UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2021
Or
For the transition period from ____ to ____
Commission File Number: 001-39952
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address, including zip code of principal executive offices)
(Telephone number, including area code, of principal executive offices)
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
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 | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
As of 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 April 30, 2021, the registrant had 513,036,834 shares of common stock outstanding, consisting of 89,866,224 shares of Class A common stock and 423,170,610 shares of Class B common stock.
1
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to be profitable;
•our ability to grow at or near historical growth rates;
•anticipated technology trends, such as the use of and demand for experience management software;
•our ability to attract and retain customers to use our products;
•our ability to respond to and overcome challenges brought by the COVID-19 pandemic;
•our ability to attract enterprises and international organizations as customers for our products;
•our ability to expand our network with content consulting partners, delivery partners, and technology partners;
•the evolution of technology affecting our products and markets;
•our ability to introduce new products and enhance existing products and to compete effectively with competitors;
•our ability to successfully enter into new markets and manage our international expansion;
•the attraction and retention of qualified employees and key personnel;
•our ability to effectively manage our growth and future expenses and maintain our corporate culture;
•our anticipated investments in sales and marketing and research and development;
•our ability to maintain, protect, and enhance our intellectual property rights;
•our ability to successfully defend litigation brought against us;
•our ability to maintain data privacy and data security;
•the sufficiency of our cash and cash equivalents to meet our liquidity needs;
•our ability to comply with modified or new laws and regulations applying to our business;
•our reduced ability to leverage resources at SAP as an independent company from SAP; and
•the increased expenses associated with being an independent public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations
and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
You should read this Quarterly Report on Form 10-Q and exhibits with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Qualtrics International Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and par value)
(Unaudited)
| As of March 31, | As of December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowance (1) | |||||||||||
| Deferred contract acquisition costs, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets from operating leases | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred contract acquisition costs, net of current portion | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and deficit | |||||||||||
| Current liabilities: | |||||||||||
| Lease liabilities | $ | $ | |||||||||
Accounts payable (1) | |||||||||||
| Accrued liabilities | |||||||||||
| Liability-classified, stock-based awards | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Lease liabilities, net of current portion | |||||||||||
| Liability-classified, stock-based awards, net of current portion | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
Note payable (1) | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
| Commitments and contingencies | |||||||||||
| Equity (deficit) | |||||||||||
Preferred stock, par value $ | |||||||||||
Class A common stock, par value $ | |||||||||||
Class B common stock, par value $ | |||||||||||
| Additional paid in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total deficit | ( | ( | |||||||||
| Total liabilities and deficit | $ | $ | |||||||||
________________
(1) Includes amounts from related parties. See Note 14 for further details.
(2) See Note 1 “2020 Stock Split and Capital Reorganization” for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Qualtrics International Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue: | |||||||||||
| Subscription | $ | $ | |||||||||
| Professional services and other | |||||||||||
| Total revenue | |||||||||||
| Cost of revenue: | |||||||||||
| Subscription | |||||||||||
| Professional services and other | |||||||||||
| Total cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Research and development | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Total operating expenses | |||||||||||
| Operating loss | ( | ( | |||||||||
| Other non-operating income (expense), net | ( | ||||||||||
| Loss before income taxes | ( | ( | |||||||||
| Provision for income taxes | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per share attributable to common stockholder, basic and diluted | $ | ( | $ | ( | |||||||
| Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholder, basic and diluted | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Operating expenses includes:
Stock-based compensation expense as follows:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Cost of subscription revenue | $ | $ | |||||||||
| Cost of professional services and other revenue | |||||||||||
| Research and development | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Total stock-based compensation expense, including cash settled | $ | $ | |||||||||
Amortization of acquired intangible assets as follows:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Cost of subscription revenue | $ | $ | |||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Total amortization of acquired intangible assets | $ | $ | |||||||||
2
Qualtrics International Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation gain (loss) | ( | ( | |||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Qualtrics International Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
(Unaudited)
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total deficit | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Capital contribution from SAP | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Total deficit | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock units (RSUs) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Modification of cash-settled stock-based compensation awards into equity-settled awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Capital contribution from SAP | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Sales of Class A common stock, net of issuance costs (1) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||
