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xm-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 001-39952

QUALTRICS INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)


Delaware						47-1754215
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

333 West River Park Drive

Provo, Utah 84604

(Address, including zip code of principal executive offices)

385-203-4999

(Telephone number, including area code, of principal executive offices)


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share	XM	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐

As of October 11, 2021, the registrant had 541,228,137 shares of common stock outstanding, consisting of 118,057,527 shares of Class A common stock and 423,170,610 shares of Class B common stock.

TABLE OF CONTENTS


		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	41
Item 4.	Controls and Procedures	42
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	45
Item 6.	Exhibits	85

SIGNATURES		86

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,” “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 September 30,		As of December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	589,946	$	203,891
Accounts receivable, net of allowance (1)	258,809		296,148
Deferred contract acquisition costs, net	51,270		43,429
Prepaid expenses and other current assets	50,711		48,130
Total current assets	950,736		591,598
Non-current assets:
Property and equipment, net	122,152		116,120
Right-of-use assets from operating leases	183,841		195,372
Goodwill	27,092		6,709
Other intangible assets, net	7,749		3,959
Deferred contract acquisition costs, net of current portion	124,785		115,837
Deferred tax assets	3,961		92
Other assets	22,246		9,368
Total assets	$	1,442,562	$	1,039,055

Liabilities and equity (deficit)
Current liabilities:
Lease liabilities	$	15,710	$	7,125
Accounts payable (1)	46,823		30,452
Accrued liabilities	94,849		225,046
Liability-classified, stock-based awards	4,464		209,286
Deferred revenue	514,337		495,638
Total current liabilities	676,183		967,547
Non-current liabilities:
Lease liabilities, net of current portion	221,590		235,620
Liability-classified, stock-based awards, net of current portion	330		76,627
Deferred revenue, net of current portion	5,891		5,477
Note payable (1)	504,564		—
Deferred tax liabilities	3,966		5,970
Other liabilities	11,110		16,716
Total liabilities	$	1,423,634	$	1,307,957
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 92,680,590 and 6,000,000 shares as of September 30, 2021 and December 31, 2020(2)	9		1
Class B common stock, par value $0.0001 per share; authorized 1,000,000,000 shares; issued and outstanding 423,170,610 as of September 30, 2021 and December 31, 2020(2)	42		42
Additional paid in capital	2,167,649		1,126,631
Accumulated other comprehensive income (loss)	(631)		3,191
Accumulated deficit	(2,148,141)		(1,398,767)
Total equity (deficit)	18,928		(268,902)
Total liabilities and equity (deficit)	$	1,442,562	$	1,039,055

________________

(1) Includes amounts from related parties. See Note 15 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.

Qualtrics International Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Subscription	$	220,314	$	148,259	$	611,748	$	415,000
Professional services and other	51,320		44,590		147,874		134,956
Total revenue	271,634		192,849		759,622		549,956
Cost of revenue:
Subscription	23,802		16,362		65,865		46,974
Professional services and other	43,041		32,674		127,522		100,060
Total cost of revenue	66,843		49,036		193,387		147,034
Gross profit	204,791		143,813		566,235		402,922
Operating expenses:
Research and development	83,875		62,065		226,552		168,985
Sales and marketing	161,570		103,008		449,446		322,775
General and administrative	236,810		60,731		637,944		155,225
Total operating expenses	482,255		225,804		1,313,942		646,985
Operating loss	(277,464)		(81,991)		(747,707)		(244,063)
Other non-operating expense, net	(3,160)		(556)		(6,091)		(483)
Loss before income taxes	(280,624)		(82,547)		(753,798)		(244,546)
Provision (benefit) for income taxes	5,409		3,141		(4,424)		13,481
Net loss	$	(286,033)	$	(85,688)	$	(749,374)	$	(258,027)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.56)	$	(0.20)	$	(1.49)	$	(0.61)
Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted	515,212,996		423,170,610		503,781,082		423,170,610

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

Cost of revenue and operating expenses includes:

Stock-based compensation expense as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
Cost of subscription revenue	$	2,516	$	725	$	8,522	$	3,809
Cost of professional services and other revenue	6,977		2,582		18,161		6,193
Research and development	33,697		23,919		89,410		63,165
Sales and marketing	36,651		12,086		94,917		34,933
General and administrative	196,979		44,810		553,582		109,949
Total stock-based compensation expense, including cash settled	$	276,820	$	84,122	$	764,592	$	218,049

Amortization of acquired intangible assets as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
Cost of subscription revenue	$	442	$	265	$	973	$	797
Sales and marketing	74		51		176		153
General and administrative	47		47		141		141
Total amortization of acquired intangible assets	$	563	$	363	$	1,290	$	1,091

