QUALTRICS INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

March 09, 2021 at 05:01 pm EST

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Annual Report on
Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed below. You should review the sections titled "Special Note Regarding
Forward-Looking Statements" and "Risk Factors" for a discussion of
forward-looking statements and important factors that could cause actual results
to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
Overview
We created the first experience management platform to manage customer,
employee, product, and brand experiences. Our platform serves as a business
operating system for Experience Management. The Qualtrics Experience Management
Platform, or Qualtrics XM, is a system of action that helps companies design and
improve the experiences they provide to their many constituents across these
four core experiences.
We have more than 13,500 customers, including 85% of the Fortune 100 as of
December 31, 2020. Our revenue was $763.5 million, $591.2 million, and $401.9
million for the years ended December 31, 2020, 2019, and 2018, respectively,
representing year-over-year growth of 29% and 47%, respectively. For the years
ended December 31, 2020, 2019, and 2018, our net loss was $272.5 million,
$1,007.6 million, and $37.3 million, respectively. The results of our operations
for the years ended December 31, 2020, 2019, and 2018 were impacted by equity
and cash settled stock-based compensation expense and advisory and legal costs
related to the 2018 abandoned IPO and the SAP Acquisition.
We generate revenue by selling subscriptions to our XM Platform and integrated
solutions, as well as professional services. Over 99% of our contracts have a
subscription period of one year or longer, and we primarily bill annually in
advance. Subscription revenue comprised over 75% of our total revenue for the
year ended December 31, 2020. We have a diversified customer base consisting of
organizations of various sizes across virtually all industries. Our largest
customer accounted for less than 2% of revenue in 2020, and our largest
industries by annual recurring revenue, or ARR, as of December 31, 2020 were
financial services, professional and business services, education, technology,
government, and healthcare. ARR is calculated by annualizing subscription
revenue in the last month of a period.
We price and package our software subscriptions solutions based on the capacity,
use case, and functionality needs of our customers. This pricing and packaging
includes volume of expected responses, number of users accessing our platform,
number of employees, and level of functionality provided, such as dashboards, iQ
functionality, and integrations. We have also recently begun to offer use case
pricing that simplifies pricing for customers seeking to address specific needs.
Our customers often expand their subscriptions as they increase volume of
responses, add solutions and integrations, grow users and employees, and
increase features and workflows within each solution.
Our professional services consist primarily of research services, through our
DesignXM offering, which allows customers to gain market intelligence by
procuring a curated group of respondents and returning actionable results, while
conforming to best-practice design and methodology, as well as implementations,
configurations, and integration and engineering services to help customers
deploy our XM Platform. Other professional services revenue consists of
consulting and training fees.
Subsequent Events
On February 1, 2021, we completed an IPO, in which we issued and sold 59,449,903
shares of our common stock at a public offering price of $30.00 per share. We
received net proceeds of approximately $1,688 million, after deducting the
underwriting discounts and commissions of $89.2 million and offering expenses of
$6 million. We used the net proceeds from the IPO to repay the intercompany
indebtedness to SAP.
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On December 23, 2020, Silver Lake Partners VI DE (AIV), L.P. ("Silver Lake")
agreed to purchase $550 million of shares of our Class A common stock,
comprising (a) 15,018,484 shares at $21.64 per share and (b) $225 million of
shares at the initial public offering price of $30 per share, in a concurrent
private placement transaction (the "Silver Lake investment"). On February 1,
2021, we closed our private placement transaction with Silver Lake.
For a description of subsequent events, see Item 8 of Part II, Financial
Statements and Supplementary Data - Note 17, "Subsequent Events."
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many
factors. While each of these factors presents significant opportunities for our
business, they also pose important challenges that we must successfully address
in order to sustain our growth and improve our results of operations.
Customer Acquisition and Expansion
We are focused on continuing to acquire new customers to support our long-term
growth. We have invested, and expect to continue to invest, heavily in our sales
and marketing efforts to drive customer acquisition. As of December 31, 2020, we
had more than 13,500 customers, including 85% of the Fortune 100. Our customers
include businesses of all sizes, academic institutions, and government
organizations. We define the number of customers at the end of any particular
period as the number of parties or individual legal entities that have entered
into a separate subscription contract with us. For avoidance of doubt,
international subsidiaries of parent entities are not separately counted, but
business units, brands, and academic institutions are counted if they are
distinct legal entities. A single organization or customer may have multiple
paid business accounts.
Our business model relies on rapidly and efficiently landing new customers and
expanding our relationship with them over time. We have a history of attracting
new customers, driving expanded use through upselling our XM Platform across the
enterprise, and cross-selling through the subsequent deployment of additional
solutions throughout the enterprise. Our relationship with SAP has resulted in
greater access to enterprise customers and increased cross-sell opportunities
through SAP's customer base.
We continue to increase the number of customers who have entered into larger
subscriptions with us. We had 1,338 customers with ARR of $100,000 or more as of
December 31, 2020, increased from 1,026 and 720 as of December 31, 2019 and
2018, respectively. Further, as of December 31, 2020, we had 74 customers with
ARR of $1 million or more, up from 43 and 27 as of December 31, 2019 and 2018,
respectively. The number of customers with ARR of $100,000 or more indicates the
strategic importance of our platform for enterprise customers and our ability to
both initially land significant accounts and grow them over time.
Investing for Growth
Our investment for growth encompasses multiple critical areas, including
international growth, enterprise sales, and product expansion.
Our revenue outside of the United States represented 28%, 26%, and 23% of our
total revenue in the years ended December 31, 2020, 2019, and 2018. We initially
started our expansion outside of the United States in English-speaking
countries, such as Ireland, the United Kingdom, Canada, and Australia, as we
were able to leverage our core technologies and go-to-market motion. Since
opening our first international office in Dublin, Ireland in 2013, we now have
27 sales offices in countries around the globe.
We continue to evolve our technology to ensure that we are best serving our
customers' needs. We believe this will lead to continued increased retention and
positive customer referrals that will continue to generate expansion within
current customer organizations and business from new customers. Since 2015, we
have established offices in Seattle and Poland to expand our engineering
headcount. We continue to invest in research and development to drive product
innovation and development.
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Strategic Partnerships
In 2018, we announced the launch of QPN. Since then, we have built out our
partner network to include over 200 global member companies partnering with us
on our platform to help drive breakthrough business outcomes for joint
customers. Since the SAP Acquisition in 2019, we have also developed joint
go-to-market and product integrations with SAP. We expect our partnerships to
extend our sales reach and provide implementation leverage both domestically and
internationally, as well as product and technology integrations that will
accelerate our product roadmap.
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
Large Customers
We define our large customers as those spending more than $100,000 in ARR on our
XM Platform. We believe that our ability to increase the number of large
customers is an indicator of our market penetration, strategic demand for our
platform, the growth of our business, and our potential future business
opportunities. Increasing awareness of our platform and its broad range of
capabilities, coupled with the mainstream adoption of cloud-based technology,
has expanded the diversity of our large customer base to include organizations
of different sizes across virtually all industries.
Growth Rate
December 31, December 31,
2020 2019 2020 2019
Large customers 1,338 1,026 30 % 43 %

Net Retention Rate
We calculate our dollar-based net retention rate to measure our ability to
retain and expand subscription revenue from our existing customers and is an
indicator of the value our platform delivers to customers and our future
business opportunities. Our net retention rate compares our subscription revenue
from the same set of customers across comparable periods and reflects customer
renewals, expansion, contraction and churn.
We calculate our net retention rate on a trailing four-quarter basis. As of
December 31, 2020, our net retention rate was 120%. Our net retention rate was
125% and 122% as of December 31, 2019 and 2018, respectively.
To calculate our net retention rate, we first calculate the subscription revenue
in one quarter from a cohort of customers that were customers at the beginning
of the same quarter in the prior fiscal year, or cohort customers. We repeat
this calculation for each quarter in the trailing four-quarter period. The
numerator for net retention rate is the sum of subscription revenue from cohort
customers for the four most recent quarters, or numerator period, and the
denominator is the sum of subscription revenue from cohort customers for the
four quarters preceding the numerator period.
SAP Acquisition
Since the SAP Acquisition in January 2019 and until the sale of 6,000,000 shares
of our Class A common stock to Q II, we have operated as a wholly owned
subsidiary of SAP. Accordingly, our financial results for the year-ended
December 31, 2019 differ in comparison to the year-ended December 31, 2018
primarily with respect to sales and marketing expenses and equity and cash
settled stock-based compensation expense.
During the year ended December 31, 2020 and 2019, we recorded $19.2 million and
$15.2 million, respectively, of sales and marketing costs incurred by SAP for
our indirect benefit, such as salaries and benefits of SAP's sales staff. During
the year ended December 31, 2020 and 2019, these expenses were partially offset
by $20.2 million and
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$8.7 million in charges to SAP for indirect benefits we provided, such as
salaries and benefits of Qualtrics' sales staff to support SAP. We expect these
indirect benefits and the related costs to continue in the near future. These
amounts may fluctuate from period to period based on the nature and extent of
the indirect benefits received and provided.
In 2020 we recorded $224.0 million in equity and cash settled stock-based
compensation expense compared to $876.2 million and $4.6 million in 2019 and
2018, respectively. The increase from 2018 to 2019 was due to performance based
awards that were recognized as a result of the SAP Acquisition and the
modification of unvested awards, at the time of the SAP Acquisition, to
liability-classified awards to be settled in cash, which resulted in
mark-to-market accounting for these awards. The decrease from 2019 to 2020 was
primarily due to the timing of vesting of liability-classified awards and the
decrease in SAP's stock price.
Our 2020 stock-based compensation expense of $224.0 million consisted entirely
of liability-classified awards. We settled $388.6 million of
liability-classified awards in cash in 2020. Our 2019 stock-based compensation
expense of $876.2 million consisted of $185.8 million of equity-classified
awards recognized as a result of the SAP Acquisition and $690.4 million of
liability-classified awards, of which $312.8 million were settled in cash in
2019. Our 2018 stock-based compensation expense of $4.6 million consisted
entirely of equity-classified awards.
As a result of this increase in equity and cash settled stock-based
compensation, our cost of revenue, research and development, sales and
marketing, and general and administrative costs increased significantly in
absolute dollars and as a percentage of revenue during the year ended 2019
compared to 2018. These changes are described in additional detail within our
results of operations.
SAP Segment Reporting
Since the SAP Acquisition, certain of our financial results have been presented
as an operating segment within SAP's publicly reported financial results. These
Euro-reported financial results are prepared under International Financial
Reporting Standards, or IFRS, and presented on a non-IFRS basis. The SAP segment
results differ from our standalone financial results primarily due to:
differences in reporting currency, differences between IFRS and GAAP,
differences in the reporting of certain related party transactions between
Qualtrics and SAP, SAP's reporting of expenses related to certain corporate
overhead functions, and differences in the reporting related to the SAP
Acquisition.
Response to COVID-19
In response to the COVID-19 pandemic, we have taken broad actions to mitigate
the impact of this public health crisis on our business. In response, we have
implemented, among other measures, a COVID-19 task force, a temporary work from
home policy across all offices globally, new operating guidelines for our
offices based on local conditions, restrictions on work-related travel, and
additional wellness benefits for employees, all of which have the potential to
result in a significant disruption to how we operate our business. Our customers
and partners have similarly been impacted. Our XM Platform enables customers to
focus on managing their customer, employee, product, and brand experiences,
which is increasingly important in a digitally connected world. Although we
believe our business is well-suited to navigate the current environment, the
ultimate duration and extent of the COVID-19 pandemic cannot be accurately
predicted at this time, and the direct or indirect impact on our business,
results of operations, and financial condition will depend on future
developments that are highly uncertain. We have experienced, and may continue to
experience, an adverse impact on certain parts of our business. The conditions
caused by the pandemic have adversely affected or may in the future adversely
affect, among other things, demand, spending by new customers, renewal and
retention rates of existing customers, the length of our sales cycles, sales
productivity, the value and duration of subscriptions, collections of accounts
receivable, our IT and other expenses, our ability to recruit, and the ability
of our employees to travel, all of which could adversely affect our business,
results of operations, and financial condition.
We have also experienced, and may continue to experience, certain positive
impacts on other aspects of our business, including an increase in sales of our
platform to state, local, and federal governments and non-profit organizations
to help them navigate through the pandemic. Moreover, we have seen a reduction
in certain operating expenses due to reduced business travel, deferred hiring
for some positions, and the virtualization or cancellation of
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customer and employee events. At our virtual event Work Different this year, we
explored how successful organizations are listening to and taking action on the
feedback from their customers and employees to reimagine the future of work.
Additionally, we believe that the COVID-19 pandemic could also accelerate
customer transformation into digital businesses, which we expect will generate
additional opportunities for us in the future.
The global impact of COVID-19 continues to rapidly evolve, and we will continue
to monitor the situation and the effects on our business and operations closely.
We do not yet know the full extent of potential impacts on our business or
operations. In particular, due to our subscription-based business model, the
effect of the COVID-19 pandemic may not be fully reflected in our revenue until
future periods. Given the uncertainty, we cannot reasonably estimate the impact
on our future results of operations, cash flows, or financial condition. For
additional details, see "Risk Factors."
Components of Our Results of Operations
Revenue
We generate revenue from sales of subscriptions to our XM Platform and related
professional services.
Subscription revenue is recognized ratably over the related contractual term,
generally beginning on the date that our XM Platform is made available to our
customer. Our subscription agreements generally have annual contractual terms,
with a growing number having multi-year contractual terms. Our agreements
generally cannot be canceled with refund. We primarily bill in advance for our
annual contracts and annually in advance for our multi-year contracts. Amounts
that have been billed are initially recorded as deferred revenue until the
revenue is recognized. Subscription revenue as a percentage of total revenue may
fluctuate period to period.
Professional services and other revenue consists primarily of research services,
implementation services, and engineering services. Research services revenue is
recognized upon completion of the project. Our agreements generally cannot be
canceled with refund. We typically bill in advance for research services
projects, with a number of customers purchasing annual retainers to fund future
projects. Amounts that have been billed are initially recorded as deferred
revenue until the revenue is recognized. Implementation services and engineering
services include fees associated with new and expanding customers requesting
implementation, integration, customization, consulting, and other services. We
price these services on a fixed fee basis. Our agreements generally cannot be
canceled with refund. We typically bill in advance for professional services and
other revenue. Amounts that have been billed are initially recorded as deferred
revenue until the revenue is recognized. We continue to increase deployment of
partners to fulfill certain of these services, especially implementation
services, and we generally expect professional services and other revenue to
decrease as a percentage of total revenue in the long term, although this
percentage may fluctuate from period to period.
Cost of revenue and gross margin
Cost of revenue. Our cost of subscription revenue includes expenses related to
operating our XM Platform in data centers, depreciation of our data center
equipment, and the amortization of our capitalized internal-use software and
acquired technology. Subscription cost of revenue also includes employee-related
costs associated with our customer support and XM Platform operations
organizations. Our cost of professional services and other revenue includes
vendor costs and employee-related costs associated with the delivery of these
services. Additionally, we make allocations of certain overhead costs, primarily
based on headcount, to each of these costs of revenue. Allocated overhead
includes costs such as facilities, including lease expense, utilities,
depreciation on leasehold improvements, and shared information technology costs.
We expect our cost of revenue will increase in absolute dollars in future
periods as we continue to invest in our business.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue.
Our gross margin may fluctuate from period to period based on the timing of
capital expenditures and the related depreciation expense, or other changes in
equity and cash settled stock-based compensation, employee-related costs,
infrastructure costs, revenue mix, timing of completion of professional services
projects, as well as revenue fluctuations. Excluding the impact of equity and
cash settled stock-based compensation expense, we generally expect our gross
margin to
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remain relatively consistent in the near term and to increase modestly in the
long term, although our gross margin may fluctuate from period to period
depending on the interplay of all of these factors.
Operating expenses
Research and development. Our research and development expenses consist
primarily of employee-related costs for our engineering, product, and design
teams, and allocated overhead.
We plan to continue to hire employees for our engineering, product, and design
teams to support our efforts to enhance the functionality and improve the
reliability, availability, and scalability of our XM Platform. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
our research and development expenses to increase in absolute dollars in future
periods, to remain relatively consistent as a percentage of our revenue in the
near term, and to decrease as a percentage of our revenue over the long term,
although our research and development expenses may fluctuate as a percentage of
our revenue from period to period due to the timing and extent of these
expenses.
Sales and marketing. Our sales and marketing expenses relate to both inside and
outbound sales activities, as well as expansion efforts with our current
customers. The expenses consist primarily of employee-related costs, marketing
programs and events, including our X4 Summit, lead generation fees, indirect
benefits received from SAP net of indirect benefits we provide to SAP, and
allocated overhead. Sales commissions earned by our sales team and the related
payroll taxes, that we consider to be incremental and recoverable costs of
obtaining a contract with an organization, are deferred and amortized over an
estimated period of benefit of five years.
We plan to continue to invest in sales and marketing to grow our customer base
and increase our brand awareness. The trend and timing of sales and marketing
expenses will depend in part on the timing of marketing campaigns. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
that sales and marketing expenses will increase in absolute dollars in future
periods; however, we expect our sales and marketing expenses to decrease as a
percentage of our revenue over the long term, although our sales and marketing
expenses may fluctuate as a percentage of our revenue from period to period due
to the timing and extent of these expenses.
General and administrative. Our general and administrative expenses consist
primarily of employee-related costs for our finance, legal, people operations,
and other administrative teams, as well as certain executives. In addition,
general and administrative expenses include allocated overhead, outside legal,
accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support our
growth as well as our transition to being a publicly traded company. Excluding
the impact of equity and cash settled stock-based compensation expense, we
expect that general and administrative expenses will increase in absolute
dollars in future periods. Our general and administrative expenses may fluctuate
as a percentage of our revenue from period to period due to the timing and
extent of these expenses.
Other non-operating income (expense), net
Other non-operating income (expense), net consists of other non-operating gains
or losses, including those related to interest income and foreign currency
transaction gains and losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes related to the
U.S. and other foreign jurisdictions in which we conduct business. We maintain a
full valuation allowance against our U.S. deferred tax assets as we have
concluded that it is not more likely than not that the deferred tax assets will
be realized. Our effective tax rate is affected by tax rates in foreign
jurisdictions and the relative amounts of income we earn in those jurisdictions,
as well as non-deductible expenses, such as share-based compensation, and
changes in our valuation allowance.
Income taxes as presented in our consolidated financial statements attribute
current and deferred income taxes of SAP to our standalone financial statements
in a manner that is systematic, rational and consistent with the asset
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and liability method prescribed by FASB ASC Topic 740: Income Taxes, or ASC 740.
Accordingly, our income tax provision was prepared following the separate return
method. The separate return method applies ASC 740 to the standalone financial
statements of each member of the consolidated group as if the group members were
a separate taxpayer and a standalone enterprise. As a result, actual
transactions included in the consolidated financial statements of SAP may not be
included in our separate consolidated financial statements. Similarly, the tax
treatment of certain items reflected in our consolidated financial statements
may not be reflected in the consolidated financial statements and tax returns of
SAP. Therefore, such items as net operating losses, credit carry-forwards and
valuation allowances may exist in the standalone financial statements that may
or may not exist in SAP's consolidated financial statements. As such, our income
taxes as presented in these consolidated financial statements may not be
indicative of the income taxes that we will generate in the future.
As described above, we have calculated the income taxes in our consolidated
financial statements on a separate return basis. However, we were in actuality
included in the consolidated, combined or unitary U.S. federal and state income
tax returns with SAP America and its affiliates. As a result, a portion of our
net operating loss and credit carryforwards would not be available for our use
in future tax periods as the net operating losses, or underlying deductions, and
credits have already been partially absorbed by SAP America.
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
Year Ended
December 31,
2020 2019 2018
(In thousands)
Revenue:
Subscription $ 575,397 $ 430,038 $ 295,528
Professional services and other 188,125 161,117 106,380
Total revenue 763,522 591,155 401,908
Cost of revenue(1)(2):
Subscription 62,671 67,982 35,785
Professional services and other 135,816 117,509 66,929
Total cost of revenue 198,487 185,491 102,714
Gross profit 565,035 405,664 299,194
Operating expenses(1)(2):
Research and development 212,795 242,124 65,925
Sales and marketing 431,794 440,325 192,142
General and administrative 175,499 717,363 74,248
Total operating expenses 820,088 1,399,812 332,315
Operating loss (255,053) (994,148) (33,121)
Other non-operating income (expense), net (972) (486) 169
Loss before income taxes (256,025) (994,634) (32,952)
Provision for income taxes 16,477 12,999 4,356
Net loss $ (272,502) $ (1,007,633) $ (37,308)

