Qualtrics International Inc. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from ____ to ____

Commission File Number: 001-39952

QUALTRICS INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)


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

333 West River Park Drive

Provo, Utah 84604

(Address, including zip code of principal executive offices)

385-203-4999

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


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

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

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

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


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

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

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

As of April 27, 2023, the registrant had 606,391,893 shares of common stock outstanding, consisting of 183,221,283 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 March 31, 2023 and December 31, 2022	1
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	32
Item 4.	Controls and Procedures	33
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 6.	Exhibits	39

SIGNATURES		40

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 address and overcome challenges caused by the current economic downturn;

•our ability to attract enterprises and international organizations as customers for our products;

•our ability to expand our network with content consulting partners, delivery partners, and technology partners;

•the evolution of technology affecting our products and the competitive landscape;

•our ability to introduce new products and enhance existing products and to compete effectively with competitors;

•our ability to successfully enter into new markets and manage our international expansion;

•the attraction and retention of qualified employees and key personnel;

•our ability to effectively manage our growth and future expenses and maintain our corporate culture;

•our ability to realize cost savings and achieve other benefits related to our restructuring efforts;

•our anticipated investments in sales and marketing and research and development;

•our ability to maintain, protect, and enhance our intellectual property rights;

•our ability to successfully defend litigation brought against us;

•our ability to maintain data privacy and data security, including compliance with the broad spectrum of relevant laws;

•our ability to remediate our material weakness in our internal control over financial reporting;

•the sufficiency of our cash and cash equivalents to meet our liquidity needs;

•our ability to comply with modified or new laws and regulations applying to our business;

•the effects on our business of recent volatility in capital markets and lower market prices for our securities (including possible disruptions to the Company’s operations and customer demands due to the continuation of the COVID-19 pandemic);

•our ability to meet investor and customer expectations and evolving regulations regarding environmental, social and governance issues;

•our reduced ability to leverage resources at SAP as an independent company from SAP;

•the increased expenses associated with being an independent public company;

•the ability of the parties to consummate the Merger (as defined herein) in a timely manner or at all;

•the satisfaction (or waiver) of closing conditions to the consummation of the Merger;

•potential delays in consummating the Merger;

•the ability of the Company to timely and successfully achieve the anticipated benefits of the Merger;

•the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the Merger Agreement, including in circumstances that require the Company to pay the Company Termination Fee;

•the Company’s ability to implement its business strategy;

•significant transaction costs associated with the Merger;

•potential litigation relating to the Merger;

•the risk that disruptions from the Merger will harm the Company’s business, including current plans and operations (including risks related to diverting management’s attention from the Company’s ongoing business operations);

•potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger;

•legislative, regulatory and economic developments affecting the Company’s business;

•general economic and market developments and conditions;

•the evolving legal, regulatory and tax regimes under which the Company operates;

•potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger that could affect the Company’s financial performance;

•restrictions during the pendency of the Merger that may impact the Company’s ability to pursue certain business opportunities or strategic transactions; and

•unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as the Company’s response to any of the aforementioned factors.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

You should read this Quarterly Report on Form 10-Q and exhibits with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Qualtrics International Inc.

Condensed Consolidated Balance Sheets

(In thousands, except number of shares and par value)

(Unaudited)


	As of March 31,		As of December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	806,718	$	719,892
Accounts receivable, net of allowance (1)	384,501		537,037
Deferred contract acquisition costs, net	88,056		81,130
Prepaid expenses and other current assets	78,015		68,224
Total current assets	1,357,290		1,406,283
Non-current assets:
Property and equipment, net	223,328		215,645
Right-of-use assets from operating leases	213,616		216,514
Goodwill	1,117,915		1,117,915
Other intangible assets, net	199,734		210,415
Deferred contract acquisition costs, net of current portion	189,578		183,741
Deferred tax assets	9,318		9,625
Other assets	36,872		35,713
Total assets	$	3,347,651	$	3,395,851

Liabilities and equity
Current liabilities:
Lease liabilities	$	17,564	$	17,081
Accounts payable (1)	129,579		142,293
Accrued liabilities	130,383		155,291
Liability-classified, stock-based awards	510		1,053
Deferred revenue	848,445		858,186
Total current liabilities	1,126,481		1,173,904
Non-current liabilities:
Lease liabilities, net of current portion	259,855		261,097
Deferred revenue, net of current portion	14,387		16,717
Deferred tax liabilities	11,228		12,447
Other liabilities (1)	35,884		27,666
Total liabilities	1,447,835		1,491,831
Commitments and contingencies
Equity
Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares; no shares outstanding as of March 31, 2023 and December 31, 2022	—		—
Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 183,127,510 and 170,687,065 shares as of March 31, 2023 and December 31, 2022	18		17
Class B common stock, par value $0.0001 per share; authorized 1,000,000,000 shares; issued and outstanding 423,170,610 as of March 31, 2023 and December 31, 2022	42		42
Additional paid-in capital	5,682,305		5,428,297
Accumulated other comprehensive loss	(4,194)		(4,945)
Accumulated deficit	(3,778,355)		(3,519,391)
Total equity	1,899,816		1,904,020
Total liabilities and equity	$	3,347,651	$	3,395,851

________________

(1) Includes amounts from related parties. See Note 12 for further details.

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

Qualtrics International Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Revenue:
Subscription	$	339,803	$	280,808
Professional services and other	69,967		54,839
Total revenue	409,770		335,647
Cost of revenue:
Subscription	54,671		44,774
Professional services and other	68,511		54,493
Total cost of revenue	123,182		99,267
Gross profit	286,588		236,380
Operating expenses:
Research and development	108,975		105,999
Sales and marketing	252,772		218,330
General and administrative	178,672		202,589
Total operating expenses	540,419		526,918
Operating loss	(253,831)		(290,538)
Other non-operating income, net	1,655		674
Loss before income taxes	(252,176)		(289,864)
Provision for income taxes	6,788		2,461
Net loss	$	(258,964)	$	(292,325)

Net loss per share attributable to common stockholder, basic and diluted	$	(0.43)	$	(0.51)
Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted	599,314,127		575,700,568
Other comprehensive income (loss):
Foreign currency translation gains (losses)	751		(448)
Comprehensive loss	$	(258,213)	$	(292,773)

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

Qualtrics International Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)


	Three Months Ended March 31, 2023
	Class A common stock			Class B common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total equity
	Shares	Amount		Shares	Amount
Balance, December 31, 2022	170,687,065	$	17	423,170,610	$	42	$	5,428,297	$	(4,945)	$	(3,519,391)	$	1,904,020
Stock-based compensation	—	—		—	—		236,027		—		—		236,027
Issuance of common stock upon settlement of restricted stock units (RSUs)	10,596,029	1		—	—		(1)		—		—		—
Issuance of common stock upon exercise of stock options	116,278	—		—	—		866		—		—		866
Issuance of common stock for employee stock purchase plan	1,728,138	—		—	—		19,965		—		—		19,965
Common stock withheld related to net share settlement of equity awards	—	—		—	—		(2,849)		—		—		(2,849)
Net loss	—	—		—	—		—		—		(258,964)		(258,964)
Foreign currency translation adjustment	—	—		—	—		—		751		—		751
Balance, March 31, 2023	183,127,510	$	18	423,170,610	$	42	$	5,682,305	$	(4,194)	$	(3,778,355)	$	1,899,816


	Three Months Ended March 31, 2022
	Class A common stock			Class B common stock			Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total equity
	Shares	Amount		Shares	Amount
Balance, December 31, 2021	147,309,254	$	15	423,170,610	$	42	$	4,645,800	$	(1,244)	$	(2,457,913)	$	2,186,700
Stock-based compensation	—	—		—	—		270,089		—		—		270,089
Issuance of common stock upon settlement of restricted stock units (RSUs)	10,658,728	1		—	—		(1)		—		—		—
Issuance of common stock upon exercise of stock options	123,171	—		—	—		614		—		—		614
Issuance of common stock for employee stock purchase plan	770,966	—		—	—		20,380		—		—		20,380
Common stock withheld related to net share settlement of equity awards	—	—		—	—		(208,920)		—		—		(208,920)
Net loss	—	—		—	—		—		—		(292,325)		(292,325)
Foreign currency translation adjustment	—	—		—	—		—		(448)		—		(448)
Balance, March 31, 2022	158,862,119	$	16	423,170,610	$	42	$	4,727,962	$	(1,692)	$	(2,750,238)	$	1,976,090