________________
(1)See Note 10 “Sale of Class A Common Stock” for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Qualtrics International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Reduction of right-of-use assets from operating leases | |||||||||||
| Stock-based compensation expense, including cash settled | |||||||||||
| Amortization of deferred contract acquisition costs | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Deferred contract acquisitions costs | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Lease liabilities | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Other liabilities | |||||||||||
| Settlement of stock-based payments liabilities | ( | ( | |||||||||
| Net cash flows used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
| Cash paid for intangible assets | |||||||||||
| Cash paid for business combinations, net of cash acquired | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash flows used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from capital contributions from SAP | |||||||||||
| Proceeds from issuance of class A common stock, net of underwriting discounts and commissions | |||||||||||
| Payment of costs related to initial public offering | ( | ||||||||||
| Repayment of promissory note | ( | ||||||||||
| Net cash flows provided by financing activities | |||||||||||
| Effect of changes in exchange rates on cash and cash equivalents | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemented cash flow disclosures | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for operating leases, net of incentives received | $ | $ | |||||||||
| Modification of cash-settled stock-based compensation awards into equity-settled awards | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Capital expenditures incurred but not yet paid | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | |||||||||
| Equity-based compensation capitalized as internal-use software | $ | $ | |||||||||
| Note payable issued for dividend declared | $ | $ | |||||||||
| Costs related to initial public offering incurred but not yet paid | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Qualtrics International Inc.
Notes to Condensed Consolidated Financial Statements
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics has built the first experience management platform (“XM Platform”) to manage customer, employee, product, and brand experiences. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services, and engineering services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2021, and the condensed consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for the three months ended March 31, 2021 and 2020 are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to state fairly the Company's financial position as of March 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2021 and 2020. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other future year or interim period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2020, included in the Company's Annual Report on Form 10-K.
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. 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.
Use of Estimates
6
Foreign Currency Transactions
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.
7
Recognition of Revenue
Access to the Company’s XM Platform represents a series of distinct services as the Company continually provides access to and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer.
Revenue from professional services and other revenue related to research services is recognized upon completion because completion and delivery of the results is considered a separate performance obligation satisfied at a point in time. Revenue from professional services and other revenue related to customized software coding is recognized upon completion, because the customer consumes the intended benefit and assumes control upon final completion of the custom coding. Revenue from professional services and other revenue related to implementation and other ancillary services is recognized as the services are performed, because the customer consumes the benefit as the services are provided.
Judgment is required to determine whether revenue is to be recognized at a point in time or over time. For performance obligations satisfied over time, we need to measure progress using the method that best reflects Qualtrics’ performance.
All judgments and estimates mentioned above can significantly impact the timing and amount of revenue to be recognized.
Contract Balances
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Subscription revenue: | |||||||||||
| Revenue included in prior period deferred revenue | $ | $ | |||||||||
| Revenue generated from same period billings | |||||||||||
| Total subscription revenue | $ | $ | |||||||||
| Professional services and other revenue: | |||||||||||
| Revenue included in prior period deferred revenue | $ | $ | |||||||||
| Revenue generated from same period billings | |||||||||||
| Total professional services and other revenue | $ | $ | |||||||||
8
Remaining Performance Obligations
Disaggregation of Revenue
The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use the Company’s cloud platform:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| United States | $ | $ | |||||||||
| International | |||||||||||
| Total revenue | $ | $ | |||||||||
No single country outside the United States accounted for 10% or more of revenue during the three months ended March 31, 2021 and 2020.
Stock-Based Compensation, including cash settled
On December 28, 2020, the Company initiated a voluntary exchange offer pursuant to which it offered its eligible employees, including its executive officers, the ability to exchange their existing unvested legacy liability-classified stock-based awards to be settled in cash (“Qualtrics Rights”) and SAP restricted stock units (“RSUs”) for awards with underlying shares of the Company’s 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.
Net loss per Share Attributable to Common Stockholders
Accounts Receivable and Allowances
9
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 three months ended March 31, 2021 and 2020.