________________
(1)Includes equity and cash settled stock-based compensation expense, as
follows:
Year Ended
December 31,
2020 2019 2018
(In thousands)
Cost of subscription revenue $ 4,632 $ 24,136 $ 4
Cost of professional services and other revenue 6,737 17,168 144
Research and development 68,355 130,809 2,228
Sales and marketing 37,877 115,581 708
General and administrative 106,412 588,532 1,516
Total stock-based compensation, including cash
settled(a) $ 224,013 $ 876,226 $ 4,600

_________________
(a)As a result of the SAP Acquisition, our stock-based compensation expense
reflects the recognition of both equity-classified awards and
liability-classified awards. Liability-classified awards are settled in cash in
accordance with SAP's employee equity compensation programs. 2020 stock-based
compensation expense consisted of $224.0 million of liability-classified awards.
During the year ended December 31, 2020 awards of $388.6 million were settled in
cash. 2019 stock-based compensation expense consisted of $185.8 million of
equity-classified awards that was recognized as a result of the SAP Acquisition,
and $690.4 million of liability-classified awards, of which $312.8 million were
settled in cash in 2019. 2018 stock-based compensation expense consisted
entirely of equity-classified awards. Liability-classified awards are recorded
according to mark-to-market accounting.
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(2)Includes amortization of acquired intangible assets as follows:


                                                                    Year Ended
                                                                   December 31,
                                                          2020         2019         2018
                                                                  (In thousands)
     Cost of subscription revenue                       $ 1,062      $

1,160 $ 703



     Sales and marketing                                      204          204          145
     General and administrative                               188          114          201

Total amortization of acquired intangible assets $ 1,454 $ 1,478 $ 1,049

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


                                                 Year Ended
                                                December 31,
                                        2020           2019       2018
                                            (as a % of revenue)
Revenue:
Subscription                                75          73         74
Professional services and other             25          27         26
Total revenue                              100  %      100  %     100  %
Cost of revenue:
Subscription                                 8          11          9
Professional services and other             18          20         17
Total cost of revenue                       26          31         26
Gross profit                                74          69         74
Operating expenses:
Research and development                    28          41         16
Sales and marketing                         57          74         48
General and administrative                  23         121         18
Total operating expenses                   108         236         82
Operating loss                             (34)       (167)        (8)
Other non-operating income, net              -           -          -
Loss before income taxes                   (34)       (167)        (8)
Provision for income taxes                   2           2          1
Net loss                                   (36) %     (169) %      (9) %


Comparison of the years ended December 31, 2020 and 2019
Revenue
                                               Year Ended December 31,
                                               2020                   2019              $ Change               % Change
                                                              (In thousands)
Subscription revenue                   $     575,397              $  430,038          $  145,359                        34  %
Professional services and other
revenue                                      188,125                 161,117          $   27,008                        17  %
Total revenue                          $     763,522              $  591,155          $  172,367                        29  %


Subscription revenue increased by $145.4 million, or 34%, for the year ended
December 31, 2020 as compared to the year ended December 31, 2019. This increase
was due primarily to increased demand for our solutions from
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new and existing customers. Of the increase in subscription revenue for the year
ended December 31, 2020 compared to the year ended December 31, 2019,
approximately $92.0 million was attributable to existing customers and
approximately $53.4 million was attributable to new customers. The increase in
revenue from existing customers was driven by upgrades of current subscription
solutions and the purchase of additional solutions within our platform. Pricing
changes were not material to the increase in revenue. Professional services and
other revenue increased $27.0 million, or 17%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. This increase was primarily
due to an increase in revenue from large customers, who generally require more
services.
Cost of revenue, gross profit, and gross margin
                                             Year Ended December 31,
                                            2020                 2019              $ Change               % Change
                                                           (In thousands)
Cost of subscription revenue           $     62,671          $   67,982          $   (5,311)                       (8) %
Cost of professional services and
other revenue                               135,816             117,509              18,307                        16  %
Total cost of revenue                       198,487             185,491              12,996                         7  %

Subscription gross profit                   512,726             362,056             150,670                        42  %
Professional services and other gross
profit                                       52,309              43,608               8,701                        20  %
Total gross profit                     $    565,035          $  405,664          $  159,371                        39  %

Subscription gross margin                        89  %               84  %
Professional services and other gross
margin                                           28  %               27  %
Total gross margin                               74  %               69  %


Cost of subscription revenue decreased $5.3 million, or 8%, for the year ended
December 31, 2020, as compared to the year ended December 31, 2019, while
subscription revenue grew 34% over the same period. This decrease was driven by
a $19.5 million decrease in stock-based compensation expense primarily due to
fluctuations in SAP's stock price related to liability-classified awards,
partially offset by a $6.7 million increase in employee-related costs from
headcount growth, a $5.9 million increase in server costs, and a $1.5 million
increase in amortization of internal-use software. Cost of professional services
and other revenue increased $18.3 million, or 16%, for the year ended December
31, 2020, as compared to the year ended December 31, 2019. This increase was
driven by a $19.2 million increase in employee-related costs from headcount
growth and a $11.1 million increase in professional services vendor costs,
offset partially by a $10.4 million decrease in stock-based compensation expense
and a $1.6 million decrease in travel-related expenses.
Our gross margins increased from 69% during the year ended December 31, 2019 to
74% during the year ended December 31, 2020, due primarily to a decrease in
equity and cash settled stock-based compensation expense of $29.9 million, as
described above.
Operating Expenses
Research and development
                                 Year Ended December 31,
                                   2020               2019         $ Change       % Change
                                             (In thousands)
Research and development   $     212,795           $ 242,124      $ (29,329)         (12) %


Research and development expenses decreased $29.3 million, or 12%, for the year
ended December 31, 2020, as compared to the year ended December 31, 2019. This
decrease was driven by a $62.5 million decrease in stock-
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based compensation expense, partially offset by a $33.8 million increase in
employee-related costs from headcount growth as we continue to add to and
enhance our products.
Sales and marketing
                              Year Ended December 31,
                                2020               2019         $ Change      % Change
                                         (In thousands)
Sales and marketing     $     431,794           $ 440,325      $ (8,531)          (2) %


Sales and marketing expenses decreased $8.5 million, or 2%, for the year ended
December 31, 2020, as compared to the year ended December 31, 2019. The decrease
in sales and marketing was primarily driven by a $77.7 million decrease in
stock-based compensation expense and a $9.2 million decrease in travel-related
expenses resulting from the COVID-19 pandemic, partially offset by a $75.1
million increase in employee-related costs from headcount growth and a $3.3
million increase in marketing spend.
General and administrative
                                    Year Ended December 31,
                                      2020               2019          $ Change       % Change
                                                (In thousands)
General and administrative    $     175,499           $ 717,363      $ (541,864)         (76) %


General and administrative expenses decreased $541.9 million, or 76%, for the
year ended December 31, 2020, as compared to the year ended December 31, 2019.
The decrease in general and administrative expenses was primarily driven by a
$482.1 million decrease in stock-based compensation expense and a $62.7 million
decrease in advisory and legal costs related to the SAP acquisition.
Other non-operating income (expense), net
Other non-operating income (expense), net decreased $(0.5) million for the year
ended December 31, 2020, as compared to the year ended December 31, 2019. This
immaterial change for the periods results from immaterial changes in interest
income due to differences in average cash balances and interest rates and
immaterial changes in foreign currency transactions gains and losses.
Provision for income taxes
Provision for income taxes increased $3.5 million for the year ended December
31, 2020, as compared to the year ended December 31, 2019, due to our growth
internationally and increases in tax reserves.
Our effective tax rate decreased to (6.4)% for the year ended December 31, 2020,
as compared to (1.3)% for the year ended December 31, 2019. The decrease was
primarily driven by differences in our effective tax rate for the respective
years, as described below.
Our effective tax rate for the year ended December 31, 2020 was (6.4)%. The
difference between the U.S. statutory rate of 21% and our effective tax rate is
primarily driven by rate increases due to tax reserves, foreign taxes, and the
impact of valuation allowances recorded against current year losses in the
United States.
Our effective tax rate for the year ended December 31, 2019 was (1.3)%. The
difference between the U.S. statutory rate of 21% and our effective tax rate is
primarily driven by rate adjustments due to tax reserves, non-deductible stock
compensation, foreign taxes, and the impact of valuation allowances recorded
against current year losses in the United States.
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Comparison of the years ended December 31, 2019 and 2018
Revenue
                                               Year Ended December 31,
                                               2019                   2018              $ Change               % Change
                                                              (In thousands)
Subscription revenue                   $     430,038              $  295,528          $  134,510                        46  %
Professional services and other
revenue                                      161,117                 106,380              54,737                        51  %
Total revenue                          $     591,155              $  401,908          $  189,247                        47  %


