vertical, we have reference customers that we believe validate the adoption of our XM Platform.
•Further Develop Our Partner Network. We have developed a network of leading content and consulting partners, delivery partners, and technology partners who enrich our offerings, scale our coverage, and help us reach a broader audience than we would be able to reach on our own. Our partner channel extends our sales reach, enhances our products, and provides implementation leverage both domestically and internationally. Since the launch of QPN in 2018, we have entered into many impactful partnerships with over 200 global member companies, including Accenture, Ernst & Young, Deloitte, IBM, J.D. Power, and Kantar. During 2019, we launched the QDP as a core element of QPN. We will continue to partner with other leading organizations to broaden our reach and maintain our strong net retention rates.
•Jointly Develop, Market and Sell our Solutions with SAP. As part of SAP, we have been able to utilize our partnership to grow and enhance our business. We will continue to jointly develop, market, and sell our solutions with SAP. SAP has a global footprint in over 180 countries, which has allowed us to reach new geographies and expand our international presence faster. Our go-to-market motion has greater enterprise reach through SAP’s global customer base, allowing Qualtrics to be sold alongside SAP applications through our solution selling partnership.
Our Platform, Solutions, and Technology
Our XM Platform was built to provide flexible, scalable solutions for our clients. We use a secure, modern data processing architecture to ensure the specific needs of our clients are met across their organizations. Clients can deploy experience management modules or choose to access the entire XM Platform and add on specific solutions as their needs evolve. We offer over 100 out-of-the-box integrations, with leading enterprise vendors such as SAP, Microsoft, and Salesforce, as well as custom integrations for our clients. Our architecture is designed to scale
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horizontally and cost-effectively by combining the Platform-as-a-Service offerings and modern open-source technology stacks running within our co-location data centers.
We offer a range of experience management solutions, including Integrated Solutions for experience design, customer experience, employee experience, product experience, and brand experience––all built on the Qualtrics XM platform, a collection of powerful capabilities, tools, and building blocks.
Integrated Solutions
CustomerXM
Our CustomerXM solution is a system of action that enables organizations to gain a true understanding across all forces that impact the customer experience and surfaces these insights in real-time to drive improvements in both micro-level issues (e.g., specific customer remediation situations) and in macro-level issues (e.g., systemic problems with customer care experiences or broken digital journeys). With Qualtrics, organizations can capture, analyze and then act on customer sentiment across all channels and touchpoints along the customer lifecycle. It provides customer-focused analytics, native to the XM Platform, automated action and workflow capabilities, and no-code/low-code integrations that help organizations take effective, data-driven actions that lead to higher new customer acquisition, reduced customer churn, increased share of wallet, and lower costs to acquire and serve customers.
At the core of our CustomerXM solution is our customer-centric data management system, which consolidates all experience data across all touchpoints, along with relevant operational data, into a single system of record. This enables personalized experiences at scale, deep journey and segment intelligence, and predictions about future behavior. Our listening engine enables omni-channel engagement and data collection across in-app, SMS, interactive voice response, or IVR, chat and call center platforms, messaging apps, social media and review sites, video, voice, email and more. Qualtrics iQ, native to the XM Platform, analyzes this data in real time, surfacing recommended actions tailored by role and department. With low/no-code automated actions and workflows, as well as our open developer platform, organizations can quickly take action and deeply embed CustomerXM within existing operational workflow systems. This drives high adoption and action taking across the entire organization, which ultimately leads to meaningful change and business outcomes.
EmployeeXM
Our EmployeeXM solution provides a holistic view of an employee’s experience to help companies reduce unwanted attrition, improve employee engagement, develop and retain top performers, improve customer experience, drive productivity, and build strong teams and cultures. It allows organizations to draw insights from their employees and continuously improve every facet of the employee experience during the employment lifecycle— from recruitment onwards.
We have architected our EmployeeXM solution to meet the exacting requirements of human resource managers. It features workflows that enable employees to seek the right feedback from across the organization, robust administrator rights that enable higher anonymity thresholds, interactive data visualization that conveys the right information to each user, and expert designed, guided action planning surfacing the areas where potential improvements would drive the highest impact. The solution also integrates with a number of HCM and Learning Management System, or LMS, vendors.
ProductXM
Our ProductXM solution helps organizations more successfully build and maintain products and services that their customers love by understanding demand and experience signals across all phases of the product life cycle. This solution identifies actionable insights from identifying a target market, uncovering unmet needs to concept development and initial product marketing. Organizations can quickly determine the top drivers of product satisfaction and loyalty and incorporate experience insights into key product decisions, assisting in product feature prioritization, increasing product decision velocity, and building a customer and data-driven product roadmap.
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Our ProductXM solution packages our omni-channel listening capabilities, insights from structured and unstructured data, and automated workflows and actions in a turnkey, guided, easy to use user interface that enables anyone without a degree in statistics to make smart data-driven product decisions. It seamlessly supports contextual operational data such as cost of production, margins or click stream behavioral data to augment human factor data, which enables product teams to identify actionable insights such as key drivers of retention, engagement, or profit maximizing scenarios. With our ProductXM capabilities, product teams can continuously tune their products and services through every phase of the product life cycle.
BrandXM
Our BrandXM solution provides a complete view of all brand experience drivers across the brand funnel from awareness to purchase and post-purchase experience to increase new customer acquisitions, repeat purchases, and share of wallet. This solution delivers automated, real-time analysis to help organizations understand how to improve brand perception and experiences relative to competitors at a specific market and segment level. Marketing teams can quickly optimize brand advertising and communication strategies, as well as work across the organization to improve the experiences that matter most.
Our BrandXM solution provides real-time, role-based insights that help organizations take the right actions to improve brand perception. It includes workflows that integrate with marketing platforms and other operational systems that enable organizations to improve how a brand is experienced by customers and potential customers alike.
DesignXM
Our DesignXM solution helps organizations uncover the products, services, brands, and cultures that customers and employees want next. Our software helps teams connect with people in authentic ways to create new experiences that shift markets, define brands, establish cultures, and attract new customers.
These tools are used by market research professionals, marketing teams, product teams, HR teams, academics, insights professionals, data analysts, and developers to do advanced market, customer, and employee research. These customers use DesignXM to adopt a self-service approach to conducting a wide variety of research projects that formerly required hiring expensive outsourced consultants.
Our DesignXM solution can be purchased as software only or can be packaged with expert research services delivered in house, or via our ecosystem partners.
Qualtrics Developer Platform
The Qualtrics Developer Platform, or QDP, enables customers to seamlessly integrate Qualtrics with their existing applications and workflows and extend the functionality of the XM Platform. QDP includes a robust set of developer tools — including Software Developer Kits, or SDKs, APIs, and workflow configuration tools — for our customers or third-party developers to build data connectors, widgets, plug-ins, visualizations, workflows, and automations. Leveraging the QDP, customers can connect Qualtrics with third-party software systems to automate key business processes, enhance their XM program by bringing experience data from other listening posts into Qualtrics, and extend the XM Platform to address their specific business requirements.
Through the QDP, we provide over 100 out-of-the-box integrations, or XM Extensions, across 30 complementary technology categories with leading enterprise solutions like SAP, Adobe, Atlassian, Microsoft, Salesforce, ServiceNow, Slack, and Zendesk, and applications in adjacent software categories such as digital experience, social analytics, user research, help desk and support, and contact center management. The aforementioned XM Extensions, along with select partner solutions, can be marketed and sold on the XM Marketplace, our enterprise cloud marketplace, or sold directly by our innovation partners. For the year ended December 31, 2020, over 60% of our customers used XM Extensions to connect Qualtrics with other business systems and workflows.
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Modern Data Processing Architecture
Over 100 million distinct responses are generated each month on our XM Platform. Each piece of X-data represents a distinct data stream, which are combined with related streams generated from social media, enterprise, and third-party integrations via API. Our XM Platform continually aggregates these data streams to provide up-to-the-minute analytics, as well as near real-time analysis across billions of historical data points collected. Our architecture is designed to scale horizontally and cost effectively by combining the Platform-as-a-Service offerings and modern open-source technology stacks running within our co-location data centers.
Information Security as a Key Business Enabler
We have achieved multiple information security certifications, including the globally recognized ISO 27001 standard in addition to FedRAMP certification to authorize the use of our XM Platform for U.S. Federal Government agencies. These certifications require ongoing independent validation of our compliance frameworks to provide our customers with confidence in choosing our XM Platform. Our premium Data Isolation feature protects customer response data with a customer specific encryption key. Qualtrics is Privacy Shield certified and provides our customers with self-service tools to help comply with privacy frameworks such as GDPR.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce new technologies, features, and functionality. Our research and development organization is responsible for the design, architecture, testing, and quality of our XM Platform. We focus our efforts on developing our core technologies and further enhancing their usability, functionality, reliability, performance, and flexibility. We prioritize research and development and attempt to foster creativity and autonomy in our engineering teams. Research and development expenses were $212.8 million, $242.1 million, and $65.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Customers
As of December 31, 2020, we had more than 13,500 customers using our XM Platform in more than 120 countries. We have key reference customers in many industry verticals that we believe validate our solutions in the market, and our customers range from small and medium-sized organizations to Fortune 100 companies.
Our Go-To-Market Strategy
Our XM Platform is used by more than 13,500 customers of all sizes globally across a broad range of industries, including 85% of the Fortune 100 as of December 31, 2020. No one industry comprises more than 15% of our revenues, with banking, professional & business services, technology, education, and healthcare making up the top five. Our XM Platform has been adopted by many of the world’s largest organizations that view us as a strategic partner in their digital transformation initiatives.
This broad adoption of our XM Platform is facilitated by a multi-pronged go-to-market model comprised of highly productive inside and field sales teams, a joint development and solution selling partnership with SAP, and our robust and growing QPN. We primarily generate sales through our direct sales team, which includes both inside and field sales personnel. All sales personnel focus on attracting new customers as well as expanding usage within our existing customer base. Our sales team is supported by technical sales professionals and subject-matter experts who facilitate the sales process through developing and presenting demonstrations of our XM Platform after assessing requirements, addressing security and technical questions, and matching customer needs with the appropriate Qualtrics solutions. We also have a team of solution experts who help advise on best practices and methodologies, assist with program design, and provide assistance as required through customer launch to accelerate time to value. Our customer success team complements our sales team by consulting with our customers and helping drive adoption, subscription renewal, expansion to additional use cases, and customer value.
Our marketing efforts are focused on generating awareness of our XM Platform, creating sales leads, establishing and promoting our brand, and cultivating a community of loyal customers and users. We utilize both
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online and offline marketing initiatives, including user conferences (such as our annual X4 Summit), online advertising, webinars, blogs, corporate communications, white papers, and case studies.
We also work with partners through QPN, which has over 200 global member companies delivering breakthrough business outcomes for our customers.
QPN consists of the following:
•Strategic Partners offer a full suite of capabilities to accelerate XM within customers’ organizations, including implementation, consulting, and XM program and solution design. Strategic partners include Accenture, Bain, Capgemini, Deloitte, EY, and others.
•Innovation Partners bring XM into customers’ existing IT ecosystems and augment the capabilities of our XM Platform. Leveraging the QDP, customers can connect Qualtrics to third-party software systems to automate key business processes, enhance their XM programs by bringing experience data from other listening posts into Qualtrics, and extend our XM Platform to address their specific business requirements. Innovation partners include enterprise software leaders such as Adobe, Salesforce, ServiceNow, and independent software vendors in adjacent software categories (e.g., digital experience, social listening & analytics, user research).
•Advisory Partners are trusted XM scientists and consultants trained on our XM Platform. They work with customers to design plans and roadmaps for starting their experience management journeys. Advisory partners include Ipsos, JD Power, Kantar TNS, and many more.
•Alliance Partners help customers understand how XM can benefit their organization by evaluating their current business needs and desired outcomes. Alliance partners include Walker, Korn Ferry, commonFont, and others.
•Delivery Partners are trained and certified to implement the Qualtrics XM Platform. Enterprise organizations work with these accredited partners to scope and implement XM programs and to provide ongoing platform customizations. Delivery partners include Acumen Solutions, Ugam (a Merkle company), Workforce Science Associates, and many others.
We will continue to jointly develop, market, and sell our solutions with SAP. Examples include the use of our XM Platform within SAP SuccessFactors to gauge employee sentiment at various stages of the employee lifecycle and create workflows to resolve experience gaps that might lead to dissatisfaction and employee attrition, within SAP’s e-commerce applications to listen and act upon customer sentiment to drive higher conversion rates as consumer buying behavior moves online, and within procurement applications to enable buyers and suppliers to better understand and collaborate with each other. In addition, we have a robust roadmap of potential areas of collaboration across SAP’s product portfolio. As an independent subsidiary of SAP, we will aim to replicate those collaborations with a broader ecosystem of partners.
Professional Services
Our professional services team helps customers design and execute their market intelligence projects, through our DesignXM offering, and provides our customers with implementation, training, and similar services to help them realize the full benefits of our XM Platform. Our training programs include a mix of virtual and in-person offerings with different options focused either on helping onboard teams of users quickly or helping individuals achieve certification level subject matter expertise. Our team works closely with our partners and enables them to deploy our solutions. By working with these partners, we both augment our pipeline and our ability to scale globally by size and complexity of deployment.
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Competition
Experience management is a new and rapidly developing software category. Certain features of our XM Platform compete in certain segments of the overall experience management market. Our main competitors fall into the following categories:
•Providers of software for specific use cases, such as Medallia for customer experience;
•Traditional professional and marketing research services firms, such as Aon Hewitt and Towers Watson; and
•Individual-focused and self-service survey tools, such as SurveyMonkey.
We believe that the principal competitive factors in our markets include the following:
•Product features, quality, functionality, and design;
•Ease of deployment and use;
•Market vision and pace of product innovation;
•Security and privacy;
•Overall platform experience;
•Third-party integrations;
•Pricing and total cost of ownership;
•Brand awareness and reputation;
•Accessibility across several devices, operating systems, and applications;
•Strength of sales and marketing efforts; and
•Customer support.
Some of our competitors and potential competitors are larger and have greater brand name recognition, longer operating histories, larger marketing budgets and established marketing relationships, access to larger customer bases and significantly greater resources for the development of their offerings. Moreover, because our market is new and rapidly developing, it is possible that new entrants, especially those with substantial resources, more efficient operating models, more rapid technology and content development cycles or lower marketing costs, could introduce new products and services that disrupt our market and better address the needs of our customers and potential customers. See “Risk Factors—Risks Related to Our Business and Industry—The experience management software category is relatively new and rapidly changing, and if we do not compete effectively, our business, results of operations, and financial condition could be harmed” for additional information.
Intellectual Property
We rely on a combination of patent, copyright, trademark, and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual provisions, to protect our proprietary technology. We also rely on a number of international and domestic registered, pending, and common law trademarks to protect our brand.
In addition, we seek to protect our intellectual property rights by requiring our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.
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Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses, and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, we intend to continue to expand our international operations, and effective patent, copyright, trademark, trade secret, and other intellectual property protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Further, many companies in the communications and technology industries own large numbers of patents, copyrights, and trademarks and may threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We may face in the future allegations that we have infringed the intellectual property rights of third parties. See “Risk Factors—Risks Related to Our Business and Industry—We may be sued by third parties for alleged infringement or misappropriation of their proprietary rights” for additional information.
Our Employees and Human Capital
As of December 31, 2020, we had 3,455 full-time employees. We also engage contractors and consultants from time to time. We have not experienced any work stoppages, and we believe that our employee relations are good.
At Qualtrics, we live by our TACOS culture, which defines Qualtrics and our employees. TACOS stands for Transparency, All-in, Customer-Obsessed, One-Team, and Scrappy. Our TACOS culture impacts who we hire, how we retain and promote employees, and how we engage with each other and our customers.
We recognize that a person is not simply his or her job, hobbies, or personal life but a mix of all of those pieces. It is this mix—and this ability to bring one’s entire self to work—that cements the foundation of our culture. Diversity, Equity, and Inclusion, or DEI, is a cornerstone of our company culture. While our TACOS culture is integral to our history, Qualtrics does not thrive without the Q-mmunity, which includes a mix of employee resource groups, or Q Groups, that serve to advance the careers, goals, and well-being of the many different communities that make up our employee base. The Q Groups include:
•MosaiQ: Recruits and engages communities of color, as well as amplifies underrepresented voices;
•QPride: Focuses on making Qualtrics a welcoming place to work for members of the LGBTQ+ community;
•QSalute: Concentrates on recruiting military talent;
•Women’s Leadership Development: Aims to empower all women at Qualtrics; and
•Q&Able: Seeks to recruit, develop, and promote people of diverse abilities.
The Q-mmunity strengthens our TACOS culture and underscores our commitment to each other and our customers.
Seasonality
We generally experience seasonality in billings with our customers, and we typically record a higher percentage of billings in our fourth quarter, as we have historically executed many of our contracts in the third and fourth quarters due to the fiscal year ends and procurement cycles of our customers.
Corporate Information
We were formed in 2002 as Qualtrics Labs, Inc. In 2012, Qualtrics, LLC, a Delaware limited liability company, was established as a new parent company for our operating business. In September 2014, we incorporated Qualtrics International Inc. in Delaware. Through a corporate restructuring in September 2014, Qualtrics, LLC became a wholly owned subsidiary of Qualtrics International Inc. In January 2019, we were acquired by SAP America, Inc., a wholly owned subsidiary of SAP SE (“SAP”), a multinational corporation that is headquartered in Walldorf, Germany. In January 2021, we completed the initial public offering of our common stock (the “IPO”). Our common stock trades on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “XM.” Following the IPO, SAP continues to be our controlling shareholder.
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Our principal executive offices are located at 333 West River Park Drive, Provo, Utah 84604, and our telephone number is 385-203-4999. Our website address is www.qualtrics.com. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934, as amended (Exchange Act). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, amendments to those reports and our Proxy Statement for our annual meeting of stockholders. These filings are available for download free of charge on our investor relations website located at www.qualtrics.com/investors. The SEC also maintains a website that contains reports, proxy statements, and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. Further corporate governance information, including our corporate governance guidelines, code of business conduct, code of ethics and committee charters, is also available on our investor relations website under the heading “Governance.” The contents of the websites provided above are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC. Further, our references to the URLs for these websites are intended to be inactive textual references only.
“Qualtrics” and our other registered or common law trade names, trademarks, or service marks are our property. Other trademarks and trade names are the property of their respective owners.
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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 Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our 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.
Risk Factor Summary
The following is a summary of some of the risks and uncertainties that could materially adversely affect our business, financial condition, and results of operations. You should read this summary together with the more detailed risk factors contained below.
•Our rapid growth makes it difficult to evaluate our future prospects and may increase the risk that we will not continue to grow at or near historical rates.
•We may not be able to sustain our revenue growth rate or achieve or maintain profitability in the future.
•If we fail to effectively manage our growth, our business and results of operations could be harmed.
•The experience management software category is relatively new and rapidly changing, and if we do not compete effectively, our business, results of operations, and financial condition could be harmed.
•The impact of the COVID-19 pandemic has adversely affected and could continue to adversely affect our business, financial condition, and results of operations.
•If we are unable to retain customers at existing levels or sell additional functionality to our existing customers, our revenue growth will be adversely affected.
•If the experience management software category does not develop further, develops more slowly, or develops in a way that we do not expect, our business may be adversely affected.
•If we are not able to develop new solutions and enhancements to our existing solutions that achieve market acceptance and that keep pace with technological developments, or if we are not able to deliver these new or enhanced solutions so that they can be easily and consistently deployed by our customers, our business and results of operations would be harmed.
•If our security measures are breached or unauthorized access to data is otherwise obtained, our XM Platform may be perceived as insecure, we may lose existing customers or fail to attract new customers, our reputation may be harmed, and we may incur significant liabilities.
•Our business could be harmed by any significant disruption of service on our XM Platform or loss of content.
•If we fail to offer high quality customer support, our business and reputation could suffer.
•We invest significantly in research and development, and to the extent our research and development investments do not translate into new solutions or material enhancements to our current solutions, or if we do not use those investments efficiently, our business and results of operations would be harmed.
•Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, our ability to expand our number of customers will be impaired and our business, results of operations, and financial condition will be harmed.
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•Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our XM Platform.
•We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.
•If we are unable to develop and maintain successful relationships with certain partners, our business, results of operations, and financial condition could be harmed.
•Our sales cycle with enterprise, government, and international customers can be long and unpredictable.
•As long as SAP controls us, the ability of holders of Class A common stock to influence matters requiring stockholder approval will be limited.
•Our historical financial information as a business segment of SAP may not be representative of our results as an independent public company.
•SAP’s ability to control our board of directors and company may make it difficult for us to recruit high-quality independent directors and employees.
•We are a “controlled company” within the meaning of the corporate governance rules of Nasdaq and, as a result, rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
Risks Related to Our Business and Industry
Our rapid growth makes it difficult to evaluate our future prospects and may increase the risk that we will not continue to grow at or near historical rates.
We have been growing rapidly over the last several years, and as a result, our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future growth. Our recent and historical growth should not be considered indicative of our future performance. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies in new and rapidly changing markets. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our growth rates may slow, and our business would suffer.
We may not be able to sustain our revenue growth rate or achieve or maintain profitability in the future.
In future periods, our revenue could grow more slowly than in recent periods or decline for a number of reasons, including any reduction in demand for our XM Platform, increase in competition, limited ability to, or our decision not to, increase pricing, contraction of the experience management software category, or our failure to capitalize on growth opportunities. In addition, our revenue from subscription and professional services and other may grow at different rates than in recent periods or decline for a number of reasons, including those described above. Our results of operations for 2020 included a significant expense increase related to the recognition of cash settled stock-based compensation as a result of the SAP Acquisition. Excluding the impact of cash settled stock-based compensation, we expect expenses to increase in the near term, particularly as we continue to make significant investments in research and development and technology infrastructure, expand our operations globally and develop new solutions and features for, and enhancements of, our XM Platform. In addition, in connection with operating as an independent public company, we will incur additional legal, accounting, and other expenses that we did not incur as a wholly owned subsidiary of SAP. In addition, the added expenses we will incur may not lead to sufficient additional revenue to maintain historical revenue growth rates or achieve or maintain profitability in the future.
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If we fail to effectively manage our growth, our business and results of operations could be harmed.
We have experienced, and may continue to experience, rapid growth, which has placed, 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 13,500 customers in more than 100 countries, and have employees in the United States, Australia, Canada, France, Germany, Ireland, Japan, the Netherlands, Poland, Singapore, Spain, Sweden, 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. Additionally, 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 features for our existing solutions, hiring additional personnel, and upgrading our infrastructure. These investments will require significant capital expenditures and the allocation 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.
The experience management software category is relatively new and rapidly changing, and if we do not compete effectively, our business, results of operations, and financial condition could be harmed.
The experience management software category is relatively new and rapidly changing and has relatively low barriers to entry compared to some categories. While we do not believe that any of our competitors currently offer a full suite of experience management solutions that competes with our entire XM Platform, we do have numerous competitors who offer products and services that compete with certain features of our XM Platform. Our main competitors fall into the following categories:
•Providers of software for specific use cases, such as Medallia for customer experience;
•Traditional professional and marketing research services firms, such as Aon Hewitt and Towers Watson; and
•Individual-focused and self-service survey tools, such as SurveyMonkey.
While we have reasons to believe we compete favorably against these competitors, some of our existing competitors and potential future competitors are larger and have greater brand name recognition, longer operating histories, larger marketing budgets, established marketing relationships, access to larger customer bases, and significantly greater resources for the development of their offerings. These competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements.
With the introduction of new technologies, the evolution of our solutions, and new market entrants, we expect competition to intensify in the future. We also anticipate that potential competition may come in the future from incumbent software providers. For example, as we expand our focus into new use cases or other solutions beyond our existing solutions, we expect competition to increase. Pricing pressures from competitors undercutting our prices, and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business, results of operations, and financial condition. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties, or consolidate through acquisitions or be sold to our competitors with greater resources than we have, that may further enhance their resources and offerings in the market we address and may increase the likelihood of our competitors offering bundled or integrated products with which we cannot compete effectively. Additionally, some current and potential customers and partners, particularly
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large organizations, have elected, and may in the future elect, to develop or acquire their own internal experience management software tools that would reduce or eliminate the demand for our solutions. For all of these reasons and others we do not or cannot anticipate today, we may not be able to compete successfully against our current and future competitors, which could harm our business, results of operations, and financial condition.
The impact of the COVID-19 pandemic has adversely affected and could continue to adversely affect our business, financial condition, and results of operations.
The COVID-19 pandemic is widespread across the United States and around the globe, creating significant uncertainty and economic disruption as businesses and federal, state, and local governments have taken broad actions to mitigate this public health crisis. In response, we have 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 a significant disruption to how we operate our business. We may take further actions as required by government entities or that we determine are in the best interests of our employees, customers, partners, and suppliers.
As a result of the COVID-19 pandemic, 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, the value and duration of subscriptions, collections of accounts receivable, our IT and other expenses, 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. 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. Our customers, suppliers, and partners have similarly been impacted. Certain customers have and may continue to fail to renew subscriptions, request to renegotiate current contracts or payment terms, reduce their usage, and/or fail to expand their usage of our XM Platform within their organizations.
Given the uncertainty, we do not yet know the full extent of potential impacts on our business or operations and cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition. The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely. 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 or indirect impact on our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain. The potential impacts of COVID-19 could also have the effect of heightening other risks described in this “Risk Factor” section.
If we are unable to retain customers at existing levels or sell additional functionality to our existing customers, our revenue growth will be adversely affected.
To increase our revenue, we must retain existing customers, convince them to expand their use of our solutions across their organizations and for a variety of use cases, and expand their subscriptions on terms favorable to us. If we are not able to renew our agreements with existing customers or attract new business from existing customers on favorable terms, this could have an adverse effect on our business, revenue, gross margins, and other operating results, and accordingly on the value of our common stock. The rate at which our customers purchase new or enhanced solutions from us, as well as the expansion of use of our solutions across organizations, depend on a number of factors, including general economic conditions, customer specific conditions, competitive pricing, integration with existing technologies, and satisfaction and market acceptance of our XM Platform generally. If our efforts to sell additional functionality and solutions to our customers are not successful, our business and growth prospects may suffer. Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their initial subscription period, and a majority of our subscription contracts were one year in duration for the year ended December 31, 2020.
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If the experience management software category does not develop further, develops more slowly, or develops in a way that we do not expect, our business may be adversely affected.
We generate, and expect to continue to generate, revenue from the sale of subscriptions to our XM Platform. As a result, widespread acceptance and use of experience management solutions in general, and our XM Platform in particular, is critical to our future growth and success. If the experience management software category fails to grow or grows more slowly than we currently anticipate, demand for our XM Platform could be negatively affected.
Changes in user preferences for experience management may have a disproportionately greater impact on us than if we offered multiple platforms or a variety of products. Demand for experience management solutions in general, and our XM Platform in particular, is affected by a number of factors, many of which are beyond our control. Some of these factors include:
•awareness of the experience management category generally;
•availability of products and solutions that compete with ours;
•ease of adoption and use;
•features, performance and overall platform experience;
•brand;
•security and privacy;
•accessibility across several devices, operating systems, and applications;
•customer support;
•continued innovation; and
•pricing.
The experience management software category is subject to rapidly changing user demand and trends in preferences. If we fail to successfully predict and address these changes and trends, meet user demands, or achieve more widespread market acceptance of our XM Platform, our business, results of operations, and financial condition could be harmed.
If we are not able to develop new solutions and enhancements to our existing solutions that achieve market acceptance and that keep pace with technological developments, or if we are not able to deliver these new or enhanced solutions so that they can be easily and consistently deployed by our customers, our business and results of operations would be harmed.
Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing solutions and to introduce compelling new solutions. The success of any enhancement to our solutions depends on several factors, including timely completion and delivery, competitive pricing, adequate quality testing, integration with other technologies and our XM Platform, and overall market acceptance. Any new solution that we develop may not be introduced in a timely or cost-effective manner, may contain errors, vulnerabilities or bugs, or may not achieve the market acceptance necessary to generate significant revenue. If we are unable to successfully develop new solutions, enhance our existing solutions to meet customer requirements, or otherwise gain market acceptance, our reputation, business, results of operations, and financial condition would be harmed.
Our ability to attract new customers and increase revenue from existing customers also depends on our ability to deliver enhancements and new solutions to our customers in a format where they can be easily and consistently deployed by most or all users without significant customer support. If our customers believe that deploying our enhancements and new solutions would be overly time-consuming, confusing, or technically challenging, then our ability to grow our business would be substantially harmed. We need to deliver a repeatable, user-friendly,
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prescriptive approach to deployment that allows users of all kinds to effectively and easily deploy our solutions, and if we fail to do so, our business and results of operations would be harmed.
Our success also depends on our ability to identify important and emerging use cases for our customers and quickly develop new and effective solutions to address those use cases. For example, prior to 2017, we did not offer a solution specifically tailored for either Product Experience or Brand Experience. We developed solutions for these specific use cases because we were able to identify that many of our customers were using our existing tools for those purposes. If we are unable to identify similar emerging use cases or applications of our XM Platform in a timely manner and innovate in a way that allows us to address these emerging use cases or applications, and also present them to our customers in a compelling package that differentiates those solutions from our existing capabilities, then we may lose customers to more innovative competitors or alternative solutions, and we will experience difficulties in attracting new customers and expanding revenue from existing customers.
If our security measures are breached or unauthorized access to data is otherwise obtained, our XM Platform may be perceived as insecure, we may lose existing customers or fail to attract new customers, our reputation may be harmed, and we may incur significant liabilities.
Unauthorized access to, or other security breaches of, our XM Platform or the other systems or networks used in our business, including our own systems as well as those of our vendors, contractors, partners or those with which we have strategic relationships, could result in the unauthorized disclosure, loss, compromise, exfiltration, destruction or corruption of customer or other personal data, including sensitive data, loss of business, reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, class action or other litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, notification obligations, significant costs for remediation, and other liabilities. We have errors and omissions insurance coverage for certain security and privacy damages and claim expenses, but this coverage may be insufficient to compensate us for the type or quantity of liabilities that we may incur.
Our XM Platform and the other systems or networks used in our business are also at risk for breaches as a result of third-party action, or employee, contractor, vendor, partner or customer error or malfeasance. Security incidents have occurred in the past, and may occur in the future, resulting in unauthorized access to, loss or destruction of or unauthorized disclosure of information, regulatory enforcement actions, litigation, indemnity obligations, and other possible liabilities, as well as negative publicity, which could damage our reputation or customer satisfaction, impair our sales, and harm our business. Cyberattacks and other malicious activity continue to increase in frequency and complexity, and cloud-based platform providers of services have been and are expected to continue to be targeted. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), employee theft or misuse, phishing, social engineering, denial-of-service attacks and human error, sophisticated criminal, nation-state and nation-state supported actors now regularly engage in attacks (including advanced persistent threat intrusions). Despite significant efforts to implement security designed to protect against such threats, it is impossible for us to entirely protect against or mitigate these risks. If our security measures are compromised, for example, as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation or customer satisfaction could be damaged, our business, including our delivery of services, may be harmed, and we could incur significant liability. We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access or to compromise our systems, in part because they are continuously evolving and changing, and may not be known or detected until after an incident has occurred. Concerns regarding data privacy and security may cause some of our customers to stop using our solutions and fail to renew their subscriptions. This discontinuance in use or failure to renew could substantially harm our business, operating results, and growth prospects. Further, as we rely on third-party and public-cloud infrastructure, we will depend in part on third parties’ security measures to protect against unauthorized access, cyberattacks, and the mishandling of customer data. Failures to meet customers’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers, and grow our business. In addition, a cybersecurity event could result in significant increases in costs, including costs for remediating the effects of such an event, legal and advisor fees, and legal claims; lost revenue due to network downtime and decrease in customer trust; increases in insurance premiums and coverage; and damage to our reputation.
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Our business could be harmed by any significant disruption of service on our XM Platform or loss of content.
Our brand, reputation, and ability to attract, retain, and serve our customers are dependent upon the reliable performance of our XM Platform, including our underlying technical infrastructure. Our technical infrastructure may not be adequately designed with sufficient reliability and redundancy to avoid performance delays or outages that could be harmful to our business. If our XM Platform is unavailable when users attempt to access it, or if it does not load as quickly as they expect, users may not use our XM Platform as often in the future, or at all.
As our user base and the amount and types of information stored and shared on our XM Platform continue to grow, we will need an increasing amount of technical infrastructure, including network capacity and computing power, to continue to satisfy the needs of our users. Further, as we continue to grow and scale our business to meet the needs of our users, we may overestimate or underestimate our infrastructure capacity requirements, which could adversely affect our results of operations. We regularly evaluate our short- and long-term infrastructure capacity requirements to ensure adequate capacity for new and existing users while minimizing unnecessary excess capacity costs. If we overestimate the demand for our XM Platform and therefore secure excess infrastructure capacity, our operating margins could be reduced. If we underestimate our infrastructure capacity requirements, we may not be able to service the expanding needs of new and existing users, and our hosting facilities, network, or systems may fail. In some cases, our contracts with our customers stipulate a minimum uptime availability of our XM Platform, and to the extent we do not meet these obligations, we may be subject to penalties, refunds or other contractual claims from our customers. If any of these events occur, our reputation, business, and financial condition would be harmed.
As a subsidiary of SAP, we have relied on administrative and other resources of SAP to operate our business. We have entered into various service agreements with SAP to retain the ability for specified periods to use these SAP resources. These services may also not be sufficient to meet our needs, and after these arrangements with SAP expire, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have with SAP. We will need to create our own administrative and other support systems or contract with third parties to replace SAP’s systems. In addition, we have received informal support from SAP which may not be adequately addressed in the agreements entered into with SAP and the level of this informal support may diminish over time as we become a more independent company. Any failure or significant downtime in our own administrative systems or in SAP’s administrative systems during the transitional period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.
If we fail to offer high quality customer support, our business and reputation could suffer.
Our customers rely on our customer support teams to resolve technical and operational issues if and when they arise. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for customer support. We also may be unable to modify the nature, scope, and delivery of our customer support to compete with changes in customer support services provided by our competitors or to adapt to product and industry developments. Increased customer demand for customer support, without corresponding revenue, could increase costs and harm our results of operations. In addition, as we continue to grow our operations and reach a large global customer base, we need to be able to provide efficient customer support that meets our customers’ needs globally at scale. The number of our customers has grown significantly, and that growth has and will continue to put additional pressure on our support organization. As our business scales, we may need to engage third-party customer support service providers, which could negatively impact the quality of our customer support if such third parties are unable to provide customer support that is as effective as that we provide ourselves. Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers. Accordingly, high quality customer support is important for the renewal and expansion of our agreements with existing customers and any failure to maintain such standards of customer support, or a market perception that we do not maintain high quality customer support, could harm our reputation, our ability to sell product to existing and prospective customers, and our business, results of operations, and financial condition.
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We invest significantly in research and development, and to the extent our research and development investments do not translate into new solutions or material enhancements to our current solutions, or if we do not use those investments efficiently, our business and results of operations would be harmed.
A key element of our strategy is to invest significantly in our research and development efforts to develop new solutions and rapidly introduce new technologies, features and functionality of our existing solutions. For the years ended December 31, 2020, 2019, and 2018, our research and development expenses were 28%, 41%, and 16% of our revenue, respectively. If we do not spend our research and development budget efficiently or effectively on compelling innovation and technologies, our business may be harmed and we may not realize the expected benefits of our strategy. Moreover, research and development projects can be technically challenging and expensive. The nature of these research and development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we are able to offer compelling solutions and generate revenue, if any, from such investment. Additionally, anticipated customer demand for a solution or solutions we are developing could decrease after the development cycle has commenced, and we would nonetheless be unable to avoid substantial costs associated with the development of any such solution or solutions. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction or improvement of solutions that are competitive in our current or future markets, it would harm our business and results of operations.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, our ability to expand our number of customers will be impaired and our business, results of operations, and financial condition will be harmed.
We believe that our brand identity and awareness have significantly contributed to our success and have helped fuel our efficient go-to-market model. We also believe that maintaining and enhancing our Qualtrics brand and our other brands, as well as our reputation generally, is critical to expanding our number of customers. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. The perception of our brand by our customers, prospective customers, and partners has likely evolved as a result of our acquisition by SAP and will likely continue to evolve, including in ways that may be unforeseeable or unfavorable to us. Any unfavorable publicity or consumer perception of our XM Platform, or even a competitor’s platform in the experience management software category generally, could adversely affect our reputation and our ability to attract and retain customers on our XM Platform, and diminish customer interest in the experience management market generally. Additionally, if we fail to promote and maintain the Qualtrics brand, or if we incur excessive expenses in this effort, our business, results of operations, and financial condition will be materially and adversely affected. As an SAP company, we also face the risk that unfavorable publicity or negative consumer perception of SAP may adversely affect our business and brand.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our XM Platform.
Our ability to broaden our customer base, particularly our business customer base, and achieve broader market acceptance of our XM Platform will depend to a significant extent on the ability of our sales and marketing organizations to work together to drive our sales pipeline and cultivate customer and partner relationships to drive revenue growth. As an SAP company, we have been able to utilize our partnership to grow and enhance our business. We continue to jointly develop, market, and sell our solutions with SAP, and SAP’s global footprint has allowed us to reach new geographies and expand our international presence faster. If we are unable to effectively leverage our partnership with SAP to drive sales, increase our customer base, and achieve broader market acceptance, our growth plans could be adversely affected.
We have invested in and plan to continue to invest aggressively to expand our sales and marketing organizations, both domestically and internationally. Identifying, recruiting, and training sales personnel will require significant time, expense, and attention. In addition to our partnership with SAP, we have also developed a network of leading content and consulting partners, delivery partners, and technology partners who enrich our offerings, scale our coverage, and help us reach a broader audience than we would be able to reach on our own. If we are unable to recruit, hire, develop, and retain talented sales or marketing personnel, if our new sales or marketing personnel and
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partners are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and marketing programs are not effective, our ability to broaden our customer base and achieve broader market acceptance of our XM Platform could be harmed. In addition, the investments we make in our sales and marketing organization will occur in advance of experiencing benefits from such investments, making it difficult to determine in a timely manner if we are efficiently allocating our resources in these areas.
We also plan to dedicate significant resources to sales and marketing programs, including user conferences (such as our annual X4 Summit), online advertising, webinars, blogs, corporate communications, white papers, and case studies. We were unable to hold our in-person X4 Summit event in 2020 due to the COVID-19 pandemic and may be unable to do so in future years as a result of this pandemic or changes in the public’s perception of live events resulting therefrom. To the extent that we are unable to hold in person events such as user conferences due to the COVID-19 pandemic or fewer users choose to attend, our efforts to achieve broader market acceptance of our XM Platform may be adversely affected.
We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.
Our success and future growth depend upon the continued services of our management team and other key employees. In particular, Ryan Smith, our Founder, Executive Chair and Director, and Zig Serafin, our Chief Executive Officer, are both critical to our vision, strategic direction, culture, and offerings. From time to time, there may be changes in our management team, including those resulting from the hiring or departure of executives and key employees, which could disrupt our business. For example, Ryan Smith recently transitioned from Chief Executive Officer to Executive Chair and Zig Serafin recently transitioned from President to Chief Executive Officer. Given the recency of these transitions, we cannot yet know the impact they will have on our business. We also are dependent on the continued service of our existing employees, in part because of the complexity of our solutions. Our senior management and key employees are employed on an at-will basis. In general, we may terminate our employees’ employment at any time, and any employee may resign at any time, with or without cause. The loss of one or more of our senior management or other key employees could harm our business, and we may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. In particular, recruiting and hiring senior product engineering personnel has been, and we expect to continue to be, challenging given the intense competition in the software industry for skilled product engineering talent. In addition, as our business grows and scales, including internationally, we will need to continue to find and attract talented, experienced managers both in the United States and internationally. If we are unable to hire talented personnel, we may be unable to scale our operations or release new products in a timely fashion and, as a result, customer satisfaction with our products may decline. Additionally, many of our employees and members of our management team may receive significant proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us.
If we are unable to develop and maintain successful relationships with certain partners, our business, results of operations, and financial condition could be harmed.
In addition to our sales force and our joint go-to-market strategy with SAP, we work with certain strategic partners to help grow and develop our sales and distribution channels and implement our XM Platform. We believe that continued growth in our business is dependent upon identifying, developing, and maintaining strategic relationships with our existing and potential partners that can drive substantial revenue and provide additional solutions to our customers. We engage certain partners to generate customer acquisition opportunities, certain other partners to implement our XM Platform with our existing customers, and certain other partners to participate in our Qualtrics Developer Platform. In some cases, we do not yet have sufficient data or feedback regarding the effectiveness of these partnerships. If we are unable to develop and maintain successful relationships with these partners, or if they otherwise fail to succeed in the objectives of our relationships with them, our business, results of operations, and financial condition could be harmed.
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Our sales cycle with enterprise, government, and international customers can be long and unpredictable.
The timing of our sales with our enterprise, government, and international customers and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these customers. We sell to United States federal, state and local, as well as foreign, governmental agency customers, and government demand and payment for our offerings are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offerings. We are often required to spend significant time and resources to better educate and familiarize these potential customers with the value proposition of paying for our solutions. The length of our sales cycle for these customers, from initial evaluation to payment for our offerings, is often significantly longer for other customers, and can vary substantially from customer to customer, and thus it is difficult to predict whether and when a sale will be completed.
Our ability to sell subscriptions to our XM Platform could be harmed by real or perceived material defects or errors in our platform.
The software technology underlying our XM Platform is inherently complex and may contain material defects or errors, particularly when first introduced or when new features or capabilities are released. We have from time to time found defects or errors in our XM Platform, and new defects or errors in our existing XM Platform or new software may be detected in the future by us or our users. There can be no assurance that our existing XM Platform and new software will not contain defects. Any real or perceived errors, failures, vulnerabilities, or bugs in our XM Platform could result in negative publicity or lead to data security, access, retention, or other performance issues, all of which could harm our business. The costs incurred in correcting such defects or errors may be substantial and could harm our results of operations and financial condition. Moreover, the harm to our reputation and legal liability related to such defects or errors may be substantial and could harm our business, results of operations, and financial condition.
We also utilize hardware purchased or leased, and software and services licensed, from third parties to host and provide security over our XM Platform. Our customers may also seek to integrate our XM Platform with other software systems developed by third parties. Any defect in, or unavailability of, our or third-party software, services or hardware, or problems with integrating our XM Platform with third-party software that causes interruptions to the availability of our XM Platform, loss of data, or performance issues could, among other things:
•cause a reduction in revenue or delay in market acceptance of our XM Platform;
•require us to issue refunds to our users or expose us to claims for damages;
•cause us to lose existing users and make it more difficult to attract new users;
•divert our development resources or require us to make extensive changes to our XM Platform, which would increase our expenses;
•increase our technical support costs; and
•harm our reputation and brand.
If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success and our business may be harmed.
We believe that a critical component to our success has been our company culture. Our company is aligned behind our culture and key values, and we have invested substantial time and resources in building our team within this company culture. Our company culture has evolved as a result of the SAP Acquisition and will likely continue to evolve as a result of being a public company, including in ways that may be unforeseeable or unfavorable to us. As we increase the size of our employee base, grow and develop the infrastructure of a public company, transition from wholly owned subsidiary to majority-owned subsidiary of, or acquire other companies, we may find it difficult to maintain our company culture. Any failure to preserve our culture could harm our future success, including our ability to retain and recruit personnel, innovate and operate effectively, and execute on our business strategy.
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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 outside 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 year ended December 31, 2020, 28% 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 and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal 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 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:
•recruiting and retaining talented and capable employees outside the United States and maintaining our company culture across all of our offices;
•providing our XM Platform 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;
•compliance with applicable international laws and regulations, including laws and regulations with respect to privacy, data protection, consumer protection, and unsolicited email, and the risk of penalties to our users and individual members of management or employees if our practices are deemed to be out of compliance;
•management of an employee base in jurisdictions that may not give us the same employment and retention flexibility as does the United States;
•operating in jurisdictions that do not protect intellectual property rights to the same extent as does the United States;
•compliance by us and our business partners with anti-corruption laws, import and export control laws, tariffs, trade barriers, economic sanctions, and other regulatory limitations on our ability to provide our XM Platform in certain international markets;
•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 outside the United States;
•political and economic instability;
•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; and
•higher costs of doing business internationally, including increased accounting, travel, infrastructure, and legal compliance costs.
Compliance with laws and regulations applicable to our global operations substantially increases our cost of doing business in international jurisdictions. We may be unable to keep current with changes in laws and regulations as they change. Although we have implemented policies and procedures designed to support compliance with these
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laws and regulations, there can be no assurance that we will always maintain compliance or that all of our employees, contractors, partners, and agents will comply. Any violations could result in enforcement actions, fines, civil and criminal penalties, damages, injunctions, or reputational harm. If 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 may acquire other companies or technologies which could divert our management’s attention, result in additional dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.
As we have in the past, we may in the future seek to acquire or invest in businesses, people, or technologies that we believe could complement, expand, or enhance our XM Platform or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are ultimately consummated.
Any integration process may result in unforeseen operating difficulties and require significant time and resources and, we may not be able to integrate the acquired personnel, operations, and technologies successfully or effectively manage the combined business in connection with any future acquisition. Our prior acquisitions have been relatively small, and thus we are relatively inexperienced in effectively implementing an integration process. We may also not achieve the anticipated benefits from the acquired business due to a number of factors, including, among others:
•costs or liabilities associated with the acquisition;
•diversion of management’s attention from other business concerns;
•inability to integrate or benefit from acquired content, technologies, or solutions in a profitable manner;
•harm to our existing relationships with customers and partners as a result of the acquisition;
•difficulty integrating the accounting systems, operations, and personnel of the acquired business;
•difficulty converting the customers of the acquired business onto our XM Platform and contract terms;
•the potential loss of key employees;
•use of resources that are needed in other parts of our business; and
•the use of substantial portions of our available cash or equity to consummate the acquisition.
In the future, if our acquisitions do not yield expected returns, we may be required to take charges for the write-down or impairment of amounts related to goodwill and acquired intangible assets, which could negatively impact our results of operations. We may issue additional equity securities in connection with any future acquisitions that would dilute our existing stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to pay, incur large charges or substantial liabilities, and become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges. These challenges could adversely affect our business, financial conditions, results of operations, and prospects.
Privacy, data protection, and information security concerns, and data collection and transfer restrictions and related domestic or foreign regulations, may limit the use and adoption of our XM Platform and adversely affect our business.
Use of our XM Platform involves the storage, transmission, and processing of data from our customers and their users, employees or other personnel, including certain personal or individually identifying information. Personal privacy, information security, and data protection are significant issues in the United States, including at the individual state level, Europe, and many other jurisdictions where we offer our XM Platform. As a global software and service provider, we are required to comply with local laws of various countries and jurisdictions. The regulatory frameworks governing the collection, processing, storage, and use of business information, particularly
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information that includes personal data, are rapidly and continuously evolving across multiple jurisdictions, which may introduce conflicts between compliance obligations or other uncertainties. Any failure or perceived failure to comply with applicable privacy, security, or data protection laws, regulations and/or contractual obligations may adversely affect our business. Such evolving regulations and new laws globally (such as the California Consumer Privacy Act and the EU’s proposed ePrivacy Regulation) regarding data protection and privacy or other standards increasingly aimed at the use of personal information, such as for marketing purposes and the tracking of individuals’ online activities. We may have additional burdens imposed on us due to increasing compliance standards that could restrict the use and adoption of our products and services and make it more challenging and complex to meet customer expectations.
The United States federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution, use, security, and storage of, and individual rights relating to, personally identifiable information and other data relating to individuals, and federal and state consumer protection laws are also commonly applied to investigate and enforce companies’ statements regarding their collection, use, dissemination and other treatment of data, as well as security measures implemented to protect data. Under the laws of every state and numerous foreign jurisdictions, companies are obligated to notify individuals of security breaches involving certain personal information, which may result from breaches of our own systems, but could also result from breaches experienced by our vendors, our contractors, or organizations with which we have formed strategic relationships. Even though we may have contractual protections with such vendors, contractors, or other organizations, notifications and follow-up actions related to a security breach could impact our reputation, cause us to incur significant costs, including legal expenses, harm customer confidence, hurt our expansion into new markets, result in regulatory investigations or enforcement actions, instigate class action or other litigation, cause us to incur remediation costs, and cause us to lose existing customers.
Further, many foreign countries and governmental bodies, including the EU, where we conduct business, have laws and regulations concerning the collection and use of personal data obtained from their residents or by businesses operating within their jurisdictions. These laws and regulations are often more wide-ranging and more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and Internet Protocol addresses. Further, European data protection laws prohibit the transfer of personal data from the European Economic Area, or EEA, and Switzerland to other countries, including the United States, unless adequate protections are provided for personal data in such recipient countries.
With regard to transfers of personal data from our European employees and customers to the United States, we historically relied on our adherence to the United States Department of Commerce’s Safe Harbor Privacy Principles and compliance with the EU-U.S. and Swiss-U.S. Safe Harbor Frameworks as agreed to and set forth by the United States Department of Commerce, the EU, and Switzerland, which established means for legitimizing the transfer of personal data from the EEA or Switzerland to the United States. The EU-U.S. Safe Harbor Framework was deemed an invalid method of compliance with EU restrictions on data transfers in a ruling by the Court of Justice of the European Union in October 2015. Following this ruling, we implemented certain measures in order to certify our adherence to the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks, programs established by EU, Swiss, and U.S. authorities to provide mechanisms for companies to transfer EEA and Swiss personal data to the United States in the absence of the EU-U.S. and Swiss-U.S. Safe Harbor Frameworks. In addition, we have relied on standard contractual clauses approved by the European Commission for this purpose. In July 2020, the EU-U.S. Privacy Shield Framework was invalidated by the Court of Justice of the European Union as a means of assuring adequate safeguards for personal data transferred to the United States. Since the invalidation of the EU-U.S. Privacy Shield Framework, we have sought to implement other measures to permit transfers of personal data from the EEA and Switzerland to the United States, including continuing to rely on the standard contractual clauses approved by the European Commission for this purpose. The standard contractual clauses are also subject to challenges, however, and it is uncertain whether the standard contractual clauses will also be invalidated by the European courts. In addition to the present uncertainty as to valid means to assure adequate safeguards of EEA and Swiss personal data transferred to the United States, we expect to be impacted by future changes in law as a result of a further reviews of transfer mechanisms by European regulators, as well as challenges to these mechanisms in the European courts.
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There are also questions of whether and by what mechanisms personal data may be transferred from the EEA and Switzerland to the United Kingdom, post-Brexit.
International privacy and data security regulations may become more complex and have greater consequences. For instance, as of May 2018, the General Data Protection Regulation, or GDPR, has replaced the Data Protection Directive with respect to the collection and use of personal data of data subjects in the EU. The GDPR applies extraterritorially and imposes several stringent requirements for controllers and processors of personal data, including, for example, higher standards for obtaining consent from individuals to process their personal data, more robust disclosures to individuals and a strengthened individual data rights regime, shortened timelines for data breach notifications, limitations on retention of information, increased requirements pertaining to special categories of personal data and pseudonymized (i.e., key-coded) data and additional obligations when we contract third-party processors in connection with the processing of the personal data. The GDPR provides that EU member states may make their own further laws and regulations limiting the (i) processing of personal data, including special categories of special data (e.g., racial or ethnic origin, political opinions, religious or philosophical beliefs), and (ii) profiling and automated individual decision-making of individual; which could limit our ability to use and share personal data or other data and could cause our costs to increase, and harm our business and financial condition. Noncompliance with the GDPR can trigger steep fines of up to €20 million or 4% of global annual revenue, whichever is higher. Separate EU laws and regulations (and member states’ implementations thereof) govern the protection of consumers and of electronic communications.
The implementation of the GDPR has led other jurisdictions to amend, or propose legislation to amend, their existing data protection laws to align with the requirements of the GDPR with the aim of obtaining an adequate level of data protection to facilitate the transfer of personal data from the EU. Accordingly, the challenges we face in the EU will likely also apply to other jurisdictions outside the EU that adopt laws similar in construction to the GDPR or regulatory frameworks of equivalent complexity. For example, the United Kingdom may enact data privacy laws similar to the GDPR following Brexit, in order to maintain harmony with GDPR requirements, but this is not yet settled. In addition, in 2018, the State of California adopted the California Consumer Privacy Act of 2018, or the CCPA, which came into effect January 1, 2020.
The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States because it mirrors certain provisions of the GDPR, including an extraterritorial application. However, the CCPA establishes a new privacy framework for covered businesses with expansive definitions of “personal information” and the “sale” of personal information, and by establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of consumer data from minors, requiring businesses to provide consumers in the State of California a means of opt-out from the sale of personal information and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. As with the GDPR, enforcement priorities and interpretation of certain provisions of the CCPA are still unclear. And to comply with the rules imposed by CCPA we may be required to put in place additional mechanisms ensuring compliance and other substantial expenditures. This may be onerous and adversely affect our business, financial condition, results of operations, and prospects.
These new requirements, together with laws and regulations that may be passed in the future, could reduce demand for our XM Platform, increase our costs, impair our ability to grow our business, restrict our ability to store and process data, subject us to liability, or, in some cases, impact our ability to offer our XM Platform in some locations. Further, in view of new or modified federal, state, or foreign laws and regulations, industry standards, contractual obligations, and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our XM Platform and otherwise adapt to these changes. We may be unable to make such changes and modifications in a commercially reasonable manner, or at all, and our ability to develop new content and features could be limited. Further, failure to comply with the GDPR, the CCPA and other privacy or data security-related laws, rules or regulations of jurisdictions in which we do business could result in material fines and other penalties imposed by regulators, affect our compliance with client contracts and have an adverse effect on our business, financial condition, and results of operations. Our activities could also result in mandatory disclosures of breaches to affected individuals, customers, and data protection supervisory authorities, as well as investigations and
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administrative measures by data protection supervisory authorities, such as the instruction to alter or stop non-compliant data processing activities, including the instruction to stop using non-compliant subcontractors.
Our XM Platform allows our customers to communicate through email, SMS, and other means. We generally require that communications sent though our XM Platform include an unsubscribe or opt-out function; however, users who elect to unsubscribe are typically unsubscribed only from one particular customer’s communications and not from all communications sent via our XM Platform. From time to time, consumers have complained to us after receiving communications via our platform from one customer despite having opted out of communications from another customer. Consumers must unsubscribe from each customer on an individual basis. Similarly, consumers have complained to us after receiving communications sent directly to them by our customers, outside of our XM Platform, after mistakenly believing they were sent via our platform. If consumers do not understand this process or do not believe we are following the appropriate rules and regulations in their respective jurisdictions, or if we fail to build and maintain our XM Platform in a manner that complies with relevant laws and rules relating to unsubscribe and opt-out capabilities, then consumers may complain to us or to our regulators and could seek to take legal or regulatory action against us or our customers.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depends in part upon our intellectual property and other proprietary rights. We primarily rely on a combination of patent, copyright, trade secret, and trademark laws, trade secret protection and confidentiality or license agreements with our employees, contractors, customers, partners, suppliers and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be insufficient, and our intellectual property may still be challenged, invalidated, disclosed, or subject to other attacks from competitors or former employees. We cannot guarantee that any of our pending applications will be approved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology. For example, competitors may try to use brand names confusingly similar to ours for similar products and services in order to benefit from our brand’s value. Others, including our competitors, may independently develop similar technology, duplicate our services or design around our intellectual property and, in such cases, we may not be able assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
We hold a number of patents and patent applications in the United States and a number of international patent applications that we may use to pursue patents and patent applications in other foreign jurisdictions. We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively protect every significant feature of our solutions, technology, or proprietary information, or provide us with any competitive advantages. Moreover, we cannot guarantee that any of our pending patent applications will issue or be approved. The United States Patent and Trademark Office and various foreign governmental patent agencies also require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in which noncompliance can result in abandonment or lapse of the patent, trademark or application, resulting in partial or complete loss of rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business. In addition, we believe that the protection of our trademark rights is an important factor in Qualtrics’ recognition, protecting our brand, and maintaining goodwill. If we do not adequately protect our rights in our trademarks from infringement, any goodwill that we have developed in those trademarks could be lost or impaired, which could harm our brand and our business. Furthermore, we may not always detect infringement of our intellectual property rights, and any infringement of our intellectual property rights, even if successfully detected, prosecuted and enjoined, could be costly to deal with and could harm our business. In any event, in order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets.
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Effective trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business. In addition, many foreign countries limit the enforceability of patents or other intellectual property against third parties, including government agencies or government contractors, or have patent and intellectual property laws that are less developed or less enforceable than in the United States. In these countries, patents and other intellectual property may provide limited or no benefit. Further, intellectual property law, including statutory and case law, particularly in the United States, is constantly developing, and any changes in the law could make it harder for us to enforce our rights.
Litigation brought to protect and enforce our intellectual property rights, has been in the past, and could be in the future, costly, time consuming and distracting to management. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and counter-suits attacking the validity and enforceability of our intellectual property rights, which could result in the impairment or loss of portions of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our failure to secure, protect, and enforce our intellectual property rights could delay further implementation of our XM Platform, impair functionality of our XM Platform, delay introductions of new products and services, result in our substituting inferior or more costly technologies into our XM Platform or harm our brand and our business. Further, we may not always successfully monitor and detect infringement of our intellectual property rights, and defending our intellectual property rights, even if successfully detected, prosecuted, enjoined, or remedied, could result in the expenditure of significant financial and managerial resources.
Moreover, a portion of our intellectual property has been acquired from one or more third parties. While we have conducted diligence with respect to such acquisitions, because we did not participate in the development or prosecution of much of the acquired intellectual property, we cannot guarantee that our diligence efforts identified and/or remedied all issues related to such intellectual property, including potential ownership errors, potential errors during prosecution of such intellectual property, and potential encumbrances that could limit our ability to enforce such intellectual property rights.
We may be sued by third parties for alleged infringement or misappropriation of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon or misappropriating the intellectual property rights of others. From time to time, our competitors or other third parties have claimed in the past, and may claim in the future, that we are infringing upon or misappropriating their intellectual property rights, and we may be found to be infringing upon or misappropriating such rights. We may not be successful in defending against any such challenges, securing settlements, or obtaining licenses to avoid or resolve any intellectual property disputes.
In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid, or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, the state of the law, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may be unaware of the intellectual property rights of others that may cover some or all of our technology, or technology that we obtain from third parties. Because patent applications can take years to issue and are often afforded confidentiality for some period of time there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products. Any claims or litigation (with or without merit) could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions or using certain technologies, require
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us to implement expensive work-arounds, or require that we comply with other unfavorable terms. In the case of infringement or misappropriation caused by technology that we obtain from third parties, any indemnification or other contractual protections we obtain from such third parties, if any, may be insufficient to cover the liabilities we incur as a result of such infringement or misappropriation. We may also be obligated to indemnify our customers or business partners in connection with any such claims and litigation and to obtain licenses, modify our solutions, or refund fees, which could further exhaust our resources. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty, or license fees, modification of our solutions or refunds to customers of fees, which would negatively impact our financial performance. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations and disrupt our business or harm our brand and reputation.
Moreover, our intellectual property acquired from one or more third parties may have previously been the subject of one or more intellectual property infringement suits and/or allegations. While we have conducted diligence with respect to such acquisitions, we cannot guarantee that our diligence efforts identified and/or remedied all issues related to such intellectual property infringement suits and/or allegations. Moreover, we cannot guarantee that we understand and/or have complied with all obligations related to the settlement of such intellectual property suits and/or the resolution of such intellectual property allegations.
We use open source software in our XM Platform that may subject our XM Platform to general release or require us to re-engineer our XM Platform, which may harm our business.
We use open source software in our XM Platform and expect to continue to use open source software in our platform in the future. There are uncertainties regarding the proper interpretation of and compliance with open source software licenses. Moreover, we cannot assure you that our processes for controlling our use of open source software in our XM Platform have been or will be effective. Our current or future use of open source software could result in claims of copyright infringement, the subjecting of our proprietary software to general release, forced changes to and re-engineering of our XM Platform, reputational harm and harm to our business and results of operations. In addition, if the license terms for the open source software we utilize change, we may be forced to incur additional costs to comply with the changed license terms or to replace the affected open source software. Although we have implemented policies and tools to regulate the use and incorporation of open source software into our XM Platform, we cannot be certain that we have not incorporated open source software in our XM Platform in a manner that is inconsistent with such policies and the relevant open source licenses.
Responding to any infringement claim, regardless of its validity, or discovering unknown or improper use of open source software code in our XM Platform could harm our business, operating results, and financial condition, by, among other things:
•resulting in time-consuming and costly litigation;
•diverting management’s time and attention from developing our business;
•requiring us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable;
•causing delays in the deployment of our XM Platform;
•requiring us to stop selling certain of our XM Platform;
•requiring us to redesign certain components of our XM Platform using alternative non-infringing or non-open source technology or practices, which could require significant effort and expense;
•requiring us to disclose our software source code, the detailed program commands for our software; and
•requiring us to satisfy indemnification obligations to our customers.
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Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers, suppliers, partners and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, data and security breaches, and other liabilities relating to or arising from our software, services, acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although in some cases we contractually limit our liability with respect to such obligations, we do not always do so, and in the future we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our solutions, and harm our business, results of operations, and financial condition.
Our business is subject to a variety of United States and international laws and regulations that could subject us to claims, increase the cost of operations, or otherwise harm our business, including due to changes in such laws, changes in the interpretations of such laws, greater enforcement of such laws, or investigations into compliance with such laws.
Our business is subject to laws and regulations from various federal, state, local, and foreign governments and agencies, including those relating to copyright, labor and employment, workplace safety, consumer protection, privacy and data protection, anti-bribery and anti-corruption, import and export controls, sanctions, securities, and tax. In certain foreign jurisdictions, these regulatory requirements may be more stringent than, or otherwise different from, those in the United States. These laws and regulations are subject to change over time, and thus we must continue to monitor and dedicate resources to ensure continued compliance. Non-compliance with applicable laws, regulations or requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, and injunctions, any of which could adversely affect our business, operating results, and financial condition. In addition, responding to any action could result in a significant diversion of management’s attention and resources and an increase in professional fees.
We are also subject to consumer protection laws that may impact our sales and marketing efforts, including laws related to subscriptions, billing, and auto-renewal. These laws, as well as any changes in these laws, could make it more difficult for us to retain existing customers and attract new ones.
We are subject to governmental export and import controls, economic sanctions, and anti-corruption laws and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
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.
While we take precautions to prevent our products and services 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 found to be in violation of U.S. economic sanctions 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 through other penalties, reputational harm, loss of access to certain markets, or otherwise.
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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 limitation on our ability to export or sell our products or services would likely 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.
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;
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•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;
•changes in laws and regulations that impact our business; and
•general economic and market conditions.
In 2020, we recorded $224.0 million in equity and cash settled stock-based compensation expenses compared to $876.2 million and $4.6 million in 2019 and 2018, respectively. This change was a result of the vesting of performance based awards that were triggered as a result of the SAP Acquisition and the modification of remaining awards to cash settled awards, which resulted in fair value accounting for these awards. As a result of this increase in equity and cash settled stock-based compensation, our cost of revenue, research and development, sales and marketing, and general and administrative costs increased significantly in absolute dollars and as a percentage of revenue during 2020 and 2019 compared to 2018.
If our billings, revenue, or 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 these or other factors, and we do not believe that our financial results in any one quarter or any other period should be relied upon by investors as indicative of our future financial performance.
Our subscription or pricing models may not accurately reflect the optimal pricing necessary to attract new customers and retain existing customers as the market matures.
As the market for our solutions matures, or as competitors introduce new solutions that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. We provide our software on a subscription basis priced on the number of solutions and level of functionality required by customers and the number of users and level of interactions through our software, and therefore, pricing decisions may also impact the mix of adoption among our subscription plans and negatively impact our overall revenue. Further, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our products to achieve or maintain more widespread market acceptance, any of which could harm our business, results of operations, and financial condition. In the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.
Interruptions or delays in service from our data center facilities could impair the delivery of our XM Platform and harm our business.
We currently serve our customers both from our co-location data center facilities in the United States, Australia, Canada, and Germany, and from public cloud data center facilities located in the United States, Australia, Canada, Germany, and Ireland. Any damage to, or failure of, our systems generally could result in interruptions in our XM Platform. As we continue to add new data centers, add capacity in our existing data centers and transition existing data centers from a managed service hosting model to a co-location model, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the use of our XM Platform. Any damage to, or failure of, our XM Platform, or those of our third-party data centers, could result in interruptions in use of our XM Platform. Impairment of or interruptions in customers accessing our XM Platform may reduce our revenue, cause us to issue credits or pay penalties, subject us to claims and litigation, cause our customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. We have experienced interruptions and delays in service in the past, and we may experience
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interruptions and delays in service in the future. Our business will also be harmed if our customers and potential customers believe our XM Platform is unreliable.
We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and other similar events. They may also be subject to break-ins, sabotage, attacks, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. We cannot rapidly switch to new data centers or move customers from one data center to another in the event of an adverse event. Despite precautions taken at these facilities, the occurrence of a natural disaster, an act of terrorism or other act of malfeasance, a decision to close the facilities without adequate notice or other problems at these facilities could result in lengthy interruptions in accessing our XM Platform and the loss or exposure of customer data.
We may transition from managed co-location data center facilities to public cloud alternatives, which could impact our gross margins and our financial results.
We currently rely primarily on managed co-location data center facilities. We have made and will continue to make substantial investments in new equipment to support growth at our data centers and provide enhanced levels of service to our customers. This may include increases in network bandwidth, CPU, storage, power or other elements of our hosting operations. We anticipate that we may move some of our data centers away from co-location facilities to public cloud options in the next five years. As we make this transition, we anticipate that it would impact margins, particularly as we move our spend from capital expenditures to operating expenses. Additionally, to the extent that we are required to add data center capacity to accommodate customer demands, we may need to significantly increase the bandwidth, storage, power or other elements of our hosting operations, and the costs associated with adjustments to our data center architecture could also harm our margins and operating results.
We recognize revenue from subscriptions ratably over the term of our customer contracts, and as such our reported revenue and billings may differ significantly in a given period, and our revenue in any period may not be indicative of our financial health and future performance.
We recognize revenue from subscriptions ratably over the subscription term of the underlying customer contract, which is generally one year. Our billings are recorded upon invoicing for access to our XM Platform, and thus a significant portion of the billings we report in each quarter are generated from customer agreements entered and invoiced during the period. As a result, much of the revenue we report each quarter is derived from contracts that we entered into with customers in prior periods. Consequently, a decline in new or renewed subscriptions in any quarter will not be fully reflected in revenue or other results of operations in that quarter but will negatively affect our revenue and other results of operations across future quarters. It is difficult for us to rapidly increase our revenue from additional billings in a given period. Any increases in the average term of subscriptions would result in revenue for those contracts being recognized over longer periods of time with little impact on our results of operations in the near term. Our professional services and certain other revenue is recognized upon completion of the performance or as the service is rendered. Accordingly, our revenue in any given period may not be an accurate indicator of our financial health and future performance.
If we fail to integrate our solutions with a variety of operating systems, software applications, platforms, and hardware that are developed by others, our solutions may become less marketable, less competitive, or obsolete, and our results of operations could be harmed.
Our customers and prospective customers expect that our solutions integrate with a variety of network, hardware, and software platforms, and we need to continuously modify and enhance our solutions to adapt to changes in hardware, software, networking, browser, and database technologies. We have developed our solutions to be able to integrate with third-party software-as-a-service (SaaS) applications through the interaction of application programming interfaces, or APIs. In general, we rely on the fact that the providers of such software systems continue to allow us access to their APIs to enable these custom integrations. We are subject to the standard terms and conditions of such providers, or other agreements we may have with them, which govern the distribution, operation, and fees of such software systems, and which may be subject to change by such providers. Certain of our current and future potential integrations are with organizations that compete with us or with SAP, and which may
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have incentives to limit or prohibit our ability to integrate with them. We may not successfully build, deploy or offer the integrations we need to as a result of limits or prohibitions by other parties, unacceptable terms, technical difficulties, our failure to recognize the demand for them, or for other reasons. If we fail to offer a variety of integrations or the integrations that our customers and prospective customers expect and demand, then our solutions may become less marketable, less competitive, or obsolete, and our results of operations could be harmed.
Our business could be adversely impacted by changes in internet access for our users or laws specifically governing the internet.
Our XM Platform depends on the quality of our users’ access to the internet. Certain features of our XM Platform require significant bandwidth and fidelity to work effectively. Internet access is frequently provided by companies that have significant market power that could take actions that degrade, disrupt, or increase the cost of user access to our XM Platform, which would negatively impact our business.
In December 2017, the Federal Communications Commission, or the FCC, voted to repeal its “net neutrality” Open Internet rules, effective June 2018. The rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. The FCC’s new rules, which took effect on June 11, 2018, repealed the neutrality obligations imposed by the Open Internet rules and granted providers of broadband internet access services greater freedom to make changes to their services. Such changes may cause us to incur greater operating expenses, make it more difficult for us to provide our products and services, or discriminate against or harm our business, all of which could have an adverse effect on our business operations.
As the internet continues to experience growth in the number of users, frequency of use, and amount of data transmitted, the internet infrastructure that we and our users rely on may be unable to support the demands placed upon it. The failure of the internet infrastructure that we or our users rely on, even for a short period of time, could undermine our operations and harm our results of operations.
In addition, there are various laws and regulations that could impede the growth of the internet or other online services, and new laws and regulations may be adopted in the future. These laws and regulations could, in addition to limiting internet neutrality, involve taxation, tariffs, privacy, data protection, information security, content, copyrights, distribution, electronic contracts and other communications, consumer protection, and the characteristics and quality of services, any of which could decrease the demand for, or the usage of, our XM Platform. Legislators and regulators may make legal and regulatory changes, or interpret and apply existing laws, in ways that require us to incur substantial costs, expose us to unanticipated civil or criminal liability, or cause us to change our business practices. These changes or increased costs could materially harm our business, results of operations, and financial condition.
Our international operations subject us to potentially adverse tax consequences.
We are subject to income taxes as well as non-income-based taxes, such as payroll, sales, use, value-added, property, and goods and services taxes, in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to various jurisdictional rules regarding the timing and allocation of revenue and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file and to changes in tax laws. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. From time to time, we may be subject to income and non-income tax audits by U.S. and non-U.S. taxing authorities. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse effect on our business, results of operations, and financial condition.
Our future effective tax rate may be affected by such factors as changes in tax laws, regulations, or rates, changing interpretation of existing laws or regulations, the impact of accounting for equity-based compensation, the impact of accounting for business combinations, changes in our international organization, and changes in overall levels of income before tax. In addition, in the ordinary course of our global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Although we believe that our tax
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estimates are reasonable, we cannot ensure that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.
We may have exposure to greater than anticipated tax liabilities and may be affected by changes in tax laws or interpretations, any of which could adversely impact our results of operations.
We are subject to income taxes in the United States and various jurisdictions outside of the United States. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits of equity-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, effects from acquisitions, and the evaluation of new information that results in a change to a tax position taken in a prior period. A successful assertion by a country, state, or other jurisdiction that we have an income tax filing obligation could result in substantial tax liabilities for prior tax years.
Our tax position could also be impacted by changes in accounting principles, changes in U.S. federal, state, or international tax laws applicable to corporate multinationals, other fundamental law changes currently being considered by many countries, including the United States, and changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions. Any of the foregoing changes could have an adverse impact on our results of operations, cash flows, and financial condition.
Additionally, the Organization for Economic Co-Operation and Development has released guidance covering various topics, including transfer pricing, country-by-country reporting, and definitional changes to permanent establishment that could ultimately impact our tax liabilities as it is implemented in various jurisdictions.
Our results of operations may be harmed if we are required to collect sales or other related taxes for our subscription solutions in jurisdictions where we have not historically done so.
We collect sales and similar value-added taxes as part of our customer agreements in a number of jurisdictions. Sales and use, value-added, and similar tax laws and rates vary greatly by jurisdiction. One or more states or countries may seek to impose additional sales, use, or other tax collection obligations on us, including for past sales by us. Furthermore, in June 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state retailers even if those retailers lack any physical presence within the states imposing the sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after the publication of Wayfair) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state retailers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state retailers on sales that occurred in prior tax years. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes on our XM Platform could, among other things, result in substantial tax liabilities for past sales, create significant administrative burdens for us, discourage customers from purchasing our XM Platform, or otherwise harm our business, results of operations, and financial condition.
We are subject to tax examinations of our tax returns by the Internal Revenue Service, or IRS, and other tax authorities. An adverse outcome of any such audit or examination by the IRS or other tax authority could have a material adverse effect on our results of operations, financial condition, and liquidity.
We are, and expect to continue to be, subject to regular review and audit by the IRS and other tax authorities in various jurisdictions. As a result, we have received, and may in the future receive, assessments in multiple jurisdictions on various tax-related assertions. Taxing authorities may in the future challenge our tax positions and methodologies on various matters, including our positions regarding the collection of sales and use taxes and the jurisdictions in which we are subject to taxes, which could expose us to additional taxes. We regularly assess the likelihood of adverse outcomes resulting from ongoing tax examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable estimates and judgments. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a variety of
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jurisdictions. There can be no assurance that our tax positions and methodologies or calculation of our tax liabilities are accurate or that the outcomes from ongoing and future tax examinations will not have an adverse effect on our operating results and financial condition. A difference in the ultimate resolution of tax uncertainties from what is currently estimated could have an adverse effect on our operating results and financial condition.
The nature of our business requires the application of complex revenue and expense recognition rules, and any significant changes in current rules could affect our financial statements and results of operations.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, or the FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls over financial reporting. In addition, many companies’ accounting policies and practices are being subjected to heightened scrutiny by regulators and the public. The accounting rules and regulations are continually changing, and may change in the future in ways that could materially impact our financial statements. In addition, if we were to change our critical accounting estimates, including those related to the recognition of subscription revenue and other revenue sources or the period of benefit for deferred contract acquisition costs, our results of operations could be significantly affected.
If our judgments or estimates relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of our financial statements in conformity with GAAP requires management to make judgments, estimates, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock. Significant judgments, estimates, and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, deferred contract acquisition costs, the period of benefit generated from deferred contract acquisition costs, equity and cash settled stock-based compensation expense, goodwill and intangible assets, and accounting for income taxes, including deferred tax assets and liabilities.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of the listing standards of Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.
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Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second Annual Report on Form 10-K.
Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and results of operations and could cause a decline in the price of our Class A common stock.
We might require additional capital to support our growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our existing XM Platform or acquire complementary businesses, technologies, and content. While we expect that SAP, as our majority owner, may continue to support our growth, SAP may be unable or unwilling to address particular financial needs or may prefer that we look to other funding sources in the first instance. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing from SAP or in the capital markets on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our growth and to respond to business challenges could be significantly impaired.
We may face exposure to foreign currency exchange rate fluctuations.
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound sterling, and Australian Dollar. We have not instituted a hedging program. We expect our international operations to continue to grow in the near term, and we regularly monitor our foreign currency exposure to determine when we should begin a hedging program. Today, our international contracts are denominated in either U.S. dollars or local currency, while our international operating expenses are often denominated in local currencies. Additionally, as we expand our international operations, a larger
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portion of our operating expenses will be denominated in local currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may affect our results of operations when translated into U.S. dollars.
Catastrophic events may disrupt our business.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce, and the global economy, and thus could harm our business. In the event of a major earthquake, hurricane, fire, cyber-attack, war, terrorist attack, disease, such as the COVID-19 pandemic, power loss, telecommunications failure, or other catastrophic events, we may be unable to continue our operations, in part or in whole, and may endure reputational harm, delays in developing our XM Platform and solutions, breaches of data security and loss of critical data, all of which could harm our business, results of operations and financial condition.
Additionally, we rely on our network and third-party infrastructure and applications, internal technology systems, and our websites for our development, marketing, operational support, hosted services, and sales activities. If these systems were to fail or be negatively impacted as a result of a natural disaster or other event, our ability to deliver solutions to our customers would be impaired.
As we grow our business, the need for business continuity planning and disaster recovery plans will grow in significance. If we are unable to develop adequate plans to ensure that our business functions continue to operate during and after a disaster, and successfully execute on those plans in the event of a disaster or emergency, our business and reputation would be harmed.
Adverse economic conditions could negatively impact our business.
Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. Our business depends on demand for business software applications generally and for experience management software solutions in particular. In addition, the market adoption of our solutions and our revenue is dependent on the number of users of our solutions. To the extent that weak economic conditions reduce the number of personnel overseeing customer experience, employee experience, or other experience matters or that limit the available budgets within organizations for software solutions, demand for our solutions may be harmed. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their information technology budgets, which would limit our ability to grow our business and harm our results of operations.
Risks Related to Our Relationship with SAP and Being a “Controlled” Company
As long as SAP controls us, the ability of the holders of Class A common stock to influence matters requiring stockholder approval will be limited.
SAP owns 100% of the shares of Class B common stock, representing a controlling interest in the total outstanding shares of the Company. The rights of the holders of Class A and Class B common stock differ in a number of ways, including with respect to voting and conversion rights, certain actions that require the consent of holders of Class B common stock and other protective provisions as set forth in this Annual Report on Form 10-K. Holders of our Class B common stock are entitled to ten votes per share of Class B common stock, and the holders of our Class A common stock are entitled to one vote per share of Class A common stock. Subject to any rights of any series of preferred stock to elect directors, the holders of Class A common stock and the holders of Class B common stock, voting together as a single class, are entitled to elect all directors to our board of directors. If, prior to the occurrence of any Distribution, SAP transfers shares of our Class B common stock to any party that is not beneficially owned by SAP, those shares would automatically convert into Class A common stock. For so long as SAP beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, SAP will be able to elect all of the members of our board of directors.
In addition, until such time as SAP beneficially owns shares of our common stock representing less than a majority of the votes entitled to be cast by the holders of outstanding voting stock, SAP will have the ability to take stockholder action without the vote of any other stockholder and without having to call a stockholder meeting, and
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holders of Class A common stock will not be able to affect the outcome of any stockholder vote during this period. As a result, SAP has the ability to control all matters affecting us, including:
•the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies;
•any determinations with respect to mergers, acquisitions and other business combinations;
•our acquisition or disposition of assets;
•our financing activities;
•changes to our amended and restated certificate of incorporation and amended and restated bylaws;
•changes to the agreements providing for our transition to becoming a public company;
•corporate opportunities that may be suitable for us and SAP;
•determinations with respect to enforcement of rights we may have against third parties, including with respect to intellectual property rights;
•the payment of dividends on our common stock;
•the number of shares available for issuance under our stock plans for our prospective and existing employees; and
•the strategy, direction, and objectives of our business.
Our amended and restated certificate of incorporation and the stockholders’ agreement contain provisions that require that as long as SAP beneficially owns at least 20% or more of the outstanding shares of our common stock, the prior affirmative vote or written consent of SAP as the holder of the Class B common stock is required (subject in each case to certain exceptions) in order to authorize us to:
•adopt or implement any stockholder rights plan or similar takeover defense measure;
•consolidate or merge with or into any other entity;
•permit any of our subsidiaries to consolidate or merge with or into any other entity, with certain exceptions;
•acquire the stock or assets of another entity for consideration in excess of $100 million except in connection with acquisitions of securities pursuant to portfolio investment decisions in the ordinary course of business to which the company and one or more of our wholly owned subsidiaries are the only parties;
•issue any stock or other equity securities except to our subsidiaries or to our employee benefit plans;
•conduct any business other than the business of enterprise software and related businesses;
•create, incur, assume or permit to exist any indebtedness or guarantee any indebtedness in excess of $100 million;
•make any loan to or purchase any debt securities of any person in excess of $50 million;
•take any actions to dissolve, liquidate or wind-up our company;
•declare dividends on our stock;
•redeem, purchase or otherwise acquire or retire for value any equity securities of the company except repurchases from employees, officers, directors or other service providers upon termination of employment or through the exercise of any right of first refusal;
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•enter into any joint venture or any exclusive or exclusionary arrangement with a third party; and
•amend, terminate or adopt any provision inconsistent with certain provisions of our amended and restated certificate of incorporation or amended and restated bylaws.
If SAP does not provide any requisite consent allowing us to conduct such activities when requested, we will not be able to conduct such activities and, as a result, our business and our operating results may be harmed.
SAP’s voting control and its additional rights described above may discourage transactions involving a change of control of us, including transactions in which holders of our Class A common stock might otherwise receive a premium for their shares over the then-current market price. SAP is not prohibited from selling a controlling interest in us to a third party and may do so without the approval of the holders of Class A common stock and without providing for a purchase of the shares of Class A common stock. Accordingly, the shares of Class A common stock may be worth less than they would be if SAP did not maintain voting control over us or have the additional rights described above.
SAP’s interests and objectives as a stockholder may not align with, or may even directly conflict with, the interests and objectives of holders of our Class A common stock. For example, SAP may be more or less interested in us entering into a transaction or conducting an activity due to the impact such transaction or activity may have on SAP as a company, independent of us. In such instances, SAP may exercise its control over us in a way that is beneficial to SAP, and holders of our Class A common stock will not be able to affect the outcome so long as SAP continues to hold a majority of the shareholder votes.
In the event SAP is acquired or otherwise undergoes a change of control, any acquiror or successor will be entitled to exercise the voting control and contractual rights of SAP, and may do so in a manner that could vary significantly from that of SAP.
By becoming a stockholder in our company, holders of Class A common stock are deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation and the stockholders’ agreement with respect to the limitations that are described above.
Our business and that of SAP overlap, and SAP is not prohibited from competing with us, which could reduce our market share.
SAP and we are both software companies providing products that help companies succeed. There can be no assurance that SAP will not engage in increased competition with us in the future. In addition, the intellectual property matters agreement that we have entered into with SAP provide SAP the right to use our intellectual property, which, subject to limitations, it may use to produce certain products that compete with ours. SAP’s rights in this regard extend to its majority-owned subsidiaries, which could include joint ventures where SAP may hold a majority position and one or more of our competitors may hold minority positions.
SAP could assert control over us in a manner which could impede our growth or our ability to enter new markets or otherwise adversely affect our business. Further, SAP could utilize its control over us to cause us to take or refrain from taking certain actions, including entering into relationships with channel, technology and other marketing partners, enforcing our intellectual property rights or pursuing corporate opportunities or product development initiatives that could adversely affect our competitive position, including our competitive position relative to that of SAP in markets where we compete with them. In addition, SAP maintains relationships with certain of our competitors, which SAP or those competitors could use in ways that could adversely affect our competitive position. If any of these scenarios were to materialize, our market share could be reduced, which could have an adverse impact on our results of operations.
SAP’s competition in certain markets may affect our ability to build and maintain relationships with partners, suppliers, and customers.
Our existing and potential relationships with partners, suppliers, and customers may be affected by our relationship with SAP. We partner with, purchase from, and sell to a number of companies that compete with SAP.
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SAP’s majority ownership in us might affect our ability to develop and maintain relationships with these companies, including because SAP may require us to limit our relationships with them or not work with them at all. Likewise, these companies may be less willing or unwilling to develop and maintain relationships with us, and may favor our competitors or may view us as competitors, because of our relationship with SAP.
SAP competes with certain of our significant channel, technology and other marketing partners as well as certain of our customers and suppliers. Pursuant to our amended and restated certificate of incorporation and certain agreements that we have entered into with SAP, SAP may have the ability to impact our relationship with these companies, which could have a material adverse effect on our results of operations or our ability to pursue opportunities which may otherwise be available to us.
Our historical financial information as a business segment of SAP may not be representative of our results as an independent public company.
The historical financial information we have included in this Annual Report on Form 10-K does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate functions historically provided by SAP, including tax, accounting, treasury, legal, human resources, compliance, insurance, sales, and marketing services. The historical financial information is not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses will be in the future. We have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, standalone company. For additional information, see “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and notes thereto.
We are a smaller company relative to SAP, which could result in increased costs because of a decrease in our purchasing power and difficulty maintaining existing customer relationships and obtaining new customers.
Prior to our initial public offering, we were able to take advantage of SAP’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit and other professional services. While this may continue in some ways with SAP as a majority shareholder, we are a smaller company than SAP, and we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to our initial public offering. As a standalone company, we may be unable to obtain office space, goods, technology, and services at prices or on terms as favorable as those available to us prior to our initial public offering, which could increase our costs and reduce our profitability. Likewise, we may find it more difficult to attract and retain high quality employees as a smaller company than it was as a wholly owned subsidiary of SAP, which could impact our results of operations. Our future success also depends on our ability to develop and maintain relationships with customers. Our reduced relationship with SAP and our smaller relative size may make it more difficult to develop and maintain relationships with customers, which could adversely affect our prospects.
In order to preserve the ability for SAP to distribute its shares of our Class B common stock on a tax-free basis for U.S. federal income tax purposes, we may be prevented from pursuing opportunities to raise capital, to effectuate acquisitions or to provide equity incentives to our employees, which could hurt our ability to grow.
