QUALTRICS INTERNATIONAL INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We created the first experience management platform to manage customer, employee, product, and brand experiences. Our platform serves as a business operating system for experience management. The Qualtrics Experience Management Platform, or 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$356.4 million and$249.3 million for the three months endedJune 30, 2022 and 2021, respectively, representing year-over-year growth of 43%. Our revenue was$692.0 million and$488.0 million for the six months endedJune 30, 2022 and 2021, respectively, representing year-over-year growth of 42%. For the three months endedJune 30, 2022 and 2021, our net loss was$279.2 million and$263.5 million , respectively, and$571.6 million and$463.3 million for the six months endedJune 30, 2022 and 2021, respectively. The results of our operations for the three and six months endedJune 30, 2022 and 2021 were impacted by equity and cash settled stock-based compensation expense. We generate revenue by selling subscriptions to our XM Platform and integrated solutions, as well as professional services. Over 99% of our contracts have a subscription period of one year or longer, and we primarily bill annually in advance. Subscription revenue comprised approximately 84% of our total revenue for each of the three and six months endedJune 30, 2022 . We have a diversified customer base consisting of organizations of various sizes across virtually all industries. Our largest customer accounted for less than 3% of revenue during the three and six months endedJune 30, 2022 , and our largest industries by annual recurring revenue, or ARR, as ofJune 30, 2022 were financial services, professional and business services, education, technology, government, and healthcare. ARR is calculated by annualizing subscription revenue in the last month of a period. We price and package our software subscriptions solutions based on the capacity, use case, and functionality needs of our customers. This pricing and packaging includes volume of expected responses, number of users accessing our platform, number of employees, and level of functionality provided, such as dashboards, iQ functionality, and integrations. We have also recently begun to offer use case pricing that simplifies pricing for customers seeking to address specific needs. Our customers often expand their subscriptions as they increase volume of responses, add solutions and integrations, grow users and employees, and increase features and workflows within each solution. Our professional services consist primarily of research services, through our DesignXM offering, which allows customers to gain market intelligence by procuring a curated group of respondents and returning actionable results, while conforming to best-practice design and methodology, as well as implementations, configurations, and integration and engineering services to help customers deploy our XM Platform. Other professional services revenue consists of consulting and training fees.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many
factors. While each of these factors presents significant opportunities for our
business, they also pose important challenges that we must successfully address
in order to sustain our growth and improve our results of operations.
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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 ofthe United States represented 31% and 30% of our total revenue during the three months endedJune 30, 2022 and 2021, respectively, and 30% and 29% of our total revenue during the six months endedJune 30, 2022 and 2021, respectively. We initially started our expansion outside ofthe United States in English-speaking countries, such asIreland , theUnited Kingdom ,Canada , andAustralia , as we were able to leverage our core technologies and go-to-market motion. Since opening our first international office inDublin, 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 inSeattle andPoland 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 300 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 26
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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 2,146 customers with ARR of$100,000 or more as ofJune 30, 2022 , up from 1,940 as ofDecember 31, 2021 . The number of customers with ARR of$100,000 or more indicates the strategic importance of our XM 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 ofJune 30, 2022 , our net retention rate was 126%. Our net retention rate was 128% as ofDecember 31, 2021 . 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 byQualtrics . Our results also include expenses of SAP directly charged toQualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. We expect this revenue and these cross charges to continue in the near future. These amounts may fluctuate from period to period based on the nature and extent of the indirect benefits received and provided. See Note 13 "Related Party Transactions" for further details in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
SAP Segment Reporting
Since the SAP Acquisition, certain of our financial results have been presented as an operating segment within SAP's publicly reported financial results. These Euro-reported financial results are prepared under International Financial Reporting Standards, or IFRS, and presented on a non-IFRS basis. The SAP segment results differ from our standalone financial results primarily due to: differences in reporting currency, differences between IFRS and GAAP, differences in the reporting of certain related party transactions betweenQualtrics and SAP, SAP's reporting of expenses related to certain corporate overhead functions, and differences in the reporting related to the SAP Acquisition.
Response to COVID-19
In response to the COVID-19 pandemic, we implemented a variety of measures,
including a COVID-19 task force, a temporary work from home policy, new
operating guidelines for our offices based on local conditions, restrictions on
work-related travel, and additional wellness benefits for employees, all of
which have the potential to result in disruptions to how we operate our
business. We have begun relaxing many of these measures, in compliance with
local restrictions and orders, but some of them are ongoing. Our employees'
health and safety is our top priority, and we continue to monitor the status of
the pandemic globally. Our customers and partners have similarly been impacted.