Subscription revenue increased by $134.5 million, or 46%, for the year ended
December 31, 2019 as compared to the year ended December 31, 2018. This increase
was due primarily to increased demand for our solutions from new and existing
customers. Of the increase in subscription revenue for the year ended December
31, 2019 compared to the year ended December 31, 2018, approximately $84.0
million was attributable to existing customers and approximately $50.5 million
was attributable to new customers. The increase in revenue from existing
customers was driven by upgrades of current subscription solutions and the
purchase of additional solutions within our platform. Pricing changes were not
material to the increase in revenue. Professional services and other revenue
increased $54.7 million, or 51%, from the year ended December 31, 2018 to the
year ended December 31, 2019. This increase was primarily due to the growth of
our research services offering, as well as an increase in revenue from large
customers, who generally require more services.
Cost of revenue, gross profit, and gross margin
                                             Year Ended December 31,
                                            2019                 2018              $ Change               % Change
                                                           (In thousands)
Cost of subscription revenue           $     67,982          $   35,785          $   32,197                        90  %
Cost of professional services and
other revenue                               117,509              66,929              50,580                        76  %
Total cost of revenue                       185,491             102,714              82,777                        81  %

Subscription gross profit                   362,056             259,743             102,313                        39  %
Professional services and other gross
profit                                       43,608              39,451               4,157                        11  %
Total gross profit                     $    405,664          $  299,194          $  106,470                        36  %

Subscription gross margin                        84  %               88  %
Professional services and other gross
margin                                           27  %               37  %
Total gross margin                               69  %               74  %


Cost of subscription revenue increased $32.2 million, or 90%, for the year ended
December 31, 2019, as compared to the year ended December 31, 2018, while
subscription revenue grew 46% over the same period. This increase was driven by
a $24.2 million increase in equity and cash settled stock-based compensation
expense, a $4.4 million increase in employee-related costs from headcount
growth, a $2.5 million increase in amortization of internal-use software, and a
$1.1 million increase in server costs. Cost of professional services and other
revenue increased $50.6 million, or 76%, for the year ended December 31, 2019,
as compared to the year ended December 31, 2018. This increase was driven by a
$23.1 million increase in employee-related costs from headcount growth, a $17.0
million increase in equity and cash settled stock-based compensation expense,
and a $10.5 million increase in professional services vendor costs.
Our gross margins decreased from 74% in 2018 to 69% in 2019, due primarily to an
increase in equity and cash settled stock-based compensation expense of $41.2
million, as described above.
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Operating Expenses
Research and development
                                 Year Ended December 31,
                               2019                    2018        $ Change       % Change
                                             (In thousands)
Research and development    242,124                   65,925      $ 176,199          267  %


Research and development expenses increased $176.2 million, or 267%, for the
year ended December 31, 2019, as compared to the year ended December 31, 2018.
This increase was driven by a $128.6 million increase in equity and cash settled
stock-based compensation expense, a $39.4 million increase in employee-related
costs from headcount growth as we continue to add to and enhance our products,
and a $7.1 million increase in allocated overhead costs, partially offset by a
$3.2 million increase in capitalized internal-use software.
Sales and marketing
                              Year Ended December 31,
                            2019                     2018        $ Change       % Change
                                          (In thousands)
Sales and marketing      440,325                   192,142      $ 248,183          129  %


Sales and marketing expenses increased $248.2 million, or 129%, for the year
ended December 31, 2019, as compared to the year ended December 31, 2018. The
increase in sales and marketing was primarily driven by a $114.9 million
increase in equity and cash settled stock-based compensation expense, $118.9
million in employee-related costs from headcount growth and sales costs incurred
by SAP, including increased sales commission expenses due to increased billings.
Additional increases include $14.4 million in marketing campaign expenses.
General and administrative
                                    Year Ended December 31,
                                  2019                    2018        $ Change       % Change
                                                (In thousands)
General and administrative     717,363                   74,248      $ 643,115          866  %


General and administrative expenses increased $643.1 million, or 866%, for the
year ended December 31, 2019, as compared to the year ended December 31, 2018.
The increase in general and administrative expenses was primarily driven by a
$587.0 million increase in equity and cash settled stock-based compensation
expense, a $35.9 million increase in acquisition-related costs, and a $13.5
million increase in employee-related costs driven by headcount growth to support
expansion of the business.
Other non-operating income (expense), net
Other non-operating income (expense), net decreased $0.5 million for the year
ended December 31, 2019, as compared to the year ended December 31, 2018,
primarily due to a decrease in interest income of $0.6 million resulting from
lower average cash balances throughout 2019 compared to 2018.
Provision for income taxes
Provision for income taxes increased $8.6 million for the year ended December
31, 2019, as compared to the year ended December 31, 2018, due to our growth
internationally.
Our effective tax rate increased to (1.3)% for the year ended December 31, 2019,
as compared to (13.2)% for the year ended December 31, 2018. The increase was
primarily driven by differences in our effective tax rate for the respective
years, as described below.
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Our effective tax rate for the year ended December 31, 2019 was (1.3)%. The
difference between the U.S. statutory rate of 21% and our effective tax rate is
primarily driven by rate adjustments due to tax reserves, non-deductible stock
compensation, foreign taxes, and the impact of valuation allowances recorded
against current year losses in the United States.
Our effective tax rate for the year ended December 31, 2018 was (13.2)%. The
difference between the U.S. statutory rate of 21% and our effective tax rate is
primarily driven by rate adjustments due to changes in the valuation allowances
recorded against current year losses in the United States, which was partially
offset by a rate adjustment due to tax credits.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations
data for each of the last eight quarters ended December 31, 2020. The
information for each of these quarters has been prepared on the same basis as
the audited annual financial statements included elsewhere in this Annual Report
on Form 10-K and, in the opinion of management, includes all adjustments, which
includes only normal recurring adjustments, necessary for the fair statement of
the results of operations for these periods. This data should be read in
conjunction with our audited consolidated financial statements and related notes
thereto included elsewhere in this Annual Report on Form 10-K. These quarterly
results of operations are not necessarily indicative of our future results of
operations that may be expected for any future period.
                                                                                                Three Months Ended
                                 Dec. 31,          Sept. 30,           June 30,           March 31,           Dec. 31,           Sept. 30,           June 30,            March 31,
                                   2020               2020               2020                2020               2019                2019               2019                2019
                                                                                                  (In thousands)
Revenue:
Subscription                   $ 160,397          $ 148,259          $  138,476          $ 128,265          $  120,476          $ 110,497          $  102,453          $   96,612
Professional services and
other                             53,169             44,590              42,567             47,799              52,331             41,484              34,379              32,923
Total revenue                    213,566            192,849             181,043            176,064             172,807            151,981             136,832             129,535
Cost of revenue(1)(2):
Subscription                      15,697             16,362              16,896             13,716              16,419             13,936              13,396              24,231
Professional services and
other                             35,756             32,674              33,178             34,208              36,817             29,564              27,017              24,111
Total cost of revenue             51,453             49,036              50,074             47,924              53,236             43,500              40,413              48,342
Gross profit                     162,113            143,813             130,969            128,140             119,571            108,481              96,419              81,193
Operating expenses(1)(2):
Research and development          43,810             62,065              71,431             35,489              58,658             42,110              53,376              87,980
Sales and marketing              109,019            103,008             112,672            107,095             112,871             93,130              97,045             137,279
General and administrative        20,274             60,731              72,007             22,487              93,021             59,022             137,816             427,504
Total operating expenses         173,103            225,804             256,110            165,071             264,550            194,262             288,237             652,763
Operating loss                   (10,990)           (81,991)           (125,141)           (36,931)           (144,979)           (85,781)           (191,818)           (571,570)


Other non-operating income
(expense), net                      (489)              (556)               (412)               485                 180               (413)               (228)                (25)
Loss before income taxes         (11,479)           (82,547)           (125,553)           (36,446)           (144,799)           (86,194)           (192,046)           (571,595)
Provision for income taxes         2,996              3,141               1,951              8,389               2,471              4,321               2,226               3,981
Net loss                       $ (14,475)         $ (85,688)         $ (127,504)         $ (44,835)         $ (147,270)         $ (90,515)         $ (194,272)         $ (575,576)


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____________________

(1)Includes stock-based compensation expense as follows:


                                                                                           Three Months Ended
                             Dec. 31,          Sept. 30,           June 30,          March 31,           Dec. 31,          Sept. 30,           June 30,          March 31,
                               2020               2020               2020               2020               2019               2019               2019               2019
                                                                                             (In thousands)


Cost of subscription
revenue                     $    823          $     725          $   2,915          $     169          $   3,189          $   2,057          $   3,384          $  15,506
Cost of professional
services and other revenue       544              2,582              3,522                 89              3,231              3,678              5,779              4,480
Research and development       5,190             23,919             37,282              1,964             23,675             12,893             26,943             67,298
Sales and marketing            2,944             12,086             19,064              3,783             21,493             11,625             24,732             57,731
General and administrative    (3,537)            44,810             58,642              6,497             74,517             43,007            124,784            346,224
Total stock-based
compensation                $  5,964          $  84,122          $ 121,425          $  12,502          $ 126,105          $  73,260          $ 185,622          $ 491,239

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


                                                                                             Three Months Ended
                              Dec. 31,           Sept. 30,           June 30,           March 31,           Dec. 31,           Sept. 30,           June 30,           March 31,
                                2020               2020                2020               2020                2019               2019                2019               2019
                                                                                               (In thousands)


Cost of subscription
revenue                     $     265          $      265          $     266          $      266          $     282          $      285          $     285          $      308
Sales and marketing                51                  51                 51                  51                    51               51                 51                  51
General and administrative         47                  47                 47                  47                 27                  27                 28                  32
Total amortization of
acquired intangible assets  $     363          $      363          $     364          $      364          $     360          $      363          $     364          $      391


Quarterly Revenue Trends
Our revenue increased sequentially in each of the quarters presented primarily
due to increases in the number of customers and expansion with existing
customers. We generally experience seasonality in billings with our customers,
and we typically record a higher percentage of billings in our fourth quarter.
However, because we recognize subscription revenue ratably over the terms of our
subscription agreements, a substantial portion of the subscription revenue that
we report in each period is attributable to the recognition of remaining
performance obligations relating to agreements that we entered into during
previous periods. Consequently, increases or decreases in new or renewal
billings in any one period may not be immediately reflected as subscription
revenue for that period. For the three months ended December 31, 2020, September
30, 2020, June 30, 2020, and March 31, 2020, professional services and other
revenue decreased as a percentage of total revenue due largely to customer
delays in completing research services projects following the COVID-19 pandemic.
Quarterly cost of revenue and gross margin trends
Beginning in 2019, our quarterly subscription cost of revenue fluctuated mainly
due to equity and cash settled stock-based compensation expense. Cash settled
stock-based compensation expense follows mark-to-market accounting, which
results in changes in quarterly periods due to changes in the underlying price
of SAP's stock. Excluding the impacts of stock-based compensation expense,
margins have been consistent throughout the quarterly periods shown. Beginning
in 2019, our quarterly professional services and other cost of revenue
fluctuated mainly due equity and cash settled stock-based compensation expense.
Excluding the impacts of stock-based compensation expense, we generally expect
our subscription and total gross margin to remain relatively constant in the
near term and to increase modestly in the long term as subscription revenue
becomes a bigger percentage of our overall revenue. Our subscription and total
gross margin may fluctuate from period to period depending on the interplay of
all of these factors.
Quarterly operating expense trends
Our quarterly operating expenses fluctuated mainly due to equity and cash
settled stock-based compensation expense and advisory and legal costs related to
the SAP Acquisition. Excluding the impacts of stock-based
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compensation expense and costs related to the SAP acquisition, our overall total
quarterly operating expenses generally increased sequentially in the quarters
presented primarily due to headcount growth in connection with the expansion of
our business.
Liquidity and Capital Resources
As of December 31, 2020 we had cash and cash equivalents of $203.9 million. Our
cash and cash equivalents consist primarily of cash and money market funds. As
of December 31, 2020, we had $23.5 million of our cash and cash equivalents held
by our foreign subsidiaries.
We have financed our operations primarily through cash generated from our
operations, equity issuances, and proceeds from capital contributions received
from SAP in conjunction with the SAP Acquisition and funding of cash settled
stock-based compensation expense. Our principal uses of cash in recent periods
have been funding our operations, making capital expenditures, and settling
equity-based awards.
We believe our existing cash and cash equivalents, together with cash provided
by operations and funding obligations from SAP, will be sufficient to meet our
needs for at least the next 12 months. Our future capital requirements will
depend on many factors, including our revenue growth rate, subscription renewal
activity, the timing and extent of spending to support further infrastructure
development and research and development efforts, the timing and extent of
additional capital expenditures to invest in existing and new office spaces, the
satisfaction of tax withholding obligations for the settlement of future
share-based awards, the expansion of sales and marketing and international
operation activities, the introduction of new product capabilities and
enhancement of our XM Platform, and the continuing market acceptance of our
platform. With respect to the funding of tax withholding and remittance
obligations related to the settlement of share-based awards, we may use a
significant portion of our existing cash, including funds raised in our initial
public offering and private placements to Q II and Silver Lake. If we elect not
to fully fund tax withholding and remittance obligations through cash or if we
are unable to do so, we may choose to sell equity or debt securities, or rely on
a combination of these alternatives. We have based this estimate on assumptions
that may prove to be wrong, and we could use our available capital resources
sooner than we currently expect. On December 28, 2020, we initiated a voluntary
exchange offer pursuant to which we offered our eligible employees, including
our executive officers, the ability to exchange their existing cash-settled
Qualtrics Rights and cash-settled SAP RSUs for equity-settled awards with
underlying shares of our Class A common stock. Upon completion of our initial
public offering on January 28, 2021, 5.3 million Qualtrics Rights and 1.3
million SAP RSU awards were exchanged into 12.8 million Qualtrics RSU awards,
significantly reducing our liability-classified stock-based awards liability. We
may in the future enter into arrangements to acquire or invest in complementary
businesses, services, and technologies, including intellectual property rights.
We may be required to seek additional equity or debt financing. In the event
that additional financing is required from outside sources, we may not be able
to raise it on terms acceptable to us or at all. If we are unable to raise
additional capital when desired, our business, results of operations, and
financial condition would be materially and adversely affected.
Our cash flow activities were as follows for the periods presented:
                                                                 Years Ended December 31,
                                                       2020                2019                2018
                                                                      (In thousands)
Net cash flows provided by (used in) operating
activities                                         $ (410,722)         $ (370,904)         $   36,404
Net cash used in investing activities                 (89,518)            (33,181)            (32,686)
Net cash flows (used in) provided by financing
activities                                            660,000             329,793                (531)
Effect of exchange rate changes on cash and cash
equivalents                                             1,664               1,316              (1,179)
Net increase (decrease) in cash and cash
equivalents                                        $  161,424          $  (72,976)         $    2,008