Beneficial ownership of at least 80% of the total voting power and 80% of each class of non-voting capital stock is required in order for SAP to effect a spin-off of Qualtrics that is tax-free for U.S. federal income tax purposes. This applies to both an internal spin-off of Qualtrics by SAP America to SAP SE that is tax-free for U.S. federal income tax purposes, which we refer to as an Internal Distribution, and an external spin-off of Qualtrics by SAP SE that is tax-free for U.S. federal income tax purposes, which we refer to as an External Distribution with any of an Internal Distribution or an External Distribution, being referred to as a Distribution. SAP has advised us that it does not have any present intention or plans to undertake any Distribution. However, SAP currently intends to preserve its ability to engage in an Internal Distribution or an External Distribution following an Internal Distribution. We have agreed that we will not knowingly take or fail to take any action that could reasonably be expected to preclude
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SAP’s ability to undertake a Distribution. Additionally, under our amended and restated certificate of incorporation and the stockholders’ agreement, until such time as SAP ceases to own at least 20% or more of the outstanding shares of our common stock, we must obtain the consent of SAP as the holder of our Class B common stock to issue stock or other equity securities except to our subsidiaries or to our employee benefit plans. SAP’s intention to retain its ability to effectuate a Distribution may cause SAP to not consent to such stock or securities issuances. This could cause us to forgo capital raising or acquisition opportunities that would otherwise be available to us. As a result, we may be precluded from pursuing certain growth initiatives.
We will be required to indemnify SAP for any taxes imposed on SAP related to our status as a “controlled foreign corporation” or “passive foreign investment company” for German tax purposes that are attributable to SAP’s ownership of us, which may prevent us from pursuing certain strategic, internal restructuring or financing transactions or taking other actions, that would otherwise be beneficial to us.
We (including certain of our subsidiaries) are treated as a “controlled foreign corporation” with respect to SAP for German tax purposes. Further, in the event that we cease to be treated as such a controlled foreign corporation, we (including certain of our subsidiaries) may be treated as a “passive foreign investment company” with respect to SAP for German tax purposes. As a result, SAP may be subject to German taxation, which we refer to as CFC/PFIC Taxes, on certain of our income regardless of whether such income is received by SAP. The tax sharing agreement with SAP provides that we will be required to indemnify SAP for any CFC/PFIC Taxes imposed on SAP that are attributable to SAP’s ownership of us. Prior to entering into any agreement or engaging in any transaction, we intend to evaluate whether, and to what extent, such agreement or transaction would subject SAP to CFC/PFIC Taxes for which we would be responsible under the tax sharing agreement. We may be discouraged from taking any such action that could reasonably be expected to subject SAP to CFC/PFIC Taxes. Further, we cannot predict any future changes to the German tax rules governing controlled foreign corporations or passive foreign investment companies. As a result, this indemnification obligation could cause us to forgo certain strategic, internal restructuring or financing transactions or other actions, that would otherwise be beneficial to us.
Third parties may seek to hold us responsible for liabilities of SAP, which could result in a decrease in our income.
Third parties may seek to hold us responsible for SAP’s liabilities. Likewise, our relationship with SAP, as a much larger company and our majority shareholder, may make us more of a target for litigation than we otherwise would be on our own. Under our master transaction agreement with SAP, we agreed to indemnify SAP for claims and losses relating to liabilities related to our business and not related to SAP’s business, and SAP will indemnify us for claims and losses relating to liabilities related to SAP’s business and not related to our business. However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure you that we will be able to recover the full amount of our losses from SAP.
Although we have entered into a tax sharing agreement with SAP under which our tax liabilities generally will be determined as if we were not part of any consolidated, combined or unitary tax group that includes SAP and/or any of its subsidiaries, we nonetheless could be held liable for the tax liabilities of other members of these groups.
Since the SAP Acquisition we have been, and expect to continue to be, included in SAP America’s consolidated group for U.S. federal income tax purposes, which we refer to as a U.S. Consolidated Group, as well as in certain other consolidated, combined or unitary groups that include SAP SE or SAP America and/or certain of their subsidiaries, any such group being referred to as a SAP Tax Group. Pursuant to the tax sharing agreement with SAP, SAP will file with the relevant tax authority with respect to a SAP Tax Group, and, for taxable periods beginning after December 31, 2020, we will make tax sharing payments to SAP. The amount of our tax sharing payments with respect to SAP America’s U.S. Consolidated Group will be determined, subject to certain adjustments (including with respect to the use of tax attribute carryforwards), as if we and each of our subsidiaries included in SAP America’s U.S. Consolidated Group filed our own U.S. federal consolidated income tax return for the relevant taxable period. The amount of a tax sharing payment with respect to SAP Tax Groups relating to U.S. state or local income taxes will be calculated using certain simplifying conventions.
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We are included in SAP America’s U.S. Consolidated Group so long as SAP America owns at least 80% of the total voting power and value of our outstanding stock. Each member of a U.S. Consolidated Group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or non-U.S. income tax purposes is jointly and severally liable for the state, local or non-U.S. income tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in a SAP Tax Group, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group.
Our inability to maintain a strong relationship with SAP, or to resolve favorably any disputes that may arise between us and SAP, could result in a significant reduction of our revenue.
Maintaining a strong relationship with SAP and its management team will be important to our success for at least as long as SAP remains a majority shareholder. Disputes may arise between SAP and us in a number of areas relating to our ongoing relationship, including:
•our strategy, direction, and objectives as a business;
•labor, tax, employee benefit, indemnification and other matters arising from our separation from SAP;
•employee retention and recruiting;
•business combinations involving us;
•our ability to engage in activities with certain customers, suppliers, and partners;
•sales or dispositions by SAP of all or any portion of its ownership interest in us;
•the nature, quality, and pricing of services SAP has agreed to provide us;
•business opportunities that may be attractive to both SAP and us; and
•product or technology development or marketing activities which may require the consent of SAP.
We may not be able to resolve any potential conflicts between us and SAP. Assuming we are able to resolve such a potential conflict, we intend for such resolution to be comparable to the resolution that we would reach with an unaffiliated party. However, the resolution that we actually reach may be less favorable than if we were dealing with an unaffiliated party.
The agreements we have entered into with SAP may be amended upon agreement between the parties. While we are controlled by SAP, we may not have the leverage to negotiate agreements or amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
The arrangement we made with SAP in connection with our IPO may not be adequate and could harm our operation and performance.
We are the first and only subsidiary of SAP to conduct an initial public offering. We have made various transition arrangements with SAP. However, given the rare structure of the transaction and lack of precedents, we cannot be certain that such arrangements will fully and adequately encompass all of our needs as a standalone company. If the arrangements we have made with SAP are not comprehensive enough to meet our needs as a standalone company, our operation and financial performance may be adversely impacted.
The agreements we have put in place with SAP were entered into while we are a majority-owned subsidiary of SAP with relatively little negotiating power. The agreements were not negotiated at arm’s length and contain terms that we would not have agreed to with an independent third party. For example, we are providing SAP an irrevocable, royalty-free license to all of our patents and certain other intellectual property that will remain in place perpetually, even after SAP is no longer a majority shareholder. As another example, SAP does not give us the ability to control the investigation, negotiation, and settlement of certain government investigations but requires us
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to pay for all expenses associated therewith. These and other terms of our agreements with SAP may put us at a disadvantage relative to our competitors and peer companies and could adversely impact our operations and financial performance.
We cannot know how the market will react over time to our unique arrangements with SAP or how those arrangements will develop if our relationship with SAP evolves. We are making careful preparation for the separation from SAP, but due to the unique structure we are employing, there may be many foreseeable and unforeseeable adverse effects on us if the expected benefits of our arrangements with SAP do not realize.
Some of our directors and executive officers own cash-settled restricted stock units that fluctuate in accordance with the value of SAP’s share price or hold management positions with SAP, which could cause conflicts of interest that could result in us not acting on opportunities we otherwise may have.
Some of our directors and executive officers own cash-settled restricted stock units that fluctuate in accordance with the value of SAP’s share price. In addition, some of our directors are executive officers and/or directors of SAP. Ownership of cash-settled restricted stock units that fluctuate in accordance with the value of SAP’s share price by our directors and officers and the presence of executive officers or directors of SAP on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and SAP that could have different implications for SAP than they do for us. Provisions of our amended and restated certificate of incorporation and the stockholders’ agreement address corporate opportunities that are presented to our directors or officers that are also directors or officers of SAP. We cannot assure you that the provisions in our amended and restated certificate of incorporation will adequately address potential conflicts of interest, that potential conflicts of interest will be resolved in our favor or that we will be able to take advantage of corporate opportunities presented to individuals who are officers or directors of both us and SAP. As a result, we may be precluded from pursuing certain growth initiatives, which could adversely affect our business.
SAP’s ability to control our board of directors and company may make it difficult for us to recruit high-quality independent directors and employees.
So long as SAP beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of outstanding voting stock, SAP can effectively control and direct our board of directors and our company generally. Further, the interests of SAP and our other stockholders may diverge. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors or become our employees may decline.
We are a “controlled company” within the meaning of the corporate governance rules of Nasdaq and, as a result, rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
SAP owns more than 50% of the total voting power of our common shares and we are a “controlled company” within the meaning of the corporate governance rules of Nasdaq. As a controlled company, certain exemptions under the Nasdaq standards free us from the obligation to comply with certain Nasdaq corporate governance requirements, including the requirements:
•that a majority of our board of directors consists of independent directors;
•that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
•that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
•for an annual performance evaluation of the nominating and governance committee and compensation committee.
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As a result of our use of the “controlled company” exemptions, holders of our Class A common stock do not have the same protection afforded to stockholders of companies that are subject to all of the corporate governance rules of Nasdaq.
Risks Related to Ownership of Our Class A Common Stock
Our stock price may fluctuate significantly.
The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our results of operations;
•the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
•failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings changes by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•media reports and coverage of our operations, industry, employees, and company;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•price and volume fluctuations in the overall stock market;
•trends and factors in the economy generally, both in the U.S. and globally;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
•announced or completed acquisitions of businesses or technologies by us or our competitors;
•developments or disputes concerning our intellectual property or our solutions, or third-party proprietary rights;
•new laws or regulations, new interpretations of existing laws, or the new application of existing regulations to our business;
•any major change in our board of directors or management;
•any actions or conduct by our employees, directors, or management that could impact our reputation;
•additional Class A common stock being sold into the market by us or our existing stockholders or the anticipation of such sales;
•changes in operating performance and stock market valuations of technology companies in our industry;
•lawsuits threatened or filed against us; and
•other events or factors, including those resulting from war, incidents of terrorism, disease, global pandemics such as COVID-19 or responses to these events.
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In addition, the stock markets, and in particular the market on which our Class A common stock will be listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from operating our business, and harm our business, results of operations, and financial condition.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our Class A common stock could decline.
The trading market for our Class A common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our results of operations fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our stock price and trading volume to decline.
Substantial future sales of our Class A common stock could cause the market price of our Class A common stock to decline.
The market price of our Class A common stock could decline as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers, and significant stockholders, a large number of our Class A common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. As of March 5, 2021, we had a total of 88,066,422 shares outstanding of Class A common stock and 423,170,610 shares outstanding of Class B common stock, all of which are owned by SAP. Shares of our Class A common stock received by our employees (including our executive officers) upon vesting of equity awards received in the exchange offer completed in January 2021 will be freely tradable upon issuance, subject to compliance with Rule 144, as applicable, and are not subject to any lock-up restriction. Shares of Class A common stock issued to Q II, or to be issued to Silver Lake, are or will be, respectively, deemed “restricted securities” as defined in Rule 144 under the Securities Act and, pursuant to their respective Class A common stock purchase agreements, each of Q II and Silver Lake has agreed with us not to sell or transfer such shares for a period of 12 months and 24 months, respectively, after the effectiveness of our initial public offering registration statement. The remaining outstanding shares of our Class A and all of our Class B common stock will be deemed “restricted securities” as defined in Rule 144. These restricted securities, and the shares of Class A common stock into which the outstanding shares of our Class B common stock are convertible, may be sold in the public market only if they are registered or if they qualify for an exemption from registration under the Securities Act.
Sales of our Class A common stock as these restrictions end may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our Class A common stock to fall and make it more difficult for you to sell our Class A common stock.
We have entered into a stockholders’ agreement with SAP, Q II, LLC (“Q II”) and Silver Lake Technology Management, LLC (“Silver Lake”) which, among other things, provide for specified registration rights relating to the shares of our Class A common stock and Class B common stock owned by SAP, Q II and Silver Lake. Registration of those shares under the Securities Act would permit SAP, Q II, Silver Lake and their permitted transferees registration rights agreement to sell their respective shares into the public market.
We will be obligated to pay cash to settle any Qualtrics Rights or SAP RSUs that were not tendered in the January 2021 exchange offer.
In January 2021, we conducted a voluntary exchange offer pursuant to which we offered eligible employees, including our executive officers, the ability to exchange their existing Qualtrics Rights and SAP RSUs for awards with underlying shares of our Class A common stock. According to the existing award terms, upon vesting we will be obligated to pay cash to settle any Qualtrics Rights and SAP RSUs that were not tendered in the exchange offer.
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While the dividend we paid to SAP America in the form of promissory note 1 (as defined herein) was reduced by an amount equal to the cash required to settle any outstanding Qualtrics Rights and SAP RSUs based on the estimated liabilities for such awards at the expiration of the exchange offer, such dividend and promissory note 1 will not be further reduced to reflect any increase in such liabilities subsequent to the expiration of the exchange offer. For example, the cash liabilities for such awards may increase if SAP’s share price increases following the expiration of the exchange offer.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company,” which could adversely affect our business, financial condition, and results of operations.
As a public company, and particularly after we cease to be an “emerging growth company,” we will incur greater legal, accounting, and other expenses than we incurred as a private company. We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the rules and regulations of Nasdaq. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made, and will continue to make, some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current board of directors, and limit the market price of our Class A common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws will have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, if such action occurs after SAP ceases to be the beneficial owner of a majority of votes entitled to be cast by the holders of Class A common stock and the holders of Class B common stock, voting together as a single class, such date being referred to as the Written Consent Threshold Date;
•until the Written Consent Threshold Date, allow our stockholders to act by written consent, without a meeting and without prior notice;
•specify that special meetings of our stockholders may only be called by (1) SAP, until the Written Consent Threshold Date, (2) our Executive Chair or Chief Executive Officer or (3) a majority of directors then in office. No business other than that stated in the notice of a special meeting may be transacted at such special meetings;
•provide for a dual-class common stock structure in which holders of our Class B common stock have the ability to control the outcome of certain matters requiring stockholder approval, even if they own significantly less than a majority of the aggregate outstanding shares of our common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
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•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•prohibit cumulative voting;
•provide that any vacancy on the board of directors that results from an increase in the number of directors may be filled only by a majority of the board of directors then in office, provided that a quorum is present, and any other vacancy occurring in the board of directors may be filled only by a majority of directors then in office, even if less than a quorum, or by a sole remaining director. However, until the Written Consent Threshold Date, any vacancy caused by the removal of a director by our stockholders may be filled only by our stockholders;
•require that certain provisions of our amended and restated certificate of incorporation, including those relating to (i) corporate opportunities and conflicts of interest between us and SAP, (ii) the consent of SAP as the holder of our Class B common stock, (iii) our amended and restated bylaws, (iv) our board of directors and (v) the indemnification of our directors and officers, may be amended by the affirmative vote of at least 80% of the votes entitled to be cast thereon subject to the rights of holders of our Class B common stock to withhold their consent to the amendment, of the provisions of our amended and restated certificate of incorporation relating to corporate opportunities and conflicts of interest between our company and SAP. All other provisions of our amended and restated certificate of incorporation may be amended by the affirmative vote of a majority of the votes entitled to be cast thereon; and
•allow our board of directors to amend, supplement or repeal our amended and restated bylaws upon the vote of a majority of the board of directors. Our amended and restated certificate of incorporation will provide that, after the Written Consent Threshold Date, the sections of our amended and restated bylaws related to the removal of directors and the required advance notice related to stockholder proposals and nomination of directors by stockholders may only be amended by the affirmative vote of shares representing at least 80% of the votes entitled to be cast by the outstanding common stock, voting as a single class, subject to any voting rights granted to any holders of any preferred stock.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, or the DGCL, which imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our outstanding common stock. Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control or changes in our management could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our Class A common stock.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees or our stockholders to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provisions of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision. Our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act; provided, however, that our stockholders cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and
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regulations thereunder. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the choice of forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.
We do not expect to declare dividends in the foreseeable future.
We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price, which may never occur.
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.
We are permitted to take advantage of these provisions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of our IPO.
We may choose to take advantage of some but not all of these reduced reporting requirements. If we take advantage of any of these reduced reporting requirements in future filings, the information that we provide our security holders may be different than the information you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions.
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Risks Related to Our Organizational Structure
Our principal asset is our interest in Qualtrics, LLC, and we are, and expect to continue to be, dependent upon the results of operations and cash flows of Qualtrics, LLC and its consolidated subsidiaries and distributions we receive from Qualtrics, LLC.
Qualtrics International Inc. is, and we expect to continue to be, a holding company with no material assets other than our ownership of the capital stock of Qualtrics, LLC and other subsidiaries, which we control. As such, Qualtrics International Inc. has no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the results of operations and cash flows of Qualtrics, LLC and other subsidiaries, and distributions we receive therefrom. There can be no assurance that our direct and indirect subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in any future debt instruments, will permit such distributions. In addition, in the event that the board of directors and stockholders of Qualtrics International Inc. were to approve a sale of all of our direct and indirect interests in Qualtrics, LLC and other subsidiaries, the equity interest of the holders of our common stock would be in a holding company with no material assets other than those assets and other consideration received in such transaction.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have co-headquarters in Provo, Utah, and Seattle, Washington consisting of approximately 165,000 square feet of space pursuant to a lease that expires in 2030 and approximately 275,000 square feet of space pursuant to a lease that expires in 2034, respectively. We maintain additional offices in multiple locations in the United States and internationally in Australia, Canada, France, Germany, Ireland, Japan, the Netherlands, Poland, Singapore, Spain Sweden, and the United Kingdom. We lease all of our facilities, except that we own one office building in Provo, Utah consisting of approximately 42,000 square feet. In a few instances, we occupy space in SAP’s offices - notably but not exclusively in New York City and Toronto. We intend to procure additional space in the future as we continue to add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
Item 3. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. 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.
For information on legal proceedings, refer to Note 9. Commitments and Contingencies--Legal Matters in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosure
Not applicable.
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Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Our Class A Common Stock
Our Class A common stock began trading on Nasdaq under the symbol “XM” on January 28, 2021. Prior to that, there was no public trading market for our Class A common stock. Our Class B common stock is not listed or traded on any stock exchange.
Holders of Record
As of March 5, 2021, there were 3 registered stockholders of record of our Class A common stock, and 1 holder of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders
Dividend Policy
In connection with our initial public offering, we declared a $2,392 million dividend on our common stock. The dividend was payable to holders of our common stock as of January 28, 2021, the date of effectiveness of the initial public offering, (which did not include investors purchasing shares of our Class A common stock in the initial public offering). SAP America received the dividend in the form of two promissory notes, which we refer to as “Promissory note 1” and “Promissory note 2.” Q II waived its right to receive the dividend.
We do not intend to pay cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and the consent of the holders of our Class B common stock pursuant to our amended and restated certificate of incorporation, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. Holders of our Class A common stock and our Class B common stock will share equally on a per share basis in any dividend declared on our common stock by our board of directors.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference in our 2021 Proxy Statement to be filed with the SEC within 120 days of the year ended December 31, 2020.
Recent Sales of Unregistered Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On December 8, 2020, Q II, an entity controlled by Ryan Smith, agreed to purchase 6,000,000 shares of our Class A common stock, at $20.00 per share for an aggregate purchase price of $120 million. This transaction, which we refer to as the Q II investment, was completed on December 21, 2020.
On December 23, 2020, funds affiliated with Silver Lake Technology Management, L.L.C., or Silver Lake, agreed to purchase $550 million of shares of our Class A common stock, comprising (a) 15,018,484 shares at $21.64 per share and (b) $225 million of shares at the initial public offering price, in a concurrent private placement transaction, which we refer to as the Silver Lake investment. This transaction was completed on January 28, 2021.
Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of the securities in each of these transactions represented their intentions to acquire
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the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed on the share certificates issued in these transactions.
Use of Proceeds
On February 1, 2021, we completed an IPO, in which we issued and sold 59,449,903 shares of our common stock at a public offering price of $30.00 per share, for an aggregate offering price of $1,783.5 million. All shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-251767), which was declared effective on January 28, 2021. We received net proceeds from the IPO of approximately $1,688.3 million, after deducting the underwriting discounts and commissions of $89.2 million and estimated offering related expenses of $6.0 million.
To date, we have used the net proceeds we received from the IPO to repay the intercompany indebtedness to SAP. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 28, 2021 pursuant to Rule 424(b)(4).
Issuer Purchases of Equity Securities
None.
Item 6. Selected Consolidated Financial and Other Data
Not applicable.
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Item 7. 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 consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We created the first experience management platform to manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for Experience Management. The Qualtrics Experience Management Platform, or Qualtrics XM, is a system of action that helps companies design and improve the experiences they provide to their many constituents across these four core experiences.
We have more than 13,500 customers, including 85% of the Fortune 100 as of December 31, 2020. Our revenue was $763.5 million, $591.2 million, and $401.9 million for the years ended December 31, 2020, 2019, and 2018, respectively, representing year-over-year growth of 29% and 47%, respectively. For the years ended December 31, 2020, 2019, and 2018, our net loss was $272.5 million, $1,007.6 million, and $37.3 million, respectively. The results of our operations for the years ended December 31, 2020, 2019, and 2018 were impacted by equity and cash settled stock-based compensation expense and advisory and legal costs related to the 2018 abandoned IPO and the SAP Acquisition.
We generate revenue by selling subscriptions to our XM Platform and integrated solutions, as well as professional services. Over 99% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised over 75% of our total revenue for the year ended December 31, 2020. We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 2% of revenue in 2020, and our largest industries by annual recurring revenue, or ARR, as of December 31, 2020 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.
Subsequent Events
On February 1, 2021, we completed an IPO, in which we issued and sold 59,449,903 shares of our common stock at a public offering price of $30.00 per share. We received net proceeds of approximately $1,688 million, after deducting the underwriting discounts and commissions of $89.2 million and offering expenses of $6 million. We used the net proceeds from the IPO to repay the intercompany indebtedness to SAP.
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On December 23, 2020, Silver Lake Partners VI DE (AIV), L.P. (“Silver Lake”) agreed to purchase $550 million of shares of our Class A common stock, comprising (a) 15,018,484 shares at $21.64 per share and (b) $225 million of shares at the initial public offering price of $30 per share, in a concurrent private placement transaction (the “Silver Lake investment”). On February 1, 2021, we closed our private placement transaction with Silver Lake.
For a description of subsequent events, see Item 8 of Part II, Financial Statements and Supplementary Data - Note 17, “Subsequent Events.”
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. As of December 31, 2020, we had more than 13,500 customers, including 85% of the Fortune 100. 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.
We continue to increase the number of customers who have entered into larger subscriptions with us. We had 1,338 customers with ARR of $100,000 or more as of December 31, 2020, increased from 1,026 and 720 as of December 31, 2019 and 2018, respectively. Further, as of December 31, 2020, we had 74 customers with ARR of $1 million or more, up from 43 and 27 as of December 31, 2019 and 2018, respectively. 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.
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 28%, 26%, and 23% of our total revenue in the years ended December 31, 2020, 2019, and 2018. 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 27 sales offices in countries around the globe.
We continue to evolve our technology to ensure that we are best serving our customers’ needs. We believe this will lead to continued increased retention and positive customer referrals that will continue to generate expansion within current customer organizations and business from new customers. Since 2015, we have established offices in Seattle and Poland to expand our engineering headcount. We continue to invest in research and development to drive product innovation and development.
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Strategic Partnerships
In 2018, we announced the launch of QPN. Since then, we have built out our partner network to include over 200 global member companies partnering with us on our platform to help drive breakthrough business outcomes for joint customers. Since the SAP Acquisition in 2019, we have also developed joint go-to-market and product integrations with SAP. We expect our partnerships to extend our sales reach and provide implementation leverage both domestically and internationally, as well as product and technology integrations that will accelerate our product roadmap.
Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Large Customers
We define our large customers as those spending more than $100,000 in ARR on our XM Platform. We believe that our ability to increase the number of large customers is an indicator of our market penetration, strategic demand for our platform, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and its broad range of capabilities, coupled with the mainstream adoption of cloud-based technology, has expanded the diversity of our large customer base to include organizations of different sizes across virtually all industries.
| Growth Rate | |||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Large customers | 1,338 | 1,026 | 30 | % | 43 | % | |||||||||||||||||
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 December 31, 2020, our net retention rate was 120%. Our net retention rate was 125% and 122% as of December 31, 2019 and 2018, respectively.
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
Since the SAP Acquisition in January 2019 and until the sale of 6,000,000 shares of our Class A common stock to Q II, we have operated as a wholly owned subsidiary of SAP. Accordingly, our financial results for the year-ended December 31, 2019 differ in comparison to the year-ended December 31, 2018 primarily with respect to sales and marketing expenses and equity and cash settled stock-based compensation expense.
During the year ended December 31, 2020 and 2019, we recorded $19.2 million and $15.2 million, respectively, of sales and marketing costs incurred by SAP for our indirect benefit, such as salaries and benefits of SAP’s sales staff. During the year ended December 31, 2020 and 2019, these expenses were partially offset by $20.2 million and
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$8.7 million in charges to SAP for indirect benefits we provided, such as salaries and benefits of Qualtrics’ sales staff to support SAP. We expect these indirect benefits and the related costs 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.
In 2020 we recorded $224.0 million in equity and cash settled stock-based compensation expense compared to $876.2 million and $4.6 million in 2019 and 2018, respectively. The increase from 2018 to 2019 was due to performance based awards that were recognized as a result of the SAP Acquisition and the modification of unvested awards, at the time of the SAP Acquisition, to liability-classified awards to be settled in cash, which resulted in mark-to-market accounting for these awards. The decrease from 2019 to 2020 was primarily due to the timing of vesting of liability-classified awards and the decrease in SAP’s stock price.
Our 2020 stock-based compensation expense of $224.0 million consisted entirely of liability-classified awards. We settled $388.6 million of liability-classified awards in cash in 2020. Our 2019 stock-based compensation expense of $876.2 million consisted of $185.8 million of equity-classified awards recognized as a result of the SAP Acquisition and $690.4 million of liability-classified awards, of which $312.8 million were settled in cash in 2019. Our 2018 stock-based compensation expense of $4.6 million consisted entirely of equity-classified awards.
As a result of this increase in equity and cash settled stock-based compensation, our cost of revenue, research and development, sales and marketing, and general and administrative costs increased significantly in absolute dollars and as a percentage of revenue during the year ended 2019 compared to 2018. These changes are described in additional detail within our results of operations.
SAP Segment Reporting
Since the SAP Acquisition, certain of our financial results have been presented as an operating segment within SAP’s publicly reported financial results. These Euro-reported financial results are prepared under International Financial Reporting Standards, or IFRS, and presented on a non-IFRS basis. The SAP segment results differ from our standalone financial results primarily due to: differences in reporting currency, differences between IFRS and GAAP, differences in the reporting of certain related party transactions between Qualtrics and SAP, SAP’s reporting of expenses related to certain corporate overhead functions, and differences in the reporting related to the SAP Acquisition.
Response to COVID-19
In response to the COVID-19 pandemic, we have taken broad actions to mitigate the impact of this public health crisis on our business. In response, we have 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 a significant disruption to how we operate our business. 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 or 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, collections of accounts receivable, our IT and other expenses, 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. Moreover, we have seen a reduction in certain operating expenses due to reduced business travel, deferred hiring for some positions, and the virtualization or cancellation of
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customer and employee events. At our virtual event Work Different this year, we explored how successful organizations are listening to and taking action on the feedback from their customers and employees to reimagine the future of work. 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, 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 with refund. We primarily bill in advance for our annual contracts and annually in advance for our multi-year contracts. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Subscription revenue as a percentage of total revenue may fluctuate period to period.
Professional services and other revenue consists primarily of research services, implementation services, and engineering services. Research services revenue is recognized upon completion of the project. Our agreements generally cannot be canceled with refund. We typically bill in advance for research services projects, with a number of customers purchasing annual retainers to fund future projects. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Implementation services and engineering services include fees associated with new and expanding customers requesting implementation, integration, customization, consulting, and other services. We price these services on a fixed fee basis. Our agreements generally cannot be canceled with 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
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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, including our X4 Summit, lead generation fees, indirect benefits received from SAP net of indirect benefits we provide to SAP, and allocated overhead. Sales commissions earned by our sales team and the related payroll taxes, that we consider to be incremental and recoverable costs of obtaining a contract with an organization, are deferred and amortized over an estimated period of benefit of five years.
We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns. Excluding the impact of equity and cash settled stock-based compensation expense, we expect that sales and marketing expenses will increase in absolute dollars in future periods; however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
General and administrative. Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people operations, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support our growth as well as our transition to being a publicly traded company. Excluding the impact of equity and cash settled stock-based compensation expense, we expect that general and administrative expenses will increase in absolute dollars in future periods. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Other non-operating income (expense), net
Other non-operating income (expense), net consists of other non-operating gains or losses, including those related to interest income and foreign currency transaction gains and losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes related to the U.S. and other foreign jurisdictions in which we conduct business. We maintain a full valuation allowance against our U.S. deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Our effective tax rate is affected by tax rates in 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
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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. 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, actual transactions included in the consolidated financial statements of SAP may not be included in our separate consolidated financial statements. Similarly, the tax treatment of certain items reflected in our consolidated financial statements may not be reflected in the consolidated financial statements and tax returns of SAP. Therefore, such items as net operating losses, credit carry-forwards and valuation allowances may exist in the standalone financial statements that may or may not exist in SAP’s consolidated financial statements. As such, our income taxes as presented in these consolidated financial statements may not be indicative of the income taxes that we will generate in the future.
As described above, we have calculated the income taxes in our consolidated financial statements on a separate return basis. However, we were in actuality included in the consolidated, combined or unitary U.S. federal and state income tax returns with SAP America and its affiliates. As a result, a portion of our net operating loss and credit carryforwards would not be available for our use in future tax periods as the net operating losses, or underlying deductions, and credits have already been partially absorbed by SAP America.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Revenue: | |||||||||||||||||
| Subscription | $ | 575,397 | $ | 430,038 | $ | 295,528 | |||||||||||
| Professional services and other | 188,125 | 161,117 | 106,380 | ||||||||||||||
| Total revenue | 763,522 | 591,155 | 401,908 | ||||||||||||||
Cost of revenue(1)(2): | |||||||||||||||||
| Subscription | 62,671 | 67,982 | 35,785 | ||||||||||||||
| Professional services and other | 135,816 | 117,509 | 66,929 | ||||||||||||||
| Total cost of revenue | 198,487 | 185,491 | 102,714 | ||||||||||||||
| Gross profit | 565,035 | 405,664 | 299,194 | ||||||||||||||
Operating expenses(1)(2): | |||||||||||||||||
| Research and development | 212,795 | 242,124 | 65,925 | ||||||||||||||
| Sales and marketing | 431,794 | 440,325 | 192,142 | ||||||||||||||
| General and administrative | 175,499 | 717,363 | 74,248 | ||||||||||||||
| Total operating expenses | 820,088 | 1,399,812 | 332,315 | ||||||||||||||
| Operating loss | (255,053) | (994,148) | (33,121) | ||||||||||||||
| Other non-operating income (expense), net | (972) | (486) | 169 | ||||||||||||||
| Loss before income taxes | (256,025) | (994,634) | (32,952) | ||||||||||||||
| Provision for income taxes | 16,477 | 12,999 | 4,356 | ||||||||||||||
| Net loss | $ | (272,502) | $ | (1,007,633) | $ | (37,308) | |||||||||||
________________
(1)Includes equity and cash settled stock-based compensation expense, as follows:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cost of subscription revenue | $ | 4,632 | $ | 24,136 | $ | 4 | |||||||||||
| Cost of professional services and other revenue | 6,737 | 17,168 | 144 | ||||||||||||||
| Research and development | 68,355 | 130,809 | 2,228 | ||||||||||||||
| Sales and marketing | 37,877 | 115,581 | 708 | ||||||||||||||
| General and administrative | 106,412 | 588,532 | 1,516 | ||||||||||||||
Total stock-based compensation, including cash settled(a) | $ | 224,013 | $ | 876,226 | $ | 4,600 | |||||||||||
_________________
(a)As a result of the SAP Acquisition, our stock-based compensation expense reflects the recognition of both equity-classified awards and liability-classified awards. Liability-classified awards are settled in cash in accordance with SAP’s employee equity compensation programs. 2020 stock-based compensation expense consisted of $224.0 million of liability-classified awards. During the year ended December 31, 2020 awards of $388.6 million were settled in cash. 2019 stock-based compensation expense consisted of $185.8 million of equity-classified awards that was recognized as a result of the SAP Acquisition, and $690.4 million of liability-classified awards, of which $312.8 million were settled in cash in 2019. 2018 stock-based compensation expense consisted entirely of equity-classified awards. Liability-classified awards are recorded according to mark-to-market accounting.
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(2)Includes amortization of acquired intangible assets as follows:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cost of subscription revenue | $ | 1,062 | $ | 1,160 | $ | 703 | |||||||||||
| Sales and marketing | 204 | 204 | 145 | ||||||||||||||
| General and administrative | 188 | 114 | 201 | ||||||||||||||
| Total amortization of acquired intangible assets | $ | 1,454 | $ | 1,478 | $ | 1,049 | |||||||||||
The following table sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (as a % of revenue) | |||||||||||||||||
| Revenue: | |||||||||||||||||
| Subscription | 75 | 73 | 74 | ||||||||||||||
| Professional services and other | 25 | 27 | 26 | ||||||||||||||
| Total revenue | 100 | % | 100 | % | 100 | % | |||||||||||
| Cost of revenue: | |||||||||||||||||
| Subscription | 8 | 11 | 9 | ||||||||||||||
| Professional services and other | 18 | 20 | 17 | ||||||||||||||
| Total cost of revenue | 26 | 31 | 26 | ||||||||||||||
| Gross profit | 74 | 69 | 74 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 28 | 41 | 16 | ||||||||||||||
| Sales and marketing | 57 | 74 | 48 | ||||||||||||||
| General and administrative | 23 | 121 | 18 | ||||||||||||||
| Total operating expenses | 108 | 236 | 82 | ||||||||||||||
| Operating loss | (34) | (167) | (8) | ||||||||||||||
| Other non-operating income, net | — | — | — | ||||||||||||||
| Loss before income taxes | (34) | (167) | (8) | ||||||||||||||
| Provision for income taxes | 2 | 2 | 1 | ||||||||||||||
| Net loss | (36) | % | (169) | % | (9) | % | |||||||||||
Comparison of the years ended December 31, 2020 and 2019
Revenue
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Subscription revenue | $ | 575,397 | $ | 430,038 | $ | 145,359 | 34 | % | |||||||||||||||
| Professional services and other revenue | 188,125 | 161,117 | $ | 27,008 | 17 | % | |||||||||||||||||
| Total revenue | $ | 763,522 | $ | 591,155 | $ | 172,367 | 29 | % | |||||||||||||||
Subscription revenue increased by $145.4 million, or 34%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. This increase was due primarily to increased demand for our solutions from
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new and existing customers. Of the increase in subscription revenue for the year ended December 31, 2020 compared to the year ended December 31, 2019, approximately $92.0 million was attributable to existing customers and approximately $53.4 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. Pricing changes were not material to the increase in revenue. Professional services and other revenue increased $27.0 million, or 17%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily due to an increase in revenue from large customers, who generally require more services.
Cost of revenue, gross profit, and gross margin
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of subscription revenue | $ | 62,671 | $ | 67,982 | $ | (5,311) | (8) | % | |||||||||||||||
| Cost of professional services and other revenue | 135,816 | 117,509 | 18,307 | 16 | % | ||||||||||||||||||
| Total cost of revenue | 198,487 | 185,491 | 12,996 | 7 | % | ||||||||||||||||||
| Subscription gross profit | 512,726 | 362,056 | 150,670 | 42 | % | ||||||||||||||||||
| Professional services and other gross profit | 52,309 | 43,608 | 8,701 | 20 | % | ||||||||||||||||||
| Total gross profit | $ | 565,035 | $ | 405,664 | $ | 159,371 | 39 | % | |||||||||||||||
| Subscription gross margin | 89 | % | 84 | % | |||||||||||||||||||
| Professional services and other gross margin | 28 | % | 27 | % | |||||||||||||||||||
| Total gross margin | 74 | % | 69 | % | |||||||||||||||||||
Cost of subscription revenue decreased $5.3 million, or 8%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019, while subscription revenue grew 34% over the same period. This decrease was driven by a $19.5 million decrease in stock-based compensation expense primarily due to fluctuations in SAP’s stock price related to liability-classified awards, partially offset by a $6.7 million increase in employee-related costs from headcount growth, a $5.9 million increase in server costs, and a $1.5 million increase in amortization of internal-use software. Cost of professional services and other revenue increased $18.3 million, or 16%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was driven by a $19.2 million increase in employee-related costs from headcount growth and a $11.1 million increase in professional services vendor costs, offset partially by a $10.4 million decrease in stock-based compensation expense and a $1.6 million decrease in travel-related expenses.
Our gross margins increased from 69% during the year ended December 31, 2019 to 74% during the year ended December 31, 2020, due primarily to a decrease in equity and cash settled stock-based compensation expense of $29.9 million, as described above.
Operating Expenses
Research and development
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Research and development | $ | 212,795 | $ | 242,124 | $ | (29,329) | (12) | % | |||||||||||||||
Research and development expenses decreased $29.3 million, or 12%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease was driven by a $62.5 million decrease in stock-
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based compensation expense, partially offset by a $33.8 million increase in employee-related costs from headcount growth as we continue to add to and enhance our products.
Sales and marketing
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 431,794 | $ | 440,325 | $ | (8,531) | (2) | % | |||||||||||||||
Sales and marketing expenses decreased $8.5 million, or 2%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The decrease in sales and marketing was primarily driven by a $77.7 million decrease in stock-based compensation expense and a $9.2 million decrease in travel-related expenses resulting from the COVID-19 pandemic, partially offset by a $75.1 million increase in employee-related costs from headcount growth and a $3.3 million increase in marketing spend.
General and administrative
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| General and administrative | $ | 175,499 | $ | 717,363 | $ | (541,864) | (76) | % | |||||||||||||||
General and administrative expenses decreased $541.9 million, or 76%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The decrease in general and administrative expenses was primarily driven by a $482.1 million decrease in stock-based compensation expense and a $62.7 million decrease in advisory and legal costs related to the SAP acquisition.
Other non-operating income (expense), net
Other non-operating income (expense), net decreased $(0.5) million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This immaterial change for the periods results from immaterial changes in interest income due to differences in average cash balances and interest rates and immaterial changes in foreign currency transactions gains and losses.
Provision for income taxes
Provision for income taxes increased $3.5 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019, due to our growth internationally and increases in tax reserves.
Our effective tax rate decreased to (6.4)% for the year ended December 31, 2020, as compared to (1.3)% for the year ended December 31, 2019. The decrease was primarily driven by differences in our effective tax rate for the respective years, as described below.
Our effective tax rate for the year ended December 31, 2020 was (6.4)%. The difference between the U.S. statutory rate of 21% and our effective tax rate is primarily driven by rate increases due to tax reserves, foreign taxes, and the impact of valuation allowances recorded against current year losses in the United States.
Our effective tax rate for the year ended December 31, 2019 was (1.3)%. The difference between the U.S. statutory rate of 21% and our effective tax rate is primarily driven by rate adjustments due to tax reserves, non-deductible stock compensation, foreign taxes, and the impact of valuation allowances recorded against current year losses in the United States.
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Comparison of the years ended December 31, 2019 and 2018
Revenue
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Subscription revenue | $ | 430,038 | $ | 295,528 | $ | 134,510 | 46 | % | |||||||||||||||
| Professional services and other revenue | 161,117 | 106,380 | 54,737 | 51 | % | ||||||||||||||||||
| Total revenue | $ | 591,155 | $ | 401,908 | $ | 189,247 | 47 | % | |||||||||||||||
Subscription revenue increased by $134.5 million, or 46%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was due primarily to increased demand for our solutions from new and existing customers. Of the increase in subscription revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018, approximately $84.0 million was attributable to existing customers and approximately $50.5 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. Pricing changes were not material to the increase in revenue. Professional services and other revenue increased $54.7 million, or 51%, from the year ended December 31, 2018 to the year ended December 31, 2019. This increase was primarily due to the growth of our research services offering, as well as an increase in revenue from large customers, who generally require more services.
Cost of revenue, gross profit, and gross margin
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of subscription revenue | $ | 67,982 | $ | 35,785 | $ | 32,197 | 90 | % | |||||||||||||||
| Cost of professional services and other revenue | 117,509 | 66,929 | 50,580 | 76 | % | ||||||||||||||||||
| Total cost of revenue | 185,491 | 102,714 | 82,777 | 81 | % | ||||||||||||||||||
| Subscription gross profit | 362,056 | 259,743 | 102,313 | 39 | % | ||||||||||||||||||
| Professional services and other gross profit | 43,608 | 39,451 | 4,157 | 11 | % | ||||||||||||||||||
| Total gross profit | $ | 405,664 | $ | 299,194 | $ | 106,470 | 36 | % | |||||||||||||||
| Subscription gross margin | 84 | % | 88 | % | |||||||||||||||||||
| Professional services and other gross margin | 27 | % | 37 | % | |||||||||||||||||||
| Total gross margin | 69 | % | 74 | % | |||||||||||||||||||
Cost of subscription revenue increased $32.2 million, or 90%, for the year ended December 31, 2019, as compared to the year ended December 31, 2018, while subscription revenue grew 46% over the same period. This increase was driven by a $24.2 million increase in equity and cash settled stock-based compensation expense, a $4.4 million increase in employee-related costs from headcount growth, a $2.5 million increase in amortization of internal-use software, and a $1.1 million increase in server costs. Cost of professional services and other revenue increased $50.6 million, or 76%, for the year ended December 31, 2019, as compared to the year ended December 31, 2018. This increase was driven by a $23.1 million increase in employee-related costs from headcount growth, a $17.0 million increase in equity and cash settled stock-based compensation expense, and a $10.5 million increase in professional services vendor costs.
Our gross margins decreased from 74% in 2018 to 69% in 2019, due primarily to an increase in equity and cash settled stock-based compensation expense of $41.2 million, as described above.
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Operating Expenses
Research and development
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Research and development | 242,124 | 65,925 | $ | 176,199 | 267 | % | |||||||||||||||||
Research and development expenses increased $176.2 million, or 267%, for the year ended December 31, 2019, as compared to the year ended December 31, 2018. This increase was driven by a $128.6 million increase in equity and cash settled stock-based compensation expense, a $39.4 million increase in employee-related costs from headcount growth as we continue to add to and enhance our products, and a $7.1 million increase in allocated overhead costs, partially offset by a $3.2 million increase in capitalized internal-use software.
Sales and marketing
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Sales and marketing | 440,325 | 192,142 | $ | 248,183 | 129 | % | |||||||||||||||||
Sales and marketing expenses increased $248.2 million, or 129%, for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase in sales and marketing was primarily driven by a $114.9 million increase in equity and cash settled stock-based compensation expense, $118.9 million in employee-related costs from headcount growth and sales costs incurred by SAP, including increased sales commission expenses due to increased billings. Additional increases include $14.4 million in marketing campaign expenses.
General and administrative
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| General and administrative | 717,363 | 74,248 | $ | 643,115 | 866 | % | |||||||||||||||||
General and administrative expenses increased $643.1 million, or 866%, for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase in general and administrative expenses was primarily driven by a $587.0 million increase in equity and cash settled stock-based compensation expense, a $35.9 million increase in acquisition-related costs, and a $13.5 million increase in employee-related costs driven by headcount growth to support expansion of the business.
Other non-operating income (expense), net
Other non-operating income (expense), net decreased $0.5 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily due to a decrease in interest income of $0.6 million resulting from lower average cash balances throughout 2019 compared to 2018.
Provision for income taxes
Provision for income taxes increased $8.6 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, due to our growth internationally.
Our effective tax rate increased to (1.3)% for the year ended December 31, 2019, as compared to (13.2)% for the year ended December 31, 2018. The increase was primarily driven by differences in our effective tax rate for the respective years, as described below.
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Our effective tax rate for the year ended December 31, 2019 was (1.3)%. The difference between the U.S. statutory rate of 21% and our effective tax rate is primarily driven by rate adjustments due to tax reserves, non-deductible stock compensation, foreign taxes, and the impact of valuation allowances recorded against current year losses in the United States.
Our effective tax rate for the year ended December 31, 2018 was (13.2)%. The difference between the U.S. statutory rate of 21% and our effective tax rate is primarily driven by rate adjustments due to changes in the valuation allowances recorded against current year losses in the United States, which was partially offset by a rate adjustment due to tax credits.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations data for each of the last eight quarters ended December 31, 2020. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. These quarterly results of operations are not necessarily indicative of our future results of operations that may be expected for any future period.
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | 2019 | 2019 | 2019 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Subscription | $ | 160,397 | $ | 148,259 | $ | 138,476 | $ | 128,265 | $ | 120,476 | $ | 110,497 | $ | 102,453 | $ | 96,612 | |||||||||||||||||||||||||||||||
Professional services and other | 53,169 | 44,590 | 42,567 | 47,799 | 52,331 | 41,484 | 34,379 | 32,923 | |||||||||||||||||||||||||||||||||||||||
| Total revenue | 213,566 | 192,849 | 181,043 | 176,064 | 172,807 | 151,981 | 136,832 | 129,535 | |||||||||||||||||||||||||||||||||||||||
Cost of revenue(1)(2): | |||||||||||||||||||||||||||||||||||||||||||||||
| Subscription | 15,697 | 16,362 | 16,896 | 13,716 | 16,419 | 13,936 | 13,396 | 24,231 | |||||||||||||||||||||||||||||||||||||||
Professional services and other | 35,756 | 32,674 | 33,178 | 34,208 | 36,817 | 29,564 | 27,017 | 24,111 | |||||||||||||||||||||||||||||||||||||||
Total cost of revenue | 51,453 | 49,036 | 50,074 | 47,924 | 53,236 | 43,500 | 40,413 | 48,342 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 162,113 | 143,813 | 130,969 | 128,140 | 119,571 | 108,481 | 96,419 | 81,193 | |||||||||||||||||||||||||||||||||||||||
Operating expenses(1)(2): | |||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 43,810 | 62,065 | 71,431 | 35,489 | 58,658 | 42,110 | 53,376 | 87,980 | |||||||||||||||||||||||||||||||||||||||
Sales and marketing | 109,019 | 103,008 | 112,672 | 107,095 | 112,871 | 93,130 | 97,045 | 137,279 | |||||||||||||||||||||||||||||||||||||||
General and administrative | 20,274 | 60,731 | 72,007 | 22,487 | 93,021 | 59,022 | 137,816 | 427,504 | |||||||||||||||||||||||||||||||||||||||
Total operating expenses | 173,103 | 225,804 | 256,110 | 165,071 | 264,550 | 194,262 | 288,237 | 652,763 | |||||||||||||||||||||||||||||||||||||||
| Operating loss | (10,990) | (81,991) | (125,141) | (36,931) | (144,979) | (85,781) | (191,818) | (571,570) | |||||||||||||||||||||||||||||||||||||||
Other non-operating income (expense), net | (489) | (556) | (412) | 485 | 180 | (413) | (228) | (25) | |||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (11,479) | (82,547) | (125,553) | (36,446) | (144,799) | (86,194) | (192,046) | (571,595) | |||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 2,996 | 3,141 | 1,951 | 8,389 | 2,471 | 4,321 | 2,226 | 3,981 | |||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (14,475) | $ | (85,688) | $ | (127,504) | $ | (44,835) | $ | (147,270) | $ | (90,515) | $ | (194,272) | $ | (575,576) | |||||||||||||||||||||||||||||||
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____________________
(1)Includes stock-based compensation expense as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | 2019 | 2019 | 2019 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of subscription revenue | $ | 823 | $ | 725 | $ | 2,915 | $ | 169 | $ | 3,189 | $ | 2,057 | $ | 3,384 | $ | 15,506 | |||||||||||||||||||||||||||||||
| Cost of professional services and other revenue | 544 | 2,582 | 3,522 | 89 | 3,231 | 3,678 | 5,779 | 4,480 | |||||||||||||||||||||||||||||||||||||||
| Research and development | 5,190 | 23,919 | 37,282 | 1,964 | 23,675 | 12,893 | 26,943 | 67,298 | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 2,944 | 12,086 | 19,064 | 3,783 | 21,493 | 11,625 | 24,732 | 57,731 | |||||||||||||||||||||||||||||||||||||||
| General and administrative | (3,537) | 44,810 | 58,642 | 6,497 | 74,517 | 43,007 | 124,784 | 346,224 | |||||||||||||||||||||||||||||||||||||||
| Total stock-based compensation | $ | 5,964 | $ | 84,122 | $ | 121,425 | $ | 12,502 | $ | 126,105 | $ | 73,260 | $ | 185,622 | $ | 491,239 | |||||||||||||||||||||||||||||||
(2)Includes amortization of acquired intangible assets as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | 2019 | 2019 | 2019 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of subscription revenue | $ | 265 | $ | 265 | $ | 266 | $ | 266 | $ | 282 | $ | 285 | $ | 285 | $ | 308 | |||||||||||||||||||||||||||||||
| Sales and marketing | 51 | 51 | 51 | 51 | 51 | 51 | 51 | 51 | |||||||||||||||||||||||||||||||||||||||
| General and administrative | 47 | 47 | 47 | 47 | 27 | 27 | 28 | 32 | |||||||||||||||||||||||||||||||||||||||
| Total amortization of acquired intangible assets | $ | 363 | $ | 363 | $ | 364 | $ | 364 | $ | 360 | $ | 363 | $ | 364 | $ | 391 | |||||||||||||||||||||||||||||||
Quarterly Revenue Trends
Our revenue increased sequentially in each of the quarters presented primarily due to increases in the number of customers and expansion with existing customers. We generally experience seasonality in billings with our customers, and we typically record a higher percentage of billings in our fourth quarter. However, because we recognize subscription revenue ratably over the terms of our subscription agreements, a substantial portion of the subscription revenue that we report in each period is attributable to the recognition of remaining performance obligations relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new or renewal billings in any one period may not be immediately reflected as subscription revenue for that period. For the three months ended December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, professional services and other revenue decreased as a percentage of total revenue due largely to customer delays in completing research services projects following the COVID-19 pandemic.
Quarterly cost of revenue and gross margin trends
Beginning in 2019, our quarterly subscription cost of revenue fluctuated mainly due to equity and cash settled stock-based compensation expense. Cash settled stock-based compensation expense follows mark-to-market accounting, which results in changes in quarterly periods due to changes in the underlying price of SAP’s stock. Excluding the impacts of stock-based compensation expense, margins have been consistent throughout the quarterly periods shown. Beginning in 2019, our quarterly professional services and other cost of revenue fluctuated mainly due equity and cash settled stock-based compensation expense. Excluding the impacts of stock-based compensation expense, we generally expect our subscription and total gross margin to remain relatively constant in the near term and to increase modestly in the long term as subscription revenue becomes a bigger percentage of our overall revenue. Our subscription and total gross margin may fluctuate from period to period depending on the interplay of all of these factors.
Quarterly operating expense trends
Our quarterly operating expenses fluctuated mainly due to equity and cash settled stock-based compensation expense and advisory and legal costs related to the SAP Acquisition. Excluding the impacts of stock-based
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compensation expense and costs related to the SAP acquisition, our overall total quarterly operating expenses generally increased sequentially in the quarters presented primarily due to headcount growth in connection with the expansion of our business.
Liquidity and Capital Resources
As of December 31, 2020 we had cash and cash equivalents of $203.9 million. Our cash and cash equivalents consist primarily of cash and money market funds. As of December 31, 2020, we had $23.5 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, and settling equity-based awards.
We believe our existing cash and cash equivalents, together with cash provided by operations and funding obligations from SAP, 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 for the settlement of 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. With respect to the funding of tax withholding and remittance obligations related to the settlement of share-based awards, we may use a significant portion of our existing cash, including funds raised in our initial public offering and private placements to Q II and Silver Lake. If we elect not to fully fund tax withholding and remittance obligations through cash or if we are unable to do so, we may choose to sell equity or debt securities, or rely on a combination of these alternatives. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. On December 28, 2020, we initiated a voluntary exchange offer pursuant to which we offered our eligible employees, including our executive officers, the ability to exchange their existing cash-settled Qualtrics Rights and cash-settled SAP RSUs for equity-settled awards with underlying shares of our Class A common stock. Upon completion of our initial public offering on January 28, 2021, 5.3 million Qualtrics Rights and 1.3 million SAP RSU awards were exchanged into 12.8 million Qualtrics RSU awards, significantly reducing our liability-classified stock-based awards liability. 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.
Our cash flow activities were as follows for the periods presented:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Net cash flows provided by (used in) operating activities | $ | (410,722) | $ | (370,904) | $ | 36,404 | |||||||||||
| Net cash used in investing activities | (89,518) | (33,181) | (32,686) | ||||||||||||||
| Net cash flows (used in) provided by financing activities | 660,000 | 329,793 | (531) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,664 | 1,316 | (1,179) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 161,424 | $ | (72,976) | $ | 2,008 | |||||||||||
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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 year ended December 31, 2020, net cash used in operating activities was $410.7 million, which resulted from net loss of $272.5 million, adjusted for $224.0 million in stock-based compensation expense, including cash settled of $388.6 million, additional non-cash charges of $89.0 million and net cash inflow of $62.6 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $26.5 million for depreciation and amortization expense, $32.1 million of amortization of deferred contract acquisition costs and $17.2 million related to the reduction of right-of-use assets from operating leases. The outflow from operating assets and liabilities was primarily due $103.7 million increase in accounts receivable due to billings growth and timing of collections, $111.7 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, and $18.4 million increase in prepaid and other assets, partially offset by an increase of $114.3 million in deferred revenue from advance invoicing in accordance with our customer contracts, $22.3 million aggregate increase in accrued liabilities and accounts payable, and a $24.7 million increase in lease liabilities.
For the year ended December 31, 2019, net cash flows used in operating activities was $370.9 million, which resulted from net loss of $1,007.6 million, adjusted for $876.2 million in stock-based compensation expense, including cash settled of $312.8 million, additional non-cash charges of $42.9 million, net cash inflow of $30.3 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $19.7 million for depreciation and amortization expense, and $19.5 million of amortization of deferred contract acquisition costs. The inflow from operating assets and liabilities was primarily due to an increase of $102.6 million in deferred revenue from advance invoicing in accordance with our revenue contracts, $51.9 million aggregate increase in accrued liabilities and accounts payable, partially offset by $54.3 million increase in accounts receivable due to billings growth and timing of collections, $47.7 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, and $15.7 million increase in prepaid and other assets.
For the year ended December 31, 2018, net cash provided by operating activities was $36.4 million, which resulted from net loss of $37.3 million, adjusted for non-cash charges of $32.9 million and net cash inflow of $40.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $14.8 million for depreciation and amortization expense, $13.4 million of amortization of deferred contract acquisition costs and $4.6 million for equity-classified stock-based compensation expense. The inflow from operating assets and liabilities was primarily due to an increase of $99.1 million in deferred revenue from advance invoicing in accordance with our customer contracts, $29.6 million aggregate increase in accrued liabilities and accounts payable, partially offset by $57.8 million increase in accounts receivable due to billings growth and timing of collections, $27.1 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, and $3.5 million increase in prepaid and other assets.
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 year ended December 31, 2020, 2019, and 2018 of $89.5 million, $33.2 million, and $32.7 millions, respectively, resulted primarily from capital expenditures for our XM Platform and office build-outs and the cash paid for business combinations in 2018.
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Financing activities
Net cash provided by financing activities of $660.0 million during the year ended December 31, 2020 was due to $540.0 million in proceeds from a capital contribution from SAP and $120.0 million and proceeds from the stock purchase agreement with Q II.
Net cash provided by financing activities of $329.8 million during the year ended December 31, 2019 was due to $869.5 million in proceeds from a capital contribution from SAP offset by $539.7 million related to the settlement of equity-based awards.
Net cash used in financing activities of $0.5 million during the year ended December 31, 2018 was primarily due to the repurchase of our class B common stock.
On December 23, 2020, Silver Lake agreed to purchase $550 million of shares of our Class A common stock, comprising (a) 15,018,484 shares of our Class A common stock at $21.64 per share and (b) $225 million of shares of our Class A common stock at the initial public offering price, in a concurrent private placement. Based on our initial public offering price of $30.00, this resulted in a total of 22,518,484 shares of our Class A common stock purchased. The Class A common stock purchase agreement restricts Silver Lake’s right to sell or transfer the shares of our Class A common stock acquired pursuant to the purchase agreement for a period of 24 months after the effectiveness of the initial public offering registration statement. Pursuant to the Silver Lake investment, we granted Silver Lake certain rights under our stockholders’ agreement, including demand registration rights and “piggyback” registration rights with respect to our Class A common stock that may be exercised after the date that is 24 months after the effectiveness of the initial public offering registration statement, subject to cutback provisions. We have also agreed to appoint Egon Durban, a representative of Silver Lake, to our Board upon the closing of the Silver Lake investment.
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:
| Next 12 Months | Thereafter | Total | |||||||||||||||
| As of December 31, 2020 | $ | 645,416 | $ | 498,950 | $ | 1,144,366 | |||||||||||
| As of December 31, 2019 | $ | 434,121 | $ | 208,562 | $ | 642,683 | |||||||||||
| As of December 31, 2018 | $ | 303,275 | $ | 67,662 | $ | 370,937 | |||||||||||
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.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020:
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Operating lease commitments | $ | 322,308 | $ | 26,802 | $ | 52,337 | $ | 54,110 | $ | 189,059 | |||||||||||||||||||
| Non-cancelable purchase obligations | 26,782 | 16,205 | 10,577 | — | — | ||||||||||||||||||||||||
| Total | $ | 349,090 | $ | 43,007 | $ | 62,914 | $ | 54,110 | $ | 189,059 | |||||||||||||||||||
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. Purchase orders issued in the ordinary course of business are not included in the table above, as our purchase orders represent authorizations to purchase rather than binding agreements. Tax contingencies are not included in the table above as the period in which payment is due cannot be determined.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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 Judgments
The preparation of financial statements in conformity with GAAP requires us 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. Our most significant estimates and judgments involve revenue recognition with respect to the determination of the standalone selling prices for our services, valuation of our equity and cash settled stock-based compensation, including the underlying deemed estimated fair value of our common stock, valuation of deferred income tax assets and liabilities, uncertain tax positions, and contingencies and litigation. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue recognition
We recognize revenue from its service/product lines when control is transferred to its customers, in an amount that reflects the consideration we expect 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. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). We account for revenue contracts with customers by applying the requirements of 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
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•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
We derive revenue from two service/product lines:
Subscription Revenue. We generate revenue primarily from sales of subscriptions to access our XM Platform, together with related support services to our 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.
Our subscription contracts generally have annual contractual terms while some have multi-year contractual terms. We generally bill annually in advance with net 30 payment terms. Our agreements generally cannot be canceled with 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, we provide professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.
Identification of a Contract
For accounting purposes, we treat multiple contracts entered into with the same customer as a single contract if they are entered into at or near the same time and are economically interrelated. We do not combine contracts with closing days more than three months apart because we do not consider them being entered into near the same time. Judgment is required in evaluating whether various contracts are interrelated, which includes considerations as to whether they were negotiated as a package with a single commercial objective, whether the amount of consideration on one contract is dependent on the performance of the other contract, or if some or all goods in the contracts are a single performance obligation.
New arrangements with existing customers can be either a new contract or the modification of prior contracts with the customer. Our respective judgment in making this determination considers whether there is a connection between the new arrangement and the pre-existing contracts, whether the goods and services under the new arrangement are highly interrelated with the goods and services sold under prior contracts, and how the goods and services under the new arrangement are priced. In determining whether a change in transaction price represents a contract modification or a change in variable consideration, we examine whether the change in price results from changing the contract or from applying unchanged existing contract provisions.
Identification of Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately, if they are distinct. Typically, the products and services outlined in the Classes of Revenue section qualify as separate performance obligations and the portion of the contractual fee allocated to them is recognized separately. Judgment is required, however, in determining whether a good or service is considered a separate performance obligation. In particular for our professional services and implementation activities, judgment is required to evaluate whether such services significantly integrate, customize, or modify the subscription service to which they relate. In this context, we consider the nature of the services and their volume relative to the volume of the subscription service to which they relate. In general, the implementation services for our subscription services go beyond pure setup activities and qualify as separate performance obligations. Non-distinct goods and services are combined into one distinct bundle of goods and services (combined performance obligation).
In rare instances, customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at standalone selling price, or SSP.
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We apply judgment in determining whether such options provide a material right to the customer that the customer would not receive without entering into that contract (material right options). In this judgment, we consider, for example, whether the options entitle the customer to a discount that exceeds the discount granted for the respective goods or services sold together with the option.
Determination of Transaction Price
We apply judgment in determining the amount to which we expect to be entitled in exchange for transferring promised goods or services to a customer. This includes estimates as to whether and to what extent subsequent concessions or payments may be granted to customers and whether the customer is expected to pay the contractual fees. In this judgment, we consider our history both with the respective customer and more broadly.
If our services do not meet certain service level commitments, certain customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. Historically, we have not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts. Accordingly, any estimated refunds related to these agreements in the consolidated financial statements is not material during the periods presented.
We applied the practical expedient in Topic 606 and did not evaluate contracts of one year or less for the existence of a significant financing component. We determined that no significant financing component existed on our multi-year contracts, as these contracts were structured for purposes other than obtaining financing from customers. Additionally, prices are generally fixed at contract inception; therefore, our contracts do not contain a significant amount of variable consideration.
Allocation of Transaction Price
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine standalone selling prices considering market conditions and based on overall pricing objectives such as observable standalone selling prices, and other factors, including the value of contracts, types of services sold, customer demographics, and the number and types of users within such contracts. We have established a hierarchy to identify the standalone selling prices that we use to allocate the transaction price of a customer contract to the performance obligations in the contract:
•Where standalone selling prices for an offering are observable and reasonably consistent across customers (that is, not highly variable), our standalone selling price estimates are derived from our respective pricing history.
•Where sales prices for an offering are not directly observable or highly variable across customers, we use estimation techniques. For renewable offerings with highly variable pricing, these techniques consider the individual contract’s expected renewal price as far as this price is substantive. Typically, our subscription offerings follow this approach. For our professional and other services, these estimations typically follow a cost-plus-margin approach.
Judgment is required when estimating standalone selling prices. To judge whether the historical pricing of our goods and services is highly variable, we have established thresholds of pricing variability. For judging whether contractual renewal prices are substantive, we have established floor prices that we use as standalone selling prices whenever the contractual renewal prices are below these floor prices. In judging whether contracts are expected to renew at their contractual renewal prices, we rely on our respective renewal history. We review the standalone selling prices periodically or whenever facts and circumstances change to ensure the most objective input parameters available are used.
Recognition of Revenue
Access to our XM Platform represents a series of distinct services as we continually provide access to and fulfill our 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
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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.
Stock-based compensation, including cash settled
Equity Awards
We measure and recognize compensation expense for stock-based payment awards, including restricted stock awards, or RSAs, restricted stock units, or RSUs, and stock options granted to employees and advisors, based on the grant date fair value of the awards. Awards that will be settled in cash are marked-to-market each quarter. The grant date fair value of stock options is estimated using a Black-Scholes option pricing model. The fair value of stock-based compensation for stock options is recognized on a straight-line basis over the period during which services are provided in exchange for the award. The grant date fair value of RSAs and RSUs is estimated based on the fair value of the underlying common stock. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method.
As discussed in detail in Note 12, we issue two types of RSAs, one-tier and two-tier. One-tier RSAs vest solely on a service-based condition. For these awards, we recognize stock-based compensation expense on a straight-line basis over the vesting period. Two-tier RSAs contain both a service-based condition and performance condition, defined as the earlier of (i) an acquisition or change in control of the Company or (ii) upon the occurrence of an initial public offering by the Company. A change in control event and effective registration event are not deemed probable until consummated; accordingly, no expense is recorded related to two-tier RSAs until the performance condition becomes probable of occurring. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring.
As discussed in detail in Note 12, all of our RSUs contain both a service-based condition and performance condition, defined as the earlier of (i) an acquisition or change in control of the Company or (ii) upon the occurrence of an initial public offering by the Company. A change in control event and effective registration event are not deemed probable until consummated; accordingly, no expense is recorded related to RSUs until the performance condition becomes probable of occurring. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring.
With the SAP Acquisition, the performance condition of two-tier RSAs and RSUs was deemed to be met in January 2019.
In conjunction with the SAP Acquisition, under the terms of the acquisition agreement, unvested RSAs, RSUs, and options held by our employees were exchanged into liability-classified, stock-based awards to be settled in cash, or Qualtrics Rights. Approximately $858 million of the purchase price was related to RSAs, RSUs, and options that were to vest after the SAP Acquisition, contingent upon continued service from employees. The price realized by employees for these time-based awards is $35.00 per share, if the award was granted before January 1, 2018 or if the award was originally granted as an option; provided, that the fixed amount will be reduced by the original exercise
75
price for any Qualtrics Rights that were originally granted as options. If the award was granted on or after January 1, 2018, the amount realized is $35.00 per share, adjusted for changes in the five-day average price of SAP stock for the period immediately preceding the close of the SAP Acquisition compared to SAP’s stock price on the vesting date.
Cash Awards
We measure and recognize compensation expense for cash settled stock-based awards based on the fair value of the awards each quarter until settlement. 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. The fair value is estimated based on the fair value of the underlying stock price or some are valued at $35.00. Awards which contained both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring.
After the SAP Acquisition, certain executives and employees were granted SAP RSUs, which are virtual shares representing a contingent right to receive a cash payment determined by the SAP share price and the number of share units that ultimately vest. SAP RSUs have a service-based vesting condition over a three-year period. These awards have a cliff vesting period of one year and continue to vest annually thereafter. We began granting SAP RSUs in March 2019. We recognize compensation expense associated with these RSUs ratably on a straight-line basis over the requisite service period. All awards are paid out in cash upon vesting.
We account for forfeitures as they occur; therefore, equity and cash settled stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 has been calculated based on actual forfeitures in our consolidated statements of operations.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about other recent accounting pronouncements.
Item 7A. 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 $203.9 million as of December 31, 2020. 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
76
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 $0.6 million in net foreign currency transaction losses in the year ended December 31, 2020, $0.9 million in net foreign currency transaction losses in the year ended December 31, 2019, and $1.1 million in net foreign currency transaction losses in the year ended December 31, 2018. A hypothetical 10% change in foreign currency rates would not have resulted in material gains or losses for the years ended December 31, 2020, 2019, and 2018.
Inflation risk
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.
77
Item 8. Financial Statements and Supplementary Data
78
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Qualtrics International Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Qualtrics International Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 842 - Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2019.
Salt Lake City, Utah
March 9, 2021
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Qualtrics International Inc.
Consolidated Balance Sheets
(In thousands, except share and par value)
| As of December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 203,891 | $ | 42,467 | |||||||
Accounts receivable, net of allowance (1) | 296,148 | 193,692 | |||||||||
| Deferred contract acquisition costs, net | 43,429 | 22,168 | |||||||||
| Prepaid expenses and other current assets | 48,130 | 37,090 | |||||||||
| Total current assets | 591,598 | 295,417 | |||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | 116,120 | 51,067 | |||||||||
| Right-of-use assets from operating leases | 195,372 | 184,838 | |||||||||
| Goodwill | 6,709 | 6,709 | |||||||||
| Other intangible assets, net | 3,959 | 5,414 | |||||||||
| Deferred contract acquisition costs, net of current portion | 115,837 | 54,832 | |||||||||
| Deferred tax assets | 92 | 3,313 | |||||||||
| Other assets | 9,368 | 1,694 | |||||||||
| Total assets | $ | 1,039,055 | $ | 603,284 | |||||||
| Liabilities, redeemable convertible preferred stock, and deficit | |||||||||||
| Current liabilities: | |||||||||||
| Lease liabilities | $ | 7,125 | $ | 7,893 | |||||||
Accounts payable (1) | 30,452 | 31,707 | |||||||||
| Accrued liabilities | 225,046 | 80,029 | |||||||||
| Liability-classified, stock-based awards | 209,286 | 286,991 | |||||||||
| Deferred revenue | 495,638 | 382,602 | |||||||||
| Total current liabilities | 967,547 | 789,222 | |||||||||
| Non-current liabilities: | |||||||||||
| Lease liabilities, net of current portion | 235,620 | 182,274 | |||||||||
| Liability-classified, stock-based awards, net of current portion | 76,627 | 161,237 | |||||||||
| Deferred revenue, net of current portion | 5,477 | 4,182 | |||||||||
| Deferred tax liabilities | 5,970 | — | |||||||||
| Other liabilities | 16,716 | 6,889 | |||||||||
| Total liabilities | $ | 1,307,957 | $ | 1,143,804 | |||||||
| Commitments and contingencies | |||||||||||
| Equity (deficit) | |||||||||||
Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares; no shares outstanding (2) | — | — | |||||||||
Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 6,000,000 and no shares as of December 31, 2020 and 2019 (2) | 1 | — | |||||||||
Class B common stock, par value $0.0001 per share; authorized 1,000,000,000 shares; issued and outstanding 423,170,610 and 423,170,610 as of December 31, 2020 and 2019 (2) | 42 | 42 | |||||||||
| Additional paid in capital | 1,126,631 | 586,631 | |||||||||
| Accumulated other comprehensive income (loss) | 3,191 | (928) | |||||||||
| Accumulated deficit | (1,398,767) | (1,126,265) | |||||||||
| Total deficit | (268,902) | (540,520) | |||||||||
| Total liabilities, redeemable convertible preferred stock, and deficit | $ | 1,039,055 | $ | 603,284 | |||||||
________________
(1)Includes amounts from related parties. See Note 15 for further details
(2)See Note 2 “2020 Stock Split and Capital Reorganization” for further details
The accompanying notes are an integral part of these consolidated financial statements.
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Qualtrics International Inc.
Consolidated Statements of Operations
(In thousands, except share data)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Subscription | $ | 575,397 | $ | 430,038 | $ | 295,528 | |||||||||||
| Professional services and other | 188,125 | 161,117 | 106,380 | ||||||||||||||
| Total revenue | 763,522 | 591,155 | 401,908 | ||||||||||||||
| Cost of revenue: | |||||||||||||||||
| Subscription | 62,671 | 67,982 | 35,785 | ||||||||||||||
| Professional services and other | 135,816 | 117,509 | 66,929 | ||||||||||||||
| Total cost of revenue | 198,487 | 185,491 | 102,714 | ||||||||||||||
| Gross profit | 565,035 | 405,664 | 299,194 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 212,795 | 242,124 | 65,925 | ||||||||||||||
| Sales and marketing | 431,794 | 440,325 | 192,142 | ||||||||||||||
| General and administrative | 175,499 | 717,363 | 74,248 | ||||||||||||||
| Total operating expenses | 820,088 | 1,399,812 | 332,315 | ||||||||||||||
| Operating loss | (255,053) | (994,148) | (33,121) | ||||||||||||||
| Other non-operating income (expense), net | (972) | (486) | 169 | ||||||||||||||
| Loss before income taxes | (256,025) | (994,634) | (32,952) | ||||||||||||||
| Provision for income taxes | 16,477 | 12,999 | 4,356 | ||||||||||||||
| Net loss | $ | (272,502) | $ | (1,007,633) | $ | (37,308) | |||||||||||
| Year Ended December 31, 2020 | January 23, 2019 through December 31, 2019 | ||||||||||||||||
| Net loss per share attributable to common stockholder, basic | $ | (0.64) | $ | (1.76) | |||||||||||||
| Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholder, basic | 423,334,994 | 423,170,610 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Operating expenses includes:
Stock-based compensation expense as follows:
| Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Cost of subscription revenue | $ | 4,632 | $ | 24,136 | $ | 4 | |||||||||||
| Cost of professional services and other revenue | $ | 6,737 | $ | 17,168 | $ | 144 | |||||||||||
| Research and development | $ | 68,355 | $ | 130,809 | $ | 2,228 | |||||||||||
| Sales and marketing | $ | 37,877 | $ | 115,581 | $ | 708 | |||||||||||
| General and administrative | $ | 106,412 | $ | 588,532 | $ | 1,516 | |||||||||||
Total stock-based compensation expense, including cash settled(a) | $ | 224,013 | $ | 876,226 | $ | 4,600 | |||||||||||
________________
(a)As a result of the SAP Acquisition, our stock-based compensation expense reflects the recognition of both equity-classified awards and liability-classified awards. Liability-classified awards are settled in cash in accordance with SAP’s employee equity compensation programs. 2020 stock-based compensation expense consisted of $224.0 million of liability-classified awards. During the year ended December 31, 2020 awards of $388.6 million were settled in cash. 2019 stock-based compensation expense consisted of $185.8 million of equity-classified awards that was recognized as a result of the SAP Acquisition, and $690.4 million of liability-classified awards, of which $312.8 million were settled in cash in 2019. 2018 stock-based compensation expense consisted entirely of equity-classified awards. Liability-classified awards are recorded according to mark-to-market accounting.
Amortization of acquired intangible assets as follows:
| Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Cost of subscription revenue | $ | 1,062 | $ | 1,160 | $ | 703 | |||||||||||
| Sales and marketing | 204 | 204 | 145 | ||||||||||||||
| General and administrative | 188 | 114 | 201 | ||||||||||||||
| Total amortization of acquired intangible assets | $ | 1,454 | $ | 1,478 | $ | 1,049 | |||||||||||
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Qualtrics International Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net loss | $ | (272,502) | $ | (1,007,633) | $ | (37,308) | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
Foreign currency translation gain (loss) | 4,119 | (9) | (1,471) | ||||||||||||||
| Comprehensive loss | $ | (268,383) | $ | (1,007,642) | $ | (38,779) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Qualtrics International Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
| Redeemable convertible preferred stock | Class A common stock | Class B common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total equity (deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2018 | 183,031,841 | $ | 36 | — | $ | — | 3,545,242 | $ | 1 | $ | 137,747 | $ | 552 | $ | (81,324) | $ | 56,976 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | 4,600 | — | — | 4,600 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of restricted stock to common stock | — | — | — | — | 103,446 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of class B common stock | — | — | — | — | (40,000) | — | (531) | — | — | (531) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (37,308) | (37,308) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | (1,471) | — | (1,471) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 183,031,841 | $ | 36 | — | $ | — | 3,608,688 | $ | 1 | $ | 141,816 | $ | (919) | $ | (118,632) | $ | 22,266 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | 185,792 | — | — | 185,792 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of vested stock-based awards | — | — | — | — | — | — | (539,707) | — | — | (539,707) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Modification of equity awards to liability awards | — | — | — | — | — | — | (70,765) | — | — | (70,765) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of restricted stock to common stock | — | — | — | — | 1,209,466 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital restructuring pursuant to reorganization | (183,031,841) | (36) | — | — | 418,352,456 | 41 | (5) | — | — | 36 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution | — | — | — | — | — | — | 869,500 | — | — | 869,500 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | (1,007,633) | (1,007,633) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | — | $ | — | 423,170,610 | $ | 42 | $ | 586,631 | $ | (928) | $ | (1,126,265) | $ | (540,520) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from SAP | — | — | — | — | — | — | 540,000 | — | — | 540,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales of class A common stock (1) | 6,000,000 | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | (272,502) | (272,502) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | 4,119 | — | 4,119 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | — | $ | — | 6,000,000 | $ | 1 | 423,170,610 | $ | 42 | $ | 1,126,631 | $ | 3,191 | $ | (1,398,767) | $ | (268,902) | ||||||||||||||||||||||||||||||||||||||||||||||||
________________
(1)See Note 11 “Sale of Class A Common Stock” for further details
The accompanying notes are an integral part of these consolidated financial statements.
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Qualtrics International Inc.
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net loss | $ | (272,502) | $ | (1,007,633) | $ | (37,308) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||||||||
| Depreciation and amortization | 26,457 | 19,715 | 14,787 | ||||||||||||||
| Reduction of right-of-use assets from operating leases | 17,202 | 9,031 | — | ||||||||||||||
| Stock-based compensation expense, including cash settled | 224,013 | 876,226 | 4,600 | ||||||||||||||
| Amortization of deferred contract acquisition costs | 32,098 | 19,513 | 13,368 | ||||||||||||||
| Deferred income taxes | 13,200 | (5,321) | 143 | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Accounts receivable, net | (103,692) | (54,320) | (57,799) | ||||||||||||||
| Prepaid expenses and other current assets | (10,773) | (17,533) | (2,573) | ||||||||||||||
| Deferred contract acquisitions costs | (111,686) | (47,734) | (27,101) | ||||||||||||||
| Other assets | (7,592) | 1,801 | (910) | ||||||||||||||
| Lease liabilities | 24,741 | (6,375) | — | ||||||||||||||
| Accounts payable | (282) | 7,219 | 12,350 | ||||||||||||||
| Accrued liabilities | 22,546 | 44,662 | 17,194 | ||||||||||||||
| Deferred revenue | 114,331 | 102,562 | 99,077 | ||||||||||||||
| Other liabilities | 9,826 | 55 | 576 | ||||||||||||||
| Settlement of stock-based payments liabilities | (388,609) | (312,772) | — | ||||||||||||||
| Net cash flows provided by (used in) operating activities | (410,722) | (370,904) | 36,404 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Cash paid for intangible assets | — | — | (1,500) | ||||||||||||||
| Cash paid for business combinations, net of cash acquired | — | — | (9,865) | ||||||||||||||
| Purchases of property and equipment | (89,518) | (33,181) | (21,321) | ||||||||||||||
| Net cash flows used in investing activities | (89,518) | (33,181) | (32,686) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from capital contributions from SAP | 540,000 | 869,500 | — | ||||||||||||||
| Proceeds from issuance of class A common stock | 120,000 | — | — | ||||||||||||||
| Settlement of equity-based awards | — | (539,707) | — | ||||||||||||||
| Repurchase of class B common stock | — | — | (531) | ||||||||||||||
| Net cash flows (used in) provided by financing activities | 660,000 | 329,793 | (531) | ||||||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | 1,664 | 1,316 | (1,179) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 161,424 | (72,976) | 2,008 | ||||||||||||||
| Cash and cash equivalents as at 1 January | 42,467 | 115,443 | 113,435 | ||||||||||||||
| Cash and cash equivalents as at 31 December | $ | 203,891 | $ | 42,467 | $ | 115,443 | |||||||||||
| Supplemented cash flow disclosures | |||||||||||||||||
| Cash paid for income taxes, net of tax refunds | $ | 11,356 | $ | 4,034 | $ | 1,146 | |||||||||||
| Cash paid for operating leases, net of incentives received | 18,579 | 10,932 | — | ||||||||||||||
| Non-cash investing and financing activities | |||||||||||||||||
| Capital expenditures incurred but not yet paid | $ | 741 | $ | 1,115 | $ | 72 | |||||||||||
| Business combination consideration in accrued liabilities | — | — | 600 | ||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | 26,494 | 141,240 | — | ||||||||||||||
| Construction costs capitalized under build-to-suit lease | — | — | 2,900 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Qualtrics International Inc.
Notes to Consolidated Financial Statements
1.DESCRIPTION OF THE BUSINESS
Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics has built the first experience management platform (“XM Platform”) to manage customer, employee, product, and brand experiences. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services, and engineering services.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
On January 23, 2019, SAP SE (“SAP”) acquired all outstanding shares of Qualtrics International Inc. for approximately $8.0 billion in cash and push down accounting was not elected to be used at the time of acquisition (the “SAP Acquisition”). Since the SAP Acquisition, the operations of Qualtrics have been included in SAP’s consolidated financial statements. Qualtrics continues to operate as separate legal entities and will continue to be presented as a separate segment within SAP’s consolidated financial statements. Certain contracts for Qualtrics products are legally owned by SAP entities and the related revenues, expenses, assets and liabilities will remain with SAP. Qualtrics receives a royalty charge from SAP for these arrangements.
The financial statements have been derived from the consolidated financial statements and accounting records of SAP using the historical results of operations and historical basis of assets and liabilities for Qualtrics and its wholly owned subsidiaries. All intercompany transactions and balances of Qualtrics and its wholly owned subsidiaries have been eliminated in consolidation. Since the SAP Acquisition, Qualtrics has functioned as part of the larger group of companies controlled by SAP. However, due to the relative short period since the SAP Acquisition, Qualtrics largely continued to operate as a standalone operation and had not yet been fully integrated into the SAP group of companies, with limited use of corporate overhead functions. For that reason, it was not required to carve out or carve in any material assets or liabilities on the balance sheet. Additionally, due to the limited integration efforts, Qualtrics’ benefit from direct or indirect corporate overhead functions such as human resources, marketing, accounting or legal were also limited. Any allocated expenses from SAP were included in the financial statements. Certain other costs incurred by SAP for the direct benefit of Qualtrics, such as payroll services, have been directly charged to Qualtrics and included in Qualtrics’ financial statements. Services provided by the SAP entities for Qualtrics are recorded in the Qualtrics legal entities.
Management believes the assumptions underlying the financial statements and the above allocations are reasonable. However, the financial statements included herein may not necessarily reflect results of operations, financial position and cash flows as if Qualtrics had operated as a standalone company during all periods presented. Accordingly, historical results of Qualtrics should not be relied upon as an indicator of the future performance of Qualtrics.
2018 Stock Split
On October 24, 2018, the Company amended its restated certificate of incorporation to effect a two-for-one reverse stock split of its common stock and redeemable convertible preferred stock. On the effective date of the reverse stock split, (1) each two shares of outstanding redeemable convertible preferred stock and common stock were reduced to one share of redeemable convertible preferred stock and common stock, respectively; (2) the number of shares of common stock issuable under each outstanding option to purchase common stock and issuable upon vesting under each restricted stock unit was proportionately reduced on a two-for-one basis; (3) the exercise price of each outstanding option to purchase common stock was proportionately increased on a two-for-one basis; and (4) corresponding adjustments in the per share conversion prices, dividend rates, and liquidation preferences of the redeemable convertible preferred stock were made. The impact of the stock split has been retroactively applied to the Company’s financial statements.
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2019 Merger and Capital Restructuring Pursuant to Reorganization
On January 23, 2019, with the completion of the SAP Acquisition of the Company by a subsidiary of SAP (“Merger”), Merger was merged with and into Qualtrics International Inc. As a result of these and other transactions (collectively referred to herein as the “Reorganization”), the separate corporate existence of Merger ceased, and the Company continues as the surviving corporation. In connection with the Reorganization, all 187,849,989 shares of redeemable convertible preferred stock and common stock of the Company are no longer outstanding. The 423,170,610 shares of common stock of Merger became newly issued and outstanding shares of the surviving corporation. Share and per share information referenced throughout the consolidated financial statements and notes to the consolidated financial statements for the period ended December 31, 2019 have been adjusted to reflect the decreased number of shares outstanding. Due to the impact of the Reorganization, the Company’s capital structure for the year ended December 31, 2018 is not comparable with the Company’s capital structure after the Reorganization. As a result, the presentation of net loss per share for the period prior to such transaction is not meaningful and only net loss per share for periods subsequent to the Reorganization are presented herein.
2020 Stock Split and Capital Reorganization
On December 21, 2020, the Company amended its restated certificate of incorporation to create new classes of preferred stock, Class A and Class B common stock. The Company’s previously outstanding shares of common stock issued on January 23, 2019, were converted into shares of Class B common stock. SAP holds all of the shares of the new Class B common stock. The ownership rights of Class A and Class B common stockholders are the same except with respect to voting, the election of directors, conversion, and certain actions that require the consent of holders of Class B and other protective provisions. See Note 11 for further details related to the terms and conditions of the new equity of the Company. The amended and restated certificate of incorporation effectuated a 4,231,706.1-for-one stock split of the new Class B common stock. The capitalization of the Company, including all share and per share data has been retroactively adjusted back to January, 23, 2019, the date of the SAP acquisition, to reflect the recapitalization. As discussed in the 2019 Merger and Capital Restructuring Pursuant to Reorganization note above, the historical capital structure prior to January 23, 2019 is not comparable to the capital structure after the acquisition by SAP and therefore the historical capital structure is not retroactively adjusted as the presentation would not be meaningful. To retroactively adjust the consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit), the stock split is reflected as an adjustment of the capital restructuring pursuant to reorganization that occurred in 2019 of the new Class B shares issued and outstanding of 423,170,610, net of the historical Class B shares that were acquired by SAP.
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, including the underlying deemed estimated fair value of the Company’s common stock, valuation of deferred income tax assets, uncertain tax positions, contingencies, goodwill and intangible assets, the determination of whether a contract contains a lease, determining the incremental borrowing rate for the calculation of the present value of lease liabilities and litigation accruals. Actual results could differ from those estimates.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the CODM. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of
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making operating decisions, allocating resources, and evaluating financial performance. As such, the Company has determined that it operates in one operating and one reportable segment.