Qualtrics International Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net loss	$	(286,033)	$	(85,688)	$	(749,374)	$	(258,027)
Other comprehensive income (loss):
Foreign currency translation gain (loss)	(2,015)		1,908		(3,822)		1,452
Comprehensive loss	$	(288,048)	$	(83,780)	$	(753,196)	$	(256,575)

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

Qualtrics International Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)


	Three Months Ended September 30, 2021
	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
Balance, June 30, 2021	91,035,764	$	9	423,170,610	$	42	$	1,895,938	$	1,384	$	(1,862,108)	$	35,265
Stock-based compensation	—	—		—	—		277,737		—		—		277,737
Issuance of common stock upon settlement of restricted stock units (RSUs)	1,073,145	—		—	—		—		—		—		—
Issuance of common stock for employee stock purchase plan	571,681	—		—	—		16,586		—		—		16,586
Payment of withholding taxes on vested RSUs and employee stock purchase plan	—	—		—	—		(22,968)		—		—		(22,968)
Modification of cash-settled stock-based compensation awards into equity-settled awards	—	—		—	—		356		—		—		356
Net loss	—	—		—	—		—		—		(286,033)		(286,033)
Foreign currency translation adjustment	—	—		—	—		—		(2,015)		—		(2,015)
Balance, September 30, 2021	92,680,590	$	9	423,170,610	$	42	$	2,167,649	$	(631)	$	(2,148,141)	$	18,928


	Three Months Ended September 30, 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, June 30, 2020	—	$	—	423,170,610	$	42	$	866,631	$	(1,384)	$	(1,298,604)	$	(433,315)
Capital contribution from SAP	—	—		—	—		120,000		—		—		120,000
Net loss	—	—		—	—		—		—		(85,688)		(85,688)
Foreign currency translation adjustment	—	—		—	—		—		1,908		—		1,908
Balance, September 30, 2020	—	$	—	423,170,610	$	42	$	986,631	$	524	$	(1,384,292)	$	(397,095)


	Nine Months Ended September 30, 2021
	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
Balance, December 31, 2020	6,000,000	$	1	423,170,610	$	42	$	1,126,631	$	3,191	$	(1,398,767)	$	(268,902)
Stock-based compensation	—	—		—	—		764,273		—		—		764,273
Issuance of common stock upon settlement of RSUs	4,140,522	—		—	—		—		—		—		—
Issuance of common stock for employee stock purchase plan	571,681	—		—	—		16,586		—		—		16,586
Payment of withholding taxes on vested RSUs and employee stock purchase plan	—	—		—	—		(27,800)		—		—		(27,800)
Modification of cash-settled stock-based compensation awards into equity-settled awards	—	—		—	—		206,669		—		—		206,669
Capital contribution from SAP	—	—		—	—		115,000		—		—		115,000
Sales of Class A common stock, net of issuance costs (1)	81,968,387	8		—	—		2,238,571		—		—		2,238,579
Class A common stock option exercised(1)	—	—		—	—		119,999		—		—		119,999
Dividend declared	—	—		—	—		(2,392,280)		—		—		(2,392,280)
Net loss	—	—		—	—		—		—		(749,374)		(749,374)
Foreign currency translation adjustment	—	—		—	—		—		(3,822)		—		(3,822)
Balance, September 30, 2021	92,680,590	$	9	423,170,610	$	42	$	2,167,649	$	(631)	$	(2,148,141)	$	18,928


	Nine Months Ended September 30, 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	—	$	—	423,170,610	$	42	$	586,631	$	(928)	$	(1,126,265)	$	(540,520)
Capital contribution from SAP	—	—		—	—		400,000		—		—		400,000
Net loss	—	—		—	—		—		—		(258,027)		(258,027)
Foreign currency translation adjustment	—	—		—	—		—		1,452		—		1,452
Balance, September 30, 2020	—	$	—	423,170,610	$	42	$	986,631	$	524	$	(1,384,292)	$	(397,095)

________________

(1)See Note 11 “Sale of Class A Common Stock” for further details.