Our XM Platform enables customers to focus on managing their customer, employee,
product, and brand experiences, which is increasingly important in a digitally
connected world. Although we believe
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our business is well-suited to navigate the current environment, the ultimate
impact of the COVID-19 pandemic cannot be accurately predicted at this time, and
the direct and indirect impact on our business, results of operations, and
financial condition will depend on future developments that are uncertain. We
have experienced, and may continue to experience, an adverse impact on certain
parts of our business. The conditions caused by the pandemic have adversely
affected or may in the future adversely affect, among other things, demand,
spending by new customers, renewal and retention rates of existing customers,
the length of our sales cycles, sales productivity, the value and duration of
subscriptions, supply of goods and services provided by third parties,
collections of accounts receivable, our IT and other expenses, our ability to
focus time and attention on our core business, our ability to recruit, and the
ability of our employees to travel, all of which could adversely affect our
business, results of operations, and financial condition.
We have also experienced, and may continue to experience, certain positive
impacts on other aspects of our business, including an increase in sales of our
platform to state, local, and federal governments and non-profit organizations
to help them navigate through the pandemic as well as sales of vaccine and
testing verification solutions on our XM Platform. Moreover, we have seen a
reduction in certain operating expenses due to reduced business travel, reduced
office use, deferred hiring for some positions, and the virtualization or
cancellation of customer and employee events. Additionally, we believe that the
COVID-19 pandemic could also accelerate customer transformation into digital
businesses, which we expect will generate additional opportunities for us in the
future. These benefits, however, may be reduced by difficulties in renewing
licenses for pandemic-related solutions and increased operating costs as the
world begins to emerge from the COVID-19 pandemic.
The global impact of COVID-19 continues to evolve, including as a result of new
variants of the virus and the changing legal landscape, and we will continue to
monitor the situation and the effects on our business and operations closely. We
do not yet know the full extent of potential impacts on our business or
operations. In particular, due to our subscription-based business model, the
effect of the COVID-19 pandemic may not be fully reflected in our revenue until
future periods. Given the uncertainty, we cannot reasonably estimate the impact
on our future results of operations, cash flows, or financial condition. For
additional details, see "Risk Factors."
Components of Our Results of Operations
Revenue
We generate revenue from sales of subscriptions to our XM Platform and related professional services.
Subscription revenue is recognized ratably over the related contractual term,
generally beginning on the date that our XM Platform is made available to our
customer. Our subscription agreements generally have annual contractual terms,
with a growing number having multi-year contractual terms. Our agreements
generally cannot be canceled for a refund. We primarily bill in advance for our
annual contracts and annually in advance for our multi-year contracts. Amounts
that have been billed are initially recorded as deferred revenue until the
revenue is recognized. Subscription revenue as a percentage of total revenue may
fluctuate period to period.
Professional services and other revenue consists primarily of research services,
implementation services, and engineering services. Research services revenue is
recognized upon completion of the project. Our research services agreements
generally cannot be canceled for a refund. We typically bill in advance for
research services projects, with a number of customers purchasing annual
retainers to fund future projects. Amounts that have been billed are initially
recorded as deferred revenue until the revenue is recognized. Implementation
services and engineering services include fees associated with new and expanding
customers requesting implementation, integration, customization, consulting, and
other services. We price these services on a fixed fee basis. Our implementation
services and engineering services agreements generally cannot be canceled for a
refund. We typically bill in advance for professional services and other
revenue. Amounts that have been billed are initially recorded as deferred
revenue until the revenue is recognized. We continue to increase deployment of
partners to fulfill certain of these services, especially implementation
services, and we generally expect professional services and other revenue to
decrease as a percentage of total revenue in the long term, although this
percentage may fluctuate from period to period.