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. The Company recorded $0.6 million in net foreign currency transaction losses in the year ended December 31, 2020, $0.9 million in net foreign currency transaction losses in the year ended December 31, 2019, and $1.1 million in net foreign currency transaction losses in the year ended December 31, 2018.
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 with 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.
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Identification of a Contract
For accounting purposes, we treat multiple contracts entered into with the same customer as a single contract if they are entered into at or near the same time and are economically interrelated. We do not combine contracts with closing days more than three months apart because we do not consider them being entered into near the same time. Judgment is required in evaluating whether various contracts are interrelated, which includes considerations as to whether they were negotiated as a package with a single commercial objective, whether the amount of consideration on one contract is dependent on the performance of the other contract, or if some or all goods in the contracts are a single performance obligation.
New arrangements with existing customers can be either a new contract or the modification of prior contracts with the customer. Our respective judgment in making this determination considers whether there is a connection between the new arrangement and the pre-existing contracts, whether the goods and services under the new arrangement are highly interrelated with the goods and services sold under prior contracts, and how the goods and services under the new arrangement are priced. In determining whether a change in transaction price represents a contract modification or a change in variable consideration, we examine whether the change in price results from changing the contract or from applying unchanged existing contract provisions.
Identification of Performance Obligations
Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, if they are distinct. Typically, the products and services outlined in the Classes of Revenue section qualify as separate performance obligations and the portion of the contractual fee allocated to them is recognized separately. Judgment is required, however, in determining whether a good or service is considered a separate performance obligation. In particular for our professional services and implementation activities, judgment is required to evaluate whether such services significantly integrate, customize, or modify the subscription service to which they relate. In this context, we consider the nature of the services and their volume relative to the volume of the subscription service to which they relate. In general, the implementation services for our subscription services go beyond pure setup activities and qualify as separate performance obligations. Non-distinct goods and services are combined into one distinct bundle of goods and services (combined performance obligation).
In rare instances, customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at standalone selling price, or SSP. We apply judgment in determining whether such options provide a material right to the customer that the customer would not receive without entering into that contract (material right options). In this judgment, we consider, for example, whether the options entitle the customer to a discount that exceeds the discount granted for the respective goods or services sold together with the option.
Determination of Transaction Price
We apply judgment in determining the amount to which we expect to be entitled in exchange for transferring promised goods or services to a customer. This includes estimates as to whether and to what extent subsequent concessions or payments may be granted to customers and whether the customer is expected to pay the contractual fees. In this judgment, we consider our history both with the respective customer and more broadly.
If the Company’s services do not meet certain service level commitments, certain customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. Historically, the Company has not experienced any significant incidents affecting the defined levels of reliability and performance as required by its subscription contracts. Accordingly, any estimated refunds related to these agreements in the consolidated financial statements is not material during the periods presented.
The Company applied the practical expedient in Topic 606 and did not evaluate contracts of one year or less for the existence of a significant financing component. The Company determined that no significant financing component existed on its multi-year contracts, as these contracts were structured for purposes other than obtaining
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financing from customers. Additionally, prices are generally fixed at contract inception; therefore, the Company’s contracts do not contain a significant amount of variable consideration.
Allocation of transaction price
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling prices considering market conditions and based on overall pricing objectives such as observable standalone selling prices, and other factors, including the value of contracts, types of services sold, customer demographics, and the number and types of users within such contracts. We have established a hierarchy to identify the standalone selling prices that we use to allocate the transaction price of a customer contract to the performance obligations in the contract:
•Where standalone selling prices for an offering are observable and reasonably consistent across customers (that is, not highly variable), our standalone selling price estimates are derived from our respective pricing history.
•Where sales prices for an offering are not directly observable or highly variable across customers, we use estimation techniques. For renewable offerings with highly variable pricing across customers, these techniques consider the individual contract’s expected renewal price as far as this price is substantive. Typically, our subscription offerings follow this approach. For our professional and other services, these estimations typically follow a cost-plus-margin approach.
Judgment is required when estimating standalone selling prices. To judge whether the historical pricing of our goods and services is highly variable, we have established thresholds of pricing variability. For judging whether contractual renewal prices are substantive, we have established floor prices that we use as standalone selling prices whenever the contractual renewal prices are below these floor prices. In judging whether contracts are expected to renew at their contractual renewal prices, we rely on our respective renewal history. We review the standalone selling prices periodically or whenever facts and circumstances change to ensure the most objective input parameters available are used.
Recognition of Revenue
Access to our 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
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a straight-line basis over the non-cancelable term and accounts for the difference between straight-line revenue and annual invoice amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of December 31, 2020 were $9.6 million and $6.9 million, respectively. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of December 31, 2019 were $3.7 million and $2.4 million, respectively. The increase in contract assets is due to a higher number of multi-year deals in 2020 compared to 2019.
The Company records contract liabilities to deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the customer prior to the related performance obligation being fulfilled. In certain circumstances we receive consideration from customers in advance of a specific service being identified. Total consideration received in advance of a specific service being identified totaled $33.8 million and $26.4 million as of December 31, 2020 and 2019, respectively and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue for each of the Company’s revenue generating solutions:
| Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Subscription revenue: | |||||||||||||||||
| Revenue included in prior period deferred revenue | $ | 337,299 | $ | 233,811 | $ | 160,449 | |||||||||||
| Revenue generated from same period billings | 238,098 | 196,227 | 135,079 | ||||||||||||||
| Total subscription revenue | $ | 575,397 | $ | 430,038 | $ | 295,528 | |||||||||||
| Professional services and other revenue: | |||||||||||||||||
| Revenue included in prior period deferred revenue | $ | 39,253 | $ | 43,539 | $ | 3,758 | |||||||||||
| Revenue generated from same period billings | 148,872 | 117,578 | 102,622 | ||||||||||||||
| Total professional services and other revenue | $ | 188,125 | $ | 161,117 | $ | 106,380 | |||||||||||
Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Amounts of a customer contract’s transaction price that are allocated to the remaining performance obligations represent contracted revenue that has not yet been recognized. They include amounts recognized as contract liabilities and amounts that are contracted but not yet due. The future estimated revenue related to unsatisfied performance obligations as of December 31, 2020 was $1,144.4 million, of which approximately $645.4 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, 2019 was $642.7 million, of which approximately $434.1 million was recognized as revenue in 2020. The future estimated revenue related to unsatisfied performance obligations as of December 31, 2018 was $370.9 million, of which approximately $303.3 million was recognized in 2019. This estimate is based on our best judgment, as it needs to consider estimates of possible future contract modifications. The amount of transaction price allocated to the remaining performance obligations, and changes in this amount over time, are impacted by, among others, currency fluctuations and the contract period of our cloud contracts remaining at the balance sheet date and thus by the timing of contract renewals.
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Disaggregation of Revenue
The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our cloud platform:
| Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| United States | $ | 552,221 | $ | 438,052 | $ | 308,394 | |||||||||||
| International | 211,301 | 153,103 | 93,514 | ||||||||||||||
| Total revenue | $ | 763,522 | $ | 591,155 | $ | 401,908 | |||||||||||
No single country outside the United States accounted for 10% or more of revenue during the years ended December 31, 2020, 2019, and 2018.
Stock-Based Compensation, including cash settled
Equity Awards
The Company measures and recognizes compensation expense for stock-based payment equity awards, including restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options granted to employees and advisors, based on the grant date fair value of the awards. Awards that will be settled in cash are marked-to-market each quarter. The grant date fair value of stock options is estimated using a Black-Scholes option pricing model. The fair value of stock-based compensation for stock options is recognized on a straight-line basis over the period during which services are provided in exchange for the award. The grant date fair value of RSAs and RSUs is estimated based on the fair value of the underlying common stock. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method.
As discussed in detail in Note 12, prior to the SAP acquisition, the Company issued two types of RSAs, one-tier and two-tier. One-tier RSAs vested solely on a service-based condition. For these awards, the Company recognized stock-based compensation expense on a straight-line basis over the vesting period. Two-tier RSAs and RSUs contained both a service-based condition and performance condition, defined as the earlier of (i) an acquisition or change in control of the Company or (ii) upon the occurrence of an initial public offering by the Company. A change in control event and effective registration event are not deemed probable until consummated; accordingly, no expense was recorded related to two-tier RSAs and RSUs until the performance condition becomes probable of occurring. Awards which contained both service-based and performance conditions were recognized using the accelerated attribution method once the performance condition was probable of occurring.
With the SAP Acquisition, the performance condition of two-tier RSAs and RSUs was deemed to be met in January 2019.
In conjunction with the SAP Acquisition, under the terms of the acquisition agreement, unvested RSAs, RSUs, and options held by employees of Qualtrics were exchanged into liability-classified, stock-based awards to be settled in cash (“Qualtrics Rights”). Approximately $858 million of the purchase price related to RSAs, RSUs, and options that were to vest after the SAP Acquisition, contingent upon continued service from employees. The price realized by employees for these time-based awards is $35.00 per share, if the award was granted before January 1, 2018 or if the award was originally granted as an option; provided, that the fixed amount will be reduced by the original exercise price for any Qualtrics Rights that were originally granted as options. If the award was granted on or after January 1, 2018, the amount realized is $35.00 per share, adjusted for changes in the five-day average price of SAP stock for the period immediately preceding the close compared to SAP’s stock price on the vesting date.
In conjunction with the SAP Acquisition, the Founder Performance Grants described in Note 12 were cancelled. New Founder Grants were granted at the closing date that vest upon continuing employment over a two-year period from the closing date. Certain stock-based awards contained change in control provisions and vesting was accelerated upon close of the SAP Acquisition.
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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 stock-based compensation cash awards that vests 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. The fair value is estimated based on the fair value of the underlying SAP stock price or some are valued at $35.00. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring.
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.
Due to the impact of the SAP Acquisition of Qualtrics, the Company’s capital structure for the years ended December 31, 2019 and 2018 are not comparable. As a result, the presentation of net loss per share for the year ended prior to the transaction is not meaningful and only net loss per share for periods subsequent to the SAP Acquisition of Qualtrics are presented herein.
Cost of Revenue
Cost of revenue includes expenses related to operating the Company’s cloud platform in data centers, depreciation of the Company’s data center equipment, the amortization of the Company’s capitalized internal-use software and acquired technology, and third-party vendor costs to fulfill contracts with customers. Cost of revenue also includes employee-related costs, including salaries, bonuses, equity and cash settled stock-based compensation expense, and employee benefit costs associated with the Company’s customer support, cloud operations, and delivery of professional services. Additionally, the Company makes allocations of certain overhead costs, primarily based on headcount.
Advertising and Promotional Expense
Advertising and promotional expenses are expensed as incurred. Advertising and promotional expenses for the years ended December 31, 2020, 2019, and 2018 were $4.6 million, $3.2 million, and $2.3 million, respectively.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less from the date of purchase. The Company maintains cash and cash equivalents at financial institutions, which at times may not be federally insured or may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on such accounts. Cash and cash equivalents are recorded at cost, which approximates fair value.
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.
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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 charge to bad debt expense in the consolidated statements of comprehensive loss. Bad debt expense was not material in the years ended December 31, 2020, 2019, and 2018.
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 revenue and deferred revenue. Write-offs to revenue and deferred revenue from cancellations are based upon the composition of revenue recognized and deferred revenue remaining at the time of cancellation.
The Company’s allowances were $30.2 million and $12.0 million as of December 31, 2020 and 2019, respectively. During 2020, $3.0 million of net additions was charged to revenue and $15.2 million of net additions was charged to deferred revenue. During 2019, $1.1 million of net additions was charged to revenue and $1.1 million of net additions was charged to deferred revenue.
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 December 31, 2020 and 2019. No single customer accounted for 10% or more of total revenue during the years ended December 31, 2020, 2019, and 2018.
Deferred Contract Acquisition Costs, net
Deferred contract acquisition costs, net is stated at gross deferred contract acquisition costs less accumulated amortization. Sales commissions and related payroll taxes for initial software-as-a-service (SaaS) subscription contracts earned by the Company’s sales force are considered to be incremental and recoverable costs of obtaining a contract with a customer. As a result, these amounts have been capitalized as deferred contract acquisition costs on the consolidated balance sheets. The Company deferred incremental costs of obtaining a contract of $111.7 million and $47.7 million during the years ended December 31, 2020 and 2019, 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 $32.1 million, $19.5 million, and $13.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.
Property and Equipment, net
Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated asset lives. Routine maintenance and repairs are charged to expense when
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incurred. Expenditures that materially increase values, change capacities, or extend the useful lives of the respective assets are capitalized. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations. The estimated useful lives by asset classification are generally as follows:
| Computer equipment | 3-5 years | ||||
| Furniture and fixtures | 5-10 years | ||||
| Server equipment | 5 years | ||||
| Vehicles | 3 years | ||||
| Internal-use software | 2 years | ||||
| Buildings | 25 years | ||||
| Leasehold improvements | Lesser of useful life or remaining lease term | ||||
Property and equipment subject to depreciation is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment exist, recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. There was no impairment of property and equipment during the years ended December 31, 2020 and 2019.
The following table sets forth property and equipment by geographic area:
| As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| United States | $ | 102,560 | $ | 46,361 | |||||||
| International | 13,560 | 4,706 | |||||||||
| Total property and equipment, net | $ | 116,120 | $ | 51,067 | |||||||
No single country outside the United States had a property and equipment balance greater than 10% of total property and equipment, net, as of December 31, 2020 and 2019.
Leases
As of January 1, 2019, the Company adopted the lease accounting requirements of ASU 2016-2 Leases (“Topic 842”) using the modified retrospective transition approach. Under Topic 842, the Company determines if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases. As of December 31, 2020 and 2019, the Company had no finance 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. Additionally, the Company has elected to combine non-lease components with lease components for the purposes of calculating the ROU asset and liabilities, to the extent they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease costs. The Company uses the incremental borrowing rate based on information available at the commencement date in determining the present value of future lease payments. The rate is an estimate of the collateralized borrowing rate the Company would incur on future lease payments over a similar term.
The Company leases facilities under non-cancelable operating lease agreements. Certain of the operating lease agreements contain rent concessions and rent escalations which are included in the present value calculation of minimum lease payments. Topic 842 requires that operating leases recognize expense on a straight-line basis over the lease term. The lease term begins on the date the Company has the right to use the leased property. Lease terms
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may include options to extend or terminate the lease. These options are included in the ROU asset and lease liability when it is reasonably certain that the option will be exercised. The Company’s lease agreements do not contain residual value guarantees or covenants.
As of December 31, 2018, the Company had recorded $2.9 million in property and equipment, net, and other liabilities relating to a build-to-suit facility lease arrangement in Dublin, Ireland. In accordance with Topic 842, this has been derecognized. This new Dublin lease will not be recognized until the Company has the right to use the facility in 2021.
Prior to the January 1, 2019 adoption of Topic 842, ROU assets and lease liabilities were not recognized for operating leases. Rent concessions and rent escalation provisions were considered in determining the straight-line rent expense to be recorded over the lease term.
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 $12.5 million, $11.0 million, and $8.5 million related to capitalized internal-use software for the years ended December 31, 2020, 2019, and 2018, respectively, within cost of subscription revenue.
Goodwill and Other Intangible Assets
The Company records goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. The Company has determined that there is a single reporting unit for the purpose of goodwill impairment tests, which are performed annually on October 1st or more frequently if certain indicators are present. For purposes of assessing the impairment of goodwill, the Company annually estimates the fair value of the reporting unit and compares this amount to the carrying value of the reporting unit. If the Company determines that the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value. There was no impairment of goodwill for the years ended December 31, 2020, 2019, and 2018.
Other intangible assets, consisting of developed technology, customer relationships, tradenames, purchased license agreements, developed content, and purchased patents, are stated at cost less accumulated amortization. All other intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated remaining economic lives. Developed technology is amortized over 5 to 6 years to cost of subscription revenue and had a weighted average remaining amortization period of 2.0 years as of December 31, 2020. Customer relationships are amortized over 1 to 9 years to sales and marketing expense and had a weighted average remaining amortization period of 6.1 years as of December 31, 2020. Tradenames are amortized over 5 years to general and administrative expense, with a weighted average remaining amortization period of 2.2 years as of December 31, 2020. Purchased license agreements are determined to have definite lives and are amortized over 4 years to cost of subscription revenue, with a weighted average remaining amortization period of 1.3 years as of December 31, 2020. Developed content is amortized over 4 years and included in cost of subscription revenue, with a weighted average remaining amortization period of 1.8 years as of December 31, 2020. Purchased patents are amortized over useful lives ranging from 9 to 16 years to general and administrative expense. The patents’ weighted average remaining amortization period is 7.8 years as of December 31, 2020.
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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. 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, actual transactions included in the consolidated financial statements of SAP may not be included in the separate consolidated financial statements of the Company. Similarly, the tax treatment of certain items reflected in the consolidated financial statements of the Company may not be reflected in the consolidated financial statements and tax returns of SAP. Therefore, such items as net operating losses, credit carry-forwards and valuation allowances may exist in the standalone financial statements that may or may not exist in SAP’s consolidated financial statements. As such, the income taxes of the Company as presented in these consolidated financial statements may not be indicative of the income taxes that the Company will generate in the future.
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.
A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.
The Company uses a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of pre-tax book income or loss. Significant judgment is required to evaluate uncertain tax positions.
Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company evaluates its uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and results of operations.
Fair Value Measurement
The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk
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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.
Warranty and Indemnification
The Company includes service level commitments to its customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that the Company fails to meet those levels. To date, the Company has not incurred any material costs related to such commitments.
The Company’s contracts include provisions indemnifying customers against liabilities if its products infringe a third-party’s intellectual property rights. The Company has not incurred any costs as a result of such indemnification and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU 2016-2 Leases (“Topic 842”). The standard requires the recognition of a liability for lease obligations and a corresponding ROU asset on the balance sheet, and disclosure of certain information regarding leasing arrangements. The Company adopted this standard effective January 1, 2019 using the transitional provision of ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” which allows for the adoption of Topic 842 at the beginning of the fiscal year of adoption. Prior periods were not restated. The Company elected to apply practical expedients upon transition to this standard, which allowed the Company to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contained a lease. The practical expedient to exclude leases with a term of less than twelve months was also elected.
Under adoption of Topic 842, leases previously classified as operating leases are now reported on the balance sheet. The Company recognized operating leases related ROU assets of $52.6 million and lease liabilities of $55.8 million as of January 1, 2019. In addition, the $2.9 million build-to-suit asset and related liability previously recorded as of December 31, 2018 was derecognized. The new guidance does not require recognition until control has been established. Because there are no finance leases, the updated standard did not have a material impact on the consolidated statements of income or cash provided by operating activities.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The update requires measurement and recognition of expected credit losses for financial assets held at amortized cost, including accounts receivable. ASU 2016-13 was amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, and again in April 2019 by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019 by ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. ASU 2016-13, as amended, is effective for annual reporting periods of emerging growth companies beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the standard will be applied using a modified retrospective approach with a cumulative-effect adjustment to retained
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earnings. The Company is currently evaluating the impact on its consolidated financial statements and cannot reasonably estimate the impact on its financial statements at this time.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. The new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods of emerging growth companies beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. Adoption of the standard requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. We are currently assessing the impact of this standard on our financial condition and results of operations.
3.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
| As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Cash | $ | 203,891 | $ | 42,247 | |||||||
| Money market mutual funds | — | 220 | |||||||||
| Total cash and cash equivalents | $ | 203,891 | $ | 42,467 | |||||||
4.FAIR VALUE MEASUREMENTS
The Company’s cash equivalents with regards to the money market mutual funds are classified within Level 1 of the fair value hierarchy. See Note 2, “Summary of Significant Accounting Policies” for additional details.
5.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
| As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Internal-use software | $ | 25,757 | $ | 23,365 | |||||||
| Server equipment | 27,551 | 21,995 | |||||||||
| Leasehold improvements | 28,377 | 16,539 | |||||||||
| Computer equipment | 15,589 | 9,073 | |||||||||
| Buildings | 13,625 | 8,216 | |||||||||
| Furniture and fixtures | 2,217 | 2,214 | |||||||||
| Software | 222 | 222 | |||||||||
| Construction in progress | 47,920 | 348 | |||||||||
| Total property and equipment | $ | 161,258 | $ | 81,972 | |||||||
| Accumulated depreciation and amortization | (45,138) | (30,905) | |||||||||
| Property and equipment, net | $ | 116,120 | $ | 51,067 | |||||||
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The Company recognized depreciation and amortization expense related to its property and equipment as follows:
| Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Cost of revenue | $ | 18,588 | $ | 14,654 | $ | 11,248 | |||||||||||
| Research and development | 2,010 | 1,181 | 638 | ||||||||||||||
| Sales and marketing | 3,667 | 2,086 | 1,575 | ||||||||||||||
| General and administrative | 738 | 316 | 277 | ||||||||||||||
| Total depreciation and amortization expense | $ | 25,003 | $ | 18,237 | $ | 13,738 | |||||||||||
6.LEASES
The Company has operating leases for corporate offices under non-cancelable operating leases with various expiration dates. There are no finance leases. The leases have remaining terms of 1 to 13 years. Options to extend for up to 15 years have not been included because they are not reasonably certain.
The components of lease expense were as follows:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Operating lease cost | $ | 24,420 | $ | 13,177 | |||||||
| Variable and short-term lease cost | 6,171 | 1,291 | |||||||||
Supplemental balance sheet information related to operating leases was as follows:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Operating lease right-of-use assets | $ | 195,372 | $ | 184,838 | |||||||
| Operating lease liabilities, current | 7,125 | 7,893 | |||||||||
| Operating lease liabilities, non-current | 235,620 | 182,274 | |||||||||
| Total operating lease liabilities | $ | 242,745 | $ | 190,167 | |||||||
Other information related to leases was as follows:
As of December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Weighted average remaining lease term | 11.8 years | 12.8 years | |||||||||
| Weighted average discount rate | 3.19 | % | 3.57 | % | |||||||
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As of December 31, 2020 and 2019, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, was as follows (in thousands):
| Fiscal Period | As of December 31, | ||||
| 2020 | |||||
| 2021 | 14,597 | ||||
| 2022 | 23,620 | ||||
| 2023 | 23,951 | ||||
| 2024 | 24,120 | ||||
| 2025 | 24,803 | ||||
| Thereafter | 181,712 | ||||
| Total minimum lease payments | $ | 292,803 | |||
| Less: imputed interest | (50,058) | ||||
| Total | $ | 242,745 | |||
7.OTHER INTANGIBLE ASSETS, NET
Other intangible assets, net consisted of the following:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Patents | $ | 751 | $ | 751 | |||||||
| Developed technology | 3,070 | 3,070 | |||||||||
| Customer relationships | 2,100 | 2,100 | |||||||||
| Developed content | 400 | 400 | |||||||||
| Tradename | 550 | 550 | |||||||||
| License agreements | 1,500 | 1,500 | |||||||||
| Total intangible assets | $ | 8,371 | $ | 8,371 | |||||||
| Accumulated amortization | (4,412) | (2,957) | |||||||||
| Other intangible assets, net | $ | 3,959 | $ | 5,414 | |||||||
The Company recognized amortization expense to cost of revenue of $1.1 million, $1.2 million, and $0.7 million, for the years ended December 31, 2020, 2019, and 2018, respectively. An immaterial amount of amortization expense was recorded to sales and marketing and general and administrative for the years ended December 31, 2020, 2019, and 2018.
Estimated amortization expense for intangible assets for the next five years consists of the following:
As of December 31, | |||||
| in thousands | 2020 | ||||
| 2021 | 1,455 | ||||
| 2022 | 1,104 | ||||
| 2023 | 398 | ||||
| 2024 | 281 | ||||
| 2025 | 274 | ||||
| Thereafter | 447 | ||||
| Total | $ | 3,959 | |||
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8.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Accrued wages, bonuses and commissions | $ | 76,842 | $ | 45,238 | |||||||
| Accrued payroll taxes | 2,753 | 1,742 | |||||||||
Share deposit liability (1) | 120,000 | — | |||||||||
| Other accrued expenses | 22,037 | 21,602 | |||||||||
| Accrued income taxes | 3,414 | 11,447 | |||||||||
| Total accrued liabilities | $ | 225,046 | $ | 80,029 | |||||||
________________
(1)See Note 11 “Sale of Class A Common Stock” for further details
9.COMMITMENTS AND CONTINGENCIES
Leases
An unconditional bank guarantee for $0.8 million with an expiration date of December 31, 2021, was outstanding as of December 31, 2020 and 2019. This bank guarantee is required by the lease agreement on the Company’s Sydney, Australia office.
In March 2018, the Company entered into a lease commitment for additional office space that is currently being constructed in Dublin, Ireland. Upon delivery of the constructed office space, the Company will pay approximately $1.7 million per annum to lease the space. The Company expects the constructed office space to be delivered in 2021. The lease agreement is for 15-years, with a termination option at the election of the Company at the end of the 8th year.
Legal Matters
From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred, and the amount of loss or range of loss can be reasonably estimated. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the information available at the time of the assessment. As additional information becomes available, the Company reassesses the potential liability and may revise the estimate. The Company is not presently a party to any litigation the outcome of which, it believes, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the business, operating results, or financial condition.
10.REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company applies the SEC staff’s guidance (included in ASC 480-10-S99, SEC Materials) when evaluating the classification for its shares within the balance sheets. A liquidation or winding up of the Company, a greater than 50% change in control, or a sale of substantially all of its assets triggered a redemption of these shares. Therefore, all shares of redeemable convertible preferred stock outstanding as of December 31, 2018 were presented outside of permanent equity as they were contingently redeemable.
As of December 31, 2020 and 2019, no redeemable convertible preferred stock was outstanding after the restructuring of the 183,031,841 shares of redeemable convertible preferred stock in January 2019.
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The following table summarizes the redeemable convertible preferred stock outstanding and liquidation preferences – prior to the capital restructuring - as of December 31, 2018:
| Shares | Per share price at issuance (in $) | Liquidation preference (in $) | |||||||||||||||||||||
| Authorized | Outstanding | ||||||||||||||||||||||
| Series A-1 | 18,013,088 | 12,572,189 | $ | 2.00 | $ | 2,514 | |||||||||||||||||
| Series A-2 | 94,884,748 | 88,823,418 | 2.00 | 34,161,487 | |||||||||||||||||||
| Series A-3 | 1,400,000 | 1,399,993 | 2.00 | 2,800,000 | |||||||||||||||||||
| Series B-1 | 35,000,000 | 35,000,000 | 2.00 | 70,000,000 | |||||||||||||||||||
| Series B-2 | 27,102,163 | 27,102,161 | 4.46 | 120,833,333 | |||||||||||||||||||
| Series B-3 | 20,204,436 | 10,102,212 | 12.38 | 124,999,996 | |||||||||||||||||||
| Series B-4 | 5,607,344 | 5,607,341 | 5.36 | 30,000,000 | |||||||||||||||||||
| Series B-5 | 4,849,064 | 2,424,527 | 12.38 | 30,000,001 | |||||||||||||||||||
| Total | 207,060,843 | 183,031,841 | $ | 412,797,331 | |||||||||||||||||||
Upon a liquidation event, as defined in the then current certificate of incorporation, the holders of Series A-1, Series A-2, Series A-3, Series B-1, Series B-2, Series B-3, Series B-4, and Series B-5 redeemable convertible preferred stock were entitled to receive, prior to and in preference to any distribution of the proceeds of such liquidation to common stockholders, an amount per share equal to $0.00, $0.38, $2.00, $2.00, $4.46, $12.38, $5.36, and $12.38, respectively, plus any declared but unpaid dividends on such shares. If the proceeds distributed among the holders of the redeemable convertible preferred stock are insufficient to permit the redeemable convertible preferred stock holders to receive the full payment noted above, then the entire proceeds legally available for distribution would have been distributed ratably among the holders of the redeemable convertible preferred stock in proportion to the full preferential amount that each such holder were otherwise entitled to receive.
Dividends
Holders of the Company’s redeemable convertible preferred stock were entitled to receive dividends, when, as and if declared by the Company’s Board of Directors, on a pro-rata share ownership basis, prior to and in preference of any dividend paid to holders of the Company’s common stock. Such dividends were not cumulative or mandatory. No dividends have been declared in any period presented.
Voting
Each holder of redeemable convertible preferred stock had the right to 10 votes for each share of Class A common stock into which the shares of redeemable convertible preferred stock held by such holder could then be converted.
Conversion
In January 2019, the Company’s redeemable convertible preferred stock were converted to common stock as follows:
At the option of the holder thereof, each share of redeemable convertible preferred stock was converted into a number of shares of Class A common stock that results from dividing the applicable original issue price for such series by the applicable conversion price in effect on the date of conversion (the “Conversion Rate”). Each share of the 183,031,841 redeemable convertible preferred stock was automatically converted into 183,031,841 shares of Class A common stock at the Conversion Rate at the time in effect for such series of redeemable convertible preferred stock upon the closing of the Company’s sale and restructured as discussed in Note 2.
11.COMMON STOCK
On January 23, 2019, with the completion of the SAP Acquisition, all shares of redeemable convertible preferred stock and common stock were retired and new shares of common stock were issued by the surviving corporation.
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On December 21, 2020, the Company amended its restated certificate of incorporation to create new shares of preferred stock, Class A and Class B common stock. The following description summarizes certain important terms of our capital stock and of our amended and restated certificate of incorporation and amended and restated bylaws.
Class A Common Stock and Class B Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our Class A common stock and Class B common stock are entitled to receive dividends, out of assets legally available, sharing equally in all such dividends on a per share basis, at the times and in the amounts that our board of directors may determine from time to time.
Voting Rights
Except that holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to ten votes per share on all matters to be voted on by our stockholders and except with respect to the conversion, certain corporate actions that require the consent of holders of Class B common stock and other protective provisions, the holders of Class A common stock and Class B common stock have identical rights. Subject to any rights of any series of preferred stock to elect directors, the holders of our Class A common stock and the holders of our Class B common stock, voting together as a single class, are entitled to elect all directors to our board of directors. In the event that the rights of any series of preferred stock would preclude the holders of our Class A common stock and the holders of our Class B common stock, voting together as a single class, from electing at least one director, the board of directors will increase the number of directors prior to the issuance of that preferred stock to the extent necessary to allow these stockholders to elect at least one director.
Right to Receive Liquidation Distributions
Upon our liquidation, dissolution or winding-up, the holders of our Class A common stock and Class B common stock are entitled to share equally in all of our assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock.
Conversion
If all or any portion of our Class B common stock is distributed by SAP America, Inc. in a transaction that is intended to be tax-free for U.S. federal income tax purposes (a “Distribution”), shares of our Class B common stock will no longer be convertible into shares of Class A common stock. Prior to any Distribution, all shares of Class B common stock will automatically be converted into shares of Class A common stock upon the transfer of such shares of Class B common stock by SAP to any party that is not beneficially owned by SAP. If a Distribution has not occurred, each share of Class B common stock will also automatically convert into a share of Class A common stock at such time as the number of shares of common stock owned by SAP (and its affiliates) falls below 20% of the outstanding shares of our common stock. All conversions will be effected on a share-for-share basis.
Preferred Stock
Our board of directors is authorized, subject to the approval of our Class B stockholders and subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by our stockholders. We have no current plan to issue any shares of preferred stock.
Sale of Class A Common Stock
In December 2020, we entered into a stock purchase agreement with Q II, an entity controlled by Ryan Smith, our founder and executive chair, pursuant to which Q II purchased 6,000,000 shares of our Class A common stock at a price of $20.00 per share for an aggregate purchase price of $120 million. The shares are redeemable at the option of the Company for the 60-day period following June 30, 2021 unless the following conditions have been met: (i)
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the closing of our underwritten public offering shall have occurred prior to that date and (ii) Ryan Smith shall remain employed by the Company on that date or his employment shall have been terminated prior to that date by the Company without cause or by him with good reason. If such conditions do not occur, the Company will have 60 days following June 30, 2021 to repurchase the shares. Based on the terms of purchase agreement, the funds received from the Q II purchase are reported within accrued liabilities until the redemption options have expired.
12.STOCK-BASED COMPENSATION
Stock-based compensation expense, including cash settled, for the years ended December 31, 2020, 2019, and 2018 was recorded as follows:
Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Cost of subscription revenue | $ | 4,632 | $ | 24,136 | $ | 4 | |||||||||||
| Cost of professional services and other revenue | 6,737 | 17,168 | 144 | ||||||||||||||
| Research and development | 68,355 | 130,809 | 2,228 | ||||||||||||||
| Sales and marketing | 37,877 | 115,581 | 708 | ||||||||||||||
| General and administrative | 106,412 | 588,532 | 1,516 | ||||||||||||||
Total stock-based compensation expense, including cash settled(1) | $ | 224,013 | $ | 876,226 | $ | 4,600 | |||||||||||
______________
(1)As a result of the SAP Acquisition, our stock-based compensation expense reflects the recognition of both equity-classified awards and liability-classified awards. Liability-classified awards are settled in cash in accordance with SAP’s employee equity compensation programs. 2020 stock-based compensation expense consisted of $224.0 million of liability-classified awards. During the year ended December 31, 2020 awards of $388.6 million were settled in cash. 2019 stock-based compensation expense consisted of $185.8 million of equity-classified awards that was recognized as a result of the SAP Acquisition, and $690.4 million of liability-classified awards, of which $312.8 million were settled in cash in 2019. 2018 stock-based compensation expense consisted entirely of equity-classified awards. Liability-classified awards are recorded according to mark-to-market accounting.
Equity Awards
2014 Stock Option and Grant Plan (2014 Plan)
Under the Company’s 2014 Stock Option and Grant Plan, as amended (the “2014 Plan”), the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors, and consultants. The Company issued four types of equity awards under the 2014 Plan, 1) one-tier RSAs, 2) two-tier RSAs, 3) two-tier RSUs, and 4) stock options. Each of these types of equity awards were outstanding as of December 31, 2018, as follows:
•One-tier RSAs, which have a service-based vesting condition over a four-year period. These awards have a cliff vesting period of one year and continue to vest quarterly thereafter. The Company began granting one-tier RSAs under its 2014 Plan in April 2014. The last grant of one-tier RSAs in the 2014 Plan was in August 2014. The Company recognizes compensation expense associated with one-tier RSAs ratably on a straight-line basis over the requisite service period. Additional one-tier RSAs have been issued subsequent to August 2014, outside the 2014 Plan, in relation to business combinations.
•Two-tier RSAs, which have both a service-based vesting condition and a performance vesting condition. The service-based vesting period for these awards is four years with a cliff vesting period of one year and continue to vest quarterly thereafter. The performance vesting condition is satisfied on the earlier of (i) an acquisition or change in control of the Company or (ii) upon the occurrence of an initial public offering by the Company. As of December 31, 2018, no compensation expense related to two-tier RSAs had been recognized, because the performance vesting condition was not satisfied. In January 2019, for two-tier RSAs, at the time the performance condition becomes probable, the Company has recognized the
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cumulative stock-based compensation expense for the awards that have met their service-based vesting condition using the accelerated attribution method of $1.1 million.
•Two-Tier RSUs, which have both a service-based vesting condition and a performance vesting condition. The service-based vesting period for these awards is generally four years with a cliff vesting period of one year and continue to vest quarterly thereafter. The performance vesting condition is satisfied on the earlier of (i) an acquisition or change in control of the Company or (ii) upon the occurrence of an initial public offering by the Company. The Company began granting two-tier RSUs under its 2014 plan in April 2014. Certain two-tier RSUs contained change in control provisions and vesting was accelerated upon close of the acquisition in January 2019. As of December 31, 2018, no compensation expense related to two-tier RSUs had been recognized because the performance vesting condition was not satisfied. In January 2019, for two-tier RSUs, at the time the performance condition became probable, the Company recognized the cumulative stock-based compensation expense for the awards that have met their service-based vesting condition using the accelerated attribution method of $125.2 million.
•Stock options, which have a service-based vesting period. The Company began granting stock options under its 2014 plan in August 2016. The last grant of stock options in the 2014 Plan was in October 2018. Certain stock options contained change in control provisions and vesting was accelerated upon close of the acquisition in January 2019. The Company records compensation expense related to stock options granted to employees and contractors based on the fair values estimated using the Black-Scholes pricing model on the measurement date. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the Black-Scholes pricing model, including the fair value of its common stock, expected term, expected volatility, risk-free interest rate, and expected dividend yield. These judgments are made as follows:
Fair Value of Common Stock
The absence of an active market for the Company’s common stock required it to estimate the fair value of its common stock for purposes of granting stock options, RSAs as well as RSUs, and for determining equity and cash settled stock-based compensation expense for the periods presented. The Company obtained contemporaneous third-party valuations to assist in determining the estimated fair value of its common stock. These contemporaneous third-party valuations used the methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
The Company considered numerous factors in assessing the estimated fair value of its common stock, including the rights, preferences, and privileges of its redeemable convertible preferred stock relative to those of its common stock; market multiples of comparable public companies in its industry as indicated by their market capitalization and guideline merger and acquisition transactions; the Company’s performance and market position relative to its competitors, who may change from time to time; the Company’s historical financial results and estimated trends and prospects for its future performance; the economic and competitive environment; the likelihood and timeline of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; any adjustments necessary to recognize a lack of marketability for its common stock; and precedent sales of or offers to purchase its common stock.
Expected Term
The Company estimated the expected term using the simplified method, as the Company did not have sufficient historical exercise activity to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The simplified method calculated the average period the stock options were expected to remain outstanding as the midpoint between the vesting date and the contractual expiration date of the award.
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Expected Volatility
The expected volatility rate was based on an average of the historical volatilities of the publicly traded equity securities of several entities with characteristics similar to those of the Company, as there had been no public market for the Company’s common stock to date and as a result the Company did not have any trading history of its common stock
Risk-Free Interest Rate
The risk-free interest rate was based on the U.S. Treasury security in effect at the time of grant for maturities corresponding with the expected term of the option.
Expected Dividend Yield
The Company had not paid and does not expect to pay dividends. Consequently, the Company used an expected dividend yield of zero.
The fair values of the stock options granted during the year 2018 were calculated using the following assumptions:
As of December 31, | |||||
| 2018 | |||||
| Fair value of underlying common stock | $13.30 - $15.38 | ||||
| Expected term (in years) | 6.0 - 6.4 | ||||
| Expected volatility | 45.0% | ||||
| Risk free interest rate | 2.5% - 3.0% | ||||
| Expected dividend yield | — | ||||
As of December 31, 2018, 555,839 stock options were vested and exercisable, respectively. The weighted-average exercise prices of the exercisable stock options were $12.80 as of December 31, 2018. The weighted-average remaining contractual term of the exercisable stock options was 7.7 years at December 31, 2018. The aggregate intrinsic value of options vested and expected to vest as of December 31, 2018 was $48.4 million. The aggregate intrinsic value of options exercisable as of December 31, 2018 was $13.8 million.
Founder Awards
In September 2018, the Company’s board of directors approved co-founder equity grants to Messrs. Ryan Smith and Jared Smith. These were the first equity grants offered to the founders in the history of the Company. The grants issued were a mix of time-based grants and performance grants based upon the future success of the Company. The grants included RSUs with respect to 11.25 million shares of Class B common stock in the aggregate, or, collectively, the Founder Grants, of which 9.0 million RSUs were granted to Mr. Ryan Smith, our co-founder and then Chief Executive Officer, and 2.25 million RSUs were granted to Mr. Jared Smith, our co-founder and then President. Subject to satisfaction of a liquidity-based vesting condition, 50% of the Founder Grants vest upon the satisfaction of a service condition (“Founder Time Grants”), and 50% of the Founder Grants vest upon the satisfaction of a service condition and achievement of certain stock price goals (“Founder Performance Grants”), each as described below. The liquidity-based vesting condition for each Founder Grant is the earlier to occur of (i) a Sale Event (as defined in our 2014 Plan) or (ii) the consummation of an initial public offering. Vesting is also contingent upon the individuals maintaining certain positions with the Company.
The Founder Performance Grants were eligible to vest over the five-year period following August 1, 2018. The Founder Performance Grants comprised five tranches that were eligible to vest upon the first applicable vesting date, or Vesting Date, to occur following the achievement of specified stock price goals, for each, a Stock Price Target, measured as a ninety-day rolling average trading price at any time during the 12-month period prior to a Vesting Date. The stock price goals ranged from $35.56 to $71.12 and upon the achievement of each price goal 20% of the shares would vest. In November 2019 the Founder Performance Grants were modified such that upon the Merger
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with SAP the awards would be terminated and forfeited for no consideration, which occurred in January 2019. No compensation expense related to the Founder Performance Grants had been recognized.
The Founder Time Grants satisfy the service condition over the five-year period following August 1, 2018, with the initial 20% satisfying the service condition on August 1, 2019 and the remaining 80% satisfying the service condition in sixteen equal quarterly installments thereafter. In addition, upon a Sale Event, 50% of any then-unvested portion of the Founder Time Grants would vest in full. At the time the performance condition became probable as a result of the SAP Merger, the Company recognized the cumulative stock-based compensation expense of $52.1 million for the awards that had met the service-based vesting condition using the accelerated attribution method.
In January 2019, the Company’s board of directors approved co-founder equity grants to Messrs. Ryan Smith and Jared Smith. The grants issued are time-based grants. The grants include RSUs with respect to 6.1 million shares of common stock in the aggregate (“Founder New Grants”), of which 4.07 million RSUs were granted to Mr. Ryan Smith, our co-founder and then Chief Executive Officer, and 2.03 million RSUs were granted to Mr. Jared Smith, our co-founder and then President. These awards are subject to the satisfaction of a service condition over a two-year period from the closing date, with the initial 25% satisfying the service condition on July 23, 2019 and the remaining 75% satisfying the service condition in six equal quarterly installments thereafter.
Equity activity for the 2014 Plan – prior to the capital restructuring - was as follows for the years ended December 31, 2019 and 2018:
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| Stock options outstanding | One-Tier Restricted Stock Outstanding | Two-Tier Restricted Stock Outstanding | Two-Tier Restricted Stock Units Outstanding | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in thousands | Number of shares available for issuance under the 2014 Plan | Number of shares outstanding under the 2014 Plan | Weighted average exercise price per share (in $) | Weighted average remaining contractual term (years) | Number of shares outstanding under the 2014 Plan | Weighted average grant date fair value per share (in $) | Number of shares outstanding under the 2014 Plan | Weighted average grant date fair value per share (in $) | Number of shares outstanding under the 2014 Plan | Weighted average grant date fair value per share (in $) | Weighted average remaining contractual term (years) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 563 | 1,070 | 12.79 | 9.40 | 2,231 | 0.19 | 995 | 0.24 | 18,230 | 6.05 | 5.80 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional shares authorized | 23,214 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares granted | (20,556) | 824 | 14.57 | — | — | — | — | 19,732 | 14.90 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares forfeited | 982 | — | — | — | — | — | — | (982) | 9.07 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares repurchased | — | — | — | (40) | 0.26 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 4,203 | 1,894 | 13.57 | 8.20 | 2,191 | 0.18 | 995 | 0.24 | 36,980 | 10.68 | 5.50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares granted | (6,700) | — | — | — | — | — | — | 6,700 | 34.92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares cancelled | 5,600 | — | — | — | — | — | — | (5,600) | 15.38 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares forfeited | 192 | — | — | — | — | — | — | (192) | 2.33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares settled | — | (1,498) | 13.50 | (2,191) | 0.18 | (995) | 0.24 | (14,277) | 7.52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares exchanged | — | (396) | 13.81 | — | — | — | — | (23,611) | 18.46 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cancelled authorized shares | (3,295) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cash Awards
Cash Awards Replacing Pre-Acquisition Qualtrics Awards (Qualtrics Rights)
In conjunction with the acquisition, unvested Restricted Share Awards (RSAs), Restricted Share Units (RSUs), and options held by employees of Qualtrics were exchanged into stock-based cash awards (Qualtrics Rights).
The replacement awards closely mirror the terms of the replaced awards except that:
•The replaced awards were planned to be settled by issuing equity instruments, whereas the replacement awards are settled in cash.
•RSAs, RSUs, and options granted before 2018 and unvested as at the closing date of the Qualtrics acquisition were converted into the right to receive, at the originally agreed vesting dates, an amount in cash equal to the number of RSAs and RSUs held as at the vesting date multiplied by $35.00 per share. The respective amount of options equals the number of options held as at the vesting date multiplied by $35.00 per share less the originally-agreed exercise price.
•RSAs and RSUs granted in 2018 and thereafter and unvested as at the closing date of the Qualtrics acquisition were converted into awards that are indexed to SAP’s share price as follows: SAP’s consideration per share ($35.00) was divided by the average closing price of the SAP share over the five trading days on the closing date (€91.28), translated into US$ ($103.75), and the result (Equity Award Exchange Ratio of 0.3373) was multiplied by the average closing price of the SAP share over the five trading days prior to the exercise or vesting date.
There were 24.7 million unvested Qualtrics Rights as at the closing date of the acquisition, representing a fair value of $848 million. Of the total fair value, $244 million was allocated to pre-modification service, while $604 million was allocated to future services to be provided. Post-modification compensation expense will be recognized as the awards vest over the remainder of the original vesting terms. The remaining vesting periods for such Qualtrics Rights are in a range of up to five years from closing date. In January 2019, at the time of the modification, the Company recognized the cumulative stock-based compensation expense for the awards that have been exchanged of $173.5 million.
The unvested Qualtrics Rights include the converted Founder Grants. All awards are paid out in cash upon vesting. SAP is contractually obligated to contribute the required cash to settle the awards.
From January 23, 2019, through December 31, 2019, 7.8 million Qualtrics Rights vested and were settled by an amount of $311 million in cash. During the year ended December 31, 2020, 7.8 million Qualtrics Rights vested and were settled by an amount of $337 million in cash. The unrecognized expense related to Qualtrics Rights was $69 million and $252 million as of December 31, 2020 and 2019, and will be recognized over a remaining vesting period of up to three years and four years, respectively.
As of December 31, 2020 and 2019, 5.5 million and 11.7 million outstanding Qualtrics Rights were valued based on the SAP share of €107.22 and €120.32, respectively, multiplied by the Equity Award Exchange Ratio translated into US$ and 2.0 million and 4.3 million, respectively, outstanding Qualtrics Rights were valued at $35.00. The weighted-average remaining contractual term of the Qualtrics Rights was 1.5 and 1.7 years at December 31, 2020 and 2019, respectively. The weighted average SAP share price for the Qualtrics Rights settled in 2020 and 2019 is €113.34 and €106.15, respectively.
Move SAP Plan (SAP RSU Plan)
To retain and motivate executives and certain employees, SAP grants virtual shares representing a contingent right to receive a cash payment determined by the SAP share price and the number of share units that ultimately vest.
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Granted share units will vest in annual tranches over a three year service period.
•Move SAP RSUs have a service-based vesting condition over a three-year period. These awards have a cliff vesting period of one year and continue to vest annually thereafter. The Company began granting under Move SAP Plan in March 2019. The Company recognizes compensation expense associated with the RSUs ratably on a straight-line basis over the requisite service period. All awards are paid out in cash upon vesting.
The fair values of the cash awards at the December 31, 2020 and 2019 were calculated using the following assumptions:
| SAP RSU Plan | |||||||||||
| As of December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Fair value of underlying common stock | €107.22 | €120.32 | |||||||||
| Weighted average remaining life at year end (in years) | 1.2 | 1.5 | |||||||||
| Weighted average fair value at year end | €105.28 | €118.08 | |||||||||
| Risk free interest rate | (0.58%) to (0.14%) | (0.53%) to (0.13%) | |||||||||
| Expected dividend yield | 1.54% | 1.26% | |||||||||
For these awards, the fair value is calculated by subtracting the net present value of expected future dividend payments, if any, until maturity of the respective award from the prevailing share price as at the valuation date. The risk-free interest rate is derived from German government bonds with a similar duration. The SAP dividend yield is based on expected future dividends.
In 2020, 0.3 million Move SAP RSUs vested and were settled by an amount of $44.0 million in cash. The unrecognized expense related to Move SAP RSUs was $143.0 million as of December 31, 2020 and will be recognized over a remaining vesting period of up to three years. There were no SAP RSUs that vested and therefore no cash settlements for the year ended 2019.
Changes in Outstanding Awards Under Our Cash-Settled Plans
| in thousands | Qualtrics Rights | SAP RSU Plan | |||||||||
| 12/31/2018 | — | — | |||||||||
| Granted | 24,666 | 1,051 | |||||||||
| Transferred in/out | — | 1 | |||||||||
| Settled/exercised | (7,776) | — | |||||||||
| Forfeited | (883) | (1) | |||||||||
| 12/31/2019 | 16,007 | 1,051 | |||||||||
| Granted | — | 873 | |||||||||
| Transferred in/out | — | 4 | |||||||||
| Settled/exercised | (7,790) | (324) | |||||||||
| Forfeited | (699) | (177) | |||||||||
| 12/31/2020 | 7,518 | 1,427 | |||||||||
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| in thousands | Qualtrics Rights | SAP RSU Plan | |||||||||
| Total carrying amount of liabilities as at December 31, 2020 | 241,485 | 44,428 | |||||||||
| Total carrying amount of liabilities as at December 31, 2019 | 423,081 | 25,147 | |||||||||
| Total expense recognized in 2020 | 154,321 | 62,467 | |||||||||
| Total expense recognized in 2019 | 663,309 | 25,076 | |||||||||
Own SAP Plan (Own)
Starting in July 2019 under Own, employees have the opportunity to purchase, on a monthly basis, SAP shares without any required holding period. The investment per each eligible employee is limited to a percentage of the respective employee’s monthly base salary. The Company matches the employee investment by 40% and adds a subsidy equivalent of €20 per month for non-executives. The number of shares purchased under this plan was 185,709 and 53,293 in 2020 and 2019, respectively. The Company recognized compensation expense associated with the match of $7.2 million and $2.0 million in 2020 and 2019, respectively.
As a result of our stock-based payments transactions, the Company has commitments to grant SAP shares to employees. The Company intends to meet these commitments through SAP by reissuing treasury shares or through an agent who administers the equity-settled programs and purchases shares on the open market. The Company has fulfilled the obligations of Own through an agent.
Sale of Class A Common Stock
As discussed in Note 11, regarding the sale of Class A common stock to Q II, the 6,000,000 shares have certain vesting conditions including the completion of our IPO and the continued employment of Ryan Smith through June 30, 2021. Based on the terms of purchase agreement, the sale of our Class A common stock to Q II is accounted for as an early exercise of a stock option award. The IPO is considered a performance condition that upon occurring in January 2021 results in a cumulative catch-up of recognizing expense of the fair value of the option for the pro-rata portion of the vesting period that had occurred and the remaining expense will be recorded over the remaining vesting period.
13.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.
Due to the impact of the SAP acquisition of Qualtrics, the Company’s capital structure for the years ended December 31, 2019 and 2018 are not comparable. As a result, the presentation of net loss per share for the year ended prior to the transaction is not meaningful and only net loss per share for periods subsequent to the SAP acquisition of Qualtrics are presented herein.
| in thousands (except share amount) | Year Ended December 31, | January 23 through December 31, | |||||||||
| 2020 | 2019 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to common shareholder | $ | (272,502) | $ | (743,010) | |||||||
| Denominator: | |||||||||||
| Weighted-average shares outstanding for basic loss per share | 423,334,994 | 423,170,610 | |||||||||
| Basic loss per share | $ | (0.64) | $ | (1.76) | |||||||
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14.INCOME TAXES
For the years ended December 31, 2020, 2019, and 2018, the Company’s (loss) from continuing operations before provision for income taxes was as follows:
Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Domestic | $ | (297,724) | $ | (1,016,772) | $ | (41,919) | |||||||||||
| Foreign | 41,699 | 22,138 | 8,967 | ||||||||||||||
| Loss before income taxes | $ | (256,025) | $ | (994,634) | $ | (32,952) | |||||||||||
The federal, state and foreign income tax provisions are summarized as follows:
Year Ended December 31, | |||||||||||||||||
| in thousands | 2020 | 2019 | 2018 | ||||||||||||||
| Current taxes: | |||||||||||||||||
| Federal | $ | — | $ | (127) | $ | — | |||||||||||
| State | 166 | 175 | (23) | ||||||||||||||
| Foreign | 6,970 | 18,326 | 4,135 | ||||||||||||||
| Total current taxes | $ | 7,136 | $ | 18,374 | $ | 4,112 | |||||||||||
| Deferred taxes: | |||||||||||||||||
| Federal | $ | — | $ | 127 | $ | (515) | |||||||||||
| State | — | — | (261) | ||||||||||||||
| Foreign | 9,341 | (5,502) | 1,020 | ||||||||||||||
| Total deferred taxes | 9,341 | (5,375) | 244 | ||||||||||||||
| Total | $ | 16,477 | $ | 12,999 | $ | 4,356 | |||||||||||
A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate is as follows:
Year Ended December 31, | |||||||||||||||||
| in % | 2020 | 2019 | 2018 | ||||||||||||||
| Tax at U.S. statutory rates | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State tax, net of federal tax effect | 3.4 | % | 5.5 | % | 4.5 | % | |||||||||||
| Foreign taxes | (3.2) | % | (1.0) | % | (8.4) | % | |||||||||||
| Items not deductible for tax | (0.3) | % | (0.6) | % | (3.6) | % | |||||||||||
| Equity compensation | (0.3) | % | 8.4 | % | (1.1) | % | |||||||||||
| Tax credits | 6.7 | % | 3.1 | % | 27.6 | % | |||||||||||
| Changes in valuation allowance | (27.6) | % | (36.7) | % | (45.4) | % | |||||||||||
| Changes in tax reserves | (5.0) | % | (1.0) | % | (7.8) | % | |||||||||||
| Other items, net | (1.1) | % | — | % | — | % | |||||||||||
| Effective income tax rate | (6.4) | % | (1.3) | % | (13.2) | % | |||||||||||
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Significant components of the Company’s deferred tax assets (liabilities) are as follows:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Deferred tax assets: | |||||||||||
| Investment in partnership | $ | 112,190 | $ | 111,172 | |||||||
| Tax credits | 61,616 | 40,660 | |||||||||
| Charitable contribution carryovers | 711 | 665 | |||||||||
| Stock compensation | 9,031 | 8,171 | |||||||||
| Net operating loss carryovers | 310,462 | 250,071 | |||||||||
| Other | 11,574 | 2,721 | |||||||||
| Gross deferred tax assets | 505,584 | 413,460 | |||||||||
| Valuation allowance | (481,822) | (403,033) | |||||||||
| Net deferred tax assets | 23,762 | 10,427 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Compensation accruals | (18,474) | (4,096) | |||||||||
| Other | (11,166) | (3,018) | |||||||||
| Total net deferred tax assets (liabilities) | $ | (5,878) | $ | 3,313 | |||||||
The Company conducts the majority of its operations through a limited liability company that is wholly owned within the consolidated group. Accordingly, the outside basis difference in the limited liability company is reflected as a deferred tax asset, shown as “investment in partnership.” During 2020, the Company effectuated an internal restructuring, which removed certain foreign entities from the limited liability company ownership structure. As a result, the deferred tax balances of those foreign entities are now presented separately from the partnership deferred tax asset.
ASC 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 considered all available evidence, both positive and negative, including historical levels of income, legislative developments, expectations, and risks associated with estimates of future taxable income, and prudent and feasible tax planning strategies. The valuation allowance for deferred tax assets was $481.8 million and $403.0 million at December 31, 2020 and 2019, respectively. During 2020, the valuation allowance increased by $78.8 million primarily due to current year pre-tax book losses in the United States.
As of December 31, 2020, the Company had approximately $1,239.3 million of consolidated federal net operating loss carryforwards and $892.1 million of state net operating loss carryforwards available to offset future taxable income, respectively. If unused, federal net operating loss carryforwards of $38.4 million will expire between 2033 and 2037. $1,200.9 million of federal net operating loss carryforwards can be carried forward indefinitely. If unused, state net operating loss carryforwards of $609.6 million will expire between 2023 and 2040. $282.5 million of state net operating loss carryforwards can be carried forward indefinitely. The Company has $3.2 million of foreign jurisdiction net operating loss carryforwards that will expire beginning in 2040. The Company has federal research tax credit carryforwards of $36.7 million and Utah research tax credit carryforwards of $3.7 million, which if not utilized, will expire between 2033 and 2040, and 2028 and 2034, respectively. The Company has foreign tax credit carryforwards of $15.7 million which will expire between 2024 and 2030, if not utilized.
As described above, the Company has 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, a portion of the Company’s net operating loss and credit carryforwards would not be available for the Company’s use in future tax periods as the net operating losses, or underlying deductions, and credits have already been partially absorbed by SAP America, Inc.
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Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to approximately $58 million at December 31, 2020. Those earnings are considered to be indefinitely reinvested; accordingly, no provision for state, local and foreign withholding income taxes has been provided hereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the complexities associated with its hypothetical calculation.
ASC 740 requires the Company to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The following table summarizes the activity related to unrecognized tax benefits for the periods December 31, 2020 and 2019:
As of December 31, | |||||||||||
| in thousands | 2020 | 2019 | |||||||||
| Beginning balance | $ | 15,041 | $ | 4,970 | |||||||
| Additions for tax positions related to current year | 13,089 | 9,301 | |||||||||
| Additions for tax positions related to prior year | — | 910 | |||||||||
| Reductions for settlements | — | (140) | |||||||||
| Ending balance | $ | 28,130 | $ | 15,041 | |||||||
The Company does not anticipate material changes within 12 months of the reporting date to its unrecognized tax benefits as of December 31, 2020. At December 31, 2020, the Company had $28.1 million of total unrecognized tax benefits, of which, if recognized, $14.3 million would impact the Company’s effective tax rate. Of the $28.1 million of 2020 unrecognized tax benefits, $13.8 million is offset to deferred tax assets and the remaining $14.3 million is recorded as a long term liability. At December 31, 2019, the Company had $15.0 million of total unrecognized tax benefits, of which, if recognized, $5.7 million would impact the Company’s effective tax rate. Of the $15.0 million of 2019 unrecognized tax benefits, $9.3 million is offset to deferred tax assets and the remaining $5.7 million is recorded as a long term liability.
The Company recognizes interest and penalties related to unrecognized tax benefits as part of pre-tax book income or expense, which totaled $1.5 million, $0.1 million, and $0.8 million for 2020, 2019, and 2018, respectively. The Company’s accrual for interest and penalties totaled $2.4 million and $0.9 million at December 31, 2020 and 2019, respectively.
The Company files federal, state, and foreign income tax returns in various jurisdictions such as Australia, Ireland, the United Kingdom, and the United States, with varying statutes of limitations. The tax years from 2017 forward remain subject to examination for the Company and its U.S. subsidiaries. Tax filings for the Company’s foreign subsidiaries remain subject to examination by local tax authorities from 2016 and onward.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the United States on March 27, 2020, and the Consolidated Appropriations Act, 2021 (the “Appropriations Act”) was enacted on December 27, 2020. Neither the CARES Act nor the Appropriations Act have a material impact on the Company’s provision for income taxes for 2020.
15.RELATED PARTY TRANSACTIONS
On January 23, 2019, SAP acquired all outstanding shares of Qualtrics International Inc. Since the acquisition, SAP and its affiliates are related parties to the Company. The Company has entered into certain arrangements for services and products with SAP and its affiliates.
The consolidated statements of operations and comprehensive income statements include all revenues and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. The year ended December 31, 2020 and 2019 consolidated statement of operations also includes expenses of SAP directly charged or allocated 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. Certain costs
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are allocated to the Company based on direct usage/benefit where identifiable, with the remainder allocated on a pro rata basis of revenues or headcount.
These charges were determined based on actual expenses incurred on Qualtrics’ behalf or by usage. The total costs charged from SAP and its affiliates were $38.4 million and $34.1 million during the year ended December 31, 2020 and 2019, respectively. There were no costs charged by SAP in 2018 due to Qualtrics being a standalone company. During the year ended December 31, 2020 and 2019, the Company received revenues of $11.8 million and $2.4 million, respectively, from SAP and its affiliates in exchange for services and products. As of December 31, 2020 and 2019, the Company had outstanding accounts receivables from SAP’s affiliates of $0.2 million and $0.0 million, respectively, and outstanding trade payables to SAP and its affiliates of $13.6 million and $14.4 million, respectively. All open items within both balances are due within one year.
Certain costs incurred by SAP for Qualtrics’ benefit, including salaries and benefits of SAP’s sales staff totaled $19.2 million and $15.2 million during the year ended December 31, 2020 and 2019, respectively. In order to compensate for Qualtrics’ efforts to support SAP sales, SAP received an indirect benefit, such as salaries and benefits of Qualtrics’ sales staff in the amount of $20.2 million and $8.7 million during the year ended December 31, 2020 and 2019, respectively. Qualtrics’ expenses as a separate, standalone company in the future could differ materially from the historical results presented herein.
These direct charges and allocations may not include all of the actual expenses that would have been incurred by the Company and may not reflect its consolidated results of operations, financial position and cash flows had it been a standalone company during the periods presented. It is not practicable to estimate actual costs that would have been incurred had Qualtrics been a standalone company during the periods presented. Actual revenues and expenses that might have resulted had we been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions we might have performed ourselves or outsourced and strategic decisions we might have made in areas such as information technology and infrastructure.
Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Qualtrics and its operations and that the consolidated statement of operations for the year ended December 31, 2020 and 2019.
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 relationships with certain of these entities in the ordinary course of business. During the year ended December 31, 2020 and 2019, the recorded revenue with these related parties totaled $0.5 million and $0.3 million, respectively. Accounts receivable from these related parties as of December 31, 2020 and 2019 totaled $0.0 million and $0.3 million, respectively.
During 2015, the Company entered into a 10-year property lease agreement with an entity owned by certain Company founders. For the year ended December 31, 2018, the Company paid $2.2 million related to the lease agreement. In October 2018, the Company terminated its 10-year lease agreement with an entity owned by certain Company founders and entered into a new lease agreement for the same property with an unrelated entity.
As of December 31, 2017, the Company had an outstanding loan of $1.0 million to an executive of the Company. This loan was entered into during 2017. The loan matured and became due on the earlier of May 23, 2022, 60 days following the date of termination of employment, or immediately prior to the Company’s initial filing of a registration statement under the Securities Act of 1933 covering the offer and sale of the Company’s equity securities. Until that time, the loan accrued interest at 2.04% per annum, compounded annually. The loan was repaid in full in July 2018.
In December 2020, Ryan Smith, our Founder and Executive Chair, acquired a majority interest in the Utah Jazz basketball franchise, the associated venue, and certain related sports teams and operations and business interests. The Company has ongoing sales revenue with the Utah Jazz that totaled $0.3 million for the year ended December 31, 2020. 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. Sales and marketing and general and administrative expenses with the Utah Jazz totaled $2.9 million for the year ended December 31, 2020.
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16.DEFINED CONTRIBUTION PLAN
In 2018 and through June 30, 2019, the Company had a 401(k) plan covering eligible employees of the Company. Eligible employees were U.S. full-time or part-time employees who were at least 18 years of age and who met a 90-day minimum service requirement. The 401(k) plan was subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Eligible participants could contribute up to 90% of compensation. Participants directed the investment of their contributions into various investment options offered by the 401(k) plan. From 2016 until June 30, 2019, the Company contributed, at its discretion, 3% of eligible U.S. employee compensation to the 401(k) plan.
Since July 1, 2019, the Company has had a 401(k) plan administered by SAP, with employer contributions funded by the Company. Eligible employees are able to contribute up to 25% of their compensation to the 401(k) plan each pay period, and then the Company automatically makes partial matching contributions of up to 4.5% of their compensation, up to a maximum employer contribution of $12,825 in 2020 and $12,600 in 2019. The employer matching contributions partially vest after two years and fully vest after three years of employee service. The Company’s contributions to the 401(k) plans for the years ended December 31, 2020, 2019, and 2018 totaled $16.7 million, $8.2 million, $4.0 million, respectively.
17.SUBSEQUENT EVENTS
On December 28, 2020, we initiated a voluntary exchange offer pursuant to which we offered our eligible employees, including our executive officers, the ability to exchange their existing Qualtrics Rights and SAP RSUs for awards with underlying shares of our Class A common stock. The terms of the voluntary exchange offer, including the exchange ratio, were designed to preserve the intrinsic value of the Qualtrics Rights and SAP RSUs that were tendered. Upon completion of the exchange offer on January 28, 2021, 5.4 million of Qualtrics Rights and 1.3 million SAP RSU awards were exchanged into 12.8 million Qualtrics RSU awards, representing 93% of the outstanding Qualtrics Rights and SAP RSU awards.
In January 2021, our board of directors authorized the issuance of new RSU awards representing approximately 61.4 million shares of our Class A common stock. These awards were granted to eligible employees and the executive officers of the Company on January 28, 2021. Approximately 44.2 million of the RSU awards are subject to time-based vesting, with 25% vesting on February 1, 2022 and ratably thereafter for twelve quarters, such that this portion of the RSUs will be fully vested on the fourth anniversary of their vesting commencement date. The remaining 17.2 million RSU awards vest in four equal annual installments based on the achievement of certain performance conditions, as established by our board of directors and measured annually, with vesting of 100% of each installment in the event that the performance targets are achieved and ratable downward adjustments in the event that the performance targets are partially achieved.
On January 5, 2021, our board of directors approved a one-time optional salary adjustment program that provided eligible employees with the opportunity to reduce their annual cash base salary, effective as of February 1, 2021 and on an ongoing basis, in exchange for a one-time RSU grant valued at a multiple of the cash forgone as a result of an employee’s participation in the program. RSUs granted pursuant to this program totaled 2.5 million and vest quarterly over four years, with a vesting commencement date of February 1, 2021.
In January 2021, we declared a $2.4 billion dividend to SAP, payable in two notes. The first note totaled $1.9 billion and was paid on February 1, 2021. The second note totaled $500 million and bears an interest rate of 1.35%, compounded semi annually. The second note and accrued interest is payable on or before the earlier of January 2031 or the date at which cash raised in additional public offerings exceeds $500 million.
On February 1, 2021, we closed our initial public offering, or IPO, in which we issued and sold 59,449,903 shares of Class A common stock at $30.00 per share for aggregate net proceeds of $1,688 million, after deducting underwriters' discounts and offering expenses payable by us. On February 1, 2021, the various agreements between SAP and us, as described in our final prospectus filed with the SEC on January 28, 2021 pursuant to Rule 424(b)(4), became effective.
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On December 23, 2020, Silver Lake Partners VI DE (AIV), L.P. (“Silver Lake”) agreed to purchase $550 million of shares of our Class A common stock, comprising (a) 15,018,484 shares at $21.64 per share and (b) $225 million of shares at the initial public offering price of $30 per share, in a concurrent private placement transaction (the “Silver Lake investment”). On February 1, 2021, we closed our private placement transaction with Silver Lake.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 December 31, 2020. 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 December 31, 2020, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our 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
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deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information
None.
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Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the definitive proxy statement (the “2021 Proxy Statement”) for our 2021 annual meeting of shareholders. The 2021 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
Our board of directors has adopted SAP’s code of business conduct, which applies to all of our employees, officers, and directors, including our Chief Executive Officer, Chief Financial Officer, and other executive and senior financial officers. Our board of directors has also adopted a code of ethics that applies to all of our employees, officers, and directors, including our Chief Executive Officer, Chief Financial Officer, and other executive and senior financial officers. The full text of SAP’s code of business conduct and our code of ethics is posted on the investor relations page on our website at www.qualtrics.com/investors, and is available free of charge in print to any shareholder who requests it. Requests for copies should be addressed to the Secretary at mailing address 333 West River Park Drive, Provo, Utah 84604. We intend to disclose any amendments to our code of ethics, or waivers of its requirements, on our website or in filings under the Exchange Act.
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Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2021 Proxy Statement for our 2021 annual meeting of shareholders. The 2021 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the 2021 Proxy Statement, which will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
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Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the 2021 Proxy Statement, which will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the 2021 Proxy Statement, which will be filed with the SEC not later than 120 days subsequent to December 31, 2020.
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Part IV.
Item 15. Exhibits and Financial Statement Schedules
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 10.1*+ | ||||||||
| 10.2*+ | ||||||||
| 10.3*+ | ||||||||
| 10.4*+ | ||||||||
| 10.5* | ||||||||
| 10.6*+ | ||||||||
| 10.7*+ | ||||||||
| 10.8* | ||||||||
| 10.9*+ | ||||||||
| 10.10* | ||||||||
| 10.11* | ||||||||
| 10.12# | ||||||||
| 10.13# | ||||||||
| 10.14# | ||||||||
| 10.15# | ||||||||
| 10.16# | ||||||||
| 10.17# | ||||||||
| 10.18+† | ||||||||
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| 10.19+† | ||||||||
| 10.20 | ||||||||
| 10.21+ | ||||||||
| 10.22+ | ||||||||
| 10.23# | ||||||||
| 10.24# | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
________________
* Filed herewith.
** Furnished herewith.
# Represents management compensation plan, contract or arrangement.
+ Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.
† Portions of this exhibit (indicated by asterisks) have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Provo, Utah, on the 9th day of March, 2021.
| 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) | |||||
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Zig Serafin and Chris Beckstead, and each of them, as his or her true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Zig Serafin | Chief Executive Officer (Principal Executive Officer) and Director | March 9, 2021 | ||||||||||||
| Zig Serafin | ||||||||||||||
| /s/ Rob Bachman | Chief Financial Officer (Principal Financial and Accounting Officer) | March 9, 2021 | ||||||||||||
| Rob Bachman | ||||||||||||||
| /s/ Ryan Smith | Founder, Executive Chair and Director | March 9, 2021 | ||||||||||||
| Ryan Smith | ||||||||||||||
| /s/ Christian Klein | Director | March 9, 2021 | ||||||||||||
| Christian Klein | ||||||||||||||
| /s/ Luka Mucic | Director | March 9, 2021 | ||||||||||||
| Luka Mucic | ||||||||||||||
| /s/ Sindhu Gangadharan | Director | March 9, 2021 | ||||||||||||
| Sindhu Gangadharan | ||||||||||||||
| /s/ Paula Hansen | Director | March 9, 2021 | ||||||||||||
| Paula Hansen | ||||||||||||||
| /s/ Donald (DJ) Paoni | Director | March 9, 2021 | ||||||||||||
| Donald (DJ) Paoni | ||||||||||||||
| /s/ Egon Durban | Director | March 9, 2021 | ||||||||||||
| Egon Durban | ||||||||||||||
| /s/ Kelly Steckelberg | Director | March 9, 2021 | ||||||||||||
| Kelly Steckelberg | ||||||||||||||
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Exhibit 10.1
MASTER TRANSACTION AGREEMENT
dated as of February 1, 2021
between
SAP SE
and
QUALTRICS INTERNATIONAL INC.
TABLE OF CONTENTS
1
2
MASTER TRANSACTION AGREEMENT
This Master Transaction Agreement is dated as of the 1st day of February, 2021, between SAP SE, a European Company (Societas Europaea), registered in accordance with the corporate laws of Germany and the European Union (“SAP”), and Qualtrics International Inc., a Delaware corporation (“Qualtrics”, with each of SAP and Qualtrics a “Party,” and together, the “Parties”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in ARTICLE VI hereof.
RECITALS
WHEREAS, SAP is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP, through Qualtrics, is engaged in the business of experience management software and services, including providing a technology platform for organizations to collect, manage, analyze and take action on experience data, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission (“Commission”) under the Securities Act (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (“IPO”) of its Class A common stock pursuant to the IPO Registration Statement; and
WHEREAS, the Parties intend in this Agreement to set forth the principal arrangements between SAP and Qualtrics regarding the relationship of the Parties from and after the filing of the IPO Registration Statement and the consummation of the IPO.
NOW, THEREFORE, in consideration of the foregoing and the terms, conditions, covenants and provisions of this Agreement, SAP and Qualtrics mutually covenant and agree as follows:
Article I.
DOCUMENTS AND ITEMS TO BE DELIVERED ON THE IPO DATE
Section i.Documents to be delivered by SAP
. On or prior to the closing of the IPO (the “IPO Date”), SAP will deliver, or will cause its appropriate Subsidiaries to deliver, to Qualtrics all of the following items and agreements:
(1)a duly executed Administrative Services Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.2 (the “Administrative Services Agreement”);
(2)a duly executed Tax Sharing Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.3 (the “Tax Sharing Agreement”);
(3)a duly executed Employee Matters Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.4 (the “Employee Matters Agreement”);
(4)a duly executed Intellectual Property Matters Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.5 (the “Intellectual Property Matters Agreement”);
(5)a duly executed Distribution Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.6 (the “Distribution Agreement”);
(6)a duly executed Insurance Matters Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.7 (the “Insurance Matters Agreement”);
(7)a duly executed Stockholders’ Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.8 (the “Stockholders’ Agreement”);
(8)a duly executed Real Estate Matters Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.9 (the “Real Estate Matters Agreement”); and
(9)such other agreements, documents or instruments as Qualtrics may reasonably require.
Section ii.Documents to be delivered by Qualtrics
. On or prior to the IPO Date, Qualtrics will deliver to SAP all of the following items and agreements:
(1)a duly executed counterpart of each agreement or instrument referred to in Section 1.1;
(2)(i) a duly executed promissory note, substantially in the form attached to the IPO Registration Statement as Exhibit 10.10 (“Note 1”), in a principal amount equal to the IPO Dividend Amount (as defined below), and (ii) a duly executed promissory note, substantially in the form attached to the IPO Registration Statement as Exhibit 10.11 (“Note 2”), in a principal amount of $500 million; and
(3)such other agreements, documents or instruments as SAP may reasonably require.
Article II.
THE IPO AND ACTIONS PENDING THE IPO
Section i.Transactions Prior to the IPO
2
. Subject to the occurrence of the events described in this ARTICLE II, SAP intends to cause Qualtrics to consummate the IPO and take, or cause to be taken, the actions specified in this Section 2.1.
(1)Registration Statement. Qualtrics has filed the IPO Registration Statement, and intends to file such amendments or supplements thereto as may be necessary in order to cause the same to become and remain effective as required by law or by the managing underwriters for the IPO (the “Underwriters”), including filing such amendments or supplements to the IPO Registration Statement as may be required by the underwriting agreement to be entered into among Qualtrics and the Underwriters (the “Underwriting Agreement”), the Commission or federal, state or foreign securities laws. Qualtrics also intends to prepare, file with the Commission and cause to become effective a registration statement registering the Class A common stock of Qualtrics under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO or the other transactions contemplated by this Agreement. SAP shall cooperate with Qualtrics in furtherance of the foregoing.
(2)Underwriting Agreement. Qualtrics shall enter into the Underwriting Agreement, which shall in form and substance be satisfactory to SAP and Qualtrics, and Qualtrics shall comply with its obligations thereunder.
(3)NASDAQ Listing. Qualtrics shall prepare, file and use its reasonable best efforts to make effective, an application for listing of its Class A common stock issued in the IPO on the Nasdaq Stock Market (“Nasdaq”), subject to official notice of issuance.
(4)Charter and Bylaws. Immediately prior to the IPO Date, the Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws of Qualtrics, each substantially in the forms attached to the IPO Registration Statement as Exhibits 3.1 and 3.2, respectively, shall be in effect.
Section ii.Cooperation
. Qualtrics shall consult with, and cooperate in all respects with, SAP in connection with the pricing and marketing, including any roadshow presentations, of the Class A common stock of Qualtrics to be offered in the IPO and shall, at SAP’s direction, promptly take any and all actions necessary or desirable to consummate the IPO as contemplated by the IPO Registration Statement and the Underwriting Agreement.
Section iii.Conditions Precedent to Consummation of the IPO
. The obligations of the Parties to consummate the IPO shall be conditioned on the satisfaction of the following conditions (collectively, the “IPO Conditions”):
3
(1)Registration Statement. The IPO Registration Statement shall have been declared effective by the Commission (the time of such effectiveness being the “IPO Effective Time”), and there shall be no stop-order in effect with respect thereto;
(2)Blue Sky. The actions and filings with regard to applicable securities and blue sky laws of any state (and any comparable laws under any foreign jurisdictions) shall have been taken and, where applicable, have become effective or been accepted;
(3)NASDAQ Listing. The Class A common stock of Qualtrics to be issued in the IPO shall have been accepted for listing on the Nasdaq, subject only to official notice of issuance;
(4)Underwriting Agreement. Qualtrics shall have entered into the Underwriting Agreement and all conditions to the obligations of Qualtrics and the Underwriters shall have been satisfied or waived by the party that is entitled to the benefit thereof;
(5)Rollover Shortfall Shares. In the event that holders of the Cash-Settled Equity Awards elect to exchange less than 100% of Cash-Settled Equity Awards for New Share-Settled Equity Awards in the exchange offer by Qualtrics that is described in the IPO Registration Statement, (i) Qualtrics will increase the number of shares of Class A common stock to be sold pursuant to the IPO by such Rollover Shortfall Shares and (ii) the proceeds to Qualtrics from the sale of such Rollover Shortfall Shares will remain on Qualtrics’ balance sheet and there shall not be a corresponding increase in the principal amount of Note 1 or Note 2. “Cash-Settled Equity Awards” shall mean equity-based awards issued to employees of Qualtrics by Qualtrics and/or SAP that are to be settled in cash. “New Share-Settled Equity Awards” shall mean equity-based awards issued by Qualtrics in exchange for Cash-Settled Equity Awards that are to be settled by the issuance of shares of Class A common stock. “Rollover Shortfall Shares” shall mean such additional number of shares of Class A common stock that would have been required to be issued in respect of any Cash-Settled Equity Awards that were not exchanged, or not elected to be exchanged, for New Share-Settled Equity Awards in the exchange offer referred to above and that remain outstanding as of the time of sale of the Firm Shares, if such Cash-Settled Equity Awards had so been exchanged or elected to be exchanged;
(6)Intercompany Notes. After the IPO Effective Time, and prior to the IPO Date, Qualtrics shall have issued Note 1 and Note 2 as a dividend payable to all holders of record of Common Stock as of immediately prior to the IPO Effective Time (other than any such holder of Common Stock who shall have waived its right to receive such dividend) in an amount equal to (i) the amount by which the sum of the anticipated net proceeds to Qualtrics in the IPO (but excluding proceeds received in respect of Rollover Shortfall Shares), plus the proceeds to Qualtrics from all sales of Class A common stock in private placement transactions after the filing of the IPO Registration Statement and occurring substantially concurrent with or prior to the IPO Date, minus anticipated transaction expenses and cash required for the settlement of Cash-Settled Equity Awards vesting in January 2021 and not eligible to be tendered in the exchange offer, exceeds the amount required to provide Qualtrics with approximately $500 million in cash following the closing of the IPO (such amount, the “IPO Dividend Amount”),
4
payable in the form of a promissory note in the form of Note 1, and (ii) $500 million, payable in the form of a promissory note in the form of Note 2;
(7)No Legal Restraints. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the IPO or any of the other transactions contemplated by this Agreement or any Intercompany Agreement shall be in effect;
(8)Deliveries. Each Party shall have made the deliveries required pursuant to Section 1.1 and Section 1.2, respectively; and
(9)Other Actions. Such other actions as either Party may reasonably request to be taken prior to the IPO, in order to assure the successful completion of the IPO, shall have been taken.
Qualtrics shall use its reasonable best efforts to satisfy, or cause to be satisfied, the IPO Conditions, it being understood and acknowledged by the Parties that SAP shall have absolute discretion to proceed with or abandon the IPO.
Article III.
COVENANTS AND OTHER MATTERS
Section i.Other Agreements
. SAP and Qualtrics agree to negotiate, execute and deliver, or cause to be negotiated, executed and delivered by the appropriate parties, as appropriate, such other agreements, instruments and other documents as SAP may reasonably deem necessary or desirable in order to effect the purposes of this Agreement and the Intercompany Agreements.
Section ii.Consent of Holders of Class B Common Stock
.
(1)In addition to any other vote required by law or by the Amended and Restated Certificate of Incorporation of Qualtrics, prior to the Operative Date (as defined in the Amended and Restated Certificate of Incorporation of Qualtrics), the prior affirmative vote of the holders of a majority of the outstanding shares of the Class B common stock, voting separately as a class, shall be required to authorize Qualtrics to (and (in the case of clauses (iii) through (x) and (xiii) below) to authorize or permit any Subsidiary of Qualtrics to), in each case whether directly or indirectly and whether by merger, consolidation, division, operation of law or otherwise:
(i)adopt or implement any stockholder rights plan or similar takeover defense measure;
(ii)consolidate or merge with or into any Person;
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(iii)permit any Subsidiary to consolidate or merge with or into any Person (other than (a) a consolidation or merger of a Wholly-Owned Subsidiary with or into Qualtrics or with or into another Wholly-Owned Subsidiary or (b) in connection with a Permitted Acquisition);
(iv)directly or indirectly acquire Stock, Stock Equivalents or assets (including, without limitation, any business or operating unit) of any Person (other than Qualtrics or its Subsidiaries), in each case in a single transaction or series of related transactions, involving consideration (whether in cash, securities, assets or otherwise, and including Indebtedness assumed by Qualtrics or any of its Subsidiaries and Indebtedness of any entity so acquired) paid or delivered by Qualtrics and its Subsidiaries in excess of $100,000,000; provided, however, that this Section 3.2(a)(iv) shall not require the vote of the holders of Class B common stock in connection with acquisitions of securities pursuant to portfolio investment decisions in the ordinary course of business or transactions to which Qualtrics and one or more Wholly-Owned Subsidiaries are the only parties;
(v)issue any Stock or any Stock Equivalents, except (A) the issuance of shares of Stock of a Wholly-Owned Subsidiary of Qualtrics to Qualtrics or another Wholly-Owned Subsidiary of Qualtrics, (B) pursuant to the IPO or in private placement transactions after the filing of the IPO Registration Statement and occurring substantially concurrent with or prior to the IPO Date or (C) the issuance of shares of Class A common stock or options or other rights to purchase or acquire Class A common stock pursuant to employee benefit plans or programs, including in connection with any exchange offer that occurs at the time of or substantially concurrent with the IPO, or dividend reinvestment plans approved by the Qualtrics board of directors (the “Qualtrics Board”) (provided, however, that notwithstanding the provision of this clause (C), the prior affirmative vote of the holders of a majority of the outstanding shares of the Class B common stock, voting separately as a class, shall be required to authorize any increase in the number of shares reserved and available for issuance under such employee benefit plans or programs in any year in excess of 5% of the outstanding number of shares of Class B common stock and Class A common stock on the immediately preceding December 31);
(vi)conduct any business other than the business of enterprise software and other businesses ancillary thereto;
(vii)make or commit to make any individual or series of related capital expenditures or commitments in excess of $100,000,000;
(viii)create, incur, assume or permit to exist any Indebtedness or guarantee the Indebtedness of any other Person, or permit any Subsidiary to create, incur, assume or permit to exist any Indebtedness or guarantee any Indebtedness of any other Person, in excess of an aggregate principal amount at any time outstanding of $100,000,000;
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(ix)make any loan to any other Person or purchase any debt securities of any other Person, in excess of an aggregate principal amount at any time outstanding of $50,000,000;
(x)redeem, purchase or otherwise acquire (or pay into or set aside funds for a sinking fund for such purpose) any shares of Stock or Stock Equivalents of Qualtrics or a Subsidiary (other than a Wholly-Owned Subsidiary); provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for Qualtrics or any Wholly-Owned Subsidiary pursuant to agreements under which Qualtrics has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment, or through the exercise of any right of first refusal or the conversion or reclassification of any shares of Class B common stock pursuant to clause (vi) of Article IV, Section C of the Amended and Restated Certificate of Incorporation of Qualtrics;
(xi)dissolve, liquidate or wind up Qualtrics;
(xii)declare dividends on any class or series of the capital stock of Qualtrics;
(xiii)enter into any joint venture or any other arrangement or agreement with any Person to provide or license on an exclusive basis any products or services of such Person that are substantially equivalent to products and services offered by the SAP Group; and
(xiv)alter, amend, change, terminate or repeal, or adopt any provision inconsistent with (A) this Agreement, (B) Articles V or VI or Sections A, or C through D of Article VII of the Amended and Restated Certificate of Incorporation of Qualtrics or (C) Sections 2.2, 2.4, 2.6, 2.8(B), 2.11, 3.2, 3.9, 3.11, 6.9 or 8.1 of the Amended and Restated Bylaws of Qualtrics.
(a)Qualtrics shall not undertake any action or conduct that would have the effect of indirectly engaging Qualtrics in activities that the provisions of this Section 3.2 would otherwise prohibit.
Section iii.Agreement for Exchange of Information
.