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

Qualtrics International Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities
Net loss	$	(258,964)	$	(292,325)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	26,368		23,355
Gain on disposal of property and equipment	(25)		(17)
Change in fair value of distribution liability for tax sharing agreement	5,432		(1,500)
Reduction of right-of-use assets from operating leases	6,626		7,501
Stock-based compensation expense, including cash settled	231,970		268,261
Amortization of deferred contract acquisition costs	22,439		15,812
Deferred income taxes	(971)		(227)
Changes in assets and liabilities:
Accounts receivable, net	152,267		95,414
Prepaid expenses and other current assets	(9,752)		(7,259)
Deferred contract acquisitions costs	(34,716)		(26,809)
Other assets	(1,149)		(1,033)
Lease liabilities	(4,598)		(3,723)
Accounts payable	5,540		(13,472)
Accrued liabilities	(25,318)		(40,146)
Deferred revenue	(12,543)		1,969
Other liabilities	2,667		(16)
Settlement of stock-based payments liabilities	(994)		(2,682)
Net cash flows provided by operating activities	104,279		23,103

Cash flows from investing activities
Purchases of property and equipment	(21,811)		(13,173)
Cash paid for intangible assets	(2,050)		—
Net cash flows used in investing activities	(23,861)		(13,173)

Cash flows from financing activities
Payments of tax sharing liabilities to SAP (1)	(12,119)		—
Payments for taxes related to net share settlement of equity awards	(2,849)		(208,920)
Issuance of common stock of Employee Stock Purchase Plan	19,965		20,380
Proceeds from exercise of stock options	866		614
Net cash flows provided by (used in) financing activities	5,863		(187,926)
Effect of changes in exchange rates on cash and cash equivalents	545		(67)
Net increase (decrease) in cash and cash equivalents	86,826		(178,063)
Cash and cash equivalents as of 1 January	719,892		1,014,511
Cash and cash equivalents as of 31 March	$	806,718	$	836,448

Supplemental cash flow disclosures
Cash paid for income taxes	$	6,460	$	673
Cash paid for operating leases, net of incentives received	$	4,573	$	5,662

Non-cash investing and financing activities
Capital expenditures incurred but not yet paid	$	251	$	759
Stock-based compensation capitalized as internal-use software	$	4,416	$	2,193
Right-of-use assets obtained in exchange for lease obligations	$	1,928	$	15,761

________________

(1) Includes amounts from related parties. See Note 3 and 12 for further details.

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

Qualtrics International Inc.

Notes to Condensed Consolidated Financial Statements

1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics pioneered a new category of software, experience management, or XM, that enables organizations to find and fix broken experiences and drive operational improvements to improve customer loyalty, increase employee retention, and become a brand that people love.

The Company’s technology helps organizations find and keep customers, retain and engage employees, and improve their competitive position in their product categories and talent markets. The XM Platform helps organizations listen to their employees and customers, understand their feedback, and then take action in response. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services and engineering services.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated balance sheet as of March 31, 2023, and the condensed consolidated statements of comprehensive loss, stockholders' equity, and cash flows for the three months ended March 31, 2023 and 2022 are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to fairly state the Company's financial position as of March 31, 2023 and its results of operations and cash flows for the three months ended March 31, 2023 and 2022. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 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, 2022, included in the Company's Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the standalone selling prices for the Company’s services, valuation of the distribution liability related to the tax sharing agreement with SAP, and valuation of deferred income tax assets. Actual results could differ from those estimates.

Revenue

The Company derives revenue from two service/product lines:

Subscription Revenue

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

The Company’s subscription contracts generally have annual contractual terms while some have multi-year contractual terms. The Company generally bills annually in advance with net 30 payment terms. The Company’s agreements generally cannot be canceled for a refund.

Professional Services and Other Revenue

Professional services and other revenue mainly includes two types of services: research services and professional services. Research services is a solution provided to existing subscription customers with arrangements which are distinct from subscription revenue services. In addition, the Company provides professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.

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 invoiced amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of March 31, 2023 were $22.1 million and $21.7 million, respectively. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of December 31, 2022 were $22.3 million and $19.9 million, respectively.

The Company records contract liabilities to deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the customer prior to the related performance obligation being fulfilled. In certain circumstances, the Company receives consideration from customers in advance of a specific service being identified. Total consideration received in advance of a specific service being identified totaled $30.0 million and $31.3 million as of March 31, 2023 and December 31, 2022, respectively and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue and revenue generated from same period billings for each of the Company’s revenue generating solutions:


	Three Months Ended March 31,
in thousands	2023		2022
Subscription revenue:
Revenue included in prior period deferred revenue	$	270,659	$	228,216
Revenue generated from same period billings	69,144		52,592
Total subscription revenue	$	339,803	$	280,808
Professional services and other revenue:
Revenue included in prior period deferred revenue	$	43,069	$	23,790
Revenue generated from same period billings	26,898		31,049
Total professional services and other revenue	$	69,967	$	54,839

Remaining Performance Obligations

Remaining performance obligations represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Amounts of a customer contract’s transaction price that are allocated to the remaining performance obligations represent contracted revenue that has not yet been recognized. They include amounts recognized as contract liabilities and amounts that are contracted but not yet due. The expected future revenue related to unsatisfied performance obligations as of March 31, 2023 was $2,135.1 million, of which approximately $1,206.0 million is expected to be recognized as revenue over the next twelve months. 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 the Company’s cloud contracts remaining at the balance sheet date and thus, by the timing of contract renewals.

Disaggregation of Revenue

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


	Three Months Ended March 31,
in thousands	2023		2022
United States	$	286,367	$	236,642
International	123,403		99,005
Total revenue	$	409,770	$	335,647

No single country outside the United States accounted for 10% or more of revenue during the three months ended March 31, 2023 and 2022.

Stock-Based Compensation, including cash settled

Equity Awards

The Company records stock-based compensation based on the grant date fair value of the awards. The Company recognizes the fair value of restricted stock awards that do not contain a performance condition as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, the Company recognizes expense using the accelerated attribution method based on the probability that the performance conditions will be met.

The Company estimates the grant date fair value of RSUs based on the closing stock price of the Company’s publicly traded Class A common stock on the grant date. The Company estimates the grant date fair value of purchase rights issued under the Qualtrics Employee Stock Purchase Plan, or ESPP, based on the Black-Scholes option-pricing model using the estimated number of awards as of the beginning of the offering periods.

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, customer specific circumstances and expected losses. The allowance for bad debt, as needed, is established with a charge to bad debt expense in the consolidated statements of comprehensive loss. The Company’s allowance for bad debt was $8.3 million and $8.6 million as of March 31, 2023 and December 31, 2022, respectively. Bad debt expense was $3.4 million during the three months ended March 31, 2023 and not material during the three months ended March 31, 2022. The Company’s allowance for cancellations was $25.1 million and $28.8 million as of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023, $(3.4) million of net additions (reductions) were charged to revenue and $(0.3) million of net additions (reductions) were charged to deferred revenue. During the three months ended March 31, 2022, $(0.4) million of net additions (reductions) were charged to revenue and $(3.0) million of net additions (reductions) were charged to deferred revenue. The allowance for cancellations is established with a reduction to revenue and deferred revenue. In the event of lack of payment due to a bankruptcy or other credit-related issues of a customer, the Company writes off the related accounts receivable with a reduction to the allowance for bad debt. In the event of lack of payment from a customer for issues unrelated to credit risk, the Company cancels the customer’s subscription access or service and writes off the corresponding accounts receivable with reductions to the allowance for cancellations.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, and accounts receivable. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. No customer accounted for more than 10% of accounts receivable at March 31, 2023 and December 31, 2022. No single customer accounted for 10% or more of total revenue during the three months ended March 31, 2023 and 2022.

Deferred Contract Acquisition Costs, net

Deferred contract acquisition costs, net is stated at gross deferred contract acquisition costs less accumulated amortization. Sales commissions and related payroll taxes for initial software-as-a-service (SaaS) subscription contracts earned by the Company’s sales force are considered to be incremental and recoverable costs of obtaining a contract with a customer. As a result, these amounts have been capitalized as deferred contract acquisition costs on the consolidated balance sheets. The Company capitalized additional deferred incremental costs of obtaining a contract of $34.7 million and $26.8 million during the three months ended March 31, 2023 and 2022, respectively.

Amortization of deferred contract acquisition costs were $22.4 million and $15.8 million for the three months ended March 31, 2023 and 2022, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of comprehensive loss. There was no impairment loss in relation to the deferred costs for any period presented.