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 $23.4 million and $30.2 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, $1.3 million of net reductions were charged to revenue and $5.5 million of net reductions were charged to deferred revenue. During the three months ended March 31, 2020, $0.4 million of net reductions were charged to revenue and $2.1 million of net reductions were charged to deferred revenue.
Concentration of Credit Risk
Deferred Contract Acquisition Costs, net
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 $11.2 million and $6.7 million for the three months ended March 31, 2021 and 2020, 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.
10
Leases
Internal-use Software
Income Taxes
Income taxes as presented in the condensed 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 condensed consolidated financial statements of the Company. Similarly, the tax treatment of certain items reflected in the condensed 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 condensed consolidated financial statements may not be indicative of the income taxes that the Company will generate in the future.
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 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
11
measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Recently Issued Accounting Pronouncements Not Yet Adopted
In 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 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.
2.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
| As of March 31, | As of December 31, | ||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Cash | $ | $ | |||||||||
| Money market mutual funds | |||||||||||
| Total cash and cash equivalents | $ | $ | |||||||||
3.FAIR VALUE MEASUREMENTS
12
4.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
| As of March 31, | As of December 31, | ||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Internal-use software | $ | $ | |||||||||
| Server equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Computer equipment | |||||||||||
| Buildings | |||||||||||
| Furniture and fixtures | |||||||||||
| Software | |||||||||||
| Construction in progress | |||||||||||
| Total property and equipment | $ | $ | |||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
The Company recognized depreciation and amortization expense related to its property and equipment as follows:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Cost of revenue | $ | $ | |||||||||
| Research and development | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Total depreciation and amortization expense | $ | $ | |||||||||
5.LEASES
The Company has operating leases for corporate offices under non-cancelable operating leases with various expiration dates. There are no finance leases. The leases have remaining terms of 1 to 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:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Operating lease cost | $ | $ | |||||||||
| Variable and short-term lease cost | |||||||||||
13
Supplemental balance sheet information related to operating leases was as follows:
| As of March 31, | As of December 31, | ||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Operating lease liabilities, current | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
Other information related to leases was as follows:
| As of March 31, | As of December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Weighted average remaining lease term | |||||||||||
| Weighted average discount rate | % | % | |||||||||
As of March 31, 2021, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, was as follows:
| As of March 31, | |||||
| in thousands | 2021 | ||||
| Remainder of 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total minimum lease payments | $ | ||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
6.OTHER INTANGIBLE ASSETS, NET
Other intangible assets, net consisted of the following:
| As of March 31, | As of December 31, | ||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Patents | $ | $ | |||||||||
| Developed technology | |||||||||||
| Customer relationships | |||||||||||
| Developed content | |||||||||||
| Tradename | |||||||||||
| License agreements | |||||||||||
| Total intangible assets | $ | $ | |||||||||
| Accumulated amortization | ( | ( | |||||||||
| Other intangible assets, net | $ | $ | |||||||||
14
The Company recognized amortization expense to cost of revenue of $0.3
Estimated amortization expense for intangible assets for the next five years consists of the following:
| As of March 31, | |||||
| in thousands | 2021 | ||||
| Remainder of 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
7.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| As of March 31, | As of December 31, | ||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Accrued wages, bonuses and commissions | $ | $ | |||||||||
| Accrued payroll taxes | |||||||||||
Share deposit liability (1) | |||||||||||
| Other accrued expenses | |||||||||||
| Accrued income taxes | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
(1)See Note 10 “Sale of Class A Common Stock” for further details.
8.PROMISSORY NOTES
In January 2021, and in connection with the initial public offering, the Company declared a $2,392 million dividend in the form of two promissory notes payable from Qualtrics International Inc. to SAP AMERICA, INC.
Promissory Note 1 was issued with a principal amount of $1,892 million and interest rate of 0.14 % compounded semi annually. The principal balance and accrued interest was due and paid in full on February 1, 2021, the date of the closing of the initial public offering.