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Operating activities
Our largest source of operating cash is cash collections from our paying
customers for subscriptions to our XM Platform. Our primary uses of cash from
operating activities are for employee-related costs, infrastructure-related
expenditures, and marketing expenses. Net cash provided by operating activities
is impacted by our net loss adjusted for certain non-cash items, including
depreciation and amortization expenses and equity and cash settled stock-based
compensation, as well as the effect of changes in operating assets and
liabilities.
For the year ended December 31, 2020, net cash used in operating activities was
$410.7 million, which resulted from net loss of $272.5 million, adjusted for
$224.0 million in stock-based compensation expense, including cash settled of
$388.6 million, additional non-cash charges of $89.0 million and net cash inflow
of $62.6 million from changes in operating assets and liabilities. Additional
non-cash charges primarily consisted of $26.5 million for depreciation and
amortization expense, $32.1 million of amortization of deferred contract
acquisition costs and $17.2 million related to the reduction of right-of-use
assets from operating leases. The outflow from operating assets and liabilities
was primarily due $103.7 million increase in accounts receivable due to billings
growth and timing of collections, $111.7 million increase in deferred contract
acquisition costs as our sales commission payments increased due to addition of
new customers and expansion of our existing customer subscriptions, and $18.4
million increase in prepaid and other assets, partially offset by an increase of
$114.3 million in deferred revenue from advance invoicing in accordance with our
customer contracts, $22.3 million aggregate increase in accrued liabilities and
accounts payable, and a $24.7 million increase in lease liabilities.
For the year ended December 31, 2019, net cash flows used in operating
activities was $370.9 million, which resulted from net loss of $1,007.6 million,
adjusted for $876.2 million in stock-based compensation expense, including cash
settled of $312.8 million, additional non-cash charges of $42.9 million, net
cash inflow of $30.3 million from changes in operating assets and liabilities.
Non-cash charges primarily consisted of $19.7 million for depreciation and
amortization expense, and $19.5 million of amortization of deferred contract
acquisition costs. The inflow from operating assets and liabilities was
primarily due to an increase of $102.6 million in deferred revenue from advance
invoicing in accordance with our revenue contracts, $51.9 million aggregate
increase in accrued liabilities and accounts payable, partially offset by $54.3
million increase in accounts receivable due to billings growth and timing of
collections, $47.7 million increase in deferred contract acquisition costs as
our sales commission payments increased due to addition of new customers and
expansion of our existing customer subscriptions, and $15.7 million increase in
prepaid and other assets.
For the year ended December 31, 2018, net cash provided by operating activities
was $36.4 million, which resulted from net loss of $37.3 million, adjusted for
non-cash charges of $32.9 million and net cash inflow of $40.8 million from
changes in operating assets and liabilities. Non-cash charges primarily
consisted of $14.8 million for depreciation and amortization expense, $13.4
million of amortization of deferred contract acquisition costs and $4.6 million
for equity-classified stock-based compensation expense. The inflow from
operating assets and liabilities was primarily due to an increase of $99.1
million in deferred revenue from advance invoicing in accordance with our
customer contracts, $29.6 million aggregate increase in accrued liabilities and
accounts payable, partially offset by $57.8 million increase in accounts
receivable due to billings growth and timing of collections, $27.1 million
increase in deferred contract acquisition costs as our sales commission payments
increased due to addition of new customers and expansion of our existing
customer subscriptions, and $3.5 million increase in prepaid and other assets.
Investing activities
Net cash used in investing activities is primarily impacted by purchases of
property and equipment, particularly for capital expenditures for our data
centers, capitalized software, improvements to existing and new office spaces,
and business combinations.
Net cash used in investing activities during the year ended December 31, 2020,
2019, and 2018 of $89.5 million, $33.2 million, and $32.7 millions,
respectively, resulted primarily from capital expenditures for our XM Platform
and office build-outs and the cash paid for business combinations in 2018.

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Financing activities
Net cash provided by financing activities of $660.0 million during the year
ended December 31, 2020 was due to $540.0 million in proceeds from a capital
contribution from SAP and $120.0 million and proceeds from the stock purchase
agreement with Q II.
Net cash provided by financing activities of $329.8 million during the year
ended December 31, 2019 was due to $869.5 million in proceeds from a capital
contribution from SAP offset by $539.7 million related to the settlement of
equity-based awards.
Net cash used in financing activities of $0.5 million during the year ended
December 31, 2018 was primarily due to the repurchase of our class B common
stock.
On December 23, 2020, Silver Lake agreed to purchase $550 million of shares of
our Class A common stock, comprising (a) 15,018,484 shares of our Class A common
stock at $21.64 per share and (b) $225 million of shares of our Class A common
stock at the initial public offering price, in a concurrent private placement.
Based on our initial public offering price of $30.00, this resulted in a total
of 22,518,484 shares of our Class A common stock purchased. The Class A common
stock purchase agreement restricts Silver Lake's right to sell or transfer the
shares of our Class A common stock acquired pursuant to the purchase agreement
for a period of 24 months after the effectiveness of the initial public offering
registration statement. Pursuant to the Silver Lake investment, we granted
Silver Lake certain rights under our stockholders' agreement, including demand
registration rights and "piggyback" registration rights with respect to our
Class A common stock that may be exercised after the date that is 24 months
after the effectiveness of the initial public offering registration statement,
subject to cutback provisions. We have also agreed to appoint Egon Durban, a
representative of Silver Lake, to our Board upon the closing of the Silver Lake
investment.
Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future
revenue that has not yet been recognized, including both deferred revenue and
non-cancelable contracted amounts that will be invoiced and recognized as
revenue in future periods. The aggregate transaction price of remaining
performance obligations is expected to be recognized as revenue as follows:
                            Next 12 Months       Thereafter         Total
As of December 31, 2020    $       645,416      $  498,950      $ 1,144,366
As of December 31, 2019    $       434,121      $  208,562      $   642,683
As of December 31, 2018    $       303,275      $   67,662      $   370,937


These amounts are based on our best judgment, as we need to consider estimates
of possible future contract modifications. The amount of transaction price
allocated to the remaining performance obligations, and changes in this amount
over time, are impacted by, among others, currency fluctuations and the contract
period of our cloud contracts remaining at the balance sheet date and thus by
the timing of contract renewals.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31,
2020:
                                                                      Payments Due by Period
                                                     Less than 1                                                     More than 5
                                    Total               year              1 - 3 years           3 - 5 years             years
                                                                          (In thousands)
Operating lease commitments      $ 322,308          $   26,802          $     52,337          $     54,110          $  189,059
Non-cancelable purchase
obligations                         26,782              16,205                10,577                     -                   -
Total                            $ 349,090          $   43,007          $     62,914          $     54,110          $  189,059