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

Qualtrics International Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(749,374)	$	(258,027)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	24,011		18,570
Loss on disposal of property and equipment	1,525		—
Reduction of right-of-use assets from operating leases	16,571		12,429
Stock-based compensation expense, including cash settled	764,592		218,049
Amortization of deferred contract acquisition costs	35,977		22,383
Deferred income taxes	(5,544)		2,672
Changes in assets and liabilities, excluding the effect of business combinations:
Accounts receivable, net	37,261		31,777
Prepaid expenses and other current assets	(5,043)		(7,578)
Deferred contract acquisitions costs	(54,986)		(63,293)
Other assets	(13,104)		(6,378)
Lease liabilities	(10,369)		213
Accounts payable	14,875		1,205
Accrued liabilities	(8,232)		(1,842)
Deferred revenue	18,837		(5,571)
Other liabilities	(985)		7,125
Settlement of stock-based payments liabilities	(76,875)		(283,963)
Net cash flows used in operating activities	(10,863)		(312,229)

Cash flows from investing activities
Purchases of property and equipment	(29,711)		(43,054)
Cash paid for business combination, net of cash acquired	(25,000)		—
Net cash flows used in investing activities	(54,711)		(43,054)

Cash flows from financing activities
Proceeds from capital contributions from SAP	115,000		400,000
Proceeds from issuance of Class A common stock, net of underwriting discounts and commissions	2,244,322		—
Payment of costs related to initial public offering	(3,081)		—
Repayment of promissory note	(1,892,280)		—
Payments for taxes related to net share settlement of equity awards	(27,800)		—
Issuance of class A common stock through Employee Stock Purchase Plan	16,586		—
Net cash flows provided by financing activities	452,747		400,000
Effect of changes in exchange rates on cash and cash equivalents	(1,118)		316
Net increase in cash and cash equivalents	386,055		45,033
Cash and cash equivalents, beginning of period	203,891		42,467
Cash and cash equivalents, end of period	$	589,946	$	87,500

Supplemented cash flow disclosures
Cash paid for income taxes	$	7,848	$	7,125
Cash paid for operating leases, net of incentives received	$	10,008	$	5,160
Modification of cash-settled stock-based compensation awards into equity-settled awards	$	206,669	$	—

Non-cash investing and financing activities
Capital expenditures incurred but not yet paid	$	208	$	16,431
Right-of-use assets obtained in exchange for lease obligations	$	1,374	$	7,258
Note payable issued for dividend declared	$	500,000	$	—
Expiration of contingency associated with Class A common stock option exercised	$	120,000	$	—

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

Qualtrics International Inc.

Notes to Condensed Consolidated Financial Statements

1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics has built the 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 September 30, 2021, and the condensed consolidated statements of operations, comprehensive loss, and stockholders' equity (deficit) for the three and nine months ended September 30, 2021 and 2020, and condensed consolidated statements of cash flows for the nine months ended September 30, 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 September 30, 2021 and its results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 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 and nine month periods are also unaudited. The results of operations for the three and nine months ended September 30, 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

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 prior to the IPO, valuation of deferred income tax assets, uncertain tax positions, contingencies, determining the incremental borrowing rate for

the calculation of the present value of lease liabilities and litigation accruals. Actual results could differ from those estimates.

Foreign Currency Transactions

The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date and revenue and expense amounts are translated at the average exchange rate for the period. Foreign currency translation gains and losses are recorded in other comprehensive loss. Exchange rate differences resulting from translation adjustments are accounted for as a component of accumulated other comprehensive loss. Gains and losses, whether realized or unrealized, from foreign currency transactions (those transactions denominated in currencies other than the entities’ functional currency) are included in other non-operating expense, net.

Revenue Recognition

The Company recognizes revenue from its service/product lines when control is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the services. Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue. The Company accounts for revenue contracts with customers by applying the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 – Revenue from Contracts with Customers (Topic 606), which includes the following steps:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in a contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, performance obligations are satisfied

Classes of Revenue

The Company derives revenue from two service/product lines:

Subscription Revenue

The Company generates revenue primarily from sales of subscriptions to access its XM Platform, together with related support services to its customers. Arrangements with customers do not provide the customer with the right to take possession of the software operating the XM Platform at any time. Instead, customers are granted continuous access to the XM Platform over the contractual period.

The Company’s subscription contracts generally have annual contractual terms while some have multi-year contractual terms. The Company generally bills annually in advance with net 30 payment terms. The Company’s agreements generally cannot be canceled 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 that are distinct from subscription revenue services. In addition, the Company provides professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.

Recognition of Revenue

Access to the Company’s XM Platform represents a series of distinct services as the Company continually provides access to and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer.

Revenue from professional services and other revenue related to research services is recognized upon completion because completion and delivery of the results is considered a separate performance obligation satisfied at a point in time. Revenue from professional services and other revenue related to customized software coding is recognized upon completion, because the customer consumes the intended benefit and assumes control upon final completion of the custom coding. Revenue from professional services and other revenue related to implementation and other ancillary services is recognized as the services are performed, because the customer consumes the benefit as the services are provided.