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. The Company recognized amortization expenses of $7.4 million and $3.9 million related to capitalized internal-use software for the three months ended March 31, 2023 and 2022, respectively, within cost of subscription revenue. The Company capitalized $17.0 million and $6.8 million of expenses to internal-use software during the three months ended March 31, 2023 and 2022, respectively.

Recently Adopted Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, which creates an exception to the general recognition and measurement principles of ASC 805. The standard will result in companies recognizing contract assets and liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. The standard is effective for public companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company adopted the standard as of January 1, 2023. The impact will be dependent upon the occurrence and magnitude of any future acquisitions.

2.CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following:


	As of March 31,		As of December 31,
in thousands	2023		2022
Cash	$	501,081	$	589,948
Money market mutual funds	305,637		129,944
Total cash and cash equivalents	$	806,718	$	719,892

3.FAIR VALUE MEASUREMENTS

Cash and cash equivalents

The Company’s cash equivalents with regards to money market mutual funds are classified within Level 1 of the fair value hierarchy and are reported at their fair value on the consolidated balance sheets as of March 31, 2023 and December 31, 2022.

Tax sharing liability

From the date of the SAP Acquisition, Qualtrics has been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, the Company deconsolidated from the SAP Tax Group for U.S. federal income tax purposes. The Company continues to be a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, Qualtrics will make tax sharing payments to SAP related to certain share based payment awards that existed prior to or were granted at the time of the IPO, the Pre-IPO Awards. Upon deconsolidation from the SAP Tax Group, the initial tax sharing liability was recorded as a distribution payable to SAP in accounts payable (current portion) and other liabilities (non-current portion) and as a reduction to additional paid-in capital. Changes in the fair value of the tax sharing liability are recorded through other non-operating income, net. As of March 31, 2023 and December 31, 2022, the Company’s distribution liability for the tax sharing agreement with SAP based on an estimated fair value totaled $66.0 million and $65.0 million, respectively.

The tax sharing agreement liability is estimated based on the estimated future tax benefits associated with the Pre-IPO Awards. The liability is classified within Level 3 of the fair value hierarchy and is based on the discounted estimated future cash flows of the liability. The primary assumptions used in the valuation include the amount of the estimated future tax deductions related to the Pre-IPO Awards, the Company’s estimated future taxable income or loss excluding the Pre-IPO Awards, including the ability and timing of when the Company will be able to utilize the tax deductions from the Pre-IPO Awards using a hypothetical with and without tax calculation, and the estimated discount rate, which is based on current market rates for unsecured liabilities with similar maturities and credit quality. We are using an estimated discount rate of 10%, we have utilized the current stock price as of March 31, 2023 as the best estimate of the future vest date value, and we estimate that the deductions will be utilized in the next one to three years based on the Company's current forecasts. Estimating the tax sharing liability balance requires significant estimates and assumptions, which are inherently uncertain and therefore actual results could differ from those estimates. During the three months ended March 31, 2023 the Company had no transfers in and out of Level 3 fair value measurements. The changes in the fair value of the tax sharing liability were as follows:


in thousands
Balance as of December 31, 2022	$	(65,000)
Change in the fair value reported in other non-operating income, net	(5,432)
Payments of tax sharing liabilities based on estimated fair value to SAP (1)	4,432
Balance as of March 31, 2023	$	(66,000)

(1) See Note 12 for additional details on the full payment of tax sharing liabilities.

4.PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:


	As of March 31,		As of December 31,
in thousands	2023		2022
Internal-use software	$	64,093	$	50,488
Server equipment	19,058		19,192
Leasehold improvements	108,458		88,254
Computer equipment	26,580		25,999
Land	13,383		13,383
Buildings	61,345		61,345
Furniture and fixtures	3,191		3,158
Software	3,034		3,034
Construction in progress	10,889		27,533
Total property and equipment	$	310,031	$	292,386
Accumulated depreciation and amortization	(86,703)		(76,741)
Property and equipment, net	$	223,328	$	215,645

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


	Three Months Ended March 31,
in thousands	2023		2022
Cost of revenue	$	9,279	$	6,097
Research and development	1,490		1,364
Sales and marketing	2,285		2,005
General and administrative	383		472
Total depreciation and amortization expense	$	13,437	$	9,938

5.LEASES

The Company has operating leases for corporate offices under non-cancelable operating leases with various expiration dates. There are no finance leases. The leases have remaining terms of less than 1 to 13 years. Options to extend for up to 10 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 March 31,
in thousands	2023		2022
Operating lease cost	$	6,626	$	7,501
Variable and short-term lease cost	3,378		2,449

Other information related to leases was as follows:


	As of March 31,		As of December 31,
	2023		2022
Weighted average remaining lease term	10.4 years		10.7 years
Weighted average discount rate	2.08	%	2.08	%

As of March 31, 2023, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, were as follows:


	As of March 31,
in thousands	2023
Remainder of 2023	$	7,639
2024	29,880
2025	32,052
2026	32,656
2027	29,939
Thereafter	178,324
Total minimum lease payments	$	310,490
Less: imputed interest	(33,071)
Total	$	277,419

6.OTHER INTANGIBLE ASSETS, NET

Other intangible assets, net consisted of the following:


	As of March 31,		As of December 31,
in thousands	2023		2022
Patents	$	751	$	751
Developed technology	161,920		159,670
Customer relationships	111,700		111,700
Developed content	400		400
Tradename	1,890		1,890
Licenses and certifications	6,350		6,350
License agreements	1,500		1,500
Total intangible assets	$	284,511	$	282,261
Accumulated amortization	(84,777)		(71,846)
Other intangible assets, net	$	199,734	$	210,415

The Company recognized amortization expense related to its acquired intangible assets as follows:


	Three Months Ended March 31,
in thousands	2023		2022
Cost of revenue	$	7,358	$	7,572
Sales and marketing	5,531		5,527
General and administrative	42		318
Total amortization of acquired intangible assets	$	12,931	$	13,417

Estimated amortization expense for intangible assets for the next five years and thereafter consists of the following:


	As of March 31,
in thousands	2023
Remainder of 2023	$	39,009
2024	52,009
2025	50,122
2026	41,366
2027	17,156
Thereafter	72
Total	199,734

7.ACCRUED LIABILITIES

Accrued liabilities consisted of the following:


	As of March 31,		As of December 31,
in thousands	2023		2022
Accrued wages, bonuses and commissions	$	71,739	$	79,518
Accrued payroll taxes	5,501		9,087
Other accrued expenses	30,236		32,590
Employee Stock Purchase Plan (“ESPP”) liability	7,128		18,924
Accrued income taxes	15,779		15,172
Total accrued liabilities	$	130,383	$	155,291

8.COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred, and the amount of loss or range of loss can be reasonably estimated. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the most current information available. 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 its business, operating results, or financial condition.

Merger Expenses

As previously disclosed, on March 12, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Quartz Holdco, LLC, a Delaware limited liability company (“Parent”), and Quartz MergerCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Silver Lake (“Silver Lake”). During the three months ended March 31, 2023, the Company has incurred $16.3 million in Merger-related expenses, $7.1 million of which have been paid. The remaining $9.2 million is included in accounts payable.

9.STOCK-BASED COMPENSATION

Stock-based compensation expense for the three months ended March 31, 2023 and 2022 was recorded as follows:


	Three Months Ended March 31,
in thousands	2023		2022
Cost of subscription revenue	$	5,063	$	4,544
Cost of professional services and other revenue	8,593		8,066
Research and development	40,646		41,275
Sales and marketing	52,196		49,053
General and administrative	125,472		165,323
Total stock-based compensation expense	$	231,970	$	268,261

Equity Awards

Qualtrics RSUs

The following table sets forth the outstanding Qualtrics RSUs and related activity for the three months ended March 31, 2023:


	Number of RSUs (in thousands)	Weighted-Average Grant Date Fair Value
Outstanding as of December 31, 2022	76,673	$	34.17
Granted	15,980	16.32
Vested	(10,601)	38.53
Forfeited/Canceled	(1,910)	28.71
Outstanding as of March 31, 2023	80,142	$	30.18

The total fair value of RSUs that vested during the three months ended March 31, 2023 and 2022 was $176.0 million and $529.8 million, respectively. As of March 31, 2023, there was $1,952.4 million of unrecognized stock-based compensation expense related to outstanding Qualtrics RSUs which is expected to be recognized over a weighted-average period of 2.4 years.