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Cost of revenue and gross margin
Cost of revenue. Our cost of subscription revenue includes expenses related to operating our XM Platform in data centers, depreciation of our data center equipment, and the amortization of our capitalized internal-use software and acquired technology. Subscription cost of revenue also includes employee-related costs associated with our customer support and XM Platform operations organizations. Our cost of professional services and other revenue includes vendor costs and employee-related costs associated with the delivery of these services. Additionally, we make allocations of certain overhead costs, primarily based on headcount, to each of these costs of revenue. Allocated overhead includes costs such as facilities, including lease expense, utilities, depreciation on leasehold improvements, and shared information technology costs. We expect our cost of revenue will increase in absolute dollars in future periods as we continue to invest in our business. Gross margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period based on the timing of capital expenditures and the related depreciation expense, or other changes in equity and cash settled stock-based compensation, employee-related costs, infrastructure costs, revenue mix, timing of completion of professional services projects, as well as revenue fluctuations. Excluding the impact of equity and cash settled stock-based compensation expense, we generally expect our gross margin to remain relatively consistent in the near term and to increase modestly in the long term, although our gross margin may fluctuate from period to period depending on the interplay of all of these factors.
Operating expenses
Research and development. Our research and development expenses consist primarily of employee-related costs for our engineering, product, and design teams, and allocated overhead.
We plan to continue to hire employees for our engineering, product, and design
teams to support our efforts to enhance the functionality and improve the
reliability, availability, and scalability of our XM Platform. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
our research and development expenses to increase in absolute dollars in future
periods, to remain relatively consistent as a percentage of our revenue in the
near term, and to decrease as a percentage of our revenue over the long term,
although our research and development expenses may fluctuate as a percentage of
our revenue from period to period due to the timing and extent of these
expenses.
Sales and marketing. Our sales and marketing expenses relate to both inside and
outbound sales activities, as well as expansion efforts with our current
customers. The expenses consist primarily of employee-related costs, marketing
programs and events, lead generation fees, indirect benefits received from SAP
net of indirect benefits we provide to SAP, and allocated overhead. Sales
commissions earned by our sales team and the related payroll taxes, that we
consider to be incremental and recoverable costs of obtaining a contract with an
organization, are deferred and amortized over an estimated period of benefit of
five years.
We plan to continue to invest in sales and marketing to grow our customer base
and increase our brand awareness. The trend and timing of sales and marketing
expenses will depend in part on the timing of marketing campaigns. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
that sales and marketing expenses will increase in absolute dollars in future
periods; however, we expect our sales and marketing expenses to decrease as a
percentage of our revenue over the long term, although our sales and marketing
expenses may fluctuate as a percentage of our revenue from period to period due
to the timing and extent of these expenses.
General and administrative. Our general and administrative expenses consist
primarily of employee-related costs for our finance, legal, people operations,
and other administrative teams, as well as certain executives. In addition,
general and administrative expenses include allocated overhead, outside legal,
accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support our
growth as well as our transition to being a publicly traded company. Excluding
the impact of equity and cash settled stock-based compensation expense, we
expect that general and administrative expenses will increase in absolute
dollars in future
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periods. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Other non-operating income (expense), net
Other non-operating income (expense), net consists of other non-operating gains or losses, including those related to interest income and foreign currency transaction gains and losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes related to theU.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 bothU.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 inOctober 2021 forU.S. federal income tax purposes, and the separate return method continues to apply for other jurisdictions where we file returns as part of aSAP 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 forU.S. federal income tax purposes, our reported tax attributes in certain jurisdictions were updated in 2021 to reflect the actual tax attributes available for future use by theQualtrics tax reporting entities that file returns separate from aSAP Tax Group . 30
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands)
Revenue:
Subscription $ 300,578 $ 204,538 $ 581,386 $ 391,434
Professional services and other 55,787 44,807 110,626 96,554
Total revenue 356,365 249,345 692,012 487,988
Cost of revenue(1)(2):
Subscription 47,593 21,693 92,367 42,063