The contractual commitment amounts in the table above are associated with
agreements that are enforceable and legally binding. Obligations under contracts
that we can cancel without a significant penalty are not included in the table
above. Purchase orders issued in the ordinary course of business are not
included in the table above, as our purchase orders represent authorizations to
purchase rather than binding agreements. Tax contingencies are not included in
the table above as the period in which payment is due cannot be determined.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Critical Accounting Policies and Judgments
The preparation of financial statements in conformity with GAAP requires us to
make certain estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the balance sheet date, as well as reported amounts
of revenue and expenses during the reporting period. Our most significant
estimates and judgments involve revenue recognition with respect to the
determination of the standalone selling prices for our services, valuation of
our equity and cash settled stock-based compensation, including the underlying
deemed estimated fair value of our common stock, valuation of deferred income
tax assets and liabilities, uncertain tax positions, and contingencies and
litigation. Actual results could differ from those estimates. To the extent that
there are differences between our estimates and actual results, our future
financial statement presentation, financial condition, results of operations,
and cash flows will be affected.
We believe that the accounting policies described below involve a greater degree
of judgment and complexity. Accordingly, these are the policies we believe are
the most critical to aid in fully understanding and evaluating our consolidated
financial condition and results of operations.
Revenue recognition
We recognize revenue from its service/product lines when control is transferred
to its customers, in an amount that reflects the consideration we expect to be
entitled to in exchange for the services. Sales and other taxes collected from
customers to be remitted to government authorities are excluded from revenue. In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606) and Subtopic 340-40, Other Assets and Deferred Costs-Contracts with
Customers (Subtopic 340-40). We account for revenue contracts with customers by
applying the requirements of Topic 606, which includes the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in a contract
•Determination of the transaction price
                                       72
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•Allocation of the transaction price to the performance obligations in the
contract
•Recognition of revenue when, or as, performance obligations are satisfied
Classes of Revenue
We derive revenue from two service/product lines:
Subscription Revenue. We generate revenue primarily from sales of subscriptions
to access our XM Platform, together with related support services to our
customers. Arrangements with customers do not provide the customer with the
right to take possession of the software operating the XM Platform at any time.
Instead, customers are granted continuous access to the XM Platform over the
contractual period.
Our subscription contracts generally have annual contractual terms while some
have multi-year contractual terms. We generally bill annually in advance with
net 30 payment terms. Our agreements generally cannot be canceled with refund.
Professional Services and Other Revenue. Professional services and other revenue
mainly includes two types of services: research services and professional
services. Research services is a solution provided to existing subscription
customers with arrangements, which are distinct from subscription revenue
services. In addition, we provide professional services associated with new and
expanding customers requesting implementation, integration services, and other
ancillary services. These services are distinct from subscription revenue
services.
Identification of a Contract
For accounting purposes, we treat multiple contracts entered into with the same
customer as a single contract if they are entered into at or near the same time
and are economically interrelated. We do not combine contracts with closing days
more than three months apart because we do not consider them being entered into
near the same time. Judgment is required in evaluating whether various contracts
are interrelated, which includes considerations as to whether they were
negotiated as a package with a single commercial objective, whether the amount
of consideration on one contract is dependent on the performance of the other
contract, or if some or all goods in the contracts are a single performance
obligation.
New arrangements with existing customers can be either a new contract or the
modification of prior contracts with the customer. Our respective judgment in
making this determination considers whether there is a connection between the
new arrangement and the pre-existing contracts, whether the goods and services
under the new arrangement are highly interrelated with the goods and services
sold under prior contracts, and how the goods and services under the new
arrangement are priced. In determining whether a change in transaction price
represents a contract modification or a change in variable consideration, we
examine whether the change in price results from changing the contract or from
applying unchanged existing contract provisions.
Identification of Performance Obligations
Some contracts with customers contain multiple performance obligations. For
these contracts, we account for individual performance obligations separately,
if they are distinct. Typically, the products and services outlined in the
Classes of Revenue section qualify as separate performance obligations and the
portion of the contractual fee allocated to them is recognized separately.
Judgment is required, however, in determining whether a good or service is
considered a separate performance obligation. In particular for our professional
services and implementation activities, judgment is required to evaluate whether
such services significantly integrate, customize, or modify the subscription
service to which they relate. In this context, we consider the nature of the
services and their volume relative to the volume of the subscription service to
which they relate. In general, the implementation services for our subscription
services go beyond pure setup activities and qualify as separate performance
obligations. Non-distinct goods and services are combined into one distinct
bundle of goods and services (combined performance obligation).
In rare instances, customers have the option to purchase additional subscription
and support services at a stated price. These options generally do not provide a
material right as they are priced at standalone selling price, or SSP.
                                       73
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We apply judgment in determining whether such options provide a material right
to the customer that the customer would not receive without entering into that
contract (material right options). In this judgment, we consider, for example,
whether the options entitle the customer to a discount that exceeds the discount
granted for the respective goods or services sold together with the option.
Determination of Transaction Price
We apply judgment in determining the amount to which we expect to be entitled in
exchange for transferring promised goods or services to a customer. This
includes estimates as to whether and to what extent subsequent concessions or
payments may be granted to customers and whether the customer is expected to pay
the contractual fees. In this judgment, we consider our history both with the
respective customer and more broadly.
If our services do not meet certain service level commitments, certain customers
are entitled to receive service credits, and in certain cases, refunds, each
representing a form of variable consideration. Historically, we have not
experienced any significant incidents affecting the defined levels of
reliability and performance as required by our subscription contracts.
Accordingly, any estimated refunds related to these agreements in the
consolidated financial statements is not material during the periods presented.
We applied the practical expedient in Topic 606 and did not evaluate contracts
of one year or less for the existence of a significant financing component. We
determined that no significant financing component existed on our multi-year
contracts, as these contracts were structured for purposes other than obtaining
financing from customers. Additionally, prices are generally fixed at contract
inception; therefore, our contracts do not contain a significant amount of
variable consideration.
Allocation of Transaction Price
The transaction price is allocated to the separate performance obligations on a
relative standalone selling price basis. We determine standalone selling prices
considering market conditions and based on overall pricing objectives such as
observable standalone selling prices, and other factors, including the value of
contracts, types of services sold, customer demographics, and the number and
types of users within such contracts. We have established a hierarchy to
identify the standalone selling prices that we use to allocate the transaction
price of a customer contract to the performance obligations in the contract:
•Where standalone selling prices for an offering are observable and reasonably
consistent across customers (that is, not highly variable), our standalone
selling price estimates are derived from our respective pricing history.
•Where sales prices for an offering are not directly observable or highly
variable across customers, we use estimation techniques. For renewable offerings
with highly variable pricing, these techniques consider the individual
contract's expected renewal price as far as this price is substantive.
Typically, our subscription offerings follow this approach. For our professional
and other services, these estimations typically follow a cost-plus-margin
approach.
Judgment is required when estimating standalone selling prices. To judge whether
the historical pricing of our goods and services is highly variable, we have
established thresholds of pricing variability. For judging whether contractual
renewal prices are substantive, we have established floor prices that we use as
standalone selling prices whenever the contractual renewal prices are below
these floor prices. In judging whether contracts are expected to renew at their
contractual renewal prices, we rely on our respective renewal history. We review
the standalone selling prices periodically or whenever facts and circumstances
change to ensure the most objective input parameters available are used.
Recognition of Revenue
Access to our XM Platform represents a series of distinct services as we
continually provide access to and fulfill our obligation to the end customer
over the subscription term. The series of distinct services represents a single
performance obligation that is satisfied over time. Accordingly, the fixed
consideration related to subscription
                                       74
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revenue is generally recognized on a straight-line basis over the contract term,
beginning on the date that the service is made available to the customer.
Revenue from professional services and other revenue related to research
services is recognized upon completion because completion and delivery of the
results is considered a separate performance obligation satisfied at a point in
time. Revenue from professional services and other revenue related to customized
software coding is recognized upon completion, because the customer consumes the
intended benefit and assumes control upon final completion of the custom coding.
Revenue from professional services and other revenue related to implementation
and other ancillary services is recognized as the services are performed,
because the customer consumes the benefit as the services are provided.
Judgment is required to determine whether revenue is to be recognized at a point
in time or over time. For performance obligations satisfied over time, we need
to measure progress using the method that best reflects Qualtrics' performance.
All judgments and estimates mentioned above can significantly impact the timing
and amount of revenue to be recognized.
Stock-based compensation, including cash settled
Equity Awards
We measure and recognize compensation expense for stock-based payment awards,
including restricted stock awards, or RSAs, restricted stock units, or RSUs, and
stock options granted to employees and advisors, based on the grant date fair
value of the awards. Awards that will be settled in cash are marked-to-market
each quarter. The grant date fair value of stock options is estimated using a
Black-Scholes option pricing model. The fair value of stock-based compensation
for stock options is recognized on a straight-line basis over the period during
which services are provided in exchange for the award. The grant date fair value
of RSAs and RSUs is estimated based on the fair value of the underlying common
stock. Awards which contain both service-based and performance conditions are
recognized using the accelerated attribution method.
As discussed in detail in Note 12, we issue two types of RSAs, one-tier and
two-tier. One-tier RSAs vest solely on a service-based condition. For these
awards, we recognize stock-based compensation expense on a straight-line basis
over the vesting period. Two-tier RSAs contain both a service-based condition
and performance condition, defined as the earlier of (i) an acquisition or
change in control of the Company or (ii) upon the occurrence of an initial
public offering by the Company. A change in control event and effective
registration event are not deemed probable until consummated; accordingly, no
expense is recorded related to two-tier RSAs until the performance condition
becomes probable of occurring. Awards which contain both service-based and
performance conditions are recognized using the accelerated attribution method
once the performance condition is probable of occurring.
As discussed in detail in Note 12, all of our RSUs contain both a service-based
condition and performance condition, defined as the earlier of (i) an
acquisition or change in control of the Company or (ii) upon the occurrence of
an initial public offering by the Company. A change in control event and
effective registration event are not deemed probable until consummated;
accordingly, no expense is recorded related to RSUs until the performance
condition becomes probable of occurring. Awards which contain both service-based
and performance conditions are recognized using the accelerated attribution
method once the performance condition is probable of occurring.
With the SAP Acquisition, the performance condition of two-tier RSAs and RSUs
was deemed to be met in January 2019.
In conjunction with the SAP Acquisition, under the terms of the acquisition
agreement, unvested RSAs, RSUs, and options held by our employees were exchanged
into liability-classified, stock-based awards to be settled in cash, or
Qualtrics Rights. Approximately $858 million of the purchase price was related
to RSAs, RSUs, and options that were to vest after the SAP Acquisition,
contingent upon continued service from employees. The price realized by
employees for these time-based awards is $35.00 per share, if the award was
granted before January 1, 2018 or if the award was originally granted as an
option; provided, that the fixed amount will be reduced by the original exercise
                                       75
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price for any Qualtrics Rights that were originally granted as options. If the
award was granted on or after January 1, 2018, the amount realized is $35.00 per
share, adjusted for changes in the five-day average price of SAP stock for the
period immediately preceding the close of the SAP Acquisition compared to SAP's
stock price on the vesting date.
Cash Awards
We measure and recognize compensation expense for cash settled stock-based
awards based on the fair value of the awards each quarter until settlement. The
fair value of stock-based compensation cash awards that vest solely on a
service-based condition is recognized on a straight-line basis over the period
during which services are provided in exchange for the award. The fair value is
estimated based on the fair value of the underlying stock price or some are
valued at $35.00. Awards which contained both service-based and performance
conditions are recognized using the accelerated attribution method once the
performance condition is probable of occurring.
After the SAP Acquisition, certain executives and employees were granted SAP
RSUs, which are virtual shares representing a contingent right to receive a cash
payment determined by the SAP share price and the number of share units that
ultimately vest. SAP RSUs have a service-based vesting condition over a
three-year period. These awards have a cliff vesting period of one year and
continue to vest annually thereafter. We began granting SAP RSUs in March 2019.
We recognize compensation expense associated with these RSUs ratably on a
straight-line basis over the requisite service period. All awards are paid out
in cash upon vesting.
We account for forfeitures as they occur; therefore, equity and cash settled
stock-based compensation expense for the years ended December 31, 2020, 2019 and
2018 has been calculated based on actual forfeitures in our consolidated
statements of operations.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for more information about other recent
accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We have operations in the United States and internationally, and we are exposed
to market risk in the ordinary course of our business.
Interest rate risk
We had cash and cash equivalents of $203.9 million as of December 31, 2020. We
hold our cash and cash equivalents for working capital purposes. Our cash and
cash equivalents are held in cash deposits and money market funds. The primary
objectives of our investment activities are the preservation of capital, the
fulfillment of liquidity needs, and the control of cash and investments. We do
not enter into investments for trading or speculative purposes. Due to the
short-term nature of these instruments, we believe that we do not have any
material exposure to changes in the fair value of our investment portfolio as a
result of changes in interest rates. Decreases in interest rates, however, would
reduce future interest income.
We do not have any long-term debt or financial liabilities with floating
interest rates that would subject us to interest rate fluctuations.
A hypothetical 10% change in interest rates during any of the periods presented
would not have had a material impact on our financial statements.
Foreign currency exchange risk
Our results of operations and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates relative to U.S. dollars, our
reporting currency. Our revenue is primarily generated in U.S. dollars, Euros,
Australian dollars, British pounds sterling, Canadian dollars, New Zealand
dollars, Japanese yen, and Singapore dollars. A portion of our operating
expenses are incurred outside the United States, denominated in foreign
                                       76
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currencies and subject to fluctuations due to changes in foreign currency
exchange rates, particularly changes in the Euro, British pound sterling, and
Australian dollar. Additionally, fluctuations in foreign currency exchange rates
may cause us to recognize transaction gains and losses in our consolidated
statements of operations. As the impact of foreign currency exchange rates has
not been material to our historical operating results, we have not entered into
derivative or hedging transactions, but we may do so in the future if our
exposure to foreign currency becomes more significant.
We recorded $0.6 million in net foreign currency transaction losses in the year
ended December 31, 2020, $0.9 million in net foreign currency transaction losses
in the year ended December 31, 2019, and $1.1 million in net foreign currency
transaction losses in the year ended December 31, 2018. A hypothetical 10%
change in foreign currency rates would not have resulted in material gains or
losses for the years ended December 31, 2020, 2019, and 2018.
Inflation risk
We do not believe that inflation has had a material effect on our business,
results of operations, or financial condition. Nonetheless, if our costs were to
become subject to significant inflationary pressures, we may not be able to
fully offset such higher costs. Our inability or failure to do so could harm our
business, results of operations, or financial condition.

                                       77

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Item 8. Financial Statements and Supplementary Data


  Report of Independent Registered Public Accounting Firm                                79
  Consolidated Balance Sheets                                                            80
  Consolidated Statements of Operations                                                  81
  Consolidated Statements of Comprehensive Loss                                          83

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit )


             84
  Consolidated Statements of Cash Flows                                                  85
  Notes to Consolidated Financial Statements                                             86


                                       78


--------------------------------------------------------------------------------

            Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Qualtrics International Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Qualtrics
International Inc. and subsidiaries (the Company) as of December 31, 2020 and
2019, the related consolidated statements of operations, comprehensive loss,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows for each of the years in the threeyear period ended December 31,
2020, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows
for each of the years in the threeyear period ended December 31, 2020, in
conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has
elected to change its method of accounting for leases as of January 1, 2019 due
to the adoption of Financial Accounting Standards Board Accounting Standards
Codification (ASC) Topic 842 - Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company's auditor since 2019.
Salt Lake City, Utah
March 9, 2021
                                       79
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                          Qualtrics International Inc.
                          Consolidated Balance Sheets
                   (In thousands, except share and par value)
                                                                                         As of December 31,
                                                                                      2020                 2019
Assets
Current assets:
Cash and cash equivalents                                                        $   203,891          $    42,467
Accounts receivable, net of allowance (1)                                            296,148              193,692
Deferred contract acquisition costs, net                                              43,429               22,168
Prepaid expenses and other current assets                                             48,130               37,090
Total current assets                                                                 591,598              295,417
Non-current assets:
Property and equipment, net                                                          116,120               51,067
Right-of-use assets from operating leases                                            195,372              184,838
Goodwill                                                                               6,709                6,709
Other intangible assets, net                                                           3,959                5,414
Deferred contract acquisition costs, net of current portion                          115,837               54,832
Deferred tax assets                                                                       92                3,313
Other assets                                                                           9,368                1,694
Total assets                                                                     $ 1,039,055          $   603,284

Liabilities, redeemable convertible preferred stock, and deficit
Current liabilities:
Lease liabilities                                                                $     7,125          $     7,893
Accounts payable (1)                                                                  30,452               31,707
Accrued liabilities                                                                  225,046               80,029
Liability-classified, stock-based awards                                             209,286              286,991
Deferred revenue                                                                     495,638              382,602
Total current liabilities                                                            967,547              789,222
Non-current liabilities:
Lease liabilities, net of current portion                                            235,620              182,274
Liability-classified, stock-based awards, net of current portion                      76,627              161,237
Deferred revenue, net of current portion                                               5,477                4,182
Deferred tax liabilities                                                               5,970                    -
Other liabilities                                                                     16,716                6,889
Total liabilities                                                                $ 1,307,957          $ 1,143,804
Commitments and contingencies
Equity (deficit)
Preferred stock, par value $0.0001 per share; authorized 100,000,000 shares;
no shares outstanding (2)                                                                  -                    -

Class A common stock, par value $0.0001 per share; authorized 2,000,000,000 shares; issued and outstanding 6,000,000 and no shares as of December 31, 2020 and 2019 (2)

                                                                          1                    -
Class B common stock, par value $0.0001 per share; authorized 1,000,000,000
shares; issued and outstanding 423,170,610 and 423,170,610 as of December 31,
2020 and 2019 (2)                                                                         42                   42
Additional paid in capital                                                         1,126,631              586,631
Accumulated other comprehensive income (loss)                                          3,191                 (928)
Accumulated deficit                                                               (1,398,767)          (1,126,265)
Total deficit                                                                       (268,902)            (540,520)

Total liabilities, redeemable convertible preferred stock, and deficit

$ 1,039,055 $ 603,284

________________

(1)Includes amounts from related parties. See Note 15 for further details (2)See Note 2 "2020 Stock Split and Capital Reorganization" for further details

The accompanying notes are an integral part of these consolidated financial


                                  statements.
                                       80
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                          Qualtrics International Inc.
                     Consolidated Statements of Operations
                       (In thousands, except share data)


                                                                            Year Ended December 31,
                                                               2020                     2019                  2018
Revenue:
Subscription                                             $      575,397          $       430,038          $  295,528
Professional services and other                                 188,125                  161,117             106,380
Total revenue                                                   763,522                  591,155             401,908
Cost of revenue:
Subscription                                                     62,671                   67,982              35,785
Professional services and other                                 135,816                  117,509              66,929
Total cost of revenue                                           198,487                  185,491             102,714
Gross profit                                                    565,035                  405,664             299,194
Operating expenses:
Research and development                                        212,795                  242,124              65,925
Sales and marketing                                             431,794                  440,325             192,142
General and administrative                                      175,499                  717,363              74,248
Total operating expenses                                        820,088                1,399,812             332,315
Operating loss                                                 (255,053)                (994,148)            (33,121)
Other non-operating income (expense), net                          (972)                    (486)                169
Loss before income taxes                                       (256,025)                (994,634)            (32,952)
Provision for income taxes                                       16,477                   12,999               4,356
Net loss                                                 $     (272,502)         $    (1,007,633)         $  (37,308)

                                                                                  January 23, 2019
                                                            Year Ended            through December
                                                         December 31, 2020            31, 2019

Net loss per share attributable to common
stockholder, basic                                       $        (0.64)

$ (1.76) Weighted-average Class A and Class B shares used in computing net loss per share attributable to common stockholder, basic

                                          423,334,994

423,170,610

The accompanying notes are an integral part of these consolidated financial


                                  statements.
                                       81
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Operating expenses includes:
Stock-based compensation expense as follows:
                                                                   Year Ended December 31,
in thousands                                            2020                2019                2018
Cost of subscription revenue                        $    4,632          $   24,136          $        4
Cost of professional services and other revenue     $    6,737          $   17,168          $      144
Research and development                            $   68,355          $  130,809          $    2,228
Sales and marketing                                 $   37,877          $  115,581          $      708
General and administrative                          $  106,412          $  588,532          $    1,516
Total stock-based compensation expense, including
cash settled(a)                                     $  224,013          $  876,226          $    4,600


________________
(a)As a result of the SAP Acquisition, our stock-based compensation expense
reflects the recognition of both equity-classified awards and
liability-classified awards. Liability-classified awards are settled in cash in
accordance with SAP's employee equity compensation programs. 2020 stock-based
compensation expense consisted of $224.0 million of liability-classified awards.
During the year ended December 31, 2020 awards of $388.6 million were settled in
cash. 2019 stock-based compensation expense consisted of $185.8 million of
equity-classified awards that was recognized as a result of the SAP Acquisition,
and $690.4 million of liability-classified awards, of which $312.8 million were
settled in cash in 2019. 2018 stock-based compensation expense consisted
entirely of equity-classified awards. Liability-classified awards are recorded
according to mark-to-market accounting.
Amortization of acquired intangible assets as follows:
                                                          Year Ended December 31,
in thousands                                          2020          2019         2018
Cost of subscription revenue                       $   1,062      $ 1,160      $   703
Sales and marketing                                      204          204          145
General and administrative                               188          114          201