Qualtrics Options

The following table sets forth the outstanding common stock options and related activity for the three months ended March 31, 2023:


	Number of Options (in thousands)	Weighted-Average Exercise Price per Share		Weighted-Average Remaining Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2022	1,468	$	4.87	5.1	$	8,091
Exercised	(116)	4.27
Forfeited/Expired	(6)	6.79
Outstanding as of March 31, 2023	1,346	$	4.91	4.9	$	17,388
Vested and exercisable at March 31, 2023	850	$	4.68	4.9	$	11,173

The aggregate intrinsic value of options exercised was $1.5 million and $3.0 million for the three months ended March 31, 2023 and 2022. The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option. The intrinsic value of options as of March 31, 2023 is based on the market closing price of the Company's Class A common stock on that date.

As of March 31, 2023, there was $10.4 million of unrecognized stock-based compensation expense related to outstanding stock options which is expected to be recognized over a weighted-average period of 1.5 years.

Qualtrics Employee Stock Purchase Plan (ESPP)

The Company recognized compensation expense associated with the ESPP of $4.5 million and $5.1 million during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there was $4.7 million of unrecognized stock-based compensation expense associated with the ESPP, which is expected to be recognized over a weighted-average period of 0.3 years.

10.NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following table sets forth the calculation of basic net loss per share attributable to common stockholders during the periods presented:


in thousands (except share amount)	Three Months Ended March 31,
	2023		2022
Numerator:
Net loss attributable to common shareholders	$	(258,964)	$	(292,325)
Denominator:
Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholders, basic and diluted	599,314,127		575,700,568
Net loss per share attributable to common stockholders, basic and diluted	$	(0.43)	$	(0.51)

The net loss per share amounts are the same for the Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions, whether through dividends or in liquidation. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been antidilutive. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented:


	As of March 31, 2023	As of December 31, 2022
Qualtrics restricted stock units	80,141,929	76,672,908
Qualtrics options	1,346,011	1,467,828
Qualtrics employee stock purchase program	494,762	2,144,827

11.INCOME TAXES

The Company has an effective tax rate of (2.7)% and (0.8)% for the three months ended March 31, 2023 and 2022, respectively. The Company has incurred U.S. book operating losses and has minimal profits in its foreign jurisdictions. Our effective tax rate is affected by tax rates in both U.S. and foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.

The Company had historically calculated the income taxes in its consolidated financial statements on a separate return basis. However, the Company was in actuality included in the consolidated, combined or unitary U.S. federal and state income tax returns with SAP America, Inc. and its affiliates. As a result of deconsolidation from SAP during 2021, net operating losses and credits were updated to reflect actual attributes available for use by the Company. Qualtrics is subject to a tax sharing agreement with SAP that requires the Company to reimburse SAP for the Company's taxable income, or be reimbursed by SAP in cases of a taxable loss, which is included on the consolidated tax returns with SAP, subject to adjustments for hypothetical tax attributes and certain simplifying conventions.

ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considered all available evidence, both positive and negative, including historical levels of income or loss, legislative developments, expectations, and risks associated with estimates of future taxable income, and prudent and feasible tax planning strategies. The Company has evaluated this evidence and determined that it is more likely than not that the net deferred tax assets for some of the Company’s U.S. entities will not be realized. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against its net U.S. deferred tax assets in these entities.

12.RELATED PARTY TRANSACTIONS

Since the SAP acquisition in 2019, SAP and its affiliates are related parties to the Company. The Company has entered into certain arrangements for services and products with SAP and its affiliates.

The consolidated statements of comprehensive loss include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. The consolidated statements of comprehensive loss also includes expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. The Company directly charges SAP for certain functions provided to SAP, including sales support. These charges were determined based on actual expenses incurred on Qualtrics’ or SAP’s behalf or by usage.

During the three months ended March 31, 2023 and 2022, the Company recognized revenue of $8.6 million and $10.0 million, respectively, from SAP and its affiliates in exchange for services and products. Total costs charged from SAP and its affiliates to the Company were $8.2 million and $12.0 million during the three months ended March 31, 2023 and 2022, respectively. Total costs charged from the Company to SAP and its affiliates were $0.8 million and $4.8 million during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the outstanding receivable and payable with SAP and its affiliates was $10.7 million and $18.0 million, respectively. As of December 31, 2022, the outstanding receivable and payable with SAP and its affiliates was $19.2 million and $15.2 million, respectively.

Because of the SAP Acquisition, Qualtrics had been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, the Company deconsolidated from the SAP Tax Group for federal tax purposes. The Company continues to be a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, the Company will make certain tax sharing payments to SAP. As of March 31, 2023, the Company’s distribution liability for the tax sharing agreement with SAP totaled $78.0 million, consisting of $12.0 million based on our separate tax liability included on SAP Tax Group returns and $66.0 million based on an estimated fair value of the liability related to Pre-IPO Awards. Of the $78.0 million, $57.2 million is recorded within accounts payable and the remaining $20.8 million is recorded within other liabilities on the condensed consolidated balance sheet as of March 31, 2023. As of December 31, 2022, the Company’s distribution liability for the tax sharing agreement with SAP totaled $84.7 million, consisting of $7.7 million based on 2021 actual tax return activity, $12.0 million based on the Company’s 2022 tax provision and $65.0 million based on an estimated fair value. Of the $84.7 million, $72.0 million is recorded within accounts payable and the remaining $12.7 million is recorded within other liabilities on the condensed consolidated balance sheet as of December 31, 2022. For the three months ended March 31, 2023, the Company made a payment of the distribution tax liability to SAP of $12.1 million, of which $4.4 million was based on the estimated fair value, which is disclosed in Note 3, “Fair Value Measurements”.

Certain Board members of the Company and certain Supervisory Board and Executive Board members of SAP SE currently hold, or held within the last year, positions of significant responsibility with other entities. The Company has relationships with certain of these entities in the ordinary course of business. During the three months ended March 31, 2023 and 2022, revenue and charges from these related parties were immaterial.

On March 12, 2023, concurrently with the execution of the Merger Agreement, the Company and SAP SE (“SAP”) entered into a Separation Agreement (the “Separation Agreement”), which governs, among other things, the terms of the separation of the Company’s business from SAP and its affiliates (other than the Company and its subsidiaries).

The Separation Agreement requires the parties to use commercially reasonable efforts to take certain actions between the signing of the Merger Agreement and the closing of the Merger in respect of separating certain shared operations and resources of the Company and SAP so that the Company can operate on a standalone basis independent of SAP and its affiliates (other than the Company and its subsidiaries) following the closing of the Merger (the “Separation”). If the Separation has not been fully completed prior to the closing of the Merger, the Company and SAP will enter into a customary transition services agreement on mutually agreed terms under which SAP will continue providing certain support services and assistance to the Company on a transitional basis as necessary after closing of the Merger.

In December 2020, Ryan Smith, the Company’s Founder and Executive Chair, acquired a majority interest in the Utah Jazz basketball franchise, the associated venue, and certain related sports teams and operations and business interests. In 2019, the Company entered into multi-year agreements with the Utah Jazz related to ticket purchases, advertising, sponsorships, and the Utah Jazz Five for the Fight Campaign which were amended in Q1 2023, under which the Company was billed $0.7 million and $1.2 million during the three months ended March 31, 2023 and 2022, respectively.I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We created the first experience management platform to design and manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for experience management. The Qualtrics Experience Management Platform, or XM Platform, is a system of action that helps companies design and improve the experiences they provide to their many constituents across these four core experiences.

Our revenue was $409.8 million and $335.6 million for the three months ended March 31, 2023 and 2022, respectively, representing year-over-year growth of 22%. For the three months ended March 31, 2023 and 2022, our net loss was $259.0 million and $292.3 million, respectively. The results of our operations for the three months ended March 31, 2023 and 2022 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 98% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised approximately 83% of our total revenue for the three months ended March 31, 2023. We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 2% of revenue during the three months ended March 31, 2023, and our largest industries by annual recurring revenue, or ARR, as of March 31, 2023 were financial services, professional and business services, education, technology, government, and healthcare. ARR is calculated by annualizing subscription revenue in the last month of a period.

We price and package our software subscriptions solutions based on the capacity, use case, and functionality needs of our customers. This pricing and packaging includes volume of expected responses, number of users accessing our platform, number of employees, and level of functionality provided, such as dashboards, iQ functionality, and integrations. We have also recently begun to offer use case pricing that simplifies pricing for customers seeking to address specific needs. Our customers often expand their subscriptions as they increase volume of responses, add solutions and integrations, grow users and employees, and increase features and workflows within each solution.