(1)Generally. SAP agrees to provide, or cause to be provided, to Qualtrics, at any time, as soon as reasonably practicable after request therefor, any Information in the possession or under the control of SAP that Qualtrics reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on Qualtrics (including under applicable securities laws) by a Governmental Authority having jurisdiction over Qualtrics, including, as required by Nasdaq requirements, (ii) to comply with its obligations under this Agreement or any Intercompany Agreement or (iii) to conduct the ongoing Qualtrics Business; provided, however, that in the event that SAP determines that any such provision of Information
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could be commercially detrimental, violate any law or agreement, or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. Qualtrics agrees to provide, or cause to be provided, to SAP, at any time, as soon as reasonably practicable after request therefor, all reports and other Information regularly provided by Qualtrics to SAP prior to the IPO Date and any Information in the possession or under the control of Qualtrics that SAP reasonably needs (A) to comply with reporting, disclosure, filing or other requirements imposed on SAP (including under applicable securities laws) by a Governmental Authority having jurisdiction over SAP, including, as required by German, New York Stock Exchange and Frankfurt Stock Exchange requirements, (B) to comply with its obligations under this Agreement or any Intercompany Agreement or (C) to conduct the ongoing SAP Business; provided, however, that in the event that Qualtrics determines that any such provision of Information could be commercially detrimental, violate any law or agreement, or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. Each of SAP and Qualtrics agree to make their respective personnel available to discuss the Information exchanged pursuant to this Section 3.3.
(2)Internal Accounting Controls; Financial Information. Except as otherwise provided in the Administrative Services Agreement, after the IPO Date, (i) each Party shall maintain in effect at its own cost and expense adequate systems and controls for its business to the extent necessary to enable the other Party to satisfy its reporting, tax return, accounting, audit and other obligations, and (ii) each Party shall provide, or cause to be provided, to the other Party and its Subsidiaries in such form as such requesting Party shall reasonably request, at no charge to the requesting Party, all financial and other data and information as the requesting Party reasonably determines necessary or advisable in order to prepare its financial statements and reports or filings with any Governmental Authority, in each case including as required by German, New York Stock Exchange, Nasdaq and Frankfurt Stock Exchange requirements (and, to the extent a Party provides the other Party with access to its finance and accounting systems, the Party provided with access must agree to comply with all requirements and policies of the Party providing access that are generally applicable to third parties provided with system access).
(3)Ownership of Information. Any Information owned by a Party that is provided to a requesting Party pursuant to this Section 3.3 shall be deemed to remain the property of the providing Party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information. Notwithstanding the foregoing, this Section 3.3(c) shall not restrict the use of any Information by a Party to the extent such Party requires such information in connection with its stock exchange reporting requirements and otherwise as required by applicable law.
(4)Record Retention. To facilitate the possible exchange of Information pursuant to this Section 3.3 and other provisions of this Agreement, each Party agrees to use its reasonable best efforts to retain all Information in its respective possession or control substantially in accordance with and for not less than the period required by its respective record retention policies and/or practices as in effect on the IPO Date, and for such longer period as may
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be required by any Governmental Authority, any litigation matter, any applicable law, any provision of this Agreement (including Section 3.4(f)) or any Intercompany Agreement. However, except as set forth in the Tax Sharing Agreement, each Party may amend its respective record retention policies at such Party’s discretion at any time; provided, however, that if a Party desires to effect any such amendment in a way that shortens the duration of its record retention prior to the date that is three years after the termination of this Agreement, the amending Party must give 30 days prior written notice (to the extent permitted by law) of such change in the policy to the other Party to this Agreement. In the event either Party desires to discard or destroy any such Information prior to the expiration of the period required by its respective record retention policies and or practices, each Party agrees to give the other Party 30 days written notice prior to discarding or destroying any such Information and, if the other Party so requests, the Party seeking to discard or destroy such Information shall allow the other Party to take possession of such Information at such other Party’s sole cost and expense.
(5)Limitation of Liability. Each Party will use its reasonable best efforts to ensure that Information provided to the other Party hereunder is accurate and complete; provided, however, no Party shall have any liability to any other Party in the event that any Information exchanged or provided pursuant to this Section 3.3 is found to be inaccurate, in the absence of gross negligence or willful misconduct by the party providing such Information. No Party shall have any liability to any other Party if any Information is destroyed or lost after the relevant Party has complied with the provisions of Section 3.3(d).
(6)Other Agreements Providing for Exchange of Information. The rights and obligations granted under this Section 3.3 are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange, ownership, retention or confidential treatment of Information set forth in this Agreement and any Intercompany Agreement.
(7)Production of Witnesses; Records; Cooperation. For a period from the IPO Date until the date that is seven years after the first date upon which members of the SAP Group cease to own at least 20% of the then outstanding number of shares of Common Stock, and except in the case of an Action in which Qualtrics (or any of its Subsidiaries or any of its or their respective officers or directors) and SAP (or any of its Subsidiaries or any of its or their respective officers or directors) are adverse parties, each Party shall use its reasonable best efforts to make available to each other Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of such Party as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such directors, officers, employees, other personnel and agents (giving consideration to their business demands) or books, records or other documents may reasonably be required in connection with any legal, administrative or other proceeding in which the requesting Party may from time to time be involved, regardless of whether such legal, administrative or other proceeding is a matter with respect to which indemnification may be sought hereunder. Notwithstanding the foregoing, during the seven year period after the first date upon which the members of the SAP Group hold shares of Common Stock representing less than a majority of the votes entitled to be cast by all holders of Common Stock, the obligations of this Section 3.3(g) shall not apply in instances where doing so would be materially against the
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best interest of such Party. The requesting Party shall bear all costs and expenses in connection therewith.
Section iv.Auditors and Audits; Financial Statements; Accounting Matters
. Each Party agrees that:
(1)Selection of Auditors.
(i)Qualtrics shall select the independent certified public accountants (“Qualtrics’ Auditors”) used by SAP to serve as its (and its Subsidiaries’) independent certified public accountants (“SAP’s Auditors” and, for the avoidance of doubt, should SAP at any time change the accounting firm serving as its independent certified public accountants, “SAP’s Auditors” shall thereafter mean the new firm serving as SAP’s independent certified public accountants) for purposes of providing an opinion on its consolidated financial statements; provided, however, that Qualtrics’ Auditors may be different from SAP’s Auditors if necessary to comply with applicable laws, regulations or rules regarding auditor independence and qualifications (provided, however, that Qualtrics shall use commercially reasonable efforts to ensure that neither it nor its directors, officers or employees take any actions that could reasonably be expected to require Qualtrics to engage auditors other than SAP’s Auditors). The foregoing shall not be construed after Qualtrics conducts an IPO so as to unlawfully limit any responsibility of the audit committee of the Qualtrics Board, pursuant to Rule 10A-3(b)(2), to appoint, compensate, retain and oversee the work of the registered public accounting firm Qualtrics engages.
(ii)Each Party shall provide the other Party as much prior notice as reasonably practical of any change in Qualtrics’ Auditors for purposes of providing an opinion on its consolidated financial statements.
(2)Date of Auditors’ Opinion and Quarterly Reviews. During the term of this Agreement and thereafter to the extent necessary for the purpose of preparing financial statements or completing a financial statement audit (but in no event after the date that is ten years after the first date upon which the members of the SAP Group hold shares of Common Stock representing less than a majority of the votes entitled to be cast by all holders of Common Stock), Qualtrics shall use its reasonable best efforts to enable Qualtrics’ Auditors to complete their audit such that they will date their opinion on Qualtrics’ audited annual financial statements on the same date that SAP’s Auditors date their opinion on SAP’s audited annual financial statements, and to enable SAP to meet its timetable for the printing, filing and public dissemination of SAP’s annual financial statements. During the term of this Agreement and thereafter to the extent necessary for the purpose of preparing financial statements or completing a financial statement audit, Qualtrics shall use its reasonable best efforts to enable Qualtrics’ Auditors to complete their annual audit and quarterly review procedures such that they will provide clearance on Qualtrics’ annual and quarterly financial statements on the same date that SAP’s Auditors provide clearance on SAP’s annual and quarterly financial statements. During the term of this Agreement, Qualtrics shall ensure that its periodic earnings announcements will
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be made after the close of market of the Nasdaq on the trading day before the scheduled date for SAP’s earnings announcements for the corresponding period, unless either (i) otherwise consented to in advance by SAP in writing or (ii) the Qualtrics Board shall determine that Qualtrics is required to do otherwise under applicable law, regulations, rules or listing requirements.
(3)Annual and Quarterly Financial Statements. During the term of this Agreement, Qualtrics shall not change its fiscal year and shall, upon request, provide to SAP on a timely basis all Information that SAP reasonably requires from Qualtrics to meet its schedule for the preparation, printing, filing, and public dissemination of SAP’s annual, quarterly and monthly financial statements and reports. Without limiting the generality of the foregoing, Qualtrics will provide, upon request, all required financial Information with respect to Qualtrics to Qualtrics’ Auditors in a sufficient and reasonable time, and in sufficient detail, to permit Qualtrics’ Auditors to take all steps and perform all reviews necessary to provide sufficient assistance to SAP’s Auditors with respect to financial Information to be included or contained in SAP’s annual, quarterly and monthly financial statements. Similarly, SAP shall, upon request, provide to Qualtrics on a timely basis all financial Information that Qualtrics reasonably requires to meet its schedule for the preparation, printing, filing, and public dissemination of Qualtrics’ annual, quarterly and monthly financial statements. Without limiting the generality of the foregoing, SAP will provide, upon request, all required financial Information with respect to SAP and its Subsidiaries to Qualtrics’ Auditors in a sufficient and reasonable time, and in sufficient detail, to permit Qualtrics’ Auditors to take all steps and perform all reviews necessary to provide sufficient assistance to Qualtrics’ Auditors with respect to Information to be included or contained in Qualtrics’ annual and quarterly financial statements.
(4)Certifications and Attestations.
(i)During the term of this Agreement and thereafter to the extent necessary for the timely filing by SAP of annual and quarterly reports under the Exchange Act or in connection with any investigations of prior periods, Qualtrics shall cause its principal executive officer and principal financial officer to provide to SAP on a timely basis and as reasonably requested by SAP (A) any certificates requested as support for the certifications and attestations required by Sections 302, 906 and 404 of the Sarbanes-Oxley Act of 2002, as amended, to be filed with such annual and quarterly reports, (B) any certificates requested as may be necessary under German legal requirements, (C) any certificates or other written Information which such principal executive officer or principal financial officer received as support for the certificates provided to SAP and (D) a reasonable opportunity to discuss with such principal financial officer and other appropriate officers and employees of Qualtrics any issues reasonably related to the foregoing.
(ii)During the term of this Agreement and thereafter to the extent necessary for the timely filing by Qualtrics of annual and quarterly reports under the Exchange Act or in connection with any investigations of prior periods, SAP shall cause its appropriate officers and employees to provide to Qualtrics on a timely basis and as reasonably
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requested by Qualtrics (A) any certificates requested as support for the certifications and attestations required by Sections 302, 906 and 404 of the Sarbanes-Oxley Act of 2002, as amended, to be filed with such annual and quarterly reports, (B) any certificates or other Information which such appropriate officers and employees received as support for the certificates provided to Qualtrics and (C) a reasonable opportunity to discuss with such appropriate officers and employees any issues reasonably related to the foregoing.
(5)Identity of Personnel Performing the Annual Audit and Quarterly Reviews. During the term of this Agreement and thereafter to the extent such information and cooperation is necessary for the preparation of financial statements or completing a financial statements audit, Qualtrics shall authorize Qualtrics’ Auditors to make available to SAP’s Auditors both the personnel who performed or will perform the annual audits and quarterly reviews of Qualtrics and work papers related to the annual audits and quarterly reviews of Qualtrics, in all cases within a reasonable time prior to Qualtrics’ Auditors’ opinion date, so that SAP’s Auditors are able to perform the procedures they consider necessary to take responsibility for the work of Qualtrics’ Auditors as it relates to SAP’s Auditors’ report on SAP’s financial statements, all within sufficient time to enable SAP to meet its timetable for the printing, filing and public dissemination of SAP’s annual and quarterly statements. Similarly, SAP shall authorize SAP’s Auditors to make available to Qualtrics’ Auditors both the personnel who performed or will perform the annual audits and quarterly reviews of SAP and work papers related to the annual audits and quarterly reviews of SAP, in all cases within a reasonable time prior to SAP’s Auditors’ opinion date, so that Qualtrics’ Auditors are able to perform the procedures they consider necessary to take responsibility for the work of SAP’s Auditors as it relates to Qualtrics’ Auditors’ report on Qualtrics’ statements, all within sufficient time to enable Qualtrics to meet its timetable for the printing, filing and public dissemination of Qualtrics’ annual and quarterly financial statements.
(6)Access to Books and Records. During the term of this Agreement and thereafter, until all governmental audits are complete and the applicable statute of limitations for tax matters has expired, in each case only to the extent such information and cooperation is necessary for the preparation of financial statements or completing a financial statements audit, Qualtrics shall provide SAP’s internal auditors, counsel and other designated representatives of SAP access, upon request, to (i) the premises of Qualtrics during normal business hours and all Information (and duplicating rights) within the knowledge, possession or control of Qualtrics and its Subsidiaries and (ii) the officers and employees of Qualtrics and its Subsidiaries, so that SAP may conduct reasonable audits relating to the financial statements provided by Qualtrics pursuant hereto as well as to the internal accounting controls and operations of Qualtrics. Similarly, SAP shall provide Qualtrics’ internal auditors, counsel and other designated representatives of Qualtrics access during normal business hours to (A) the premises of SAP and its Subsidiaries and all Information (and duplicating rights) within the knowledge, possession or control of SAP and its Subsidiaries and (B) the officers and employees of SAP and its Subsidiaries, so that Qualtrics may conduct reasonable audits relating to the financial statements provided by SAP pursuant hereto as well as to the internal accounting controls and operations of SAP and its Subsidiaries.
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(7)Accounting Policies and Principles. During the term of this Agreement and thereafter if a change in accounting principles by a Party would affect the historical financial statements of the other Party, (i) Qualtrics shall be subject to the SAP’s Global Revenue Recognition Guidelines and Group Accounting Guidelines, as in effect from time to time (the “SAP Accounting Policies”), (ii) Qualtrics shall not make or adopt any changes in its accounting estimates or accounting principles from those in effect on the IPO Date without SAP’s prior consent (not to be unreasonably withheld or delayed) and (iii) SAP shall not make or adopt any changes in the SAP Accounting Policies or its accounting estimates or accounting principles (in each case as they apply to Qualtrics) from those in effect on the IPO Date without first giving Qualtrics as much prior notice as reasonably practical and consulting with Qualtrics and, if requested by Qualtrics, consulting with the Qualtrics’ Auditors, with respect thereto; provided, that SAP may make or adopt any changes in its sole discretion after such consultation.
(8)Conflict with Third-Party Agreements. Nothing in Section 3.3 or Section 3.4 shall require either Party to violate any agreement with any third party regarding the confidentiality of confidential and proprietary information relating to that third party or its business; provided, however, that in the event that such Party is required under Section 3.3 or Section 3.4 to disclose any such Information, such Party shall use its reasonable best efforts to seek to obtain such third party’s consent to the disclosure of such information.
Section v.Confidentiality
.
(1)SAP and Qualtrics shall hold and shall cause each of their respective Subsidiaries to hold, and shall each cause its and their respective officers, employees, agents, consultants and advisors to hold, in strict confidence and shall not disclose or release without the prior written consent of the other Party, any and all Confidential Information (as defined below) concerning the other Party and/or its respective Subsidiaries. Notwithstanding the foregoing sentence, the Parties may disclose, or may permit disclosure of, Confidential Information (i) to their respective Affiliated Companies, auditors, attorneys, financial advisors, bankers and other consultants and advisors who have a need to know such information and, in each case, are informed of their obligation to hold such information confidential to the same extent as is applicable to the Parties and in respect of whose failure to comply with such obligations, Qualtrics or SAP, as the case may be, will be responsible, or (ii) if the Parties or any of their respective Affiliated Companies are required to disclose any such Confidential Information by applicable law, or judicial or administrative process; provided, that the Party required to disclose such Confidential Information (the “Notifying Party”) shall, to the extent permitted by law or court order, promptly notify the other Party of the existence of such requirement, and shall provide the other Party a reasonable opportunity to seek an appropriate protective order or other remedy, which the Notifying Party will reasonably cooperate in obtaining. In the event that an appropriate protective order or other remedy is not obtained, then to the extent permitted by law or court order, the Notifying Party shall furnish, or cause to be furnished, only that portion of the Confidential Information that is required to be disclosed and shall use its reasonable best efforts to obtain reasonable assurances that confidential treatment will be accorded to such Information.
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(2)As used in this Section 3.5, “Confidential Information” shall mean all non-public information, data, or material that is marked confidential or that should reasonably be understood to be confidential under the circumstances, including (i) scientific, engineering, mathematical or design information, data and material of the Disclosing Party, including, but not limited to, specifications, ideas, concepts, models, and strategies for products or services, quality assurance policies, procedures and specifications, source code and object code and all other know-how, methodology, processes, procedures, techniques and trade secrets related to product or service design, development, manufacture, implementation, use, support, and maintenance and (ii) all other non-public information, data or material of the Disclosing Party, including, but not limited to training materials and information, proprietary earnings reports and forecasts, proprietary macro-economic reports and forecasts, proprietary business plans, proprietary general market evaluations and surveys, proprietary financing and credit-related information, customer information and risk and insurance information, in each case that, prior to, on or following the IPO Date, has been disclosed by one Party or its Subsidiaries (the “Disclosing Party”) to the other Party or its Subsidiaries (the “Receiving Party”). Confidential Information includes any modifications or derivatives prepared by the Receiving Party that contain or are based upon any Confidential Information obtained from the Disclosing Party, including any analyses, reports, or summaries of the Confidential Information. Confidential Information may also include information disclosed to a Disclosing Party by third parties. Confidential Information shall not, however, include any information which (A) is or becomes publicly known through no improper action or inaction by the Receiving Party; (B) was in the possession of or known by the Receiving Party without restriction prior to receipt from the Disclosing Party; (C) is obtained by the Receiving Party from a third party without a breach of the Receiving Party’s obligations hereunder or such third party’s obligations of confidentiality; or (D) is independently developed by the Receiving Party without use of or reference to the Disclosing Party’s Confidential Information, in each case as established by documentary evidence.
(3)Nothing in this Section 3.5 shall restrict (i) the Disclosing Party from using, disclosing, or disseminating its own Confidential Information in any way, or (ii) the Disclosing Party from reassigning any of its employees that have had access to Confidential Information to businesses of the Receiving Party that may engage in the same or similar business activities or lines of business as the Disclosing Party or that do business with any client or customer of the Disclosing Party. Moreover, nothing in this Section 3.5 supersedes any restriction imposed by third parties on their Confidential Information, and there is no obligation on the Disclosing Party to conform third party agreements to the terms of this Agreement except as expressly set forth therein.
(4)Notwithstanding anything to the contrary set forth herein, (i) SAP and its Subsidiaries, on the one hand, and Qualtrics and its Subsidiaries, on the other hand, shall be deemed to have satisfied their obligations hereunder with respect to Confidential Information if they exercise the same degree of care (but no less than a reasonable degree of care) as they take to preserve confidentiality for their own similar Information and (ii) confidentiality obligations provided for in any agreement between SAP or its Subsidiaries, or Qualtrics or any of its Subsidiaries, on the one hand, and any employee of SAP or any of its Subsidiaries, or Qualtrics or any of its Subsidiaries, on the other hand, shall remain in full force and effect.
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(5)Confidential Information of SAP and its Subsidiaries, on the one hand, or Qualtrics and its Subsidiaries, on the other hand, in the possession of and used by the other as of the IPO Date may continue to be used by such Party or its Subsidiaries in possession of the Confidential Information in and only in the operation of the SAP Business or the Qualtrics Business, as the case may be, and may be used only so long as the Confidential Information is maintained in confidence and not disclosed in violation of Section 3.5(a). The disclosure of Confidential Information from one Party to the other Party does not include a license or other substantive rights in the Confidential Information except to the extent such a license or rights are granted elsewhere in this Agreement or an Intercompany Agreement. Notwithstanding the foregoing, (i) in the event there is any conflict or inconsistency between this Section 3.5 and any provision of the Intellectual Property Matters Agreement, the terms and conditions of the Intellectual Property Matters Agreement shall govern and control, and (ii) any use of Confidential Information that constitutes use of Intellectual Property Rights (as defined in the Intellectual Property Matters Agreement) that is addressed in the Intellectual Property Matters Agreement shall be governed by the Intellectual Property Matters Agreement and any such use must be within the scope of the licenses and covenants therein. Such continued right to use Confidential Information may only be transferred to a third party (A) to the extent expressly permitted by the Intellectual Property Matters Agreement for Confidential Information that constitutes use of Intellectual Property Rights and (B) where such third party expressly agrees in writing to be bound by the provisions of this Section 3.5.
Section vi.Privileged Matters
.
(1)SAP and Qualtrics agree that their respective rights and obligations to maintain, preserve, assert or waive any or all privileges belonging to either Party or its Subsidiaries, including but not limited to the attorney-client privilege, the work product immunity, and any other privilege or immunity from production (collectively, “Privileges”), shall be governed by the provisions of this Section 3.6. With respect to Privileged Information (as defined below) of SAP, SAP shall have sole authority in perpetuity to determine whether to assert or waive any or all Privileges, and Qualtrics shall use its reasonable best efforts to ensure that it takes no action (nor permit any of its Subsidiaries to take action) without the prior written consent of SAP that would be reasonably likely to result in any waiver of any Privilege that could be asserted by SAP or any of its Subsidiaries under applicable law and this Agreement. With respect to Privileged Information of Qualtrics arising after the IPO Date, Qualtrics shall have sole authority in perpetuity to determine whether to assert or waive any or all Privileges, and SAP shall use its reasonable best efforts to ensure that it takes no action (nor permit any of its Subsidiaries to take action) without the prior written consent of Qualtrics that would be reasonably likely to result in any waiver of any Privilege that could be asserted by Qualtrics or any of its Subsidiaries under applicable law and this Agreement. The rights and obligations created by this Section 3.6 shall apply to all Information as to which SAP or Qualtrics or their respective Subsidiaries would be entitled to assert or have asserted a Privilege (“Privileged Information”).
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(2)Upon receipt by SAP or Qualtrics, as the case may be, of any subpoena, discovery or other request from any third party that actually or arguably calls for the production or disclosure of Privileged Information of the other, or if SAP or Qualtrics, as the case may be, obtains knowledge that any current or former employee of SAP or Qualtrics, as the case may be, has received any subpoena, discovery or other request from any third party that actually or arguably calls for the production or disclosure of Privileged Information of the other, SAP or Qualtrics, as the case may be, shall promptly notify the other of the existence of the request and shall, to the extent possible, provide the other a reasonable opportunity to review the Information and to assert any rights it may have under this Section 3.6 or otherwise to prevent the production or disclosure of Privileged Information. SAP or Qualtrics, as the case may be, will not produce or disclose to any third party any of the other’s Privileged Information under this Section 3.6 unless (i) the other has provided its express written consent to such production or disclosure or (ii) a court of competent jurisdiction has entered an order not subject to interlocutory appeal or review finding that the Information is not entitled to protection from disclosure under any applicable privilege, doctrine or rule.
(3)Each and all of the Parties’ transfer of books and records and other Information to each other and each Party’s agreement to permit the other Party to obtain Information existing prior to the IPO Date are made in reliance on SAP’s and Qualtrics’ respective agreements, as set forth in Section 3.5 and this Section 3.6, to maintain the confidentiality of such Information and to take the steps provided herein for the preservation of all Privileges that may belong to or be asserted by SAP or Qualtrics, as the case may be. The access to Information, witnesses and individuals being granted pursuant to Section 3.3 and Section 3.4 and the disclosure to Qualtrics and SAP of Privileged Information relating to the Qualtrics Business or the SAP Business pursuant to this Agreement shall not be asserted by SAP or Qualtrics to constitute, or otherwise be deemed, a waiver of any Privilege that has been or may be asserted under this Section 3.6 or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to SAP and Qualtrics in, or the obligations imposed upon SAP and Qualtrics by, this Section 3.6.
Section vii.Cooperation in Future Litigation and Other Proceedings
. Subject to the other terms and conditions of this Agreement and excluding any circumstance in which Qualtrics (or any of its Subsidiaries or any of its or their respective officers or directors) and SAP (or any of its Subsidiaries or any of its or their respective officers or directors) are adverse parties in an Action: (a) in the event that Qualtrics (or any of its Subsidiaries or any of its or their respective officers or directors) or SAP (or any of its Subsidiaries or any of its or their respective officers or directors) at any time after the date hereof initiates or becomes subject to any Action with respect to which the Parties have no prior agreements (as to indemnification or otherwise), the Party (and its Subsidiaries and its and their respective officers and directors) that has not initiated and is not subject to such Action shall comply, at the other Party’s expense, with any reasonable requests by the other Party for assistance in connection with such Action (including by way of provision of information, compliance with subpoenas and making available of associates or employees as witnesses); and (b) unless otherwise provided in this Agreement, another Intercompany Agreement or any other
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contract between the Parties, in the event that Qualtrics (or any of its Subsidiaries or any of its or their respective officers or directors) and SAP (or any of its Subsidiaries or any of its or their respective officers or directors) at any time after the date hereof initiate or become subject to any Action with respect to which the Parties have no prior agreements (as to indemnification or otherwise), each Party (and its officers and directors) shall, at its own expense, coordinate with the other Party with respect to strategies and actions with respect to such Action to the extent such coordination would not be detrimental to their respective interests and shall comply, at the expense of the requesting Party, with any reasonable requests of the other Party for assistance in connection therewith (including by way of provision of information, compliance with subpoenas and making available of employees as witnesses).
Section viii.Mail and Other Communications
. After the IPO Date, each of SAP and Qualtrics may receive mail, facsimiles, packages and other communications properly belonging to the other. Accordingly, at all times after the IPO Date, each of SAP and Qualtrics authorizes the other to receive and open all mail, facsimiles, packages and other communications received by it and not unambiguously intended for the other Party or any of the other Party’s officers or directors, and to retain the same to the extent that they either (i) relate to the business of the receiving Party or (ii) do not relate to the business of the other Party. In the event that a Party shall receive mail, facsimiles, packages or other communications that are either unambiguously intended for the other Party or any of the other Party’s officers or directors or that (x) relate to the business of the other Party and (y) do not relate to the business of the receiving Party, the receiving Party shall promptly deliver such mail, facsimiles, packages or other communications to the other Party as provided for in Section 5.8 hereof. The provisions of this Section 3.8 are not intended to, and shall not, be deemed to constitute (a) an authorization by either SAP or Qualtrics to permit the other to accept service of process on its behalf and neither Party is or shall be deemed to be the agent of the other for service of process purposes or (b) a waiver of any Privilege with respect to Privileged Information contained in such mail, facsimiles, packages or other communications.
Section ix.Dispute Resolution
.
(1)In the event of any dispute, controversy or claim arising between the Parties out of or relating to this Agreement or any Intercompany Agreement or the breach, termination or validity thereof (“Dispute”), upon the provision of notice by either Party to the other party in accordance with the terms of this Agreement (which notice shall include a summary of the Dispute and appropriate supporting materials), such Dispute shall first be negotiated between appropriate senior executives of each Party who shall have the authority to resolve the matter. Such executives shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other available remedies, within ten days of receipt by a Party of notice of a Dispute, which date of receipt shall be referred to herein as the “Dispute Resolution Commencement Date.” Discussions and correspondence relating to trying to resolve such Dispute shall be treated as Confidential Information and Privileged Information of each of SAP
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and Qualtrics developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible in any subsequent proceeding between the Parties.
(2)If the senior representatives of the two Parties are unable to resolve the Dispute within 120 days from the Dispute Resolution Commencement Date, on the request of any Party, the Dispute will be mediated by a mediator appointed pursuant to the mediation rules of the American Arbitration Association. Both Parties will share the administrative costs of the mediation and the mediator’s fees and expenses equally, and each Party shall bear all of its other costs and expenses related to the mediation, including but not limited to attorney’s fees, witness fees, and travel expenses. The mediation shall take place in New York unless the Parties agree on an alternative forum.
(3)If the mediation does not result in resolution of the Dispute within six months from the date a request for mediation is made to the American Arbitration Association, on the request of any Party, the Dispute will be submitted for binding arbitration before an arbitrator appointed pursuant to the arbitration rules of the American Arbitration Association; provided, however, if the matter or matters in Dispute involve claimed amounts in excess of $25,000,000, there shall be three arbitrators: one appointed by SAP, one appointed by Qualtrics, and one appointed by the other two arbitrators. Both Parties will share the administrative costs of the arbitration and the arbitrator’s or arbitrators’ fees and expenses equally, and each Party shall bear all of its other costs and expenses related to the arbitration, including but not limited to attorney’s fees, witness fees, and travel expenses. The arbitration shall take place in New York or in whatever alternative forum on which the Parties may agree.
(4)Notwithstanding the foregoing, if either Party requires emergency relief such that the timeline described above is reasonably likely to result in material additional harm to such Party, then such Party may immediately submit the applicable Dispute for binding arbitration pursuant to Section 3.9(c) without following the steps and timelines described above in Sections 3.9(a) through (c).
(5)Notwithstanding anything to the contrary in this Section 3.9, Disputes arising under the Distribution Agreement or the IP Matters Agreement shall be subject to the Dispute resolution provisions of those agreements, as applicable.
(6)Unless otherwise agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement and each Intercompany Agreement during the course of dispute resolution pursuant to the provisions of this Section 3.9 with respect to all matters not subject to such Dispute.
Section x.Governmental Approvals
. To the extent that any of the transactions contemplated by this Agreement requires any Governmental Approvals, the Parties will use their reasonable best efforts to obtain any such Governmental Approvals.
Section xi.Compliance and Other Policies
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.
(1)SAP Policies. The Qualtrics Group members and, as applicable, all software and services provided or distributed by the Qualtrics Group, shall be subject to the SAP global compliance policies listed on Schedule 3.11(a)(i), as in effect from time to time and generally applicable to SAP’s Subsidiaries (the “SAP Compliance Policies”), or such equivalent Qualtrics policies as Qualtrics may adopt and SAP may approve (such approval not to be unreasonably withheld or delayed) from time to time (the “Qualtrics Equivalent Compliance Policies”), and the SAP policies (including product policies) listed on Schedule 3.11(a)(ii), as in effect from time to time and generally applicable to SAP’s Subsidiaries (the “SAP Other Policies” and, together with the SAP Compliance Policies, the “SAP Policies”), or such equivalent policies as Qualtrics may adopt and SAP may approve (such approval not to be unreasonably withheld or delayed) from time to time (the “Qualtrics Equivalent Other Policies” and, together with the Qualtrics Equivalent Compliance Policies, the “Qualtrics Equivalent Policies”). The Qualtrics Board shall approve and adopt the SAP Policies or Qualtrics Equivalent Policies, as applicable, on an annual basis.
(2)Provisions Applicable to SAP Policies; SAP Role in Implementation and Oversight of SAP Policies.
(i)Qualtrics shall be responsible for ensuring compliance with and implementation of all SAP Policies or Qualtrics Equivalent Policies, as applicable, including by developing appropriate and reasonable training materials (which, to the extent they relate to SAP Compliance Policies, shall be in coordination with SAP), conducting appropriate training (which may be provided by SAP pursuant to the Administrative Services Agreement) and implementing reasonable systems for tracking training.
(ii)SAP may amend or modify the SAP Policies from time to time with prior written notice to Qualtrics; provided that SAP shall provide Qualtrics with reasonable time to implement such changes before the policy changes go into effect. SAP may add or modify SAP Policies to address changes in applicable law that impose responsibility on SAP for, or that have a reasonable potential to cause SAP to incur liability or other adverse consequences resulting from, the conduct of the Qualtrics Group, or in connection with ordinary course updates to the SAP Policies, which shall be applicable to Qualtrics and, if required, approved and adopted by the Qualtrics Board or replaced with additional or modified Qualtrics Equivalent Policies as Qualtrics may adopt and SAP may approve (such approval not to be unreasonably withheld or delayed). Qualtrics may amend or modify Qualtrics Equivalent Policies from time to time with the approval of the Qualtrics Board, if required, and shall amend or modify Qualtrics Equivalent Policies as directed by SAP in order to reflect changes made to the corresponding global SAP Policies. Qualtrics may make modifications to SAP Policy documentation and Qualtrics Equivalent Policy documentation to reflect Qualtrics’ branding, formatting, style or business needs without changing the substance or content of such policies, unless such substance or content is clearly not applicable to U.S. subsidiaries of SAP.
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(iii)Qualtrics shall work with SAP to implement policies and procedures as necessary for the Qualtrics Group to comply with the SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable. SAP and Qualtrics shall jointly be responsible for implementing Qualtrics’ compliance functions in the areas covered by the SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable, until Qualtrics develops its own compliance infrastructure. As Qualtrics develops its own compliance infrastructure, SAP’s role will transition to providing oversight and resources as reasonably necessary to support ongoing compliance until such time as Qualtrics has fully developed its own compliance infrastructure. Such oversight shall consist of the rights and obligations set forth in Section 3.11(f) below.
(3)Qualtrics Policies. For applicable matters that are not subject to SAP Policies or Qualtrics Equivalent Policies, the Qualtrics Board and management shall establish and maintain Qualtrics compliance policies (the “Qualtrics Policies”) and controls as it determines appropriate, which may include for the matters listed on Schedule 3.11(c).
(4)Access. SAP shall provide the Qualtrics Group with access at all times to current versions of the SAP Policies and the SAP Accounting Policies, and Qualtrics shall make the SAP Policies, SAP Accounting Policies or Qualtrics Equivalent Policies, as applicable, available to Qualtrics Group employees on the Qualtrics internal network. Qualtrics shall, upon request, provide individuals identified by SAP with such access as they may request to current versions of the Qualtrics Equivalent Policies.
(5)Chief Compliance Officer. The Qualtrics Board or management shall be responsible for hiring or appointing, firing and determining compensation of the Qualtrics chief compliance officer (“CCO”), and for delegating power and authority to the CCO or other personnel designated by the Qualtrics Board. The power and authority delegated to the CCO shall include the power to delegate responsibility for certain compliance functions to other personnel. The CCO or other personnel designated by the Qualtrics Board or by the CCO shall be responsible for administering a compliance program applicable to the subject matter of each SAP Compliance Policy and Qualtrics Equivalent Compliance Policy, and for coordinating with the SAP Group Chief Compliance Officer or such other SAP personnel designated by SAP as responsible for each SAP Compliance Policy or the subject matter of the applicable Qualtrics Equivalent Compliance Policy.
(6)Compliance Reporting; Audits.
(i)Qualtrics shall, upon request, provide SAP with periodic reports regarding compliance with SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable, with such frequency (which, except as provided in clause (ii) below, shall be no more frequently than quarterly without the agreement of Qualtrics) and format as may be reasonably required by SAP. SAP, upon reasonable prior written notice, shall have the right to review Qualtrics’ compliance status and processes to ensure adequacy and consistency with each SAP Compliance Policy and Qualtrics Equivalent Compliance Policy. SAP’s compliance and internal audit functions may audit Qualtrics’ compliance management systems upon reasonable prior written notice. Qualtrics shall also provide
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SAP with access, upon reasonable prior written notice, to Qualtrics’ books, records, systems and employees as reasonably necessary in connection with any regulatory audit involving the SAP Group. Qualtrics will support any such review or audit in good faith.
(ii)Without limiting the generality of the foregoing sentence, upon request, the CCO shall work with SAP’s designated compliance officer to provide the SAP Group Chief Compliance Officer or such other officer of SAP designated for such purpose with regular reports on the status of Qualtrics’ compliance program applicable to the subject matter of each SAP Compliance Policy and Qualtrics Equivalent Compliance Policy, as reasonably required by SAP to enable the SAP Group Chief Compliance Officer or such other officer of SAP designated for such purpose to meet its internal reporting obligations to the extent and for so long as those reporting obligations require the SAP Group Chief Compliance Officer or such other officer of SAP designated for such purpose to report on Qualtrics to SAP’s senior management or supervisory board.
(7)Breach Reporting and Response. Qualtrics and SAP shall establish mechanisms for (i) Qualtrics to report breaches of SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable, to the appropriate authority, which may include the audit committee of the Qualtrics Board and/or SAP, (ii) the response to (including communications with applicable Governmental Authorities), and the conduct of investigations of, any actual, reported or suspected breaches of SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable, and (iii) consequence management and remediation required as a result of any breaches of SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable. SAP shall reasonably and fairly allocate to Qualtrics, and Qualtrics shall be responsible for, all costs, fines and penalties incurred by Qualtrics and SAP (including all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses) that are attributable to any actual, reported or suspected breach by Qualtrics of SAP Compliance Policies or Qualtrics Equivalent Compliance Policies, as applicable, as allocated to Qualtrics.
(8)Governmental Investigations and Proceedings. Notwithstanding anything herein to the contrary, unless prohibited by applicable legal requirements or by a Governmental Authority, SAP shall have, in its sole discretion, the right to direct (or, at SAP’s election, participate in) Qualtrics’ conduct of any investigation by any Governmental Authority and defense of any other Action brought by any Governmental Authority involving the subject matter of a SAP Compliance Policy or Qualtrics Equivalent Compliance Policy, as applicable, and to control all communications with applicable Governmental Authorities in connection with any such investigation or other Action, except where such investigation, defense, or communications relate solely to the actions or conduct of the Qualtrics Group and do not involve the SAP Group, and are not reasonably likely to materially affect the SAP Group, other than in its capacity as a shareholder of Qualtrics, as determined by SAP in its sole discretion. SAP shall reasonably and fairly allocate to Qualtrics, and Qualtrics shall be responsible for, all costs, fines and penalties incurred by Qualtrics and SAP (including all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses) in connection with any investigation by any Governmental Authority or any other Action brought by any Governmental Authority that are attributable to
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any actual, reported or suspected breach by Qualtrics of a SAP Compliance Policy or Qualtrics Equivalent Compliance Policy, as applicable, as allocated to Qualtrics. For the avoidance of doubt, this Section 3.11(h) applies to investigations and Actions brought by a Governmental Authority and not to Third Party Claims initiated by other third parties that are merely brought before or through a Governmental Authority.
(9)Certifications. Qualtrics shall, upon request, provide all certifications and representation letters (that are related to or applicable to Qualtrics and its Subsidiaries) regarding SAP Policies, SAP Accounting Policies and Qualtrics Equivalent Policies as required by SAP to enable SAP to provide all required regulatory certifications required by any Government Authorities.
(10)SAP Assistance. SAP shall provide assistance to Qualtrics on a transitional basis in fulfilling its obligations under this Section 3.11 for the duration and in the manner described on Schedule 3.11(j).
Section xii.Termination of Intercompany Agreements
. Except for (a) this Agreement and the Intercompany Agreements and (b) as set forth on Schedule 3.12, in furtherance of the releases and other provisions of Section 4.1, effective immediately prior to the IPO Date, SAP for itself and as agent for each other member of the SAP Group, on the one hand, and Qualtrics for itself and as agent for each other member of the Qualtrics Group, on the other hand, hereby terminate any and all agreements, arrangements, commitments and understandings, oral or written (“Existing Intercompany Agreements”) between such parties and in effect as of the IPO Date. No such terminated Existing Intercompany Agreement (including any provision thereof that purports to survive termination) shall be of any further force or effect after the IPO Date. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. The Parties, on behalf of the members of their respective Groups, hereby waive any advance notice provision or other termination requirements with respect to any Existing Intercompany Agreement. For the avoidance of doubt, intercompany accounts payable and receivable among the Parties and their Subsidiaries shall continue in effect after the IPO Date.
Section xiii.Guaranties
. Except as otherwise provided in the Real Estate Matters Agreement, SAP and Qualtrics shall each use their reasonable efforts to cause each member of the SAP Group to be removed and released, effective as of the IPO Date, in respect of all obligations under each guarantee, indemnity, surety bond, letter of credit and letter of comfort (each, a “Guarantee”), given or obtained by any member of the SAP Group for the benefit of any member of the Qualtrics Group or the Qualtrics Business. If the Parties are unable to effect any such substitution, removal, release and termination with respect to any such Guarantee as of the IPO Date then, following the IPO Date, Qualtrics shall effect such substitution, removal, release and termination as soon as reasonably practicable after the IPO Date; provided, that from and after IPO Date, Qualtrics shall indemnify, hold harmless and promptly reimburse the members of the
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SAP Group for any payments made by members of the SAP Group and for any and all Liabilities of the members of the SAP Group arising out of, or in performing, in whole or in part, any performance obligation in accordance with the underlying obligation under any such Guarantee.
Section xiv.Tax-Free Distribution
.
(1)Tax-Free Distribution Generally. At any time after the IPO Date, if SAP, in its sole and absolute discretion, advises Qualtrics that SAP intends to pursue any Tax-Free Distribution, Qualtrics agrees to take all reasonable action requested by SAP to facilitate such Tax-Free Distribution.
(2)SAP’s Sole Discretion. SAP shall, in its sole and absolute discretion, determine whether to proceed with any Tax-Free Distribution, the date of the consummation of such Tax-Free Distribution and all terms of such Tax-Free Distribution, including the form, structure and terms of any transaction(s) and/or offering(s) to effect such Tax-Free Distribution and the timing of and conditions to the consummation of such Tax-Free Distribution. In addition, SAP may at any time and from time to time until the completion of any Tax-Free Distribution, modify or change the terms of such Tax-Free Distribution, including by accelerating or delaying the timing of the consummation of all or part of such Tax-Free Distribution. Qualtrics shall reasonably cooperate with SAP in all respects to accomplish any Tax-Free Distribution and shall, at SAP’s direction, promptly take any and all reasonable actions that SAP reasonably deems necessary or desirable to effect such Tax-Free Distribution. Without limiting the generality of the foregoing, Qualtrics shall, at SAP’s direction, reasonably cooperate with SAP, and execute and deliver, or use its reasonable best efforts to cause to have executed and delivered, all instruments, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authorities as SAP may reasonably deem necessary or desirable in order to consummate and make effective any Tax-Free Distribution. If, in connection with any Tax-Free Distribution, SAP makes a Request (as defined in the Stockholders’ Agreement) for a Demand Registration (as defined in the Stockholders’ Agreement), the terms and the conditions of the Stockholders’ Agreement shall govern.
(3)This Section 3.14 shall not be interpreted as limiting the provisions of Section 5.2(a) of the Tax Sharing Agreement.
Article IV.
Mutual releases; indemnification
Section i.Release of Pre-IPO Date Claims
.
(1)Qualtrics Release. Except as provided in Section 4.1(c), as of the IPO Date, Qualtrics does hereby, for itself and as agent for each member of the Qualtrics Group, and on behalf of any Person acting through the Qualtrics Group in a shareholder or derivative action
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or otherwise, remise, release and forever discharge the SAP Indemnitees from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising in tort or under any contract or agreement or otherwise, by operation of law or otherwise, existing or arising from any past acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the IPO Date, including in connection with the transactions and all other activities to implement the IPO.
(2)SAP Release. Except as provided in Section 4.1(c), as of the IPO Date, SAP does hereby, for itself and as agent for each member of the SAP Group, and on behalf of any Person acting through the SAP Group in a shareholder or derivative action or otherwise, remise, release and forever discharge the Qualtrics Indemnitees from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising in tort or under any contract or agreement or otherwise, by operation of law or otherwise, existing or arising from any past acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the IPO Date, including in connection with the transactions and all other activities to implement the IPO.
(3)No Impairment. Nothing contained in Section 4.1(a) or Section 4.1(b) shall limit or otherwise affect any Party’s rights or obligations pursuant to or contemplated by this Agreement or any Intercompany Agreement, in each case in accordance with its terms including any obligations relating to indemnification, including indemnification pursuant to Section 4.2 and Section 4.3 of this Agreement, and any Insurance Proceeds under any of SAP’s Insurance Policies relating to the Qualtrics Business which Qualtrics is entitled to be paid.
(4)No Actions as to Released Pre-IPO Date Claims. Qualtrics agrees, for itself and as agent for each member of the Qualtrics Group, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against SAP or any member of the SAP Group, or any other Person released pursuant to Section 4.1(a), with respect to any Liabilities released pursuant to Section 4.1(a). SAP agrees, for itself and as agent for each member of the SAP Group, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Qualtrics or any member of the Qualtrics Group, or any other Person released pursuant to Section 4.1(b), with respect to any Liabilities released pursuant to Section 4.1(b).
(5)Further Instruments. At any time, at the request of any other Party, each Party shall cause each member of its respective SAP Group or Qualtrics Group, as applicable, to execute and deliver releases reflecting the provisions hereof.
Section ii.Indemnification by Qualtrics
. Except as otherwise provided in this Agreement, including Section 4.7(f) hereof, Qualtrics shall, for itself and as agent for each member of the Qualtrics Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless the SAP Indemnitees from and against, and shall reimburse such SAP Indemnitees with respect to, any
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and all Losses that any third party, including any Person acting through the Qualtrics Group in a shareholder or derivative action or otherwise, seeks to impose upon the SAP Indemnitees, or which are imposed upon the SAP Indemnitees, that relate to, arise or result from, whether prior to or following the IPO Date, any of the following items (without duplication):
(1)any Qualtrics Liability;
(2)any breach by Qualtrics or any member of the Qualtrics Group of this Agreement or any of the Intercompany Agreements; and
(3)any Liabilities relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information (i) contained in the IPO Registration Statement, any issuer free writing prospectus or any preliminary, final or supplemental prospectus forming a part of the IPO Registration Statement (other than written information provided by SAP to Qualtrics), (ii) contained in any public filings made by Qualtrics with the Commission following the IPO Date (other than written information provided by SAP to Qualtrics) and (iii) provided by Qualtrics to SAP specifically for inclusion in SAP’s annual or quarterly reports and other regulatory reports following the IPO Date.
(4)In the event that any member of the Qualtrics Group makes a payment to the SAP Indemnitees hereunder, and any of the SAP Indemnitees subsequently diminishes the Liability on account of which such payment was made, either directly or through a third-party recovery (other than a recovery indirectly from SAP), SAP will promptly repay (or will procure SAP Indemnitee to promptly repay) such member of the Qualtrics Group the amount by which the payment made by such member of the Qualtrics Group exceeds the actual cost of the associated indemnified Liability.
Section iii.Indemnification by SAP
. Except as otherwise provided in this Agreement, SAP shall cause SAP America to, for itself and as agent for each member of the SAP Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless the Qualtrics Indemnitees from and against, and shall reimburse such Qualtrics Indemnitee with respect to, any and all Losses that any third party, including any Person acting through the SAP Group in a shareholder or derivative action or otherwise, seeks to impose upon the Qualtrics Indemnitees, or which are imposed upon the Qualtrics Indemnitees, that relate to, arise or result from, whether prior to or following the IPO Date, any of the following items (without duplication):
(1)any SAP Liability (in each case excluding the Qualtrics Liabilities);
(2)any breach by SAP or any member of the SAP Group of this Agreement or any of the Intercompany Agreements; and
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(3)any Liabilities relating to, arising out of or resulting from any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information (i) contained in the IPO Registration Statement, any issuer free writing prospectus or any preliminary, final or supplemental prospectus forming a part of the IPO Registration Statement provided by SAP specifically for inclusion therein and (ii) provided by SAP to Qualtrics specifically for inclusion in Qualtrics’ annual or quarterly reports following the IPO Date.
(4)In the event that any member of the SAP Group makes a payment to the Qualtrics Indemnitees hereunder, and any of the Qualtrics Indemnitees subsequently diminishes the Liability on account of which such payment was made, either directly or through a third-party recovery (other than a recovery indirectly from Qualtrics), Qualtrics will promptly repay (or will procure a Qualtrics Indemnitee to promptly repay) such member of the SAP Group the amount by which the payment made by such member of the SAP Group exceeds the actual cost of the associated indemnified Liability.
Section iv.Ancillary Agreement Liabilities
. Notwithstanding any other provision in this Agreement to the contrary, any Liability specifically assumed by, or allocated to, a Party in any of the Intercompany Agreements shall be governed exclusively by the terms of such Intercompany Agreement. For the avoidance of doubt, the allocation between the Parties of Liabilities for Taxes shall be governed exclusively by the Tax Sharing Agreement.
Section v.Reductions for Insurance Proceeds and other Recoveries
(1).
1.Insurance Proceeds. The amount that any Indemnifying Party is or may be required to provide indemnification to or on behalf of any Indemnitee pursuant to Section 4.2 or Section 4.3, as applicable, shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related Loss. The existence of a claim by an Indemnitee for monies from an insurer or against a third party in respect of any indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather, the Indemnifying Party shall make payment in full of the amount determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for Insurance Proceeds or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the Parties that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated. If an Indemnitee has received the payment required by this Agreement from an Indemnifying Party in respect of any indemnifiable Loss and later receives Insurance Proceeds or other amounts in respect of such indemnifiable Loss, then such Indemnitee shall hold such Insurance Proceeds or
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other amounts in trust for the benefit of the Indemnifying Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as promptly as practicable after receipt, a sum equal to the amount of such Insurance Proceeds or other amounts received, up to the aggregate amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such indemnifiable Loss (or, if there is more than one Indemnifying Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share (based on payments received from the Indemnifying Parties) of such Insurance Proceeds).
2.Tax Cost/Tax Benefit. The amount that any Indemnifying Party is or may be required to provide indemnification to or on behalf of any Indemnitee pursuant to Section 4.2 or Section 4.3, as applicable, shall be (i) increased to take account of any net Tax cost incurred by the Indemnitee arising from the receipt or accrual of an indemnification payment hereunder (grossed up for such increase) and (ii) reduced to take account of any net Tax benefit realized by the Indemnitee arising from incurring or paying such loss or other liability. In computing the amount of any such Tax cost or Tax benefit, the Indemnitee shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any indemnification payment hereunder or incurring or paying any indemnified Loss. Any indemnification payment hereunder shall initially be made without regard to this Section 4.5(b) and shall be increased or reduced to reflect any such net Tax cost (including gross-up) or net Tax benefit only after the Indemnitee has actually realized such cost or benefit. For purposes of this Agreement, an Indemnitee shall be deemed to have “actually realized” a net Tax cost or a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such Indemnitee is increased above or reduced below, as the case may be, the amount of Taxes that such Indemnitee would be required to pay but for the receipt or accrual of the indemnification payment or the incurrence or payment of such Loss, as the case may be. The amount of any increase or reduction hereunder shall be adjusted to reflect any Final Determination with respect to the Indemnitee’s liability for Taxes, and payments between such indemnified parties to reflect such adjustment shall be made if necessary. Notwithstanding any other provision of this Agreement, to the extent permitted by applicable law, the Parties agree that any indemnity payment made hereunder shall be treated as a capital contribution by SAP America to Qualtrics or dividend distribution by Qualtrics to SAP America, as the case may be, immediately prior to the IPO Date and, accordingly, not includible in the taxable income of the recipient or deductible by the payor.
a.Procedures for Defense, Settlement and Indemnification of the Third Party Claims
.
3.Notice of Claims. If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person who is not a member of the SAP Group or the Qualtrics Group of any claim or of the commencement by any such Person of any Action (collectively, a “Third Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification, SAP and Qualtrics (as applicable) will ensure that such Indemnitee shall give such Indemnifying Party written notice thereof within 30 days after becoming aware of such
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Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the delay or failure of any Indemnitee or other Person to give notice as provided in this Section 4.6(a) shall not relieve the related Indemnifying Party of its obligations under this ARTICLE IV, except to the extent that such Indemnifying Party is actually and substantially prejudiced by such delay or failure to give notice.
4.Defense by Indemnifying Party. An Indemnifying Party shall be entitled to participate in the defense of any Third Party Claim and, to the extent that it wishes, at its cost, risk and expense, to assume the defense thereof, with counsel reasonably satisfactory to the party seeking indemnification. After timely notice from the Indemnifying Party to the Indemnitee of such election to so assume the defense thereof, the Indemnifying Party shall not be liable to the party seeking indemnification for any legal expenses of other counsel or any other expenses subsequently incurred by Indemnitee in connection with the defense thereof, except that the Indemnifying Party shall bear the expenses of separate counsel for the Indemnitee if there exists a conflict of interest between the Indemnitee and the Indemnifying Party in connection with the defense of such Third Party Claim that would make the representation by the same counsel or the counsel selected by Indemnifying Party inappropriate or the Indemnitee would lose any defenses available to it which are different from or in addition to those available to the Indemnifying Party. The Indemnitee agrees to cooperate in all reasonable respects with the Indemnifying Party and its counsel in the defense against any Third Party Claim. The Indemnifying Party shall be entitled to compromise or settle any Third Party Claim as to which it is providing indemnification; provided, however, that such compromise or settlement shall be made only with the written consent of the Indemnitee, such consent not to be unreasonably withheld, conditioned or delayed.
5.Defense by Indemnitee. If an Indemnifying Party fails to assume the defense of a Third Party Claim within 30 calendar days after receipt of notice of such claim, Indemnitee will, upon delivering notice to such effect to the Indemnifying Party, have the right to undertake the defense, compromise or settlement of such Third Party Claim on behalf of and for the account of the Indemnifying Party subject to the limitations as set forth in this Section 4.6; provided, however, that such Third Party Claim shall not be compromised or settled without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed. If the Indemnitee assumes the defense of any Third Party Claim, it shall keep the Indemnifying Party reasonably informed of the progress of any such defense, compromise or settlement. The Indemnifying Party shall reimburse all applicable costs and expenses of the Indemnitee in the event it is ultimately determined that the Indemnifying Party is obligated to indemnify the Indemnitee with respect to such Third Party Claim. In no event shall an Indemnifying Party be liable for any settlement effected without its consent, which consent will not be unreasonably withheld, conditioned or delayed.
b.Additional Matters
.
6.Pre-IPO Date Actions. Except with respect to matters pertaining solely to, or solely in connection with, the Qualtrics Business, SAP may, in its sole discretion, have
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exclusive authority and control over the investigation, prosecution, defense and appeal of all Actions pending at the IPO Date relating to or arising in connection with, in any manner, the Qualtrics Business or the Qualtrics Liabilities, in each case if SAP or a member of the SAP Group is named as a party thereto; provided, however, that SAP must obtain the written consent of Qualtrics, such consent not to be unreasonably withheld, conditioned or delayed, to settle or compromise or consent to the entry of judgment with respect to such Action. After any such compromise, settlement, consent to entry of judgment or entry of judgment, SAP shall reasonably and fairly allocate to Qualtrics, and Qualtrics shall be responsible for Qualtrics’ proportionate share of, any such compromise, settlement, consent or judgment attributable to the Qualtrics Business or the Qualtrics Liabilities, including its proportionate share of the costs and expenses associated with defending same consistent with the manner in which costs and expenses would be allocated to other members of the SAP Group.
7.Management of Third Party Claims. With respect to any Third Party Claim that does not implicate any SAP Group members as parties or otherwise, Qualtrics shall be responsible for hiring counsel, managing and defending such Third Party Claim. Qualtrics acknowledges and agrees that, to the extent it is utilizing insurance coverage in connection with such Third Party Claim, it may be required to take direction from an insurance company in the selection and hiring of such counsel. With respect to any Third Party Claim that materially implicates both Qualtrics Group and SAP Group members, (i) SAP shall be responsible for hiring counsel, managing and defending such Third Party Claim, (ii) SAP will in good faith keep Qualtrics informed and seek input from Qualtrics as appropriate and (iii) Qualtrics may elect to hire its own counsel or participate in its own defense at its own expense.
8.Cooperation in Defense and Settlement. With respect to any Third Party Claim that implicates both Qualtrics and SAP in a material fashion due to the allocation of Liabilities, responsibilities for management of defense and related indemnities set forth in this Agreement or any of the Intercompany Agreements, the Parties agree to cooperate fully and maintain a joint defense (in a manner that will preserve the attorney-client privilege, joint defense or other privilege with respect thereto) so as to minimize such Liabilities and defense costs associated therewith. The Party that is not responsible for managing the defense of such Third Party Claims shall, upon reasonable request, be consulted with respect to significant matters relating thereto and may, if such Party deems necessary or helpful, associate counsel to assist in the defense of such claims.
9.Governmental Claims. Notwithstanding anything in this Agreement to the contrary (including Section 4.6 hereof) and unless prohibited by applicable legal requirements or by a Governmental Authority, SAP may, in its sole discretion, have exclusive authority and control over the investigation, prosecution, defense and appeal of all Third Party Claims initiated by a Governmental Authority, including those relating to or arising in connection with the Qualtrics Business, unless any such matter does not involve the SAP Group and is not reasonably likely to materially affect the SAP Group, other than in its capacity as a shareholder of Qualtrics, as reasonably determined by SAP. SAP shall reasonably and fairly allocate to Qualtrics, and Qualtrics shall be responsible for, all costs, fines and penalties incurred by Qualtrics and SAP (including all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses)
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in connection with any compromise, settlement, consent or judgment resulting from any investigation, prosecution, defense or appeal, attributable to the Qualtrics Business or the Qualtrics Liabilities, as allocated to Qualtrics. For the avoidance of doubt, this Section 4.7(d) applies to Third Party Claims initiated by a Governmental Authority and not to Third Party Claims initiated by other third parties that are merely brought before or through a Governmental Authority.
10.Subrogation. In the event of payment by or on behalf of any Indemnifying Party to or on behalf of any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee, in whole or in part based upon whether the Indemnifying Party has paid all or only part of the Indemnitee’s Liability, as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.
11.Intercompany Agreements Control. The foregoing provisions of this Article IV (including Section 4.7 hereof) are subject in all respects to the terms of (i) the Insurance Matters Agreement, to the extent any Action is covered by insurance, (ii) the Intellectual Property Matters Agreement, to the extent any Action relates to intellectual property and (iii) the Distribution Agreement, to the extent any Action relates to the distribution and sale of the other Party’s products.
c.Survival of Indemnities
. The rights and obligations of the members of the SAP Group and the Qualtrics Group under this ARTICLE IV shall survive the sale or other transfer by any Party of any assets or businesses or the assignment by it of any Liabilities or the sale by any member of the SAP Group or the Qualtrics Group of the capital stock or other equity interests of any Subsidiary to any Person.
Article V.
MISCELLANEOUS
d.Consent
. Any consent of SAP or Qualtrics pursuant to this Agreement or any of the Intercompany Agreements shall not be effective unless it is in writing and evidenced by the signature of the General Counsel of SAP or General Counsel of Qualtrics (or another duly authorized signatory of such Party or such other person that the General Counsel has specifically authorized in writing to give such consent).
e.Limitation of Liability
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. IN NO EVENT SHALL ANY MEMBER OF THE SAP GROUP OR QUALTRICS GROUP BE LIABLE TO ANY OTHER MEMBER OF THE SAP GROUP OR QUALTRICS GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT (a) EACH PARTY’S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN EITHER THIS AGREEMENT OR ANY INTERCOMPANY AGREEMENT, (b) EITHER PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS UNDER SECTION 3.5, OR (c) EITHER PARTY’S BREACH OF ITS DATA PROTECTION OR PRIVACY OBLIGATIONS HEREUNDER.
f.Entire Agreement
. This Agreement, the Intercompany Agreements and the Exhibits and Schedules referenced or attached hereto and thereto, constitute the entire agreement between the Parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof.
g.Governing Law and Jurisdiction
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all Disputes arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
h.Consent to Jurisdiction
. SUBJECT TO SECTION 3.9, THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
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REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
i.Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 5.4.
j.Termination; Amendment
. This Agreement and all Intercompany Agreements may be terminated or amended by and in the sole discretion of SAP, without the approval of Qualtrics, at any time prior to the IPO. This Agreement and any applicable Intercompany Agreements may be terminated or amended at any time after such date and during the term of this Agreement only by an instrument in writing signed on behalf of each of the Parties. In the event of termination pursuant to this Section 5.7, no Party shall have any liability of any kind to the other Party. Except as otherwise provided herein or required by the provisions hereof, this Agreement shall terminate on the date that is three years after the first date upon which the members of the SAP Group hold shares of Common Stock representing less than a majority of the votes entitled to be cast by all holders of Common Stock; provided, however, that the provisions of Sections 3.11 (Compliance and Other Policies) and Section 4.7(d) shall terminate on the first date upon which the members of the SAP Group hold shares of Common Stock representing less than a majority of the votes entitled to be cast by all holders of Common Stock, the provisions of Section 3.7 (Cooperation in Future Litigation or Other Proceedings) shall survive for a period of seven years after the termination of this Agreement, and the provisions of Section 3.5 (Confidentiality) and Section 3.6 (Privileged Matters), Article IV (other than Section 4.7), Article V and Article VI shall survive indefinitely after the termination of this Agreement.
k.Notices
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. Notices, offers, requests or other communications required or permitted to be given by either Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties at the following addresses:
if to SAP:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
Attention: Jochen Scholten
E-mail:
if to Qualtrics:
Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
with a copy to:
Shearman & Sterling LLP
1460 El Camino Real, 2nd Floor
Menlo Park, CA 94025
Attention: Daniel R. Mitz
E-mail: Daniel.Mitz@shearman.com
or at such other address or e-mail as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
l.Counterparts
. This Agreement, including the Intercompany Agreements and the Exhibits and Schedules hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
m.Binding Effect; Assignment
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. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
n.Severability
. If any term or other provision of this Agreement or the Exhibits or Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
o.Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Exhibits or Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.
p.Authority
. Each of the Parties represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
q.Interpretation
. The headings contained in this Agreement, in any Exhibit or Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section,
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Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, as permitted by Section 5.7. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
r.Conflicting Agreements
. None of the provisions of this Agreement are intended to supersede any provision in any Intercompany Agreement or any other agreement with respect to the respective subject matters thereof. In the event of conflict between this Agreement and any Intercompany Agreement or other agreement executed in connection herewith, the provisions of such other agreement shall prevail.
s.Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party.
t.Publicity
. Each of SAP and Qualtrics shall consult with the other, and shall, subject to the requirements of Section 3.5, provide the other Party the opportunity to review and comment upon, any press releases or other public statements in connection with this Agreement, the IPO or any other transactions related thereto and any filings with any Governmental Authority or national securities exchange with respect thereto, in each case prior to the issuance or filing thereof, as applicable.
u.Specific Performance
. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the affected Party shall have the right to seek specific performance and injunctive or other equitable relief of its rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The other Party shall not oppose the granting of such relief on the basis that money damages are an adequate remedy. The Parties agree that the remedies at law for any breach or threatened breach hereof, including monetary damages, may be inadequate compensation for any loss and that any defense in any action for specific performance that a
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remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived.
Article VI.
DEFINITIONS
v.Defined Terms
. The following capitalized terms shall have the meanings given to them in this Section 6.1:
“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration or mediation tribunal.
“Administrative Services Agreement” shall have the meaning set forth in Section 1.1(a).
“Affiliated Company” of any Person means any entity that controls, is controlled by, or is under common control with such Person. As used herein, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.
“Agreement” shall mean this Master Transaction Agreement, together with the Schedules and Exhibits hereto, as the same may be amended from time to time in accordance with the provisions hereof.
“Cash-Settled Equity Awards” shall have the meaning set forth in Section 2.3(e).
“CCO” shall have the meaning set forth in Section 3.11(e)
“Class A common stock” means the Class A common stock, par value $0.0001 per share, of Qualtrics.
“Class B common stock” means the Class B common stock, par value $0.0001 per share, of Qualtrics.
“Code” means the Internal Revenue Code of 1986, as amended.
“Commission” shall have the meaning set forth in the recitals of this Agreement.
“Common Stock” means the Class A common stock and Class B common stock of Qualtrics.
“Confidential Information” shall have the meaning set forth in Section 3.5(b)(i).
“Disclosing Party” shall have the meaning set forth in Section 3.5(b)(i).
“Dispute” shall have the meaning set forth in Section 3.9(a).
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“Dispute Resolution Commencement Date” shall have the meaning set forth in Section 3.9(a).
“Distribution Agreement” shall have the meaning set forth in Section 1.1(e).
“Distribution Date” means the date on which a Tax-Free Distribution occurs.
“Employee Matters Agreement” shall have the meaning set forth in Section 1.1(c).
“Exchange Act” shall have the meaning set forth in Section 2.1(a).
“Existing Intercompany Agreements” shall have the meaning set forth in Section 3.12.
“Final Determination” shall have the meaning set forth in the Tax Sharing Agreement.
“Governmental Approvals” means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority.
“Governmental Authority” means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.
“Guarantee” shall have the meaning set forth in Section 3.13.
“IFRS” means International Financial Reporting Standards.
“Indebtedness” means, with respect to any Person, any liability of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments and shall also include (a) any liability of such Person under any agreement related to the fixing of interest rates on any Indebtedness and (b) any capitalized or finance lease obligations of such Person (if and to the extent the same would appear on a balance sheet of such Person prepared in accordance with United States generally accepted accounting principles).
“Indemnifying Party” means any party which may be obligated to provide indemnification to an Indemnitee pursuant to Section 4.2 or Section 4.3 hereof or any other section of this Agreement or any Intercompany Agreement.
“Indemnitee” means any party which may be entitled to indemnification from an Indemnifying Party pursuant to Section 4.2 or Section 4.3 hereof or any other section of this Agreement or any Intercompany Agreement.
“Information” means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software,
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marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data.
“Insurance Matters Agreement” shall have the meaning set forth in Section 1.1(f).
“Insurance Policies” means insurance policies pursuant to which a Person makes a true risk transfer to an insurer.
“Insurance Proceeds” means those monies: (a) received by an insured from an insurance carrier; or (b) paid by an insurance carrier on behalf of the insured; or (c) from Insurance Policies.
“Intellectual Property Matters Agreement” shall have the meaning set forth in Section 1.1(d).
“Intercompany Agreements” means the Employee Matters Agreement, the Insurance Matters Agreement, the Intellectual Property Matters Agreement, the Real Estate Matters Agreement, the Administrative Services Agreement, the Tax Sharing Agreement, the Distribution Agreement and the Stockholders’ Agreement.
“IPO” shall have the meaning set forth in the recitals to this Agreement.
“IPO Date” shall have the meaning set forth Section 1.1.
“IPO Conditions” shall have the meaning set forth in Section 2.3.
“IPO Dividend Amount” shall have the meaning set forth in Section 2.3(f).
“IPO Registration Statement” shall have the meaning set forth in the recitals to this Agreement.
“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Loss” and “Losses” mean any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including the costs and expenses of any and all Actions and demands, assessments, judgments, settlements and compromises relating thereto and all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder), including direct and consequential damages, but
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excluding punitive damages (other than punitive damages awarded to any third party against an indemnified party).
“Nasdaq” shall have the meaning set forth in Section 2.1(c).
“New Share-Settled Equity Awards” shall have the meaning set forth in Section 2.3(e).
“Note 1” shall have the meaning set forth in Section 1.2(b).
“Note 2” shall have the meaning set forth in Section 1.2(b).
“Notifying Party” shall have the meaning set forth in Section 3.5(a).
“Party” or “Parties” shall have the meaning set forth in the preamble to this Agreement.
“Permitted Acquisition” means any acquisition by Qualtrics or any of its Subsidiaries of Stock, Stock Equivalents or assets (including, without limitation, any business or operating unit) of any Person not requiring the prior affirmative vote of the holders of the Class B common stock pursuant to Section 3.2(a)(iv).
“Person” means an individual, partnership, joint venture, limited liability company, firm, corporation, trust or other entity, including governmental authorities.
“Privileged Information” shall have the meaning set forth in Section 3.6(a).
“Privileges” shall have the meaning set forth in Section 3.6(a).
“Qualtrics” shall have the meaning set forth in the preamble to this Agreement.
“Qualtrics’ Auditors” shall have the meaning set forth in Section 3.4(a)(i).
“Qualtrics Balance Sheet” means Qualtrics’ unaudited consolidated balance sheet for the most recently completed fiscal quarter as of the IPO Date.
“Qualtrics Board” shall have the meaning set forth in Section 3.2(a)(v).
“Qualtrics Business” means the business presently conducted by Qualtrics, as more completely described in the IPO Registration Statement, or following the IPO Date, such business that is then conducted by Qualtrics and described in its periodic filings with the Commission.
“Qualtrics Equivalent Compliance Policies” shall have the meaning set forth in Section 3.11(a).
“Qualtrics Equivalent Other Policies” shall have the meaning set forth in Section 3.11(a).
“Qualtrics Equivalent Policies” shall have the meaning set forth in Section 3.11(a).
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“Qualtrics Group” means Qualtrics and its Subsidiaries.
“Qualtrics Indemnitees” means Qualtrics, each member of the Qualtrics Group and each of their respective directors, officers and employees.
“Qualtrics Liabilities” means (without duplication) the following Liabilities:
1.all Liabilities reflected in the Qualtrics Balance Sheet;
2.all Liabilities of SAP or its Subsidiaries that arise after the date of the Qualtrics Balance Sheet that would be reflected in a Qualtrics balance sheet as of the date of such Liabilities, if such balance sheet was prepared using the same principles and accounting policies under which the Qualtrics Balance Sheet was prepared;
3.all Liabilities that should have been reflected in the Qualtrics Balance Sheet but are not reflected in the Qualtrics Balance Sheet due to mistake or unintentional omission;
4.all Liabilities (other than Liabilities for Taxes, which are governed by the Tax Sharing Agreement), whether arising before, on or after the IPO Date, that relate to, arise or result from:
1.the operation of the Qualtrics Business as conducted at any time prior to, on or after the IPO Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority)); or
2.the operation of any business conducted by any member of the Qualtrics Group at any time after the IPO Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority));
5.all Liabilities resulting from a breach of its confidentiality obligations or breach of its data protection and privacy obligations;
6.all Liabilities that are expressly contemplated by this Agreement, or any other Intercompany Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by Qualtrics or any member of the Qualtrics Group; and
7.Liabilities of any member of the Qualtrics Group under this Agreement or any of the Intercompany Agreements.
After the IPO Date, SAP and Qualtrics may receive invoices evidencing liabilities jointly incurred by or on behalf of both of them or their respective Affiliated Companies. Accordingly, each of SAP and Qualtrics agrees that such joint liabilities shall be divided among SAP,
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Qualtrics and their respective Affiliated Companies consistent with past practice and “Qualtrics Liabilities” shall include the portion so allocated to Qualtrics.
“Qualtrics Policies” shall have the meaning set forth in Section 3.11(c).
“Real Estate Matters Agreement” shall have the meaning set forth in Section 1.1(h).
“Receiving Party” shall have the meaning set forth in Section 3.5(b)(i).
“Rollover Shortfall Shares” shall have the meaning set forth in Section 2.3(e).
“Rule 10A-3(b)(2)” means Rule 10A-3(b)(2) (or any successor rule to similar effect) promulgated under the Exchange Act.
“SAP” shall have the meaning set forth in the preamble to this Agreement.
“SAP Accounting Policies” shall have the meaning set forth in Section 3.4(g).
“SAP America” means SAP America, Inc., a Delaware corporation and wholly owned Subsidiary of SAP.
“SAP’s Auditors” shall have the meaning set forth in Section 3.4(a)(i).
“SAP Business” means any business that is then conducted by SAP and described in its periodic filings with the Commission, other than the Qualtrics Business.
“SAP Compliance Policies” shall have the meaning set forth in Section 3.11(a).
“SAP Group” means (x) prior to the first Distribution Date, SAP America and, for so long as SAP America is a Subsidiary of SAP, SAP and all Subsidiaries of SAP, and (y) following the first Distribution Date, SAP and all Subsidiaries of SAP. For the avoidance of doubt, for purposes of this Agreement, the Qualtrics Group shall not be deemed to be Subsidiaries of any member of the SAP Group.
“SAP Indemnitees” means SAP, each member of the SAP Group and each of their respective directors, officers and employees.
“SAP Liabilities” means (without duplication) the following Liabilities:
1.all Liabilities (other than Liabilities for Taxes, which are governed by the Tax Sharing Agreement), whether arising before, on or after the IPO Date, that relate to, arise or result from:
3.the operation of the SAP Business as conducted at any time prior to, on or after the IPO Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority)); or
41
4.the operation of any business conducted by any member of the SAP Group at any time after the IPO Date (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person’s authority));
2.all Liabilities resulting from a breach of its confidentiality obligations or breach of its data protection and privacy obligations;
3.all Liabilities that are expressly contemplated by this Agreement, or any other Intercompany Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by SAP or any member of the SAP Group; and
4.Liabilities of any member of the SAP Group under this Agreement or any of the Intercompany Agreements.
After the IPO Date, SAP and Qualtrics may receive invoices evidencing liabilities jointly incurred by or on behalf of both of them or their respective Affiliated Companies. Accordingly, each of SAP and Qualtrics agrees that such joint liabilities shall be divided among SAP, Qualtrics and their respective Affiliated Companies consistent with past practice and “SAP Liabilities” shall include the portion so allocated to SAP.
“SAP Other Policies” shall have the meaning set forth in Section 3.11(a).
“SAP Policies” shall have the meaning set forth in Section 3.11(a).
“Securities Act” means the Securities Act of 1933, as amended.
“Stock” means shares of capital stock (whether denominated as common stock or preferred stock), beneficial, partnership, limited liability company or membership interests, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company, joint venture, trust, association or other entity, whether voting or non-voting.
“Stock Equivalents” means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any Stock, whether or not presently convertible, exchangeable or exercisable, and all voting debt.
“Stockholders’ Agreement” shall have the meaning set forth in Section 1.1(g).
“Subsidiary” means, with respect to any Person, any corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (a) beneficially owns, either directly or indirectly, more than 50% of (i) the total combined voting power of all classes of voting securities of such entity, (ii) the total combined equity interests, or (iii) the capital or profits interest, in the case of a partnership; or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors
42
or similar governing body. Notwithstanding the foregoing, for purposes of this Agreement, no member of the Qualtrics Group shall be deemed to be a Subsidiary of any member of the SAP Group.
“Tax” and “Taxes” shall have the meanings set forth in the Tax Sharing Agreement.
“Tax-Free Distribution” means a distribution or other transfer of the Class B Common Stock (i) by SAP America to holders of stock of SAP America (including SAP) and/or holders of securities issued by SAP America or (ii) by SAP to holders of stock of SAP and/or holders of securities issued by SAP, in either case in a transaction intended to qualify for non-recognition of gain and loss under Section 355 of the Code.
“Tax Sharing Agreement” shall have the meaning set forth in Section 1.1(b).
“Third Party Claim” shall have the meaning set forth in Section 4.6(a).
“Underwriters” shall have the meaning set forth in Section 2.1(a).
“Underwriting Agreement” shall have the meaning set forth in Section 2.1(a).
“U.S. GAAP” means U.S. Generally Accepted Accounting Principles.
“Wholly-Owned Subsidiary” means each Subsidiary of Qualtrics in which Qualtrics owns (directly or indirectly) all of the outstanding voting Stock, voting power, partnership interests or similar ownership interests, except for director’s qualifying shares in nominal amount.
[Signature Page Follows]
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WHEREFORE, the Parties have signed this Master Transaction Agreement effective as of the date first set forth above.
SAP SE
/s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
/s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
/s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Master Transaction Agreement]
SCHEDULE 3.11(a)(i)
SAP Global Compliance Policies
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
SCHEDULE 3.11(a)(ii)
SAP Other Policies
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
SCHEDULE 3.11(c)
Qualtrics Policies
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.[__]
SCHEDULE 3.12
Surviving Existing Intercompany Agreements
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.2
ADMINISTRATIVE SERVICES AGREEMENT
dated as of February 1, 2021
between
SAP SE,
SAP AMERICA, INC.
and
QUALTRICS INTERNATIONAL INC.
TABLE OF CONTENTS
PAGE
1
SCHEDULES
SCHEDULE I: Certain Services To Be Provided By SAP to Qualtrics
SCHEDULE II: Certain Services To Be Provided By Qualtrics to SAP
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ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is dated as of the 1st day of February, 2021, between Qualtrics International Inc., a Delaware corporation (“Qualtrics”), SAP SE, a Societas Europaea registered in accordance with the corporate laws of Germany and the European Union (“SAP SE”), and SAP America, Inc., a Delaware corporation (“SAP America” and, together with SAP SE, “SAP”). Qualtrics and SAP are sometimes referred to herein separately as a “Party” and together as the “Parties”. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in Article I hereof.
RECITALS
WHEREAS, SAP SE is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics, and SAP America is the direct beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP, through Qualtrics, is engaged in the business (the “Qualtrics Business”) of experience management software and services, including providing a technology platform for organizations to collect, manage, analyze and take action on experience data, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (the “IPO”) of its Class A common stock pursuant to the IPO Registration Statement;
WHEREAS, SAP directly or indirectly provides certain services to the Qualtrics Entities (as defined below) and Qualtrics directly or indirectly provides certain services to the SAP Entities (as defined below);
WHEREAS, following consummation of the IPO, Qualtrics desires SAP to continue to provide certain services to the Qualtrics Entities, and SAP desires Qualtrics to continue to provide certain services to the SAP Entities, as more fully set forth in this Agreement; and
WHEREAS, each Party desires to set forth in this Agreement the principal terms and conditions pursuant to which SAP will provide certain services to the Qualtrics Entities and Qualtrics will provide certain services to the SAP Entities.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, for themselves and their respective successors and assigns, hereby covenant and agree as follows:
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Article I.
DEFINITIONS
Section i.Definitions
. As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority or any arbitration or mediation tribunal.
“Agreement” means this Administrative Services Agreement, together with the Schedules, as the same may be amended and supplemented from time to time in accordance with the provisions hereof.
“Change of Control” means the occurrence of any one or more of the following events:
(a)the sale or disposition, in one or a series of related transactions, of all or substantially all of the consolidated assets of the Qualtrics Entities, taken as a whole, to any “person” or “group” (as such terms are used for purposes of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than SAP SE or any of its direct or indirect wholly-owned Subsidiaries;
(b)any “person” or “group,” other than SAP SE or any of its direct or indirect wholly-owned Subsidiaries, is or becomes the beneficial owner, directly or indirectly, of more than fifty percent (50%) of the total voting power of the outstanding voting stock of Qualtrics, excluding as a result of any merger or consolidation that does not constitute a Change of Control pursuant to clause (c);
(c)any merger or consolidation of Qualtrics with or into any other person, unless immediately thereafter SAP SE or any of its direct or indirect wholly-owned Subsidiaries beneficially owns a majority of the outstanding shares of the common stock (or equivalent voting securities) of the surviving or successor entity (or the parent entity thereof); or
(d)SAP SE or any of its direct or indirect wholly-owned Subsidiaries ceases to have the right to cause the election of that number of members of the board of directors of Qualtrics who collectively have the right to vote a majority of the aggregate number of votes represented by all of the members of the board of directors of Qualtrics.
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“Contract” means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of such Person’s property under applicable law.
“Distribution Agreement” means the Distribution Agreement between the Parties of even date herewith.
“Employee” means any Qualtrics Employee or SAP Employee.
“Employee Matters Agreement” means the Employee Matters Agreement between the Parties of even date herewith.
“Insurance Matters Agreement” means the Insurance Matters Agreement between the Parties of even date herewith.
“Intellectual Property Matters Agreement” means the Intellectual Property Matters Agreement between the Parties of even date herewith.
“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Losses” means any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including the costs and expenses of any and all Actions and demands, assessments, judgments and settlements and compromises relating thereto and all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder), including direct and consequential damages, but excluding punitive damages (other than punitive damages awarded to any third party against an indemnified party).
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Offering Date” means the date on which the IPO is consummated.
“Person” means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (including any department or agency thereof) or other entity.
“Qualtrics-Aligned Employee” has the meaning set forth in the Employee Matters Agreement.
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“Qualtrics Employee” means (i) an employee or individual contractor of a Qualtrics Entity who will be engaged in providing Qualtrics Services, or (ii) a Qualtrics-Aligned Employee who will be engaged in providing Qualtrics Services.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity which becomes a Subsidiary of Qualtrics after the date hereof, and “Qualtrics Entity” means any one of the Qualtrics Entities.
“Qualtrics Services” means the various services to be provided by a Qualtrics Entity to or on behalf of the SAP Entities as described on Schedule II and any Additional Services provided by a Qualtrics Entity pursuant to this Agreement.
“Real Estate Matters Agreement” means the Real Estate Matters Agreement between the Parties of even date herewith.
“SAP Employee” means an employee or individual contractor of an SAP Entity who will be engaged in providing SAP Services. For the avoidance of doubt, no Qualtrics-Aligned Employee shall be considered to be an SAP Employee for purposes of this Agreement.
“SAP Entities” means SAP SE and its Subsidiaries (other than the Qualtrics Entities) and any entity which becomes a Subsidiary of SAP SE after the date hereof, and “SAP Entity” means any one of the SAP Entities.
“SAP Services” means the various services to be provided by an SAP Entity to or on behalf of the Qualtrics Entities as described on Schedule I and any Additional Services provided by an SAP Entity pursuant to this Agreement.
“Schedule I” means the first Schedule attached hereto, as amended from time to time, which lists certain agreed upon SAP Services to be provided by SAP to or on behalf of the Qualtrics Entities and sets forth the related pricing for such Services.
“Schedule II” means the second Schedule attached hereto which sets forth the pricing for Qualtrics Services to be provided by Qualtrics to or on behalf of the SAP Entities and sets forth the related pricing for such Services.
“Schedules” means any one or more of the schedules referred to in and attached to this Agreement.
“Services” means the Qualtrics Services and the SAP Services.
“Subsidiary” means, as to any Person, a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (1) beneficially owns, either directly or indirectly, more than fifty percent (50%) of (A) the total combined voting power of all classes of voting securities of such entity, (B) the total combined equity interests, or (C) the capital or profits interest, in the case of a partnership; or (2) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors
4
or similar governing body. For purposes of this Agreement, no Qualtrics Entity shall be deemed to be Subsidiaries of any SAP Entity.
“Tax” and “Taxes” shall have the meanings set forth in the Tax Sharing Agreement.
“Tax Sharing Agreement” means the Tax Sharing Agreement between the Parties of even date herewith.
“Transaction Agreements” means this Agreement, the Distribution Agreement, the Employee Matters Agreement, the Insurance Matters Agreement, the Intellectual Property Matters Agreement, the Real Estate Matters Agreement, the Master Transaction Agreement and the Tax Sharing Agreement.
(1)Each of the following terms is defined in the Section set forth opposite such term:
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| TERM | SECTION | ||||
| Additional Services | 2.03 | ||||
| ARMR | 3.01(a)(i) | ||||
| Billable Employees | 3.01(a)(i) | ||||
| Billable Offerings | 3.01(a)(i) | ||||
| Consulting Services | 3.01(a)(i) | ||||
| Cost | 3.01(a)(ii) | ||||
| Development Services Intellectual Property Rights | 2.10(a) | ||||
| Development Services Provider | 2.10(a) | ||||
| Development Services Recipient | 2.10(a) | ||||
| Force Majeure | 6.04(a) | ||||
| Initial Term | 5.01(a) | ||||
| IPO | Recitals | ||||
| IPO Registration Statement | Recitals | ||||
| Other Services | 3.01(a)(ii) | ||||
| Out-of-Pocket Costs | 3.01(d) | ||||
| Parties | Preamble | ||||
| Party | Preamble | ||||
| Qualtrics | Preamble | ||||
| Qualtrics Indemnified Person | 4.03(b) | ||||
| Qualtrics Business | Recitals | ||||
| Renewal Term | 5.01(a) | ||||
| SAP | Preamble | ||||
| SAP America | Preamble | ||||
| SAP Indemnified Person | 4.03(a) | ||||
| SAP SE | Preamble | ||||
| Service Center | 3.01(b) | ||||
| Services Managers | 4.02 | ||||
| Services Taxes | 3.01(e)(i) | ||||
| SLA | 3.01(b) | ||||
| Termination Date | 5.03(a) | ||||
Section ii.Internal References
. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement.
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Article II.
PROVISION OF SERVICES
Section i.Provision of SAP Services
.
(1)Subject to the terms and conditions of this Agreement and in consideration of the costs for SAP Services described below, SAP agrees to provide or cause to be provided to the Qualtrics Entities, and Qualtrics agrees to purchase or to cause the Qualtrics Entities to purchase from SAP, the SAP Services, until such SAP Services are terminated in accordance with the provisions hereof.
(2)The Parties acknowledge and agree that SAP may directly satisfy its obligation to provide or to procure the SAP Services hereunder or may indirectly do so by causing one or more of its Subsidiaries to provide or to procure the SAP Services. The SAP Services shall, at Qualtrics’ request, be provided directly to Qualtrics or Subsidiaries of Qualtrics. With respect to the SAP Services provided to, or procured on behalf of, any Subsidiary of Qualtrics, Qualtrics agrees to pay on behalf of such Subsidiary all amounts payable by or in respect of such SAP Services pursuant to this Agreement, if any amounts payable are not otherwise paid by such Subsidiary. Qualtrics (or the other relevant Qualtrics Entity receiving SAP Services) shall pay all amounts payable in respect of SAP Services to the SAP Entity indicated on the applicable invoice for such SAP Services (which may be SAP or the Subsidiary of SAP that provided or procured such SAP Services).
(3)Except as otherwise provided on a Schedule, SAP may elect not to provide any Services requested by Qualtrics, and Qualtrics may elect not to purchase any Services offered by SAP.
Section ii.Provision of Qualtrics Services
.