Professional services and other 56,855 43,070 111,348 84,481
Total cost of revenue 104,448 64,763 203,715 126,544
Gross profit 251,917 184,582 488,297 361,444
Operating expenses(1)(2):
Research and development 116,156 79,871 222,155 142,677
Sales and marketing 219,644 151,695 437,974 287,876
General and administrative 188,085 226,685 390,674 401,134
Total operating expenses 523,885 458,251 1,050,803 831,687
Operating loss (271,968) (273,669) (562,506) (470,243)
Other non-operating income (expense),
net 507 (1,191) 1,181 (2,931)
Loss before income taxes (271,461) (274,860) (561,325) (473,174)
Provision for income taxes 7,784 (11,373) 10,245 (9,833)
Net loss $ (279,245) $ (263,487) $ (571,570) $ (463,341)
________________(1)Includes equity and cash settled stock-based compensation expense, including cash settled, as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands)
Cost of subscription revenue $ 4,334 $ 3,382 $ 8,878 $ 6,006
Cost of professional services and other
revenue 8,243 6,754 16,309 11,184
Research and development 45,556 34,381 86,831 55,713
Sales and marketing 50,865 35,489 99,918 58,266
General and administrative 154,057 204,767 319,380 356,603
(2)Includes amortization of acquired intangible assets as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands)
Cost of revenue $ 7,505 $ 265 $ 15,077 $ 531
Sales and marketing 5,531 51 11,058 102
General and administrative 320 47 638 94
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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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
(as a % of revenue)
Revenue:
Subscription 84 82 84 80
Professional services and other 16 18 16 20
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue:
Subscription 13 9 13 9
Professional services and other 16 17 16 17
Total cost of revenue 29 26 29 26
Gross profit 71 74 71 74
Operating expenses:
Research and development 33 32 32 29
Sales and marketing 62 61 63 59
General and administrative 53 91 56 82
Total operating expenses 148 184 151 170
Operating loss (77) (110) (80) (96)
Other non-operating income (expense),
net - - - (1)
Loss before income taxes (77) (110) (80) (97)
Provision for income taxes 2 (5) 1 (2)
Net loss (79) % (105) % (81) % (95) %
Comparison of the three months ended
Revenue
Three Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Subscription revenue $ 300,578 $ 204,538 $ 96,040 47 %
Professional services and other
revenue 55,787 44,807 10,980 25 %
Total revenue $ 356,365 $ 249,345 $ 107,020 43 %
Subscription revenue increased by $96.0 million , or 47%, for the three months
ended June 30, 2022 , as compared to the three months ended June 30, 2021 . 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
June 30, 2022 , as compared to the three months ended June 30, 2021 ,
approximately $66.8 million was attributable to existing customers and
approximately $29.2 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 $11.0 million , or 25%, for the three months
ended June 30, 2022 , as compared to the three months ended June 30, 2021 . This
increase was due to an increase in revenue from large customers, who generally
require more services.
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Cost of revenue, gross profit, and gross margin
Three Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Cost of subscription revenue $ 47,593 $ 21,693 $ 25,900 119 %
Cost of professional services and
other revenue 56,855 43,070 13,785 32 %
Total cost of revenue 104,448 64,763 39,685 61 %
Subscription gross profit 252,985 182,845 70,140 38 %
Professional services and other gross
(loss) profit (1,068) 1,737 (2,805) (161) %
Total gross profit $ 251,917 $ 184,582 $ 67,335 36 %
Subscription gross margin 84 % 89 %
Professional services and other gross
margin (2) % 4 %
Total gross margin 71 % 74 %
Cost of subscription revenue increased $25.9 million , or 119%, for the three
months ended June 30, 2022 , as compared to the three months ended June 30, 2021 .
This increase was driven by a $9.8 million increase in employee-related costs
from headcount growth related to our recent acquisitions and hiring, a $7.2
million increase in amortization expense related to acquired intangible assets,
a $6.8 million increase in server costs, a $1.0 million increase in stock-based
compensation expense, and a $1.1 million increase in amortization of internal
use software. Cost of professional services and other revenue increased $13.8
million , or 32%, for the three months ended June 30, 2022 , as compared to the
three months ended June 30, 2021 . This increase was driven by a $6.4 million
increase in employee-related costs from headcount growth related to our recent
acquisitions and hiring, a $5.7 million increase in professional services vendor
costs, and a $1.5 million increase in stock-based compensation expense.
Our gross margins decreased from 74% during the three months ended June 30, 2021
to 71% during the three months ended June 30, 2022 , due to a decrease in
subscription gross margins driven by an increase in amortization expense and
other expenses discussed above and a decrease in professional services and other
gross margins based on the changes discussed above. Our professional services
and other gross margins reflect our investment in certain of our professional
services and our partner ecosystem, which facilitate the adoption of our
subscription offerings and help us to secure subscription revenue contracts and
ensure our customers' success.
Operating Expenses
Research and development
Three Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Research and development $ 116,156 $ 79,871 $ 36,285 45 %
Research and development expenses increased $36.3 million , or 45%, for the three
months ended June 30, 2022 , as compared to the three months ended June 30, 2021 .