Our professional services consist primarily of research services, through our DesignXM offering, which allows customers to gain market intelligence by procuring a curated group of respondents and returning actionable results, while conforming to best-practice design and methodology, as well as implementations, configurations, and integration and engineering services to help customers deploy our XM Platform. Other professional services revenue consists of consulting and training fees.

As of March 31, 2023, we had over 5,300 employees. On January 11, 2023, the Company committed to a plan to eliminate approximately 207 roles across the Company globally that do not align with the Company’s highest priorities for 2023. This represents less than 5% of the Company’s work force. As of March 31, 2023, the Company has incurred non-recurring charges of approximately $7.5 million, primarily consisting of severance payments, notice pay (where applicable), employee benefits contributions and related costs.

Merger Agreement

As a result of the Merger, each share of Class A common stock of the Company, par value $0.0001 per share (“Class A Common Stock”), and Class B common stock of the Company, par value $0.0001 per share (“Class B Common Stock” and together with Class A Common Stock, the “Common Stock”) outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (subject to certain exceptions, including shares of Common Stock held in treasury by the Company or owned by any direct or indirect wholly owned subsidiary of the Company and any shares of Common stock owned by Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”)) will, at the Effective Time, automatically be cancelled and converted into the right to receive $18.15 in cash (the “Merger Consideration”), without interest and subject to applicable withholding taxes.

Effective as of 11:59 p.m. Eastern Time on April 24, 2023, the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) expired. The consummation of the Merger remains subject to the satisfaction (or written waiver by each of the Company, Parent and Merger Sub if permissible by law) of other closing conditions, including, but not limited to, clearances or approvals having been obtained or waived under applicable specified foreign antitrust laws and foreign investment laws.

The Board of Directors of the Company, after considering the unanimous recommendation of the independent subcommittee of the audit committee of the Board of Directors of the Company, has approved the Merger Agreement and the transactions contemplated thereby and the necessary stockholder approval has been duly executed and delivered, adopting and approving in all respects the Merger Agreement and the transactions contemplated thereby. Completion of the Merger remains subject to certain closing conditions, including (1) the information statement having been mailed to the Company’s stockholders and at least 20 calendar days having elapsed since the completion of such mailing, (2) the obtainment of regulatory clearances or approvals under certain specified foreign antitrust laws and foreign investment laws, (3) the absence of any law enjoining, restraining or otherwise prohibiting or making illegal the consummation of the Merger, (4) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) compliance in all material respects with the other party’s covenants, agreements and obligations under the Merger Agreement, and (6) no Material Adverse Effect (as defined in the Merger Agreement) having occurred and being continuing since the date of the Merger Agreement. Subject to the satisfaction or waiver of such closing conditions, the parties expect the transaction to close in the second half of 2023.

If the Merger is consummated, Class A Common Stock will be delisted from the Nasdaq Global Select Market and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we will no longer file periodic reports with the SEC on account of Company Class A Common Stock.

Separation Agreement

As previously disclosed, on March 12, 2023, concurrently with the execution of the Merger Agreement, the Company and SAP SE (“SAP”) entered into a Separation Agreement (the “Separation Agreement”), which governs, among other things, the terms of the separation of the Company’s business from SAP and its affiliates (other than the Company and its subsidiaries).

Key Factors Affecting Our Performance

We believe that the growth and future success of our business depends on many factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations.

Customer Acquisition and Expansion

We are focused on continuing to acquire new customers to support our long-term growth. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts to drive customer acquisition. Our customers include businesses of all sizes, academic institutions, and government organizations. We define the number of customers at the end of any particular period as the number of parties or individual legal entities that have entered into a separate subscription contract with us. For avoidance of doubt, international subsidiaries of parent entities are not separately counted, but business units, brands, and academic institutions are counted if they are distinct legal entities. A single organization or customer may have multiple paid business accounts.

Our business model relies on rapidly and efficiently landing new customers and expanding our relationship with them over time. We have a history of attracting new customers, driving expanded use through upselling our XM Platform across the enterprise, and cross-selling through the subsequent deployment of additional solutions throughout the enterprise. Our relationship with SAP has resulted in greater access to enterprise customers and increased cross-sell opportunities through SAP’s customer base.

Investing for Growth

Our investment for growth encompasses multiple critical areas, including international growth, enterprise sales, and product expansion.

Our revenue outside of the United States represented 30% and 29% of our total revenue in the three months ended March 31, 2023 and 2022, respectively. We initially started our expansion outside of the United States in English-speaking countries, such as Ireland, the United Kingdom, Canada, and Australia, as we were able to leverage our core technologies and go-to-market motion. Since opening our first international office in Dublin, Ireland in 2013, we now have over 25 sales offices in countries around the globe.

We continue to evolve our technology to ensure that we are best serving our customers’ needs. We believe this will lead to continued strong 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 the Qualtrics Partner Network, or “QPN”. Since then, we have built out our partner network to include over 400 global member companies partnering with us on our platform to help drive breakthrough business outcomes for joint customers. Since the SAP Acquisition in 2019, we have also developed joint go-to-market and product integrations with SAP. We expect our partnerships to continue to extend our sales reach and provide implementation leverage both domestically and internationally, as well as product and technology integrations that will accelerate our product roadmap.

Key Business Metrics

We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

Large Customers

We define our large customers as those spending more than $100,000 in ARR on our XM Platform. We believe that our ability to increase the number of large customers is an indicator of our market penetration, strategic demand for our platform, the growth of our business, and our potential future business opportunities. Increasing awareness of our XM Platform and its broad range of capabilities, coupled with the mainstream adoption of cloud-based technology, has expanded the diversity of our large customer base to include organizations of different sizes across virtually all industries.

We continue to increase the number of customers who have entered into larger subscriptions with us. We had 2,372 customers with ARR of $100,000 or more as of March 31, 2023, up from 2,262 as of December 31, 2022. The number of customers with ARR of $100,000 or more indicates the strategic importance of our platform for enterprise customers and our ability to both initially land significant accounts and grow them over time.

Net Retention Rate

We calculate our dollar-based net retention rate to measure our ability to retain and expand subscription revenue from our existing customers and is an indicator of the value our platform delivers to customers and our future business opportunities. Our net retention rate compares our subscription revenue from the same set of customers across comparable periods and reflects customer renewals, expansion, contraction and churn.

We calculate our net retention rate on a trailing four-quarter basis. As of March 31, 2023, our net retention rate was 116%. Our net retention rate was 120% as of December 31, 2022.

To calculate our net retention rate, we first calculate the subscription revenue in one quarter from a cohort of customers that were customers at the beginning of the same quarter in the prior fiscal year, or cohort customers. We repeat this calculation for each quarter in the trailing four-quarter period. The numerator for net retention rate is the sum of subscription revenue from cohort customers for the four most recent quarters, or numerator period, and the denominator is the sum of subscription revenue from cohort customers for the four quarters preceding the numerator period.

SAP Acquisition

The results of our operations include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. Our results also include expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. These amounts may fluctuate from period to period based on the nature and extent of the indirect benefits received and provided. See Note 12 “Related Party Transactions” for further details in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

SAP Segment Reporting

Certain of our financial results have been presented as an operating segment within SAP’s publicly reported financial results. These Euro currency reported financial results are prepared and presented under International Financial Reporting Standards, or IFRS. 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.

Components of Our Results of Operations

Revenue

We generate revenue from sales of subscriptions to our XM Platform and related professional services.

Subscription revenue is recognized ratably over the related contractual term, generally beginning on the date that our XM Platform is made available to our customer. Our subscription agreements generally have annual contractual terms, with a growing number having multi-year contractual terms. Our agreements generally cannot be canceled for a refund. We primarily bill in advance for our annual contracts and annually in advance for our multi-year contracts. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Subscription revenue as a percentage of total revenue may fluctuate period to period.

Professional services and other revenue consists primarily of research services, implementation services, and engineering services. Research services revenue is recognized upon completion of the project. Our research services agreements generally cannot be canceled for a refund. We typically bill in advance for research services projects, with a number of customers purchasing annual retainers to fund future projects. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Implementation services and engineering services include fees associated with new and expanding customers requesting implementation, integration, customization, consulting, and other services. We price these services on a fixed fee basis. Our implementation services and engineering services agreements generally cannot be canceled for a refund. We typically bill in advance for professional services and other revenue. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. We continue to increase deployment of partners to fulfill certain of these services, especially implementation services, and we generally expect professional services and other revenue to decrease as a percentage of total revenue in the long term, although this percentage may fluctuate from period to period.