Promissory Note 2 was issued with a principal amount of $500 million and interest rate of 1.35 % compounded semi annually. The principal balance and accrued interest is due and payable in full on or before the earlier of (i) February 2031, the 10 -year anniversary of the closing date of the initial public offering, and (ii) the date on which the aggregate net cash proceeds of primary public offerings of shares of the Company’s Class A common stock exceeds $500 million. The Company has the right to prepay this note in full or in part at any time at par and without prepayment penalties. At any time following August 1, 2021, the six-month anniversary of the closing date of the initial public offering, if the 30 -day volume weighted average price per share of the Company’s Class A common stock exceeds $37.50 , SAP has the right to cause the Company to effect one or more follow-on public offerings within 30 days following its receipt of such written notice from SAP; provided, however, that the Company 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 the Company, effecting a follow-on public offering would be detrimental to the Company at such time.
15
9.COMMITMENTS AND CONTINGENCIES
Leases
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 the second half of 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.COMMON STOCK
Sale of Class A Common Stock
In December 2020, the Company entered into a stock purchase agreement with Q II, an entity controlled by Ryan Smith, the Company’s founder and executive chair, pursuant to which Q II purchased 6,000,000 shares of 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) the closing of the Company’s 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.
On December 23, 2020, Silver Lake Partners VI DE (AIV), L.P. (“Silver Lake”) agreed to purchase $550 million of shares of 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 $30.00 per share, in a concurrent private placement transaction (the “Silver Lake investment”). On February 1, 2021, the Company closed its private placement transaction with Silver Lake.
16
11.STOCK-BASED COMPENSATION
Stock-based compensation expense, including cash settled, for the three months ended March 31, 2021 and 2020 was recorded as follows:
| Three Months Ended March 31, | |||||||||||
| in thousands | 2021 | 2020 | |||||||||
| Cost of subscription revenue | $ | $ | |||||||||
| Cost of professional services and other revenue | |||||||||||
| Research and development | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
Total stock-based compensation expense, including cash settled | $ | $ | |||||||||
Cash Awards
Qualtrics Rights
During the three months ended March 31, 2021, 1.7 million Qualtrics Rights vested and were settled for $69.5 million in cash. During the three months ended March 31, 2020, 2.2 million Qualtrics Rights vested and were settled for $93.0 million in cash. The unrecognized expense related to Qualtrics Rights was $1.2 million and $69 million as of March 31, 2021 and December 31, 2020, and will be recognized over a remaining vesting period of up to three years .
As of March 31, 2021 and December 31, 2020, 0.1 million and 5.5 million outstanding Qualtrics Rights were valued based on the SAP share of €104.42 and €107.22 , respectively, multiplied by the Equity Award Exchange Ratio translated into US$ and less than 0.1 million and 2.0 million, respectively, outstanding Qualtrics Rights were valued at $35.00 0.6 years and 1.5 years at March 31, 2021 and December 31, 2020, respectively. The weighted average SAP share price for the Qualtrics Rights settled in during the three months ended March 31, 2021 and 2020 was €104.71 and €112.93 , respectively.
Move SAP Plan (SAP RSU Plan)
During the three months ended March 31, 2021, less than 0.1 million Move SAP RSUs vested and were settled for $2.5 million in cash. During the three months ended March 31, 2020, less than 0.1 million Move SAP RSUs vested and were settled for $5.3 million in cash. The unrecognized expense related to Move SAP RSUs was $8.8 million and $143.0 million as of March 31, 2021 and December 31, 2020, respectively, and will be recognized over a remaining vesting period of up to three years .
Changes in Outstanding Awards Under the Company’s Cash-Settled Plans
| in thousands | Qualtrics Rights | SAP RSU Plan | |||||||||
| Outstanding as of December 31, 2020 | |||||||||||
| Exchanged into Qualtrics Equity Awards | ( | ( | |||||||||
| Settled/exercised | ( | ( | |||||||||
| Forfeited | ( | ( | |||||||||
| Outstanding as of March 31, 2021 | |||||||||||
17
| in thousands | As of March 31, 2021 | As of December 31, 2020 | |||||||||
| Qualtrics Rights - total carrying amount of liabilities | $ | $ | |||||||||
| SAP RSU Plan - Total carrying amount of liabilities | |||||||||||
Equity Awards
On January 28, 2021, the Company completed a voluntary exchange offer pursuant to which 5.4 million cash-settled Qualtrics Rights and 1.3 million cash-settled SAP RSU awards were exchanged and modified into 12.8 million equity-settled Qualtrics RSU awards, representing 93 % of the outstanding Qualtrics Rights and SAP RSU awards.