Total amortization of acquired intangible assets $ 1,454 $ 1,478

$ 1,049


                                       82
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                          Qualtrics International Inc.
                 Consolidated Statements of Comprehensive Loss
                                 (In thousands)
                                                         Year Ended December 31,
                                                  2020             2019            2018
Net loss                                      $ (272,502)     $ (1,007,633)     $ (37,308)
Other comprehensive income (loss):
Foreign currency translation gain (loss)           4,119                (9)        (1,471)
Comprehensive loss                            $ (268,383)     $ (1,007,642)     $ (38,779)

The accompanying notes are an integral part of these consolidated financial


                                  statements.
                                       83
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                          Qualtrics International Inc.
     Consolidated Statements of Redeemable Convertible Preferred Stock and
                         Stockholders' Equity (Deficit)
                      (In thousands, except share amounts)

                                          Redeemable convertible preferred stock                     Class A common stock                          Class B common stock                                           Accumulated other
                                                  Shares                 Amount                     Shares               Amount                  Shares                   Amount            Additional           comprehensive income          Accumulated           Total equity
                                                                                                                                                                                         paid-in capital                (loss)                   deficit               (deficit)
Balance, January 1, 2018                          183,031,841          $    36                               -          $    -                       3,545,242          $     1          $     137,747          $               552          $     (81,324)         $     56,976
Stock-based compensation expense                            -                -                               -               -                               -                -                  4,600                            -                      -                 4,600
Conversion of restricted stock to
common stock                                                -                -                               -               -                         103,446                -                      -                            -                      -                     -
Repurchase of class B common stock                          -                -                               -               -                         (40,000)               -                   (531)                           -                      -                  (531)
Net loss                                                    -                -                               -               -                               -                -                      -                                             (37,308)              (37,308)
Foreign currency translation
adjustment                                                  -                -                               -               -                               -                -                      -                       (1,471)                     -                (1,471)
Balance, December 31, 2018                        183,031,841          $    36                               -          $    -                       3,608,688          $     1          $     141,816          $              (919)         $    (118,632)         $     22,266
Stock-based compensation expense                            -                -                               -               -                               -                -                185,792                            -                      -               185,792
Settlement of vested stock-based
awards                                                      -                -                               -               -                               -                -               (539,707)                           -                      -              (539,707)
Modification of equity awards to
liability awards                                            -                -                               -               -                               -                -                (70,765)                           -                      -               (70,765)
Conversion of restricted stock to
common stock                                                -                -                               -               -                       1,209,466                -                      -                            -                      -                     -
Capital restructuring pursuant to
reorganization                                   (183,031,841)             (36)                              -               -                     418,352,456               41                     (5)                           -                      -                    36
Capital contribution                                        -                -                               -               -                               -                -                869,500                            -                      -               869,500
Net loss                                                    -                -                               -               -                               -                -                      -                            -             (1,007,633)           (1,007,633)
Foreign currency translation
adjustment                                                  -                -                               -               -                               -                -                      -                           (9)                     -                    (9)
Balance, December 31, 2019                                  -          $     -                               -          $    -                     423,170,610          $    42          $     586,631          $

(928) $ (1,126,265) $ (540,520) Capital contribution from SAP

                               -                -                               -               -                               -                -                540,000                            -                      -               540,000
Sales of class A common stock (1)                                                                    6,000,000               1                               -                -                      -                            -                      -                     1
Net loss                                                    -                -                               -               -                               -                -                      -                            -               (272,502)             (272,502)
Foreign currency translation
adjustment                                                  -                -                               -               -                               -                -                      -                        4,119                      -                 4,119
Balance, December 31, 2020                                  -          $


 -                       6,000,000          $    1                     423,170,610          $    42          $   1,126,631          $             3,191          $  (1,398,767)         $   (268,902)

________________

(1)See Note 11 "Sale of Class A Common Stock" for further details

The accompanying notes are an integral part of these consolidated financial


                                  statements.
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                          Qualtrics International Inc.
                     Consolidated Statements of Cash Flows
                                 (In thousands)
                                                                    Year Ended December 31,
                                                        2020                 2019                 2018
Cash flows from operating activities
Net loss                                            $ (272,502)         $ (1,007,633)         $  (37,308)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization                           26,457                19,715              14,787
Reduction of right-of-use assets from operating
leases                                                  17,202                 9,031                   -
Stock-based compensation expense, including cash
settled                                                224,013               876,226               4,600
Amortization of deferred contract acquisition costs     32,098                19,513              13,368
Deferred income taxes                                   13,200                (5,321)                143
Changes in assets and liabilities:
Accounts receivable, net                              (103,692)              (54,320)            (57,799)
Prepaid expenses and other current assets              (10,773)              (17,533)             (2,573)
Deferred contract acquisitions costs                  (111,686)              (47,734)            (27,101)
Other assets                                            (7,592)                1,801                (910)
Lease liabilities                                       24,741                (6,375)                  -
Accounts payable                                          (282)                7,219              12,350
Accrued liabilities                                     22,546                44,662              17,194
Deferred revenue                                       114,331               102,562              99,077
Other liabilities                                        9,826                    55                 576
Settlement of stock-based payments liabilities        (388,609)             (312,772)                  -
Net cash flows provided by (used in) operating
activities                                            (410,722)             (370,904)             36,404

Cash flows from investing activities
Cash paid for intangible assets                              -                     -              (1,500)
Cash paid for business combinations, net of cash
acquired                                                     -                     -              (9,865)
Purchases of property and equipment                    (89,518)              (33,181)            (21,321)
Net cash flows used in investing activities            (89,518)              (33,181)            (32,686)

Cash flows from financing activities
Proceeds from capital contributions from SAP           540,000               869,500                   -
Proceeds from issuance of class A common stock         120,000                     -                   -
Settlement of equity-based awards                            -              (539,707)                  -
Repurchase of class B common stock                           -                     -                (531)
Net cash flows (used in) provided by financing
activities                                             660,000               329,793                (531)
Effect of changes in exchange rates on cash and
cash equivalents                                         1,664                 1,316              (1,179)
Net increase (decrease) in cash and cash
equivalents                                            161,424               (72,976)              2,008
Cash and cash equivalents as at 1 January               42,467               115,443             113,435

Cash and cash equivalents as at 31 December $ 203,891 $

42,467 $ 115,443



Supplemented cash flow disclosures
Cash paid for income taxes, net of tax refunds      $   11,356          $      4,034          $    1,146
Cash paid for operating leases, net of incentives
received                                                18,579                10,932                   -

Non-cash investing and financing activities
Capital expenditures incurred but not yet paid      $      741          $      1,115          $       72
Business combination consideration in accrued
liabilities                                                  -                     -                 600

Right-of-use assets obtained in exchange for lease obligations

                                             26,494               141,240                   -
Construction costs capitalized under build-to-suit
lease                                                        -                     -               2,900