Cost of revenue and gross margin

Cost of revenue. Our cost of subscription revenue includes expenses related to operating our XM Platform in data centers, depreciation of our data center equipment, and the amortization of our capitalized internal-use software and acquired technology. Subscription cost of revenue also includes employee-related costs associated with our customer support and XM Platform operations organizations. Our cost of professional services and other revenue includes vendor costs and employee-related costs associated with the delivery of these services. Additionally, we make allocations of certain overhead costs, primarily based on headcount, to each of these costs of revenue. Allocated overhead includes costs such as facilities, including lease expense, utilities, depreciation on leasehold improvements, and shared information technology costs. We expect our cost of revenue will increase in absolute dollars in future periods as we continue to invest in our business.

Gross margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period based on the timing of capital expenditures and the related depreciation expense, or other changes in equity and cash settled stock-based compensation, employee-related costs, infrastructure costs, revenue mix, timing of completion of professional services projects, as well as revenue fluctuations. Excluding the impact of equity and cash settled stock-based compensation expense, we generally expect our gross margin to remain relatively consistent in the near term and to increase modestly in the long term, although our gross margin may fluctuate from period to period depending on the interplay of all of these factors.

Operating expenses

Research and development. Our research and development expenses consist primarily of employee-related costs for our engineering, product, and design teams, and allocated overhead.

We plan to continue to hire employees for our engineering, product, and design teams to support our efforts to enhance the functionality and improve the reliability, availability, and scalability of our XM Platform. Excluding the impact of equity and cash settled stock-based compensation expense, we expect our research and development expenses to increase in absolute dollars in future periods and to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Sales and marketing. Our sales and marketing expenses relate to both inside and outbound sales activities, as well as expansion efforts with our current customers. The expenses consist primarily of employee-related costs, marketing programs and events, lead generation fees, indirect benefits received from SAP net of indirect benefits we provide to SAP, and allocated overhead. Sales commissions earned by our sales team and the related payroll taxes, that we consider to be incremental and recoverable costs of obtaining a contract with an organization, are deferred and amortized over an estimated period of benefit of five years.

We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness, including bringing back our in-person X4 Summit event that took place this quarter in March 2023. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns. Excluding the impact of equity and cash settled stock-based compensation expense, we expect that sales and marketing expenses will increase in absolute dollars in future periods; however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

General and administrative. Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people operations, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, and non-income based taxes.

We expect to incur additional general and administrative expenses to support our growth. 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, net

Other non-operating income, net consists of other non-operating gains or losses, including those related to changes in the fair value of our distribution liability related to our tax sharing agreement with SAP, interest income, interest expense and foreign currency transaction gains and losses.

Provision for income taxes

Provision for income taxes consists primarily of income taxes related to the U.S. and other foreign jurisdictions in which we conduct business. We maintain a full valuation allowance against our deferred tax assets in certain entities as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Other entities do not have a valuation allowance, as they are, and are expected to be, taxable in the future. Our effective tax rate is affected by tax rates in both U.S. and foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.

Income taxes as presented in our consolidated financial statements attribute current and deferred income taxes of SAP to our standalone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by FASB ASC Topic 740: Income Taxes, or ASC 740. Accordingly, our income tax provision was prepared following the separate return method prior to deconsolidation in October 2021 for U.S. federal income tax purposes, and the separate return method continues to apply for other jurisdictions where we file returns as part of an SAP Tax Group. The separate return method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a standalone enterprise. As a result of deconsolidation for U.S. federal income tax purposes, we have updated our reported tax attributes in certain jurisdictions to reflect the tax attributes available for future use by the Qualtrics tax reporting entity that files returns separate from an SAP Tax Group.

Results of Operations

The following table sets forth our results of operations for the periods presented:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Revenue:
Subscription	$	339,803	$	280,808
Professional services and other	69,967		54,839
Total revenue	409,770		335,647
Cost of revenue(1)(2):
Subscription	54,671		44,774
Professional services and other	68,511		54,493
Total cost of revenue	123,182		99,267
Gross profit	286,588		236,380
Operating expenses(1)(2):
Research and development	108,975		105,999
Sales and marketing	252,772		218,330
General and administrative	178,672		202,589
Total operating expenses	540,419		526,918
Operating loss	(253,831)		(290,538)
Other non-operating income, net	1,655		674
Loss before income taxes	(252,176)		(289,864)
Provision for income taxes	6,788		2,461
Net loss	$	(258,964)	$	(292,325)

________________

(1)Includes equity and cash settled stock-based compensation expense as follows:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Cost of subscription revenue	$	5,063	$	4,544
Cost of professional services and other revenue	8,593		8,066
Research and development	40,646		41,275
Sales and marketing	52,196		49,053
General and administrative	125,472		165,323
Total stock-based compensation, including cash settled	$	231,970	$	268,261

(2)Includes amortization of acquired intangible assets as follows:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Cost of revenue	$	7,358	$	7,572

Sales and marketing	5,531		5,527
General and administrative	42		318
Total amortization of acquired intangible assets	$	12,931	$	13,417

The following table sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:


	Three Months Ended March 31,
	2023		2022
	(as a % of revenue)
Revenue:
Subscription	83		84
Professional services and other	17		16
Total revenue	100	%	100	%
Cost of revenue:
Subscription	13		13
Professional services and other	17		16
Total cost of revenue	30		29
Gross profit	70		71
Operating expenses:
Research and development	27		32
Sales and marketing	62		65
General and administrative	43		60
Total operating expenses	132		157
Operating loss	(62)		(86)
Other non-operating income, net	—		—
Loss before income taxes	(62)		(86)
Provision for income taxes	2		1
Net loss	(64)	%	(87)	%

Comparison of the three months ended March 31, 2023 and 2022

Revenue


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(In thousands)
Subscription revenue	$	339,803	$	280,808	$	58,995	21	%
Professional services and other revenue	69,967		54,839		15,128		28	%
Total revenue	$	409,770	$	335,647	$	74,123	22	%

Subscription revenue increased by $59.0 million, or 21%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This increase was due to increased demand for our solutions from new and existing customers. Of the increase in subscription revenue for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, approximately $35.6 million was attributable to existing customers and approximately $23.4 million was attributable to new customers. The increase in revenue from existing customers was driven by upgrades of current subscription solutions and the purchase of additional solutions within our XM Platform. Pricing changes were not material to the increase in revenue. Professional services and other revenue increased $15.1 million, or 28%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This increase was primarily due to an increase in revenue from larger customers, who generally require more services.

Cost of revenue, gross profit, and gross margin


	Three Months Ended March 31,
	2023			2022			$ Change		% Change
	(In thousands)
Cost of subscription revenue	$	54,671		$	44,774		$	9,897	22	%
Cost of professional services and other revenue	68,511			54,493			14,018		26	%
Total cost of revenue	123,182			99,267			23,915		24	%

Subscription gross profit	285,132			236,034			49,098		21	%
Professional services and other gross profit	1,456			346			1,110		321	%
Total gross profit	$	286,588		$	236,380		$	50,208	21	%

Subscription gross margin	84		%	84		%
Professional services and other gross margin	2		%	1		%
Total gross margin	70		%	70		%

Cost of subscription revenue increased $9.9 million, or 22%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, consistent with the increase in subscription revenue growth over the same period. This increase was driven by a $3.5 million increase in amortization of internal-use software, a $3.4 million increase in employee-related costs from headcount growth related to hiring, a $2.7 million increase in server costs, and a $0.5 million increase in stock-based compensation expense. Cost of professional services and other revenue increased $14.0 million, or 26%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This increase was driven by a $7.9 million increase in professional services vendor costs, a $5.6 million increase in employee-related costs from headcount growth related to hiring, and a $0.5 million increase in stock-based compensation expense.

Operating Expenses

Research and development


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(In thousands)
Research and development	$	108,975	$	105,999	$	2,976	3	%

Research and development expenses increased $3.0 million, or 3%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This increase was driven by a $4.1 million increase in employee-related costs from headcount growth related to hiring as we continue to add to and enhance our products and $1.7 million of restructuring expenses in Q1 2023, partially offset by a $1.3 million decrease in employer payroll tax on employee stock transactions, a $0.8 million decrease in outside vendor costs, and a $0.6 million decrease in stock-based compensation expense.