(1)Subject to the terms and conditions of this Agreement and in consideration of the costs for Qualtrics Services described below, Qualtrics agrees to provide or cause to be provided to the SAP Entities, and SAP agrees to purchase or to cause the SAP Entities to purchase from Qualtrics, the Qualtrics Services, until such Qualtrics Services are terminated in accordance with the provisions hereof.
(2)The Parties acknowledge and agree that Qualtrics may directly satisfy its obligation to provide or to procure the Qualtrics Services hereunder or may indirectly do so by causing one or more of its Subsidiaries to provide or to procure the Qualtrics Services. The Qualtrics Services shall, at SAP’s request, be provided directly to SAP or Subsidiaries of SAP. With respect to the Qualtrics Services provided to, or procured on behalf of, any Subsidiary of SAP, SAP agrees to pay on behalf of such Subsidiary all amounts payable by or in respect of such Qualtrics Services pursuant to this Agreement, if any amounts payable are not otherwise
7
paid by such Subsidiary. SAP SE or SAP America (or the other relevant SAP Entity receiving Qualtrics Services) shall pay all amounts payable in respect of Qualtrics Services to the Qualtrics Entity indicated on the applicable invoice for such Qualtrics Services (which may be Qualtrics or the Subsidiary of Qualtrics that provided or procured such Qualtrics Services).
(3)Except as otherwise provided on a Schedule, Qualtrics may elect not to provide any Services requested by SAP, and SAP may elect not to purchase any Services offered by Qualtrics.
Section iii.Additional Services
. In addition to the Services to be provided or procured pursuant to, and in accordance with, Section 2.01 or Section 2.02, and subject to Section 2.09, if requested by the Party receiving such Services, and to the extent that the Party providing such Services may agree in writing (including by amending the Schedules, entering into an SLA pursuant to Section 3.01(b), providing a statement of work, or any other written (including by email) evidence of a request for additional services and an acceptance of such request), the Party providing such Services shall provide additional services to such other Party (“Additional Services”). The costs and other terms and conditions applicable to such Additional Services shall be as provided in Section 3.01, unless otherwise mutually agreed by the Parties prior to the provision of such Additional Services.
Section iv.Transition
. Each Party receiving a Service (including any SAP Service provided pursuant to an SLA) agrees to use commercially reasonable efforts to cooperate with the Party providing such Service in providing for an orderly transition of such Service to the Party receiving such Service or to a successor service provider as designated by the Party receiving such Service.
Section v.Cooperation
. To the extent reasonably necessary to perform the Services, a Party receiving Services shall provide personnel of the Party providing Services, its Subsidiaries and its subcontractors with reasonable access during normal business hours to the receiving Party’s office space, telecommunications and computer equipment and systems, and other areas and equipment. The Party providing Services will comply, and shall instruct its Subsidiaries and subcontractors to comply, with any reasonable security and access restrictions and other procedures that are communicated to such Party in writing and applicable to such access. The Party receiving Services shall (a) comply with any reasonable instructions of the Party providing Services that are reasonably necessary for it to adequately provide the Services; (b) comply with all standards and procedures applicable to such Services (if any) which are generally applied by such Party in the provision of services similar to such Services to itself and its Subsidiaries and which are
8
communicated to the receiving Party in writing; and (c) promptly notify the Party providing Services of any operational or system problem which may affect the provision of any Services. To the extent the receiving Party fails to adhere to this Section 2.05, the Party providing Services shall (i) be entitled to additional compensation and/or time to perform the Services, as applicable, as mutually agreed between the Parties in writing to the extent such failure materially increases its cost or burden to provide such Services, or (ii) be excused from its performance of the Services hereunder where such failure prevents its provision of the Service in conformance with this Agreement; provided that the Party providing Services shall first notify the receiving Party of such failure in writing and, where applicable, allow the receiving Party a reasonable opportunity (not to exceed thirty (30) days) to cure such failure.
Section vi.Modifications
.
(1)Each Party may make changes from time to time in its standards and procedures for performing Services; provided that any such change shall also apply to such Party’s own business.
(2)Each Party shall provide the other Party with a minimum of sixty (60) days’ prior written notice of any planned changes to such Party’s business or information technology infrastructure or systems that may affect the provision or receipt of the Services hereunder.
Section vii.Exceptions
. In connection with providing the Services, neither Party shall be required to perform, or to refrain from taking, any actions that, in such Party’s reasonable judgment, could result in or cause any conflict with, or breach or violation of, any existing license, lease or other agreement to which such Party or any of its Subsidiaries is a party, or any law, rule or regulation; provided that each Party agrees to, as promptly as practicable after becoming aware of such conflict, breach, or violation, consult with the other Party to identify any reasonable alternative services or solutions and, with such other Party’s permission, implement such alternative services or solutions.
Section viii.Annual Review
. No later than 30 days prior to the end of each year during the Initial Term or the end of any Renewal Term (unless notice of non-renewal shall have been given), the Parties may commence discussions to determine the appropriate scope and level of service for each Service (including any SAP Service provided pursuant to an SLA) to be provided in the next year of the Initial Term or in the subsequent Renewal Term, as applicable, based on a good faith review of the Services and
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levels of service provided in the then-current year or term and a good faith estimate of each Party’s future service requirements, and may execute and deliver amended Schedules for the subsequent year or Renewal Term as mutually agreed.
Section ix.Transaction Agreements
. Certain of the other Transaction Agreements require the Parties to perform services to each other under the terms of the applicable other Transaction Agreements. Unless specifically designated as a Service or Additional Service under or in accordance with this Agreement, the provision of services pursuant to any such other Transaction Agreement shall be subject to the terms and conditions of the applicable other Transaction Agreement and shall not constitute Services or Additional Services under this Agreement and shall not be subject to the terms and conditions of this Agreement.
Section x.Proprietary Rights in relation to Development Services.
(1)Each Party providing Development Services, including Custom Development Services, (each as described in the Schedules) ( the “Development Services Provider”) agrees to assign, and hereby assigns, to the other Party (the “Development Services Recipient”), to the extent legally permissible, all intellectual property rights, title and interest in any and all products, works, inventions, designs and other materials (and any modifications and enhancements thereto) created or produced by or in connection with the Development Services Provider’s provision of Development Services under this Agreement (“Development Services Intellectual Property Rights”). The Development Services Provider agrees to provide any declarations and sign any documents reasonably necessary to effect such assignment to the Development Services Recipient. To the extent the foregoing assignment is ineffective for any reason, the Development Services Provider hereby grants to the Development Services Recipient an exclusive, perpetual, irrevocable, world-wide, royalty-free, fully paid up, transferable and unrestricted (in terms of time and substance) right to use, sell, duplicate, modify, process, translate and distribute such Development Services Intellectual Property Rights, including in the form of leasing or renting out, and to transfer these rights to use the work results to any third party. The assignment and/or granting of rights hereunder shall become effective immediately upon the respective Development Services Intellectual Property Rights coming into existence. The Development Services Recipient herewith accepts this assignment and this granting of rights in the Development Services Intellectual Property Rights.
(2)The Development Services Provider expressly waives the right to be identified as the author of the Development Services Intellectual Property Rights. The Development Services Provider will secure by respective agreements with its employees that the assignment and granting of Development Services Intellectual Property Rights pursuant to Section 2.10(a) and the waiver pursuant to Section 2.10(b) will not be hindered or prevented by, nor be in conflict with, proprietary rights of the Development Services Provider’s Employees.
(3)The Development Services Provider shall make available to the Development Services Recipient, promptly upon the completion of any Development Services
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(including Custom Development Services set forth in Schedule I) under this Agreement, information whether in tangible or intangible form, electronically stored or any form of media or otherwise, which is necessary for the Development Services Recipient to fully exercise the rights granted under paragraph (a) hereof.
(4)Notwithstanding the foregoing, the terms of this Section 2.10 shall not apply to any Development Services Intellectual Property Rights that constitute improvements, modifications or derivative works of the Development Services Provider’s products or services and, as between the Parties, each Party shall exclusively own and retain all right, title or interest in and to their respective products or services, including all improvements, modifications or derivative works. Without limiting the foregoing, the Parties acknowledge and agree that neither Party intends to create any such Development Services Intellectual Property Rights that constitute improvements, modifications or derivative works of the Development Services Provider’s products or services.
(5)Development Services Provider Indemnification.
(i)The Development Services Provider agrees to defend or at its option settle, at its own cost and expense, the Development Services Recipient against any and all claims of third parties against the Development Services Recipient to the extent alleging that the Development Services Recipient’s use of the Development Services Intellectual Property Rights as provided by the Development Services Provider and as authorized by this Agreement infringes such third parties’ intellectual property rights. The Development Services Provider shall indemnify and hold harmless against any final judgment entered on such claim or in settlement thereof.
(ii)The Parties shall promptly inform each other in case either of them becomes aware of a third party asserting an infringement of proprietary rights by the use of Development Services Intellectual Property Rights as authorized by this Agreement.
(iii)The Development Services Provider may, at is sole option and without limiting its indemnification obligations hereunder, either exchange or modify the Development Services Intellectual Property Rights in a manner that it no longer infringes third-party intellectual property rights, without materially degrading its functionality, or procure for the Development Services Recipient the right to continue the use of the Development Services Intellectual Property Rights.
(6)The terms of this Section 2.10 shall survive any termination or expiration of this Agreement.
Article III.
SERVICE COSTS; OTHER CHARGES
Section i.Service Costs
.
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(1)Services Performed by Employees of the Providing Party. Except (x) for SAP Services that the Parties mutually agree shall be provided and charged pursuant to an SLA entered into pursuant to Section 3.01(b), or (y) as otherwise provided in the applicable Schedule for the applicable Service, each Service (including Additional Services, unless otherwise mutually agreed by the Parties prior to the provision of such Additional Services) shall be provided at a fee or price calculated as follows:
(i)For Services (“Consulting Services”) performed by consultants, instructors and other Employees who have an internal or external billing rate (“Billable Employees”), or for other Services that consist of a billable offering with a defined selling price on an external price list, such as training services (“Billable Offerings”), such Consulting Services shall be charged at the Average Realized Market Rate (“ARMR”) determined and adjusted by the providing Party pursuant to Section 3.01(a)(iii) for each Billable Employee who renders Consulting Services or for each Billable Offering. To the extent any Billable Employee does not have an ARMR, the lowest consulting fee rate determined by such Party for such Billable Employee shall be used.
(ii)For all other Services (“Other Services”), unless a different cost methodology or markup rate is specified on the applicable Schedule for a particular Other Service, such Other Services shall be charged at the providing Party’s cost (including assessments for administration, information technology and facilities) (“Cost”) as determined by the providing Party, plus a markup rate of 6%. If any Other Services are performed by Billable Employees, the price for the portion of such Other Services performed by Billable Employees shall be determined as if such services were Consulting Services as provided above. The providing Party shall not charge for any Other Services that are provided primarily for the benefit of the providing Party.
(iii)ARMR and Cost shall be calculated by the providing Party in a manner consistent with how ARMR and Cost are calculated by SAP for the applicable job types or other measurement criteria in the applicable locations across SAP’s business units. SAP shall provide Qualtrics with sufficient information regarding how ARMR and Cost are calculated by SAP in order to enable Qualtrics to calculate ARMR and Cost pursuant to this Agreement. ARMR shall be subject to an annual adjustment process whereby at the end of each year and no later than the end of SAP’s year-end closing process, the providing Party shall recalculate the amounts charged to the receiving Party for such year based on the ARMR as calculated by the providing Party for such year, and shall either invoice the receiving Party for any shortfall in the event such recalculation results in the receiving Party having paid less than the amount owed for such year or credit the receiving Party for any excess in the event such recalculation results in the receiving Party having paid more than the amount owed for such year.
(2)SAP Services Performed Pursuant to an SLA. The parties may mutually agree that certain SAP Services shall be provided and charged by an SAP Entity pursuant to a separate Shared Services Agreement and Service Level Agreement (each, together with all
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schedules, exhibits and appendices thereto, an “SLA”) to be entered into between an SAP Entity (any SAP Entity entering into an SLA, a “Service Center”) and a Qualtrics Entity. To the extent that any SAP Services are provided by or on behalf of a Service Center pursuant to an SLA, such SLA shall constitute a Schedule to this Agreement and such SAP Services shall be provided pursuant to, and shall be subject to the terms and conditions of, any such SLA with the same effect as if such SLA were a Schedule to this Agreement.
(3)Third Party Service Providers. Services performed by third party service providers or subcontractors directly to or for the benefit of the receiving party that are billed to the providing Party rather than being billed directly to the receiving Party shall be charged at the price charged by such third party service provider or subcontractor without any markup, unless otherwise specified on the applicable Schedule for such Other Services.
(4)Out-of-Pocket Costs. In addition to the amounts payable pursuant to Section 3.01(a), (b) or (c), in the event that a Party providing Services incurs reasonable and documented out-of-pocket expenses in connection with the provision of any Service, including license fees and payments, reasonable travel costs and expenses, shipping and transportation costs and other fees or expenses, but excluding payments made to Employees of such Party, payments to third party service providers or subcontractors, or other payments included in the calculation of Costs (such included expenses, collectively, “Out-of-Pocket Costs”), the Party receiving such Service shall reimburse the Party providing such Service for all such Out-of-Pocket Costs in accordance with the invoicing procedures set forth in Section 3.02, without any markup. Neither Party shall incur any individual or series of related Out-of-Pocket Costs (excluding license fees and payments and duties and non-recoverable taxes) for any individual Service in excess of $5,000 in any billing period without the prior written approval of the Party receiving Services unless such Out-of-Pocket Costs are approved on the applicable Schedule for such Services.
(5)Taxes.
(i)All applicable sales, use, value added, GST, transfer, receipts, customs duties, consumption or other similar Taxes (and any other Taxes other than income Taxes and corporation Taxes), together with any interest, penalties or amounts imposed with respect thereto (collectively, “Services Taxes”), shall be borne by the Party (or its Subsidiary) receiving Services hereunder. If any Services Tax is required to be withheld or deducted from any payment under this Agreement, the Party (or its Subsidiary) receiving Services will increase the amount payable under this Agreement as shall ensure that after such withholding or deduction, the Party (or its Subsidiary) providing Services receives an amount equal to the amount required to be paid hereunder.
(ii)Income Taxes will be borne by the Party (or its Subsidiary) providing Services. If the Party (or its Subsidiary) receiving Services is required to withhold any Taxes (other than Services Taxes) from any payment to the Party (or its Subsidiary) providing Services under this Agreement, the Party (or its Subsidiary) receiving Services hereunder shall be entitled to withhold or deduct such Taxes from the gross amount to be paid. However, the Party (or its Subsidiary) receiving Services shall cooperate with the
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Party (or its Subsidiary) providing Services to reduce any such withholding Tax payable pursuant to applicable law or an income tax treaty. The Party (or its Subsidiary) receiving Services hereunder will in the case of any withholding Tax (including withholding Taxes described under Section 3.01(e)(ii)) provide to the Party (or its Subsidiary) providing Services a receipt from the relevant tax authority to which such withholding Tax has been paid.
(iii)Each Party shall cooperate with each other Party and take any reasonably requested action which does not cause such first Party to incur any cost or inconvenience (other than de minimis costs or inconveniences) in order to minimize any Services Taxes imposed on the sale of the Services (or other goods and services sold pursuant to this Agreement), including providing sales and use (or value added) tax exemption certificates or other documentation necessary to support tax exemptions. Each Party agrees to provide each other Party such information and data as reasonably requested from time to time, and to fully cooperate with each other Party, in connection with (i) the reporting of any Services Taxes payable pursuant to this Agreement, (ii) any audit relating to any Services Taxes payable pursuant to this Agreement or (iii) any assessment, refund, claim or proceeding relating to any such Services Taxes.
(iv)Except as otherwise provided in any SLA, this Section 3.01(e) shall be applicable to any SAP Service provided pursuant to an SLA.
Section ii.Payment
.
(1)Unless otherwise set forth on a Schedule (or otherwise mutually agreed to by the Parties in writing), charges for Services shall be invoiced quarterly in arrears by each Party (or its Subsidiary) providing or procuring such Services following the end of a quarter; provided that charges for Consulting Services shall be invoiced monthly in arrears by each Party (or its Subsidiary) providing or procuring such Consulting Services following the end of a month. The invoice shall set forth in reasonable detail (which shall be sufficient to allow the receiving Party’s internal controlling or financial oversight personnel or its certified public accountants to verify independently the correctness of the invoice) for the period covered by such invoice (i) the Services rendered, (ii) the aggregate amount charged for each type of Service provided, (iii) the calculations for such amount charged, including billing rates, hours worked, ARMR, and Cost, as applicable, and (iv) such additional information as the Party receiving the invoice may reasonably request. Each invoice shall be directed to the appropriate Services Manager of the Party to receive the invoice or such other individual designated in writing from time to time by such Services Manager. Unless otherwise agreed in writing between the Parties, all payments made pursuant to an invoice shall, in the case of payments to a Qualtrics Entity, unless otherwise agreed in writing, be made in U.S. dollars and, in the case of payments to a SAP Entity, be made in the local or functional currency of such SAP Entity. The Parties shall provide documentation supporting any amounts invoiced pursuant to this Section 3.02 as the Party receiving the invoice may from time to time reasonably request.
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(2)Each invoice shall be payable within sixty (60) days after receipt; provided that if such Party, in good faith, disputes any invoiced charge, payment of such charge may be made only after mutual resolution of such dispute. Each Party agrees to notify the Party sending the invoice promptly, and in no event later than thirty (30) days following receipt of an invoice, of any disputed charge, listing all disputed items and providing a reasonably detailed description of each disputed item. Amounts not so disputed shall be deemed accepted and shall be paid, notwithstanding disputes on other items, within the period set forth in Section 3.02(a). The applicable Parties shall seek to resolve all such disputes expeditiously and in good faith. Interest shall be charged on amounts overdue. The interest rate is based on the official interbank offered rate (1m-LIBOR) or a similar official reference rate of the relevant currency prevailing the first day of the month in which the interest will be calculated plus a margin of 100 basis points (1.00%) per annum. The interest will be calculated and charged on a monthly basis.
(3)During the term of this Agreement, each Party shall keep such books, records and accounts as are reasonably necessary to verify the calculation of the fees and related expense for Services provided hereunder. Each Party shall provide documentation supporting any amounts invoiced pursuant to this Section 3.02 as the other Party may from time to time reasonably request. Each Party shall have the right to review such books, records and accounts of the other Party at any time upon reasonable notice, and the Party requesting such review agrees to conduct any such review in a manner so as not to unreasonably interfere with the other Party’s normal business operations.
(4)Each Party hereby acknowledges and agrees that it shall have no right under this Agreement to offset any amounts owed (or to become due and owing) to another Party, whether under this Agreement or otherwise, against any other amount owed (or to become due and owing) to it by the other Party.
Section iii.Financial Responsibility for Parties’ Personnel
. Each Party shall pay for all personnel and other related expenses, including salary or wages, of its employees performing the applicable Services (including any SAP Service provided pursuant to an SLA). No individual providing SAP Services (including any SAP Service provided pursuant to an SLA) to a Qualtrics Entity pursuant to the terms of this Agreement shall be deemed to be, or shall have any rights as, an employee of any Qualtrics Entity, and no individual providing Qualtrics Services to an SAP Entity pursuant to the terms of this Agreement shall be deemed to be, or shall have any rights as, an employee of such SAP Entity. Notwithstanding the foregoing, the financial responsibility for, and the rights of, all Qualtrics-Aligned Employees shall be as provided in the Employee Matters Agreement.
Article IV.
STANDARD OF PERFORMANCE AND INDEMNIFICATION
Section i.General Standard of Service
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. Except as otherwise agreed to in writing by the Parties or as described in this Agreement:
(1)The nature, quality, degree of skill and standard of care applicable to the delivery of the SAP Services hereunder, and the skill levels of the SAP Employees providing such SAP Services, shall be substantially the same as or consistent with those which similar SAP Entities exercise or employ in providing similar services within or to any SAP Entity.
(2)The nature, quality, degree of skill and standard of care applicable to the delivery of the Qualtrics Services hereunder, and the skill levels of the Qualtrics Employees providing such Qualtrics Services, shall be substantially the same as or consistent with those which any Qualtrics Entity exercises or employs in providing similar services within or to any Qualtrics Entity.
Section ii.Services Management
. SAP and Qualtrics each agree to appoint one or more of their respective employees for each specific Service (including any SAP Service provided pursuant to an SLA) it provides who will have overall responsibility for managing and coordinating the delivery of such Service, including making available the services of appropriately qualified employees and resources to enable the provision of the Services (each, a “Services Manager”). The Services Managers will consult and coordinate with each other regarding the provision of Services. A Party may change its Service Managers for any Service from time to time by providing notice of such change in writing to the other Party and to the other Party’s Service Manager for such Service.
Section iii.Limitation of Liability
.
(1)Except as provided in Section 4.04, Qualtrics agrees that none of the SAP Entities and their respective directors, officers, agents, and employees (each, of the SAP Entities and their respective directors, officers, agents, and employees, an “SAP Indemnified Person”) shall have any liability, whether direct or indirect, in contract or tort or otherwise, to any Qualtrics Entity or any other Person under the control of such Qualtrics Entity for or in connection with the SAP Services rendered or to be rendered by any SAP Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any SAP Indemnified Person’s actions or inactions in connection with any SAP Services or such transactions, except for damages which have resulted (i) from such SAP Indemnified Person’s breach, gross negligence, bad faith or willful misconduct in connection with the foregoing, or (ii) from such SAP Indemnified Person’s breach of its confidentiality or data protection or privacy obligations hereunder or under the Master Transaction Agreement.
(2)Except as provided in Section 4.04, SAP agrees that none of the Qualtrics Entities and their respective directors, officers, agents, and employees (each, of the Qualtrics
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Entities and their respective directors, officers, agents, and employees, a “Qualtrics Indemnified Person”) shall have any liability, whether direct or indirect, in contract or tort or otherwise, to any SAP Entity or any other Person under the control of such SAP Entity for or in connection with the Qualtrics Services rendered or to be rendered by any Qualtrics Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any Qualtrics Indemnified Person’s actions or inactions in connection with any Qualtrics Services or such transactions, except for damages which have resulted (i) from such Qualtrics Indemnified Person’s breach, gross negligence, bad faith or willful misconduct in connection with the foregoing, or (ii) from such Qualtrics Indemnified Person’s breach of its confidentiality or data protection or privacy obligations hereunder or under the Master Transaction Agreement.
(3)None of the SAP Entities shall have any liability to any Qualtrics Entity or any other Person for failure to perform SAP’s obligations under this Agreement or otherwise, where such failure to perform similarly affects the SAP Entities receiving the same or similar services and does not have a disproportionately adverse effect on the Qualtrics Entities, taken as a whole. None of the Qualtrics Entities shall have any liability to any SAP Entity or any other Person for failure to perform Qualtrics’ obligations under this Agreement or otherwise, where such failure to perform similarly affects the Qualtrics Entities receiving the same or similar services and does not have a disproportionately adverse effect on the SAP Entities, taken as a whole.
(4)In addition to the foregoing, each Party agrees that, in all circumstances, it shall mitigate and otherwise minimize damages to such Party and its Subsidiaries, individually and collectively, whether direct or indirect, due to, resulting from or arising in connection with any failure by the other Party to comply fully with such Party’s obligations under this Agreement, to the extent required by applicable law.
Section iv.Indemnification
.
(1)Qualtrics agrees to indemnify and hold harmless each SAP Indemnified Person from and against any Losses arising out of or related to any Action by a third party to the extent arising out of or in connection with (i) Qualtrics Services rendered or to be rendered by any Qualtrics Indemnified Person pursuant to this Agreement or the transactions contemplated hereby or (ii) any Qualtrics Indemnified Person’s actions or inactions in connection with this Agreement or any such Qualtrics Services or transactions; provided that Qualtrics shall not be responsible for any damages incurred by any SAP Indemnified Person that have resulted from any SAP Entity’s, or any such SAP Indemnified Person’s, gross negligence or willful misconduct in connection with the SAP Services rendered or to be rendered pursuant to this Agreement.
(2)SAP agrees to indemnify and hold harmless each Qualtrics Indemnified Person from and against any Losses arising out of or related to any Action by a third party to the extent arising out of or in connection with (i) SAP Services rendered or to be rendered by any SAP Indemnified Person pursuant to this Agreement or the transactions contemplated hereby or (ii) any SAP Indemnified Person’s actions or inactions in connection with this Agreement or any
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such SAP Services or transactions; provided that SAP shall not be responsible for any damages incurred by any Qualtrics Indemnified Person that have resulted from any Qualtrics Entity’s, or any such Qualtrics Indemnified Person’s, gross negligence or willful misconduct in connection with the Qualtrics Services rendered or to be rendered pursuant to this Agreement.
Article V.
TERM AND TERMINATION
Section i.Term
. Except as otherwise provided in this Article V or as otherwise agreed in writing by the Parties (including as provided on any Schedule), (a) this Agreement shall have an initial term from the Offering Date through the third anniversary of the Offering Date (the “Initial Term”), and will be renewed automatically thereafter for successive one year terms (each, a “Renewal Term”) unless either Party elects not to renew this Agreement by notice in writing to the other Party not less than 150 days prior to the end of the Initial Term or any Renewal Term (unless otherwise set forth in a Schedule with respect to any particular Service), and (b) with respect to any Service, the obligation of a Party to provide or to procure, and the obligation of the other Party to purchase, such Service shall cease as of the applicable date set forth in Schedule I or Schedule II or the applicable date set forth in any agreement between the Parties pursuant to which Additional Services are provided (in each case as such dates may be extended with the consent of the Party providing or procuring a Service and the Party receiving a Service) or such earlier date determined in accordance with Section 5.02.
Section ii.Termination
.
(1)The Parties may by mutual agreement from time to time, at any time, terminate this Agreement with respect to one or more of the Services, in whole or in part.
(2)Except as provided in clause (iii) of Section 5.03(a) or as otherwise provided on any Schedule, (i) Qualtrics may terminate any SAP Service at any time upon at least sixty (60) days prior written notice of such termination to SAP, effective as of such 60th day, and (ii) SAP may terminate any Qualtrics Service at any time upon at least sixty (60) days prior written notice of such termination to Qualtrics, effective as of such 60th day.
(3)Except as provided in any agreement between the Parties pursuant to which Additional Services are provided, either Party may terminate any Additional Service that is not reflected on an amendment to the Schedules at any time.
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(4)Except as provided in clause (iii) of Section 5.03(a), a Party may terminate a Service provided by such Party upon written notice in the event of the receiving Party’s material breach of this Agreement, which breach remains uncured thirty (30) days after the breaching Party’s receipt of written notice thereof.
(5)Except as provided in clause (iii) of Section 5.03(a), this Agreement (including all Services) shall terminate automatically 90 days following a Change of Control.
Section iii.Effect of Termination
.
(1)Other than as required by law, upon the effective date of the expiration or termination of any Service pursuant to Section 5.01 or Section 5.02, or upon termination of this Agreement in accordance with its terms (any such date, the “Termination Date”), the Parties shall have no further obligation to provide the terminated Service (or any Service, in the case of termination of this Agreement) and shall have no obligation to pay any fees relating to such terminated Services or to make any other payments hereunder; provided that notwithstanding such termination, (i) each Party shall remain liable for fees owed and payable in respect of Services provided to it prior to the effective date of the termination; (ii) the Parties shall continue to charge for administrative, employee and program costs relating to amounts paid after but incurred or committed prior to the termination of any Service and for year-end recalculations pursuant to Section 3.01(a)(iii), and the Party so charged shall be obligated to pay such expenses in accordance with the terms of this Agreement, provided that (A) the Party that provided the Service makes reasonable efforts to obtain available refunds of such costs and (B) if such Party obtains a refund of any such costs already paid by the Party that received the Service, the Party that provided the Service shall return such portion of the costs to the Party that received the Service; (iii) notwithstanding any termination of any Service or of this Agreement, any Consulting Services or support and maintenance services provided under this Agreement and necessary to enable a Party to perform under any customer contract whereby products or services are sold or otherwise distributed by such Party prior to the IPO or pursuant to the Distribution Agreement or any other reseller agreement or inbound OEM agreement after the IPO shall continue in accordance with this Agreement for the duration of the support term under the applicable customer contract (including renewals); and (iv) the provisions of Section 2.10 and Articles IV, V and VI shall survive any such termination indefinitely.
(2)Following termination of this Agreement with respect to any Service, the Parties agree to cooperate with each other in providing for an orderly transition of such Service to the receiving Party or to a successor service provider as designated by the receiving Party.
Article VI.
MISCELLANEOUS
Section i.Ownership
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. Except as expressly provided in Section 2.10, (i) this Agreement and the performance of the Services hereunder will not affect the ownership of any assets or responsibility for any liabilities, and (ii) no Party will gain, by virtue of this Agreement or the Services provided hereunder, by implication or otherwise, any rights of ownership of any property or intellectual property rights owned by any other Party or their respective Subsidiaries.
Section ii.No Agency
. Nothing in this Agreement shall constitute or be deemed to constitute a partnership or joint venture by and among the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of any other Party for any purpose whatsoever, and no Party shall have authority or power to bind any other Party or to contract in the name of, or create a liability against, any other Party in any way or for any purpose.
Section iii.Subcontractors
. Each Party may hire or engage one or more third party subcontractors to perform all or any of the Services to be provided (or caused to be provided) by it under this Agreement; provided that (i) subject to Section 3.01, such Party shall pay for all fees due each such subcontractor, and (ii) subject to Section 4.03, such Party shall in all cases remain primarily responsible for all obligations undertaken by each such subcontractor on such Party’s behalf pursuant to the terms of this Agreement with respect to the scope, quality, degree of skill and nature of the Services provided by such Party hereunder.
Section iv.Force Majeure
.
(1)For purposes of this Section 6.04, “Force Majeure” means an event beyond the control of any Party which prevents a Party from performing its obligation under this Agreement, and includes without limitation, acts of God, storms, floods, riots, fires, natural disasters, labor disputes or stoppages, government acts or orders, epidemics, pandemics, outbreaks of communicable disease, quarantines, acts of terrorism, sabotage, civil commotion or civil unrest, interference by civil or military authorities, acts of war (declared or undeclared) and failure of energy sources.
(2)Continued performance of a Service may be suspended immediately to the extent caused by Force Majeure. The Party claiming suspension of a Service due to Force Majeure will give prompt notice to the other of the occurrence of the event giving rise to the suspension and of its nature and anticipated duration. The Parties shall cooperate with each other to find alternative means and methods for the provision of the suspended Service.
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(3)No Party shall be under any liability for failure to fulfill any obligation under this Agreement, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure and does not have a disproportionately adverse effect on the other Party.
Section v.Entire Agreement
. Except as otherwise expressly set forth in this Agreement, this Agreement (including the Schedules constituting a part of this Agreement) and any other writing signed by the Parties that specifically references or is specifically related to this Agreement constitute the entire agreement among the Parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Parties with respect to the subject matter hereof.
Section vi.Information
. Subject to applicable law and privileges, each Party covenants with and agrees to provide to the other Party all information regarding itself and transactions under this Agreement that is reasonably required by the other Party to comply with all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations.
Section vii.Notices
. Notices, offers, requests or other communications required or permitted to be given by any Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties to the following addresses:
(1)If to SAP SE, to:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
Attention: Jochen Scholten
E-mail:
(2)If to SAP America, to:
SAP America, Inc.
3999 West Chester Pike
Newtown Square, PA 19073
Attention: Mary Beth Hanss
E-mail:
(3)If to Qualtrics, to:
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Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
or to such other address as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section viii.Governing Law and Jurisdiction
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all disputes, controversies or claims arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
Section ix.Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT
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NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section x.Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.10.
Section xi.Amendment
. This Agreement may be amended only by an instrument in writing signed on behalf of each of the Parties.
Section xii.Counterparts
. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
Section xiii.Binding Effect; Assignment
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided that either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
Section xiv.Severability
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. If any term or other provision of this Agreement or the Schedules is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
Section xv.Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section xvi.Authority
. Each of the Parties represent to the other Party that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
Section xvii.Interpretation
. The headings contained in this Agreement, in any Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section or Schedule, such reference shall be to an Article or Section of, or a Schedule to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar
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import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
Section xviii.Conflicting Agreements
. In the event of conflict between this Agreement and the Master Transaction Agreement or other agreement executed in connection herewith, the provisions of this Agreement shall prevail. Only those provisions of the Master Transaction Agreement that are specifically incorporated by reference shall apply to this Agreement.
Section xix.Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party, including any employee or any creditor of any Person. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party.
Section xx.Limitation of Liability
. IN NO EVENT SHALL ANY SAP ENTITY OR QUALTRICS ENTITY BE LIABLE TO ANY OTHER SAP ENTITY OR QUALTRICS ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT (A) EACH PARTY’S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN EITHER THIS AGREEMENT OR ANY TRANSACTION AGREEMENT OR (B) EITHER PARTY’S BREACH OF ITS CONFIDENTIALITY OR DATA PROTECTION OR PRIVACY OBLIGATIONS HEREUNDER OR UNDER THE MASTER TRANSACTION AGREEMENT.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their duly authorized representatives.
SAP SE
By: /s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
By: /s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
SAP AMERICA, INC.
By: /s/ Mary Beth Hanss
Name: Mary Beth Hanss
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Administrative Services Agreement]
SCHEDULE I
Certain Services To Be Provided By SAP to Qualtrics
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Sch. I-1
SCHEDULE II
Certain Services To Be Provided By Qualtrics to SAP
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Sch. II-1
Exhibit 10.3
TAX SHARING AGREEMENT
dated as of February 1, 2021
among
SAP SE,
SAP AMERICA, INC.
AND THEIR AFFILIATES
and
QUALTRICS INTERNATIONAL INC.
AND ITS AFFILIATES
TABLE OF CONTENTS
Page
1
2
TAX SHARING AGREEMENT
This Tax Sharing Agreement (this “Agreement”) is dated as of the 1st day of February, 2021, among Qualtrics International Inc., a Delaware corporation (“Qualtrics”), each Qualtrics Affiliate (as defined below), SAP SE, a Societas Europaea registered in accordance with the corporate laws of Germany and the European Union (“SAP”), SAP America, Inc., a Delaware corporation (“SAP America”), and each other SAP Affiliate (as defined below). Qualtrics, each Qualtrics Affiliate, SAP, SAP America and each other SAP Affiliate are sometimes referred to herein separately as a “Party” and together as the “Parties”.
RECITALS
WHEREAS, SAP America, a direct subsidiary of SAP, intends to cause Qualtrics to complete the Qualtrics Recapitalization (as defined below);
WHEREAS, SAP America intends, sometime after the Qualtrics Recapitalization, to effect the initial public offering by Qualtrics of its Class A common stock and the contemporaneous private placement of Class A common stock (the “IPO”);
WHEREAS, certain members of the SAP Group (as defined below), on the one hand, and certain members of the Qualtrics Group (as defined below), on the other hand, file (or may file in the future) certain Tax Returns (as defined below) on a consolidated, combined or unitary basis for certain U.S. federal, state, local and non-U.S. income tax purposes; and
WHEREAS, in contemplation of the IPO, the Parties hereto have determined to enter into this Agreement, setting forth their agreement with respect to certain tax matters.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Parties hereto hereby agree as follows:
Article I.
Definitions
Section i. Definitions
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As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Affiliate” means an SAP Affiliate or a Qualtrics Affiliate, as the context requires.
“After Tax Amount” means any additional amount necessary to reflect the hypothetical Tax consequences of the receipt or accrual of any payment required to be made under this Agreement (including payment of any additional amount or amounts hereunder and the effect of the deductions available for interest paid or accrued and for Taxes such as state and
local Income Taxes), determined by using the highest applicable statutory corporate Income Tax rate (or rates, in the case of an item that affects more than one Tax) for the relevant taxable period (or portion thereof).
“Aggregate Distribution Tax Liabilities” means, in the event of a Distribution, the sum of the Distribution Tax Liabilities with respect to each Taxing Jurisdiction.
“Agreement” has the meaning set forth in the preamble hereto.
“Audit” means any audit, assessment of Taxes, other examination by any Taxing Authority, proceeding, or appeal of such a proceeding relating to Taxes, whether administrative or judicial, including proceedings relating to competent authority determinations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Combined Group” means any consolidated, combined, unitary or similar group under applicable Tax law of which both one or more members of the SAP Group and one or more members of the Qualtrics Group are members.
“Combined Return” means any Consolidated Return, Combined State Return or other Income Tax Return with respect to a Combined Group.
“Combined State Return” means any Income Tax Return with respect to a Combined Group that relates to U.S. state or local Taxes.
“Consolidated Return” means any Tax Return with respect to U.S. federal income taxes filed on a consolidated basis wherein Qualtrics or one or more Qualtrics Affiliates join in the filing of such Tax Return (for any taxable period or portion thereof) with SAP America or one or more subsidiaries of SAP America.
“Controlling Party” has the meaning set forth in Section 9.1 of this Agreement.
“Deconsolidation Event” means, with respect to any Combined Group, any event or transaction that causes Qualtrics and/or one or more Qualtrics Affiliates to no longer be eligible to join with SAP or one or more SAP Affiliates in the filing of the applicable Combined Return.
“Distribution” means an Internal Distribution or an External Distribution.
“Distribution Tax Liabilities” means, in the event of a Distribution, with respect to any Taxing Jurisdiction, the sum of (a) any Taxes actually paid to such Taxing Jurisdiction as a result of any corporate-level gain or income recognized that would not have been paid but for the failure of such Distribution to qualify for its Intended Tax Treatment in such Taxing Jurisdiction (assuming that there are no applicable Tax Attributes available in any relevant taxable year), (b) interest on such amounts calculated pursuant to such Taxing Jurisdiction’s laws regarding interest on Tax liabilities from the date such additional gain or income was recognized until full payment with respect thereto is made pursuant to Section 8.5 hereof (or in the case of a
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reduction in a Tax refund, the amount of interest that would have been received on the foregone portion of the Tax refund but for the failure of the Distribution to qualify for its Intended Tax Treatment), and (c) any penalties actually paid to such Taxing Jurisdiction that would not have been paid but for the failure of such Distribution to qualify for its Intended Tax Treatment in such Taxing Jurisdiction.
“Estimated Tax Installment Date” means, (i) with respect to U.S. federal income taxes, the estimated Tax installment due dates prescribed in Section 6655(c) of the Code and, (ii) with respect to any other state, local or non-U.S. Tax any other date on which an installment payment of an estimated amount of such Tax is required to be made under applicable law.
“External Distribution” means, following an Internal Distribution, any distribution by SAP of Qualtrics stock (and securities, if any) to SAP shareholders and/or securityholders in a transaction intended to qualify for an Intended Tax Treatment.
“Fifty-Percent or Greater Interest” shall have the meaning ascribed to such term for purposes of Sections 355(d) and (e) of the Code.
“Final Determination” means the final resolution of liability for any Tax for any taxable period, by or as a result of: (i) a final and unappealable decision, judgment, decree or other order by any court of competent jurisdiction; (ii) a final settlement with the IRS, a closing agreement or accepted offer in compromise under Section 7121 or Section 7122 of the Code, or a comparable agreement under the laws of other jurisdictions, which resolves the entire Tax liability for any taxable period, (iii) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered by the jurisdiction imposing the Tax; or (iv) any other final disposition, including by reason of the expiration of the applicable statute of limitations.
“first Party” has the meaning set forth in Section 10.2 of this Agreement.
“Hypothetical Qualtrics Tax Attribute” means any current-year loss, deduction, tax credit or other similar amount or Tax Attribute (other than any Pre-IPO Equity Award Tax Attribute), in each case, (i) that is properly attributable to Qualtrics or any Qualtrics Affiliate, (ii) that is generated in a taxable year beginning after December 31, 2020, (iii) the utilization of which resulted in a Tax Benefit to SAP or any SAP Affiliate, and (iv) that Qualtrics or any of its Affiliates would have been entitled under applicable law to carry forward to the applicable taxable year (taking into account applicable carryforward periods) if such item had not been utilized by SAP or any SAP affiliate in a prior period.
“Income Tax” means any U.S. federal, state, local or non-U.S. Tax determined (in whole or in part) by reference to net income, net worth, gross receipts or capital, or any Taxes imposed in lieu of such a tax. For the avoidance of doubt, the term Income Tax includes any franchise tax or any Taxes imposed in lieu of such a tax.
“Income Tax Return” means any Tax Return relating to any Income Tax.
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“Independent Firm” has the meaning set forth in Section 11.2 of this Agreement.
“Intended Tax Treatment” means the intended tax treatment of a Distribution as set forth in any applicable Opinion or Ruling, including, but not limited to, the U.S. Tax-Free Status and the treatment of such Distribution for German tax purposes.
“Internal Distribution” means any distribution by SAP America of Qualtrics stock (and securities, if any) to SAP America shareholders and/or securityholders in a transaction intended to qualify for an Intended Tax Treatment.
“IPO” has the meaning set forth in the recitals hereto.
“IPO Date” means the close of business on the date in which all steps of the IPO are completed and all shares of Qualtrics Class A common stock intended to be issued in connection therewith are issued and outstanding.
“IRS” means the U.S. Internal Revenue Service.
“Master Transaction Agreement” means the Master Transaction Agreement between SAP and Qualtrics of even date herewith.
“Non-Income Tax Return” means any Tax Return relating to any Tax other than an Income Tax.
“Notified Action” shall have the meaning set forth in Section 5.2(d)(i).
“Officer’s Certificate” means a letter executed by an officer of SAP, SAP America or Qualtrics and provided to Tax Counsel as a condition for the completion of a Tax Opinion.
“Owed Party” has the meaning set forth in Section 8.5 of this Agreement.
“Owing Party” has the meaning set forth in Section 8.5 of this Agreement.
“Party” has the meaning set forth in the preamble hereof.
“Payment Period” has the meaning set forth in Section 8.5(e) of this Agreement.
“Person” means any individual, partnership, joint venture, limited liability company, corporation, association, joint stock company, trust, estate, unincorporated organization or similar entity or a governmental authority or any department or agency or other unit thereof.
“Post-Deconsolidation Period” means any taxable period (as applicable) beginning after the date of a Deconsolidation Event with respect to the applicable U.S. federal, state, local or non-U.S. Tax.
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“Pre-Deconsolidation Period” means any taxable period beginning on or before the date of a Deconsolidation Event with respect to the applicable U.S. federal, state, local or non-U.S. Tax.
“Pre-IPO Equity Award Tax Attributes” means any current-year losses, deductions, credits or other similar amount or Tax Attributes arising from or relating to the issuance, transfer, vesting, exercise or settlement of any Pre-IPO Equity Awards.
“Pre-IPO Equity Awards” means any shares (restricted or otherwise), equity interests, options, share appreciation rights, restricted share units, performance share units or other similar rights with respect to the stock of Qualtrics or a Qualtrics Affiliate that were granted on or prior to the IPO Date in connection with compensation paid to an employee, independent contractor or director.
“Proposed Acquisition Transaction” means, in the event of any Distribution, a transaction or series of transactions (or any agreement, understanding or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulations Section 1.355-7, or any other Treasury Regulations, to enter into a transaction or series of transactions), whether such transaction is supported by Qualtrics management or shareholders, is a hostile acquisition, or otherwise, as a result of which Qualtrics would merge or consolidate with any other Person or as a result of which any Person or Persons would (directly or indirectly) acquire, or have the right to acquire, from Qualtrics and/or one or more holders of outstanding shares of Qualtrics stock, a number of shares of Qualtrics stock that would, when combined with any other changes in ownership of Qualtrics stock pertinent for purposes of Section 355(e) of the Code, comprise 20% or more of (a) the value of all outstanding shares of Qualtrics stock as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series, or (b) the total combined voting power of all outstanding shares of voting Qualtrics stock as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include (a) the adoption by Qualtrics of a shareholder rights plan or (b) issuances by Qualtrics that satisfy Safe Harbor VIII (relating to acquisitions in connection with a person’s performance of services) or Safe Harbor IX (relating to acquisitions by a retirement plan of an employer) of Treasury Regulations Section 1.355-7(d). For purposes of determining whether a transaction constitutes an indirect acquisition, any recapitalization resulting in a shift of voting power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of stock by the non-exchanging shareholders. This definition and the application thereof are intended to monitor compliance with Section 355(e) of the Code and shall be interpreted accordingly. Any clarification of, or change in, the statute or Treasury Regulations promulgated under Section 355(e) of the Code shall be incorporated into this definition and its interpretation.
“Qualtrics” has the meaning set forth in the preamble hereto.
“Qualtrics Active Business” means, in the event of a Distribution, each trade or business actively conducted (within the meaning of Section 355(b) of the Code and Treasury Regulations Section 1.355-3) by Qualtrics and its “separate affiliated group” (within the meaning
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of Section 355(b)(3)(B)) immediately after such Distribution, as described in the Tax Opinion Documents and any Ruling Documents.
“Qualtrics Affiliate” means any corporation or other entity directly or indirectly “controlled” by Qualtrics at the time in question, where “control” means the ownership of 50% or more of the ownership interests of such corporation or other entity (by vote or value) or the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such corporation or other entity.
“Qualtrics Combined State Return Materials” has the meaning set forth in Section 2.4(b).
“Qualtrics Consolidated Return Materials” has the meaning set forth in Section 2.4(a).
“Qualtrics Group” means Qualtrics and each Qualtrics Affiliate.
“Qualtrics Recapitalization” means the recapitalization of Qualtrics’ stock structure (A) intended to be completed by the (i) cancellation of all of Qualtrics’ then authorized, issued and outstanding stock, (ii) authorization of two new classes of Qualtrics stock, Qualtrics Class A common stock and Qualtrics Class B common stock, and (iii) issuance of Qualtrics Class B common stock to SAP with respect to SAP’s ownership of Qualtrics shares, and (B) that is intended qualify as a reorganization under Section 368(a)(1)(E) of the Code (and any corresponding or similar provision of state, local or non-U.S. Tax law).
“Qualtrics Separate State Tax Liability” means, with respect to any Combined State Return for any taxable year, an amount computed by SAP equal to the product of (A) a fraction, (i) the numerator of which is the aggregate taxable income (as determined for U.S. federal income tax purposes) of the members of the Qualtrics Group, if any, and (ii) the denominator of which is the combined aggregate taxable income (as determined for U.S. federal income tax purposes) of both the members of the Qualtrics Group and the members of the SAP America Group, if any; provided, that no Pre-IPO Equity Award Tax Attributes shall be taken into account in either the numerator or the denominator of such fraction, and (B) the total amount of Tax that would have been show as due and payable on such Combined State Return if no Pre-IPO Equity Award Tax Attributes (if any) had been taken into account on such Combined State Return. For the avoidance of doubt, the Qualtrics Separate State Tax Liability shall not be less than zero dollars ($0).
“Qualtrics Separate Tax Liability” means (A) with respect to any Consolidated Return for any taxable year, an amount equal to the Qualtrics Separate U.S. Federal Tax Liability, (B) with respect to any Combined State Return for any taxable year, an amount equal to the Qualtrics Separate State Tax Liability, and (C) with respect to any other Combined Return for any taxable year, an amount calculated by SAP under applicable Tax law in a manner consistent with the principles for calculating the Qualtrics Separate U.S. Federal Tax Liability.
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“Qualtrics Separate U.S. Federal Tax Liability” means, with respect to any Consolidated Return for any taxable year, an amount equal to the Tax liability that Qualtrics and each Qualtrics Affiliate that is included in such Consolidated Return would have incurred if they had filed a U.S. federal consolidated income tax return separate from the members of the SAP Group for the relevant taxable year as adjusted by the Tax Attribute Conventions set forth in Section 3.4(a) of this Agreement. For the avoidance of doubt, the Qualtrics Separate U.S. Federal Tax Liability shall not be less than zero dollars ($0).
“Relevant German CFC/PFIC Taxes” means, any Taxes imposed on any member of the SAP Group as a result of the income of any member of the Qualtrics Group being subject to German controlled foreign company taxation (within the meaning of the German Foreign Tax Act (Außensteuergesetz)).
“Ruling” means (i) any private letter ruling issued by the IRS in connection with an Internal Distribution, External Distribution or both, and (ii) any similar ruling issued by any other Taxing Authority addressing the application of a provision of the laws of another jurisdiction (including Germany) to an Internal Distribution, External Distribution or both.
“Ruling Documents” means (i) the request for a Ruling filed with the IRS, together with any supplemental filings or other materials subsequently submitted to the IRS, the appendices and exhibits thereto, and any Ruling issued by the IRS to SAP (or any SAP Affiliate) in connection with an Internal Distribution, External Distribution or both and (ii) any similar filings submitted to, or rulings issued by, any other Taxing Authority in connection with an Internal Distribution, External Distribution or both.
“SAP” has the meaning set forth in the preamble hereto.
“SAP Affiliate” means any corporation or other entity directly or indirectly “controlled” by SAP where “control” means the ownership of 50% or more of the ownership interests of such corporation or other entity (by vote or value) or the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such corporation or other entity, but at all times excluding Qualtrics or any Qualtrics Affiliate.
“SAP America” has the meaning set forth in the preamble hereto.
“SAP America Consolidated Group” means the affiliated group of corporations within the meaning of Section 1504(a) of the Code of which SAP America is the common parent.
“SAP America Group” means SAP America and any SAP Affiliate that is a subsidiary of SAP America.
“SAP Group” means SAP and each SAP Affiliate.
“Section 336(e) Tax Basis” has the meaning set forth in Section 5.1(e)(ii).
“Tax Attribute” shall mean any net operating losses, net capital losses, excess tax credits and any other similar Tax attributes as determined for U.S. federal, state, local or non-
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U.S. tax purposes (including carryovers or carrybacks thereof). For the avoidance of doubt, the existence or amount of basis and computations of previously taxed income and earnings and profits are not Tax Attributes.
“Tax Attribute Conventions” has the meaning set forth in Section 3.4(a).
“Tax Benefit” means a reduction in the cash Tax liability of a Taxpayer for any taxable period. Except as otherwise provided in this Agreement, a Tax Benefit shall be deemed to have been realized or received from a Tax Item in a taxable period only if and to the extent that the Tax liability of the Taxpayer for such period, after taking into account the effect of the Tax Item on the Tax liability of such Taxpayer in the current period and all prior periods, is less than it would have been had such Tax liability been determined without regard to such Tax Item. For the avoidance of doubt, the amount of any Tax Benefit attributable to the use of any Tax Item shall be determined after giving effect to any provision of applicable Tax law that would limit or otherwise impact the actual reduction in the cash Tax liability attributable to such Tax Item including any limitation under Section 382 or Section 383 of the Code (or a corresponding or similar provision of state, local or non-U.S. tax law) or the impact of Section 59A of the Code (or a corresponding or similar provision of state, local or non-U.S. tax law) on the reduction to the cash Tax liability of the applicable Taxpayer.
“Tax Counsel” means a nationally recognized law firm or accounting firm selected by SAP to provide a Tax Opinion.
“Tax Detriment” means an increase in the Tax liability (or reduction in refund or credit or any item of deduction or expense) of a Taxpayer for any taxable period. Except as otherwise provided in this Agreement, a Tax Detriment shall be deemed to have been realized or incurred from a Tax Item in a taxable period only if and to the extent that the Tax liability of the Taxpayer for such period, after taking into account the effect of the Tax Item on the Tax liability of such Taxpayer in the current period and all prior periods, is more than it would have been had such Tax liability been determined without regard to such Tax Item.
“Tax Item” means any item of income, gain, loss, deduction, expense or credit, or other attribute that may have the effect of increasing or decreasing any Tax.
“Tax Opinion” means, in the event of any Distribution, the opinion issued to SAP by Tax Counsel regarding the Intended Tax Treatment of such Distribution.
“Tax Opinion Documents” means, in the event of a Distribution, the Tax Opinion and the information and representations (including as set forth in any Officer’s Certificates) provided by, or on behalf of, SAP or SAP America and Qualtrics, as the case may be, to Tax Counsel in connection therewith.
“Tax-Related Losses” means, in the event of a Distribution, (i) the Aggregate Distribution Tax Liabilities; (ii) all reasonable accounting, legal and other professional fees, and court costs incurred in connection with any settlement, Final Determination, judgment or other determination with respect to such Aggregate Distribution Tax Liabilities; (iii) all costs, expenses
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and damages associated with stockholder litigation or controversies and any amount required to be paid by SAP or Qualtrics or their respective Affiliates in respect of the liability of shareholders, whether paid to shareholders or to the IRS or any other Taxing Authority payable by SAP or Qualtrics or their respective Affiliates, in each case, resulting from the failure of a Distribution to qualify for its Intended Tax Treatment.
“Tax Return” means any return, report, certificate, form or similar statement or document (including any related or supporting information or schedule attached thereto and any information return, amended tax return, claim for refund or declaration of estimated Tax) required to be supplied to, or filed with, a Taxing Authority in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax.
“Taxes” means all U.S. federal, state, local or non-U.S. taxes, charges, fees, duties, levies, imposts, rates or other assessments, including income, gross receipts, net worth, excise, property, sales, use, license, capital stock, transfer, franchise, payroll, withholding, social security, value added or other taxes, (including any interest, penalties or additions attributable thereto) and a Tax means any one of such Taxes.
“Taxing Jurisdiction” means the United States and every other government or governmental unit having jurisdiction to tax SAP, Qualtrics or any of their Affiliates.
“Taxing Authority” means any governmental authority or any subdivision, agency, commission or authority thereof or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or imposition of any Tax (including the IRS).
“Taxpayer” means any taxpayer and its Combined Group.
“Treasury Regulations” means the Treasury regulations (including temporary regulations) promulgated by the United States Department of Treasury with respect to the Code.
“Unqualified Tax Opinion” means, in the event of a Distribution, an unqualified opinion of Tax Counsel on which SAP may rely to the effect that a transaction (a) will not disqualify such Distribution from its Intended Tax Treatment, assuming that such Distribution would have qualified for its Intended Tax Treatment if such transaction did not occur, and (b) will not adversely affect any of the conclusions set forth in the Tax Opinion.
“U.S. Federal Deconsolidation Event” means a Deconsolidation Event with respect to the SAP America Consolidated Group.
“U.S. Tax-Free Status” means, (i) in the case of an Internal Distribution, the qualification of the Internal Distribution as a transaction (a) described in Section 355(a) of the Code, (b) in which the stock (and, if applicable, securities) distributed thereby is “qualified property” for purposes of Section 355(c)(2) of the Code, and (c) in which SAP America, Qualtrics and the stockholders (and, if applicable, securityholders) of SAP America, recognize
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no income, gain or loss for U.S. federal, state and local income tax purposes, and (ii) in the case of an External Distribution, the qualification of the External Distribution as a transaction (a) described in Section 355(a) of the Code, (b) in which the stock (and, if applicable, securities) distributed thereby is “qualified property” for purposes of Section 355(c)(2) of the Code, and (c) in which SAP America, Qualtrics and the stockholders (and, if applicable, securityholders) of SAP America and SAP, recognize no income, gain or loss for U.S. federal, state and local income tax purposes.
Article II.
Preparation and Filing of Tax Returns
Section i. SAP’s Responsibility
. Subject to the other applicable provisions of this Agreement (including Section 2.4), SAP shall have sole and exclusive responsibility for the filing of (or for causing the filing of):
(1)all Combined Returns for any taxable period;
(2)all Income Tax Returns (other than Combined Returns) with respect to SAP and/or any SAP Affiliate for any taxable period; and
(3)all Non-Income Tax Returns with respect to SAP or any SAP Affiliate for any taxable period.
Section ii. Qualtrics’ Responsibility
. Subject to the other applicable provisions of this Agreement (including Section 2.5(c)), Qualtrics shall have sole and exclusive responsibility for the preparation and filing of (or for causing the preparation and filing of):
(1)all Income Tax Returns (other than Combined Returns) with respect to Qualtrics and/or any Qualtrics Affiliate for any taxable period; and
(2)all Non-Income Tax Returns with respect to Qualtrics or any Qualtrics Affiliate for any taxable period.
Section iii. Agent
. Subject to the other applicable provisions of this Agreement, Qualtrics hereby irrevocably designates, and agrees to cause each Qualtrics Affiliate to so designate, SAP and/or SAP America as its sole and exclusive agents and attorneys-in-fact to take such action (including execution of documents) as SAP and/or SAP America, in their sole discretion, may deem appropriate in any and all matters (including Audits) relating to any Tax Return described in Section 2.1 of this Agreement.
Section iv. Preparation of Certain Tax Return Materials
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(1)For any taxable year that any member of the Qualtrics Group is included in a Consolidated Return, Qualtrics will deliver to SAP not later than 80 calendar days prior to the due date (including any applicable extensions) of the Consolidated Return for such taxable year, substantially completed drafts of (i) a pro forma IRS Form 1120 (including any applicable attachments and/or statements) of each applicable member of the Qualtrics Group to be filed with such Consolidated Return, (ii) so long as Qualtrics, LLC is treated as a partnership for U.S. federal income tax purposes, a copy of each Schedule K-1 (Form 1065) issued by Qualtrics, LLC, and (iii) any Tax Return workpapers in respect of the foregoing (clauses (i)-(iii), the “Qualtrics Consolidated Return Materials”). Not later than 60 calendar days prior to the due date (including any applicable extensions) of such Consolidated Return, Qualtrics will deliver to SAP the final Qualtrics Consolidated Return Materials. The Qualtrics Consolidated Return Materials will be prepared in a manner consistent with past practice using the accounting methods and elections used on the Consolidated Return.
(2)For any taxable year that any member of the Qualtrics Group is included in any Combined State Return, Qualtrics will deliver to SAP, not later than 80 calendar days prior to the due date (including any applicable extensions) of such Combined State Return for such taxable year, substantially completed drafts of (i) a pro forma Tax Return (including any applicable attachments and/or statements) of each applicable member of the Qualtrics Group to be filed with such Combined State Return, (ii) so long as Qualtrics, LLC is treated as a partnership for U.S. federal income tax purposes, a copy of each Schedule K-1 (Form 1065) issued by Qualtrics, LLC, and (iii) any applicable U.S. state apportionment workpapers or other Tax Return workpapers (clauses (i)-(iii), the “Qualtrics Combined State Return Materials”). Not later than 60 calendar days prior to the due date (including any applicable extensions) of such Combined State Return, Qualtrics will deliver to SAP the final Qualtrics Combined State Return Materials. The Qualtrics Combined State Return Materials will be prepared in a manner consistent with past practice using the accounting methods and elections used on the relevant Combined State Return.
(3)Upon SAP’s request, Qualtrics will deliver to SAP in a reasonably prompt manner any information regarding members of the Qualtrics Group (or that is otherwise within the possession of the Qualtrics Group) that is reasonably required by SAP in connection with the filing of any German or other non-U.S. Tax Return.
(4)No later than 30 calendar days prior to the due date for any estimated Taxes (including the due date for filing a request for extension) with respect to a Combined Return, Qualtrics will deliver to SAP information sufficient for SAP to calculate the estimated Qualtrics Separate Tax Liability pursuant to Section 3.4(b) of this Agreement, including information to determine relevant U.S. state apportionment factors.
Section v. Manner of Tax Return Preparation
.
(1)Unless otherwise required by a Taxing Authority, the Parties hereby agree to prepare and file all Tax Returns, and to take all other actions, in a manner consistent with
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(i) this Agreement, (ii) any Tax Opinion and (iii) any Ruling. All Tax Returns shall be filed on a timely basis (taking into account applicable extensions) by the Party responsible for filing such returns under this Agreement.
(2)SAP shall have the exclusive right, in its sole discretion, with respect to any Tax Return described in Section 2.1 of this Agreement (including, for the avoidance of doubt, any and all Combined Returns), to determine (i) the manner in which such Tax Return shall be prepared and filed, including the elections, method of accounting, positions, conventions and principles of taxation to be used and the manner in which any Tax Item shall be reported, (ii) whether any extensions shall be requested, (iii) the elections that will be made by SAP, any SAP Affiliate, Qualtrics, and/or any Qualtrics Affiliate on such Tax Return (including an election to claim foreign tax credits under Section 901(a) of the Code or any similar provision of any state, local or non-U.S. Tax law), (iv) whether any amended Tax Returns shall be filed, (v) whether any claims for refund shall be made, (vi) whether any refunds shall be paid by way of refund or credited against any liability for the related Tax, and (vii) whether to retain outside firms to prepare and/or review such Tax Returns; provided, however, that SAP or SAP America shall consult with Qualtrics prior to changing any method of accounting if such action would solely impact the Qualtrics Group.
(3)For so long as SAP and its Affiliates own, in the aggregate, directly or indirectly, more than 50% of the outstanding stock of Qualtrics (by vote or value), with respect to any Tax Return prepared by Qualtrics pursuant to Section 2.2 hereof, the Qualtrics Group shall, upon SAP’s request, (i) use commercially reasonable efforts provide a copy of such Tax Return (together with any worksheets and other materials used in preparation thereof) available for SAP’s review and comment at least forty-five 45 calendar days prior to the due date (including any applicable extensions) for filing such Tax Return and (ii) incorporate any reasonable comments provided by SAP with respect to any such Tax Return that are provided by SAP at least 10 business days prior to the due date (including any applicable extensions) for the filing of such Tax Return.
(4)Notwithstanding anything to the contrary herein, SAP shall make any decision as to whether any Tax Return that would include at least one member of the SAP Group will be filed on a consolidated, combined or unitary basis for any taxable year and the Qualtrics Group shall take all actions necessary to cause all applicable members of the Qualtrics Group to join in the filing of any such Tax Return that SAP decides to file on a consolidated, combined or unitary basis pursuant to this Section 2.5(d). With respect to any taxable year (or portion thereof) that SAP and its Affiliates own, in the aggregate, directly or indirectly, 50% or more of the outstanding stock of Qualtrics (by vote or value), no member of the Qualtrics Group shall be entitled to file any Tax Return on a consolidated, combined or unitary basis (including such a Tax Return consisting solely of members of the Qualtrics Group) for such taxable year without the prior consent of SAP (such consent not to be unreasonably withheld, conditioned or delayed). For the avoidance of doubt, such consent will not be considered to be unreasonably withheld, conditioned or delayed if the filing of such Tax Return on a consolidated, combined or unitary basis will result in a Tax Detriment to SAP or any its Affiliates for any taxable year.
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Article III.
Liability for Taxes
Section i. Qualtrics’ Liability for Taxes
. Each member of the Qualtrics Group shall be jointly and severally liable for the following Taxes, and shall be entitled to receive and retain all refunds of Taxes previously incurred by Qualtrics (except to the extent that any such refunds are attributable Pre-IPO Equity Award Tax Attributes) or any Qualtrics Affiliate with respect to such Taxes:
(1)all Taxes with respect to Tax Returns described in Section 2.1(a) of this Agreement to the extent of the Qualtrics Separate Tax Liability, for any taxable period beginning after December 31, 2020;
(2)all Taxes with respect to Tax Returns described in Section 2.2(a) of this Agreement for any taxable period beginning after December 31, 2020;
(3)all Taxes with respect to Tax Returns described in Section 2.2(b) of this Agreement; and
(4)all Taxes imposed by any Taxing Authority with respect to Qualtrics or any Qualtrics Affiliate (other than in connection with the required filing of a Tax Return described in Sections 2.1(a) or 2.2 of this Agreement) for any taxable period.
Section ii. SAP’s Liability for Taxes
. SAP shall be liable for the following Taxes, and (subject to Section 3.6) shall be entitled to receive and retain all refunds of Taxes previously incurred by SAP or any SAP Affiliate with respect to such Taxes:
(1)except for Taxes that are the responsibility of Qualtrics and the Qualtrics Affiliates pursuant to Section 3.1(a) of this Agreement, all Taxes with respect to Tax Returns described in Section 2.1(a) of this Agreement;
(2)all Taxes with respect to Tax Returns described in Sections 2.1(b) or 2.1(c) of this Agreement;
(3)all Taxes with respect to Tax Returns described in Section 2.2(a) for taxable periods beginning before January 1, 2021; and
(4)all Taxes imposed by any Taxing Authority with respect to SAP or any SAP Affiliate (other than in connection with the required filing of a Tax Return described in Section 2.1 or Section 2.2(a) of this Agreement) for any taxable period.
Section iii. Payment of Tax Liability
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. If one Party is liable or responsible for Taxes under Sections 3.1 or 3.2 of this Agreement, with respect to Tax Returns for which another Party is responsible for filing, or with respect to Taxes that are paid by another Party, then the liable or responsible Party shall pay the Taxes (or a reimbursement of such Taxes) to the other Party pursuant to Section 8.5 of this Agreement.
Section iv. Computation of Separate Tax Liability
.
(1)Any Qualtrics Separate U.S. Federal Tax Liability shall be computed using the following conventions (the “Tax Attribute Conventions”):
(i)By not taking into account any Pre-IPO Equity Award Tax Attributes;
(ii)By taking into account any carryforwards of any Tax Attribute (other than any Pre-IPO Equity Award Tax Attribute) generated in any taxable period beginning after December 31, 2020 that are properly attributable to Qualtrics or its Affiliates and are actually available to be used by the SAP America Consolidated Group in the taxable year in which the Qualtrics Separate U.S. Federal Tax Liability is being computed;
(iii)By taking into account, any Hypothetical Qualtrics Tax Attribute (determined as if all other available loss, deductions, credits and other Tax Attributes were utilized before the Hypothetical Qualtrics Tax Attribute) that has not been previously utilized by Qualtrics to reduce the Qualtrics Separate U.S. Federal Tax Liability in a prior taxable period; provided, that the Qualtrics Separate U.S. Federal Tax Liability shall only be reduced on account of a Hypothetical Qualtrics Tax Attribute to the extent of the Tax Benefit recognized by the SAP Group as a result of the utilization of the underlying Tax Attribute to which such Hypothetical Qualtrics Tax Attribute relates.
(2)At least 10 business days prior to the due date for any payment of Taxes (including estimated taxes for purposes of Section 8.1 of this Agreement) in respect of any Combined Return, SAP (or one of its Affiliates) shall provide Qualtrics with a written calculation in reasonable detail (including, upon reasonable request, copies of all work sheets and other materials used in preparation thereof) setting forth the amount of any Qualtrics Separate Tax Liability or estimated Qualtrics Separate Tax Liability, as applicable. The calculation of any Qualtrics Separate Tax Liability shall be based on the Qualtrics Consolidated Return Materials, the Qualtrics Combined State Return Materials, and/or any other information provided by Qualtrics to SAP pursuant to this Agreement and shall be computed in a manner consistent (i) with general Tax accounting principles, (ii) the Tax law of the applicable Taxing Jurisdiction, (iii) the Tax Attribute Conventions, and (iv) past practice, if any, to the extent not inconsistent with this Agreement. SAP may determine any estimated Qualtrics Separate Tax Liability based on the materials that Qualtrics is required to deliver to SAP pursuant to Section 2.4(d) of this Agreement or by using any reasonable method, including, without limitation, by basing such estimated Qualtrics Separate Tax Liability on the Qualtrics Separate Tax Liability for prior taxable years. In no event shall any payment attributable to the amount of any Qualtrics Separate
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Tax Liability or estimated Qualtrics Separate Tax Liability be paid later than the date provided in Article VIII of this Agreement.
Section v. Covenant
. Without the prior consent of SAP, no member of the Qualtrics Group will take any action that would reasonably be expected to cause any Combined Group to lose the benefit of any Tax Attribute that could otherwise be utilized with respect to a Combined Return, including, without limitation, any action that would cause Qualtrics, LLC (or its successor) to be classified as other than a partnership or disregarded entity for U.S. federal income tax purposes.
Section vi. Certain Tax Credits
. Any Utah State Economic Development Tax Increment Financing (EDTIF) tax credit shall be for the account of Qualtrics, and if any member of the SAP Group receives such a tax credit then SAP shall cause the recipient member of the SAP Group to pay to Qualtrics an amount equal to such tax credit no later than 10 business days after receipt thereof.
Article IV.
Deconsolidation Events
Section i. Tax Allocations
. The Parties have set forth how certain Tax matters with respect to a Deconsolidation Event would be handled in the event that a transaction that constitutes a Deconsolidation Event is pursued at some future time.
(1)Allocation of Tax Items. In the case of a Deconsolidation Event, all Tax computations with respect to applicable Combined Returns for (i) any Pre-Deconsolidation Periods ending on the date of the Deconsolidation Event and (ii) the immediately following taxable period of Qualtrics or any Qualtrics Affiliate, shall be made pursuant to the principles of Section 1.1502-76(b) of the Treasury Regulations or of a corresponding provision under the laws of other jurisdictions, as reasonably determined by SAP.
(2)Allocation of Tax Attributes. In the case of a Deconsolidation Event, SAP shall determine the allocation of any Tax Attributes among SAP, each SAP Affiliate, Qualtrics, and each Qualtrics Affiliate with respect to applicable Combined Returns. The Parties hereby agree that in the absence of controlling legal authority or unless otherwise provided under this Agreement, Tax Attributes shall be allocated to the legal entity that is required under Article III of this Agreement to bear the liability for the Tax associated with such Tax Attribute, or in the case where no Party is required hereunder to bear such liability, the Party that incurred the cost or burden associated with the creation of such Tax Attribute. SAP shall provide Qualtrics with an opportunity to review and comment on a draft of any such allocation, and SAP shall accept any reasonable comments.
Section ii. Carrybacks
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. Qualtrics shall (and shall cause each of its Affiliates to) waive, to the extent permitted under applicable U.S. federal, state, local or non-U.S. law, carrybacks of Tax Attributes from any Post-Deconsolidation Period to any Pre-Deconsolidation Period. If any member of the Qualtrics Group carries back a Tax Attribute from a Post-Deconsolidation Period to Pre-Deconsolidation Period, no payment shall be due from SAP (or any its Affiliates) with respect to that carryback, regardless of whether such carryback is required by applicable law. Without limiting the foregoing, Qualtrics hereby expressly agrees to elect (under Section 172(b)(3) of the Code (and any similar provision of any state, local or non-U.S. Tax law) and Treasury Regulations Section 1.1502-21(b)(3) to relinquish any right to carry back net operating losses to any Pre-Deconsolidation Periods of SAP (or and of its Affiliates).
Section iii. Post-Deconsolidation Payments
.
(1)Pre-IPO Equity Awards. For each taxable year ending after a Deconsolidation Event, Qualtrics shall pay to SAP America the amount of any Tax Benefit recognized by the Qualtrics Group during such taxable year to the extent arising from any Pre-IPO Equity Award Tax Attributes. Any amount payable under this Section 4.3(a) shall be payable within 10 calendar days after the date of filing of the Tax Return upon which such Tax Benefit is utilized.
(2)Tax Attributes. For each taxable year ending after a Deconsolidation Event in which a member of the Qualtrics Group would have been entitled to utilize a Hypothetical Qualtrics Tax Attribute under applicable Tax law (determined as if all other available loss, deductions, credits and other Tax Attributes were utilized before the Hypothetical Qualtrics Tax Attribute) that was not previously taken into account under this Section 4.3(b) or to reduce the Qualtrics Separate Tax Liability, then SAP America shall pay to Qualtrics an amount equal to the lesser of (i) the amount of the Tax Benefit that would have been available to the Qualtrics Group as a result of the utilization of such Hypothetical Qualtrics Tax Attribute and (ii) the Tax Benefit realized by the SAP Group as a result of the utilization of the Tax Attribute to which the Hypothetical Qualtrics Tax Attribute relates. Any amount payable under this Section 4.3(a)shall be payable within 10 calendar days after the date of filing of the Tax Return upon which such Hypothetical Qualtrics Tax Attribute could otherwise have been utilized. For the avoidance of doubt, a Hypothetical Qualtrics Tax Attribute does not include any amount attributable to a Pre-IPO Equity Award.
(3)Cooperation. Qualtrics agrees to share any calculations, workpapers or relevant Tax Returns reasonably requested by SAP in connection with matters related to this Section 4.3. The parties shall attempt in good faith to resolve any issues or disputes related to this Section 4.3.
Article V.
Distribution Taxes
Section i. Liability for Distribution Taxes
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.
(1)Notwithstanding anything in this Agreement to the contrary, subject to Section 5.1(c), in the event of a Distribution, Qualtrics shall be responsible for, and shall indemnify and hold harmless SAP and its Affiliates and each of their respective officers, directors and employees from and against, 100% of any Tax-Related Losses that are attributable to or result from any one or more of the following: (i) the acquisition after a Distribution of all or a portion of Qualtrics’ stock and/or its or its subsidiaries’ assets by any means whatsoever by any Person, (ii) any “agreement, understanding, arrangement, substantial negotiations or discussions” (as such terms are defined in Treasury Regulations Section 1.355-7(h)) by any one or more officers or directors of any member of the Qualtrics Group or by any other Person or Persons with the implicit or explicit permission of one or more of such officers or directors (other than officers or directors of SAP or SAP America) that cause a Distribution to be treated as part of a plan pursuant to which one or more Persons acquire, directly or indirectly, Qualtrics stock representing a Fifty-Percent or Greater Interest therein, (iii) any action or failure to act by Qualtrics after a Distribution (including, without limitation, any amendment to Qualtrics’ certificate of incorporation (or other organizational documents), whether through a stockholder vote or otherwise) affecting the voting rights of Qualtrics stock (including, without limitation, through the conversion of one class of Qualtrics stock into another class of Qualtrics stock), or (iv) any breach by Qualtrics or any Qualtrics Affiliate of any covenant contained in Section 5.2(a) or (c) (regardless whether such act or failure to act is covered by a Ruling, Unqualified Tax Opinion or SAP waiver described in Section 5.2(c)).
(2)Notwithstanding anything in this Agreement to the contrary, subject to Section 5.1(c), in the event of a Distribution, SAP (or the applicable member of the SAP Group) shall be responsible for, and shall indemnify and hold harmless Qualtrics and its Affiliates and each of their respective officers, directors and employees from and against, 100% of any Tax-Related Losses that are attributable to, or result from any one or more of the following: (i) the acquisition after an Internal Distribution of all or a portion of SAP America’s stock and/or its Subsidiaries’ assets or after an External Distribution of all or a portion of SAP’s stock and/or its Subsidiaries’ assets, in each case by any means whatsoever by any Person, (ii) any “agreement, understanding, arrangement, substantial negotiations or discussions” (as such terms are defined in Treasury Regulations Section 1.355-7(h)) by any one or more officers or directors of any member of the SAP Group or by any other Person or Persons with the implicit or explicit permission of one or more of such officers or directors that cause a Distribution to be treated as part of a plan pursuant to which one or more Persons acquire, directly or indirectly, stock of SAP representing a Fifty-Percent or Greater Interest therein, or (iii) any breach by SAP or a member of the SAP Group of any covenant contained in Section 5.2(b).
(3)To the extent any Tax-Related Loss is subject to indemnification under both Sections 5.1(a) and (b), responsibility for such Tax-Related Loss shall be shared by SAP (or the applicable member of the SAP Group) and Qualtrics according to relative fault.
(1)Notwithstanding anything in Section 5.1(b) or (c) or any other provision of this Agreement to the contrary:
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(i)with respect to (1) any Tax-Related Loss resulting from the application of Section 355(e) of the Code and (2) any other Tax-Related Loss resulting, in each case, in whole or in part, from an acquisition after the Distribution of any stock or assets of Qualtrics (or any member of the Qualtrics Group) by any means whatsoever by any Person or any action or failure to act by Qualtrics after a Distribution affecting the voting rights of Qualtrics, Qualtrics shall be responsible for, and shall indemnify and hold harmless SAP and its Affiliates and each of their respective officers, directors and employees from and against, 100% of such Tax-Related Loss; and
(ii)for purposes of calculating the amount and timing of any Tax-Related Loss for which Qualtrics is responsible under this Section 5.1(c)(i), Tax-Related Losses shall be calculated by assuming that SAP, the SAP America Consolidated Group and each member of the SAP Group have no Tax Attributes in any relevant taxable year.
(2)Notwithstanding anything in Section 5.1(a) or (c) or any other provision of this Agreement to the contrary, with respect to (A) any Tax-Related Loss resulting from the application of Section 355(e) of the Code (other than as a result of an acquisition of a Fifty-Percent or Greater Interest in Qualtrics) and (B) any other Tax-Related Loss resulting, in each case, in whole or in part, from an acquisition after an Internal Distribution of any stock or assets of SAP America (or any of its Subsidiaries) or after an External Distribution of any stock or assets of SAP (or any of its Subsidiaries), in each case, by any means whatsoever by any Person, SAP shall be responsible for, and shall indemnify and hold harmless Qualtrics and its Affiliates and each of their respective officers, directors and employees from and against, 100% of such Tax-Related Loss.
(4)SAP (or the applicable SAP Affiliate) shall be liable for 100% of any Tax-Related Losses not otherwise allocable to a Party under this Section 5.1.
(5)Section 336(e) Election. SAP shall determine, in its sole and absolute discretion, whether to make a protective election under Section 336(e) of the Code and the Treasury Regulations thereunder (and any corresponding or analogous provisions of state, local and non-U.S. law) in connection with a Distribution (a “Section 336(e) Election”). If SAP determines that a Section 336(e) Election should be made:
(1)SAP, Qualtrics and their respective Affiliates shall cooperate in making the Section 336(e) Election, including by filing any statements, amending any Tax Returns or taking such other actions reasonably necessary to carry out the Section 336(e) Election;
(2)if a Distribution fails to qualify (in whole or in part) for the U.S. Tax-Free Status and Qualtrics or any Qualtrics Affiliate realizes an increase in Tax basis as a result of the Section 336(e) Election (the “Section 336(e) Tax
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Basis”) or otherwise, then the Tax Benefit realized by the Qualtrics Group as a result of the Section 336(e) Tax Basis (or other tax basis increase) shall be shared between SAP and Qualtrics in the same proportion as the Distribution Taxes giving rise to the Section 336(e) Tax Basis were borne by SAP and Qualtrics (after giving effect to the indemnification obligations in this Agreement);
(3)the amount required to be paid under this Section 5.1(e) shall be payable within 10 business days of filing the tax return upon which the Tax Benefit was realized; and
(4)to the extent the Section 336(e) Election becomes effective, each of SAP, Qualtrics and their Affiliates agrees not to take any position that is inconsistent with the Section 336(e) Election.
Section ii. Continuing Covenants
.
(1)Qualtrics Restrictions. Qualtrics agrees that, so long as a Distribution that qualifies for the U.S. Tax-Free Status could, in the reasonable discretion of SAP, be effectuated, Qualtrics will not knowingly take or fail to take, or permit any Qualtrics Affiliate to knowingly take or fail to take, any action that could reasonably be expected to preclude SAP’s ability to effectuate such a Distribution. In the event of an Internal Distribution, External Distribution or both, Qualtrics agrees that (i) it will take, or cause any Qualtrics Affiliate to take, any action reasonably requested by SAP (including the delivery of an Officer’s Certificate) in order to enable SAP to effectuate such Distribution or Distributions and (ii) it will not take or fail to take any action (and it shall cause the members of the Qualtrics Group not to take or fail to take any action) which action or failure to act could reasonably be expected to prevent SAP from consummating either Distribution. In the event of an Internal Distribution, External Distribution or both, Qualtrics agrees that it will not take or fail to take, or permit any Qualtrics Affiliate to take or fail to take, any action where such action or failure to act would be inconsistent with any information, covenant, representation, or material that relates to facts or matters related to Qualtrics (or any Qualtrics Affiliate) or within the control of Qualtrics and is contained in the Tax Opinion Documents or any Ruling Documents other than as permitted by Section 5.2(c) of this Agreement. In the event of any Distribution, Qualtrics agrees that it will not take (and it will cause the Qualtrics Affiliates to refrain from taking) any position on a Tax Return that is inconsistent with such Distribution qualifying for its Intended Tax Treatment.
(2)SAP Restrictions. In the event of a Distribution, SAP agrees that it will not take or fail to take, or permit any SAP Affiliate to take or fail to take, any action where such action or failure to act would be inconsistent with any material, information, covenant or representation that relates to facts or matters related to SAP (or any SAP Affiliate) or within the control of SAP and is contained in the Tax Opinion Documents or any Ruling Documents. In the event of any Distribution, SAP agrees that it will not take (and it will cause the SAP Affiliates to refrain from taking) any position on a Tax Return that is inconsistent with such Distribution qualifying for its Intended Tax Treatment.
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(3)Certain Qualtrics Actions Following a Distribution. In the event of any Distribution, Qualtrics agrees that, during the two year period following any Distribution, Qualtrics shall not (i) enter into any Proposed Acquisition Transaction or, to the extent Qualtrics has the right to prohibit any Proposed Acquisition Transaction, permit any Proposed Acquisition Transaction to occur (whether by (A) redeeming rights under a shareholder rights plan, (B) finding a tender offer to be a “permitted offer” under any such plan or otherwise causing any such plan to be inapplicable or neutralized with respect to any Proposed Acquisition Transaction or (C) approving any Proposed Acquisition Transaction, whether for purposes of Section 203 of the DGCL or any similar corporate statute, any “fair price” or other provision of Qualtrics’ charter or bylaws or otherwise), (ii) merge or consolidate with any other Person or liquidate or partially liquidate, (iii) in a single transaction or series of transactions (A) sell or transfer (other than sales or transfers of inventory in the ordinary course of business) all or substantially all of the assets held by Qualtrics at the time of a Distribution (B) sell or transfer 50% or more of the gross assets of the Qualtrics Active Business or (C) sell or transfer 30% or more of the consolidated gross assets of Qualtrics and its Subsidiaries (in each case, such percentages to be measured based on fair market value as of the date of the relevant distribution), (iv) redeem or otherwise repurchase (directly or through a Subsidiary) any Qualtrics stock, or rights to acquire stock, except to the extent such repurchases satisfy Section 4.05(1)(b) of Revenue Procedure 96-30 (as in effect prior to the amendment by Revenue Procedure 2003-48), (v) amend its certificate of incorporation (or other organizational documents), or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of Qualtrics stock (including, without limitation, through the conversion of one class of Qualtrics stock into another class of Qualtrics stock) or (vi) take any other action or actions (including any action or transaction that would be reasonably likely to be inconsistent with any representation or covenant made in the Tax Opinion Documents or any Ruling Documents) which in the aggregate (and taking into account any other transactions described in this subparagraph (c)) would be reasonably likely to have the effect of causing or permitting one or more Persons to acquire, directly or indirectly, stock representing a Fifty-Percent or Greater Interest in Qualtrics or otherwise jeopardize the U.S. Tax-Free Status of a Distribution, unless, in each case, prior to taking any such action set forth in the foregoing clauses (i) through (vi), Qualtrics shall have requested that SAP obtain a Ruling (or, if applicable, a supplemental Ruling) from the IRS and/or any other applicable Taxing Authority in accordance with Section 5.2(d) of this Agreement to the effect that such transaction will not affect the U.S. Tax-Free Status of the Distribution and SAP shall have received such Ruling in form and substance satisfactory to SAP in its reasonable discretion (and in determining whether a Ruling is satisfactory, SAP may consider, among other factors, the appropriateness of any underlying assumptions and representations made in connection with such Ruling), or Qualtrics shall provide SAP with an Unqualified Tax Opinion in form and substance satisfactory to SAP in its reasonable discretion (and in determining whether an opinion is satisfactory, SAP may consider, among other factors, the appropriateness of any underlying assumptions and representations if used as a basis for the opinion), or SAP shall have waived the requirement to obtain such Ruling or Unqualified Tax Opinion.
(4)Procedures Regarding Opinions and Rulings.
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(1)If Qualtrics notifies SAP that it desires to take one of the actions described in clauses (i) through (vi) of Section 5.2(c) (a “Notified Action”), SAP and Qualtrics shall reasonably cooperate to attempt to obtain the Ruling or Unqualified Tax Opinion referred to in Section 5.2(c), unless SAP shall have waived the requirement to obtain such Ruling or Unqualified Tax Opinion.
(2)At the reasonable request of Qualtrics pursuant to Section 5.2(c), SAP shall cooperate with Qualtrics and use commercially reasonable efforts to seek to obtain, as expeditiously as possible, a Ruling from the IRS (and/or any other applicable Taxing Authority, or if applicable, a supplemental Ruling) or an Unqualified Tax Opinion for the purpose of permitting Qualtrics to take the Notified Action. Further, in no event shall SAP be required to file any request for a Ruling under this Section 5.2(d) unless Qualtrics represents that (A) it has reviewed the request for such Ruling, and (B) all information and representations, if any, relating to any member of the Qualtrics Group, contained in the related Ruling documents are (subject to any qualifications therein) true, correct and complete. Qualtrics shall reimburse SAP for all reasonable costs and expenses incurred by the SAP Group in obtaining a Ruling or Unqualified Tax Opinion requested by Qualtrics within 10 business days after receiving an invoice from SAP therefor.
(3)SAP shall have the right to request a Ruling from the IRS (and/or any other applicable Taxing Authority, or if applicable, a supplemental Ruling) or an Unqualified Tax Opinion at any time in its sole and absolute discretion. If SAP determines to obtain a Ruling or an Unqualified Tax Opinion, Qualtrics shall (and shall cause each Affiliate of Qualtrics to) cooperate with SAP and take any and all actions reasonably requested by SAP in connection with obtaining the Ruling or Unqualified Tax Opinion (including, without limitation, by making any representation or covenant or providing any materials or information requested by the IRS or Tax Counsel; provided, that Qualtrics shall not be required to make (or cause any Affiliate of Qualtrics to make) any representation or covenant that is inconsistent with historical facts or as to future matters or events over which it has no control). SAP and Qualtrics shall each bear its own costs and expenses in obtaining a Ruling or an Unqualified Tax Opinion requested by SAP.