Judgment is required to determine whether revenue is to be recognized at a point in time or over time. For performance obligations satisfied over time, we need to measure progress using the method that best reflects the Company’s performance.

All judgments and estimates mentioned above can significantly impact the timing and amount of revenue to be recognized.

Contract Balances

The Company bills in advance for annual contracts, and at times enters into non-cancelable multi-year deals. Non-cancelable multi-year deals typically include price escalations each year. The Company recognizes revenue on a straight-line basis over the non-cancelable term and accounts for the difference between straight-line revenue and annual invoice amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of September 30, 2021 were $14.8 million and $13.4 million, respectively. 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 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 $29.2 million and $33.8 million as of September 30, 2021 and December 31, 2020, respectively, and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue for each of the Company’s revenue generating solutions:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
Subscription revenue:
Revenue included in prior period deferred revenue	$	93,347	$	65,382	$	386,916	$	283,837
Revenue generated from same period billings	126,967		82,877		224,832		131,163
Total subscription revenue	$	220,314	$	148,259	$	611,748	$	415,000
Professional services and other revenue:
Revenue included in prior period deferred revenue	$	11,699	$	10,035	$	51,513	$	32,108
Revenue generated from same period billings	39,621		34,555		96,361		102,848
Total professional services and other revenue	$	51,320	$	44,590	$	147,874	$	134,956

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 September 30, 2021 was $1,362.1 million, of which approximately $781.5 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, 2020 was $1,144.4 million. This estimate is based on the Company’s best judgment, as it needs to consider estimates of possible future contract modifications. The amount of transaction price allocated to the remaining performance obligations, and changes in this amount over time, are impacted by, among others, currency fluctuations and the contract period of our cloud contracts remaining at the balance sheet date and thus by the timing of contract renewals.

Disaggregation of Revenue

The following table summarizes the revenue by region based on the billing address of customers who have contracted to use the Company’s cloud platform:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
United States	$	192,114	$	136,861	$	537,632	$	395,813
International	79,520		55,988		221,990		154,143
Total revenue	$	271,634	$	192,849	$	759,622	$	549,956

No single country outside the United States accounted for 10% or more of revenue during the three and nine months ended September 30, 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 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. On September 13, 2021, the Company completed an additional voluntary exchange offer for certain employees in Australia that were not eligible for the January 28, 2021 exchange, pursuant to which less than 0.1 million cash-settled Qualtrics Rights and SAP RSU awards were exchanged and modified into equity-settled Qualtrics RSU awards.

Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. As there are no potentially dilutive securities, diluted earnings per share attributable to common stockholders has not been presented. For purposes of calculating earnings per share, the Company uses the two-class method. Because both classes of common stock share the same rights in dividends, basic and diluted earnings per share was the same for both common stock classes.

Accounts Receivable and Allowances

Accounts receivable are recorded at the invoiced amount, net of allowances. Accounts receivable are typically due within 30 days from the date of invoice. Customer balances outstanding longer than the contractual payment

terms are considered past due. The Company establishes allowances for bad debt and cancellations based on historical collection data and customer specific circumstances. The allowance for bad debt, as needed, is established with a charge to bad debt expense in the consolidated statements of comprehensive loss. Bad debt expense was not material during the three and nine months ended September 30, 2021 and 2020. The allowance for cancellations is established with a reduction to revenue and deferred revenue. In the event of lack of payment due to a bankruptcy or other credit-related issues of a customer, the Company writes off the related accounts receivable with a reduction to the allowance for bad debt. In the event of lack of payment from a customer for issues unrelated to credit risk, the Company cancels the customer’s subscription access or service and writes off the corresponding accounts receivable with reductions to the allowance for cancellations.

The Company’s allowances were $10.2 million and $30.2 million as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021 and 2020, $(1.2) million and $0.9 million of net (reductions) additions were charged to revenue, respectively, and $(5.0) million and $3.1 million of net (reductions) additions were charged to deferred revenue, respectively. During the nine months ended September 30, 2021 and 2020, $(3.5) million and $0.7 million of net (reductions) additions were charged to revenue, respectively, and $(16.5) million and $2.0 million of net (reductions) additions were charged to deferred revenue, respectively.

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 September 30, 2021 and December 31, 2020. No single customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2021 and 2020.

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 $21.1 million and $20.6 million during the three months ended September 30, 2021 and 2020, respectively, and $55.0 million and $63.3 million during the nine months ended September 30, 2021 and 2020, 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 $12.8 million and $8.2 million for the three months ended September 30, 2021 and 2020, respectively, and $36.0 million and $22.4 million for the nine months ended September 30, 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.