In January 2021, the 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, the 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.
The following table sets forth the outstanding Qualtrics RSUs and related activity for the three months ended March 31, 2021:
| Number of RSUs (in thousands) | Weighted-Average Grant Date Fair Value | ||||||||||
| Outstanding as of December 31, 2020 | $ | ||||||||||
| Exchanged from Qualtrics Rights and SAP RSU Awards | |||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited/Canceled | ( | ||||||||||
| Outstanding as of March 31, 2021 | $ | ||||||||||
As of March 31, 2021, there was $2,980 million of unrecognized stock-based compensation expense related to outstanding Qualtrics RSUs which is expected to be recognized over a weighted-average period of 3.4 years.
Own SAP Plan (Own)
Starting in July 2019 under Own, employees had 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 matched the employee investment by 40 % and added a subsidy equivalent of €20 per month for non-executives. The number of shares purchased under this plan was 17,440 and 40,299 during the three months ended March 31, 2021 and 2020, respectively. The Company recognized compensation expense associated with the match of $0.7 million and $1.5 million during the three months ended
18
March 31, 2021 and 2020, respectively. In connection with the completion of the Company’s initial public offering, employees are no longer able to participate in Own.
Qualtrics Employee Stock Purchase Plan (ESPP)
In December 2020, the Company's board of directors approved the ESPP, which became effective in January 2021. The ESPP initially reserved and authorized the issuance of up to a total of 12,000,000 2 % of the number of shares of our Class A common stock reserved for issuance under the ESPP, 1 % of the outstanding number of shares of our Class B and Class A common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee. The share reserve is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.
The first offering under the ESPP began on February 1, 2021 and will end on August 1, 2021. Each employee who is a participant in the ESPP may purchase shares by authorizing contributions at a minimum of 1 % up to a maximum of 20 % of his or her compensation for each pay period. Accumulated contributions will be used to purchase shares on the last business day of the purchase period at a price equal to 85 % of the fair market value of the shares on the first business day of the offering period (our initial public offering price) or the last business day of the offering period, whichever is lower, provided that no more than a number of shares of Class A common stock determined by dividing $15,000 by the fair market value of the shares on the first business day of the offering period (or a lesser number as established by the plan administrator in advance of the purchase period) may be purchased by any one employee during each purchase period. Under applicable tax rules, an employee may purchase no more than $25,000 worth of shares of Class A common stock, valued at the start of the offering period, under the ESPP for each calendar year in which a purchase right is outstanding. The Company recognized compensation expense associated with the ESPP of $2.9 million during the three months ended March 31, 2021.
Sale of Class A Common Stock
As discussed in Note 10, regarding the sale of Class A common stock to Q II, the 6,000,000 shares have certain vesting conditions including the completion of the Company’s IPO and the continued employment of Ryan Smith through June 30, 2021. Based on the terms of purchase agreement, the sale of 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.
12.NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the calculation of basic net loss per share attributable to common stockholders during the periods presented.
| in thousands (except share amount) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to common shareholders | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted-average shares outstanding for basic loss per share | |||||||||||
| Basic loss per share | $ | ( | $ | ( | |||||||
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been
19
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Qualtrics restricted stock units | |||||||||||
| Qualtrics employee stock purchase program | |||||||||||
13.INCOME TAXES
The Company has an effective tax rate of (0.8 )% and (23.0 )% for the three months ended March 31, 2021 and 2020, respectively. The Company has incurred U.S. operating losses and has minimal profits in its foreign jurisdictions.
The Company has evaluated all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and has determined that it is more likely than not that its net deferred tax assets will not be realized in the United States. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against its net US deferred tax assets.
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 the three months ended March 31, 2021 and 2020, respectively.
14.RELATED PARTY TRANSACTIONS
Since the SAP acquisition in 2019, SAP and its affiliates are related parties to the Company. The Company has entered into certain arrangements for services and products with SAP and its affiliates.