(4)Qualtrics hereby agrees that SAP shall have sole and exclusive control over the process of obtaining any Ruling, and that only SAP shall apply for a Ruling. In connection with obtaining a Ruling pursuant to Section 5.2(c) hereof, (A) SAP shall keep Qualtrics informed in a timely manner of all material actions taken or proposed to be taken by SAP in connection therewith; (B) SAP shall (1) reasonably in advance of the submission of any related Ruling Documents provide Qualtrics with a draft copy thereof, (2) reasonably consider Qualtrics’ comments on such draft copy, and (3) provide Qualtrics with a final copy; and (C) SAP shall provide Qualtrics with notice reasonably in advance of, and Qualtrics shall have the right to attend, any formally scheduled meetings with
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the IRS (subject to the approval of the IRS) that relate to such Ruling. Neither Qualtrics nor any member of the Qualtrics Group shall request any guidance from the IRS or any other Taxing Authority (whether written, verbal or otherwise) at any time concerning a Distribution (including the impact of any transaction on a Distribution).
(5)Qualtrics Cooperation. Qualtrics agrees that, at the request of SAP, Qualtrics shall cooperate fully with SAP to take any action necessary or reasonably helpful to effectuate any Distribution, including seeking to obtain, as expeditiously as possible, a Tax Opinion or Ruling. Such cooperation shall include the execution of any documents that may be necessary or reasonably helpful in connection with obtaining any Tax Opinion or Ruling (including any (i) power of attorney, (ii) Officer’s Certificate, (iii) Ruling Documents and/or (iv) reasonably requested written representations confirming that (A) Qualtrics has read the Officer’s Certificate and/or Ruling Documents and (B) all information and representations, if any, relating to Qualtrics, any Qualtrics Affiliate or the Qualtrics Business contained therein are true, correct and complete in all material respects).
Article VI.
German Tax Matters
Section i. Liability for Relevant German CFC/PFIC Taxes
. Notwithstanding anything in this Agreement to the contrary, Qualtrics shall be responsible for, and shall indemnify and hold harmless SAP and its Affiliates against, 100% of any Relevant German CFC/PFIC Taxes payable by SAP or any of its Affiliates for taxable periods beginning after December 31, 2020. Any such indemnity payments shall be made in accordance with Section 8.5 hereof.
Section ii. Policy
. The Parties will cooperate to adopt a policy to provide that Qualtrics will consult with SAP (and provide certain information to SAP) prior to any member of the Qualtrics Group taking certain actions that create a risk that Relevant German CFC/PFIC Taxes could be imposed on SAP. The Parties will cooperate to review and modify such policy as appropriate, including on account of any changes in applicable law.
Article VII.
Indemnification
Section i. In General
.
(1)Each member of the SAP Group shall jointly and severally indemnify Qualtrics, each Qualtrics Affiliate, and their respective directors, officers and employees, and hold them harmless from and against any and all Taxes for which SAP or any SAP Affiliate is
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liable under this Agreement and any loss, cost, damage or expense, including reasonable attorneys’ fees and costs, that is attributable to, or results from, the failure of SAP, any SAP Affiliate or any director, officer or employee to make any payment required to be made under this Agreement.
(2)Each member of the Qualtrics Group shall jointly and severally indemnify SAP, each SAP Affiliate, and their respective directors, officers and employees, and hold them harmless from and against any and all Taxes for which Qualtrics or any Qualtrics Affiliate is liable under this Agreement and any loss, cost, damage or expense, including reasonable attorneys’ fees and costs, that is attributable to, or results from, the failure of Qualtrics, any Qualtrics Affiliate or any director, officer or employee to make any payment required to be made under this Agreement.
Section ii. Inaccurate or Incomplete Information
.
(1)Each member of the SAP Group shall jointly and severally indemnify Qualtrics, each Qualtrics Affiliate, and their respective directors, officers and employees, and hold them harmless from and against any cost, fine, penalty, or other expense of any kind attributable to the failure of SAP or any SAP Affiliate in supplying Qualtrics or any Qualtrics Affiliate with inaccurate or incomplete information, in connection with the preparation of any Tax Return.
(2)Each member of the Qualtrics Group shall jointly and severally indemnify SAP, each SAP Affiliate, and their respective directors, officers and employees, and hold them harmless from and against any cost, fine, penalty, or other expenses of any kind attributable to the failure of Qualtrics or any Qualtrics Affiliate in supplying SAP or any SAP Affiliate with inaccurate or incomplete information, in connection with the preparation of any Tax Return.
Section iii. No Indemnification for Tax Items
. Nothing in this Agreement shall be construed as a guarantee of the existence or amount of any loss, credit, carryforward, basis or other Tax Item, whether past, present or future, of SAP, any SAP Affiliate, Qualtrics or any Qualtrics Affiliate. In addition, for the avoidance of doubt, for purposes of determining any amount owed between the Parties hereto, all such determinations shall be made without regard to any financial accounting tax asset or liability or other financial accounting items.
Article VIII.
Payments
Section i. Estimated Tax Payments
. Not later than five business days prior to each Estimated Tax Installment Date with respect to a taxable period for which a Combined Return will be filed, Qualtrics shall pay to
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SAP (or the applicable SAP Affiliate) on behalf of the Qualtrics Group an amount equal to the amount of any estimated Qualtrics Separate Tax Liability (as calculated pursuant to Section 3.4(b)).
Section ii. True-Up Payments
. Not later than 10 business days after receipt of any Qualtrics Separate Tax Liability computation pursuant to Section 3.4(b) of this Agreement, the Qualtrics Group shall pay to the applicable member of the SAP Group, or the SAP Group shall pay to the applicable member of the Qualtrics Group, as appropriate, an amount equal to the difference, if any, between the Qualtrics Separate Tax Liability and the aggregate amount paid by Qualtrics with respect to such period under Section 8.1 of this Agreement.
Section iii. Redetermination Amounts
. In the event of a redetermination of any Tax Item reflected on any Combined Return (other than Tax Items relating to Distribution Taxes), as a result of a refund of Taxes paid, a Final Determination or any settlement or compromise with any Taxing Authority which in any such case would affect the Qualtrics Separate Tax Liability, then within 10 calendar days of such redetermination Qualtrics shall deliver to SAP any information that would be required for SAP to recompute the Qualtrics Separate Tax Liability pursuant to Section 3.4(b) of this Agreement or amounts due pursuant to Section 4.3 of this Agreement. Within 30 calendar days of such redetermination, SAP shall prepare (or cause to be prepared) and deliver to Qualtrics a revised calculation of the Qualtrics Separate Tax Liability for the relevant taxable period reflecting such redetermination or amounts due pursuant to Section 4.3 of this Agreement. The Qualtrics Group shall pay to the applicable member of the SAP Group, or the SAP Group shall pay to the applicable member of the Qualtrics Group, as appropriate, an amount equal to the difference, if any, between the revised Qualtrics Separate Tax Liability and the Qualtrics Separate Tax Liability for such period as originally computed pursuant to this Agreement or to reflect the revisions of the amount due pursuant to Section 4.3 of this Agreement. Any amount payable under this Section 8.3 shall be payable within 15 calendar days of receipt by Qualtrics of the revised calculation of the Qualtrics Separate Tax Liability or amounts due reflecting the redetermination of the relevant Tax Item.
Section iv. Payments of Refunds, Credits and Reimbursements
. If one Party receives a refund or credit of any Tax to which the other party is entitled pursuant to Section 3.1 or 3.2 of this Agreement, the Party receiving such refund or credit shall pay to the other Party the amount of such refund or credit (less any out-of-pocket fees or expenses incurred in obtaining such refund or credit) pursuant to Section 8.5 of this Agreement. If one Party pays a Tax with respect to which the other party is liable or responsible pursuant to Sections 3.1 or 3.2 of this Agreement, then the liable or responsible Party shall pay to the other party the amount of such Tax pursuant to Section 8.5 of this Agreement.
Section v. Payments Under This Agreement
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. In the event that one Party (the “Owing Party”) is required to make a payment to another Party (the “Owed Party”) pursuant to this Agreement, then such payments shall be made according to this Section 8.5.
(1)In General. All payments shall be made to the Owed Party or to the appropriate Taxing Authority as specified by the Owed Party within the time prescribed for payment in this Agreement, or if no period is prescribed, within 10 business days after delivery of written notice of payment owing together with a computation of the amounts due.
(2)Treatment of Payments.
(1)To the extent permitted by applicable law, the Parties agree for all applicable Tax purposes to treat any payments made by one Party to another Party pursuant to this Agreement as non-taxable payments (i.e., dividends, capital contributions or reimbursements of expenses), except for any indemnification payments made by Qualtrics to SAP with respect to Relevant German CFC/PFIC Taxes as required by Section 6.1 of this Agreement.
(2)Unless otherwise required by any Final Determination, the Parties agree that any payments treated as dividends or capital contributions pursuant to Section 8.5(b)(i) made after the date of any Deconsolidation Event that relate to taxable periods (or portions thereof) ending on or before the date of such Deconsolidation Event shall be treated for all Tax purposes as dividends or capital contributions, as the case may be, made immediately prior to the Deconsolidation Event.
(3)Unless otherwise required by any Final Determination, the Parties agree that any payments made by Qualtrics to SAP America pursuant to Section 4.3(a) of this Agreement (relating to Post-Deconsolidation payments in respect of Pre-IPO Equity Award Tax Attributes) shall be treated as having been distributed by Qualtrics to SAP America prior to the U.S. Federal Deconsolidation Event.
(3)Prompt Performance. All actions required to be taken (including payments) by any Party under this Agreement shall be performed within the time prescribed for performance in this Agreement, or if no period is prescribed, such actions shall be performed promptly.
(4)After Tax Amounts. If notwithstanding the manner in which payments described in Section 8.5(b) were reported, there is a Tax liability or an adjustment to a Tax liability of a Party as a result of the receipt a payment made under this Agreement then the Owing Party shall be liable for (i) the After Tax Amount with respect to such payment and (ii) interest at the rate described in Section 8.5(e) of this Agreement on the amount of such Tax from the date such Tax accrues through the date of payment of such After Tax Amount. An Owed Party making a demand for a payment pursuant to this Agreement and for a payment of an After Tax Amount with respect to such payment shall separately specify and compute such After Tax Amount.
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(5)Interest. Payments pursuant to this Agreement that are not made within the period prescribed in this Agreement (the “Payment Period”) shall bear interest for the period from and including the date immediately following the last date of the Payment Period through and including the date of payment at a per annum rate equal to the prime rate as published in The Wall Street Journal on the last day of such Payment Period. Such interest will be payable at the same time as the payment to which it relates and shall be calculated on the basis of a year of 365 days and the actual number of days for which due.
(6)Post-Internal Distribution Payments. Following the date of an Internal Distribution, if SAP America would otherwise be an Owed Party with respect to any payment that the Parties agree would be treated as a dividend for applicable Tax purposes that relates to a period after the Internal Distribution, then notwithstanding anything in this Article VIII to the contrary, the applicable member of the Qualtrics Group should make such payment directly to SAP, which payment shall be treated for all applicable Tax purposes as a dividend from Qualtrics to SAP relating to a period after the Internal Distribution.
Article IX.
Tax Proceedings
Section i. In General
. Except as otherwise provided in this Agreement (including, without limitation, Section 9.3 and Section 9.4), (i) with respect to Tax Returns described in Section 2.1 of this Agreement, SAP (or such SAP Affiliate as SAP shall designate) and (ii) with respect to Tax Returns described in Section 2.2 of this Agreement (including any Tax Returns with respect to Qualtrics, LLC), Qualtrics (or such Qualtrics Affiliate as Qualtrics shall designate) (in either case, the “Controlling Party”), shall have the exclusive right, in its sole discretion, to control, contest, and represent the interests of SAP, any SAP Affiliate, Qualtrics, and/or any Qualtrics Affiliate in any Audit relating to such Tax Return and to resolve, settle or agree to any deficiency, claim or adjustment proposed, asserted or assessed in connection with or as a result of any such Audit. The Controlling Party’s rights shall extend to any matter pertaining to the management and control of an Audit, including execution of waivers, choice of forum, selection of counsel, scheduling of conferences and the resolution of any Tax Item. Any costs incurred in handling, settling, or contesting an Audit shall be borne by the Controlling Party.
Section ii. Audits with Respect to Combined Returns
. Except as otherwise provided in Section 9.4 of this Agreement (relating to Audits regarding Distribution Taxes), in the event of any Audit relating to a Combined Return for which Qualtrics could reasonably be expected to become liable for any Tax in excess of $1 million, (a) SAP shall consult with Qualtrics reasonably in advance of taking any significant action in connection with such Audit, (b) SAP shall consult with Qualtrics and offer Qualtrics a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such Audit that relate solely to members of the Qualtrics Group, and (c) SAP shall provide Qualtrics copies of any written materials relating to such Audit
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received from the relevant Tax Authority (but only the portion of such written materials that relate solely to members of the Qualtrics Group).
Section iii. SAP as Non-Controlling Party
. For so long as SAP and its Affiliates own directly or indirectly, in the aggregate, more than 50% of the outstanding stock of Qualtrics (by vote or value), then with respect to any Audit for which SAP is the non-Controlling Party: (a) the Qualtrics Group shall provide SAP with a timely and reasonably detailed account of each phase of such Audit, (b) the Qualtrics Group shall consult with SAP before taking any significant action in connection with such Audit, (c) the Qualtrics Group shall consult with SAP and offer the members of the SAP Group an opportunity to comment before submitting to a Taxing Authority any written materials prepared or furnished in connection with such Audit, (d) the SAP Group shall be entitled to participate (at its own expense) in such Audit, and (e) the Qualtrics Group shall not settle such Audit without SAP’s prior written consent (which consent shall not be unreasonably withheld, delayed or conditioned).
Section iv. Control of Distribution Tax Proceedings
. In the event of a Distribution, SAP shall have the exclusive right, in its sole discretion, to control, contest, and represent the interests of SAP, any SAP Affiliate, Qualtrics, and/or any Qualtrics Affiliate in any Audits relating to Distribution Taxes and to resolve, settle or agree to any deficiency, claim or adjustment proposed, asserted or assessed in connection with or as a result of any such Audit; provided, however, that SAP shall not settle any such audit with respect to Distribution Taxes with a Taxing Authority that would reasonably be expected to result in a material Tax cost to Qualtrics or any Qualtrics Affiliate, without the prior consent of Qualtrics, which consent shall not be unreasonably withheld, conditioned or delayed. SAP’s rights shall extend to any matter pertaining to the management and control of such Audit, including execution of waivers, choice of forum, scheduling of conferences and the resolution of any Tax Item.
Section v. Notice
. Within 10 business days after a Party becomes aware of the existence of a Tax issue that may give rise to an indemnification obligation under this Agreement, such Party shall give notice to the other Party of such issue (such notice shall contain factual information, to the extent known, describing any asserted tax liability in reasonable detail), and shall promptly forward to the other Party copies of all notices and material communications with any Taxing Authority relating to such issue. The failure to provide the other Party notice as required by this Section 9.5 shall not affect the indemnification provided hereunder except, and only to the extent that, the indemnifying Party shall have been actually prejudiced as a result of such failure.
Article X.
Cooperation and Exchange of Information
Section i. Cooperation
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. Qualtrics and SAP shall each consult and cooperate fully (and each shall cause its respective Affiliates to cooperate fully) with all reasonable requests from the other Party for information and materials not otherwise available to the requesting Party in connection with the preparation and filing of any Tax Return or claims for refund, or Audits with respect to any Tax Return. Such cooperation shall include, without limitation:
(1)the retention until one year after the expiration of the applicable statute of limitations (giving effect to any extension or waiver thereof), and the provision upon request, of copies of all Tax Returns, books, records (including information regarding ownership and Tax basis of property), documentation and other information relating to any Tax Return, including accompanying schedules, related work papers, and documents relating to rulings or other determinations by Taxing Authorities;
(2)the execution of any document that may be necessary or reasonably helpful in connection with any Audit, or the filing of a Tax Return or refund claim by a member of the SAP Group or the Qualtrics Group, including certification, to the best of a Party’s knowledge, of the accuracy and completeness of the information it has supplied; and
(3)the use of a Party’s commercially reasonable efforts to obtain any documentation that may be necessary or reasonably helpful in connection with any of the foregoing.
Section ii. Other Information
. Without limiting the provisions of Section 10.1, upon a Party’s (the “first Party”) reasonable request, the other Party will deliver to the first Party any information within its possession that is required by the first Party in connection with the filing of any Tax Return that it is required to file.
Article XI.
Miscellaneous Provisions
Section i. Effectiveness
. This Agreement shall become effective upon execution by the Parties hereto.
Section ii. Dispute Resolution
. In the event that SAP and Qualtrics disagree as to the amount or calculation of any payment to be made under this Agreement, or the interpretation or application of any provision under this Agreement, the Parties shall attempt in good faith to resolve such dispute. If such dispute is not resolved within 60 business days following the commencement of the dispute, SAP and Qualtrics shall jointly agree upon and retain an internationally recognized law or accounting firm, which firm is independent of both Parties (the “Independent Firm”), to resolve the dispute. The Independent Firm shall act as an arbitrator to resolve all points of disagreement and its decision shall be final and binding upon all Parties involved. Following the decision of
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the Independent Firm, SAP and Qualtrics shall each take or cause to be taken any action necessary to implement the decision of the Independent Firm. The fees and expenses relating to the Independent Firm shall be borne equally by SAP and Qualtrics, except that if the Independent Firm determines that the position advanced by either Party is frivolous, has not been asserted in good faith or for which there is not substantial authority, 100% of the fees and expenses of the Independent Firm shall be borne by such Party.
Section iii. Notices
. Notices, offers, requests or other communications required or permitted to be given by either Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties at the following addresses:
If to SAP or any SAP Affiliate, to:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
Attention: Jochen Scholten
E-mail:
with a copy to:
SAP America, Inc.
3999 West Chester Pike
Newtown Square, PA 19073
Attention: Mary Beth Hanss
Email:
Shearman & Sterling LLP
1460 El Camino Real, 2nd Floor
Menlo Park, CA, 95025
Attention: Daniel Mitz and Larry Crouch
Email: Daniel.Mitz@shearman.com and LCrouch@shearman.com
If to Qualtrics or any Qualtrics Affiliate, to:
Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
or at such other address or e-mail as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via
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certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section iv. Changes in Law
.
(1)Any reference to a provision of the Code or a law of another jurisdiction shall include a reference to any applicable successor provision or law.
(2)If, due to any change in applicable law or regulations or their interpretation by any court of law or other governing body having jurisdiction subsequent to the date of this Agreement, performance of any provision of this Agreement or any transaction contemplated thereby shall become impracticable or impossible, the Parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision.
Section v. Confidentiality
. Each Party shall hold and cause its directors, officers, employees, advisors and consultants to hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all information (other than any such information relating solely to the business or affairs of such Party) concerning the other Parties hereto furnished it by such other Party or its representatives pursuant to this Agreement (except (a) as may otherwise be necessary in connection with the filing of Tax Returns or any Audit, or (b) to the extent that such information can be shown to have been (i) in the public domain through no fault of such Party or (ii) later lawfully acquired from other sources not under a duty of confidentiality by the Party to which it was furnished), and each Party shall not release or disclose such information to any other person, except its directors, officers, employees, auditors, attorneys, financial advisors, bankers and other consultants who shall be advised of and agree to be bound by the provisions of this Section 11.5. Each Party shall be deemed to have satisfied its obligation to hold confidential information concerning or supplied by the other Party if it exercises the same care as it takes to preserve confidentiality for its own similar information.
Section vi. Binding Effect; Assignment
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
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Section vii. Affiliates
. SAP shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any SAP Affiliate, and Qualtrics shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Qualtrics Affiliate; provided, however, that, if it is contemplated that a SAP Affiliate may cease to be a SAP Affiliate as a result of a transfer of its stock or other ownership interests to a third party in exchange for consideration in an amount approximately equal to the fair market value of the stock or other ownership interests transferred and such consideration is not distributed outside of the SAP Group to the shareholders of SAP, then (a) Qualtrics shall execute a release of such SAP Affiliate from its obligations under this Agreement effective as of such transfer; provided, that SAP shall have confirmed in writing its obligations and the obligations of its remaining SAP Affiliates with respect to their own obligations and the obligations of the departing SAP Affiliate and that such departing SAP Affiliate shall have executed a release of any rights it may have against Qualtrics or any Qualtrics Affiliate by reason of this Agreement, or (b) SAP shall acknowledge in writing no later than 30 days prior to such cessation that it shall bear 100% of the liability for the obligations of SAP and each SAP Affiliate (including the departing SAP Affiliate) under this Agreement. If at any time Qualtrics shall, directly or indirectly, obtain beneficial ownership of more than 50% of the total combined voting power of any other entity, Qualtrics shall cause such entity to become a Party to this Agreement by executing together with SAP an agreement in substantially the same form as set forth in Schedule 11.7 and such entity shall have all rights and obligations of an Qualtrics Affiliate under this Agreement.
Section viii. Authority
. Each of the Parties represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
Section ix. Entire Agreement
. This Agreement contains the entire agreement among the Parties hereto with respect to the subject matter hereof and supersedes any prior tax sharing agreements between SAP (or any SAP Affiliate) and Qualtrics (or any Qualtrics Affiliate) and such prior tax sharing agreements shall have no further force and effect. If, and to the extent, the provisions of this Agreement conflict with any agreement entered into in connection with a Distribution or another Deconsolidation Event, the provisions of this Agreement shall control. For the avoidance of doubt, in the event there is any inconsistency between the provisions of this Agreement and the provisions of the Master Transaction Agreement, the provisions of this Agreement shall govern.
Section x. Consent to Jurisdiction
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. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY AGREE THAT THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND ALL DISPUTES, CONTROVERSIES OR CLAIMS ARISING OUT OF OR RELATING TO THE AGREEMENT OR THE BREACH, TERMINATION OR VALIDITY THEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICTS OF LAW RULES. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION (OTHER THAN APPEALS) IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section xi. Counterparts
. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement.
Section xii. Severability
. If any term, provision, covenant, or restriction of this Agreement is held by a court of competent jurisdiction (or an arbitrator or arbitration panel) to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants, and restrictions set forth herein shall remain in full force and effect, and shall in no way be affected, impaired, or invalidated. In the event that any such term, provision, covenant or restriction is held to be invalid, void or unenforceable, the Parties hereto shall use their best efforts to find and employ an alternate means to achieve the same or substantially the same result as that contemplated by such terms, provisions, covenant, or restriction.
Section xiii. Third Party Beneficiaries
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. This Agreement is solely for the benefit of the Parties. This Agreement should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other rights in excess of those existing without this Agreement.
Section xiv. Failure or Indulgence not Waiver
. No failure or delay on the part of a Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No modification or waiver of any provision of this Agreement nor consent to any departure by the Parties therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.
Section xv. Setoff
. All payments to be made by any Party under this Agreement may be netted against payments due to such Party under this Agreement, but otherwise shall be made without setoff, counterclaim or withholding, all of which are hereby expressly waived.
Section xvi. Other Remedies
. Qualtrics recognizes that any failure by it or any Qualtrics Affiliate to comply with its obligations under Article V of this Agreement could, in the event of a Distribution, result in Distribution Taxes that would cause irreparable harm to SAP, SAP Affiliates, and their stockholders. Accordingly, SAP shall be entitled to seek an injunction or injunctions to prevent breaches of Article V of this Agreement and to enforce specifically the terms and provisions of Article V of this Agreement, this being in addition to any other remedy to which SAP is entitled at law or in equity.
Section xvii. Amendment and Modification
. This Agreement may be amended, modified or supplemented only by a written agreement signed by all of the Parties hereto.
Section xviii. Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS
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REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.18.
Section xix. Interpretation
. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement they shall be deemed to be followed by the words “without limitation.” The words “hereof,” “herein” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any provisions of this Agreement.
[Signature Page Follows]
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IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed by a duly authorized officer as of the date first written above.
SAP SE
On behalf of itself and each SAP Affiliate that is not a member of the SAP America Group
By: /s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
By: /s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
SAP AMERICA, INC.
On behalf of itself and each other SAP Affiliate that is a member of the SAP America Group
By: /s/ Mary Beth Hanss
Name: Mary Beth Hanss
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
on behalf of itself and each Qualtrics Affiliate
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Tax Sharing Agreement]
Schedule 11.7
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.4
EMPLOYEE MATTERS AGREEMENT
dated as of February 1, 2021
between
SAP SE
and
QUALTRICS INTERNATIONAL INC.
Table of Contents
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Exhibit 10.[__]
EMPLOYEE MATTERS AGREEMENT
This Employee Matters Agreement is dated as of the 1st day of February 2021, between SAP SE, a European Company (Societas Europaea), registered in accordance with the corporate laws of Germany and the European Union (“SAP”), and Qualtrics International Inc., a Delaware corporation (“Qualtrics”, with each of SAP and Qualtrics a “Party,” and together, the “Parties”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in Article I hereof.
RECITALS
WHEREAS, SAP is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP, through Qualtrics, is engaged in the business of providing a technology platform for experience management, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission (“Commission”) under the Securities Act (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (“IPO”) of its Class A common stock pursuant to the IPO Registration Statement; and
WHEREAS, the Parties intend in this Agreement to set forth the principal arrangements between SAP and Qualtrics regarding the allocation between them of assets, liabilities, and responsibilities with respect to certain employees and employee compensation and benefit plans, programs and matters from and after the filing of the IPO Registration Statement and the consummation of the IPO.
NOW, THEREFORE, in consideration of the foregoing and the terms, conditions, covenants and provisions of this Agreement, SAP and Qualtrics mutually covenant and agree as follows:
Article I.
DEFINITIONS
Section i.Definitions
. As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Administrative Services Agreement” means the Administrative Services Agreement between the Parties of even date herewith.
“Agreement” means this Employee Matters Agreement, together with the Schedules hereto, as the same may be amended and supplemented from time to time in accordance with the provisions hereof.
“Benefit Plans” means all benefit plans, including any welfare plans, medical, dental, and vision plans, life insurance plans, cafeteria plans, retirement, and other deferred compensation plans.
“Benefits Commencement Date” means: (i) for each Qualtrics-Aligned Employee, the Employment Commencement Date; and (ii) for each U.S. and AU Qualtrics Employee, a date that is mutually agreed between the Parties but that is no later than January 1, 2022; provided, that if Qualtrics is unable to meet this deadline notwithstanding its reasonable best efforts, the deadline shall automatically be extended by six months.
“Class A common stock” means the Class A common stock, par value $0.0001 per share, of Qualtrics.
“Class B common stock” means the Class B common stock, par value $0.0001 per share, of Qualtrics.
“Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time, or any successor federal income tax law, and the regulations promulgated thereunder.
“Common Stock” means the Class A common stock and Class B common stock of Qualtrics.
“Employment Commencement Date” means the date that each Qualtrics-Aligned Employee becomes a Qualtrics Employee in accordance with Section 2.2 of this Agreement.
“ERISA” means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
“HR Liabilities” means all Liabilities arising out of, by reason of, or otherwise in connection with, the employment of, and/or the termination of the employment of, any employee.
“HXM Systems” means human capital management systems in relation to Qualtrics Employees and Qualtrics-Aligned Employees; provided, that HXM Systems, including related implementation services, shall be administered through SuccessFactors and/or any other SAP-owned systems, as applicable, wherever such capabilities are available.
“Intercompany Agreement” has the meaning set forth in the Master Transaction Agreement.
“IPO Date” means the date on which the IPO is consummated.
“Labor Agreement” means any agreement with any Works Council that pertains to any Qualtrics Employees, Transferring Employees and/or Qualtrics-Aligned Employees.
“Liabilities” has the meaning set forth in the Master Transaction Agreement.
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“Losses” has the meaning set forth in the Administrative Services Agreement.
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Person” has the meaning set forth in the Master Transaction Agreement.
“Qualtrics 401(k) Plan” means the U.S. defined contribution retirement savings plan that Qualtrics will establish in accordance with Section 3.3(a) hereof.
“Qualtrics-Aligned Employees” means employees who provide services as if they are full-time Qualtrics Employees but who are employed by SAP entities. The Qualtrics-Aligned Employees as of January 14, 2021 are set forth on Schedule A hereto, which schedule shall be updated at the IPO Date.
“Qualtrics Business” means the business presently conducted by Qualtrics, as more completely described in the IPO Registration Statement, or following the IPO Date, such business that is then conducted by Qualtrics and described in its periodic filings with the Commission.
“Qualtrics Employee” means any individual who, immediately prior to the IPO, is either actively employed by or then on a leave of absence from a Qualtrics Entity.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity which becomes a Subsidiary of Qualtrics after the date hereof.
“Qualtrics Indemnified Person” has the meaning set forth in the Administrative Services Agreement.
“Qualtrics Plan” means any Benefit Plan sponsored or maintained by a Qualtrics Entity.
“SAP 401(k) Plan” means the SAP America, Inc. 401(k) Plan.
“SAP Employee” means any individual who, as of the IPO Date, is either actively employed by or then on a leave of absence from an SAP Entity but does not include any Qualtrics Employee.
“SAP Entities” means SAP SE and its Subsidiaries (other than the Qualtrics Entities) and any entity which becomes a Subsidiary of SAP SE after the date hereof (other than a Qualtrics Entity).
“SAP Indemnified Person” has the meaning set forth in the Administrative Services Agreement.
“SAP Plan” means any Benefit Plan sponsored or maintained by an SAP Entity.
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“Securities Act” means the Securities Act of 1933, as amended.
“Subsidiary” has the meaning set forth in the Master Transaction Agreement.
“Taxes” has the meaning set forth in the Master Transaction Agreement.
“Transferring Employee” means any Qualtrics-Aligned Employee who is transferred to a Qualtrics Entity in accordance with Section 2.2 of this Agreement.
“U.S. and AU Qualtrics Employees” means each Qualtrics Employee whose primary workplace is in the United States or Australia immediately prior to the IPO.
“Works Council” means any union, works council, or other similar agency or representative body certified or otherwise recognized for the purposes of bargaining collectively or established for the purposes of notification of or consultation on behalf of any employee.
Article II.
GENERAL PRINCIPLES
Section i.Assumption and Retention of Liabilities
.
(1)General. Except to the extent otherwise required by applicable law or otherwise provided in this Agreement, Qualtrics shall or shall cause another Qualtrics Entity, as applicable, to retain or assume, as the case may be, all HR Liabilities in respect of Qualtrics Employees and Qualtrics-Aligned Employees, regardless of when such HR Liabilities arise. For the avoidance of doubt, Qualtrics Entities shall not be responsible for HR Liabilities in respect of SAP Employees.
(2)HR Compliance. The Qualtrics Entities, and, as applicable all services provided by the Qualtrics Entities, shall be subject to Qualtrics HR compliance policies, as in effect from time to time and applicable to any Qualtrics Entity (the “Qualtrics HR Policies”). To the extent that Qualtrics’ human resources (“HR”) department is not involved at the outset of any HR matter relating to any Qualtrics Employee or Qualtrics-Aligned Employee, SAP shall promptly involve Qualtrics’ HR department. Upon such involvement, Qualtrics shall be responsible for all HR matters relating to any Qualtrics Employee and SAP and Qualtrics shall coordinate with respect to all HR matters relating to any Qualtrics-Aligned Employee. Unless otherwise agreed between the Parties, SAP’s Head of HR Compliance or his or her delegate and Qualtrics’ Managing Counsel for Employment Matters or his or her delegate shall be responsible for coordinating all such efforts. Qualtrics shall reimburse SAP for any HR Liabilities incurred by SAP or any SAP Entity (including all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses) in connection with any actual, reported or suspected breach by Qualtrics of any Qualtrics HR Policies.
Section ii.Qualtrics-Aligned Employees
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.
(1)No later than the IPO Date, Qualtrics shall ensure that each Qualtrics-Aligned Employee who is designated as a pre-IPO transfer on Schedule A hereto becomes a Qualtrics Employee; provided, that if Qualtrics is unable to meet this deadline notwithstanding its reasonable best efforts, the deadline shall automatically be extended by six months.
(2)Qualtrics shall ensure that all Qualtrics-Aligned Employees other than those described in Section 2.2(a) are transferred to a Qualtrics Entity on or as soon as reasonably possible following the IPO Date but no later than January 1, 2022; provided, that if Qualtrics is unable to meet this deadline notwithstanding its reasonable best efforts, the deadline shall automatically be extended by six months and provided further, however, that with respect to any Qualtrics-Aligned Employee who does not transfer on or prior to the IPO Date, such Qualtrics-Aligned Employee shall continue providing services to Qualtrics pursuant to the terms of the leasing arrangement set forth in Article VII of this Agreement until such time as Qualtrics implements a suitable alternative arrangement.
(3)As of the date hereof, Qualtrics shall not: (i) hire any additional Qualtrics-Aligned Employee without the prior written consent of SAP, including in jurisdictions where Qualtrics-Aligned Employees are not already engaged, except as previously approved as set forth on Schedule B of this Agreement; or (ii) inform any Qualtrics-Aligned Employee of his or her termination of employment without providing SAP with notice of any such termination of employment in accordance with the applicable local SAP payroll cutoff dates; provided, that such notice shall not be required in the event of a termination for “cause.”
(4)SAP and Qualtrics agree to cooperate in good faith to effectuate the transfers of employment contemplated by this Section 2.2.
Section iii.Relocations
. Qualtrics shall continue to administer and be responsible for all applicable relocation and expatriate programs to which Qualtrics Employees and, following the Employment Commencement Date, Transferring Employees are subject. Qualtrics and SAP shall cooperate as necessary to transfer any visas of Transferring Employees from SAP to Qualtrics.
Section iv.Comparability
. Except as otherwise provided in this Agreement or as required by applicable law or Labor Agreement, neither Qualtrics nor SAP shall have any obligation to provide any particular level of compensation or benefits following the IPO.
Article III.
EMPLOYEE BENEFIT PLANS
Section i.Benefits Transfer
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. Effective as of the Benefits Commencement Date, U.S. and AU Qualtrics Employees and Transferring Employees shall cease to participate in and accrue benefits under the SAP Plans, except that the U.S. and AU Qualtrics Employees and the Transferring Employees shall continue participation in the SAP Plans to the extent required by applicable law, the terms of the SAP Plans or as otherwise provided in this Article III. SAP shall satisfy all Liabilities under the SAP Plans relating to the U.S. and AU Qualtrics Employees and the Transferring Employees, at Qualtrics’ cost, as determined under the Administrative Services Agreement. Except as otherwise provided in this Article III or as required by any applicable law, Labor Agreement or plan provisions, Qualtrics shall use reasonable best efforts to cause any Qualtrics Plan in which any U.S. and AU Qualtrics Employee or any Transferring Employee, as applicable, becomes a participant to recognize, without duplication, such U.S. and AU Qualtrics Employee’s or Transferring Employee’s years of service with any SAP Entity prior to the Benefits Commencement Date to the same extent that service is recognized for Qualtrics Employees who transfer between Qualtrics Entities under any Qualtrics Plans, for purposes of eligibility, vesting and benefit accruals under such Qualtrics Plan.
Section ii.Eligibility at Qualtrics
. Qualtrics shall take all actions reasonably required to cause all U.S. and AU Qualtrics Employees and Transferring Employees, including all dependents of such employees, to be eligible for coverage under the Qualtrics Plans that provide group health, prescription drug, dental, dependent life, accidental death and dismemberment, flexible spending accounts, vision insurance and similar type welfare benefits effective immediately as of the Benefits Commencement Date or as soon as practicable thereafter; provided, that the Benefits Commencement Date may be different with respect to each individual Qualtrics Plan. Qualtrics shall use reasonable best efforts to cause such U.S. and AU Qualtrics Employees and Transferring Employees and their dependents to have any pre-existing condition limitations, eligibility waiting periods, evidence of insurability and required physical examinations waived with respect to all the Qualtrics Plans (to the extent the same was waived under the comparable SAP Plan prior to the Benefits Commencement Date).
Section iii.Qualtrics 401(k) Plan
.
(1)Qualtrics International Inc. 401(k) Savings Plan and Trust. Qualtrics shall adopt a defined contribution savings plan qualified under Section 401(a) of the Code and establish a related trust exempt from taxation under Section 501(a) of the Code no later than January 1, 2022 (the effective date of such plan to be the “Implementation Date”); provided, that if Qualtrics is unable to meet this deadline notwithstanding its reasonable best efforts, the deadline shall automatically be extended by six months. Until the Implementation Date, all eligible Qualtrics Employees and Transferring Employees shall continue to be entitled to participate in the SAP 401(k) Plan on the same terms and conditions as in effect immediately prior to the IPO Date and any eligible employees hired by a Qualtrics Entity in the United States after the IPO Date but prior to the Implementation Date shall be permitted to participate in the
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SAP 401(k) Plan in a manner consistent with all other eligible Qualtrics Employees and in accordance with the terms thereof.
(2)Assumption of Liabilities and Transfer of Assets. SAP and Qualtrics shall use reasonable best efforts to cause, in the manner described herein, the accounts under the SAP 401(k) Plan of each eligible Qualtrics Employee and each eligible Transferring Employee to be transferred to the Qualtrics 401(k) Plan as soon as practicable after the Implementation Date. As soon as practicable after the Implementation Date: (i) SAP shall cause the accounts (including any outstanding loan balances) of each eligible current Qualtrics Employee and Transferring Employee in the SAP 401(k) Plan to be transferred to the Qualtrics 401(k) Plan and its related trust in kind based on the investment election of the individual participant or, in the absence of an investment election, the plan’s default investment election (in each case, to the extent possible, without negative tax consequences to the applicable employee), in accordance with Sections 401(a)(12), 411(d)(6) and 414(l) of the Code; (ii) Qualtrics (or any successor Qualtrics Entity) and the Qualtrics 401(k) Plan shall assume and be solely responsible for all Liabilities under the Qualtrics 401(k) Plan relating to the accounts that are so transferred arising at or after the time of such transfer; and (iii) Qualtrics shall cause such transferred accounts to be accepted by the Qualtrics 401(k) Plan and its related trust and shall cause the Qualtrics 401(k) Plan to satisfy all protected benefit requirements under the Code and applicable law with respect to the transferred accounts. In determining whether a Qualtrics Employee is vested in his or her account under the Qualtrics 401(k) Plan, if applicable, the Qualtrics 401(k) Plan shall credit each Qualtrics Employee with at least the individual’s service credited under the SAP 401(k) Plan; provided, however, that in no event shall Qualtrics be required to provide any service or any other benefit-affecting credits to any individual to the extent that the provision of such credits would result in any duplication of benefits. Immediately prior to the date upon which the transfer described above occurs, SAP shall contribute to the SAP 401(k) Plan all matching contributions, if any, due to Qualtrics Employees pursuant to the terms and conditions of such plan for periods prior to the transfer date. Notwithstanding anything contained herein to the contrary, the transfer described herein shall not take place prior to the 31st day following the filing of any required Forms 5310-A in connection therewith.
Section iv.Terms of Participation in Benefit Plans
. Except to the extent otherwise provided herein, SAP and Qualtrics shall adopt, or shall cause to be adopted, all reasonable and necessary plan amendments to prevent the IPO from constituting a termination of employment of any Qualtrics Employee, Transferring Employee or Qualtrics-Aligned Employee for purposes of triggering a distribution under any SAP Plan or any Qualtrics Plan.
Section v.HXM Systems
. Following the IPO Date and no later than January 1, 2022, Qualtrics shall establish HXM Systems (including payroll systems where applicable) for all Qualtrics Employees and Transferring Employees, at Qualtrics’ cost, which shall be as determined in accordance with the Administrative Services Agreement for any costs associated with HXM Systems that are administered through SAP. SAP shall cooperate with Qualtrics to migrate all
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applicable data onto Qualtrics’ HXM Systems as needed to complete such process as soon as reasonably practicable thereafter. Until such time as the Qualtrics HXM Systems are established, SAP shall facilitate Qualtrics’ continued use of SAP HXM Systems for all Qualtrics Employees and Transferring Employees. For the avoidance of doubt, all Qualtrics-Aligned Employees shall remain on SAP’s HXM Systems until such time that they become Transferring Employees.
Section vi.Vacation and PTO
. With respect to Qualtrics Employees other than U.S. and AU Qualtrics Employees, Qualtrics shall retain all Liabilities for all accrued and unused vacation and paid time off (“PTO”) as of the IPO Date. With respect to Transferring Employees, Qualtrics-Aligned Employees, and U.S. and AU Qualtrics Employees, SAP shall continue to satisfy on Qualtrics’ behalf all accrued and unused vacation and PTO for the period after the IPO until the Employment Commencement Date or Benefits Commencement Date, as applicable. Only where required by applicable local law or SAP Plan provisions, SAP shall pay out all accrued and unused vacation benefits or PTO determined as of immediately prior to the Employment Commencement Date, to each Transferring Employee entitled to such benefits, at Qualtrics’ cost, as determined under the Administrative Services Agreement.
Article IV.
INCENTIVE AND EQUITY COMPENSATION MATTERS
Section i.Exchange of Outstanding Awards at the IPO Date
. Subject to local law limitations, Qualtrics shall offer Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees the opportunity to exchange their currently unvested equity-based compensation awards, which include Qualtrics Rights and SAP RSUs (both terms as defined in the IPO Registration Statement, and together, the “Existing Awards”), that vest on or after February 1, 2021 (or such other date as the Parties may agree in writing) into equity-based compensation awards of Qualtrics (the “Exchanged Awards”); provided, that the Parties may exclude any Qualtrics Employees, Transferring Employees or Qualtrics-Aligned Employees from exchanging their awards in such manner if doing so would be inadvisable or impractical. The Exchanged Awards shall retain the same vesting and payment schedule as the Existing Awards but shall otherwise be governed by the terms and conditions of the 2021 Qualtrics Employee Omnibus Equity Plan (the “2021 Plan”). All Existing Awards held by Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees that do not become Exchanged Awards (the “Unexchanged Awards”) shall continue subject to their existing terms and conditions, at Qualtrics’ cost (which cost, for the avoidance of doubt, shall constitute HR Liabilities), with administrative charges, as applicable, determined under the Administrative Services Agreement. As of the IPO, Qualtrics shall retain or assume, as applicable, the responsibility of administering the Unexchanged Awards in accordance with their original terms and conditions, and SAP shall provide Qualtrics with all applicable information as needed for Qualtrics to administer the Unexchanged Awards.
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Section ii.Treatment of Equity-Based Incentive Awards
.
(1)SAP Equity-Based Incentive Award Plans. As of the IPO Date, Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees shall no longer be eligible to participate in any equity-based incentive award plans administered by SAP, including the Move SAP Plan, Grow SAP Plan, Own SAP Plan and Own SAP Virtual Plan (together with any other equity-based incentive award plans administered by SAP, the “SAP Award Plans”); provided, that the Qualtrics-Aligned Employees shall remain eligible to participate in the Own SAP Plan and Own SAP Virtual Plan, as applicable, until the Employment Commencement Date, unless otherwise agreed in writing between the Parties. Prior to the IPO Date, SAP shall take all actions necessary or appropriate to cause all Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees to cease to be eligible to participate in any SAP Award Plans, except that SAP shall not take any action to cause the Qualtrics-Aligned Employees to cease to be eligible to participate in the Own SAP Plan or Own SAP Virtual Plan. To the extent applicable, any cash balance pursuant to an SAP Award Plan and in the account of any Qualtrics Employee, Transferring Employee or Qualtrics-Aligned Employee shall be administered in accordance with the terms of the applicable plan, including that the account of any Qualtrics Employee, Transferring Employee or Qualtrics-Aligned Employee administered under the Own SAP Plan or the Own SAP Virtual Plan shall be treated as if such employee has ceased employment with any Qualtrics Entity or SAP Entity, as applicable, in accordance with the terms of the applicable plan.
(2)Approval of Plans. Prior to the IPO Date, Qualtrics shall adopt (i) the 2021 Plan and (ii) the 2021 Qualtrics Employee Stock Purchase Plan (the “ESPP”), and each plan shall be approved by Qualtrics’ sole stockholder. Subject to local law limitations and unless inadvisable or impractical, all Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees shall become eligible to participate in the 2021 Plan and all Qualtrics Employees and Transferring Employees who transfer prior to the IPO Date shall become eligible to participate in the ESPP, in each case, immediately as of the IPO Date. All other Transferring Employees and Qualtrics-Aligned Employees shall become eligible to participate in the ESPP as of the applicable Employment Commencement Date or as soon as is reasonably practicable thereafter.
(3)Registration Requirements. As soon as practicable following the IPO Date, Qualtrics agrees that it shall cause to be registered pursuant to the Securities Act of 1933, as amended, all shares of Qualtrics common stock authorized for issuance under the 2021 Plan and the ESPP. SAP shall cooperate with Qualtrics in completing and maintaining any such registration statements and related disclosures.
Section iii.Short-Term Incentive Compensation
. Short-term incentive compensation and commission payments earned or accrued by any Qualtrics Employee or Qualtrics-Aligned Employee for the fiscal year 2020 and beyond shall be Liabilities of Qualtrics pursuant to the terms and conditions of the applicable short-term
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incentive compensation plan or policy. Following the IPO, Qualtrics shall retain all Liabilities relating to short-term compensation and commission payments earned or accrued by all Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees.
Article V.
Non-Qualified deferred compensation matters
Section i.General
. There shall be no transfer among the Parties or their affiliates of assets or Liabilities in respect of nonqualified deferred compensation plans maintained by any of them or their respective subsidiaries, and any assets of the Qualtrics Employees and Qualtrics-Aligned Employees currently held in a nonqualified deferred compensation plan shall be treated in accordance with the terms of the applicable plan. Effective as of January 1, 2021, Qualtrics Employees and Qualtrics-Aligned Employees shall no longer be eligible to participate in SAP Plans that are nonqualified voluntary elective deferral plans.
Article VI.
COSTS
Section i.Fees
. In exchange for the performance of SAP’s obligations pursuant to this Agreement, Qualtrics shall reimburse SAP for all HR Liabilities in respect of Qualtrics Employees, Transferring Employees and Qualtrics-Aligned Employees in accordance with Article III of the Administrative Services Agreement.
Section ii.Indemnification
.
(1)Qualtrics agrees to indemnify and hold harmless each SAP Indemnified Person from and against any Losses arising out of or related to any claim, action or proceeding (collectively, “Actions”) by a third party to the extent arising out of or in connection with (i) services rendered or to be rendered by any Qualtrics Indemnified Person pursuant to this Agreement or the transactions contemplated hereby or (ii) any Qualtrics Indemnified Person’s actions or inactions in connection with this Agreement or such transactions; provided, that Qualtrics shall not be responsible for any damages incurred by any SAP Indemnified Person that have resulted from any SAP Entity’s, or any such SAP Indemnified Person’s, gross negligence or willful misconduct in connection with the services rendered or to be rendered pursuant to this Agreement.
(2)SAP agrees to indemnify and hold harmless each Qualtrics Indemnified Person from and against any Losses arising out of or related to any Action by a third party to the
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extent arising out of or in connection with (i) services rendered or to be rendered by any SAP Indemnified Person pursuant to this Agreement or the transactions contemplated hereby or (ii) any SAP Indemnified Person’s actions or inactions in connection with this Agreement or such transactions; provided, that SAP shall not be responsible for any damages incurred by any Qualtrics Indemnified Person that have resulted from any Qualtrics Entity’s, or any such Qualtrics Indemnified Person’s, gross negligence or willful misconduct in connection with the services rendered or to be rendered pursuant to this Agreement.
Article VII.
LEASING AND BENEFITS SERVICES
Section i.Leasing Period
. During the period from the IPO through the end of the day immediately prior to the Employment Commencement Date for Qualtrics-Aligned Employees (the “Leasing Period”), SAP shall continue to employ the Qualtrics-Aligned Employees and to make the Qualtrics-Aligned Employees available to any Qualtrics Entity (without any requirement to provide any additional compensation or benefits to such Qualtrics-Aligned Employees that will not be reimbursed pursuant to this Agreement), to perform such lawful tasks as the applicable Qualtrics Entity may direct in connection with the Qualtrics Business, subject to applicable law and the terms of any applicable employee policies of SAP (the “Leased Services”). During the Leasing Period: (i) SAP agrees that it shall not terminate the employment of any Qualtrics-Aligned Employee without the prior written consent of Qualtrics, which shall not be unreasonably withheld or delayed in the event of grounds constituting “cause” under any SAP Plan, or any SAP policy, practice or applicable law; and (ii) SAP shall instruct in writing the leased Qualtrics-Aligned Employees to (a) maintain the confidentiality of any confidential or trade secret information of Qualtrics and (b) comply with all other applicable employment policies of SAP, and SAP shall report promptly to Qualtrics any suspected failure of the leased Qualtrics-Aligned Employees to follow such instruction. For the avoidance of doubt, a decision by SAP to terminate the employment of any Qualtrics-Aligned Employee pursuant to this Section 7.1 shall in no way modify Qualtrics’ obligations under this Agreement, including, without limitation, Article VI. Notwithstanding the foregoing, if any Qualtrics-Aligned Employee shall be terminated by SAP and re-hired by Qualtrics in connection with such employee’s transfer of employment to Qualtrics, SAP shall terminate the applicable Qualtrics-Aligned Employee as of 11:59 pm of the day immediately prior to such employee’s Employment Commencement Date.
Section ii.Compensation/Payroll
. During the Leasing Period and, for U.S. and AU Qualtrics Employees, the period from the IPO through the day immediately prior to the Benefits Commencement Date (which such period, for U.S. and AU Qualtrics Employees, shall be the “Benefits Services Period”), as applicable, SAP shall be responsible for (i) paying and shall pay to or on behalf of each Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employee, as applicable, all wages, salaries, bonuses, severance, paid leave, including paid vacation, and other compensation earned, vested, due, accrued for payment, or payable under the applicable plan, policy or program
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(collectively, “Compensation”), (ii) deducting all employment and other Taxes, withholdings and other legally required deductions (such as in the nature of social security payments or judicially ordered deductions), (iii) paying all Taxes on or with respect to such Compensation as may be required of an employer, (iv) maintaining, contributing to or paying (as applicable) unemployment insurance, unemployment compensation, workers’ compensation, disability, retirement contributions, and any other insurance and fringe benefits with respect to the Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employee, as applicable, and (v) any reporting, disclosure and withholding obligations in connection therewith. During the Leasing Period and the Benefits Services Period, as applicable, SAP shall not, unless otherwise instructed by Qualtrics to do so in writing, change the terms of employment or compensation of any Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employee, grant any bonuses, whether monetary or otherwise, or increase in any wages, salary, severance, pension, equity award or other compensation or benefits in respect of any Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employee, as applicable, or adopt or enter into any Labor Agreement affecting the Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employee, as applicable, other than as required by applicable law. With respect to the Qualtrics-Aligned Employees or U.S. and AU Qualtrics Employees during the Leasing Period or the Benefits Services Period, as applicable, Qualtrics shall not be obligated to pay any Compensation to the Qualtrics-Aligned Employees or U.S. and AU Qualtrics Employees directly, nor shall Qualtrics be responsible for paying directly to any governmental agency any Taxes, withholdings, or other legally required deductions (such as social security payments due), or for reporting to disclosure obligations in connection therewith with respect to the Qualtrics-Aligned Employee or U.S. and AU Qualtrics Employees. Nothing herein shall be interpreted as limiting the obligations of Qualtrics to make payments to SAP in respect of these Liabilities pursuant to the Administrative Services Agreement.
Section iii.Plans
. During the Leasing Period and the Benefits Services Period, as applicable, the Qualtrics-Aligned Employees and U.S. and AU Qualtrics Employees shall remain eligible for or participate in the same SAP Plans in which such Qualtrics-Aligned Employees or U.S. and AU Qualtrics Employees were eligible or participating as of immediately prior to the IPO, subject to their elections in any such SAP Plans in the ordinary course of business for any plan year thereafter, subject to the terms and limitations of such SAP Plans (including without limitation, regarding eligibility and participation), and the right of SAP to modify, cancel, amend or terminate any such SAP Plan in its sole and absolute discretion, but subject to this Agreement and only to the extent such modification, cancellation, amendment or termination is done with respect to all similarly situated participants under such SAP Plan. Wherever required by applicable local law or SAP Plan provisions, SAP will pay out all accrued and unused vacation to U.S. and AU Qualtrics Employees as soon as reasonably practicable or required after the Benefits Commencement Date, at Qualtrics’ cost, as determined under the Administrative Services Agreement. Notwithstanding the foregoing, participation in the SAP 401(k) Plan and the Qualtrics 401(k) Plan for eligible Qualtrics Employees and eligible Transferring Employees shall be determined in accordance with Section 3.3(a) of this Agreement.
Section iv.Personnel Policies
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. Except as specified herein or as required by applicable law, all terms and conditions of employment applicable to the Qualtrics-Aligned Employees shall at all times during the Leasing Period be governed by the personnel policies and practices generally applicable to similarly situated SAP Employees, as such policies and practices may be amended from time to time during the Leasing Period. Notwithstanding the foregoing, nothing contained herein shall be interpreted as limiting the obligations of Qualtrics to cause compliance with all employee-related policies as set forth in the Master Transaction Agreement.
Section v.Leased Employees
. The Qualtrics-Aligned Employees shall at all times during the Leasing Period remain SAP Employees, and no Qualtrics-Aligned Employees shall be deemed for any purpose to be an agent, servant or employee of any Qualtrics Entity during the Leasing Period. Subject to applicable data privacy and protection and employment laws, SAP shall respond to all questions and inquiries from Qualtrics, state and federal agencies, and other persons regarding payroll and employment data and history relating to the Qualtrics-Aligned Employees leased under this Article VII for periods of employment with SAP. During the Leasing Period, the Qualtrics-Aligned Employees shall not be entitled to participate in or receive any benefit or right as an employee or participant under Qualtrics’ employee benefit and welfare plans as a result of or in connection with the provision of the Leased Services, but, for the avoidance of doubt, shall be eligible to participate in equity-based incentive award programs administered by Qualtrics and SAP as set forth in Article IV. SAP shall instruct in writing all Qualtrics-Aligned Employees providing the Leased Services to comply with, during the Leasing Period, any confidentiality obligations set forth in any written arrangement between such Qualtrics-Aligned Employee and Qualtrics. SAP shall promptly notify Qualtrics of any breach of any such obligations by a Qualtrics-Aligned Employee.
Article VIII.
CERTAIN NON-U.S. JURISDICTION MATTERS
Section i.Works Council Arrangements
.
(1)General. Qualtrics Employees and Transferring Employees in the European Economic Area and Germany who are subject to SAP’s SE Works Council Europe and SAP’s German Group Works Council as of immediately prior to the IPO shall remain subject to the applicable provisions of such Works Council arrangements after the IPO until such time as is required by law. SAP shall inform Qualtrics of, and Qualtrics shall comply with, any obligations arising from these Works Council arrangements and any other applicable Labor Agreements for the duration of time that any Qualtrics Employees or Transferring Employees remain subject to their terms. In addition, Qualtrics-Aligned Employees who are subject to any Labor Agreement shall remain subject to such agreements after the IPO until such time as is required by law.
(2)GLR Communications. To the extent that any Qualtrics Employees, including any Transferring Employees, are subject to any SAP Labor Agreements, whether prior
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to or following the IPO, Qualtrics shall coordinate all communications with the applicable Works Council through SAP’s Global Labor Relations Department (“GLR”) and Qualtrics shall not communicate directly with the applicable Works Council without the prior written consent of GLR, unless otherwise required by law. For the avoidance of doubt, SAP and Qualtrics acknowledge that Qualtrics may be subject to Labor Agreements that are independent of SAP in certain jurisdictions and that, as of the IPO, Qualtrics shall be responsible for compliance with all such Labor Agreements and shall not be required to coordinate with GLR with respect to any such Labor Agreements, unless otherwise required by law.
Article IX.
GENERAL AND ADMINISTRATIVE
Section i.Personnel Records
. Qualtrics shall continue to retain all applicable employee records, data or information, and compliance-related training documents (collectively, “Employment Files”), with respect to each Qualtrics Employee, and SAP shall maintain Employment Files for each Qualtrics-Aligned Employee, in accordance with all applicable laws. Following the IPO: (i) to the extent applicable, SAP shall transfer copies of all applicable Employment Files with respect to each Transferring Employee and Qualtrics-Aligned Employee, to Qualtrics and (ii) the Parties shall have shared access to all applicable Employment Files with respect to each Qualtrics Employee, Transferring Employee and Qualtrics-Aligned Employee, in each case if permissible under, and as reasonably required in order to comply with, applicable law and as reasonably required in order for the Parties to perform their obligations under this Agreement.
Section ii.Confidentiality and Proprietary Information
. No provision of this Agreement shall be deemed to release any individual for any violation of any agreement or policy pertaining to confidential or proprietary information of SAP or any of its affiliated companies or of Qualtrics or any of its affiliated companies, respectively, or otherwise relieve any individual of his or her obligations under any such agreements or policies.
Section iii.No Termination of Plans or Plan Amendments
. Without limiting the generality of any other provisions of this Agreement: (i) except as expressly provided in this Agreement, nothing in this Agreement shall preclude any Qualtrics Entity, at any time after the consummation of the IPO, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Qualtrics Plan, any benefit under any plan or any trust, insurance policy or funding vehicle related to any Qualtrics Plan; and (ii) except as expressly provided in this Agreement, nothing in this Agreement shall preclude any SAP Entity, at any time prior to or after the consummation of the IPO, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any SAP Plan, any benefit under any plan or any trust, insurance policy or funding vehicle related to any SAP Plan. In addition, no provision of this Agreement is intended, or shall be interpreted, to amend any term or condition of any Qualtrics Plan, any SAP
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Plan or any other employee related plan, program or policy of any Qualtrics Entity or any SAP Entity.
Section iv.Fiduciary Matters
. SAP and Qualtrics each acknowledge that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and no party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination that to do so would violate such a fiduciary duty or standard. Each party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release the other party for any Liabilities imposed on such party pursuant to the provisions of this Agreement by the failure to satisfy any such responsibility.
Section v.Consent of Third Parties
. If any provision of this Agreement is dependent on the consent of any third party (such as a vendor) and such consent is withheld, SAP and Qualtrics shall use commercially reasonable efforts to implement the applicable provisions of this Agreement to the full extent practicable. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, SAP and Qualtrics shall negotiate in good faith to implement the provision in a mutually satisfactory manner. The phrase “commercially reasonable efforts” as used herein shall not be construed to require the incurrence of any non-routine or unreasonable expense or liability or the waiver of any right.
Section vi.Cooperation
. The Parties agree to, and to cause their affiliated companies to, cooperate and use reasonable efforts to promptly (a) comply with all requirements of this Agreement, ERISA, the Code and other laws which may be applicable to the matters addressed herein, (b) subject to applicable law, provide each other with such information reasonably requested by the other party to assist the other party in administering its plans and programs and complying with applicable law and regulations and the terms of this Agreement and (c) notwithstanding any provision of the Master Transaction Agreement to the contrary, any powers of attorney currently in effect between the Parties and necessary to facilitate the administration of payroll services set forth in this Agreement with respect to U.S. and AU Qualtrics Employees (“Existing Payroll POAs”) shall remain in effect until the date that such Existing Payroll POAs are terminated pursuant to their terms.
Section vii.Termination
. Except as otherwise provided herein or required by the provisions hereof, this Agreement shall terminate on the first date upon which the SAP Entities hold shares of Common Stock representing less than a majority of the votes entitled to be cast by all holders of Common Stock.
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Article X.
MISCELLANEOUS
a.No Agency
. Nothing in this Agreement shall constitute or be deemed to constitute a partnership or joint venture by and between the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of any other Party for any purpose whatsoever, and no Party shall have authority or power to bind any other Party or to contract in the name of, or create a liability against, any other Party in any way or for any purpose.
b.Entire Agreement
. This Agreement (including the Schedules constituting a part of this Agreement) and any other writing signed by the Parties that specifically references or is specifically related to this Agreement constitute the entire agreement among the Parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Parties with respect to the subject matter hereof.
c.Information
. Subject to applicable law and privileges, each Party covenants with and agrees to provide to the other Party all information regarding itself and transactions under this Agreement that is reasonably required by the other Party to comply with all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations.
d.Notices
. Notices, offers, requests or other communications required or permitted to be given by any Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties to the following addresses:
i.if to SAP, to:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
Attention: Matthias Faust
E-mail:
c/o SAP America, Inc.
3999 West Chester Pike
Newtown Square, PA 19073
Attention: Patricia Taylor
E-mail:
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ii.if to Qualtrics, to:
Qualtrics International Inc.
333 West River Park Drive
Provo, UT 84604
Attention: Legal Department
E-mail:
iii.with a copy to:
Shearman & Sterling LLP
1460 El Camino Real, 2nd Floor
Menlo Park, CA 94025
Attention: Daniel R. Mitz
E-mail: Daniel.Mitz@shearman.com
or to such other address as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
e.Governing Law
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all disputes, controversies or claims arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
f.Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS
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PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
g.Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.7.
h.Amendment
. This Agreement may be amended only by an instrument in writing signed on behalf of each of the Parties.
i.Counterparts
. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
j.Binding Effect; Assignment
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, that either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
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k.Severability
. If any term or other provision of this Agreement or the Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
l.Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.
m.Authority
. Each of the Parties represent to the other Party that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
n.Interpretation
. The headings contained in this Agreement, in any Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section or Schedule, such reference shall be to an Article or Section of, or a Schedule to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless
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otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
o.Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party.
p.Limitation of Liability
. IN NO EVENT SHALL ANY PARTY BE LIABLE TO ANY OTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT (A) EACH PARTY’S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN EITHER THE MASTER TRANSACTION AGREEMENT OR ANY INTERCOMPANY AGREEMENT OR (B) EITHER PARTY’S BREACH OF ITS CONFIDENTIALITY OR DATA PROTECTION OR PRIVACY OBLIGATIONS HEREUNDER OR UNDER THE MASTER TRANSACTION AGREEMENT.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Employee Matters Agreement to be duly executed as of the day and year first above written and the Parties agree that this Employee Matters Agreement shall have been entered into after the execution of the Intellectual Property Matters Agreement by the Parties hereto.
SAP SE
/s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
/s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
/s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Employee Matters Agreement]
Schedule A
List of Qualtrics-Aligned Employees,
as of February 1, 2021
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Schedule B
Approved Hires – Qualtrics-Aligned Employees
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.5
INTELLECTUAL PROPERTY MATTERS AGREEMENT
dated as of February 1, 2021
between
SAP SE
and
QUALTRICS INTERNATIONAL INC.
TABLE OF CONTENTS
PAGE
1
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INTELLECTUAL PROPERTY MATTERS AGREEMENT
This Intellectual Property Matters Agreement (this “Agreement”) is dated as of the 1st day of February, 2021, between SAP SE, a Societas Europaea registered in accordance with the corporate laws of Germany and the European Union (“SAP”), and Qualtrics International Inc., a Delaware corporation (“Qualtrics” with each of SAP and Qualtrics a “Party,” and together, the “Parties”).
RECITALS
WHEREAS, SAP is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP, through Qualtrics, is engaged in the business of providing a technology platform for experience management, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission under the Securities Act (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (the “IPO”) of its Class A common stock pursuant to the IPO Registration Statement; and
WHEREAS, the Parties intend in this Agreement to set forth the principal arrangements between SAP and Qualtrics regarding the use of certain Intellectual Property Rights as between the Parties from and after the filing of the IPO Registration Statement and the consummation of the IPO.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, for themselves and their respective successors and assigns, hereby covenant and agree as follows:
Article I.
DEFINITIONS
Section i. Definitions
.
As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Affiliate” means any entity controlling, controlled by or under common control with an entity, where “control” will mean ownership, directly or indirectly, of the shares of an entity representing more than 50% of the voting rights in such entity. Notwithstanding the
foregoing, neither Qualtrics nor any of its Subsidiaries shall be deemed Affiliates of SAP under this Agreement.
“Authorized Third Parties” means any entity that is authorized by a Party or its Affiliates to exercise any legal rights or to perform any activities with respect to a Party’s products or services, including original equipment manufacturers, integrators, distributors, resellers, customers, partners, contractors, consultants, and users with such authorization, other than an SAP Entity or a Qualtrics Entity.
“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.
“Change of Control” means the occurrence of any one or more of the following events:
(i)the sale or disposition, in one or a series of related transactions, of all or substantially all of the consolidated assets of the Qualtrics Entities, taken as a whole, to any “person” or “group” (as such terms are used for purposes of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than SAP or any of its direct or indirect wholly-owned Subsidiaries;
(ii)any “person” or “group,” other than SAP or any of its direct or indirect wholly-owned Subsidiaries, is or becomes the beneficial owner, directly or indirectly, of more than 50% of the total voting power of the outstanding voting stock of Qualtrics, excluding as a result of any merger or consolidation that does not constitute a Change of Control pursuant to clause (c);
(iii)any merger or consolidation of Qualtrics with or into any other person, unless immediately thereafter SAP or any of its direct or indirect wholly-owned Subsidiaries beneficially owns a majority of the outstanding shares of the common stock (or equivalent voting securities) of the surviving or successor entity (or the parent entity thereof); or
(iv)SAP or any of its direct or indirect wholly-owned Subsidiaries ceases to have the ability to cause the election of that number of members of the board of directors of Qualtrics who would collectively have the right to vote a majority of the aggregate number of votes represented by all of the members of the board of directors of Qualtrics.
“Distribution Agreement” means the Distribution Agreement between the Parties of even date herewith.
“Governmental Authority” shall mean any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority, or any arbitration or mediation tribunal or panel.
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“Improvement” means any modification, improvement or derivative work to or of any Intellectual Property Right.
“Intellectual Property Rights” means patents of any type, design rights, utility models or other similar invention rights, copyrights, mask work rights, trade secret rights, trademarks, trade names and service marks and any other intangible property rights, including applications and registrations for any of the foregoing, in any country, arising under statutory or common law or by contract and whether or not perfected, now existing or hereafter filed, issued, or acquired.
“Laws” means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity which becomes a Subsidiary of Qualtrics after the date hereof, and “Qualtrics Entity” means any one of the Qualtrics Entities.
“Qualtrics IP” means, collectively, the Qualtrics Patents and the Qualtrics Copyrights and Trade Secrets.
“Qualtrics Business” means any business conducted by Qualtrics, including the sale, distribution and support of all products, services and technologies of, offered by or supported by Qualtrics and the Qualtrics Entities; provided, that the Qualtrics Business shall exclude (a) the SAP Business and (b) any third-party business that Qualtrics acquires after the Term that competes with the SAP Business.
“Qualtrics Copyrights and Trade Secrets” means all copyrights and trade secrets owned or controlled by, or licensed through, Qualtrics during the Term that are used in or necessary for the SAP Business, including any and all Improvements to the foregoing. For the
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avoidance of doubt, Qualtrics Copyrights and Trade Secrets do not include patent or trademark rights.
“Qualtrics Patents” means all patents and patent applications owned or controlled by Qualtrics during the Term, including any patents that issue after the Term that claim priority from such patents and patent applications to the extent such later issued patents provide Qualtrics rights to bring any Action for infringement that occurred during the Term.
“SAP Business” means any business conducted by SAP, including the sale, distribution and support of all products, services and technologies of, offered by or supported by SAP and its Affiliates; provided, that the SAP Business shall exclude the Qualtrics Business.
“SAP Entities” means SAP and its Subsidiaries (other than the Qualtrics Entities) and any entity which becomes a Subsidiary of SAP after the date hereof, and “SAP Entity” means any one of the SAP Entities.
“Subsidiary” means, as to any Person, a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (i) beneficially owns, either directly or indirectly, more than 50% of (A) the total combined voting power of all classes of voting securities of such entity, (B) the total combined equity interests, or (C) the capital or profits interest, in the case of a partnership; or (ii) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body. For the avoidance of doubt, for purposes of this Agreement, no Qualtrics Entity shall be deemed to be a Subsidiary of any SAP Entity.
“Third Party” means a Person other than the SAP Entities and the Qualtrics Entities.
(1)Each of the following terms is defined in the Section set forth opposite such term:
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| TERM | SECTION | ||||
| AAA | Section 7.3 | ||||
| Agreement | Preamble | ||||
| Covenant Period | Section 3.1 | ||||
| Dispute | Section 7.1 | ||||
| Executive Escalation | Section 7.2 | ||||
| IPO | Recitals | ||||
| IPO Registration Statement | Recitals | ||||
| Licensee | Section 2.3 | ||||
| Licensed Products | Section 2.3 | ||||
| Notice of Arbitration | Section 7.3 | ||||
| Parties | Preamble | ||||
| Party | Preamble | ||||
| Qualtrics | Preamble | ||||
| Qualtrics IP Materials | Section 2.2 | ||||
| SAP | Preamble | ||||
| Term | Section 6.1 | ||||
(2)For the purposes of this Agreement, capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth in the Master Transaction Agreement.
Section ii. Internal References
. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement.
Article II.
Licenses
Section i. License to SAP
.
(1)Patent License. Qualtrics hereby grants, and agrees to cause any relevant entity within the Qualtrics Entities to grant, to SAP a non-exclusive, irrevocable, perpetual, sublicensable (to the extent provided in Section 2.3), assignable (solely to the extent provided in Section 2.4), royalty-free, worldwide, fully paid-up license under the Qualtrics Patents to make, use, offer to sell, sell (or otherwise offer), and import any products and services that are or were part of the SAP Business at or prior to the expiration of the Term (including natural extensions of such products or services), and the right to have Authorized Third Parties exercise such rights on SAP’s behalf pursuant to a permissible sublicense in accordance with Section 2.3.
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(2)License to Copyrights and Trade Secrets. Qualtrics hereby grants, and agrees to cause any relevant entity within the Qualtrics Entities to grant, to SAP a non-exclusive, irrevocable, perpetual, sublicensable (to the extent provided in Section 2.3), assignable (solely to the extent provided in Section 2.4), royalty-free, worldwide, fully paid-up license under the Qualtrics Copyrights and Trade Secrets to use, copy, distribute, publicly perform, publicly display, modify and prepare derivative works of any such Qualtrics Copyrights and Trade Secrets solely in connection with the operation of the SAP Business and the right to have Authorized Third Parties exercise such rights on SAP’s behalf pursuant to a permissible sublicense in accordance with Section 2.3. Notwithstanding the foregoing, the license to Qualtrics Copyrights and Trade Secrets granted hereunder (i) does not include the right to market, sell or distribute any product(s) or service(s) of the Qualtrics Business; and (ii) does not extend to the development, creation, marketing, sale or distribution of any product or service that is (A) substantially similar to product(s) or services of the Qualtrics Business and (B) constituted, contains or is derived from a material portion of the Qualtrics Copyrights and Trade Screts. SAP will take measures to protect the confidentiality, ownership and enforceability of any licensed Qualtrics Copyrights and Trade Secrets that are commensurate with the measures SAP uses to protect its own copyrights and trade secrets.
(3)Reservation of Rights. SAP acknowledges and agrees that no right, title or interest in or to the Qualtrics IP is granted by Qualtrics except as expressly set forth in this Section 2.1. SAP shall not use the Qualtrics IP beyond the scope of, or for any other purposes than as set forth in the licenses granted in this Section 2.1.
(4)Third Party Intellectual Property Rights. SAP acknowledges and agrees that the licenses granted in this Section 2.1 shall not include any Third Party Intellectual Property Rights that are licensed to Qualtrics and are not sublicenseable to SAP or which are sublicensable to SAP but for which SAP has not elected in writing to receive a sublicense. Notwithstanding the foregoing, to the extent Third Party Intellectual Property Rights are included in the licenses granted to SAP in this Section 2.1, SAP acknowledges and agrees that the rights granted to SAP with respect to the portion of Qualtrics IP consisting of Third Party Intellectual Property Rights are conditioned upon SAP’s compliance with the terms of the applicable agreements governing such Intellectual Property Rights between Qualtrics and such Third Parties (including payment of royalties).
Section ii. No Delivery
. SAP acknowledges and agrees that the licenses granted by Qualtrics hereunder do not require Qualtrics to deliver or provide to the SAP Entities any documents, technology, specifications, designs, source code, object code, training or other materials containing or embodying the Qualtrics IP (collectively, the “Qualtrics IP Materials”), and SAP hereby agrees not to request or require disclosure of a material portion of the Qualtrics IP Materials to any SAP Entity or Third Party outside the scope of joint development or cooperation efforts between SAP Entities and Qualtrics Entities.
Section iii. Sublicensing Rights
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. The grant of the licenses in this Article II includes the right to grant sublicenses within the scope of such license to: (a) any SAP Entity (each, a “Licensee”); (b) any Third Party engaged by a Licensee to provide development, support or other services relating to any SAP Business product within the scope of the Licensee’s license (“Licensed Products”) for or on behalf of the Licensee; (c) any bona fide distributor or reseller of Licensed Products, but only to the extent necessary for such distributor or reseller to distribute and resell the Licensed Products; and (d) any end users of the Licensed Products, but only to the extent necessary for such end users to use the Licensed Products.
Section iv. Assignment
. The licenses set forth in this Article II may be assigned without consent from Qualtrics by SAP to any SAP Entity or (with notice to Qualtrics where permitted by applicable law and contracts by which SAP is bound and advance notice to Qualtrics where commercially reasonable) to any direct or indirect successor to all or substantially all of the business of SAP or to any acquirer of SAP (by merger, stock purchase or other form of transaction), which successor shall thereafter be deemed substituted as the Party hereto, effective upon such assignment, subject to written acceptance of such assignment by such successor; provided, that the definition of “SAP Business” as used throughout this Agreement shall be fixed to mean SAP Business as it existed prior to such acquisition or transaction. Notwithstanding anything in this Section 2.4 to the contrary, SAP’s rights to assign or sublicense any of the rights granted in this Article II shall not be deemed or interpreted to grant SAP the right to authorize any third party to exercise rights under such licenses to the extent that such exercise would be in excess of the rights expressly granted to SAP under this Agreement.
Section v. Bankruptcy Code Designation
. The licenses granted in this Article II are licenses to “intellectual property” as the term is defined in 11 U.S.C. Section 101(35A) of the United States Code. All written agreements entered into in connection with the Parties’ performances hereunder from time to time shall be considered agreements “supplementary” to this Agreement for purposes of said Section 365(n).
Article III.
COVENANT NOT TO SUE
Section i. SAP Covenant
. SAP, on behalf of itself and the SAP Entities, covenants that, for a period of seven years following the expiration of the Term (the “Covenant Period”), neither it nor any SAP Entity will sue, threaten to sue, or cause or assist a Third Party in suing or threatening to sue (a) Qualtrics, (b) any Qualtrics Entity that is a Qualtrics Entity at the time of such expiration of the Term, (c) any Qualtrics Entity that is newly formed after the expiration of the Term as part of the natural growth of Qualtrics’ operations and governance and not as part of external mergers, acquisitions, investments or other similar activities; provided, that such newly formed Qualtrics Entity is not the assignee of pre-existing Qualtrics assets (that were not otherwise covered by this
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covenant) or third-party assets or, (d) subject to SAP’s written approval, any other Qualtrics Entity, or in each case their respective Authorized Third Parties, for any claim that the making, use, offer for sale, sale, import or distribution of any products or services that are or were part of the Qualtrics Business at or prior to the date of such expiration (including natural extensions of such products or services) infringes or violates any patent or patent application that is owned or controlled by SAP as of the date of such expiration, including any patents that issue after the Term that claim priority from such patents and patent applications to the extent such later issued patents provide SAP rights to bring any Action for infringement that occurred during the Term. For the avoidance of doubt, such covenant will (i) also prohibit such suits, threats, causation or assistance after the Covenant Period to the extent they are for damages or claims for relief that arise from or relate to actions occurring during the Covenant Period, and (ii) not extend to any Third-Party products or services.
Section ii. No Assignment
. The rights set forth in this Article III may not be assigned or transferred, whether in whole or in part and whether by merger, stock purchase or other form of transaction, without prior written consent from SAP, and any attempt by Qualtrics to assign the rights granted hereunder in violation of this Section 3.2 shall be void and of no effect. For the avoidance of doubt, upon a Change of Control, the rights set forth in this Article III will remain in full force and effect with respect to Qualtrics Entities (to the extent applicable, pursuant to the terms of this Article III), but will not be transferred to Qualtrics’ new parent (or other Affiliates of the new parent) or shareholders.
Article IV.
COVENANTS; RESPONSIBILITIES OF THE PARTIES
Section i. Sale of Intellectual Property Rights
. Should Qualtrics sell, transfer or otherwise dispose of its rights in any of the Qualtrics IP, Qualtrics shall (a) ensure that the acquirer shall execute a written undertaking acknowledging the licenses granted to SAP pursuant to this Agreement, including without limitation all licenses granted hereunder, (b) following a Change of Control, provide notice to SAP of such sale, transfer or other disposal, and (c) upon SAP’s request, promptly provide a copy of such undertaking to SAP. For the avoidance of doubt, such written undertaking shall not be required by the mere non-exclusive license of Qualtrics IP (or other similar transaction) in the ordinary course of business without transfer of ownership.
Section ii. Ownership; Responsibility for Intellectual Property Rights
. As between the Parties, each Party owns and shall continue to own their respective Intellectual Property Rights, including all Improvements thereto, regardless of whether such Improvements are created or developed by the other Party or its Affiliates. Each Party shall assign and hereby assigns all right, title and interest in and to any and all such Improvements to the other Party’s Intellectual Property Rights to such other Party. Each Party shall have the right (but not the obligation) to prepare, file, prosecute, issue, maintain, assign,
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dispose of, enforce, abandon and terminate its own Intellectual Property Rights at its sole discretion and expense.
Section iii. Notice of Sublicense Restrictions
. To the extent Qualtrics has knowledge that any Third-Party Intellectual Property Rights sublicensed by Qualtrics to SAP under this Agreement are used in connection with any products or services of the SAP Business, Qualtrics shall notify SAP in writing of such Third-Party Intellectual Property Rights, along with any restrictions, limitations and payment obligations associated therewith.
Section iv. Encumbrances
. Except as expressly provided in Section 4.5 below, neither Party will take any action that will require a license or assignment of any of the other Party’s Intellectual Property Rights, including (a) licensing or distributing any of the other Party’s products that are not authorized under the Distribution Agreement, (b) subjecting any of the other Party’s Intellectual Property Rights to any standards organization or open source license, or (c) including the other Party’s Intellectual Property Rights in any general or portfolio-wide licensed granted by such Party.
Section v. IP Cross Licenses
. Notwithstanding the provisions of Section 4.4, during the Term as set forth in Section 6.1, SAP may include Qualtrics Patents in any general or portfolio-wide cross-licenses of Intellectual Property Rights entered into between SAP and Third Parties. If SAP includes Qualtrics Patents in any such general or portfolio-wide license, SAP will, (a) give Qualtrics notice of any such inclusion and, to the extent commercially reasonable, provide Qualtrics advance notice thereof, (b) disclose the terms of such cross-license to Qualtrics where permissible by applicable law and contracts by which SAP is bound; provided, that SAP will use commercially reasonable efforts to be able to make such disclosure, and (c) ensure that, to the extent such cross-license includes the Qualtrics Patents, the benefit of such cross license extends to Qualtrics to substantially the same extent it extends to SAP Entities, and ensure that the duration of such benefit to Qualtrics is the same as the duration of the license of the Qualtrics Patents.
Section vi. Confidentiality
. The following provisions of the Master Transaction Agreement are hereby incorporated by reference, mutatis mutandis: Section 3.5.
Article V.
Representations and warranties
Section i. Mutual Warranties
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. Each Party represents and warrants that: (a) it and its Affiliates have not and will not enter into any agreements, obligations, or commitments with any third party that conflict in any way with their obligations under this Agreement; (b) it has the full right, power, and authority to execute and deliver this Agreement and to perform its terms; (c) the execution and delivery of this Agreement and the consummation of the transactions required by this Agreement will not violate or conflict with any charter provision or bylaw of a Party or any of its Affiliates; and (d) this Agreement is enforceable against each Party according to its terms.
Section ii. Disclaimer
. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT OR THE MASTER TRANSACTION AGREEMENT, NO EXPRESS OR IMPLIED WARRANTIES ARE GIVEN BY EITHER PARTY OR ITS AFFILIATES WITH RESPECT TO ANY INTELLECTUAL PROPERTY RIGHTS OR ANY OTHER MATTER OR SUBJECT ARISING OUT OF THIS AGREEMENT, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, ANY IMPLIED WARRANTY ARISING OUT OF COURSE OF DEALING OR USAGE OF TRADE, OR REGARDING THE VALIDITY, REGISTRABILITY, SCOPE, ENFORCEABILITY OR NON-INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS SUBJECT TO THIS AGREEMENT.
Article VI.
term and termination
Section i. Term
. This Agreement and the rights and licenses granted hereunder shall become effective on the Effective Date and shall continue in effect until Qualtrics undergoes a Change of Control (the “Term”).
Section ii. No Other Termination
. The licenses granted by Qualtrics and the Qualtrics Entities hereunder shall be irrevocable and perpetual (or for the life of the Qualtrics Patents) and shall not be terminable by Qualtrics or the Qualtrics Entities, and the licenses and covenants granted under this Agreement shall continue in full force and effect in accordance with the applicable terms thereof, notwithstanding any material breach of any term hereof by any Party hereto. Nothing herein will be construed as a waiver of the right of either Party to seek equitable or other relief to ensure compliance with the license restrictions set forth in this Agreement.
Section iii. Effect of Termination
. Upon expiration of the Term, the licenses granted to SAP under Section 2.1 shall continue, and the covenant made by SAP under Section 3.1 shall apply, in each case, in accordance with the terms of this Agreement.
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Section iv. Survival
. In addition to the provisions referenced in Section 6.3, the provisions of Articles I, II, III, VI, VII and VIII, and Sections 4.1 (for so long as SAP has ongoing rights under Section 2.1), 4.2, 4.6 and 5.2, shall survive any termination or expiration of this Agreement.
Article VII.
DISPUTE RESOLUTION
Section i. Notice of Dispute
. The Parties shall attempt to resolve any dispute, claim or controversy arising under, out of or in connection with this Agreement (a “Dispute”) amicably. In no event shall any Party commence any judicial or arbitral proceeding against another Party without first providing to the other Party to the Dispute written notice of the Dispute with sufficient detail, including reference to the contractual provisions at issue, to allow the other Party to evaluate the dispute and negotiate its resolution.
Section ii. Executive Escalation
. Upon receipt of a notice of Dispute as described in Section 7.1, the Dispute will be referred to the executive management representatives designated by each Party (“Executive Escalation”). Such representatives shall meet in person or by telephone (including videoconference) and in good faith attempt to settle the Dispute.
Section iii. Binding Arbitration
. If the Dispute has not been resolved by Executive Escalation for any reason (including a refusal by one or more Parties to participate in negotiations and discussions), within 120 days (which timeframe may be extended as mutually agreed by the Parties) of receipt of a notice of Dispute, either Party may refer the Dispute to final and binding arbitration administered under the commercial rules of the American Arbitration Association (“AAA”), including its expedited procedures, except as modified herein, by sending a written notice of its intent to arbitrate to the other Party, (the “Notice of Arbitration”). Notwithstanding the foregoing, the following Disputes will not be subject to arbitration but will be determined by a court of competent jurisdiction as described in Section 8.12: (a) any Dispute arising out of or based upon fraud, intentional misrepresentation or intentional breach of covenant, for which a Party may pursue all available remedies in any court of competent jurisdiction or by arbitration as provided for in Section 8.02 and (b) any determination of the applicability of any of the foregoing exceptions to the agreement to arbitrate.
Section iv. Procedure
. There shall be three arbitrators: one appointed by SAP, one appointed by Qualtrics, and one appointed by the other two arbitrators. If the Parties are unable to agree upon arbitrators within 30 days of the receipt of the Notice of Arbitration, either Party may request the
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AAA to appoint the arbitrators. The language of arbitration shall be English. The place of arbitration shall be in New York, New York, unless otherwise agreed upon by the Parties. The award rendered by the arbitrator shall be final and binding on the Parties and shall be deemed enforceable in any court having jurisdiction thereof. The arbitrator shall have only the power to award damages, injunctive relief and other remedies to the extent the same would be available in a court of Law having jurisdiction of the matter. The arbitrator shall have the power to compel such discovery or production of relevant documents as is appropriate to the purposes of the arbitration in accomplishing fair, speedy and cost-effective confidential resolution of disputes. All discovery activities shall be expressly limited to matters directly relevant to the dispute being arbitrated. The arbitrator shall have no power to award: (i) damages in excess of or in contravention of this Article VII or (ii) attorneys’ fees or costs. The arbitrator shall promptly commence the arbitral proceeding and issue a written and reasoned award as promptly as is reasonable under the circumstances, but no later than six months after his or her appointment, unless the arbitrator determines that the interest of justice requires that this period be extended. All statutes of limitation applicable to any dispute shall apply to any arbitration proceeding. Judgment upon any award rendered in arbitration may be entered in any court having jurisdiction. Each Party acknowledges that it is giving up judicial rights to a jury trial under the foregoing provision.