Leases

Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement based on the present value of the minimum lease payments over the lease term. The Company utilizes certain practical expedients and policy elections available under Topic 842. Leases with a one-year term or less are not recognized on the balance sheet.

Internal-use Software

The Company capitalizes certain development costs incurred in connection with its internal-use software. These capitalized costs are primarily related to the software platforms that are hosted by the Company and accessed by its customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred as research and development costs. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life of 24 months. The Company recognized amortization expenses of $3.3 million and $3.2 million related to capitalized internal-use software for the three months ended September 30, 2021 and 2020, respectively, and $10.0 million and $9.3 million for the nine months ended September 30, 2021 and 2020, respectively, within cost of subscription revenue.

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.

As a result of the acquisition of Clarabridge, Inc. (“Clarabridge”) on October 1, 2021, described in Note 16, Subsequent Events, SAP America, Inc. (“SAP America”) no longer holds 80% of the value of our outstanding stock, and as such, the Company will no longer be a member of SAP America’s consolidated group for U.S. federal income tax purposes (the “U.S. Consolidated Group”), as of October 1, 2021. The tax attributes that had been utilized by U.S. Consolidated Group, and are not available for use by Qualtrics International Inc., will no longer be reflected in our consolidated financial statements beginning in the fourth quarter of 2021.

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

The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this standard on January 1, 2021 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements.

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 September 30,		As of December 31,
in thousands	2021		2020
Cash	$	214,195	$	203,891
Money market mutual funds	375,751		—
Total cash and cash equivalents	$	589,946	$	203,891

3.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 1, “Summary of Significant Accounting Policies” for additional details.

4.PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:


	As of September 30,		As of December 31,
in thousands	2021		2020
Internal-use software	$	26,625	$	25,757
Server equipment	28,199		27,551
Leasehold improvements	73,691		28,377
Computer equipment	19,080		15,589
Buildings	13,658		13,625
Furniture and fixtures	2,770		2,217
Software	—		222
Construction in progress	10,013		47,920
Total property and equipment	$	174,036	$	161,258
Accumulated depreciation and amortization	(51,884)		(45,138)
Property and equipment, net	$	122,152	$	116,120

The Company recognized depreciation and amortization expense related to its property and equipment as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
Cost of revenue	$	5,132	$	4,779	$	15,343	$	13,500
Research and development	864		408		2,307		1,263
Sales and marketing	1,508		783		4,174		2,317
General and administrative	343		79		897		399
Total depreciation and amortization expense	$	7,847	$	6,049	$	22,721	$	17,479

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 to be exercised.

The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
in thousands	2021		2020		2021		2020
Operating lease cost	$	5,388	$	5,987	$	16,513	$	17,823
Variable and short-term lease cost	2,031		1,948		5,498		3,307

Supplemental balance sheet information related to operating leases was as follows:


	As of September 30,		As of December 31,
in thousands	2021		2020
Operating lease right-of-use assets	$	183,841	$	195,372

Operating lease liabilities, current	15,710		7,125
Operating lease liabilities, non-current	221,590		235,620
Total operating lease liabilities	$	237,300	$	242,745

Other information related to leases was as follows:


	As of September 30,		As of December 31,
	2021		2020
Weighted average remaining lease term	11.1 years		11.8 years
Weighted average discount rate	3.16	%	3.19	%

As of September 30, 2021, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, were as follows:


	As of September 30,
in thousands	2021
Remainder of 2021	4,277
2022	24,067
2023	24,169
2024	23,894
2025	24,570
Thereafter	180,544
Total minimum lease payments	$	281,521
Less: imputed interest	(44,221)
Total	$	237,300

6.BUSINESS COMBINATIONS

In July 20, 2021, the Company acquired all of the outstanding stock of Usermind, Inc. (“Usermind”), a leader in real-time experience orchestration software. The assets, liabilities, and operating results of Usermind are reflected in the Company’s consolidated financial statements from the date of acquisition. On the closing date, the Company paid approximately $25.0 million in cash, net of cash assumed in the acquisition. The allocation of the purchase price, which is subject to adjustment based upon the completion of the valuation of the intangible assets, working capital adjustments, and finalization of tax related assumptions, is as follows:


in thousands	Usermind (July 2021)
Developed technology	$	4,500
Customer relationships	580
Goodwill	20,383
Other assets, net	614
Total assets acquired	26,077
Other liabilities, net	(1,077)
Total assets acquired, net	$	25,000

The goodwill arising from the acquisition consists largely of the synergies the Company is expected to achieve from combining the acquired assets and operations with its existing operations. Goodwill related to Usermind is not deductible for tax purposes. Acquisition-related costs totaled $