The accompanying notes are an integral part of these consolidated financial

statements.
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Qualtrics International Inc.
Notes to Consolidated Financial Statements
1.DESCRIPTION OF THE BUSINESS
Qualtrics International Inc. ("Qualtrics" or "the Company") was incorporated in
the state of Delaware in September 2014. Qualtrics has built the first
experience management platform ("XM Platform") to manage customer, employee,
product, and brand experiences. The Company sells subscriptions to its XM
Platform and provides professional services primarily consisting of research
services, implementation services, and engineering services.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
On January 23, 2019, SAP SE ("SAP") acquired all outstanding shares of Qualtrics
International Inc. for approximately $8.0 billion in cash and push down
accounting was not elected to be used at the time of acquisition (the "SAP
Acquisition"). Since the SAP Acquisition, the operations of Qualtrics have been
included in SAP's consolidated financial statements. Qualtrics continues to
operate as separate legal entities and will continue to be presented as a
separate segment within SAP's consolidated financial statements. Certain
contracts for Qualtrics products are legally owned by SAP entities and the
related revenues, expenses, assets and liabilities will remain with SAP.
Qualtrics receives a royalty charge from SAP for these arrangements.
The financial statements have been derived from the consolidated financial
statements and accounting records of SAP using the historical results of
operations and historical basis of assets and liabilities for Qualtrics and its
wholly owned subsidiaries. All intercompany transactions and balances of
Qualtrics and its wholly owned subsidiaries have been eliminated in
consolidation. Since the SAP Acquisition, Qualtrics has functioned as part of
the larger group of companies controlled by SAP. However, due to the relative
short period since the SAP Acquisition, Qualtrics largely continued to operate
as a standalone operation and had not yet been fully integrated into the SAP
group of companies, with limited use of corporate overhead functions. For that
reason, it was not required to carve out or carve in any material assets or
liabilities on the balance sheet. Additionally, due to the limited integration
efforts, Qualtrics' benefit from direct or indirect corporate overhead functions
such as human resources, marketing, accounting or legal were also limited. Any
allocated expenses from SAP were included in the financial statements. Certain
other costs incurred by SAP for the direct benefit of Qualtrics, such as payroll
services, have been directly charged to Qualtrics and included in Qualtrics'
financial statements. Services provided by the SAP entities for Qualtrics are
recorded in the Qualtrics legal entities.
Management believes the assumptions underlying the financial statements and the
above allocations are reasonable. However, the financial statements included
herein may not necessarily reflect results of operations, financial position and
cash flows as if Qualtrics had operated as a standalone company during all
periods presented. Accordingly, historical results of Qualtrics should not be
relied upon as an indicator of the future performance of Qualtrics.
2018 Stock Split
On October 24, 2018, the Company amended its restated certificate of
incorporation to effect a two-for-one reverse stock split of its common stock
and redeemable convertible preferred stock. On the effective date of the reverse
stock split, (1) each two shares of outstanding redeemable convertible preferred
stock and common stock were reduced to one share of redeemable convertible
preferred stock and common stock, respectively; (2) the number of shares of
common stock issuable under each outstanding option to purchase common stock and
issuable upon vesting under each restricted stock unit was proportionately
reduced on a two-for-one basis; (3) the exercise price of each outstanding
option to purchase common stock was proportionately increased on a two-for-one
basis; and (4) corresponding adjustments in the per share conversion prices,
dividend rates, and liquidation preferences of the redeemable convertible
preferred stock were made. The impact of the stock split has been retroactively
applied to the Company's financial statements.
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2019 Merger and Capital Restructuring Pursuant to Reorganization
On January 23, 2019, with the completion of the SAP Acquisition of the Company
by a subsidiary of SAP ("Merger"), Merger was merged with and into Qualtrics
International Inc. As a result of these and other transactions (collectively
referred to herein as the "Reorganization"), the separate corporate existence of
Merger ceased, and the Company continues as the surviving corporation. In
connection with the Reorganization, all 187,849,989 shares of redeemable
convertible preferred stock and common stock of the Company are no longer
outstanding. The 423,170,610 shares of common stock of Merger became newly
issued and outstanding shares of the surviving corporation. Share and per share
information referenced throughout the consolidated financial statements and
notes to the consolidated financial statements for the period ended December 31,
2019 have been adjusted to reflect the decreased number of shares outstanding.
Due to the impact of the Reorganization, the Company's capital structure for the
year ended December 31, 2018 is not comparable with the Company's capital
structure after the Reorganization. As a result, the presentation of net loss
per share for the period prior to such transaction is not meaningful and only
net loss per share for periods subsequent to the Reorganization are presented
herein.
2020 Stock Split and Capital Reorganization
On December 21, 2020, the Company amended its restated certificate of
incorporation to create new classes of preferred stock, Class A and Class B
common stock. The Company's previously outstanding shares of common stock issued
on January 23, 2019, were converted into shares of Class B common stock. SAP
holds all of the shares of the new Class B common stock. The ownership rights of
Class A and Class B common stockholders are the same except with respect to
voting, the election of directors, conversion, and certain actions that require
the consent of holders of Class B and other protective provisions. See Note 11
for further details related to the terms and conditions of the new equity of the
Company. The amended and restated certificate of incorporation effectuated a
4,231,706.1-for-one stock split of the new Class B common stock. The
capitalization of the Company, including all share and per share data has been
retroactively adjusted back to January, 23, 2019, the date of the SAP
acquisition, to reflect the recapitalization. As discussed in the 2019 Merger
and Capital Restructuring Pursuant to Reorganization note above, the historical
capital structure prior to January 23, 2019 is not comparable to the capital
structure after the acquisition by SAP and therefore the historical capital
structure is not retroactively adjusted as the presentation would not be
meaningful. To retroactively adjust the consolidated statements of redeemable
convertible preferred stock and stockholders' equity (deficit), the stock split
is reflected as an adjustment of the capital restructuring pursuant to
reorganization that occurred in 2019 of the new Class B shares issued and
outstanding of 423,170,610, net of the historical Class B shares that were
acquired by SAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally
Accepted Accounting Principles ("GAAP") requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the balance sheet date, as well as reported amounts of revenue
and expenses during the reporting period. The Company's most significant
estimates and judgments involve revenue recognition with respect to the
determination of the standalone selling prices for the Company's services,
deferred contract acquisition costs, the period of benefit generated from
deferred contract acquisition costs, valuation of the Company's equity and cash
settled stock-based compensation, including the underlying deemed estimated fair
value of the Company's common stock, valuation of deferred income tax assets,
uncertain tax positions, contingencies, goodwill and intangible assets, the
determination of whether a contract contains a lease, determining the
incremental borrowing rate for the calculation of the present value of lease
liabilities and litigation accruals. Actual results could differ from those
estimates.
Segments
Operating segments are defined as components of an entity for which separate
financial information is available and that is regularly reviewed by the Chief
Operating Decision Maker ("CODM") in deciding how to allocate resources to an
individual segment and in assessing performance. The Company's Chief Executive
Officer is the CODM. The Company's CODM reviews financial information presented
on a consolidated basis for purposes of
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making operating decisions, allocating resources, and evaluating financial
performance. As such, the Company has determined that it operates in one
operating and one reportable segment.
Foreign Currency Transactions
The assets and liabilities of the Company's foreign subsidiaries are translated
from their respective functional currencies into U.S. dollars at the rates in
effect at the balance sheet date and revenue and expense amounts are translated
at the average exchange rate for the period. Foreign currency translation gains
and losses are recorded in other comprehensive loss. Exchange rate differences
resulting from translation adjustments are accounted for as a component of
accumulated other comprehensive loss.
Gains and losses, whether realized or unrealized, from foreign currency
transactions (those transactions denominated in currencies other than the
entities' functional currency) are included in other income (expense), net. The
Company recorded $0.6 million in net foreign currency transaction losses in the
year ended December 31, 2020, $0.9 million in net foreign currency transaction
losses in the year ended December 31, 2019, and $1.1 million in net foreign
currency transaction losses in the year ended December 31, 2018.
Revenue Recognition
The Company recognizes revenue from its service/product lines when control is
transferred to its customers, in an amount that reflects the consideration the
Company expects to be entitled to in exchange for the services. Sales and other
taxes collected from customers to be remitted to government authorities are
excluded from revenue. The Company accounts for revenue contracts with customers
by applying the requirements of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 606 - Revenue from Contracts with
Customers (Topic 606), which includes the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in a contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the
contract
•Recognition of revenue when, or as, performance obligations are satisfied
Classes of Revenue
The Company derives revenue from two service/product lines:
Subscription Revenue
The Company generates revenue primarily from sales of subscriptions to access
its XM Platform, together with related support services to its customers.
Arrangements with customers do not provide the customer with the right to take
possession of the software operating the XM Platform at any time. Instead,
customers are granted continuous access to the XM Platform over the contractual
period.
The Company's subscription contracts generally have annual contractual terms
while some have multi-year contractual terms. The Company generally bills
annually in advance with net 30 payment terms. The Company's agreements
generally cannot be canceled with refund.
Professional Services and Other Revenue
Professional services and other revenue mainly includes two types of services:
research services and professional services. Research services is a solution
provided to existing subscription customers with arrangements, which are
distinct from subscription revenue services. In addition, the Company provides
professional services associated with new and expanding customers requesting
implementation, integration services, and other ancillary services. These
services are distinct from subscription revenue services.
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Identification of a Contract
For accounting purposes, we treat multiple contracts entered into with the same
customer as a single contract if they are entered into at or near the same time
and are economically interrelated. We do not combine contracts with closing days
more than three months apart because we do not consider them being entered into
near the same time. Judgment is required in evaluating whether various contracts
are interrelated, which includes considerations as to whether they were
negotiated as a package with a single commercial objective, whether the amount
of consideration on one contract is dependent on the performance of the other
contract, or if some or all goods in the contracts are a single performance
obligation.
New arrangements with existing customers can be either a new contract or the
modification of prior contracts with the customer. Our respective judgment in
making this determination considers whether there is a connection between the
new arrangement and the pre-existing contracts, whether the goods and services
under the new arrangement are highly interrelated with the goods and services
sold under prior contracts, and how the goods and services under the new
arrangement are priced. In determining whether a change in transaction price
represents a contract modification or a change in variable consideration, we
examine whether the change in price results from changing the contract or from
applying unchanged existing contract provisions.
Identification of Performance Obligations
Some contracts with customers contain multiple performance obligations. For
these contracts, the Company accounts for individual performance obligations
separately, if they are distinct. Typically, the products and services outlined
in the Classes of Revenue section qualify as separate performance obligations
and the portion of the contractual fee allocated to them is recognized
separately. Judgment is required, however, in determining whether a good or
service is considered a separate performance obligation. In particular for our
professional services and implementation activities, judgment is required to
evaluate whether such services significantly integrate, customize, or modify the
subscription service to which they relate. In this context, we consider the
nature of the services and their volume relative to the volume of the
subscription service to which they relate. In general, the implementation
services for our subscription services go beyond pure setup activities and
qualify as separate performance obligations. Non-distinct goods and services are
combined into one distinct bundle of goods and services (combined performance
obligation).
In rare instances, customers have the option to purchase additional subscription
and support services at a stated price. These options generally do not provide a
material right as they are priced at standalone selling price, or SSP. We apply
judgment in determining whether such options provide a material right to the
customer that the customer would not receive without entering into that contract
(material right options). In this judgment, we consider, for example, whether
the options entitle the customer to a discount that exceeds the discount granted
for the respective goods or services sold together with the option.
Determination of Transaction Price
We apply judgment in determining the amount to which we expect to be entitled in
exchange for transferring promised goods or services to a customer. This
includes estimates as to whether and to what extent subsequent concessions or
payments may be granted to customers and whether the customer is expected to pay
the contractual fees. In this judgment, we consider our history both with the
respective customer and more broadly.
If the Company's services do not meet certain service level commitments, certain
customers are entitled to receive service credits, and in certain cases,
refunds, each representing a form of variable consideration. Historically, the
Company has not experienced any significant incidents affecting the defined
levels of reliability and performance as required by its subscription contracts.
Accordingly, any estimated refunds related to these agreements in the
consolidated financial statements is not material during the periods presented.
The Company applied the practical expedient in Topic 606 and did not evaluate
contracts of one year or less for the existence of a significant financing
component. The Company determined that no significant financing component
existed on its multi-year contracts, as these contracts were structured for
purposes other than obtaining
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financing from customers. Additionally, prices are generally fixed at contract
inception; therefore, the Company's contracts do not contain a significant
amount of variable consideration.
Allocation of transaction price
The transaction price is allocated to the separate performance obligations on a
relative standalone selling price basis. The Company determines standalone
selling prices considering market conditions and based on overall pricing
objectives such as observable standalone selling prices, and other factors,
including the value of contracts, types of services sold, customer demographics,
and the number and types of users within such contracts. We have established a
hierarchy to identify the standalone selling prices that we use to allocate the
transaction price of a customer contract to the performance obligations in the
contract:
•Where standalone selling prices for an offering are observable and reasonably
consistent across customers (that is, not highly variable), our standalone
selling price estimates are derived from our respective pricing history.
•Where sales prices for an offering are not directly observable or highly
variable across customers, we use estimation techniques. For renewable offerings
with highly variable pricing across customers, these techniques consider the
individual contract's expected renewal price as far as this price is
substantive. Typically, our subscription offerings follow this approach. For our
professional and other services, these estimations typically follow a
cost-plus-margin approach.
Judgment is required when estimating standalone selling prices. To judge whether
the historical pricing of our goods and services is highly variable, we have
established thresholds of pricing variability. For judging whether contractual
renewal prices are substantive, we have established floor prices that we use as
standalone selling prices whenever the contractual renewal prices are below
these floor prices. In judging whether contracts are expected to renew at their
contractual renewal prices, we rely on our respective renewal history. We review
the standalone selling prices periodically or whenever facts and circumstances
change to ensure the most objective input parameters available are used.
Recognition of Revenue
Access to our XM Platform represents a series of distinct services as the
Company continually provides access to and fulfills its obligation to the end
customer over the subscription term. The series of distinct services represents
a single performance obligation that is satisfied over time. Accordingly, the
fixed consideration related to subscription revenue is generally recognized on a
straight-line basis over the contract term, beginning on the date that the
service is made available to the customer.
Revenue from professional services and other revenue related to research
services is recognized upon completion because completion and delivery of the
results is considered a separate performance obligation satisfied at a point in
time. Revenue from professional services and other revenue related to customized
software coding is recognized upon completion, because the customer consumes the
intended benefit and assumes control upon final completion of the custom coding.
Revenue from professional services and other revenue related to implementation
and other ancillary services is recognized as the services are performed,
because the customer consumes the benefit as the services are provided.
Judgment is required to determine whether revenue is to be recognized at a point
in time or over time. For performance obligations satisfied over time, we need
to measure progress using the method that best reflects Qualtrics' performance.
All judgments and estimates mentioned above can significantly impact the timing
and amount of revenue to be recognized.
Contract Balances
The Company bills in advance for annual contracts, and at times enters into
non-cancelable multi-year deals. Non-cancelable multi-year deals typically
include price escalations each year. The Company recognizes revenue on
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a straight-line basis over the non-cancelable term and accounts for the
difference between straight-line revenue and annual invoice amounts as a
contract asset. The current and noncurrent portion of contract assets included
in prepaid and other current assets and other assets as of December 31, 2020
were $9.6 million and $6.9 million, respectively. The current and noncurrent
portion of contract assets included in prepaid and other current assets and
other assets as of December 31, 2019 were $3.7 million and $2.4 million,
respectively. The increase in contract assets is due to a higher number of
multi-year deals in 2020 compared to 2019.
The Company records contract liabilities to deferred revenue when cash payments
are received or due in advance of performance. Deferred revenue primarily
relates to the advance consideration received from the customer prior to the
related performance obligation being fulfilled. In certain circumstances we
receive consideration from customers in advance of a specific service being
identified. Total consideration received in advance of a specific service being
identified totaled $33.8 million and $26.4 million as of December 31, 2020 and
2019, respectively and is included in deferred revenue. The following table
shows the amount of revenue included in prior period deferred revenue for each
of the Company's revenue generating solutions:
Year Ended December 31,
in thousands 2020 2019 2018
Subscription revenue:
Revenue included in prior period deferred revenue $ 337,299 $ 233,811 $ 160,449
Revenue generated from same period billings 238,098 196,227 135,079
Total subscription revenue $ 575,397 $ 430,038 $ 295,528
Professional services and other revenue:
Revenue included in prior period deferred revenue $ 39,253 $ 43,539 $ 3,758
Revenue generated from same period billings 148,872

117,578 102,622 Total professional services and other revenue $ 188,125 $ 161,117 $ 106,380




Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future
revenue that has not yet been recognized, including both deferred revenue and
non-cancelable contracted amounts that will be invoiced and recognized as
revenue in future periods. Amounts of a customer contract's transaction price
that are allocated to the remaining performance obligations represent contracted
revenue that has not yet been recognized. They include amounts recognized as
contract liabilities and amounts that are contracted but not yet due. The future
estimated revenue related to unsatisfied performance obligations as of December
31, 2020 was $1,144.4 million, of which approximately $645.4 million is expected
to be recognized as revenue over the next twelve months. The future estimated
revenue related to unsatisfied performance obligations as of December 31, 2019
was $642.7 million, of which approximately $434.1 million was recognized as
revenue in 2020. The future estimated revenue related to unsatisfied performance
obligations as of December 31, 2018 was $370.9 million, of which approximately
$303.3 million was recognized in 2019. This estimate is based on our best
judgment, as it needs to consider estimates of possible future contract
modifications. The amount of transaction price allocated to the remaining
performance obligations, and changes in this amount over time, are impacted by,
among others, currency fluctuations and the contract period of our cloud
contracts remaining at the balance sheet date and thus by the timing of contract
renewals.
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Disaggregation of Revenue The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our cloud platform:


                         Year Ended December 31,
in thousands       2020           2019           2018
United States   $ 552,221      $ 438,052      $ 308,394
International     211,301        153,103         93,514
Total revenue   $ 763,522      $ 591,155      $ 401,908