Section v. No Limitation on Provisional Injunctive Relief
. Nothing in this Agreement shall restrict or delay the ability of any Party to seek provisional injunctive relief from any federal or state court of competent jurisdiction located in Delaware, as set forth in Section 8.12. Without limitation to the above, each Party acknowledges that the unauthorized use or disclosure of the other Party’s confidential information or misuse of such Party’s Intellectual Property Rights could cause the non-breaching Party to incur irreparable harm and significant damages, the degree of which may be difficult to ascertain. Accordingly, each Party agrees that the non-breaching Party in such event shall have the right to seek immediate provisional relief to enjoin any unauthorized use or disclosure of its confidential information or Intellectual Property Rights, in addition to any other rights and remedies that it may have at Law or otherwise.
Article VIII.
MISCELLANEOUS
Section i. Consent
. Any consent of either Party pursuant to this Agreement shall not be effective unless it is in writing and evidenced by the signature of the General Counsel or another duly authorized signatory of such Party (or such other Person that the General Counsel has specifically authorized in writing to give such consent).
Section ii. Limitation on Liability
. IN NO EVENT SHALL A PARTY BE LIABLE TO ANY OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL
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DAMAGES IN ANY WAY RELATED TO OR ARISING FROM THIS AGREEMENT OR ANY INTELLECTUAL PROPERTY RIGHTS LICENSED OR OTHERWISE PROVIDED HEREUNDER, UNDER ANY THEORY OF LAW, INCLUDING, CONTRACT, TORT OR STRICT LIABILITY, WHETHER OR NOT THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Section iii. Interpretation
. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
Section iv. Binding Effect
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, that either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form
Section v. Counterparts
. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
Section vi. Entire Agreement
. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof.
Section vii. Severability
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. If any term or other provision of this Agreement is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
Section viii. Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section ix. Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any Third Party, including any creditor of any Person. No such Third Party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party hereto.
Section x. Notices
. Notices, offers, requests or other communications required or permitted to be given by any Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties to the following addresses:
(1)If to SAP, to:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
Attention: Jochen Scholten
E-mail:
with a copy to:
Anthony DiBartolomeo
3999 West Chester Pike
Newtown Square, PA 19073
Email:
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(2)If to Qualtrics, to:
Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
or to such other address as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section xi. Governing Law
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with, and all Disputes arising out of or relating to this Agreement shall be governed by, the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
Section xii. Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION (OTHER THAN APPEALS) IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM,
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WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section xiii. Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 8.13.
Section xiv. Amendment
. This Agreement may be amended only by an instrument in writing signed by or on behalf of each of the Parties.
Section xv. Authority
. Each of the Parties represent to the other Party that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
Section xvi. Master Transaction Agreement
. In the event there is any inconsistency between the provisions of this Agreement and the provisions of the Master Transaction Agreement, the provisions of this Agreement shall govern.
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[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their duly authorized representatives as of the date first set forth above.
SAP SE
By: /s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
By: /s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Intellectual Property Matters Agreement]
Exhibit 10.6
DISTRIBUTION AGREEMENT
dated as of February 1, 2021
between
SAP SE
and
QUALTRICS INTERNATIONAL INC.
DISTRIBUTION AGREEMENT
This Distribution Agreement (this “Agreement”) is dated as of the 1st day of February, 2021 (the “Effective Date”), between Qualtrics International Inc., a Delaware corporation (“Qualtrics”), and SAP SE, a Societas Europaea registered in accordance with the corporate laws of Germany and the European Union (“SAP”). Qualtrics and SAP are sometimes referred to herein separately as a “Party” and together as the “Parties”. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in Article X hereof.
RECITALS
WHEREAS, SAP, through Qualtrics, is engaged in the business (the “Qualtrics Business”) of providing a technology platform for organizations to collect, manage and take action on experience data, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (“IPO”) of its Class A common stock pursuant to the IPO Registration Statement; and
WHEREAS, to facilitate the Qualtrics Business, each Party distributes the other Party’s products and services;
WHEREAS, following consummation of the IPO, each of SAP and Qualtrics desire to agree to continue to distribute the other’s products and services, as more fully set forth in this Agreement (collectively, the “Go-To-Market Models”); and
WHEREAS, each Party desires to set forth in this Agreement the principal terms and conditions of the Go-To-Market Models pursuant to which, if agreed by the Parties, the SAP Entities and the Qualtrics Entities, respectively, may sell, distribute and market the other party’s solutions.
NOW, THEREFORE, in consideration of the foregoing and the terms, conditions, covenants and provisions of this Agreement, SAP and Qualtrics mutually covenant and agree as follows:
Article I.
GO-TO-MARKET MODELS
Section i.Models. During the term of this Agreement, the Parties may, from time to time, agree to sell, resell and otherwise distribute one another’s products under the Go-To-Market-Models described below:
(1)SAP Reseller. If and to the extent agreed by the Parties, SAP may resell and distribute directly or indirectly (including through any SAP partner) any Qualtrics products under Qualtrics brand, whether as separate listed products, together with SAP products in a
bundled offering, or as embedded within a single SAP product offering, in each case in accordance with the terms set forth in Appendix A; and
(2)Qualtrics OEM. If and to the extent agreed by the Parties, Qualtrics may license SAP components, and Intellectual Property Rights embodied therein, that are embedded within a single Qualtrics product offering in accordance with the terms set forth in Appendix B.
Section ii.Implementation of Models. The Parties shall agree on which Go-To-Market Models to implement in accordance with the Governance Process described in Article III and shall, in connection therewith, determine which SAP Entities and which Qualtrics Entities will provide and/or distribute products under such Go-To-Market Models.
Section iii.Additional Models. During the term of the Agreement, the Parties may from time to time agree to implement additional Go-To-Market-Models under which they may distribute one another’s products. Any such additional Go-To-Market-Models will be agreed upon in accordance with the Governance Process described in Article III.
Article II.
COMPLIANCE
Section i.Compliance with SAP Policies. Section 3.11 (Compliance Policies) of the Master Transaction Agreement is hereby incorporated herein by reference. If the Master Transaction Agreement terminates or expires, the compliance policies listed at https://portal.wdf.sap.corp/go/globalpolicies (and which SAP will otherwise make available to Qualtrics upon Qualtrics’ request), including all updates thereto, shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement. SAP will use reasonable efforts to notify Qualtrics of any such updates to the foregoing compliance policies.
Article III.
Governance PROCESS
Section i.Executive Sponsor Board.
(1)Composition. The Parties hereby establish an executive sponsor board, as of the Effective Date, to set the overall strategy and resolve disputes of the Parties under this Agreement (the “Executive Sponsor Board”). The Executive Sponsor Board will initially be comprised of individuals listed in Table 1 of Schedule 1, consisting of an equal number of members from each Party. Each Party may replace one or more of its representatives at any time upon five (5) business days prior written notice provided to the other Party, and such replacement representative should have an equivalent position and appropriate decision-making authority for the applicable Party. The Executive Sponsor Board will be co-chaired by one executive from each Party.
(2)Responsibilities. The Executive Sponsor Board’s responsibilities include:
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a.setting forth overall strategy and providing end-to-end review for the collaboration of the Parties under the Agreement;
b.resolving any escalations from the Go-To-Market Steering Committee; and
c.addressing any other matters as otherwise raised by the Parties from time to time during the term of this Agreement.
(3)Meetings and Decision Making. A quorum (consisting of at least one representative from each Party) of the Executive Sponsor Board will meet at least quarterly (or more frequently as agreed by the members of the Executive Sponsor Board), at a mutually agreeable time and place (in person or by telephone or video). The Qualtrics and SAP Program Leads may participate in such meetings as observers, without decision making right (and their absence will not affect the quorum). In addition, each Party may request, through its representative on the Go-To-Market Steering Committee (as defined below), a special Executive Sponsor Board meeting upon reasonable advance notice. Other individuals from each Party may participate in such specially called Executive Sponsor Board meetings upon invitation, but without decision making rights. Any decision of the Executive Sponsor Board, in order to be valid, must be agreed to unanimously by all then-current members, and made in writing (which may include email). Furthermore, any decision of the Executive Sponsor Board that seeks to supplement or contradict any terms or conditions in this Agreement must be memorialized in a signed written amendment to this Agreement in accordance with the terms hereof to be effective.
Section ii.Go-To-Market Steering Committee.
(1)Composition. The Parties hereby establish an operational steering and committee to resolve problems and make decisions on a regular basis to enable both Parties to achieve their business and product goals in connection with this Agreement (the “Go-To-Market Steering Committee”). The Go-To-Market Steering Committee will initially be comprised of the individuals listed in Table 2 of Schedule 1, consisting of an equal number of members from each Party. Each of Qualtrics and SAP may replace its representatives at any time upon providing five (5) business days written notice to the other, and such replacement representative should have an equivalent position title and appropriate decision-making authority for the applicable Party. Meetings of the Go-To-Market Steering Committee will be chaired in turn by one executive from Qualtrics or SAP.
(2)Responsibilities. The responsibilities of the Go-To-Market Steering include:
a.Determine whether and under which Go-To-Market-Models the Parties may sell, resell or otherwise distribute each other’s products and services, and in connection therewith, which SAP Entity(ies) and which Qualtrics Entity(ies) shall provide and distribute such products and services;
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b.Review product roadmap matters relating to the SAP reseller Go-To-Market Model described in Appendix A;
c.ensure alignment with the Product Development Committee;
d.agree on the product owner within SAP to ensure the SolEx Process Standards and Compliance Assessment (as defined in Appendix A) are followed;
e.considering and identifying technology useful or beneficial to the other party in the research, development and creation of products.
(3)Meetings and Decision Making. A quorum (consisting of at least a majority of representatives from Qualtrics and a majority of representatives from SAP) of the Go-To-Market Steering Committee will meet at least quarterly, at a mutually agreeable time and place (in person or by telephone or video). Any decision by the Go-To-Market Steering Committee, in order to be valid, must be agreed to unanimously by all then-current representative from each of Qualtrics and SAP, and must be made in writing (which may include email). If the Go-To-Market Steering fails to agree on a matter that requires its approval in accordance to this Section 3.2(c), it will immediately escalate such matter to the Executive Sponsor Board in accordance with Section 3.6.
Section iii.Product Development Committee.
(1)Composition. The Parties hereby establish a Product Development Committee to ensure engagement and alignment among key executives at SAP and Qualtrics on a regular basis for those matters involving product development (the “Product Development Committee”). Though each Party’s product related input is discussed and considered by the Product Development Committee, each Party shall have final discretion for product development decisions for their respective products and services. The initial approved Product Development Committee members are listed in Table 3 of Schedule 1, consisting of an equal number of members from each Party. The Party that appoints the initial representative may replace its representative at any time upon providing five (5) business days written notice to the other, and such replacement representative should have an equivalent position and appropriate decision-making authority for the applicable Party.
1.Responsibilities. The responsibilities of the Product Development Committee include:
i.receive and review regular and periodic updates from SAP or Qualtrics on the SAP Solutions and Qualtrics Solutions provided under this Agreement;
ii.discuss changes to the roadmap for the SAP Solutions and Qualtrics Solutions provided under this Agreement;
iii.agree on collaborative approaches of SAP and Qualtrics for identified opportunities;
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iv.review co-innovation projects and opportunities with strategic customers and partners;
v.ensure alignment with the Go-To-Market Steering Committee;
vi.review and resolve product and technology-related customer issues and escalations;
vii.training and enabling support teams with respect to support collaboration models and product updates;
viii.ensure alignment between Qualtrics and SAP on support collaboration processes, support service delivery, support portfolio, support knowledge management, support infrastructure and architecture/technology strategy;
ix.ensure alignment on support and maintenance key performance indicators, adherence thereto, and follow up;
x.perform quality checks on customer tickets;
xi.collaborating in cases of customer complaints (e.g. low CSAT scores), SLA breach penalties, critical customer situations and escalations; and
xii.agreeing on industry events for the Parties.
a.Meetings and Decision Making. The Product Development Committee will meet at least monthly during the first six (6) months from the Effective Date, and then at least quarterly thereafter for the remainder of the term of this Agreement, at a mutually agreeable time and place (in person or by telephone or video). Any decision by the Product Development Committee, in order to be valid, must be agreed to unanimously by all then-current members, and made in writing (which may include email). Furthermore, no decision of the Product Development Committee may supplement or contradict any terms or conditions in the Agreement. If the Product Development Committee fails to agree on a matter that requires its approval, such matter will be immediately escalated to the Go-To-Market Steering Committee in accordance with Section 3.6.
2.Alliance Lead. Each Party will appoint a dedicated alliance lead (an “Alliance Lead”). The initial approved Alliance Leads for each Party are listed in Table 4 of Schedule 1. The Alliance Leads will be responsible for driving the Qualtrics and SAP relationship to deliver global revenue and support the long-term growth of Qualtrics and SAP.
b.Escalations for Disputes and Deadlocks.
3.Disputes and Deadlocks. The Parties will endeavor in good faith to promptly and reasonably settle any dispute or disagreement arising out of or relating to the activities contemplated under this Agreement, including but not limited to the items set forth in this Section 3.6 (each, a “Dispute”). A Dispute may include any claim or disagreement with
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respect to activities conducted under, either Party’s obligations under, good faith exercise of its rights of, or receipt of benefits under, this Agreement. A Dispute may also include any deadlock scenario where the Go-To-Market Steering and Product Development Committee or cannot come to a resolution.
4.Escalation Process. All Disputes will be escalated in accordance with the following process:
xiii.The Product Development Committee will attempt in good faith to resolve any Dispute on matters within its responsibilities set forth in this Article III within (10) business days after receiving written notice of such Dispute describing the details of the Dispute.
xiv.If the Product Development Committee is unable to resolve a Dispute within such ten (10) business day period, or has a deadlock on matters that require its approval, it will immediately escalate in writing such Dispute to the Go-To-Market Steering Committee.
xv.If the Go-To-Market Steering Committee, after good faith efforts, is unable to resolve the Dispute within 10 (10) business days after receipt of such escalation of such Dispute by the Product Development Committee pursuant to Section 3.5(b)(ii), then the matter will be escalated the Executive Sponsor Board within five (5) business days.
xvi.The Executive Sponsor Board will attempt in good faith to resolve any Dispute escalated to it by the Go-To-Market Steering Committee.
xvii.Any Dispute that is not resolved through the Escalation Process set forth herein shall be subject to the dispute resolution process described in Section 4.4.
c.Documentation. All decisions, approvals and/or resolutions made under this Article III will be made and documented in writing, and such written documents will be (a) promptly circulated to all members of the representatives of the Executive Sponsor Board, and/or relevant committees or teams established under this Article III, as applicable, and (b) duly maintained by such designated representatives that makes such decisions, approvals and/or resolutions. For clarity, e-mail is acceptable as a written communication, except for any change that seeks to supplement or contradict any terms or conditions in the Agreement. Any decision that seeks to supplement or contradict any terms or conditions in the Agreement must be memorialized in a signed written amendment to the Agreement to be effective.
Article IV.
joint WARRANTIES AND covenants
d.Other Agreements. SAP and Qualtrics agree to execute or cause to be executed by the appropriate parties and deliver, as appropriate, such other agreements, instruments and other documents as may be necessary or desirable in order to affect the purposes of this Agreement.
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e.Warranties. Each Party represents and warrants that:
5.it has the right and authority to enter into this Agreement, to grant the licenses and other rights it purports to grant hereunder, and to carry out its obligations hereunder and thereunder;
6.the execution, delivery and performance by such Party of this Agreement as the consummation by such Party of the transactions contemplated hereby have been duly authorized by all requisite action on the part of such Party necessary to authorize the execution, delivery and performance by such Party of this Agreement or the consummation of the transactions contemplated hereby; and
7.this Agreement has been duly executed and delivered by such Party and, assuming the due authorization, execution and delivery by the other Party, this Agreement constitutes the valid and binding obligation of such Party, enforceable against such Party in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect relating to creditors rights generally and general equitable principles (whether considered in a proceeding in equity or at law).
8.No Other Warranties. EXCEPT FOR THE EXPRESS LIMITED WARRANTIES STATED ABOVE OR EXPRESSLY STATED IN THE APPENDICES TO THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTIES WHETHER EXPRESSED, IMPLIED OR STATUTORY REGARDING OR RELATING TO ANY PRODUCTS OR SERVICES FURNISHED OR PROVIDED TO THE OTHER PARTY UNDER THIS AGREEMENT. EACH PARTY SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCTS AND SERVICES PROVIDED HEREUNDER, AND WITH RESPECT TO THE USE OF THE FOREGOING.
f.Confidentiality. Confidentiality terms are set forth in Section 3.5 (Confidentiality) of the Master Transaction Agreement and incorporated by reference. If the Master Transaction Agreement terminates or expires, the provisions of Section 3.5 (Confidentiality) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
g.Dispute Resolution
. Dispute resolution terms are set forth in Section 3.9 (Dispute Resolution) of the Master Transaction Agreement and incorporated by reference. If the Master Transaction Agreement terminates or expires, the provisions of Section 3.10 (Dispute Resolution) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
h.Publicity. Publicity terms are set forth in Section 5.17 (Publicity) of the Master Transaction Agreement and incorporated by reference. If the Master Transaction
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Agreement terminates or expires, the provisions of Section 5.17 (Publicity) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
i.Center of Excellence. Within twelve (12) months of the date of this Agreement, each Party will establish a Customer center of excellence (a “Customer Center of Excellence”, or “Customer COE”). The Customer COE is designated by each Party as a central point of contact for interaction with the other Party’s support organization. As a permanent center of excellence, the Customer COE supports each Party’s efficient implementation, innovation, operation and quality of business processes and systems related to the other Party’s products and services provided under this Agreement, based on the “Run SAP” methodology provided by SAP. Each Party’s Customer COE will fulfill the following basic functions:
9.Solution GTM Planning and Strategy. Creation of comprehensive and scalable sales plays for field execution with focus on large enterprise deals that address selling the Qualtrics platform as part of the “Intelligent Enterprise.” Plan and provide enablement (readiness) including landing demonstrations, value proposition and content creation.
10.Demand Generation and Business Development. Apply, adapt and enforce global strategy, initiatives to position Qualtrics for large enterprise deals; lead the development of solution relevant “Regional Qualtrics XM Sales Plays” working with sales teams.
11.Information Management. Distribution of information (e.g. internal demonstrations, information events and marketing) about each Party’s products and services provided under this Agreement and the Customer COE within the other Party’s organization.
12.Services Planning. Regularly engagement in a service planning process with the other Party’s Customer COE. The service planning starts during the initial implementation and will then be continued regularly.
Article V.
Risk Allocation
j.Mutual Releases. Mutual releases are set forth in Section 4.1 (Release of Pre-IPO Date Claims) of the Master Transaction Agreement and incorporated herein by reference. If the Master Transaction Agreement terminates or expires, the provisions of Section 4.1 (Release of Pre-IPO Date Claims) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
k.Limitation of Liability. The limitation of liability terms set forth in Section 5.2 (Limitation of Liability) of the Master Transaction Agreement and incorporated by reference. If the Master Transaction Agreement terminates or expires, the provisions of Section 5.2 (Limitation of Liability) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
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Article VI.
TAXES
l.Go-To-Market Models. The Parties agree that the terms of the applicable Go-To-Market Models, as set forth in Appendix A and Appendix B, or as otherwise agreed to by the Parties through the Governance Process, include and shall include the applicable provisions addressing tax matters,
Article VII.
Intellectual property AND INDEMNITIES
m.Proprietary Rights. As between the Parties, all right, title and interest in and to the SAP Solutions shall remain with SAP and/or with the respective provider or author of such SAP Solutions. Without limiting the foregoing, all Intellectual Property Rights in and to the SAP Solutions, including all improvements, modifications and derivative works thereto or thereof, shall remain with SAP and/or with the respective provider or author of such SAP Solutions. As between the Parties, all right, title and interest in and to the Qualtrics Solutions shall remain with Qualtrics and/or with the respective provider or author of such Qualtrics Solutions. Without limiting the foregoing, all Intellectual Property Rights in and to the Qualtrics Solutions, including all improvements, modifications and derivative works thereto or thereof, shall remain with Qualtrics and/or with the respective provider or author of such Qualtrics Solutions.
n.Third-Party Claims.
13.Qualtrics IP Indemnity. Qualtrics shall defend, indemnify and hold harmless the SAP Entities and their Outbound Partners (collectively, the “SAP Indemnified Parties”) from and against any losses, expenses, damages (including punitive damages), liens, fines, awards, judgements, settlements, fees, penalties, and liabilities (collectively, “Losses”) arising out of, resulting from, or relating to any IP Indemnified Claims. If an IP Indemnified Claim under this Section occurs, or if Qualtrics determines that an Indemnified Claim is likely to occur, Qualtrics shall, at its option and without limiting its obligations under this Section: (i) obtain a right for the SAP Indemnified Parties to continue using such Qualtrics Solutions; (ii) modify such Qualtrics Solutions to make them non-infringing; or (iii) replace such Qualtrics Solutions with a non-infringing equivalent. If (i), (ii) or (iii) above are not reasonably available, either Party may, at its option, cease providing or distributing, as applicable, the infringing Qualtrics Solution, and Qualtrics will refund any pre-paid fees on a pro-rata basis for the allegedly infringing Qualtrics Solutions that have not been provided. Notwithstanding the foregoing, Qualtrics shall have no obligation under this Agreement for any IP Indemnified Claim resulting or arising from: (x) modifications made to the Qualtrics Solutions that were not performed or provided by or on behalf of Qualtrics; or (y) the combination, operation or use by the SAP Indemnified Parties or anyone acting on their behalf, of the Qualtrics Solutions in connection with a third-party product or service (excluding any SAP Solution) where the IP Indemnified Claim relates to such combination.
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14.SAP IP Indemnity. SAP shall defend, indemnify and hold harmless the Qualtrics Entities and their Outbound Partners (collectively, the “Qualtrics Indemnified Parties”) from and against any Losses arising out of, resulting from, or relating to any IP Indemnified Claims. If an IP Indemnified Claim under this Section occurs, or if SAP determines that an Indemnified Claim is likely to occur, SAP shall, at its option and without limiting its obligations under this Section: (i) obtain a right for the Qualtrics Indemnified Parties to continue using such SAP Solutions; (ii) modify such SAP Solutions to make them non-infringing; or (iii) replace such SAP Solutions with a non-infringing equivalent. If (i), (ii) or (iii) above are not reasonably available, either Party may, at its option, cease providing or distributing, as applicable, the infringing SAP Solution, and SAP will refund any pre-paid fees on a pro-rata basis for the allegedly infringing SAP Solutions that have not been provided. Notwithstanding the foregoing, SAP shall have no obligation under this Agreement for any IP Indemnified Claim resulting or arising from: (x) modifications made to the SAP Solutions that were not performed or provided by or on behalf of SAP; or (y) the combination, operation or use by the Qualtrics Indemnified Parties or anyone acting on their behalf, of the SAP Solutions in connection with a third-party product or service (excluding any Qualtrics Solution) where the IP Indemnified Claim relates to such combination.
15.General Indemnity. Until a Change of Control, each Party shall defend, indemnify and hold harmless the SAP Indemnified Parties or Qualtrics Indemnified Parties, as applicable, from and against any Losses arising out of, resulting from, or relating to any third-party claim or Action to the extent relating to or arising from the Qualtrics Solutions or SAP Solutions, as applicable, provided under this Agreement (“General Indemnified Claims”); provided that General Indemnified Claims shall not include IP Indemnified Claims.
16.Reductions for Insurance Proceeds and other Recoveries.
xviii.The amount that any Indemnifying Party is or may be required to provide indemnification to or on behalf of any Indemnitee pursuant to this Section 7.2 shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related Loss. The existence of a claim by an Indemnitee for monies from an insurer or against a third party in respect of any indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather, the Indemnifying Party shall make payment in full of the amount determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for Insurance Proceeds or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the Parties that no insurer or any other third party shall be (x) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (y) relieved of the responsibility to pay any claims for which it is obligated. If an Indemnitee has received the payment required by this Agreement from an Indemnifying Party in respect of any indemnifiable Loss and later receives Insurance Proceeds or other amounts in respect of such indemnifiable Loss, then such Indemnitee shall hold such Insurance Proceeds or other
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amounts in trust for the benefit of the Indemnifying Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as promptly as practicable after receipt, a sum equal to the amount of such Insurance Proceeds or other amounts received, up to the aggregate amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such indemnifiable Loss (or, if there is more than one Indemnifying Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share (based on payments received from the Indemnifying Parties) of such Insurance Proceeds).
xix.The amount that any Indemnifying Party is or may be required to provide indemnification to or on behalf of any Indemnitee pursuant to Section 7.2 shall be (x) increased to take account of any net Tax cost incurred by the Indemnitee arising from the receipt or accrual of an indemnification payment hereunder (grossed up for such increase) and (y) reduced to take account of any net Tax benefit realized by the Indemnitee arising from incurring or paying such loss or other liability. In computing the amount of any such Tax cost or Tax benefit, the Indemnitee shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any indemnification payment hereunder or incurring or paying any indemnified Loss. Any indemnification payment hereunder shall initially be made without regard to this Section 7.2(d) and shall be increased or reduced to reflect any such net Tax cost (including gross-up) or net Tax benefit only after the Indemnitee has actually realized such cost or benefit. For purposes of this Agreement, an Indemnitee shall be deemed to have “actually realized” a net Tax cost or a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such Indemnitee is increased above or reduced below, as the case may be, the amount of Taxes that such Indemnitee would be required to pay but for the receipt or accrual of the indemnification payment or the incurrence or payment of such Loss, as the case may be. The amount of any increase or reduction hereunder shall be adjusted to reflect any Final Determination with respect to the Indemnitee’s liability for Taxes, and payments between such indemnified parties to reflect such adjustment shall be made if necessary. Notwithstanding any other provision of this Agreement, to the extent permitted by applicable law, the Parties agree that any indemnity payment made hereunder shall be treated as a capital contribution by SAP America to Qualtrics or dividend distribution by Qualtrics to SAP America, as the case may be, immediately prior to the IPO Date and, accordingly, not includible in the taxable income of the recipient or deductible by the payor.
17.Procedures for Defense, Settlement and Indemnification of the Third Party Claims.
xx.If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person who is not an SAP Entity or Qualtrics Entity of any claim or of the commencement by any such Person of any Action (collectively, a “Third Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification, SAP and Qualtrics (as applicable) will ensure that such Indemnitee shall give such Indemnifying Party written notice thereof within 30 days after becoming aware
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of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the delay or failure of any Indemnitee or other Person to give notice as provided in this Section 7.2(e) shall not relieve the related Indemnifying Party of its obligations under this ARTICLE VII, except to the extent that such Indemnifying Party is actually and substantially prejudiced by such delay or failure to give notice.
xxi.An Indemnifying Party shall be entitled to participate in the defense of any Third Party Claim and, to the extent that it wishes, at its cost, risk and expense, to assume the defense thereof, with counsel reasonably satisfactory to the party seeking indemnification. After timely notice from the Indemnifying Party to the Indemnitee of such election to so assume the defense thereof, the Indemnifying Party shall not be liable to the party seeking indemnification for any legal expenses of other counsel or any other expenses subsequently incurred by Indemnitee in connection with the defense thereof, except that the Indemnifying Party shall bear the expenses of separate counsel for the Indemnitee if there exists a conflict of interest between the Indemnitee and the Indemnifying Party in connection with the defense of such Third Party Claim that would make the representation by the same counsel or the counsel selected by Indemnifying Party inappropriate or the Indemnitee would lose any defenses available to it which are different from or in addition to those available to the Indemnifying Party. The Indemnitee agrees to cooperate in all reasonable respects with the Indemnifying Party and its counsel in the defense against any Third Party Claim. The Indemnifying Party shall be entitled to compromise or settle any Third Party Claim as to which it is providing indemnification; provided, however, that such compromise or settlement shall be made only with the written consent of the Indemnitee, such consent not to be unreasonably withheld, conditioned or delayed.
xxii.If an Indemnifying Party fails to assume the defense of a Third Party Claim within thirty (30) calendar days after receipt of notice of such claim, Indemnitee will, upon delivering notice to such effect to the Indemnifying Party, have the right to undertake the defense, compromise or settlement of such Third Party Claim on behalf of and for the account of the Indemnifying Party subject to the limitations as set forth in this Section 7.2(e); provided, however, that such Third Party Claim shall not be compromised or settled without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed. If the Indemnitee assumes the defense of any Third Party Claim, it shall keep the Indemnifying Party reasonably informed of the progress of any such defense, compromise or settlement. The Indemnifying Party shall reimburse all applicable such costs and expenses of the Indemnitee in the event it is ultimately determined that the Indemnifying Party is obligated to indemnify the Indemnitee with respect to such Third Party Claim. In no event shall an Indemnifying Party be liable for any settlement effected without its consent, which consent will not be unreasonably withheld, conditioned or delayed
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Article VIII.
Termination and effects of Termination
o.Term. Unless terminated earlier in accordance with this Article VIII, the initial term of this Agreement will begin on the Effective Date and expire upon the later of: (a) five (5) years from the Effective Date or (b) a Change of Control. If the term of the initial term of this Agreement expires in accordance with subsection (a), the term of this Agreement will renew automatically for one additional three (3) year term unless either Party terminates by providing at least eighteen (18) months’ written notice to the other Party. Following such three (3) year renewal term (if any), the term of this Agreement will renew automatically for successive eighteen (18) month terms unless either Party terminates by providing at least eighteen (18) months’ written notice to the other Party.
p.Termination; Amendment. This Agreement may be terminated or amended at any time and during the term of this Agreement by mutual consent of SAP and Qualtrics, evidenced by an instrument in writing signed on behalf of each of the Parties. In the event of termination pursuant to this Section 8.2, no Party shall have any liability of any kind to the other Party.
q.Termination for Breach. Either Party may terminate this Agreement upon written notice if the other Party is in material breach of this Agreement and the breaching Party fails to cure that breach within thirty (30) days after written notice thereof from the non-breaching Party.
r.Effect of Termination. Upon any termination of this Agreement, but subject to the rights granted to each Party under Section 8.5, each Party shall immediately discontinue the provision of the other Party’s products and services to new customers. In addition, each Party may also retain the use of the other Party’s products and services provided under this Agreement solely to the extent necessary for archival purposes which are mandatory according to the applicable law.
s.Transition. Subject to payment of the applicable fees as set forth in the Appendices hereof, so long as each Party continues to comply with the terms and conditions of the Agreement in all material respect (provided that any allegation of material breach shall be subject to the terms of Section 8.3, including the cure period set forth therein), and solely to the extent necessary for each Party to fulfil their respective contractual obligations under agreements with their respective customers effective at the time of termination or expiration of this Agreement, the terms of this Agreement, including all Appendices hereto, shall survive any termination or expiration of the Agreement for a transition period equal to the longer of (a) twenty-four (24) months or (b) the period of time necessary for each Party to fulfil its contractual obligations under agreements with their respective customers effective at the time of termination or expiration of this Agreement; provided neither Party shall renew or allow their respective customers to renew any such agreement (the “Wind-Down Period”). Notwithstanding the foregoing, the Wind-Down Period shall be a period of seven (7) years solely with respect to maintenance and support services provided to each Party’s customers who are using the other Party’s products or services provided under this Agreement in connection with a bundled
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solution as of the time of termination or expiration of this Agreement. During the Wind-Down Period, each Party shall use commercially reasonable efforts to promptly transition their respective customers out of solutions that require or use the other Party’s products or services provided under this Agreement.
t.Survival. Following termination or expiration of this Agreement, those provisions which must survive to enable the Parties to exercise their rights and perform their obligations under Section 8.5 shall survive for the duration of the Wind-Down Period. In addition, provisions of Sections 4.2(d), 4.3, 4.4, 5.2, 8.5 and 8.6, and Articles VII, IX and X shall survive any termination or expiration of this Agreement.
Article IX.
miscellaneous
u.Consent. Any consent of SAP or Qualtrics pursuant to this Agreement shall not be effective unless it is in writing and evidenced by the signature of the General Counsel of SAP or General Counsel of Qualtrics (or such other person that the General Counsel of SAP or General Counsel of Qualtrics has specifically authorized in writing to give such consent).
v.Assignment. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, (a) either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form, (b) SAP may assign this Agreement to any SAP Entity without consent from or prior notice to Qualtrics, and (c) Qualtrics may assign this Agreement to any Qualtrics Entity who is a Qualtrics Entity on the Effective Date without prior notice to or consent from SAP, not to be unreasonably withheld or delayed.
w.Interpretation. The headings contained in this Agreement, in any Exhibit or Appendix hereto are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Exhibit or Appendix but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, Exhibit or Appendix, such reference shall be to an Article or Section of, or an Exhibit or Appendix to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, as permitted by Section 9.16. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
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x.Binding Effect. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement may be enforced separately by each SAP Entity and each Qualtrics Entity.
y.Counterparts. This Agreement, including the Exhibits and Appendices hereto and thereto and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
z.Entire Agreement. This Agreement and the Exhibits and Appendices referenced or attached hereto and thereto, constitute the entire agreement between the Parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof.
aa.Conflicting Agreements. In the event of conflict between this Agreement and the Master Transaction Agreement or other agreements executed in connection herewith, the provisions of the Master Transaction Agreement shall prevail, except to the extent the Master Transaction Agreement is expired or terminated, notwithstanding such expiration or termination, Sections 3.5, 3.9, 4.1, 5.2 and 5.17, will continue in effect with respect to this Agreement.
ab.Severability. If any term or other provision of this Agreement or the Exhibits or Appendices attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
ac.Force Majeure.
18.For purposes of this Section 9.9, “Force Majeure” means an event beyond the control of any Party, which by its nature could not have been foreseen by such Party, or, if it could have been foreseen, was unavoidable, and includes without limitation, acts of God, storms, floods, riots, fires, natural disasters, labor disputes or stoppages, government acts or orders, epidemics, pandemics, outbreaks of communicable disease, quarantines, acts of terrorism, sabotage, civil commotion or civil unrest, interference by civil or military authorities, acts of war (declared or undeclared) and failure of energy sources.
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19.No Party shall be under any liability for failure to fulfill any obligation under this Agreement, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure.
ad.Failure or Indulgence not Waiver; Remedies Cumulative. No failure or delay on the part of either Party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Exhibits or Appendices attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.
ae.Third Party Beneficiaries. Subject to section 9.4, none of the provisions of this Agreement shall be for the benefit of or enforceable by any third party, including any creditor of any Person. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party hereto.
af.Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the affected Party shall have the right to seek specific performance and injunctive or other equitable relief of its rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The other Party shall not oppose the granting of such relief on the basis that money damages are an adequate remedy. The Parties agree that the remedies at law for any breach or threatened breach hereof, including monetary damages, may be inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived.
ag.Notices. Notices, offers, requests or other communications required or permitted to be given by either Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties to the following addresses:
if to SAP:
SAP SE
Dietmar-Hopp-Alee 16
Germany - 69190
Attention: Jochen Scholten
E-mail:
if to Qualtrics:
Qualtrics International Inc.
333 W River Park Dr
16
Provo, UT 84604
Attention: Legal
E-mail:
or to such other address or e-mail as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
ah.Governing Law and Jurisdiction. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all Disputes arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
ai.Consent to Jurisdiction. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS, OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
aj.Waiver of Jury Trial. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT
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OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.16.
Article X.
DEFINITIONS
ak.Defined Terms. The following capitalized terms shall have the meanings given to them in this Section 10.1:
“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international governmental authority or any arbitration or mediation tribunal, other than any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation relating to taxes.
“Agreement” shall mean this Distribution Agreement, together with the Appendices hereto, as the same may be amended from time to time in accordance with the provisions hereof.
“Change of Control” means the occurrence of any one or more of the following events:
a.the sale or disposition, in one or a series of related transactions, of all or substantially all of the consolidated assets of the Qualtrics Entities, taken as a whole, to any “person” or “group” (as such terms are used for purposes of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than SAP or any of its direct or indirect wholly-owned Subsidiaries;
b.any “person” or “group,” other than SAP or any of its direct or indirect wholly-owned Subsidiaries, is or becomes the beneficial owner, directly or indirectly, of more than fifty percent (50%) of the total voting power of the outstanding voting stock of Qualtrics, excluding as a result of any merger or consolidation that does not constitute a Change of Control pursuant to clause (c);
c.any merger or consolidation of Qualtrics with or into any other person, unless immediately thereafter SAP or any of its direct or indirect wholly-owned Subsidiaries beneficially owns a majority of the outstanding shares of the common stock (or equivalent voting securities) of the surviving or successor entity (or the parent entity thereof); or
d.SAP or any of its direct or indirect wholly-owned Subsidiaries ceases to have the ability to cause the election of that number of members of the board of directors
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of Qualtrics who would collectively have the right to vote a majority of the aggregate number of votes represented by all of the members of the board of directors of Qualtrics.
“Dispute” shall have the meaning set forth in Section 3.5 of this Agreement.
“Executive Sponsor Board” shall have the meaning set forth in Section 3.1 of this Agreement.
“Final Determination” shall have the meaning set forth in the Tax Sharing Agreement.
“General Indemnified Claims” shall have the meaning set forth in Section 7.2(c).
“Governance Process” means the governance process described in Article III of this Agreement.
“Governmental Authority” means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority, or any arbitration or mediation tribunal or panel.
“Indemnifying Party” means any party which may be obligated to provide indemnification to an Indemnitee pursuant to Section 7.2 of this Agreement.
“Indemnitee” means any party which may be entitled to indemnification from an Indemnifying Party pursuant to Section 7.2 of this Agreement.
“Insurance Policies” means insurance policies pursuant to which a Person makes a true risk transfer to an insurer.
“Insurance Proceeds” means those monies: (a) received by an insured from an insurance carrier; or (b) paid by an insurance carrier on behalf of the insured; or (c) from Insurance Policies.
“Intellectual Property Rights” means patents of any type, design rights, utility models or other similar invention rights, copyrights, mask work rights, trade secret or confidentiality rights, trademarks, trade names and service marks and any other intangible property rights, including applications and registrations for any of the foregoing, in any country, arising under statutory or common law or by contract and whether or not perfected, now existing or hereafter filed, issued, or acquired.
“IP Indemnified Claim” means any third-party claim or Action alleging that the SAP Solutions or Qualtrics Solutions, as applicable, provided and delivered pursuant to this Agreement (including any Appendices hereto) infringe, violate or misappropriate any third party’s Intellectual Property Right.
“IPO” shall have the meaning set forth in the recitals to this Agreement.
“IPO Date” means the closing of the IPO.
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“IPO Registration Statement” shall have the meaning set forth in the recitals to this Agreement.
“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Loss” and “Losses” shall have the meaning set forth in Section 7.2(a).
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Party” or “Parties” shall have the meaning set forth in the preamble to this Agreement.
“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.
“Product Development Committee” shall have the meaning set forth in Section 3.3(a) of this Agreement.
“Program Lead” shall have the meaning set forth in Section 3.4 of this Agreement.
“Go-To-Market Steering Committee” shall have the meaning set forth in Section 3.2 of this Agreement.
“Outbound Partner(s)” means indirect channels and other contractual partners of the SAP Entities or the Qualtrics Entities, as applicable, that have rights to distribute or otherwise provide SAP Solutions or Qualtrics Solutions, respectively. This shall also include multi-tier indirect channels.
“Qualtrics” shall have the meaning set forth in the preamble to this Agreement.
“Qualtrics Business” shall have the meaning set forth in the recitals to this Agreement.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity which becomes a Subsidiary of Qualtrics after the date hereof, and “Qualtrics Entity” means any one of the Qualtrics Entities.
“Qualtrics Indemnified Parties” shall have the meaning set forth in Section 7.2(b).
“Qualtrics Solution(s)” shall mean any (i) software product(s) or cloud-based offering(s) of Qualtrics or the Qualtrics Entities, as well as (ii) third party product(s) or service(s) other than
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SAP Solutions, marketed and distributed to customers by Qualtrics, the Qualtrics Entities and their respective Outbound Partners.
“SAP” shall have the meaning set forth in the preamble to this Agreement.
“SAP Entities” means SAP and its Subsidiaries (other than the Qualtrics Entities) and any entity which becomes a Subsidiary of SAP after the date hereof, and “SAP Entity” means any one of the SAP Entities.
“SAP Indemnified Parties” shall have the meaning set forth in Section 7.2(a).
“SAP Solution(s)” means any (i) software product(s) or cloud-based offering(s) of SAP or the SAP Entities, as well as (ii) third party product(s) or service(s) other than Qualtrics Solutions, marketed and distributed to customers by SAP, the SAP Entities and their respective Outbound Partners.
“Subsidiary” of any Person means a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (a) beneficially owns, either directly or indirectly, more than 50% of (i) the total combined voting power of all classes of voting securities of such entity, (ii) the total combined equity interests, or (iii) the capital or profits interest, in the case of a partnership; or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body. For the avoidance of doubt, for purposes of this Agreement, Qualtrics Entities shall not be deemed to be Subsidiaries of any member of SAP Entities.
“Tax” and “Taxes” shall have the meanings set forth in the Tax Sharing Agreement.
“Tax Sharing Agreement” means that certain Tax Sharing Agreement, substantially in the form attached to the IPO Registration Statement as Exhibit 10.3
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IN WITNESS WHEREFORE, the Parties have signed this Agreement effective as of the date first set forth above.
| SAP SE | |||||||||||||||||
| By: | /s/ Luka Mucic | ||||||||||||||||
| Name: Luka Mucic | |||||||||||||||||
| Title: Chief Financial Officer | |||||||||||||||||
| By: | /s/ Jochen Scholten | ||||||||||||||||
| Name: Jochen Scholten | |||||||||||||||||
| Title: General Counsel | |||||||||||||||||
| QUALTRICS INTERNATIONAL INC. | |||||||||||||||||
| By: | /s/ Chris Beckstead | ||||||||||||||||
| Name: Chris Beckstead | |||||||||||||||||
| Title: President | |||||||||||||||||
[Signature Page to Distribution Agreement]
Appendix A
Master Reseller Agreement
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Appendix B
Outbound OEM Terms and Conditions
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Schedule 1
Governance Process Committee Members
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.7
INSURANCE MATTERS AGREEMENT
dated as of February 1, 2021
between
QUALTRICS INTERNATIONAL INC.
and
SAP SE
TABLE OF CONTENTS
PAGE
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2
FORM OF
INSURANCE MATTERS AGREEMENT
This Insurance Matters Agreement is dated as of the 1st day of February, 2021, between Qualtrics International Inc., a Delaware corporation (“Qualtrics”), and SAP SE, a European Company (Societas Europaea), registered in accordance with the corporate laws of Germany and the European Union (“SAP”). Qualtrics and SAP are sometimes referred to herein separately as a “Party” and together as the “Parties”.
RECITALS
WHEREAS, SAP is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP currently contracts with third-party insurers to maintain Insurance Coverage (as defined below) for and on behalf of the Qualtrics Entities (as defined below), among others;
WHEREAS, the Parties wish to enter into this Agreement in connection with Qualtrics’ proposed initial public offering of Class A common stock (the “IPO”) to provide for, among other matters, certain agreements with respect to third-party insurance rights and other covenants and agreements among SAP and Qualtrics to take effect upon and after the consummation of the IPO; and
WHEREAS, from and after the consummation of the IPO, Qualtrics desires for SAP to continue to maintain Insurance Coverage for and on behalf of the Qualtrics Entities under the Schedule I Insurance Policies for a period of time, as more fully set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, for themselves and their respective successors and assigns, hereby covenant and agree as follows:
Article I.
DEFINITIONS
Section i. Definitions.
(1)As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Agreement” means this Insurance Matters Agreement, including Schedule I hereto, as the same may be amended and supplemented from time to time in accordance with the provisions hereof.
“Contract” means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of such Person’s property under applicable law.
“Insurance Policies” means insurance policies pursuant to which a Person makes a true risk transfer to an insurer.
“Insurance Proceeds” means those monies: (i) received by an insured from an insurance carrier; (ii) paid by an insurance carrier on behalf of the insured; or (iii) from Insurance Policies.
“Insured Qualtrics Liability” means any Qualtrics Liability to the extent that it is covered under the terms of the Schedule I Insurance Policies.
“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Person” means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (including any department or agency thereof) or other entity.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity that becomes a Subsidiary of Qualtrics after the date hereof, and “Qualtrics Entity” means any one of the Qualtrics Entities.
“Qualtrics Liabilities” has the meaning set forth in the Master Transaction Agreement.
“SAP Entities” means SAP and its Subsidiaries (other than the Qualtrics Entities) and any entity that becomes a Subsidiary of SAP after the date hereof, and “SAP Entity” means any one of the SAP Entities.
“Schedule I” means the first Schedule attached hereto, as modified or amended from time to time, which lists the Insurance Policies to be maintained by SAP on behalf of or for the Qualtrics Entities and the allocation for calculating the payments to be paid by Qualtrics for its share of the insurance coverage under such Insurance Policies.
“Subsidiary” means, as to any Person, a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (i) beneficially
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owns, either directly or indirectly, more than 50% of (A) the total combined voting power of all classes of voting securities of such entity, (B) the total combined equity interests, or (C) the capital or profits interest, in the case of a partnership; or (ii) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body. Notwithstanding the foregoing, for purposes of this Agreement, no Qualtrics Entity shall be deemed to be a Subsidiary of any SAP Entity.
(2)Each of the following terms is defined in the Section set forth opposite such term:
| TERM | SECTION | ||||
| Action | Section 2.5(b) | ||||
| Claims | Section 2.2 | ||||
| Force Majeure | Section 5.3 | ||||
| Insurance Coverage | Section 2.1(a) | ||||
| Insurance Expenses | Section 2.1(c) | ||||
| Insurance Transition Period | Section 2.1(a) | ||||
| IPO | Recitals | ||||
| IPO Date | Section 2.1(a) | ||||
| Parties | Preamble | ||||
| Party | Preamble | ||||
| Qualtrics | Preamble | ||||
| Qualtrics Covered Parties | Section 2.1(a) | ||||
| Qualtrics Indemnified Person | Section 3.1 | ||||
| Recovery Expenses | Section 2.5 | ||||
| SAP | Preamble | ||||
| SAP Indemnified Person | Section 3.1 | ||||
| Schedule I Insurance Policies | Section 2.1(a) | ||||
| Third Party Claim | Section 3.2 | ||||
Section ii. Interpretation
. The headings contained in this Agreement and Schedule I are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in Schedule I but not otherwise defined therein shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section or Schedule, such reference shall be to an Article or Section of, or Schedule to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including Schedule I) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended,
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supplemented or otherwise modified from time to time, as permitted by Section 5.14. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
Article II.
INSURANCE MATTERS
Section i. Qualtrics Insurance Coverage During Insurance Transition Period.
(1)The Parties recognize that prior to the closing date of the IPO (the “IPO Date”), SAP has contracted with third-party insurers to maintain insurance coverage under the Insurance Policies listed in Schedule I attached hereto or any replacements thereof (as modified or amended from time to time, the “Schedule I Insurance Policies”) that cover and are for the benefit of, among others, the Qualtrics Entities and their respective directors, officers and employees (collectively, the “Qualtrics Covered Parties”). Throughout the period beginning on the IPO Date and ending upon the termination or expiration of this Agreement in accordance with Article IV hereof (the “Insurance Transition Period”), SAP shall continue to contract with third-party insurers to maintain insurance coverage (the “Insurance Coverage”) under the Schedule I Insurance Policies covering and for the benefit of the Qualtrics Covered Parties. For the avoidance of doubt, nothing in this Agreement shall restrict or prohibit Qualtrics from procuring, negotiating or purchasing its own Insurance Policies of any kind at any time, independent of SAP.
(2)SAP shall have the right to restructure, replace or amend any Insurance Coverage under any of the Schedule I Insurance Policies in its sole discretion and shall promptly notify Qualtrics of any such changes that require an update to Schedule I; provided, however, that: (i) where such changes affect Insurance Coverage applicable to Qualtrics Entities only, any restructuring, replacement or amendment of Insurance Coverage under any of the Schedule I Insurance Policies must be mutually agreed upon in advance in writing by SAP and Qualtrics; and (ii) where such changes affect one or more SAP Entities and one or more Qualtrics Entities, Qualtrics may elect to continue to remain covered under the applicable Schedule I Insurance Policies or terminate its participation in one or more such policies in accordance with Section 4.2(c).
(3)In connection with the renewal of any of the Schedule I Insurance Policies, SAP shall provide Qualtrics with copies of the policies applicable to Qualtrics and a summary of the material changes in such policies.
(4)Upon receipt of a written invoice from SAP, Qualtrics shall pay or reimburse SAP (or directly to the insurance broker or carrier, as appropriate), as the case may be, within 30 days for the Qualtrics Covered Parties’ share, as calculated based on the allocation models set forth in Schedule I, of the Insurance Coverage amounts, costs and expenses, including applicable taxes (collectively, “Insurance Expenses”) which SAP may incur in connection with the Schedule I Insurance Policies. Notwithstanding the preceding sentence, the reimbursement of Recovery Expenses (as defined below) shall be subject to Section 2.5 hereof. Such allocation
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models will calculate the Insurance Expenses and Recovery Expenses for the Qualtrics Covered Parties the same way they are calculated for other Subsidiaries of SAP. The written invoice shall set forth in reasonable detail the amount and manner of calculation of the Insurance Expenses being charged and the Schedule I Insurance Policies and period of Insurance Coverage to which such Insurance Expenses relate.
Section ii. Cooperation; Payment of Insurance Proceeds to Qualtrics; Agreement Not to Release Carriers
. Subject to the provisions of Section 3.5 (Confidentiality) of the Master Transaction Agreement, each Party shall share such information as is reasonably necessary in order to permit the other Party to manage and conduct its insurance matters in an orderly fashion. SAP, at the request of Qualtrics, shall cooperate in recovering Insurance Proceeds under the Schedule I Insurance Policies (such recoveries or potential recoveries, “Claims”) and SAP shall promptly pay any such recovered Insurance Proceeds applicable to Qualtrics Liabilities over to Qualtrics. Neither SAP nor Qualtrics, nor any of their respective Subsidiaries, shall take any action which would intentionally jeopardize or otherwise interfere with the other Party’s ability to collect any proceeds payable pursuant to any Insurance Policy. Except as otherwise contemplated by this Agreement or any other Intercompany Agreement (as defined in the Master Transaction Agreement), neither SAP nor Qualtrics (and each Party shall ensure that no Subsidiary of such Party), without the consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed), shall provide any insurance carrier with a release, or amend, modify or waive any rights under any such policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights of the other Party or any of its Subsidiaries thereunder.
Section iii. Qualtrics Insurance Coverage After the Insurance Transition Period
. After the expiration of the Insurance Transition Period, Qualtrics shall be responsible for obtaining and maintaining any Insurance Policies in respect of the Qualtrics Entities’ risk of loss and such insurance arrangements shall be separate and apart from the Schedule I Insurance Policies, except that such expiration shall not be deemed to be a relinquishment of any rights of a Qualtrics Covered Party under any Schedule I Insurance Policies written on an occurrence basis issued prior to the termination of the Insurance Transition Period.
Section iv. Deductibles and Self-Insured Obligations
. Subject to the provisions of Section 2.1(b), solely with respect to Qualtrics Liabilities and Insured Qualtrics Liabilities, Qualtrics shall reimburse SAP for all amounts or, as applicable, its pro rata share of all amounts, necessary to exhaust or otherwise satisfy all applicable self-insured retentions, amounts for fronted policies, deductibles and retrospective premium adjustments and similar amounts not covered by the Schedule I Insurance Policies to the extent that SAP is required to pay any such amounts.
Section v. Procedures with Respect to Insured Qualtrics Liabilities.
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(1)SAP and Qualtrics shall consult and cooperate with each other in determining whether to pursue insurance recoveries in respect of Claims involving both Qualtrics Liabilities and Liabilities of SAP. In respect of Claims involving solely Qualtrics Liabilities, Qualtrics shall determine in its sole discretion whether or not to pursue such Claims. Upon receipt of a reasonably detailed, itemized invoice from SAP, Qualtrics shall reimburse SAP within 30 days for all amounts reasonably incurred by SAP in pursuing Claims (“Recovery Expenses”) from the Schedule I Insurance Policies in respect of Qualtrics Liabilities that may be covered by such policies. To the extent any such Recovery Expenses relate to pursuing Claims in respect of both Qualtrics Liabilities and Liabilities of SAP under such policies, Qualtrics shall only reimburse SAP for its pro rata share of Recovery Expenses relating to the Insured Qualtrics Liabilities, which shall be as determined by the Parties in good faith.
(2)All claims, actions or proceedings (collectively, “Actions”) against insurers to pursue Insurance Coverage relating to Qualtrics Liabilities under the Schedule I Insurance Policies, and related discussions and negotiations with the insurers, shall be managed by SAP; provided, that the management and control of litigation and outside counsel with respect to any other Actions (including any underlying Actions with third parties for which insurance coverage is claimed) shall be governed by the Master Transaction Agreement or another Intercompany Agreement, as applicable. Notwithstanding the preceding sentence, (i) SAP will keep Qualtrics informed on a current and reasonable basis in good faith and seek Qualtrics’ input and assistance related to any such Actions or discussions and negotiations as appropriate, (ii) Qualtrics will cooperate and provide such input and assistance in good faith, (iii) in respect of Claims involving solely Qualtrics Liabilities, Qualtrics and SAP will work together in good faith in respect of the discussions and negotiations with insurers in order to achieve resolutions in the best interests of Qualtrics and SAP and (iv) the settlement of any Claim in relation to any Qualtrics Liability under a Schedule I Insurance Policy shall require the consent of both SAP and Qualtrics, not to be unreasonably withheld, conditioned or delayed. For the avoidance of doubt, if Qualtrics desires to pursue a Claim under a Schedule I Insurance Policy, SAP will pursue such Claim unless coverage counsel advises that Insurance Coverage under the applicable policy is not available.
Section vi. Directors and Officers Liability Insurance
. If and as deemed reasonable and appropriate by Qualtrics’ board of directors, on and after the IPO Date, Qualtrics shall have obtained and shall maintain in effect directors and officers liability insurance policies or fiduciary liability insurance policies on terms deemed reasonable and appropriate by Qualtrics’ board of directors for each past or present director of Qualtrics or any of its Subsidiaries, as well as each individual who prior to the IPO Date becomes a director or officer of Qualtrics or any of its Subsidiaries. As between Qualtrics’ directors and officers liability insurance policies and the directors and officers liability insurance policies maintained by SAP, Qualtrics’ directors and officers liability insurance policies shall be primary in regard to Liabilities related to the Qualtrics Entities and their respective businesses.
Section vii. Changes in Qualtrics Risk Profile
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. Qualtrics shall keep SAP reasonably informed on a prompt basis regarding changes in its risk exposure that would be reasonably likely to be required to be reported to an insurance carrier or that would otherwise materially affect the availability of coverage for the Qualtrics Entities under the Schedule I Insurance Policies. In the event that SAP reasonably determines that such risk exposure has materially increased, SAP shall provide prompt notice to Qualtrics with reasonable detail regarding the reasons for such determination and information about the cost and terms of continued coverage under the applicable policy. Qualtrics shall have the option to elect to either (a) bear the additional costs required in order to maintain the applicable coverage in effect, if available, or (b) terminate the Qualtrics Entities’ participation in one or more of the Schedule I Insurance Policies, as applicable, in accordance with the terms of Section 4.2(c).
Section viii. Cooperation
. SAP and Qualtrics shall reasonably cooperate with each other in all respects and shall execute any additional documents which are reasonably necessary to effectuate the provisions of this Article II.
Section ix. No Assignment or Waiver
. This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any SAP Entity or Qualtrics Entity in respect of any Insurance Policy or any other contract or policy of insurance.
Section x. Further Agreements
. The Parties acknowledge that they intend to allocate financial obligations without violating any laws regarding insurance, self-insurance or other financial responsibility. If it is determined that any action undertaken pursuant to this Agreement or any related agreement is violative of any insurance, self-insurance or related financial responsibility law or regulation, the Parties agree to work together to do whatever is necessary to comply with such law or regulation while trying to accomplish, as much as possible, the allocation of financial obligations as intended in this Agreement or any such related agreement.
Article III.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Section i. Limitation of Liability
. Each Party agrees, for itself and as agent for each of its Subsidiaries, that no SAP Entity or Qualtrics Entity or its respective directors, officers, agents and employees (each SAP Entity and each of its respective directors, officers, agents and employees, an “SAP Indemnified Person” and each Qualtrics Entity and each of its respective directors, officers, agents and employees, a “Qualtrics Indemnified Person”) shall have any Liability whatsoever as a result of this Agreement, including, with respect to SAP, as a result of the insurance policies
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and practices of SAP and its Subsidiaries as in effect at any time prior to the end of the Insurance Transition Period, the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy, or the adequacy or timeliness of any notice to any insurance carrier with respect to any Claim or otherwise, except for Liabilities resulting from such Party’s or its Subsidiaries’ (a) breach of this Agreement or any of the Schedule I Insurance Policies or (b) gross negligence, bad faith or willful misconduct in connection with this Agreement or the Schedule I Insurance Policies. In no event shall a Party or its Subsidiaries be liable for any indirect, incidental, special, punitive or consequential damages in any way related to or arising from this Agreement, under any theory of law, including contract, tort or strict liability, whether or not the other Party has been advised of the possibility of such damages.
Section ii. Indemnification by Qualtrics
. Qualtrics agrees to indemnify and hold harmless each SAP Indemnified Person from and against any damages related to, and to reimburse each SAP Indemnified Person for all reasonable expenses (including attorneys’ fees) as they are incurred in connection with, pursuing or defending any Action brought by a third party (a “Third Party Claim”) arising from the Agreement in connection with the breach by, or the gross negligence, bad faith or willful misconduct of, any Qualtrics Indemnified Person in connection with this Agreement or the Schedule I Insurance Policies; provided, however, that Qualtrics shall not be responsible for any damages incurred by any SAP Indemnified Person to the extent they result from (a) any breach of this Agreement or the Schedule I Insurance Policies on the part of any SAP Indemnified Person or (b) the gross negligence, bad faith or willful misconduct of any SAP Indemnified Person in connection with this Agreement or the Schedule I Insurance Policies.
Section iii. Indemnification by SAP
. SAP agrees to indemnify and hold harmless each Qualtrics Indemnified Person from and against any damages related to, and to reimburse each Qualtrics Indemnified Person for all reasonable expenses (including attorneys’ fees) as they are incurred in connection with, pursuing or defending any Third Party Claim arising from the Agreement in connection with the breach by, or the gross negligence, bad faith or willful misconduct of, any SAP Indemnified Person in connection with this Agreement or the Schedule I Insurance Policies; provided, however, that SAP shall not be responsible for any damages incurred by any Qualtrics Indemnified Person to the extent they result from (a) any breach of this Agreement or the Schedule I Insurance Policies on the part of any Qualtrics Indemnified Person or (b) the gross negligence, bad faith or willful misconduct of any Qualtrics Indemnified Person in connection with this Agreement or the Schedule I Insurance Policies.
Article IV.
TERM AND TERMINATION
Section i. Term
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. Except as otherwise provided in this Article IV or as otherwise agreed in writing by the Parties, this Agreement shall have a term commencing on the IPO Date and continuing indefinitely until this Agreement is validly terminated in accordance with Section 4.2.
Section ii. Termination.
(1)This Agreement shall automatically terminate without further action by either Party upon the earlier of (i) the date on which the SAP Entities hold shares of Qualtrics common stock representing less than a majority of the votes entitled to be cast by all holders of Qualtrics common stock and (ii) the date on which none of the Qualtrics Entities remains covered under any of the Schedule I Insurance Policies.
(2)SAP may terminate the Qualtrics Entities’ participation in any one or more of the Schedule I Insurance Policies on 150 days’ notice to Qualtrics in advance of the applicable renewal date of such policy or policies, effective as of the renewal date of such policy or policies.
(3)Qualtrics may terminate the Qualtrics Entities’ participation in any one or more of the Schedule I Insurance Policies on 120 days’ notice to SAP in advance of the applicable renewal date of such policy or policies, effective as of the renewal date of such policy or policies.
(4)Either Party may terminate this Agreement at any time if the other Party shall have failed to perform any of its material obligations under this Agreement, such Party shall have notified the other Party in writing of such failure, and such failure shall have continued for a period of at least 30 days after receipt by the other Party of written notice of such failure, effective as of such 30th day.
Section iii. Effect of Termination
. Other than as required by law, upon the effective date of the termination of all or any portion of this Agreement pursuant to Section 4.2, SAP shall have no further obligation to maintain the applicable Insurance Coverage under the Schedule I Insurance Policies in respect of the Qualtrics Covered Parties, and Qualtrics shall have no obligation to pay for any applicable Insurance Expenses which SAP may incur in connection with such Insurance Policies or to make any other payments hereunder. Notwithstanding the above or any such termination, (a) Qualtrics shall remain liable to SAP for (i) the Qualtrics Covered Parties’ share of those Insurance Expenses and (ii) any Recovery Expenses, in each case, which SAP has incurred in connection with Insurance Coverage for the benefit of the Qualtrics Covered Parties pursuant to the Schedule I Insurance Policies for the period prior to the effective date of such termination, (b) to the extent Insurance Coverage remains available under occurrence-based Schedule I Insurance Policies, SAP will continue to pursue applicable Claims on Qualtrics’ behalf and (c) the provisions of Article III, this Article IV and Article V shall survive any such termination indefinitely. Upon SAP’s written request following the termination of this Agreement, Qualtrics shall promptly, and shall promptly cause its Subsidiaries to, either return or destroy all copies, reproductions and summaries thereof or based thereon (hard-copy and electronic) of the Schedule I Insurance Policies in its or their possession and Qualtrics shall provide a certification
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in writing to SAP that it has fully complied with this obligation. Notwithstanding the preceding sentence, Qualtrics shall not be required to return or destroy materials applicable to a pending Claim until such matter is finally resolved, nor shall Qualtrics be required to return or destroy such materials held in archival or back-up systems in accordance with applicable policies and/or legal requirements.
Article V.
MISCELLANEOUS
Section i. Other Agreements
. In the event there is any inconsistency between the provisions of this Agreement and the respective provisions of the Master Transaction Agreement, the provisions of this Agreement shall govern.
Section ii. No Agency
. Nothing in this Agreement shall constitute or be deemed to constitute a partnership or joint venture between the Parties hereto or constitute or be deemed to constitute the appointment of any Party as the agent or employee of the other Party for any purpose whatsoever, and neither Party shall have authority or power to bind the other Party or to contract in the name of, or create a liability against, the other Party in any way or for any purpose.
Section iii. Force Majeure.
(1)For purposes of this Section 5.3, “Force Majeure” means an event beyond the control of either Party, which by its nature could not have reasonably been foreseen by such Party, which may include acts of God, storms, floods, riots, fires, sabotage, civil commotion or civil unrest, interference by civil or military authorities, acts of war (declared or undeclared), epidemics and pandemics and failure of energy sources.
(2)Continued maintenance of Insurance Coverage for the benefit of the Qualtrics Covered Parties pursuant to the Schedule I Insurance Policies may be suspended immediately to the extent caused by Force Majeure, including in the event that, due to Force Majeure, insurance coverage is no longer available at a reasonable price or on reasonable terms. The Party claiming suspension of such Insurance Coverage due to Force Majeure shall give prompt notice to the other Party of the occurrence of the event giving rise to the suspension and of its nature and anticipated duration. The Parties shall cooperate with each other to find alternative means and methods for the provision of the suspended insurance coverage.
(3)Without limiting the generality of Section 2.6, neither Party shall be under any liability for failure to fulfill any obligation under this Agreement, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure.
Section iv. Entire Agreement
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. This Agreement (including Schedule I) constitutes the entire agreement between the Parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof.
Section v. Information
. Subject to applicable law and privileges, each Party hereto covenants with and agrees to provide to the other Party all information regarding itself and transactions under this Agreement that the other Party reasonably believes is required to comply with all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations.
Section vi. Notices
. Notices, offers, requests or other communications required or permitted to be given by either Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties at the following addresses:
(1)If to SAP:
SAP SE
Dietmar-Hopp-Allee 16
69190 Walldorf, Germany
Attention: Volker Ahrens
E-mail:
(2)If to Qualtrics:
Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
or at such other address or e-mail as the Party to whom notice is given may have previously furnished to the other Party in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section vii. Governing Law
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. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all Disputes arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
Section viii. Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section ix. Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 5.9.
Section x. Binding Effect; Assignment
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. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, that either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
Section xi. Severability
. If any term or other provision of this Agreement or Schedule I is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
Section xii. Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section xiii. Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party.
Section xiv. Amendment
. This Agreement may be amended at any time during the term of this Agreement only by an instrument in writing signed on behalf of each of the Parties.
Section xv. Counterparts
. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
Section xvi. Authority
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. Each of the Parties represents to the other Party that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their duly authorized representatives.
SAP SE
By: /s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
By: /s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Insurance Matters Agreement]
SCHEDULE I
Insurance Policies and Allocation Model
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.8
STOCKHOLDERS’ AGREEMENT
dated as of February 1, 2021
among
QUALTRICS INTERNATIONAL INC.,
SAP AMERICA, INC.,
SLP QuartZ Aggregator, L.P.
and
Q II, LLC
TABLE OF CONTENTS
PAGE
1
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STOCKHOLDERS’ AGREEMENT
This Stockholders’ Agreement (this “Agreement”) is entered into as of February 1, 2021, by and among Qualtrics International Inc., a Delaware corporation (the “Company”), SAP America, Inc., a Delaware corporation (“SAP”), SLP Quartz Aggregator, L.P., a Delaware limited partnership (“Silver Lake”), and Q II, LLC, a Utah limited liability company (“Q II”). Each of the foregoing is referred to as a “Party” and together as the “Parties.” Certain capitalized terms used in this Agreement are defined in Section 1.1.
RECITALS
WHEREAS, Silver Lake and Q II have purchased shares of the Company’s Class A common stock from the Company, pursuant to that certain Stock Purchase Agreement (the “Silver Lake Stock Purchase Agreement”), dated December 23, 2020, by and between the Company and Silver Lake Partners VI DE (AIV), L.P., a Delaware limited partnership (“SLP AIV”), under which the rights, duties and obligations of SLP AIV were assigned to Silver Lake pursuant to an Assignment and Assumption Agreement, dated as of January 8, 2021, between SLP AIV and Silver Lake, and that certain Stock Purchase Agreement, dated December 8, 2020, by and between the Company and Q II and, respectively; and
WHEREAS, the Parties wish to enter into this Agreement in connection with the Company’s proposed initial public offering of Class A common stock (the “IPO”) to provide for, among other matters, certain agreements with respect to registration rights and other covenants and agreements among the Stockholders and the Company to take effect upon the consummation of the IPO.
NOW, THEREFORE, in consideration of the foregoing and the terms, conditions, covenants and provisions of this Agreement, the Parties mutually covenant and agree as follows:
Article I.
Definitions
Section i. Defined Terms
. For purposes of this Agreement, the following terms, when used herein, shall have the meanings specified or referred to in this Section 1.1:
“Affiliate” means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. As used herein, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of voting securities or other interests, by contract or otherwise. The terms “controlled” and “controlling” have meanings correlative to the foregoing.
“Affiliated Company” of any Stockholder means any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with
such Stockholder; provided, that the Company and its Subsidiaries shall not be an Affiliated Company of any Stockholder. As used herein, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.
“Agreement” has the meaning set forth in the preamble hereto.
“beneficially own” has the meaning of such term defined in Rule 13d-3 under the Exchange Act.
“Blackout Period” has the meaning set forth in Section 3.4.
“Business Day” means any day other than a Saturday, Sunday, or a day on which all banking institutions of New York City are authorized or obligated by law or executive order to close.
“Cap Amount” has the meaning set forth in Section 3.1(d).
“Class A common stock” means shares of Class A common stock, $0.0001 par value, of the Company.
“Class B common stock” means shares of Class B common stock, $0.0001 par value, of the Company.
“Company” has the meaning set forth in the preamble hereto.
“Company Board” means the Board of Directors of the Company.
“Company Capital Stock” means all classes or series of capital stock of the Company.
“Company Common Stock” means all classes or series of common stock of the Company, excluding, for the avoidance of doubt, any preferred stock and any security convertible into or exercisable or exchangeable for, with or without consideration, any common stock or preferred stock of the Company.
“Company Group” means the Company and all Subsidiaries of the Company.
“Company Notice” has the meaning set forth in Section 3.2(a).
“Company Securities” has the meaning set forth in Section 3.2(b).
“Continuously Effective” with respect to a specified registration statement, means that such registration statement shall not cease to be effective and available for transfers of Registrable Securities in accordance with the method of distribution set forth therein during the period specified in the relevant provision of this Agreement.
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“Demand Registration” has the meaning set forth in Section 3.1(a).
“Demand Registration Statement” has the meaning set forth in Section 3.1(a)
“Distribution” has the meaning set forth in the Amended and Restated Certificate of Incorporation of the Company, as in effect as of the date of this Agreement.
“Distribution Date” means the date on which a Distribution occurs.
“Effective Date” means the date a registration statement filed pursuant to ARTICLE III is declared effective by the SEC.
“Equity Securities” means (i) any common stock or preferred stock of the Company and (ii) any security convertible into or exercisable or exchangeable for, with or without consideration, any common stock or preferred stock of the Company, including any option, warrant or right to subscribe for or purchase any common stock or preferred stock of the Company.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder.
“Filing Date” has the meaning set forth in Section 3.1(a).
“Governmental Approvals” means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Entity.
“Governmental Entity” means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.
“Holders” shall mean, collectively, the Stockholders and their Affiliated Companies who from time to time own Registrable Securities, each of such entities separately is sometimes referred to herein as a “Holder.”
“IPO” has the meaning set forth in the recitals of this Agreement.
“IPO Date” means the date of effectiveness of the registration statement relating to the IPO.
“Maximum Number” when used in connection with an Underwritten Offering, shall mean the maximum number of shares of Company Capital Stock (or amount of other Registrable Securities) that the Underwriters’ Representative has informed the Company may be included as part of such offering without adversely affecting the proposed offering pricing, the timing, the distribution method or probability of success of such offering.
“Party” or “Parties” has the meaning set forth in the preamble hereto.
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“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental body or authority.
“Q II” has the meaning set forth in the preamble hereto.
“Q II Securities” has the meaning set forth in Section 3.1(d).
“Registrable Securities” means (a) the Shares, (b) any other shares of Class A common stock issued or distributed as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued or distributed as) a stock dividend, a stock split or other distribution with respect to, or in exchange for or in replacement of, the Shares, and (c) any other successor securities received by a Holder in respect of any of the foregoing (a) through (b), including, without limitation, pursuant to a merger, consolidation, corporate conversion or other extraordinary transaction; provided that in the event that any Registrable Securities (as defined without giving effect to this proviso) are being registered pursuant hereto, the Holder may include in such registration (subject to the limitations of this Agreement otherwise applicable to the inclusion of Registrable Securities) any Class A common stock or Class B common stock or securities acquired thereafter by such Holder, which shall also be deemed to be “Shares” and accordingly Registrable Securities, for purposes of such registration. As to any particular Registrable Securities held by any Holder, such securities shall cease to be Registrable Securities on the earliest to occur of: (A) a registration statement with respect to the sale by such Holder shall have been declared effective under the Securities Act and such Shares shall have been disposed of in accordance with such registration statement, (B) they shall have been sold in accordance with Rule 144, (C) so long as such Holder and its Affiliated Companies beneficially own less than 2% of the outstanding shares of Company Common Stock, such time as Rule 144 is available for the sale of all of such Holder’s Shares without volume limitation without registration, (D) they shall have been otherwise transferred by such Holder to a Person that is not an Affiliated Company of such Holder, new certificates or book entries for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any state securities or blue sky law then in effect or (E) they shall have ceased to be outstanding.
“Registration Expenses” means any and all out-of-pocket expenses incident to performance of or compliance with this Agreement, including (a) all SEC registration and filing fees, (b) all fees and expenses of complying with securities or blue sky laws (including fees and disbursements of counsel for any underwriters in connection with blue sky qualifications of the Registrable Securities) or relating to the Financial Industry Regulatory Authority (including, if applicable, the fees and expenses of any “qualified independent underwriter” as such term is defined in FINRA Rule 5121), (c) all printing, messenger and delivery expenses, (d) all fees and expenses incurred in connection with listing the Registrable Securities on a securities exchange pursuant to the requirements hereof, (e) the fees and disbursements of counsel for the Company and of its independent public accountants, (f) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus
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and amendments and supplements thereto and the mailing and delivering of copies thereof to any Holders, underwriters and dealers and all expenses incidental to delivery of the Registrable Securities, (g) the reasonable fees and disbursements of one firm of counsel, other than the Company’s counsel, selected by the Holders of Registrable Securities being registered that made a Request for a Demand Registration, (h) any fees and disbursements of underwriters customarily paid by the issuers or sellers of securities, and the reasonable fees and expenses of any special experts retained in connection with the requested registration, but excluding underwriting discounts and commissions and transfer taxes, if any, and (i) the expenses incurred in connection with making “road show” presentations and holding meetings with potential investors to facilitate the sale of Registrable Securities in an Underwritten Offering.
“registration statement” means a registration statement filed by the Company with the SEC under the Securities Act.
“Request” has the meaning set forth in Section 3.1(a).
“Rule 144” means Rule 144 (or any successor rule to similar effect) promulgated under the Securities Act.
“Rule 415 Offering” means an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated under the Securities Act.
“SAP” has the meaning set forth in the preamble hereto.
“SAP Group” means (x) prior to the Distribution Date, SAP and, for so long as SAP is a Subsidiary of SAP Parent, SAP Parent and all Subsidiaries of SAP Parent, and (y) following the Distribution Date, SAP Parent and all Subsidiaries of SAP Parent.
“SAP Parent” means SAP SE, a European Company (Societas Europaea) registered in accordance with the corporate laws of Germany and the European Union.
“SAP Securities” has the meaning set forth in Section 3.1(d).
“SEC” means the U.S. Securities and Exchange Commission.
“Secondary Indemnitors” has the meaning set forth in Section 2.02(d).
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated by the SEC thereunder.
“Selling Holder” has the meaning set forth in Section 3.6(e).
“Shares” means (i) the shares of Class A common stock held by any Holder immediately following the closing of the IPO, (ii) the shares of Class B common stock held by SAP immediately following the closing of the IPO; provided, however, that such shares of Class B common stock shall not be included in any registrations under ARTICLE III of this Agreement unless they have been distributed by SAP in a Distribution, and (iii) the shares of Class A
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common stock issued or issuable upon conversion or reclassification of the shares of Class B common stock held by SAP immediately following the closing of the IPO.
“Silver Lake” has the meaning set forth in the preamble hereto.
“Silver Lake Designee” has the meaning set forth in Section 2.2.
“Silver Lake Securities” has the meaning set forth in Section 3.1(d).
“Silver Lake Stock Purchase Agreement” has the meaning set forth in the recitals of this Agreement.
“SLP AIV” has the meaning set forth in the preamble hereto.
“Stockholder” means SAP, Silver Lake and Q II, and any other Person who acquires Shares in a transaction in which the rights under this Agreement are assigned pursuant to Section 4.9.
“Subsidiary” of any Person means a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (i) beneficially owns, either directly or indirectly, more than 50% of (A) the total combined voting power of all classes of voting securities of such entity, (B) the total combined equity interests of such entity, or (C) the capital or profits interest, in the case such entity is a partnership; or (ii) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body. For the avoidance of doubt, for purposes of this Agreement, the Company and its Subsidiaries shall not be deemed to be Subsidiaries of any member of the SAP Group.
“Underwriters’ Representative” when used in connection with an Underwritten Offering, shall mean the managing underwriter of such offering, or, in the case of a co-managed underwriting, the managing underwriters designated as the representative or representatives of the underwriters.
“Underwritten Offering” shall mean a registration in which securities of the Company are sold to one or more underwriters in a firm commitment underwriting for reoffering to the public.
Article II.
Covenants and Other Matters
Section i. Government Approvals
. To the extent that any of the transactions contemplated by this Agreement requires any Governmental Approvals, the Parties will use their reasonable best efforts to obtain any such Governmental Approvals.
Section ii. Company Board Matters
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.
(1)For so long as Silver Lake and any of its Affiliated Companies collectively beneficially own such number of shares of Company Common Stock that is more than both (a) 50% of the Shares acquired pursuant to the Silver Lake Stock Purchase Agreement and (b) 2% of the outstanding shares of Company Common Stock (the failure to own such number of shares as set forth in either clause (a) or (b) of the foregoing, a “Fall-Away Event”), SAP shall vote at any regular or special meeting of stockholders (or take any action by written consent with respect to) all Equity Securities then owned by it or its Affiliated Companies (or as to which they then have voting power) so that one member of the Company Board is a person designated by Silver Lake (the “Silver Lake Designee”). Initially, the Silver Lake Designee shall be Egon Durban and SAP shall take all actions necessary, including calling special Board and stockholders meetings to cause Egon Durban to be appointed as a member of the Company Board, effective immediately following Closing (as defined in the Silver Lake Stock Purchase Agreement). Subject to the first sentence of this Section 2.2, in the event that Egon Durban ceases to serve in such role or if any vacancy otherwise occurs on the Company Board with respect to the Silver Lake Designee, SAP agrees to vote at any regular or special meeting of stockholders, take any action by written consent or otherwise take all actions within their power, in each case with respect to all Equity Securities then owned by it or its Affiliated Companies (or as to which they then have voting power), to fill the vacancy with respect to the Silver Lake Designee with another person designated by Silver Lake; provided, that Silver Lake must consult with the Company prior to naming such designee as the Silver Lake Designee and such designee must (i) be a managing director or other senior-level officer of Silver Lake and (ii) meet all independence and other requirements regarding service as a director of the Company under applicable law and stock exchange rules. For so long as Silver Lake is entitled to designate the Silver Lake Designee pursuant to this Section 2.2, SAP agrees to vote (and to act by written consent with respect to) all Equity Securities then owned by it or its Affiliated Companies (or as to which they then have voting power) to remove the individual serving as the Silver Lake Designee as a director of the Company, with or without cause, only upon the written request of Silver Lake. Except as otherwise required by applicable law, SAP shall not take any action to cause, directly or indirectly, the removal of the Silver Lake Designee, unless it is directed to do so by Silver Lake.
(2)The Company Board shall take all action (including calling special Board and stockholders meetings) necessary to cause Egon Durban, as the initial Silver Lake Designee, to be appointed as a member of the Company Board, effective as of the Closing. Following the Closing and until the occurrence of the Fall-Away Event, the Company shall take all action (including calling special Board and stockholders meetings) necessary to (i) nominate the Silver Lake Designee to be elected at each annual meeting of the Company’s stockholders automatically, without any action by Silver Lake or requirement for Silver Lake to comply with the notice requirements and procedures in Section 2.8 of the Company’s bylaws, (ii) recommend that holders of Company Capital Stock vote to elect the Silver Lake Designee, (iii) use its reasonable efforts to cause the election to the Company Board of a slate of directors that includes the Silver Lake Designee and (iv) in the event of the death, disability, retirement, resignation or removal (with or without cause) of the individual then serving as the Silver Lake Designee, replace such individual with another individual designated in writing by Silver Lake to be the
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new Silver Lake Designee (subject to the proviso in Section 2.2(a)) in order to fill any vacancy created by such death, disability, retirement, resignation or removal. If the Silver Lake Designee is not elected to serve as a director of the Company Board, the Company Board shall take all lawful actions to appoint the Silver Lake Designee as a director of the Company Board, including increasing the size of the Company Board and appointing the Silver Lake Designee to fill the vacancy created by such increase.
(c) For so long as the Silver Lake Designee is serving or participating on the Company Board, (i) the Company shall not implement or maintain any trading policy, equity ownership guidelines (including with respect to the use of Rule 10b5-1 plans and preclearance or notification to the Company of any trades in the Company’s securities) or similar guideline or policy with respect to the trading of securities of the Company that applies to any Stockholder in its capacity as such or any Stockholder’s Affiliates (including a policy that limits, prohibits, or restricts any Stockholder or its Affiliates from entering into any hedging or derivative arrangements), in each case other than any director designee of such Stockholder (including in respect of Silver Lake, the Silver Lake Designee) solely in his or her individual capacity, (ii) any share ownership requirement for the Silver Lake Designee serving on the Company Board will be deemed satisfied by the securities owned by the Silver Lake and/or its Affiliates and under no circumstances shall any of such policies, procedures, processes, codes, rules, standards and guidelines impose any restrictions on the transfers of securities by Silver Lake or its Affiliates and (iii) under no circumstances shall any policy, procedure, code, rule, standard or guideline applicable to the Company Board be violated by the Silver Lake Designee (x) accepting an invitation to serve on another board of directors of a company whose principal lines(s) of business do not compete with the principal line(s) of business of the Company or failing to notify an officer or director of the Company prior to doing so, (y) receiving compensation from Silver Lake or its Affiliates, or (z) failing to offer his or her resignation from the Company Board except as otherwise expressly provided in this Agreement, and, in each case of (i), (ii) and (iii), it is agreed that any such policies in effect from time to time that purport to impose terms inconsistent with this Section 2.02(c) shall not apply to the extent inconsistent with this Section 2.2(c).
(d) The Company shall indemnify the Silver Lake Designee and provide the Silver Lake Designee with director and officer insurance to the same extent as it indemnifies and provides such insurance to other non-executive members of the Company Board. The Company hereby acknowledges that the Silver Lake Designee may have certain rights to indemnification, advancement of expenses and/or insurance provided by Silver Lake or its Affiliates (collectively, the “Secondary Indemnitors”). The Company hereby agrees and acknowledges that (i) it is the indemnitor of first resort with respect to the Silver Lake Designee (i.e., its obligations to the Silver Lake Designee are primary and any obligation of the Secondary Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by the Silver Lake Designee are secondary), (ii) it will be required to advance the full amount of expenses incurred by the Silver Lake Designee and will be liable for the full amount of all expenses and other liabilities to the extent legally permitted and as required by the Company’s Amended and Restated Certificate of Incorporation or bylaws of the Company (or any agreement between the Company and the Silver Lake Designee), without regard to any rights the Silver Lake Designee
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may have against the Secondary Indemnitors and (iii) it irrevocably waives, relinquishes and releases the Secondary Indemnitors from any and all claims against the Secondary Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Secondary Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company will affect the foregoing and the Secondary Indemnitors will have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of the Silver Lake Designee against the Company.
(e) For the avoidance of doubt, without limiting any other rights of Silver Lake or its Affiliates under this Agreement, the Silver Lake Designee shall be entitled to receive expense reimbursement according to the Company’s standard policies with respect to service on the Company Board or any committee thereof.
Section iii. Section 16 Matters
. If the Company becomes a party to a consolidation, merger or other similar transaction, or if the Company reasonably believes there is otherwise any event or circumstance that may result in Silver Lake, its Affiliates and/or the Silver Lake Designee being deemed to have made a disposition or acquisition of equity securities of the Company or derivatives thereof for purposes of Section 16 of the Exchange Act (including any purchases of additional shares of Class A common stock by Silver Lake or any of its Affiliates, one or more private placements or otherwise), and if the Silver Lake Designee is serving or participating on the Company Board at such time or has served on the Company Board during the preceding six months, then upon request of Silver Lake or the Silver Lake Designee, (i) the Company Board or a committee composed solely of two or more “non-employee directors” as defined in Rule 16b-3 of the Exchange Act will pre-approve such acquisition or disposition of equity securities of the Company or derivatives thereof for the express purpose of exempting the interests of Silver Lake, its Affiliates or the Silver Lake Designee (in each case, to the extent such persons may be deemed to be a director or “directors by deputization”) in such transaction from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 thereunder to the extent applicable and (ii) if the transaction involves (A) a merger or consolidation to which the Company is a party and the Company Capital Stock is, in whole or in part, converted into or exchanged for equity securities of a different issuer, (B) a potential acquisition or deemed acquisition, or disposition or deemed disposition, by Silver Lake, its Affiliates or the Silver Lake Designee of equity securities of such other issuer or derivatives thereof and (C) an Affiliate or other designee of Silver Lake or its Affiliated Companies will serve on the board of directors (or its equivalent) of such other issuer, then the Company shall require that such other issuer pre-approve any such acquisitions of equity securities or derivatives thereof for the express purpose of exempting the interests of Silver Lake, its Affiliates and the Silver Lake Designee (in each case, to the extent such persons may be deemed to be a director or “directors by deputization” of such other issuer) in such transactions from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 thereunder to the extent applicable.