The consolidated statements of operations and comprehensive income statements include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. The condensed consolidated statement of operations also includes expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. The Company directly charges SAP for certain functions provided to SAP, including sales support. These charges were determined based on actual expenses incurred on Qualtrics’ or SAP’s behalf or by usage.
During the three months ended March 31, 2021 and 2020, the Company received revenue of $5.2 million and $1.8 million, respectively, from SAP and its affiliates in exchange for services and products. Total costs charged from SAP and its affiliates to the Company were $11.9 million and $4.7 million during the three months ended March 31, 2021 and 2020, respectively. Total costs charged from the Company to SAP and its affiliates were $4.1 million and $3.3 million during the three months ended March 31, 2021 and 2020, respectively. The outstanding receivable (payable) balance with SAP and its affiliates as of March 31, 2021 and December 31, 2020 was $14.7 million and $(13.4 ) million, respectively.
In January 2021, and in connection with the initial public offering, the Company declared a $2,392 million dividend in the form of two promissory notes payable from Qualtrics International Inc. to SAP AMERICA, INC. Promissory Note 1 was issued with a principal amount of $1,892 million and paid in full on February 1, 2021. Promissory Note 2 was issued with a principal amount of $500 million and interest rate of 1.35 % compounded semi annually. See Note 8 “Promissory Notes” for further details.
Certain Board members of the Company and certain Supervisory Board and Executive Board members of SAP SE currently hold, or held within the last year, positions of significant responsibility with other entities. We have relationships with certain of these entities in the ordinary course of business. During the three months ended March 31, 2021, and 2020, revenue and charges from these related parties were immaterial.
20
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We created the first experience management platform to manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for Experience Management. The Qualtrics Experience Management Platform, or Qualtrics XM, is a system of action that helps companies design and improve the experiences they provide to their many constituents across these four core experiences.
Our revenue was $238.6 million and $176.1 million for the three months ended March 31, 2021 and 2020, respectively, representing year-over-year growth of 36% in each period, respectively. For the three months ended March 31, 2021 and 2020, our net loss was $199.9 million and $44.8 million, respectively. The results of our operations for the three months ended March 31, 2021 and 2020 were impacted by equity and cash settled stock-based compensation expense.
We generate revenue by selling subscriptions to our XM Platform and integrated solutions, as well as professional services. Over 99% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised 78% of our total revenue for the three months ended March 31, 2021. We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 3% of revenue during the three months ended March 31, 2021, and our largest industries by annual recurring revenue, or ARR, as of March 31, 2021 were financial services, professional and business services, education, technology, government, and healthcare. ARR is calculated by annualizing subscription revenue in the last month of a period.
We price and package our software subscriptions solutions based on the capacity, use case, and functionality needs of our customers. This pricing and packaging includes volume of expected responses, number of users accessing our platform, number of employees, and level of functionality provided, such as dashboards, iQ functionality, and integrations. We have also recently begun to offer use case pricing that simplifies pricing for customers seeking to address specific needs. Our customers often expand their subscriptions as they increase volume of responses, add solutions and integrations, grow users and employees, and increase features and workflows within each solution.
Our professional services consist primarily of research services, through our DesignXM offering, which allows customers to gain market intelligence by procuring a curated group of respondents and returning actionable results, while conforming to best-practice design and methodology, as well as implementations, configurations, and integration and engineering services to help customers deploy our XM Platform. Other professional services revenue consists of consulting and training fees.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.
Customer Acquisition and Expansion
We are focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. Our
22
customers include businesses of all sizes, academic institutions, and government organizations. We define the number of customers at the end of any particular period as the number of parties or individual legal entities that have entered into a separate subscription contract with us. For avoidance of doubt, international subsidiaries of parent entities are not separately counted, but business units, brands, and academic institutions are counted if they are distinct legal entities. A single organization or customer may have multiple paid business accounts.