This increase was driven by a $24.3 million increase in employee-related costs
from headcount growth related to our recent acquisitions and hiring as we
continue to add to and enhance our products, an $11.2 million increase in
stock-based compensation expense, a $0.7 million increase in employer payroll
tax on employee stock transactions, and a $0.2 million increase in vendor costs.
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Sales and marketing
Three Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Sales and marketing $ 219,644 $ 151,695 $ 67,949 45 %
Sales and marketing expenses increased $67.9 million , or 45%, for the three
months ended June 30, 2022 , as compared to the three months ended June 30, 2021 .
The increase in sales and marketing was driven by a $39.6 million increase in
employee-related costs from headcount growth related to our recent acquisitions
and hiring, a $15.4 million increase in stock-based compensation expense, a $5.5
million increase in amortization expense, a $5.0 million increase in
travel-related expenses, a $1.5 million increase in marketing spend, and a $1.0
million increase in employer payroll tax on employee stock transactions.
General and administrative
Three Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
General and administrative $ 188,085 $ 226,685 $ (38,600) (17) %
General and administrative expenses decreased$38.6 million , or 17%, for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 . The decrease in general and administrative expenses was driven by a$50.7 million decrease in stock-based compensation expense, offset by an$11.0 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, and an$0.8 million increase in employer payroll tax on employee stock transactions.
Other non-operating income (expense), net
Other non-operating income (expense), net increased$1.7 million for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 . This increase was driven by a$5.0 million non-operating gain related to the change in the fair value of our distribution liability related to our tax sharing agreement with SAP, a decrease in interest expense, and changes in foreign currency transactions gains and losses.
Provision (benefit) for income taxes
Provision (benefit) for income taxes increased$19.2 million for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 . The change was primarily due to current tax expense forecasted in theU.S. and the impact of valuation allowances recorded against our deferred tax assets for the three months endedJune 30, 2022 , as well as the net benefit related to the reversal of an uncertain tax liability and tax benefits related to the finalization of tax returns in various foreign jurisdictions, both recorded as discrete items in the three months endedJune 30, 2021 .
Our effective tax rate was (2.9)% for the three months ended
The difference between theU.S. statutory rate of 21% and our effective tax rate, on a loss before income taxes, is primarily driven by rate adjustments due to foreign taxes, non-deductible share-based compensation, current tax expense forecasted in theU.S. , and the impact of valuation allowances recorded against our deferred tax assets. 34
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Comparison of the six months ended
Revenue
Six Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Subscription revenue $ 581,386 $ 391,434 $ 189,952 49 %
Professional services and other
revenue 110,626 96,554 14,072 15 %
Total revenue $ 692,012 $ 487,988 $ 204,024 42 %
Subscription revenue increased by $190.0 million , or 49%, for the six months
ended June 30, 2022 , as compared to the six months ended June 30, 2021 . This
increase was due to increased demand for our solutions from new and existing
customers. Of the increase in subscription revenue for the six months ended June
30, 2022 , as compared to the six months ended June 30, 2021 , approximately
$138.0 million was attributable to existing customers and approximately $51.9
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 $14.1 million , or 15%, for the six months ended June 30, 2022 , as
compared to the six months ended June 30, 2021 . This increase was primarily due
to an increase in revenue from large customers, who generally require more
services.
Cost of revenue, gross profit, and gross margin
Six Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Cost of subscription revenue $ 92,367 $ 42,063 $ 50,304 120 %
Cost of professional services and
other revenue 111,348 84,481 26,867 32 %
Total cost of revenue 203,715 126,544 77,171 61 %
Subscription gross profit 489,019 349,371 139,648 40 %
Professional services and other gross
(loss) profit (722) 12,073 (12,795) (106) %
Total gross profit $ 488,297 $ 361,444 $ 126,853 35 %
Subscription gross margin 84 % 89 %
Professional services and other gross
margin (1) % 13 %
Total gross margin 71 % 74 %
Cost of subscription revenue increased $50.3 million , or 120%, for the six
months ended June 30, 2022 , as compared to the six months ended June 30, 2021 ,
consistent with the increase in subscription revenue growth over the same
period. This increase was driven by a $18.3 million increase in employee-related
costs from headcount growth related to our recent acquisitions and hiring, a
$14.5 million increase in amortization expense, a $12.7 million increase in
server costs, a $2.9 million increase in stock-based compensation expense, and a
$1.6 million increase in amortization of internal use software. Cost of
professional services and other revenue increased $26.9 million , or 32%, for the
six months ended June 30, 2022 , as compared to the six months ended June 30,
2021 . This increase was driven by a $10.8 million increase in professional
services vendor costs, a $10.4 million increase in employee-related costs from
headcount growth related to our recent acquisitions and hiring, and a
$5.1 million increase in stock-based compensation expense.