Section iv. Corporate Waiver
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. To the fullest extent permitted by the Delaware General Corporation Law (the “DGCL”) and subject to applicable legal requirements and any express agreement that may from time to time be in effect, the Company agrees that the Silver Lake Designee, Silver Lake and its Affiliates or any portfolio company thereof (collectively, “Covered Persons”) may, and shall have no duty not to, (i) invest in, carry on and conduct, whether directly, or as a partner in any partnership, or as a joint venturer in any joint venture, or as an officer, director, stockholder, equityholder or investor in any person, or as a participant in any syndicate, pool, trust or association, any business of any kind, nature or description, whether or not such business is competitive with or in the same or similar lines of business as the Company or any of its Subsidiaries, (ii) do business with any client, customer, vendor or lessor of any of the Company or its Affiliates, and/or (iii) make investments in any kind of property in which the Company may make investments; provided, however, that no Covered Person may invest or make investments in any business on the basis of confidential information it has received from the Company or its Affiliates. To the fullest extent permitted by the DGCL, the Company renounces any interest or expectancy to participate in any business or investments of any Covered Person as currently conducted or as may be conducted in the future, and waives any claim against a Covered Person and shall indemnify a Covered Person against any claim that such Covered Person is liable to the Company or its stockholders for breach of any fiduciary duty solely by reason of such person’s participation in any such business or investment. Except as set forth below, the Company agrees that in the event that a Covered Person acquires knowledge of a potential transaction or matter which may constitute a corporate opportunity for both (x) the Covered Person and (y) the Company or its Subsidiaries, the Covered Person shall not have any duty to offer or communicate information regarding such corporate opportunity to the Company or its Subsidiaries. To the fullest extent permitted by the DGCL, the Company hereby renounces any interest or expectancy in any potential transaction or matter of which the Covered Person acquires knowledge and waives any claim against each Covered Person and shall indemnify a Covered Person to the extent permitted by the DGCL against any claim, that such Covered Person is liable to the Company or its stockholders for breach of any fiduciary duty solely by reason of the fact that such Covered Person (A) pursues or acquires any corporate opportunity for its own account or the account of any Affiliate or other person, (B) directs, recommends, sells, assigns or otherwise transfers such corporate opportunity to another person or (C) does not communicate information regarding such corporate opportunity to the Company; provided, that, in each such case, any corporate opportunity which is expressly offered to a Covered Person in his or her capacity as a member of the Company Board shall belong to the Company. The Company shall pay in advance any reasonable out-of-pocket expenses incurred in defense of such claim as provided in this provision, except to the extent that it is determined by a final, non-appealable order of a Delaware court having competent jurisdiction (or any other judgment which is not appealed in the applicable time) that (i) a Covered Person has breached this Section 2.4 or (ii) the Silver Lake Designee has breached its fiduciary duties to the Company, in which case any such advanced expenses shall be promptly reimbursed to the Company.
Article III.
Registration Rights
Section i. Demand Registration.
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(1)(i) SAP and its Affiliated Companies shall have the right, after the 180 day period following the IPO Date (or such other period as may be requested by the Company or an underwriter to facilitate compliance with applicable FINRA rules, or any successor provisions or amendments thereto), and (ii) Silver Lake and its Affiliated Companies shall have the right, after the two year period following the IPO Date, to request in writing (a “Request”) (which request shall specify the Registrable Securities intended to be disposed of by such requesting Holder, and the intended method of distribution thereof, including in a Rule 415 Offering, if the Company is then eligible to register such Registrable Securities on Form S-3 (or a successor form) for such offering) that the Company register such portion of the requesting Holder’s Registrable Securities as shall be specified in the Request (a “Demand Registration”) by filing with the SEC, as soon as practicable (the “Filing Date”) after the receipt of such a Request by the Company, a registration statement (a “Demand Registration Statement”) covering such Registrable Securities, and the Company shall use its reasonable best efforts to have such Demand Registration Statement become effective with the SEC concurrently with filing or as soon as practicable thereafter, and, subject to Section 3.4, to keep such Demand Registration Statement Continuously Effective for a period of at least 24 months, in the case of a Rule 415 Offering, or, in all other cases, for a period of at least 180 days following the date on which such Demand Registration Statement is declared effective (or for such shorter period which will terminate when all of the Registrable Securities covered by such Demand Registration Statement shall have been sold pursuant thereto) (provided that such period shall be extended for a period of time equal to the period the Holder of Registrable Securities refrains from selling any securities included in such registration statement at the request of the Company or the Underwriters’ Representative pursuant to the provisions of this Agreement), including, if necessary, by filing with the SEC a post-effective amendment or a supplement to the Demand Registration Statement or the related prospectus or any document incorporated therein by reference or by filing any other required document or otherwise supplementing or amending the Demand Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Demand Registration Statement or by the Securities Act, the Exchange Act, any state securities or blue sky laws, or any rules and regulations thereunder; provided, that such period during which the Demand Registration Statement shall remain Continuously Effective shall, in the case of an Underwritten Offering, and subject to Section 3.4, be extended for such period (if any) as the underwriters shall reasonably require, including to satisfy, in the judgment of counsel to the underwriters, any prospectus delivery requirements imposed by applicable law.
(2)The Company shall not be obligated to effect more than two Demand Registrations in any calendar year for Silver Lake or more than one Demand Registration for SAP in any calendar quarter. For purposes of the preceding sentence, a Demand Registration shall not be deemed to have been effected for SAP and its Affiliated Companies or Silver Lake and its Affiliated Companies (and, therefore, not requested for purposes of paragraph (a) above), (i) unless a Demand Registration Statement with respect thereto has become effective, (ii) if after such Demand Registration Statement has become effective, the offer, sale or distribution of Registrable Securities thereunder is prevented by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason not attributable to SAP or its Affiliated Companies, or to Silver Lake or its Affiliated Companies, as the case may
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be, and such effect is not thereafter eliminated or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with any offering pursuant to such registration are not satisfied or waived other than by reason of a failure on the part of SAP or its Affiliated Companies, or Silver Lake and its Affiliated Companies, as the case may be. If the Company shall have complied with its obligations under ARTICLE III, a right to a Demand Registration pursuant to this Section 3.1 shall be deemed to have been satisfied upon the earlier of (i) the date as of which all of the Registrable Securities included therein shall have been sold to the underwriters or distributed pursuant to the Demand Registration Statement and (ii) the date as of which such Demand Registration Statement shall have been effective for an aggregate period of at least 24 months, in the case of a Rule 415 Offering, or, in all other cases, for a period of at least 180 days following the effectiveness of such Demand Registration Statement; provided that such period shall be extended for a period of time equal to the period the Holder of Registrable Securities refrains from selling any securities included in such registration statement at the request of the Company or the Underwriters’ Representative pursuant to the provisions of this Agreement.
(3)Any request made pursuant to this Section 3.1 shall be addressed to the attention of the General Counsel of the Company and shall specify the number of Registrable Securities to be registered (which shall be not less than 0.5% of the outstanding shares of Company Common Stock).
(4)Without the prior written consent of SAP, the Company may not include in a Demand Registration pursuant to this Section 3.1 shares of Company Capital Stock for the account of the Company or any Subsidiary of the Company, but, if and to the extent required by a contractual obligation (including Section 3.2), may, subject to compliance with Section 3.1(e), include shares of Company Capital Stock for the account of any other Person who holds shares of Company Capital Stock entitled to be included therein (including any other Holder entitled to be included therein pursuant to Section 3.2); provided, that if the Underwriters’ Representative of any offering described in this Section 3.1 shall have informed the Company and/or the Holder making the Request in writing that in its judgment there is a Maximum Number of shares of Company Capital Stock that SAP and its Affiliated Companies, Silver Lake and its Affiliated Companies, all other Holders and any other Persons entitled to participate in such Demand Registration may include in such offering, then the Company shall include in such Demand Registration: (i) first, (A) the number of Registrable Securities held by SAP and its Affiliated Companies (“SAP Securities”), if any, up to 1% of the aggregate outstanding Company Capital Stock, that are requested to be included in such registration, (B) the number of Registrable Securities held by Silver Lake and its Affiliated Companies (“Silver Lake Securities”), if any, up to 1% of the aggregate outstanding Company Capital Stock, that are requested to be included in such registration and (C) the number of Registrable Securities held by Q II and its Affiliated Companies (“Q II Securities”), if any, up to 0.25% of the aggregate outstanding Company Capital Stock, that are requested to be included in such registration pursuant to Section 3.2 (clauses (A)-(C) collectively, the “Cap Amount”), except that if the number of shares of Company Capital Stock that may be included in such registration is less than the Cap Amount, the reduction shall be applied pro rata among the SAP Securities, Silver Lake Securities and Q II Securities based on each of their pro rata share of the Cap Amount (i.e., 44.44% SAP
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Securities/44.44% Silver Lake Securities/11.12% Q II Securities); (ii) second, up to the full number of SAP Securities in excess of the Cap Amount, if any, that are requested to be included in such registration; (iii) third, up to the full number of Silver Lake Securities and Q II Securities in excess of the Cap Amount, if any, that are requested to be included in such registration on a pro rata basis based on the number of shares of Company Capital Stock held by such Holders; (iv) fourth, such number of shares of Company Capital Stock duly requested to be included in such registration by other Persons, pro rata on the basis of the amount of such other shares of Company Capital Stock requested to be included or such other allocation method determined by the Company; and (v) fifth, securities the Company proposes to sell.
(5)No Holder may participate in any Underwritten Offering under this Section 3.1 and no other Person shall be permitted to participate in any such offering pursuant to this Section 3.1 unless it completes and executes all customary questionnaires, powers of attorney, custody agreements, underwriting agreements and other customary documents required under the customary terms of such underwriting arrangements. In connection with any Underwritten Offering under Section 3.1 hereof, each participating Holder and the Company and, except in the case of a Rule 415 Offering hereof, each other Selling Holder shall be a party to the underwriting agreement with the underwriters and may be required to make certain customary representations and warranties and provide certain customary indemnifications for the benefit of the underwriters.
(6)Any Holder having requested the Company to include any or all of its Registrable Securities in a registration statement under the Securities Act pursuant to Section 3.1 or Section 3.2 shall have the right to withdraw any such notice or direction with respect to any or all of the Registrable Securities designated by it for registration by giving written notice to such effect to the Company prior to the effective date of such registration statement. In the event of any such withdrawal, the Company shall not include such Registrable Securities in the applicable registration and such Registrable Securities shall continue to be Registrable Securities for all purposes of this Agreement (subject to the other terms and conditions of this Agreement). No such withdrawal shall affect the obligations of the Company with respect to the Registrable Securities not so withdrawn if any other Holder has requested pursuant to Section 3.1 or Section 3.2 that Registrable Securities be included in such registration; provided, however, that in the case of a Demand Registration, if such withdrawal shall reduce the number of Registrable Securities sought to be included in such registration below 0.5% of the outstanding shares of Company Common Stock, then the Company shall as promptly as practicable give each Holder seeking to register Registrable Securities notice to such effect and, within ten days following the mailing of such notice, such Holders still seeking registration shall, by written notice to the Company, elect to register additional Registrable Securities to satisfy the foregoing minimum offering size or elect that such registration statement not be filed or, if theretofore filed, be withdrawn. During such ten day period, the Company shall not file such registration statement if not theretofore filed or, if such registration statement has been theretofore filed, the Company shall not seek, and shall use reasonable best efforts to prevent, the effectiveness thereof.
Section ii. Piggyback Registration
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.
(1)In the event that the Company at any time after (x) in the case of Silver Lake, two years after the IPO Date, and (y) in the case of Q II, 18 months after the IPO Date, proposes to register any Equity Securities under the Securities Act, either in connection with a primary offering for cash for the account of the Company (a “Primary Offering”), a secondary offering or a combined primary and secondary offering, the Company will each time it intends to effect such a registration, give written notice (a “Company Notice”) to all Holders of Registrable Securities who are no longer subject to contractual transfer restrictions with the Company in respect of such Registrable Securities at least ten Business Days prior to the initial filing of a registration statement with the SEC pertaining thereto, informing such Holders of (i) its intent to file such registration statement and whether such registration is for a Primary Offering, a secondary offering or a combined primary and secondary offering, (ii) the intended method of distribution, (iii) the number of each class of Equity Securities proposed to be registered, (iv) the proposed date of filing of such registration statement, (v) the proposed managing underwriter(s) (if any), (vi) a good faith estimate by the Company of the proposed minimum offering price of each class of Equity Securities, in each case of (ii) to (vi), to the extent then known, and (vii) the Holders’ right to request the registration of the Registrable Securities held by the Holders. Upon the written request of the Holders made within seven Business Days after any such Company Notice is given (which request shall specify the number of Registrable Securities intended to be disposed of by such Holder and the intended distribution thereof; provided, that if (i) the Registrable Securities intended to be disposed of are Class A common stock and (ii) the applicable registration is intended to effect an offering of Class A common stock for cash for the account of the Company, such request need specify only the Registrable Securities intended to be disposed of by such Holder), unless SAP shall have responded to such Company Notice within such seven Business Day period Requesting a Demand Registration in priority to the registration described in such Company Notice (in which case, the Company shall first effect such Demand Registration in accordance with Section 3.1 and the cut-back provisions in Section 3.1(d) shall apply), the Company will use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holders to the extent required to permit the disposition (in accordance with the intended methods of distribution thereof or, in the case of a registration which is intended to effect a primary offering for cash for the account of the Company, in accordance with the Company’s intended method of distribution) of the Registrable Securities so requested to be registered, including, if necessary, by filing with the SEC a post-effective amendment or a supplement to the registration statement filed by the Company or the related prospectus or any document incorporated therein by reference or by filing any other required document or otherwise supplementing or amending the registration statement filed by the Company, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such registration statement or by the Securities Act, any state securities or blue sky laws, or any rules and regulations thereunder; provided further, that if, at any time after giving written notice of its intention to register any Equity Securities in a Primary Offering and prior to the Effective Date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay such registration of the Equity Securities, the Company shall give written notice of such determination to each Holder of Registrable Securities
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and, thereupon, (i) in the case of a determination not to register, the Company shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses incurred in connection therewith or from the Company’s obligations with respect to any subsequent registration) and (ii) in the case of a determination to delay such registration, the Company shall be permitted to delay registration of any Registrable Securities requested to be included in such registration statement for the same period as the delay in registering such Equity Securities; provided that the Holders of Registrable Securities may continue the registration as a Demand Registration under Section 3.1.
(2)If, in connection with a Primary Offering pursuant to this Section 3.2 that is initiated by the Company, the Underwriters’ Representative of the offering registered thereon shall inform the Company in writing that in its judgment there is a Maximum Number of shares of Company Capital Stock that may be included therein, the Company shall include in such registration: (i) first, if such registration statement relates to an offering initiated by the Company of Equity Securities being offered for the account of the Company, the full number of Equity Securities that the Company proposes to offer for its own account (“Company Securities”); (ii) second, SAP Securities, Silver Lake Securities and Q II Securities up to the Cap Amount, except that if the number of shares of Company Capital Stock that may be included in such registration is less than the Cap Amount, the reduction shall be applied pro rata among the SAP Securities, Silver Lake Securities and Q II Securities based on each of their pro rata share of the Cap Amount (i.e., 44.44% SAP Securities/44.44% Silver Lake Securities/11.12% Q II Securities); (iii) third, up to the full number of SAP Securities in excess of the Cap Amount, if any, that are requested to be included in such registration; (iv) fourth, up to the full number of Silver Lake Securities and Q II Securities in excess of the Cap Amount, if any, that are requested to be included in such registration on a pro rata basis based on the total number of shares of Company Capital Stock held by such Holder; (v) and fifth, such number of shares of Company Capital Stock duly requested to be included in such registration by other Persons, pro rata on the basis of the amount of such other shares of Company Capital Stock requested to be included or such other allocation method determined by the Company. If, in connection with a secondary offering or a combined primary and secondary offering pursuant to this Section 3.2, the Underwriters’ Representative of the offering registered thereon shall inform the Company and/or the Holder in writing that in its judgment there is a Maximum Number of shares of Company Capital Stock that may be included therein, the cutback provisions in Section 3.1(d) shall apply.
(3)No Holder may participate in any Underwritten Offering under this Section 3.2 and no other Person shall be permitted to participate in any such offering pursuant to this Section 3.2 unless it completes and executes all customary questionnaires, powers of attorney, custody agreements, underwriting agreements and other customary documents required under the customary terms of such underwriting arrangements. In connection with any Underwritten Offering under this Section 3.2, each participating Holder and the Company and each such other Person shall be a party to the underwriting agreement with the underwriters of such offering and may be required to make certain customary representations and warranties and provide certain customary indemnifications for the benefit of the underwriters.
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(4)The Company shall not be required to effect any registration of Registrable Securities under this Section 3.2 incidental to the registration of any of its securities in connection with the Company’s issuance of registered shares of Company Capital Stock in mergers, acquisitions, reorganizations, exchange offers, subscription offers, dividend reinvestment plans or stock option or other executive or employee benefit or compensation plans.
(5)The registration rights granted pursuant to the provisions of this Section 3.2 shall be in addition to the registration rights granted pursuant to Section 3.1. No registration of Registrable Securities effected under this Section 3.2 shall relieve the Company of its obligation to effect a Demand Registration of Registrable Securities pursuant to Section 3.1.
Section iii. Expenses
. Except as provided herein, the Company shall pay all Registration Expenses in connection with all registrations of Registrable Securities effected hereunder. Notwithstanding the foregoing, each Holder of Registrable Securities and the Company shall be responsible for its own internal administrative and similar costs and expenses (including salaries of personnel), which shall not constitute Registration Expenses.
Section iv. Blackout Period
. Notwithstanding anything to the contrary contained in this Agreement, the Company may delay the filing or effectiveness of a Registration Statement or require the Holder to suspend the use of the prospectus for sale of Registrable Securities under an effective Registration Statement if the Company Board reasonably determines in good faith that the registration and distribution of Registrable Securities would materially interfere with the Company’s ability to effect a pending material financing, merger, acquisition, consolidation, recapitalization, corporate reorganization or any other material corporate development involving the Company or any of its Subsidiaries or would require premature disclosure thereof or of other material non-public information that would be detrimental to the Company, including a primary offering by the Company or a secondary offering with respect to SAP Securities contemplated to occur within 45 days of the receipt of a Request pursuant to Section 3.1 (in which case such Holder shall have the rights afforded to it (if any) under Section 3.2) (a “Blackout Period”). The Company shall (a) promptly give SAP or Silver Lake, as applicable, written notice of such determination, (b) if requested by SAP or Silver Lake, as applicable, and to the extent such action would not violate applicable law, promptly deliver to SAP or Silver Lake, as applicable, a general statement of the reasons for such postponement or restriction on use and to the extent practicable an approximation of the anticipated delay, and (c) promptly give SAP or Silver Lake, as applicable, written notice at the conclusion of such Blackout Period. Notwithstanding the foregoing, (i) the Company will not invoke more than two Blackout Periods in any 12 month period and any Blackout Period shall not be in excess of 45 days and (ii) in the event that a Holder exercises a demand right pursuant to Section 3.1 and the related offering is expected to, or may, occur during a quarterly earnings blackout period of the Company (such blackout periods determined in accordance with such policy as the Company shall generally maintain and communicate to Holders from time to time), the Company and such Holder shall act reasonably and work cooperatively in view of such quarterly earnings blackout period. For the avoidance of
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doubt, (i) the Parties agree that an election by the Company that a registration statement for the registration and distribution of Registrable Securities shall not be usable, or shall be delayed, during a Blackout Period shall not act to reduce the period during which such registration statement shall remain effective pursuant to the terms of this ARTICLE III and (ii) any Blackout Period shall apply equally to each Holder and the Company shall not impose a Blackout Period with respect to any one Holder without imposing the same such Blackout Period to any other Holders.
Section v. Selection of Underwriters
.
(1)Any time that a Demand Registration involves an Underwritten Offering, the investment banker(s) and manager(s) that will serve as managing underwriters (including which of such managing underwriters will serve as lead or co-lead) and underwriters and their respective economics with respect to the offering of such Registrable Securities shall be selected by (i) if any SAP Securities are to be registered in such Demand Registration, SAP, or (ii) if no SAP Securities are to be registered in such Demand Registration, the Holders of the majority of the Registerable Securities to be included in such Demand Registration.
(2)Any time that a registration involves a Primary Offering pursuant to this Section 3.5 that is initiated by the Company, the Company shall select the investment banker(s) and manager(s) that will serve as managing underwriters (including which of such managing underwriters will serve as lead or co-lead) and underwriters with respect to the offering of such Registrable Securities and their respective economics.
Section vi. Obligations of the Company
. If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in this ARTICLE III, the Company shall as promptly as practicable:
(1)prepare, file and use its reasonable best efforts to cause to become effective a registration statement under the Securities Act relating to the Registrable Securities to be offered; provided, further, that before filing such Registration Statement or any amendments or supplements thereto, the Company will furnish to the holders which are including Registrable Securities in such registration (“Selling Holders”) and the lead managing underwriter(s), if any, copies of all such documents proposed to be filed, which documents will be subject to the review and reasonable comment (which comments will be considered in good faith by the Company) of the counsel (if any) to such holders and counsel (if any) to such underwriter(s), and other documents reasonably requested by any such counsel, including any comment letters from the SEC, and, if requested by any such counsel, provide such counsel and the lead managing underwriter(s), if any, reasonable opportunity to participate in the preparation of such Registration Statement and each prospectus (including any prospectus supplement) included or deemed included therein;
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(2)prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus (including any issuer free writing prospectus required to be so filed) used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until the earlier of (i) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement and (ii) the expiration of 24 months, in the case of a Rule 415 Offering, or, in all other cases, the expiration of 180 days after such registration statement becomes effective; provided, that such period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by Section 3.6(f) below is given by the Company to (y) the date on which the Company delivers to Holders of Registrable Securities the supplement or amendment contemplated by Section 3.6(f);
(3)furnish to Holders of Registrable Securities and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus, any summary prospectus and any issuer free writing prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents (including a copy of any and all transmittal letters or other correspondence to or received from the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering) as Holders of Registrable Securities or such underwriter may reasonably request;
(4)use its reasonable best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Holders of such Registrable Securities or any underwriter to such Registrable Securities shall request, and use its reasonable best efforts to obtain all appropriate registrations, permits and consents in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Holders of Registrable Securities or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; provided, that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any such jurisdiction wherein it is not so qualified or to consent to general service of process or taxation in any such jurisdiction where it is not then otherwise so subject;
(5)in the event of an Underwritten Offering, use its reasonable best efforts to furnish to each underwriter of such Underwritten Offering (i) an opinion and negative assurance letter of counsel for the Company dated the date of closing of the Underwritten Offering and (ii) a “comfort” letter signed by the independent public accountants who have audited the financial statements of the Company included in such registration statement dated the date of the underwriting agreement and a “bringdown letter” dated the date of closing of the Underwritten Offering, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in
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opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements;
(6)as promptly as practicable, notify each Selling Holder in writing (i) at any time when the registration statement, a prospectus or, prior to such time as a final prospectus is available, an issuer free writing prospectus relating to a registration made pursuant to Section 3.1 or Section 3.2, or any document incorporated by reference or deemed incorporated by reference therein contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading due to the occurrence of any event and (ii) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case, at the request of the Selling Holders prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such registration statement, prospectus or, prior to such time as a final prospectus is available, such issuer free writing prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such registration statement and prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading;
(7)as promptly as practicable notify in writing the Selling Holders and the underwriters, if any, of the following events: (A) the filing of such registration statement, any amendment thereto, the prospectus or any prospectus supplement related thereto or post-effective amendment to such Registration Statement or any free writing prospectus utilized in connection therewith, and, with respect to such registration statement or any post-effective amendment thereto, when the same has become effective; (B) the issuance by the SEC of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings by any person for that purpose; (C) the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction or the initiation or threat of any proceeding for such purpose and (D) if at any time the representations and warranties of the Company contained in any agreement (including any underwriting agreement) related to such registration cease to be true and correct in any material respect;
(8)use its reasonable best efforts to list all such Registrable Securities covered by such registration on each securities exchange on which a class of common equity securities of the Company is then listed;
(9)to the extent reasonably requested by the lead or managing underwriters in an Underwritten Offering, send appropriate officers of the Company to attend any “road shows” scheduled in connection with any such registration, with all out-of-pocket costs and expense incurred by the Company or such officers in connection with such attendance to be paid by the Company;
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(10)furnish or cause to be furnished for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration effected pursuant to Section 3.1 or Section 3.2 unlegended certificates or book entries representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Selling Holders or the underwriters if such restrictions and legends are no longer required by the Securities Act or any applicable state securities laws or any agreement with the Company to which such Holder is a party;
(11)make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months beginning with the first day of the Company’s first full calendar quarter after the effective date of the Registration Statement which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any successor rule promulgated thereafter by the SEC); and
(12)use its reasonable best efforts to take all other reasonable and customary steps typically taken by issuers to effect the registration and disposition of such Registrable Securities as contemplated hereby, including using reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of any registration statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction at the earliest reasonable practicable date.
Section vii. Obligations of Selling Holders
. Each Selling Holder agrees by having its securities treated as Registrable Securities hereunder that, upon receipt of written notice from the Company specifying that the prospectus relating to a registration made pursuant to Section 3.1 or Section 3.2 contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading due to the occurrence of any event, such Selling Holder will forthwith discontinue disposition of Registrable Securities until such Selling Holder is advised by the Company that the use of the prospectus may be resumed and is furnished with a supplemented or amended prospectus as contemplated by Section 3.6(f) above, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies of the prospectus covering such Registrable Securities then in such Selling Holder’s possession at the time of receipt of such notice; provided, that the amount of time any Selling Holder is required to discontinue disposition of such Registrable Securities shall not exceed 45 days; provided, further, that the Company shall extend the time periods under Section 3.1 with respect to the length of time that the effectiveness of a registration statement must be maintained by the amount of time the Selling Holder is required to discontinue disposition of such Registrable Securities.
Section viii. Underwriting; Due Diligence
.
(1)If requested by the underwriters for any Underwritten Offering of Registrable Securities pursuant to a registration requested under this ARTICLE III, the Company
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shall enter into an underwriting agreement in a form reasonably satisfactory to the Company with such underwriters for such offering, which agreement will contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including indemnification and contribution provisions substantially to the effect and to the extent provided in Section 3.9, and agreements as to the provision of opinions of counsel and accountants’ letters to the effect and to the extent provided in Section 3.6(e). The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be a party to any such underwriting agreement (or a party to a customary power of attorney, custody agreement and irrevocable election to sell) and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by such Selling Holders and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including indemnification and contribution provisions substantially to the effect and to the extent provided in Section 3.9. If reasonably requested by the Company or the Underwriters’ Representative, (i) the Selling Holders will execute such custody agreements, stock powers, instruments of transfer and powers of attorney in connection with such Underwritten Offering as are customary for offerings of such kind and (ii) the Selling Holders will arrange for any necessary opinions of counsel with respect to the securities being sold by such Selling Holders and the reasonable and documented expenses of such counsel shall be deemed to be Registration Expenses payable by the Company.
(2)In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act pursuant to this ARTICLE III, the Company shall give the Selling Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified the financial statements of the Company as shall be reasonably necessary to enable them to exercise their due diligence responsibility; provided, that such Holders and the underwriters and their respective counsel and accountants shall use their reasonable best efforts to coordinate any such investigation of the books and records of the Company and any such discussions with the Company’s officers and accountants so that all such investigations occur at the same time and all such discussions occur at the same time.
Section ix. Indemnification and Contribution
.
(1)In the case of each offering of Registrable Securities made pursuant to this ARTICLE III, the Company agrees to indemnify and hold harmless, to the extent permitted by law, each Selling Holder, each underwriter of Registrable Securities so offered and each Person, if any, who controls any of the foregoing Persons within the meaning of the Securities Act and the officers, directors, members, partners, stockholders, Affiliates, employees, accountants,
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advisors and agents of each of the foregoing, against any and all losses, liabilities, costs (including reasonable expenses of investigation and reasonable attorney’s fees and disbursements), claims and damages, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) that arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein or issuer free writing prospectus related thereto) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, that the Company shall not be liable to any Person in any such case to the extent that any such loss, liability, cost, claim or damage arises out of or relates to any untrue statement or alleged untrue statement, or any omission, if such statement or omission shall have been made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Person specifically for use in such registration statement (or in any preliminary or final prospectus included therein or issuer free writing prospectus related thereto), offering memorandum or other offering document, or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Selling Holder or any other holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability that the Company may otherwise have to each Selling Holder, or other holder or underwriter of the Registrable Securities or any controlling person of the foregoing and the officers, directors, members, partners, stockholders, Affiliates, employees, accountants, advisors and agents of each of the foregoing.
(2)In the case of each offering of Registrable Securities made pursuant to this ARTICLE III, each Selling Holder, by exercising its registration rights hereunder, severally and not jointly, agrees to indemnify and hold harmless, to the extent permitted by law, the Company, each underwriter who participates in such offering, each other Selling Holder or other holder with securities included in such offering, and each Person, if any, who controls any of the foregoing Persons within the meaning of the Securities Act and the officers, directors, members, partners, stockholders, Affiliates, employees, accountants, advisors and agents of each of the foregoing, against any and all losses, liabilities, costs (including reasonable expenses of investigation and reasonable attorneys’ fees and disbursements), claims and damages to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, insofar as such losses, liabilities, costs, claims and damages (or actions or proceedings in respect thereof, whether or not such indemnified Person is a party thereto) arise out of or are based upon any untrue statement or alleged untrue statement by such Selling Holder of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein or issuer free writing prospectus related thereto) or in any offering memorandum or other offering document relating to the offering and sale of such Registrable Securities prepared by the Company or at its direction, or any amendment thereof or supplement thereto, or in any document incorporated by
22
reference therein, or any omission by such Selling Holder or alleged omission by such Selling Holder to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such statement or omission shall have been made in reliance on or in conformity with information furnished to the Company in writing by or on behalf of such Selling Holder specifically for use in such registration statement (or in any preliminary or final prospectus included therein or issuer free writing prospectus related thereto), offering memorandum or other offering document or any amendment thereof or supplement thereto. The foregoing indemnity is in addition to any liability which such Selling Holder may otherwise have to the Company, or controlling persons and the officers, directors, members, partners, stockholders, Affiliates, employees, accountants, advisors and agents of each of the foregoing; provided, that the obligations of each Selling Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld, conditioned or delayed).
(3)Each party indemnified under paragraph (a) or (b) above shall, promptly after receipt of notice of a claim or action against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the claim or action; provided, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) above except to the extent that the indemnifying party was actually and materially prejudiced by such failure (through the forfeiture of substantive rights or defenses), and in no event shall such failure relieve the indemnifying party from any other liability that it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall have notified the indemnifying party thereof, unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified party and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 3.9 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation (unless (i) the indemnified party and the indemnifying party shall have so mutually agreed, (ii) such indemnified party reasonably objects to such assumption on the grounds that there may be defenses available to it which are different from or in addition to the defenses available to such indemnifying party, (iii) the indemnifying party shall have failed within a reasonable period of time to assume such defense or, having assumed such defense, has not conducted the defense of such claim actively and diligently or (iv) the named parties in any such proceeding (including any impleaded parties) include both the indemnified party and the indemnifying party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, in which case the indemnified party shall be promptly reimbursed by the indemnifying party for the expenses incurred in connection with retaining one separate legal counsel, in addition to any local counsel (for the avoidance of doubt, for all indemnified parties in connection therewith)). In any such
23
third party claim where the indemnifying party has assumed control of the defense thereof, the indemnifying party shall keep the indemnified party informed as to the status of such claim at all stages thereof (including all settlement negotiations and offers), promptly submit to such indemnified party copies of all pleadings, responsive pleadings, motions and other similar legal documents and paper received or filed in connection therewith, permit such indemnified party and their respective counsels to confer with the indemnifying party and its counsel with respect to the conduct of the defense thereof, and permit indemnified party and their respective counsel(s) a reasonable opportunity to review all legal papers to be submitted prior to their submission. Any indemnifying party against whom indemnity may be sought under this Section 3.9 shall not be liable to indemnify an indemnified party if such indemnified party settles such claim or action without the consent of the indemnifying party. The indemnifying party may not agree to any settlement of any such claim or action, without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld unless such settlement (x) is solely for monetary damages for which the indemnifying party shall be responsible hereunder, the result of which any remedy or relief shall be applied to or against the indemnified party, (y) includes an unconditional release of such indemnified party in form and substance satisfactory to such indemnified party from all liability on claims that are the subject matter of such proceeding and (z) does not include any statement as to or any admission of fault, culpability or failure to act by or on behalf of any indemnified party. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but the indemnifying party shall not be obligated hereunder to reimburse the indemnified party for the costs thereof.
(4)If the indemnification provided for in this Section 3.9 shall for any reason be unavailable (other than in accordance with its terms) to an indemnified party in respect of any loss, liability, cost, claim or damage referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, cost, claim or damage (i) as between such indemnified party on the one hand and the indemnifying party on the other, in such proportion as shall be appropriate to reflect the relative fault of such indemnified party and of the indemnifying party in connection with such statements or omissions as well as any other relevant equitable considerations. The relative fault of such indemnified party on the one hand and of the indemnifying party on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party’s stock ownership in the Company. The amount paid or payable by an indemnified party as a result of the loss, cost, claim, damage or liability, or action in respect thereof, referred to above in this Section 3.9(d) shall be deemed to include, for purposes of this Section 3.9(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. The parties agree that it would not be just and equitable if contribution pursuant to this Section 3.9 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. No person guilty of
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fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
(5)Notwithstanding any other provision of this Section 3.9, the obligation to indemnify or contribute shall be several, and not joint, among the Selling Holders who furnished or failed to furnish the information in a registration statement (or in any preliminary or final prospectus included therein or issuer free writing prospectus related thereto) or in any offering memorandum or other offering document relating to the offering and sale of Registrable Securities that resulted in any loss, liability, claim or damages. The liability of each such Selling Holder under this Section 3.9 shall not, in any event, exceed the amount of the net proceeds actually received by such Selling Holder from the sale of such Registrable Securities.
(6)Indemnification and contribution similar to that specified in the preceding paragraphs of this Section 3.9 (with appropriate modifications) shall be given by the Company, the Selling Holders and any underwriters with respect to any required registration or other qualification of securities under any state law or regulation or Governmental Entity.
(7)The obligations of the parties under this Section 3.9 shall be in addition to any liability which any party may otherwise have to any other party.
Section x. Rule 144 and Form S-3 Eligibility
. The Company shall use its reasonable best efforts to ensure that the conditions to the availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied. Upon the request of any Holder of Registrable Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. The Company further agrees to use its reasonable best efforts to cause all conditions to the availability of Form S-3 (or any successor form) under the Securities Act for the filing of registration statements under this Agreement to be met as soon as reasonably practicable after the IPO Date.
Section xi. Holdback Agreement
.
(1)If so requested by the Underwriters’ Representative for such offering, (i) in connection with the first offering of shares of common stock made by the Company pursuant to a registration statement following the closing of the IPO, each Holder shall and (ii) in connection with all other offerings of shares of common stock covered by a registration statement filed by the Company (whether or not Registrable Securities of such Holder are included therein), each Holder that holds more than 7.5% of the outstanding shares of Company Capital Stock on a fully-diluted basis shall, in each case of clauses (i) and (ii), agree not to effect any sale or distribution of its Shares, including any sale under Rule 144, without the prior written consent of the Underwriters’ Representative (otherwise than through the registered public offering then being made), within two days prior to or 90 days (or such lesser period as the Underwriters’ Representative may permit) after the Effective Date of the registration statement (or the commencement of the offering to the public of such Registrable Securities in the case of
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Rule 415 Offerings); provided that this Section 3.11(a) shall not apply to any Holder that does not hold Registrable Securities.
(2)If so requested by the Underwriters’ Representative in connection with an offering of any Registrable Securities, the Company shall agree not to effect any sale or distribution of Equity Securities, without the prior written consent of the Underwriters’ Representative (otherwise than through the registered public offering then being made or in connection with any acquisition or business combination transaction and other than in connection with stock options and employee benefit plans and compensation), within seven days prior to or 90 days (or such lesser period as the Underwriters’ Representative may permit) after the Effective Date of the registration statement (or the commencement of the offering to the public of such Registrable Securities in the case of Rule 415 Offerings) and shall use its reasonable best efforts to obtain and enforce similar agreements from any other Persons if requested by the Underwriters’ Representative.
(3)Notwithstanding anything else in this Section 3.11 to the contrary, nothing in this Agreement shall preclude SAP from distributing to any or all of its stockholders any or all of the Registrable Securities.
Section xii. Term
. This ARTICLE III shall remain in effect with respect to a Holder until all Registrable Securities held by such Holder and its Affiliated Companies have been disposed of by them or transferred by them to other Persons or otherwise cease to be Registrable Securities; provided that the provisions in Section 3.9 shall survive any termination of this ARTICLE III or this Agreement.
Section xiii. No Superior Rights
. Without the prior written consent of SAP, the Company shall not provide registration rights of any kind, including rights similar to those set forth in this ARTICLE III, with respect to the Class A common stock, to any current or future stockholder of the Company that are materially more favorable to such stockholder than are provided to Stockholders under this ARTICLE III; provided that without the consent of Silver Lake, no such rights shall be granted to such stockholder that would adversely affect the rights of Silver Lake under this Agreement unless (a) the rights granted to such stockholder are pari passu with Silver Lake’s rights or (b) the rights of SAP are similarly affected.
Article IV.
Miscellaneous
Section i. Entire Agreement
. This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and shall supersede all prior written and oral and all
26
contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof.
Section ii. Governing Law and Jurisdiction
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all Disputes arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
Section iii. Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section iv. Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER
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VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 4.4.
Section v. Specific Performance
. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the affected Party shall have the right to specific performance and injunctive or other equitable relief of its rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The other Party(ies) shall not oppose the granting of such relief on the basis that money damages are an adequate remedy. The Parties agree that the remedies at law for any breach or threatened breach hereof, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived.
Section vi. Termination; Amendments and Waivers
.
(1)This Agreement may not be terminated or amended except (i) with respect to any rights and obligations of SAP and its Affiliated Companies, by mutual consent of the Company and SAP, (ii) with respect to any rights and obligations of Silver Lake and its Affiliated Companies, by mutual consent of the Company and Silver Lake and (iii) with respect to any rights and obligations of Q II and its Affiliated Companies, by mutual consent of the Company and Q II, in each case of clauses (i) through (iii), evidenced by an instrument in writing signed on behalf of each such Party; provided that (i) any amendment or modification to Article II (Covenants and Other Matters) shall require the prior written consent of Silver Lake. The provisions of ARTICLE I (Definitions), Section 3.3 (Expenses), Section 3.9 (Indemnification and Contribution) and this ARTICLE V shall survive any termination of this Agreement pursuant to this Section 4.6.
(2)Notwithstanding anything herein to the contrary, any provision hereof may be waived by any waiving Party on such Party’s own behalf, without the consent of any other Party.
Section vii. Notices
. Notices, offers, requests or other communications required or permitted to be given by a Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties at the following addresses:
if to the Company:
Qualtrics International, Inc.
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333 W. River Park Drive
Provo, UT 84604
Attention: Legal Department
E-mail:
with a copy (which shall not constitute notice) to:
Shearman & Sterling LLP
1460 El Camino Real, 2nd Floor
Menlo Park, CA 94025
Attention: Daniel Mitz
E-mail: daniel.mitz@shearman.com
if to SAP:
SAP America, Inc.
3999 West Chester Pike
Newtown Square, PA 19073
Attention: Mary Beth Hanss
E-mail:
with a copy (which shall not constitute notice) to:
Shearman & Sterling LLP
1460 El Camino Real, 2nd Floor
Menlo Park, CA 94025
Attention: Daniel Mitz
E-mail: daniel.mitz@shearman.com
if to Silver Lake:
Silver Lake Partners
550 W 34th Street
New York, NY 10001
Attention: Andrew J. Schader
E-mail:
with a copy (which shall not constitute notice) to:
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Attention: Kenneth B. Wallach and Hui Lin
E-mail: kwallach@stblaw.com; hui.lin@stblaw.com
if to Q II:
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Q II, LLC
105 South State Street #513
Orem, Utah 84058-5419
Attention: Ryan Smith
E-mail:
with a copy (which shall not constitute notice) to:
The McCullough Group
405 S. Main Street, Suite 800
Salt Lake City, UT 84111
Attention: Scott M. McCullough
E-mail: scottm@tmglaw.com
or at such other address or e-mail as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested. All other notices may also be sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section viii. Counterparts; Signature
. This Agreement and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. If any signature is delivered by facsimile transmission or by PDF, such signature shall create a valid and binding obligation of the Party executing (or on whose behalf the signature is executed) with the same force and effect as if such facsimile or PDF signature were an original thereof.
Section ix. Binding Effect; Assignment
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. No Party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the Company, and any such assignment without consent shall be void; provided, however, (a) any Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form, (b) any Party may assign its registration rights under ARTICLE III to any of its Affiliated Companies in connection with a transfer of Registrable Securities by such Party to such Affiliated Companies and (c) in the event of a transfer by Silver Lake a number of shares constituting no less than 50% of the Shares acquired pursuant to the
30
Silver Lake Stock Purchase Agreement to any Person, such Person shall be admitted as a party hereunder and assume Silver Lake’s rights and obligations under ARTICLE III of this Agreement with respect to such transferred shares upon its, his or her execution and delivery of a joinder agreement, in form and substance reasonably acceptable to the Company, agreeing to be bound by the terms and conditions of this Agreement as if such Person were a Holder party hereto; whereupon such Person will be treated for all purposes of this Agreement, with the same rights, benefits and obligations under ARTICLE III of this Agreement as were initially granted to Silver Lake with respect to the transferred shares.
Section x. Severability
. If any term or other provision of this Agreement or is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
Section xi. Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of any Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section xii. Authority
. Each of the Parties represents to the other Parties that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
Section xiii. Interpretation
. The headings contained in this Agreement and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made in this Agreement to an Article or a
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Section, such reference shall be to an Article or Section of this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time, as permitted by Section 4.6. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive. Any law defined or referred to herein or in any agreement or instrument that is referred to herein means such law as from time to time amended, modified or supplemented, including (in the case of statutes) by succession of comparable successor laws.
Section xiv. Conflicting Agreements
. None of the provisions of this Agreement are intended to supersede any provision in any other agreement with respect to the respective subject matters thereof. In the event of conflict between this Agreement and any other agreement executed in connection herewith, the provisions of such other agreement shall prevail.
Section xv. Third Party Beneficiaries
. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party, including any creditor of any Person, except as provided in Section 3.9. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any liability (or otherwise) against any Party.
[Signature Pages Follow]
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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement, or has caused this Agreement to be duly executed on its behalf, as of the day and year first hereinabove set forth.
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Stockholders’ Agreement]
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement, or has caused this Agreement to be duly executed on its behalf, as of the day and year first hereinabove set forth.
SAP AMERICA, INC.
By: /s/ Mary Beth Hanss
Name: Mary Beth Hanss
Title: General Counsel
[Signature Page to Stockholders’ Agreement]
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement, or has caused this Agreement to be duly executed on its behalf, as of the day and year first hereinabove set forth.
SLP QUARTZ AGGREGATOR, L.P.
By: SLP VI Aggregator GP, L.L.C., its general partner
By: Silver Lake Technology Associates VI, L.P., its managing member
By: SLTA VI (GP), L.L.C., its general partner
By: Silver Lake Group, L.L.C., its managing member
By: /s/ Egon Durban
Name: Egon Durban
Title: Co-CEO
[Signature Page to Stockholders’ Agreement]
IN WITNESS WHEREOF, the undersigned has duly executed this Agreement, or has caused this Agreement to be duly executed on its behalf, as of the day and year first hereinabove set forth.
Q II, LLC
By: /s/ Ryan Smith
Name: Ryan Smith
Title: Manager
[Signature Page to Stockholders’ Agreement]
Exhibit 10.9
REAL ESTATE MATTERS AGREEMENT
dated as of February 1, 2021
between
SAP SE
and
QUALTRICS INTERNATIONAL INC.
TABLE OF CONTENTS
PAGE
1
SCHEDULES
SCHEDULE I: Licensed Areas
SCHEDULE II: Continuing Operating License Agreements
SCHEDULE III: Guaranties
2
REAL ESTATE MATTERS AGREEMENT
This Real Estate Matters Agreement is dated as of the 1st day of February, 2021, among Qualtrics International Inc., a Delaware corporation (“Qualtrics”), SAP SE, a Societas Europaea registered in accordance with the corporate laws of Germany and the European Union (“SAP”). Qualtrics and SAP are sometimes referred to herein separately as a “Party” and together as the “Parties”.
RECITALS
WHEREAS, SAP is the indirect beneficial owner of all the issued and outstanding Class B common stock of Qualtrics;
WHEREAS, SAP, through Qualtrics, is engaged in the business (the “Qualtrics Business”) of providing a technology platform for experience management, as more completely described in a Registration Statement on Form S-1 (File No. 333-251767) filed with the Securities and Exchange Commission under the Securities Act (the “IPO Registration Statement”);
WHEREAS, SAP and Qualtrics currently contemplate that Qualtrics will make an initial public offering (the “IPO”) of its Class A common stock pursuant to the IPO Registration Statement; and
WHEREAS, SAP directly or indirectly provides the Qualtrics Entities with the right to use and occupy certain spaces at its facilities and, following consummation of the IPO, Qualtrics desires SAP to continue to provide such rights to use and occupation to the Qualtrics Entities, as more fully set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, for themselves and their respective successors and assigns, hereby covenant and agree as follows:
Article I.
DEFINITIONS
Section i. Definitions
.
As used in this Agreement, the following terms shall have the following meanings, applicable both to the singular and the plural forms of the terms described:
“Administrative Services Agreement” means the Administrative Services Agreement between the Parties of even date herewith.
“Agreement” means this Real Estate Matters Agreement, together with the Schedules hereto, as the same may be amended and supplemented from time to time in accordance with the provisions hereof.
“Change of Control” means the occurrence of any one or more of the following events:
(i)the sale or disposition, in one or a series of related transactions, of all or substantially all of the consolidated assets of the Qualtrics Entities, taken as a whole, to any “person” or “group” (as such terms are used for purposes of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than SAP or any of its direct or indirect wholly-owned Subsidiaries;
(ii)any “person” or “group,” other than SAP or any of its direct or indirect wholly-owned Subsidiaries, is or becomes the beneficial owner, directly or indirectly, of more than 50% of the total voting power of the outstanding voting stock of Qualtrics, excluding as a result of any merger or consolidation that does not constitute a Change of Control pursuant to clause (c);
(iii)any merger or consolidation of Qualtrics with or into any other person, unless immediately thereafter SAP or any of its direct or indirect wholly-owned Subsidiaries beneficially owns a majority of the outstanding shares of the common stock (or equivalent voting securities) of the surviving or successor entity (or the parent entity thereof); or
(iv)SAP or any of its direct or indirect wholly-owned Subsidiaries ceases to have the ability to cause the election of that number of members of the board of directors of Qualtrics who would collectively have the right to vote a majority of the aggregate number of votes represented by all of the members of the board of directors of Qualtrics.
“Contract” means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of such Person’s property under applicable law.
“Distribution Agreement” means the Distribution Agreement between the Parties of even date herewith.
“Employee Matters Agreement” means the Employee Matters Agreement between the Parties of even date herewith.
“Insurance Matters Agreement” means the Insurance Matters Agreement between the Parties of even date herewith.
“Intellectual Property Matters Agreement” means the Intellectual Property Matters Agreement between the Parties of even date herewith.
“IPO Date” means the date on which the IPO is consummated.
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“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.
“Losses” means any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including the costs and expenses of any and all actions and demands, assessments, judgments and settlements and compromises relating thereto and the reasonable costs and expenses of attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder), excluding special, consequential, indirect and punitive damages (other than special, consequential, indirect and/or punitive damages awarded to any third party against an indemnitee).
“Master Transaction Agreement” means the Master Transaction Agreement between the Parties of even date herewith.
“Person” means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (including any department or agency thereof) or other entity.
“Qualtrics Entities” means Qualtrics and its Subsidiaries and any entity which becomes a Subsidiary of Qualtrics after the date hereof, and “Qualtrics Entity” means any one of the Qualtrics Entities.
“Real Estate License Services” means the real estate license services provided on Schedule I.
“SAP Entities” means SAP and its Subsidiaries (other than the Qualtrics Entities) and any entity which becomes a Subsidiary of SAP after the date hereof, and “SAP Entity” means any one of the SAP Entities.
“Schedule I” means the first Schedule attached hereto, as amended from time to time, which lists certain agreed upon Real Estate License Services to be provided by SAP to or on behalf of the Qualtrics Entities and sets forth the related allocation of space by facility, pricing and certain terms for such Real Estate License Services.
“Schedule II” means the second Schedule attached hereto which lists certain operating license agreements among one or more of the SAP Entities and one or more of the Qualtrics Entities relating to specific locations where such space is currently being shared.
“Schedule III” means the third Schedule attached hereto which sets forth certain Guaranties between SAP Entities and Qualtrics Entities that are currently in effect.
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“Schedules” means any one or more of the schedules referred to in and attached to this Agreement.
“Subsidiary” means, as to any Person, a corporation, limited liability company, joint venture, partnership, trust, association or other entity in which such Person: (i) beneficially owns, either directly or indirectly, more than 50% of (A) the total combined voting power of all classes of voting securities of such entity, (B) the total combined equity interests, or (C) the capital or profits interest, in the case of a partnership; or (ii) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body. For the avoidance of doubt, for purposes of this Agreement, no Qualtrics Entity shall be deemed to be a Subsidiary of any SAP Entity.
“Tax” and “Taxes” shall have the meanings set forth in the Tax Sharing Agreement.
“Tax Sharing Agreement” means the Tax Sharing Agreement between the Parties of even date herewith.
“Transaction Agreements” means this Agreement, the Distribution Agreement, the Employee Matters Agreement, the Insurance Matters Agreement, the Intellectual Property Matters Agreement, the Administrative Services Agreement, the Master Transaction Agreement and the Tax Sharing Agreement.
(1)Each of the following terms is defined in the Section set forth opposite such term:
| TERM | SECTION | ||||
| Additional Real Estate License Services | Section 2.2 | ||||
| Force Majeure | Section 6.3(a) | ||||
| Guarantee | Section 2.5 | ||||
| Initial Term | Section 5.1 | ||||
| IPO | Recitals | ||||
| IPO Registration Statement | Recitals | ||||
| Parties | Preamble | ||||
| Party | Preamble | ||||
| Qualtrics | Preamble | ||||
| Qualtrics Business | Recitals | ||||
| Qualtrics Indemnified Person | Section 4.2(b) | ||||
| Renewal Term | Section 5.1 | ||||
| SAP | Preamble | ||||
| SAP Indemnified Person | Section 4.2(a) | ||||
| Services Taxes | Section 3.1(e)(i) | ||||
| Third Party Actions | Section 4.3 | ||||
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Section ii. Internal References
. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement.
Article II.
PROVISION OF LICENSE SERVICES and Guaranties
Section i. Provision of Real Estate License Services
. Subject to the terms and conditions of this Agreement and in consideration of the costs for Real Estate License Services described below, SAP agrees to cause the SAP Entity that owns the relevant furnished office space to provide to the Qualtrics Entities, and Qualtrics agrees to purchase from the relevant SAP Entity, the Real Estate License Services, until such Real Estate License Services are terminated in accordance with the provisions hereof.
Section ii. Additional Real Estate License Services
. In addition to the Real Estate License Services to be provided or procured by SAP in accordance with Section 2.1 and set forth on Schedule I, if requested by Qualtrics, and to the extent that SAP and Qualtrics may mutually agree in writing (including by amending any of the Schedules, providing a statement of work or any other written (including by email) evidence of a request for additional services and an acceptance of such request), SAP shall provide additional license services to Qualtrics (“Additional Real Estate License Services”). The scope of any such services, as well as the costs and other terms and conditions applicable to such services, shall be as mutually agreed by SAP and Qualtrics prior to the provision of such Additional Real Estate License Services. Qualtrics agrees to cause the relevant Qualtrics Entity to pay all amounts payable in respect of Additional Real Estate License Services to the SAP Entity that provided or procured the Additional Real Estate License Services.
Section iii. Continuing Real Estate License Services
. The Parties hereby agree that the real estate license agreements set forth on Schedule II shall remain in effect and continue following the consummation of the IPO in accordance with their terms, which terms shall govern in the event of any conflict with the terms of this Agreement.
Section iv. Modifications
. SAP may make changes from time to time in its standards and procedures for providing the Real Estate License Services; provided, however, that any such change shall also apply to SAP’s own facilities as well. If any such changes apply to Qualtrics Entities only, SAP will provide Qualtrics with 60 days’ prior written notice.
Section v. Guaranties
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. SAP and Qualtrics shall each use their reasonable efforts (to the extent practicable) to cause each SAP Entity to be removed and released in respect of all obligations under each guarantee, indemnity, surety bond, letter of credit and letter of comfort given or obtained by any SAP Entity for the benefit of any Qualtrics Entity or the Qualtrics business with respect to real estate (each, a “Guarantee”), including the Guarantee set forth on Schedule III, as soon as reasonably practicable after the IPO Date. From and after the IPO Date, Qualtrics shall indemnify, hold harmless and promptly reimburse the SAP Entities for any payments made by SAP Entities and for any and all Liabilities of the SAP Entities arising out of, or in performing, in whole or in part, any obligation in accordance with the underlying obligation under any Guarantee. Beginning on the date on which the SAP Entities hold shares of Qualtrics common stock representing less than a majority of the votes entitled to be cast by all holders of Qualtrics common stock, if SAP continues to be a party to any Guarantee, until such time as the Guarantee is terminated, Qualtrics shall compensate SAP in accordance with the market rate based on the cost for a bank to issue a substitute guarantee, as determined by the Parties in good faith. Notwithstanding the foregoing, (a) in the event of a Change of Control that requires SAP’s approval pursuant to Article VI of Qualtrics’ Amended and Restated Certificate of Incorporation or Section 3.2 of the Master Transaction Agreement such that, in single transaction or series of transactions, a third party acquires Qualtrics common stock representing a majority of the votes entitled to be cast by all holders of Qualtrics common stock, it shall be a condition to the closing of such transaction(s) that any Guarantee remaining in effect at that time shall be terminated effective on or prior to the closing of such transaction(s) and in connection therewith, SAP and Qualtrics shall each use their reasonable efforts (to the extent practicable) to cause each SAP Entity to be removed and released in respect of all obligations under any such Guarantee(s) and (b) in the event of a Change of Control that does not require SAP’s approval pursuant to Article VI of Qualtrics’ Amended and Restated Certificate of Incorporation or Section 3.2 of the Master Transaction Agreement such that, in single transaction or series of transactions, a third party acquires Qualtrics common stock representing a majority of the votes entitled to be cast by all holders of Qualtrics common stock, it shall be a condition to the closing of such transaction(s) that any Guarantee remaining in effect at that time shall be terminated effective on or prior to the closing of such transaction(s).
Article III.
License SERVICE COSTS; OTHER CHARGES
Section i. License Service Costs
.
(1)Each License Service (other than Additional Real Estate License Services) will be provided at the price indicated on Schedule I.
(2)No later than 60 days prior to the end of the Initial Term or any Renewal Term, the Parties shall commence discussions to determine the appropriate Real Estate License Services to be provided pursuant to Schedule I in the subsequent Renewal Term based on a good faith review of the Real Estate License Services and the Qualtrics Entities’ future real estate requirements. The Parties shall use their reasonable best efforts to execute and deliver an
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amended Schedule I for the subsequent Renewal Term prior to the expiration of the then-current term set forth on Schedule I.
(3)Any Additional Real Estate License Services provided by SAP shall be provided at the costs set forth in Section 3.1 of the Administrative Services Agreement, unless otherwise agreed.
(4)In addition to the amounts payable pursuant to Section 3.1(a), in the event that SAP incurs pre-approved, reasonable and documented out-of-pocket expenses in connection with the provision of any License Service, including license fees and payments, reasonable travel costs and expenses, shipping and transportation costs, duties, non-recoverable taxes and other fees or expenses, but excluding payments made to employees of SAP pursuant to Section 3.1(a) or Section 3.1(b) and payments to third party professional service providers or subcontractors (such included expenses, collectively, “Out-of-Pocket Costs”), Qualtrics shall reimburse SAP or the relevant SAP Entity, as the case may be, for all such Out-of-Pocket Costs in accordance with the invoicing procedures set forth in Section 3.2, without any markup.
(5)Taxes.
(i)All applicable sales, use, value added, GST, transfer, receipts, customs duties, consumption or other similar Taxes (and any other Taxes other than income Taxes and corporation Taxes), together with any interest, penalties or amounts imposed with respect thereto (collectively, “Service Taxes”) in connection with the Real Estate License Services or Additional Real Estate License Services shall be borne by the relevant Qualtrics Entity.
(ii) Income Taxes in connection with payments under this Agreement will be borne by the relevant SAP Entity. If a Qualtrics Entity is required to withhold any Taxes (other than Service Taxes) from payment any under this Agreement, the Qualtrics Entity shall be entitled to withhold or deduct such Taxes from the gross amount to be paid. However, the Qualtrics Entity shall cooperate with the SAP Entity to reduce any such withholding Tax payable pursuant to applicable law or an income tax treaty. The Qualtrics Entity will in the case of any withholding Tax (including withholding Taxes described under Section 3.01(e)(i)) provide to the SAP Entity a receipt from the relevant tax authority to which such withholding Tax has been paid.
(iii)SAP shall cooperate with Qualtrics and take any reasonably requested action which does not cause SAP to incur any cost or inconvenience (other than de minimis costs or inconveniences) in order to minimize any Services Taxes imposed on the provision of the Real Estate License Services or Additional Real Estate License Services including providing sales and use (or value added) tax exemption certificates or other documentation necessary to support tax exemptions. Each Party agrees to provide each other Party such information and data as reasonably requested from time to time, and to fully cooperate with each other Party, in connection with (A) the reporting of any Services Taxes payable pursuant to this Agreement, (B) any audit relating to any Services
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Taxes payable pursuant to this Agreement or (C) any assessment, refund, claim or proceeding relating to any such Services Taxes.
Section ii. Payment
.
(1)Unless otherwise set forth on a Schedule (or otherwise mutually agreed to by the Parties in writing), charges for Real Estate License Services shall be invoiced quarterly in arrears by SAP (or the relevant SAP Entity that provided or procuring the Real Estate License Services) within five business days prior to the end of a quarter. The invoice shall set forth in reasonable detail for the period covered by such invoice (i) the Real Estate License Services rendered, (ii) the aggregate amount charged for each applicable location, and (iii) such additional information as Qualtrics may reasonably request at least ten business days prior to the end of a quarter. Each invoice shall be directed to the Facilities Manager of Qualtrics or such other individual designated in writing from time to time by such Facilities Manager. Unless otherwise agreed in writing between the Parties, all payments made pursuant an invoice shall be made in the local or functional currency of the SAP Entity indicated on the invoice. The Parties shall provide documentation supporting any amounts invoiced pursuant to this Section 3.2 as the Party receiving the invoice may from time to time reasonably request.
(2)Each invoice shall be payable within 60 days after receipt; provided, however, that if Qualtrics, in good faith, disputes any invoiced charge, payment of such charge may be made only after mutual resolution of such dispute. Qualtrics agrees to notify SAP promptly, and in no event later than 30 days following receipt of an invoice, of any disputed charge, listing all disputed items and providing a reasonably detailed description of each disputed item. Amounts not so disputed shall be deemed accepted and shall be paid, notwithstanding disputes on other items, within the period set forth in Section 3.2(a). The Parties shall seek to resolve all such disputes expeditiously and in good faith.
(3)During the term of this Agreement, each Party shall keep such books, records and accounts as are reasonably necessary to verify the calculation of the fees and related expense for Real Estate License Services provided hereunder. Each Party shall provide documentation supporting any amounts invoiced pursuant to this Section 3.2 as the other Party may from time to time reasonably request. Each Party shall have the right to review such books, records and accounts of the other Party at any time upon reasonable notice, and the Party requesting such review agrees to conduct any such review in a manner so as not to unreasonably interfere with the other Party’s normal business operations.
(4)Each Party hereby acknowledges and agrees that it shall have no right under this Agreement to offset any amounts owed (or to become due and owing) to another Party, whether under this Agreement or otherwise, against any other amount owed (or to become due and owing) to it by the other Party.
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Article IV.
STANDARD OF PERFORMANCE AND INDEMNIFICATION
Section i. General Standard of Service
. Except as otherwise agreed to in writing by the Parties or as described in this Agreement, the nature and quality applicable to the provision of the Real Estate License Services hereunder shall be substantially the same as or consistent with those which similar SAP Entities exercise or employ in providing similar services within or to any SAP Entity.
Section ii. Limitation of Liability
.
(1)Except as provided in Section 4.3, Qualtrics agrees that none of the SAP Entities and their respective directors, officers, agents, and employees (each, of the SAP Entities and their respective directors, officers, agents, and employees, an “SAP Indemnified Person”) shall have any liability, whether direct or indirect, in contract or tort or otherwise, to any Qualtrics Entity or any other Person under the control of such Qualtrics Entity for or in connection with the Real Estate License Services rendered or to be rendered by any SAP Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any SAP Indemnified Person’s actions or inactions in connection with any Real Estate License Services or such transactions, except for damages which have resulted from such SAP Indemnified Person’s breach, gross negligence, bad faith or willful misconduct in connection with the foregoing.
(2)Except as provided in Section 4.3, SAP agrees that none of the Qualtrics Entities and their respective directors, officers, agents, and employees (each, of the Qualtrics Entities and their respective directors, officers, agents, and employees, a “Qualtrics Indemnified Person”) shall have any liability, whether direct or indirect, in contract or tort or otherwise, to any SAP Entity or any other Person under the control of such SAP Entity for or in connection with the transactions contemplated hereby or any Qualtrics Indemnified Person’s actions or inactions in connection with such transactions, except for damages which have resulted from such Qualtrics Indemnified Person’s breach, gross negligence, bad faith or willful misconduct in connection with the foregoing.
(3)Notwithstanding the provisions of this Section 4.2, no Party shall be liable for any special, indirect, incidental, or consequential damages of any kind whatsoever (including, without limitation, attorneys’ fees) in any way due to, resulting from or arising in connection with any of the Real Estate License Services or the performance of or failure to perform such Party’s obligations under this Agreement. This disclaimer applies without limitation: (i) to claims arising from the provision of the Real Estate License Services or any failure or delay in connection therewith; (ii) to claims for lost profits; (iii) regardless of the form of action, whether in contract, tort (including negligence), strict liability, or otherwise; and (iv) regardless of whether such damages are foreseeable or whether such Party has been advised of the possibility of such damages.
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(4)None of the SAP Entities shall have any liability to any Qualtrics Entity or any other Person for failure to perform SAP’s obligations under this Agreement or otherwise, where such failure to perform similarly affects the SAP Entities receiving the same or similar services and does not have a disproportionately adverse effect on the Qualtrics Entities, taken as a whole.
(5)In addition to the foregoing, each Party agrees that, in all circumstances, it shall use commercially reasonable efforts to mitigate and otherwise minimize damages to such Party and its Subsidiaries, individually and collectively, whether direct or indirect, due to, resulting from or arising in connection with any failure by the other Party to comply fully with such Party’s obligations under this Agreement.
Section iii. Indemnification
.
(1)Qualtrics agrees to indemnify and hold harmless each SAP Indemnified Person from and against any Losses arising out of or related to any claim, action or proceeding brought by a third party (collectively, “Third Party Actions”) arising out of or in connection with Real Estate License Services rendered or to be rendered by any SAP Indemnified Person pursuant to this Agreement, the transactions contemplated hereby or any SAP Indemnified Person’s actions or inactions in connection with any such Real Estate License Services or transactions; provided, however, that Qualtrics shall not be responsible for any damages incurred by any SAP Indemnified Person that have resulted from any SAP Entity’s, or any such SAP Indemnified Person’s, breach of this Agreement or gross negligence or willful misconduct in connection with the Real Estate License Services.
(2)SAP agrees to indemnify and hold harmless each Qualtrics Indemnified Person from and against any Losses arising out of or related to any Third Party Action arising out of or in connection with any SAP Entity’s, or any such SAP Indemnified Person’s, breach of this Agreement or gross negligence or willful misconduct in connection with the Real Estate License Services.
(3)The provisions of Section 4.5 (Reductions for Insurance Proceeds and other Recoveries) and Section 4.6 (Procedures for Defense, Settlement and Indemnification of the Third Party Claims) of the Master Transaction Agreement are hereby incorporated by reference, mutatis mutandis, and shall apply to Third Party Actions. If the Master Transaction Agreement terminates or expires, the provisions of Section 4.5 (Reductions for Insurance Proceeds and other Recoveries) and Section 4.6 (Procedures for Defense, Settlement and Indemnification of the Third Party Claims) of the Master Transaction Agreement shall nevertheless continue to be effective under this Agreement and will remain in effect for the term of this Agreement.
(4)Qualtrics and SAP shall each reimburse the other for any and all Losses of SAP Indemnified Persons or Qualtrics Indemnified Persons, as applicable, arising out of or in connection with such Party’s breach of this Agreement or gross negligence or willful misconduct
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in connection with the Real Estate License Services, to the extent such Losses are not indemnifiable pursuant to Sections 4.3(a) or 4.3(b) above.
Article V.
TERM AND TERMINATION
Section i. Term
. Except as otherwise provided in this Article V or as otherwise agreed in writing by the Parties (including as provided in any Schedule), (a) this Agreement shall have an initial term from the IPO Date through the third anniversary of the IPO Date (the “Initial Term”), and will be renewed automatically thereafter for successive one year terms (each, a “Renewal Term”) unless either Party elects not to renew this Agreement by notice in writing to the other Party not less than 150 days prior to the end of the Initial Term or any Renewal Term (unless otherwise set forth in a Schedule with respect to any particular License Service), and (b) with respect to any License Service, the obligation of a Party to provide or to procure, and the obligation of the other Party to purchase, such License Service shall cease as of the applicable date set forth in Schedule I or Schedule II or the applicable date set forth in any agreement between the Parties pursuant to which Additional Real Estate License Services are provided (in each case as such dates may be extended with the consent of the Party providing or procuring a License Service and the Party receiving a License Service) or such earlier date determined in accordance with Section 5.2.
Section ii. Termination
.
(1)The Parties may by mutual agreement from time to time terminate this Agreement with respect to one or more of the Real Estate License Services, in whole or in part.
(2)Except as otherwise provided in any Schedule, (i) Qualtrics may terminate any License Service at any time upon at least 120 days prior written notice of such termination to SAP, effective as of such 120th day and (ii) SAP may terminate any License Service at any time upon at least 120 days prior written notice of such termination to Qualtrics, effective as of such 120th day.
(3)Except as provided in any agreement between the Parties pursuant to which Additional Real Estate License Services are provided, either Party may terminate any Additional License Service that is not reflected on an amendment to the Schedules at any time.
(4)A Party may terminate a License Service provided by such Party upon written notice in the event of the receiving Party’s material breach of this Agreement, which breach remains uncured 30 days after the breaching Party’s receipt of written notice thereof.
(5)This Agreement (including all Real Estate License Services) shall terminate automatically 60 days following a Change of Control; provided, however, that if any anticipated Change of Control has not been publicly announced 90 days in advance, SAP shall
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use reasonable efforts to provide prior written notice of such Change of Control and shall provide at least 60 days’ prior written notice.
Section iii. Effect of Termination
.
(1)Other than as required by law, upon the effective date of the expiration or termination of any License Service pursuant to Section 5.1 or Section 5.2, or upon termination of this Agreement in accordance with its terms (any such date, the “Termination Date”), the Parties shall have no further obligation to provide the terminated License Service (or any License Service, in the case of termination of this Agreement) and shall have no obligation to pay any fees relating to such terminated Real Estate License Services or to make any other payments hereunder; provided, however, that notwithstanding such termination, (i) each Party shall remain liable for fees owed and payable in respect of Real Estate License Services provided to it prior to the effective date of the termination; (ii) the Contracts set forth on Schedule II shall not terminate but shall remain in effect in accordance with their terms; and (iii) the provisions of Section 2.5 and Articles IV, V, and VI shall survive any such termination indefinitely.
(2)Following termination of this Agreement with respect to any License Service, the Parties agree to cooperate with each other in providing for an orderly transition of such License Service to the receiving Party or to a successor service provider as designated by the receiving Party.
Article VI.
MISCELLANEOUS
Section i. Ownership
. This Agreement and the provision of the Real Estate License Services hereunder will not affect the ownership of any assets or responsibility for any liabilities. No Party will gain, by virtue of this Agreement or the Real Estate License Services provided hereunder, by implication or otherwise, any rights of ownership of any property or intellectual property rights owned by any other Party or their respective Subsidiaries.
Section ii. No Agency
. Nothing in this Agreement shall constitute or be deemed to constitute a partnership or joint venture by and among the Parties hereto or constitute or be deemed to constitute any Party the agent or employee of any other Party for any purpose whatsoever, and no Party shall have authority or power to bind any other Party or to contract in the name of, or create a liability against, any other Party in any way or for any purpose.
Section iii. Force Majeure
.
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(1)For purposes of this Section 6.3, “Force Majeure” means an event beyond the control of any Party, which prevents a Party from performing any obligation under this Agreement (other than the payment of money), and includes acts of God, storms, floods, riots, fires, natural disasters, labor disputes or stoppages, government acts or orders, epidemics, pandemics, outbreaks of communicable disease, quarantines, acts of terrorism, sabotage, civil commotion or civil unrest, interference by civil or military authorities, acts of war (declared or undeclared) and failure of energy sources.
(2)Continued performance of a License Service may be suspended immediately to the extent caused by Force Majeure. The Party claiming suspension of a License Service due to Force Majeure will give prompt notice to the other of the occurrence of the event giving rise to the suspension and of its nature and anticipated duration. The Parties shall cooperate with each other to find alternative means and methods for the provision of the suspended License Service.
(3)No Party shall be under any liability for failure to fulfill any obligation under this Agreement, so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered, or delayed as a consequence of circumstances of Force Majeure.
Section iv. Entire Agreement
. This Agreement (including the Schedules constituting a part of this Agreement) and any other writing signed by the Parties that specifically references or is specifically related to this Agreement constitute the entire agreement among the Parties with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Parties with respect to the subject matter hereof.
Section v. Information
. Subject to applicable law and privileges, each Party covenants with and agrees to provide to the other Party all information regarding itself and transactions under this Agreement that is reasonably required by the other Party to comply with all applicable federal, state, county and local laws, ordinances, regulations and codes, including, but not limited to, securities laws and regulations.
Section vi. Notices
. Notices, offers, requests or other communications required or permitted to be given by any Party pursuant to the terms of this Agreement shall be given in writing to the respective Parties to the following addresses:
(1)If to SAP, to:
SAP SE
Dietmar-Hopp-Allee 16
Germany – 69190
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Attention: Matthias Grimm
E-mail:
(2)If to Qualtrics, to:
Qualtrics International Inc.
333 W River Park Dr
Provo, UT 84604
Attention: Legal Department
E-mail:
or to such other address as the Party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice shall be sent by hand delivery, internationally recognized overnight courier or, within the United States, may also be sent via certified mail, return receipt requested and, in any event, shall be concurrently sent by e-mail. All notices shall be deemed to have been given when received, if hand delivered; when transmitted, if transmitted electronically; one working day after it is sent, if sent by internationally recognized overnight courier; and three days after it is postmarked, if mailed first class mail or certified mail, return receipt requested, with postage prepaid.
Section vii. Governing Law
. This Agreement, including the validity hereof and the rights and obligations of the Parties hereunder, shall be construed in accordance with and all disputes, controversies or claims arising out of or relating to this Agreement shall be governed by the laws of the State of Delaware applicable to contracts made and to be performed entirely in such State (without giving effect to the conflicts of laws provisions thereof).
Section viii. Consent to Jurisdiction
. THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN THE STATE OF DELAWARE. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION IN CONNECTION WITH THIS AGREEMENT OR THE PERFORMANCE OF THE OBLIGATIONS IMPOSED HEREUNDER IN ANY OTHER COURT. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO ANY SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT ANY SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM,
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WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.
Section ix. Waiver of Jury Trial
. EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE PARTIES CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER COMPANY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH OF THE PARTIES UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH OF THE PARTIES MAKES THIS WAIVER VOLUNTARILY AND (D) EACH OF THE PARTIES HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 6.9.
Section x. Amendment
. This Agreement may be amended only by an instrument in writing signed by or on behalf of each of the Parties.
Section xi. Counterparts
. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.
Section xii. Binding Effect; Assignment
. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective legal representatives and successors. Neither Party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other Party, and any such assignment shall be void; provided, however, that either Party may assign this Agreement to a successor entity in conjunction with such Party’s reincorporation in another jurisdiction or into another business form.
Section xiii. Severability
. If any term or other provision of this Agreement or the Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the
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economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.
Section xiv. Failure or Indulgence not Waiver; Remedies Cumulative
. No failure or delay on the part of either Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.
Section xv. Authority
. Each of the Parties represent to the other Party that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement, (b) the execution, delivery and performance of this Agreement by it have been duly authorized by all necessary corporate or other actions, (c) it has duly and validly executed and delivered this Agreement, and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.
Section xvi. Interpretation
. The headings contained in this Agreement, in any Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section or Schedule, such reference shall be to an Article or Section of, or a Schedule to, this Agreement unless otherwise indicated. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires. The terms “hereof,” “herein” “and “herewith” and words of similar import, unless otherwise stated, shall be construed to refer to this Agreement as a whole (including all of the Schedules hereto) and not to any particular provision of this Agreement. Any reference herein to this Agreement, unless otherwise stated, shall be construed to refer to this Agreement as amended, supplemented or otherwise modified from time to time. The word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless the context otherwise requires or unless otherwise specified. The word “or” shall not be exclusive.
Section xvii. Third Party Beneficiaries
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. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party, including any employee or creditor of any Person. No such third party shall obtain any right under any provision of this Agreement or shall by reasons of any such provision make any claim in respect of any Liability (or otherwise) against either Party.
Section xviii. Master Transaction Agreement
. In the event there is any inconsistency between the provisions of this Agreement and the provisions of the Master Transaction Agreement, the provisions of this Agreement shall govern.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their duly authorized representatives.
SAP SE
By: /s/ Luka Mucic
Name: Luka Mucic
Title: Chief Financial Officer
By: /s/ Jochen Scholten
Name: Jochen Scholten
Title: General Counsel
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Real Estate Matters Agreement]
SCHEDULE I
Real Estate License Services
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
SCHEDULE II
Continuing Operating License Agreements
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
SCHEDULE III
Guaranties
[Omitted pursuant to Item 601(a)(5) of Regulation S-K]
Exhibit 10.10
PROMISSORY NOTE 1
| $1,892,279,626 | January 27, 2021 | ||||
FOR VALUE RECEIVED, QUALTRICS INTERNATIONAL INC., a Delaware corporation (the “Maker”), hereby promises to pay to the order of SAP AMERICA, INC., a Delaware corporation (the “Payee”), and its successors and assigns, on or before the Maturity Date (as hereinafter defined), the principal sum of One Billion Eight Hundred Ninety-Two Million Two Hundred Seventy-Nine Thousand Six Hundred Twenty-Six Dollars ($1,892,279,626) (the “Principal Amount”), together with interest from the date hereof to the Maturity Date (as defined below) on the principal balance hereof, pursuant to the terms and conditions contained herein.
This Promissory Note 1 (the “Note”) shall bear interest at a rate of 0.14% per annum compounded semi-annually. All payments under this Note shall be in lawful money of the United States of America.
The Principal Amount and any accrued interest shall be due and payable in full on the date of the closing of the initial public offering of the Maker (the “Initial Payment Date”); provided, however, that if prior to the Initial Payment Date the underwriters have not exercised their right to purchase additional shares of Class A common stock to cover any over-allotments in connection with the Maker’s initial public offering as permitted in that certain Underwriting Agreement, to be entered into January 28, 2021 among the Maker, Qualtrics, LLC, SAP SE and Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, as representatives of the underwriters named therein (the “Over-allotment Option”), then the amount due and payable at the Initial Payment Date shall be automatically reduced by $220,998,548 and the interest due and payable on the Initial Payment Date shall be based on such reduced amount. The principal amount remaining outstanding on the Initial Payment Date after giving effect to such payment, together with the related accrued interest on such reduced amount (the “Remaining Principal Amount”) shall remain outstanding and shall not be payable on the Initial Payment Date. If such underwriters exercise all or a portion of the Over-allotment Option after the Initial Payment Date but prior to the date that is 30 days following the date of pricing of the initial public offering of Maker (the “Option Expiration Date”), then (i) in the case of an exercise of only a portion of the Over-allotment option, the Remaining Principal Amount (and related accrued interest) shall be automatically reduced to equal the amount of net proceeds to be received by the Maker in respect of such exercise of the Over-allotment Option, and (ii) the Remaining Principal Amount (and related accrued interest on such amount since the Initial Payment Date) shall become due and payable on the date that the net proceeds from the exercise of such Over-allotment Option are received by the Maker (the “Maturity Date”). If such underwriters do not exercise all or any portion of the Over-allotment Option prior to the Option Expiration Date, the Remaining Principal Amount shall automatically be reduced to $0 and this Note shall automatically be cancelled and of no further force or effect. The Maker, for itself and its successors and assigns, hereby waives presentment, protest, notice of demand, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale and all other notices of
any kind whatsoever. Any failure by the Payee to exercise any right hereunder or otherwise available at law or in equity shall not be construed as a waiver of the right to exercise the same, or any other right or remedy, at any time.
The indebtedness evidenced by this Note is expressly subordinated in right of payment to the prior payment in full of any Senior Indebtedness in existence on the date of this Note. “Senior Indebtedness” shall mean, unless expressly subordinated to, or made on a parity with the amounts due under this Note, all amounts due in connection with (a) indebtedness of Maker to banks or other financial institutions and (b) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor. The indebtedness evidenced by this Note shall rank pari passu in right of payment with all indebtedness due in connection with the Maker’s trade creditors.
No waiver, amendment or other modification of this Note shall be binding upon either the Maker or the Payee, unless in writing and signed by a duly-authorized representative of both parties. If any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, and without invalidating the remainder of such provision or the remaining provisions of this Note.
Payee may assign or transfer any or all of the obligations hereunder. This Note shall be binding upon the Maker and its successors and assigns. This Note shall be governed by and construed in accordance with the laws of the State of Delaware.
(Signature Page Follows)
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed and effective as of the day and year first above written.
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Note 1]
Exhibit 10.11
PROMISSORY NOTE 2
| $500,000,000 | January 27, 2021 | ||||
FOR VALUE RECEIVED, QUALTRICS INTERNATIONAL INC., a Delaware corporation (the “Maker”), hereby promises to pay to the order of SAP AMERICA, INC., a Delaware corporation (the “Payee”), and its successors and assigns, on or before the Maturity Date (as hereinafter defined), the principal sum of Five Hundred Million Dollars ($500,000,000), together with interest from the date hereof to the Maturity Date (as defined below) on the principal balance hereof, pursuant to the terms and conditions contained herein.
This Promissory Note 2 (the “Note”) shall bear interest at a rate of 1.35% per annum compounded semi-annually. No payments in respect of accrued interest will be due prior to the earlier of (i) the exercise of a Prepayment Right and (ii) the Maturity Date. All payments under this Note shall be in lawful money of the United States of America.
The principal balance evidenced by this Note and any accrued interest shall be due and payable in full on or before the earlier of (i) the date that is the 10-year anniversary of the closing date of the initial public offering of the Maker and (ii) the date on which the aggregate net cash proceeds of primary public offerings of shares of the Maker’s Class A common stock for the account of the Maker exceeds $500,000,000 (other than pursuant to a registration statement on Form S-4 or Form S-8, or any successor forms thereto) (the earlier of such dates in clauses (i) and (ii), the “Maturity Date”); provided, however, that the Maker shall have the right to prepay this Note in full or in part at any time (the “Prepayment Right”) at par and without prepayment penalties. If the Maker exercises its Prepayment Right, then, in the case of a partial prepayment, any interest accrued as of such date also shall be payable and such partial prepayment shall apply first towards any interest accrued as of such date and the remainder of any such partial prepayment shall then apply towards the unpaid principal. If the Maker exercises its Prepayment Right in full, all unpaid interest required to be paid on the note shall be payable, even if such interest has not accrued.
At any time following the date that is the six-month anniversary of the closing date of the initial public offering of the Maker, if the 30-day volume weighted average price per share of the Maker’s Class A common stock exceeds $37.50, the Payee shall have the right, exercisable by providing written notice to the Maker, to cause the Maker to effect one or more follow-on public offerings of shares of the Maker’s Class A common stock within 30 days following its receipt of such written notice from the Payee; provided, however, that the Maker shall have the ability to defer any such obligation to effect a follow-on public offering for up to 180 days if, in the good faith judgment of the independent members of the board of directors of Maker, effecting a follow-on public offering would be detrimental to the Maker at such time.
The Maker, for itself and its successors and assigns, hereby waives presentment, protest, notice of demand, demand for payment, notice of intention to accelerate maturity, notice of acceleration of maturity, notice of sale and all other notices of any kind whatsoever. Any failure by the Payee to exercise any right hereunder or otherwise available at law or in equity shall not
be construed as a waiver of the right to exercise the same, or any other right or remedy, at any time.
The indebtedness evidenced by this Note is expressly subordinated in right of payment to the prior payment in full of any Senior Indebtedness in existence on the date of this Note. “Senior Indebtedness” shall mean, unless expressly subordinated to, or made on a parity with the amounts due under this Note, all amounts due in connection with (a) indebtedness of Maker to banks or other financial institutions and (b) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor. The indebtedness evidenced by this Note shall rank pari passu in right of payment with all indebtedness due in connection with the Maker’s trade creditors.
No waiver, amendment or other modification of this Note shall be binding upon either the Maker or the Payee, unless in writing and signed by a duly-authorized representative of both parties. If any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective but only to the extent of such prohibition or invalidity, and without invalidating the remainder of such provision or the remaining provisions of this Note.
Payee may assign or transfer any or all of the obligations hereunder. This Note shall be binding upon the Maker and its successors and assigns. This Note shall be governed by and construed in accordance with the laws of the State of Delaware.
(Signature Page Follows)
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed and effective as of the day and year first above written.
QUALTRICS INTERNATIONAL INC.
By: /s/ Chris Beckstead
Name: Chris Beckstead
Title: President
[Signature Page to Note 2]
Exhibit 21.1
Subsidiaries of Qualtrics International Inc.
| Name of Subsidiary | Jurisdiction of Incorporation or Organization | ||||
| Qualtrics, LLC | Delaware | ||||
| Q (AGF2) Inc. | Delaware | ||||
| New Debden Merger Sub II LLC | Delaware | ||||
| Delighted, LLC | Delaware | ||||
| Statwing, LLC | Delaware | ||||
| IP Asset Holdings, LLC | Delaware | ||||
| TM Property Holdings, LLC | Delaware | ||||
| Temkin Group, LLC | Delaware | ||||
| QCL Technologies Ltd. | Canada | ||||
| QAL Technologies Pty Ltd | Australia | ||||
| Qualtrics Japan LLC | Japan | ||||
| Qualtrics Sweden AB | Sweden | ||||
| QSL Technologies Pte. Ltd. | Singapore | ||||
| Qualtrics Technologies Spain, S.L.U. | Spain | ||||
| QDL Technologies GmbH | Germany | ||||
| QFL Technologies Sarl | France | ||||
| QIL Technologies Limited | Ireland | ||||
| QPL Technologies sp. z o.o. | Poland | ||||
| QUL Technologies Limited | United Kingdom | ||||
| Qualtrics Hong Kong Limited | Hong Kong | ||||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Qualtrics International Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-252521) on Form S-8 of Qualtrics International Inc. of our report dated March 9, 2021, with respect to the consolidated balance sheets of Qualtrics International Inc. as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes, which report appears in the December 31, 2020 annual report on Form 10-K of Qualtrics International Inc. Our report refers to a change in the method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
/s/ KPMG LLP
Salt Lake City, Utah
March 9, 2021
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Zig Serafin, certify that:
1.I have reviewed this Annual Report on Form 10-K of Qualtrics International Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 9, 2021 | By: | /s/ Zig Serafin | ||||||||||||
| Name: | Zig Serafin | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
| (Principal Executive Officer) | ||||||||||||||
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rob Bachman, certify that:
1.I have reviewed this Annual Report on Form 10-K of Qualtrics International Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 9, 2021 | By: | /s/ Rob Bachman | ||||||||||||
| Name: | Rob Bachman | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
| (Principal Accounting and Financial Officer) | ||||||||||||||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report") by Qualtrics International Inc. (the "Company"), Zig Serafin, as the Chief Executive Officer of the Company, and Rob Bachman, as the Chief Financial Officer of the Company, each hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
1.the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: March 9, 2021 | /s/ Zig Serafin | |||||||
| Zig Serafin | ||||||||
| Chief Executive Officer (Principal Executive Officer) | ||||||||
| /s/ Rob Bachman | ||||||||
| Rob Bachman | ||||||||
| Chief Financial Officer (Principal Accounting and Financial Officer) | ||||||||
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Qualtrics International Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.