Our business model relies on rapidly and efficiently landing new customers and expanding our relationship with them over time. We have a history of attracting new customers, driving expanded use through upselling our XM Platform across the enterprise, and cross-selling through the subsequent deployment of additional solutions throughout the enterprise. Our relationship with SAP has resulted in greater access to enterprise customers and increased cross-sell opportunities through SAP’s customer base.
Investing for Growth
Our investment for growth encompasses multiple critical areas, including international growth, enterprise sales, and product expansion.
Our revenue outside of the United States represented 29% and 27% of our total revenue in the three months ended March 31, 2021 and 2020. 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.
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.
We continue to increase the number of customers who have entered into larger subscriptions with us. We had 1,457 customers with ARR of $100,000 or more as of March 31, 2021, up from 1,338 as of December 31, 2020. The
23
number of customers with ARR of $100,000 or more indicates the strategic importance of our platform for enterprise customers and our ability to both initially land significant accounts and grow them over time.
Net Retention Rate
We calculate our dollar-based net retention rate to measure our ability to retain and expand subscription revenue from our existing customers and is an indicator of the value our platform delivers to customers and our future business opportunities. Our net retention rate compares our subscription revenue from the same set of customers across comparable periods and reflects customer renewals, expansion, contraction and churn.
We calculate our net retention rate on a trailing four-quarter basis. As of March 31, 2021, our net retention rate was 120%. Our net retention rate was 125% as of March 31, 2020.
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 in December 2020, we operated as a wholly owned subsidiary of SAP. Accordingly, our financial results for the three months ended March 31, 2021 differ in comparison to the three months ended March 31, 2020 primarily with respect to sales and marketing expenses and equity and cash settled stock-based compensation expense.
The results of our operations include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. Our results also include expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. We expect this revenue and these cross charges to continue in the near future. These amounts may fluctuate from period to period based on the nature and extent of the indirect benefits received and provided. See Note 14 “Related Party Transactions” for further details in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
During the three months ended March 31, 2021 we recorded $203.0 million in equity and cash settled stock-based compensation expense compared to $12.5 million during the three months ended March 31, 2020. The increase was primarily due to the issuance of RSU awards in connection with our initial public offering partially offset by an increase in forfeitures and a decrease in SAP’s stock price during the three months ended March 31, 2021. On January 28, 2021, we completed a voluntary exchange offer pursuant to which 5.4 million cash-settled Qualtrics Rights and 1.3 million cash-settled SAP RSU awards were exchanged into 12.8 million equity-settled Qualtrics RSU awards, representing 93% of the outstanding Qualtrics Rights and SAP RSU awards.
Our stock-based compensation expense for the three months ended March 31, 2021 of $203.0 million consisted of $203.1 million in equity settled awards and $(0.1) million in liability-classified awards. We settled $72.0 million of liability-classified awards during the three months ended March 31, 2021. Our stock-based compensation expense for the three months ended March 31, 2020 of $12.5 million consisted entirely of liability-classified awards. We settled $98.3 million of liability-classified awards during the three months ended March 31, 2020.
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 three months ended March 31, 2021 compared to the three months ended March 31, 2020. These changes are described in additional detail within our results of operations.
24
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 and indirect impact on our business, results of operations, and financial condition will depend on future developments that are highly uncertain. We have experienced, and may continue to experience, an adverse impact on certain parts of our business. The conditions caused by the pandemic have adversely affected or may in the future adversely affect, among other things, demand, spending by new customers, renewal and retention rates of existing customers, the length of our sales cycles, sales productivity, the value and duration of subscriptions, 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 customer and employee events. At our virtual event this year, titled Work Different, 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-
25
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 for a refund. We typically bill in advance for professional services and other revenue. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. We continue to increase deployment of partners to fulfill certain of these services, especially implementation services, and we generally expect professional services and other revenue to decrease as a percentage of total revenue in the long term, although this percentage may fluctuate from period to period.