Sales and marketing


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(In thousands)
Sales and marketing	$	252,772	$	218,330	$	34,442	16	%

Sales and marketing expenses increased $34.4 million, or 16%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase in sales and marketing was primarily driven by an $18.0 million increase in employee-related costs from headcount growth related to hiring, a $4.9 million increase in travel-related expenses, $4.7 million of restructuring expenses in Q1 2023, a $3.5 million increase in marketing spend, and a $3.1 million increase in stock-based compensation expense.

General and administrative


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(In thousands)
General and administrative	$	178,672	$	202,589	$	(23,917)	(12)	%

General and administrative expenses decreased $23.9 million, or 12%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The decrease in general and administrative expenses was primarily driven by a $39.9 million decrease in stock-based compensation expense, a $4.0 million decrease in employer payroll tax on employee stock transactions, and a $0.8 million decrease in acquisition-related costs, partially offset by $16.3 million of expenses related to the pending Merger transaction in Q1 2023, a $2.0 million increase in employee-related costs from headcount growth related to hiring, a $1.8 million increase in travel-related expenses, and $1.0 million of restructuring expenses in Q1 2023.

Other non-operating income, net

Other non-operating income, net increased $1.0 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This increase was primarily driven by a $6.6 million increase in interest income and a $1.3 million increase in net foreign currency transaction gains, partially offset by an increase of $6.9 million related to the change in the fair value of our distribution liability related to our tax sharing agreement with SAP.

Provision for income taxes

Provision for income taxes increased $4.3 million for the three months ended March 31, 2023, as compared to three months ended March 31, 2022, primarily due to changes in the valuation allowance recorded in our U.S. entities.

Our effective tax rate was (2.7)% for the three months ended March 31, 2023 and (0.8)% for the three months ended March 31, 2022.

The difference between the U.S. statutory rate of 21% and our effective tax rate for the quarter is primarily driven by rate adjustments due to foreign taxes and the impact of changes in the valuation allowance recorded in the United States.

Liquidity and Capital Resources

As of March 31, 2023, we had cash and cash equivalents of $806.7 million. Our cash and cash equivalents consist primarily of cash and money market funds. As of March 31, 2023, we had $59.5 million of our cash and cash equivalents held by our foreign subsidiaries.

We have financed our operations primarily through cash generated from our operations, equity issuances, and proceeds from capital contributions received from SAP in conjunction with the SAP Acquisition and funding of cash settled stock-based compensation expense. Our principal uses of cash in recent periods have been funding our operations, making capital expenditures, settling liability-classified stock-based awards, and settling tax obligations related to stock-based awards.

We believe our existing cash and cash equivalents, together with cash provided by operations, will be sufficient to meet our needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new office spaces, the satisfaction of tax withholding obligations related to the settlement of future share-based awards, the expansion of sales and marketing and international operation activities, the introduction of new product capabilities and enhancement of our XM Platform, and the continuing market acceptance of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.

As previously disclosed, on March 12, 2023, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Silver Lake. We have agreed to various covenants and agreements in the Merger Agreement, including, among others, agreements to conduct our business in the ordinary course of business between the execution of the Merger Agreement and the closing of the Merger. Outside of certain limited exceptions, we may not take certain specified actions without Parent’s prior consent, which is not to be unreasonably withheld, conditioned or delayed, that could affect our liquidity and capital resource needs or requirements, including (i) acquiring other entities or any assets, properties, or businesses, that are material to the Company, (ii) making capital expenditures above specified thresholds, (iii) incurring additional indebtedness above specified thresholds, (iv) issuing additional securities, or (v) repurchasing or redeeming shares of our Common Stock. We do not believe these restrictions will prevent us from meeting our liquidity and capital resource needs or requirements, including our ongoing costs of operations, working capital needs or capital expenditure requirements.

Our cash flow activities were as follows for the periods presented:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Net cash flows provided by in operating activities	$	104,279	$	23,103
Net cash used in investing activities	(23,861)		(13,173)
Net cash flows provided by (used in) financing activities	5,863		(187,926)
Effect of exchange rate changes on cash and cash equivalents	545		(67)
Net increase (decrease) in cash and cash equivalents	$	86,826	$	(178,063)

Operating activities

Our largest source of operating cash is cash collections from our paying customers for subscriptions to our XM Platform. Our primary uses of cash from operating activities are for employee-related costs, infrastructure-related expenditures, and marketing expenses. Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expenses and equity and cash settled stock-based compensation, as well as the effect of changes in operating assets and liabilities.

For the three months ended March 31, 2023, net cash provided by operating activities was $104.3 million, which resulted from net loss of $259.0 million, adjusted for $232.0 million in stock-based compensation expense, additional non-cash charges of $59.9 million and net cash outflow of $72.4 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $26.4 million of depreciation and amortization expense, $22.4 million of amortization of deferred contract acquisition costs, $6.6 million related to the reduction of right-of-use assets from operating leases, and $5.4 million related to the changes in fair value of distribution liability for the tax sharing agreement. The outflow from operating assets and liabilities was primarily due a $19.8 million decrease in accrued liabilities and accounts payable, a $34.7 million increase in deferred contract acquisition costs as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, a $10.9 million increase in prepaid and other assets, and a $12.5 million increase in deferred revenue from advance invoicing in accordance with our customer contracts, partially offset by a $152.3 million decrease in accounts receivable due to billings growth and timing of collections.

For the three months ended March 31, 2022, net cash provided by operating activities was $23.1 million, which resulted from net loss of $292.3 million, adjusted for $268.3 million in stock-based compensation expense, including cash settled stock-based compensation of $2.7 million, additional non-cash charges of $44.9 million and net cash outflow of $4.9 million from changes in operating assets and liabilities. Additional non-cash charges primarily consisted of $23.4 million of depreciation and amortization expense, $15.8 million of amortization of deferred contract acquisition costs and $7.5 million related to the reduction of right-of-use assets from operating leases. The outflow from operating assets and liabilities was primarily due a $53.6 million decrease in accrued liabilities and accounts payable, a $26.8 million increase in deferred contract acquisition costs as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, a $8.3 million increase in prepaid and other assets, and a $2.0 million increase in deferred revenue from advance invoicing in accordance with our customer contracts, partially offset by a $95.4 million decrease in accounts receivable due to billings growth and timing of collections.

Investing activities

Net cash used in investing activities is primarily impacted by purchases of property and equipment, particularly for capital expenditures for our data centers, capitalized software, improvements to existing and new office spaces, and business combinations.

Net cash used in investing activities during the three months ended March 31, 2023 and 2022 of $23.9 million, $13.2 million, respectively, resulted primarily from purchases of intangible assets and capital expenditures for our XM Platform and office build-outs.

Financing activities

Net cash provided by financing activities of $5.9 million during the three months ended March 31, 2023 was due to $20.8 million in proceeds from the exercise of stock options and issuance of Class A stock under our employee stock purchase plan, offset by $12.1 million in payments of TSA Liabilities to SAP and $2.8 million in payments of payroll withholding taxes to net settle equity awards.

Net cash provided by financing activities of $187.9 million during the three months ended March 31, 2022 was due to $208.9 million in payments of payroll withholding taxes to net settle equity awards, offset by $21.0 million in proceeds from the exercise of stock options and issuance of Class A stock under our employee stock purchase plan.

Remaining Performance Obligations


	As of March 31,		As of December 31,
	2023		2022
	(In thousands)
Next 12 Months	$	1,206,026	$	1,202,260
Thereafter	929,035		972,378
Total	$	2,135,061	$	2,174,638

The amount of transaction price allocated to the remaining performance obligations, and changes in this amount over time, are impacted by currency fluctuations, the contract period of our cloud contracts remaining at the balance sheet date and the timing of contract renewals, among others. These amounts include contracts with certain government entities and affiliates that may be subject to laws or enact laws that give the contracting entity a right to terminate the contract based on governmental statutes. No government entity or affiliate has exercised such termination rights.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under operating leases for office space, non-cancelable contracts for cloud infrastructure services and other services, and obligations under our tax sharing agreement with SAP. There have been no material changes in our contractual obligations and commitments, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

As of March 31, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Estimates

Critical accounting estimates are those accounting policies and estimates that are both the most important to the portrayal of our net assets and results of operations and require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the impact of the estimates on financial condition or operating performance is material.

There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

Recent Accounting Pronouncements

Refer to Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about other recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business.