35
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Our gross margins decreased from 74% during the six months ended June 30, 2021
to 71% during the six months ended June 30, 2022 , due primarily to a decrease in
subscription gross margins driven by an increase in amortization expense and
other expenses discussed above and a decrease in professional services and other
gross margins based on the changes discussed above. Our professional services
and other gross margins reflect our investment in certain of our professional
services and our partner ecosystem, which facilitate the adoption of our
subscription offerings and help us to secure subscription revenue contracts and
ensure our customers' success.
Operating Expenses
Research and development
Six Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Research and development $ 222,155 $ 142,677 $ 79,478 56 %
Research and development expenses increased $79.5 million , or 56%, for the six
months ended June 30, 2022 , as compared to the six months ended June 30, 2021 .
This increase was driven by a $42.2 million increase in employee-related costs
from headcount growth related to our recent acquisitions and hiring as we
continue to add to and enhance our products, a $31.1 million increase in
stock-based compensation expense, a $3.9 million increase in employer payroll
tax on employee stock transactions, and a $2.4 million increase in outside
vendor costs.
Sales and marketing
Six Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
Sales and marketing $ 437,974 $ 287,876 $ 150,098 52 %
Sales and marketing expenses increased $150.1 million , or 52%, for the six
months ended June 30, 2022 , as compared to the six months ended June 30, 2021 .
The increase in sales and marketing was driven by an $80.8 million increase in
employee-related costs from headcount growth related to our recent acquisitions
and hiring, a $41.7 million increase in stock-based compensation expense, an
$11.0 million increase in amortization expense, a $9.4 million increase in
travel-related expenses, a $4.1 million increase in marketing spend, and a $3.1
million increase in employer payroll tax on employee stock transactions.
General and administrative
Six Months Ended June 30,
2022 2021 $ Change % Change
(In thousands)
General and administrative $ 390,674 $ 401,134 $ (10,460) (3) %
General and administrative expenses decreased$10.5 million , or 3%, for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 . The decrease in general and administrative expenses was driven by a$37.2 million decrease in stock-based compensation expense, offset by an$18.5 million increase in employee-related costs from headcount growth related to our recent acquisitions and hiring, and a$6.8 million increase in employer payroll tax on employee stock transactions.
Other non-operating income (expense), net
Other non-operating income (expense), net increased$4.1 million for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 . This increase was driven by a$6.5 million non-operating gain related to the change in the fair value of our distribution liability related to our tax sharing agreement with SAP, a decrease in interest expense, and changes in foreign currency transactions gains and losses. 36
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Provision (benefit) for income taxes
Provision (benefit) for income taxes increased$20.1 million for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 , and our effective tax rate was (1.8)% for the six months endedJune 30, 2022 , as compared to 2.1% for the six months endedJune 30, 2021 . The change was primarily due to current tax expense forecasted in theU.S. , and the impact of valuation allowances recorded against our deferred tax assets for the six months endedJune 30, 2022 , as well as the net benefit related to the reversal of an uncertain tax liability and tax benefits related to the finalization of tax returns in various foreign jurisdictions, both recorded during the six months endedJune 30, 2021 .
Liquidity and Capital Resources
As ofJune 30, 2022 , we had cash and cash equivalents of$786.6 million . Our cash and cash equivalents consist primarily of cash and money market funds. As ofJune 30, 2022 , we had$21.6 million of our cash and cash equivalents held by our foreign subsidiaries. We have financed our operations primarily through cash generated from our operations, equity issuances, and proceeds from capital contributions received from SAP in conjunction with the SAP Acquisition and funding of cash settled stock-based compensation expense. Our principal uses of cash in recent periods have been funding our operations, making capital expenditures, and settling stock-based awards and related tax obligations. We believe our existing cash and cash equivalents, together with cash provided by operations, will be sufficient to meet our needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new office spaces, the satisfaction of tax withholding obligations related to the vesting of share-based awards, the settlement of liabilities related to the tax sharing agreement with SAP, 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 XM 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.
Our cash flow activities were as follows for the periods presented:
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