Cost of revenue and gross margin
Cost of revenue. Our cost of subscription revenue includes expenses related to operating our XM Platform in data centers, depreciation of our data center equipment, and the amortization of our capitalized internal-use software and acquired technology. Subscription cost of revenue also includes employee-related costs associated with our customer support and XM Platform operations organizations. Our cost of professional services and other revenue includes vendor costs and employee-related costs associated with the delivery of these services. Additionally, we make allocations of certain overhead costs, primarily based on headcount, to each of these costs of revenue. Allocated overhead includes costs such as facilities, including lease expense, utilities, depreciation on leasehold improvements, and shared information technology costs. We expect our cost of revenue will increase in absolute dollars in future periods as we continue to invest in our business.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period based on the timing of capital expenditures and the related depreciation expense, or other changes in equity and cash settled stock-based compensation, employee-related costs, infrastructure costs, revenue mix, timing of completion of professional services projects, as well as revenue fluctuations. Excluding the impact of equity and cash settled stock-based compensation expense, we generally expect our gross margin to remain relatively consistent in the near term and to increase modestly in the long term, although our gross margin may fluctuate from period to period depending on the interplay of all of these factors.
Operating expenses
Research and development. Our research and development expenses consist primarily of employee-related costs for our engineering, product, and design teams, and allocated overhead.
We plan to continue to hire employees for our engineering, product, and design teams to support our efforts to enhance the functionality and improve the reliability, availability, and scalability of our XM Platform. Excluding the impact of equity and cash settled stock-based compensation expense, we expect our research and development expenses to increase in absolute dollars in future periods, to remain relatively consistent as a percentage of our revenue in the near term, and to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Sales and marketing. Our sales and marketing expenses relate to both inside and outbound sales activities, as well as expansion efforts with our current customers. The expenses consist primarily of employee-related costs, marketing programs and events, lead generation fees, indirect benefits received from SAP net of indirect benefits we provide to SAP, and allocated overhead. Sales commissions earned by our sales team and the related payroll taxes, that we consider to be incremental and recoverable costs of obtaining a contract with an organization, are deferred and amortized over an estimated period of benefit of five years.
26
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 condensed consolidated financial statements attribute current and deferred income taxes of SAP to our standalone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes, or ASC 740. Accordingly, our income tax provision was prepared following the separate return method. 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 condensed consolidated financial statements. Similarly, the tax treatment of certain items reflected in our condensed 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 condensed 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 condensed 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.
27
Results of Operations
The following table sets forth our results of operations for the periods presented:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Revenue: | |||||||||||
| Subscription | $ | 186,896 | $ | 128,265 | |||||||
| Professional services and other | 51,747 | 47,799 | |||||||||
| Total revenue | 238,643 | 176,064 | |||||||||
Cost of revenue(1)(2): | |||||||||||
| Subscription | 20,370 | 13,716 | |||||||||
| Professional services and other | 41,411 | 34,208 | |||||||||
| Total cost of revenue | 61,781 | 47,924 | |||||||||
| Gross profit | 176,862 | 128,140 | |||||||||
Operating expenses(1)(2): | |||||||||||
| Research and development | 62,806 | 35,489 | |||||||||
| Sales and marketing | 136,181 | 107,095 | |||||||||
| General and administrative | 174,449 | 22,487 | |||||||||
| Total operating expenses | 373,436 | 165,071 | |||||||||
| Operating loss | (196,574) | (36,931) | |||||||||
| Other non-operating income (expense), net | (1,740) | 485 | |||||||||
| Loss before income taxes | (198,314) | (36,446) | |||||||||
| Provision for income taxes | 1,540 | 8,389 | |||||||||
| Net loss | $ | (199,854) | $ | (44,835) | |||||||
________________
(1)Includes equity and cash settled stock-based compensation expense, as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Cost of subscription revenue | $ | 2,624 | $ | 169 | |||||||
| Cost of professional services and other revenue | 4,430 | 89 | |||||||||
| Research and development | 21,332 | 1,964 | |||||||||
| Sales and marketing | 22,777 | 3,783 | |||||||||
| General and administrative | 151,836 | 6,497 | |||||||||
| Total stock-based compensation, including cash settled | $ | 202,999 | $ | 12,502 | |||||||
(2)Includes amortization of acquired intangible assets as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Cost of subscription revenue | $ | 266 | $ | 266 | |||||||
| Sales and marketing | 51 | 51 | |||||||||
| General and administrative | 47 | ||||||||||