Interest rate risk

We had cash and cash equivalents of $806.7 million as of March 31, 2023. We hold our cash and cash equivalents for working capital purposes. Our cash and cash equivalents are held in cash deposits and money market funds. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs, and the control of cash and investments. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Decreases in interest rates, however, would reduce future interest income.

We do not have any long-term debt or financial liabilities with floating interest rates that would subject us to interest rate fluctuations.

A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Foreign currency exchange risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency. Our revenue is primarily generated in U.S. dollars, Euros, Australian dollars, British pounds sterling, Canadian dollars, New Zealand dollars, Japanese yen, and Singapore dollars. A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound sterling, and Australian dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.

We recorded $0.3 million in net foreign currency transaction gains in the three months ended March 31, 2023, and $1.0 million in net foreign currency transaction losses in the three months ended March 31, 2022. A hypothetical 10% change in foreign currency rates would not have resulted in material gains or losses for the three months ended March 31, 2023 and 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2023. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2023 our disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described below.

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses described below, management has concluded that the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

Material Weakness in Internal Control over Financial Reporting

As previously disclosed, management identified certain deficiencies in the Company’s internal control over financial reporting that aggregated to a material weaknesses related to management’s risk assessment process over information technology general controls, including certain controls over logical access and change management, and process level controls including information used in the execution of those controls that impacted our financial reporting processes.

Management’s Remediation Plan and Status

In response to the material weakness management has taken the following actions:

•engaged a third party subject matter expert to assist in the review of our risk assessment process;

•established a remediation steering committee with key members of management to ensure remediation efforts are aligned to the remediation plan;

•enhanced our controls around the identification of new reports and changes to key reports;

•established training of control owners on the appropriate evidence and documentation for financial reporting controls and IT change management and logical access controls; and

•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment.

While we have taken steps to substantially remediate the identified material weakness and will continue to complete the remediation process as quickly as possible, we cannot at this time estimate how long it will take to remediate this material weakness. The material weakness will not be considered remediated until the controls are designed, implemented, and operate for a sufficient period of time and management has concluded, through independent testing, that these controls are operating effectively. As management continues to evaluate and work to improve our disclosure controls and procedures and internal control over financial reporting, we may take additional measures to address these control deficiencies or modify certain remediation measures described above.

Changes in Internal Control Over Financial Reporting

Other than continuing to make progress on the ongoing remediation efforts described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The information contained in Note 8. “Commitments and Contingencies—Legal Matters” in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q is incorporated herein by reference.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 1a. Risk Factors

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.

A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report. There have been no material changes from the risk factors previously disclosed in our Annual Report, except for the following risk factors. The risk factors below should be read in conjunction with the risk factors and other information disclosed in our Annual Report.

Risks Related to the Merger

The Merger, the pendency of the Merger or our failure to complete the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.

As previously disclosed, on March 12, 2023, we entered into the Merger Agreement by and among the Company, the Parent, and Merger Sub, providing for our acquisition by affiliates of Silver Lake. Completion of the Merger is subject to the satisfaction of various conditions, including (1) the information statement having been mailed to the Company’s stockholders and at least 20 calendar days having elapsed since the completion of such mailing, (2) the absence of any law enjoining, restraining or otherwise prohibiting or making illegal the consummation of the Merger, (3) the expiration or termination of any applicable waiting period under the HSR Act (which occurred on April 24, 2023), and the obtainment of regulatory clearances or approvals under certain specified foreign antitrust laws or foreign investment laws, (4) the accuracy of the other parties’ representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) compliance in all material respects with the other parties’ covenants, agreements and obligations under the Merger Agreement, and (6) no Material Adverse Effect (as defined in the Merger Agreement) having occurred and being continuing since the date of the Merger Agreement. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Furthermore, there are additional inherent risks in the Merger, including the risks detailed below.

During the period prior to the closing of the Merger, our business is exposed to certain inherent risks due to the effect of the announcement or pendency of the Merger on our business relationships, financial condition, operating results and business, including:

•potential uncertainty in the marketplace, which could lead current and prospective customers, retailers and distributors to purchase products from others or delay purchasing from us;

•the possibility the Merger or the Separation will harm or disrupt the Company’s business, including current plans and operations;

•potential business uncertainty, including changes to existing business relationships that could affect the Company’s financial performance;

•the inability to retain and hire key personnel, and the possibility that our current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the Merger;

•the inability to pursue certain business opportunities or strategic transactions pending the completion of the Merger, and other restrictions on our ability to conduct our business;

•our inability to solicit other acquisition proposals during the pendency of the Merger;

•potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger;

•the significant amount of transaction costs, fees, expenses and charges related to the Merger Agreement and the Merger; and

•other developments beyond our control, including, but not limited to, changes in legislative, regulatory , domestic or global economic development that may affect the timing or success of the Merger.

The Merger may be delayed, and may ultimately not be completed, due to a number of factors, including:

•the failure to obtain regulatory clearances or approvals from various governmental entities (or the imposition of any conditions, limitations or restrictions on such clearances or approvals);

•potential future stockholder litigation and other legal and regulatory proceedings, which could delay or prevent the consummation of the Merger; and

•the failure to satisfy the other closing conditions to the consummation of the Merger, including the possibility that a Material Adverse Effect on our business would permit Parent not to close the Merger.

If the Merger does not close, our business and stockholders would be exposed to additional risks, including:

•to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, the price of our common stock could decrease if the Merger is not completed;

•investor confidence could decline, stockholder litigation could be brought against us, relationships with existing and prospective customers, distributors, retailers, service providers, investors, lenders and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending Merger; and

•the requirement that we pay a termination fee of $311.5 million if the Merger Agreement is terminated in certain circumstances.

Even if successfully completed, there are certain risks to our stockholders from the Merger, including:

•the amount of cash to be paid per share under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

•the fact that receipt of the all-cash per share merger consideration under the Merger Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and

•the fact that, if the Merger is completed, our stockholders will forego the opportunity to realize the potential long-term value of the successful execution of our current strategy as an independent public company.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are generally required to conduct our business in the ordinary course. We are restricted from taking certain specified actions without Parent’s prior consent, which is not to be unreasonably withheld, conditioned or delayed. These limitations include, among other things, certain restrictions on our ability to amend our organizational documents; acquire other businesses and assets; dispose of material property or assets; make investments; repurchase, reclassify or issue securities; make loans; pay dividends; incur indebtedness; make capital expenditures; enter into certain contracts; change accounting policies or procedures; settle litigation; change tax classifications and elections; or take certain actions relating to intellectual property of the Company. These restrictions could prevent us from pursuing strategic business opportunities and taking actions with respect to our business that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial condition.

Risks Related to our Business

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect the Company’s current and projected business operations and its financial condition and results of operations.

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, borrowers under credit agreements, letters of credit and certain other financial instruments with SVB, Signature Bank or any other financial institution that is placed into receivership by the FDIC may be unable to access undrawn amounts thereunder. In addition, if any of our customers, suppliers or other parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. In this regard, counterparties to SVB credit agreements and arrangements, and third parties such as beneficiaries of letters of credit (among others), may experience direct impacts from the closure of SVB and uncertainty remains over liquidity concerns in the broader financial services industry. Similar impacts have occurred in the past, such as during the 2008-2010 financial crisis.

Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediately liquidity may exceed the capacity of such program. Additionally, there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.

Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the Company, the financial institutions with which the Company has credit agreements or arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which the Company has financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.

Item 6. Exhibits


Exhibit Number						Description

2.1*						Agreement and Plan of Merger, dated as of March 12, 2023, by and among Qualtrics International Inc., Quartz Holdco, LLC, and Quartz MergerCo, Inc. (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on March 13, 2023).
2.2*						Separation Agreement, dated as of March 12, 2023, by and between Qualtrics International Inc. and SAP SE (incorporated by reference from Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed on March 13, 2023).
3.1						Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on December 28, 2020).
3.2						Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 filed on December 28, 2020).
4.1						Specimen Class A common stock certificate of the Registrant (incorporated by reference from Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 filed on December 28, 2020).
31.1*						Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**						Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*						Inline XBRL Taxonomy Extension Schema Document.
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*						Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

________________

* Filed herewith.

** The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of the Registrant’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 1st day of May, 2023.


QUALTRICS INTERNATIONAL INC.

By:			/s/ Zig Serafin
			Zig Serafin
			Chief Executive Officer (Principal Executive Officer)


By:			/s/ Rob Bachman
			Rob Bachman
			Chief Financial Officer (Principal Financial and Accounting Officer)