No single country outside the United States accounted for 10% or more of revenue
during the years ended December 31, 2020, 2019, and 2018.
Stock-Based Compensation, including cash settled
Equity Awards
The Company measures and recognizes compensation expense for stock-based payment
equity awards, including restricted stock awards ("RSAs"), restricted stock
units ("RSUs"), and stock options granted to employees and advisors, based on
the grant date fair value of the awards. Awards that will be settled in cash are
marked-to-market each quarter. The grant date fair value of stock options is
estimated using a Black-Scholes option pricing model. The fair value of
stock-based compensation for stock options is recognized on a straight-line
basis over the period during which services are provided in exchange for the
award. The grant date fair value of RSAs and RSUs is estimated based on the fair
value of the underlying common stock. Awards which contain both service-based
and performance conditions are recognized using the accelerated attribution
method.
As discussed in detail in Note 12, prior to the SAP acquisition, the Company
issued two types of RSAs, one-tier and two-tier. One-tier RSAs vested solely on
a service-based condition. For these awards, the Company recognized stock-based
compensation expense on a straight-line basis over the vesting period. Two-tier
RSAs and RSUs contained both a service-based condition and performance
condition, defined as the earlier of (i) an acquisition or change in control of
the Company or (ii) upon the occurrence of an initial public offering by the
Company. A change in control event and effective registration event are not
deemed probable until consummated; accordingly, no expense was recorded related
to two-tier RSAs and RSUs until the performance condition becomes probable of
occurring. Awards which contained both service-based and performance conditions
were recognized using the accelerated attribution method once the performance
condition was probable of occurring.
With the SAP Acquisition, the performance condition of two-tier RSAs and RSUs
was deemed to be met in January 2019.
In conjunction with the SAP Acquisition, under the terms of the acquisition
agreement, unvested RSAs, RSUs, and options held by employees of Qualtrics were
exchanged into liability-classified, stock-based awards to be settled in cash
("Qualtrics Rights"). Approximately $858 million of the purchase price related
to RSAs, RSUs, and options that were to vest after the SAP Acquisition,
contingent upon continued service from employees. The price realized by
employees for these time-based awards is $35.00 per share, if the award was
granted before January 1, 2018 or if the award was originally granted as an
option; provided, that the fixed amount will be reduced by the original exercise
price for any Qualtrics Rights that were originally granted as options. If the
award was granted on or after January 1, 2018, the amount realized is $35.00 per
share, adjusted for changes in the five-day average price of SAP stock for the
period immediately preceding the close compared to SAP's stock price on the
vesting date.
In conjunction with the SAP Acquisition, the Founder Performance Grants
described in Note 12 were cancelled. New Founder Grants were granted at the
closing date that vest upon continuing employment over a two-year period from
the closing date. Certain stock-based awards contained change in control
provisions and vesting was accelerated upon close of the SAP Acquisition.
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Cash Awards
The Company measures and recognizes compensation expense for stock-based payment
cash awards based on the fair value of the awards each quarter until settlement.
The fair value of stock-based compensation cash awards that vests solely on a
service-based condition is recognized on a straight-line basis over the period
during which services are provided in exchange for the award. The fair value is
estimated based on the fair value of the underlying SAP stock price or some are
valued at $35.00. Awards which contain both service-based and performance
conditions are recognized using the accelerated attribution method once the
performance condition is probable of occurring.
The Company accounts for forfeitures as they occur; therefore, stock-based
compensation expense has been calculated based on actual forfeitures in the
Company's consolidated statements of operations.
Net loss per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is computed by
dividing the net loss attributable to common stockholders by the
weighted-average number of shares of common stock outstanding during the period.
As there are no potentially dilutive securities, diluted earnings per share
attributable to common stockholders has not been presented. For purposes of
calculating earnings per share, the Company uses the two-class method. Because
both classes of common stock share the same rights in dividends, basic and
diluted earnings per share was the same for both common stock classes.
Due to the impact of the SAP Acquisition of Qualtrics, the Company's capital
structure for the years ended December 31, 2019 and 2018 are not comparable. As
a result, the presentation of net loss per share for the year ended prior to the
transaction is not meaningful and only net loss per share for periods subsequent
to the SAP Acquisition of Qualtrics are presented herein.
Cost of Revenue
Cost of revenue includes expenses related to operating the Company's cloud
platform in data centers, depreciation of the Company's data center equipment,
the amortization of the Company's capitalized internal-use software and acquired
technology, and third-party vendor costs to fulfill contracts with customers.
Cost of revenue also includes employee-related costs, including salaries,
bonuses, equity and cash settled stock-based compensation expense, and employee
benefit costs associated with the Company's customer support, cloud operations,
and delivery of professional services. Additionally, the Company makes
allocations of certain overhead costs, primarily based on headcount.
Advertising and Promotional Expense
Advertising and promotional expenses are expensed as incurred. Advertising and
promotional expenses for the years ended December 31, 2020, 2019, and 2018 were
$4.6 million, $3.2 million, and $2.3 million, respectively.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments
with original maturities of three months or less from the date of purchase. The
Company maintains cash and cash equivalents at financial institutions, which at
times may not be federally insured or may exceed federally insured limits. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risks on such accounts. Cash and cash
equivalents are recorded at cost, which approximates fair value.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances.
Accounts receivable are typically due within 30 days from the date of invoice.
Customer balances outstanding longer than the contractual payment terms are
considered past due.
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In the event of lack of payment due to a bankruptcy or other credit-related
issues of a customer, the Company writes off the related accounts receivable
with a charge to bad debt expense in the consolidated statements of
comprehensive loss. Bad debt expense was not material in the years ended
December 31, 2020, 2019, and 2018.
In the event of lack of payment from a customer for issues unrelated to credit
risk, the Company cancels the customer's subscription access or service and
writes off the corresponding accounts receivable with reductions to revenue and
deferred revenue. Write-offs to revenue and deferred revenue from cancellations
are based upon the composition of revenue recognized and deferred revenue
remaining at the time of cancellation.
The Company's allowances were $30.2 million and $12.0 million as of December 31,
2020 and 2019, respectively. During 2020, $3.0 million of net additions was
charged to revenue and $15.2 million of net additions was charged to deferred
revenue. During 2019, $1.1 million of net additions was charged to revenue and
$1.1 million of net additions was charged to deferred revenue.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash, cash equivalents, and accounts receivable. The
Company performs credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. No customer accounted for
more than 10% of accounts receivable at December 31, 2020 and 2019. No single
customer accounted for 10% or more of total revenue during the years ended
December 31, 2020, 2019, and 2018.
Deferred Contract Acquisition Costs, net
Deferred contract acquisition costs, net is stated at gross deferred contract
acquisition costs less accumulated amortization. Sales commissions and related
payroll taxes for initial software-as-a-service (SaaS) subscription contracts
earned by the Company's sales force are considered to be incremental and
recoverable costs of obtaining a contract with a customer. As a result, these
amounts have been capitalized as deferred contract acquisition costs on the
consolidated balance sheets. The Company deferred incremental costs of obtaining
a contract of $111.7 million and $47.7 million during the years ended December
31, 2020 and 2019, respectively.
Sales commissions for renewal contracts are not considered commensurate with the
commissions paid for the acquisition of an initial SaaS subscription contract,
given the substantive difference in commission rates in proportion to their
respective contract values. After the conclusion of the initial contract period,
commissions paid on subsequent renewals are commensurate year after year. As
such, the Company expenses renewal commissions as incurred.
Deferred contract acquisition costs are amortized over an estimated period of
benefit of five years. The period of benefit was estimated by considering
factors such as estimated average customer life, the rate of technological
change in the subscription service, and the impact of competition in its
industry. As the Company's average customer life significantly exceeded the rate
of change in its technology, the Company concluded that the rate of change in
the technology underlying the Company's subscription service was the most
significant factor in determining the period of benefit for which the asset
relates. In evaluating the rate of change in the technology, the Company
considered the competition in the industry, its commitment to continuous
innovation, and the frequency of product, platform, and technology updates. The
Company determined that the impact of competition in the industry is reflected
in the period of benefit through the rate of technological change.
Amortization of deferred contract acquisition costs were $32.1 million, $19.5
million, and $13.4 million for the years ended December 31, 2020, 2019, and
2018, respectively. Amortization of deferred contract acquisition costs are
included in sales and marketing expense in the accompanying consolidated
statements of operations. There was no impairment loss in relation to the
deferred costs for any period presented.
Property and Equipment, net
Property and equipment, net is stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated asset
lives. Routine maintenance and repairs are charged to expense when
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incurred. Expenditures that materially increase values, change capacities, or
extend the useful lives of the respective assets are capitalized. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in operations. The estimated useful lives by asset
classification are generally as follows:
Computer equipment       3-5 years
Furniture and fixtures   5-10 years
Server equipment         5 years
Vehicles                 3 years
Internal-use software    2 years
Buildings                25 years
Leasehold improvements   Lesser of useful life or remaining lease term


Property and equipment subject to depreciation is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If indicators of impairment exist,
recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows
expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated undiscounted future
cash flows, an impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the asset. There was no
impairment of property and equipment during the years ended December 31, 2020
and 2019.
The following table sets forth property and equipment by geographic area:
                                          As of December 31,
in thousands                              2020           2019
United States                         $  102,560      $ 46,361
International                             13,560         4,706

Total property and equipment, net $ 116,120 $ 51,067




No single country outside the United States had a property and equipment balance
greater than 10% of total property and equipment, net, as of December 31, 2020
and 2019.
Leases
As of January 1, 2019, the Company adopted the lease accounting requirements of
ASU 2016-2 Leases ("Topic 842") using the modified retrospective transition
approach. Under Topic 842, the Company determines if an arrangement is a lease
at inception, and leases are classified at commencement as either operating or
finance leases. As of December 31, 2020 and 2019, the Company had no finance
leases.
Right-of-use ("ROU") assets and lease liabilities are recognized at commencement
based on the present value of the minimum lease payments over the lease term.
The Company utilizes certain practical expedients and policy elections available
under Topic 842. Leases with a one-year term or less are not recognized on the
balance sheet. Additionally, the Company has elected to combine non-lease
components with lease components for the purposes of calculating the ROU asset
and liabilities, to the extent they are fixed. Non-lease components that are not
fixed are expensed as incurred as variable lease costs. The Company uses the
incremental borrowing rate based on information available at the commencement
date in determining the present value of future lease payments. The rate is an
estimate of the collateralized borrowing rate the Company would incur on future
lease payments over a similar term.
The Company leases facilities under non-cancelable operating lease agreements.
Certain of the operating lease agreements contain rent concessions and rent
escalations which are included in the present value calculation of minimum lease
payments. Topic 842 requires that operating leases recognize expense on a
straight-line basis over the lease term. The lease term begins on the date the
Company has the right to use the leased property. Lease terms
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may include options to extend or terminate the lease. These options are included
in the ROU asset and lease liability when it is reasonably certain that the
option will be exercised. The Company's lease agreements do not contain residual
value guarantees or covenants.
As of December 31, 2018, the Company had recorded $2.9 million in property and
equipment, net, and other liabilities relating to a build-to-suit facility lease
arrangement in Dublin, Ireland. In accordance with Topic 842, this has been
derecognized. This new Dublin lease will not be recognized until the Company has
the right to use the facility in 2021.
Prior to the January 1, 2019 adoption of Topic 842, ROU assets and lease
liabilities were not recognized for operating leases. Rent concessions and rent
escalation provisions were considered in determining the straight-line rent
expense to be recorded over the lease term.
Internal-use Software
The Company capitalizes certain development costs incurred in connection with
its internal-use software. These capitalized costs are primarily related to the
software platforms that are hosted by the Company and accessed by its customers
on a subscription basis. Costs incurred in the preliminary stages of development
are expensed as incurred as research and development costs. Once an application
has reached the development stage, internal and external costs, if direct and
incremental, are capitalized until the software is substantially complete and
ready for its intended use. The Company also capitalizes costs related to
specific upgrades and enhancements when it is probable the expenditures will
result in additional functionality. Capitalized costs are recorded as part of
property and equipment. Maintenance and training costs are expensed as incurred.
Internal-use software is amortized on a straight-line basis over its estimated
useful life of 24 months. The Company recognized amortization expenses of $12.5
million, $11.0 million, and $8.5 million related to capitalized internal-use
software for the years ended December 31, 2020, 2019, and 2018, respectively,
within cost of subscription revenue.
Goodwill and Other Intangible Assets
The Company records goodwill when consideration paid in a purchase acquisition
exceeds the fair value of the net tangible assets and the identified intangible
assets acquired. Goodwill is not amortized, but rather is tested for impairment
annually or more frequently if facts and circumstances warrant a review. The
Company has determined that there is a single reporting unit for the purpose of
goodwill impairment tests, which are performed annually on October 1st or more
frequently if certain indicators are present. For purposes of assessing the
impairment of goodwill, the Company annually estimates the fair value of the
reporting unit and compares this amount to the carrying value of the reporting
unit. If the Company determines that the carrying value of the reporting unit
exceeds its fair value, an impairment charge is recognized in the amount by
which the carrying amount of the asset exceeds its fair value. There was no
impairment of goodwill for the years ended December 31, 2020, 2019, and 2018.
Other intangible assets, consisting of developed technology, customer
relationships, tradenames, purchased license agreements, developed content, and
purchased patents, are stated at cost less accumulated amortization. All other
intangible assets have been determined to have definite lives and are amortized
on a straight-line basis over their estimated remaining economic lives.
Developed technology is amortized over 5 to 6 years to cost of subscription
revenue and had a weighted average remaining amortization period of 2.0 years as
of December 31, 2020. Customer relationships are amortized over 1 to 9 years to
sales and marketing expense and had a weighted average remaining amortization
period of 6.1 years as of December 31, 2020. Tradenames are amortized over 5
years to general and administrative expense, with a weighted average remaining
amortization period of 2.2 years as of December 31, 2020. Purchased license
agreements are determined to have definite lives and are amortized over 4 years
to cost of subscription revenue, with a weighted average remaining amortization
period of 1.3 years as of December 31, 2020. Developed content is amortized over
4 years and included in cost of subscription revenue, with a weighted average
remaining amortization period of 1.8 years as of December 31, 2020. Purchased
patents are amortized over useful lives ranging from 9 to 16 years to general
and administrative expense. The patents' weighted average remaining amortization
period is 7.8 years as of December 31, 2020.
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Income Taxes
Income taxes as presented in the consolidated financial statements of Qualtrics
attribute current and deferred income taxes of SAP to the Company's standalone
financial statements in a manner that is systematic, rational and consistent
with the asset and liability method prescribed by FASB ASC Topic 740: Income
Taxes ("ASC 740"). Accordingly, the Company's income tax provision was prepared
following the separate return method. The separate return method applies ASC 740
to the standalone financial statements of each member of the consolidated group
as if the group members were a separate taxpayer and a standalone enterprise. As
a result, actual transactions included in the consolidated financial statements
of SAP may not be included in the separate consolidated financial statements of
the Company. Similarly, the tax treatment of certain items reflected in the
consolidated financial statements of the Company may not be reflected in the
consolidated financial statements and tax returns of SAP. Therefore, such items
as net operating losses, credit carry-forwards and valuation allowances may
exist in the standalone financial statements that may or may not exist in SAP's
consolidated financial statements. As such, the income taxes of the Company as
presented in these consolidated financial statements may not be indicative of
the income taxes that the Company will generate in the future.
Certain operations of Qualtrics have historically been included in a
consolidated return with other SAP entities. Current obligations for taxes in
certain jurisdictions, where the Company files a consolidated tax return with
SAP, are deemed settled with SAP for purposes of these consolidated financial
statements. Current obligations for tax in jurisdictions where the Company does
not file a consolidated return with SAP, including certain foreign and domestic
jurisdictions, are recorded as accrued liabilities.
Deferred income tax balances reflect the effects of temporary differences
between the financial reporting and tax bases of the Company's assets and
liabilities using enacted tax rates expected to apply when taxes are actually
paid or recovered. In addition, deferred tax assets are recorded for net
operating loss ("NOL") and credit carryforwards.
A valuation allowance is provided against deferred tax assets unless it is more
likely than not that they will be realized based on all available positive and
negative evidence. Such evidence includes, but is not limited to, recent
cumulative earnings or losses, expectations of future taxable income by taxing
jurisdiction, and the carry-forward periods available for the utilization of
deferred tax assets.
The Company uses a two-step approach to recognizing and measuring uncertain
income tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is
more likely than not that the position will be sustained on audit. The second
step is to measure the tax benefit as the largest amount, which is more than 50%
likely of being realized upon ultimate settlement. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of
pre-tax book income or loss. Significant judgment is required to evaluate
uncertain tax positions.
Although the Company believes that it has adequately reserved for its uncertain
tax positions, it can provide no assurance that the final tax outcome of these
matters will not be materially different. The Company evaluates its uncertain
tax positions on a regular basis and evaluations are based on a number of
factors, including changes in facts and circumstances, changes in tax law,
correspondence with tax authorities during the course of an audit, and effective
settlement of audit issues.
To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences will affect the provision for income taxes in
the period in which such determination is made and could have a material impact
on the Company's financial condition and results of operations.
Fair Value Measurement
The Company applies fair value accounting for all financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. When
determining fair value measurements for assets and liabilities, the Company
considers the principal or most advantageous market in which it would transact
and the market-based risk
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measurements or assumptions that market participants would use in pricing the
asset or liability, such as risks inherent in valuation techniques, transfer
restrictions, and credit risk. Fair value is estimated by applying the following
hierarchy, which prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon the lowest level
of input that is available and significant to the fair value measurement:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than quoted prices in active markets for
identical assets and liabilities, quoted prices for identical or similar assets
or liabilities in inactive markets, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the
assets or liabilities.
•Level 3 - Inputs that are generally unobservable and typically reflect
management's estimate of assumptions that market participants would use in
pricing the asset or liability.
Warranty and Indemnification
The Company includes service level commitments to its customers warranting
certain levels of uptime reliability and performance and permitting those
customers to receive credits in the event that the Company fails to meet those
levels. To date, the Company has not incurred any material costs related to such
commitments.
The Company's contracts include provisions indemnifying customers against
liabilities if its products infringe a third-party's intellectual property
rights. The Company has not incurred any costs as a result of such
indemnification and has not accrued any liabilities related to such obligations
in the accompanying consolidated financial statements.
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU 2016-2 Leases ("Topic 842"). The standard
requires the recognition of a liability for lease obligations and a
corresponding ROU asset on the balance sheet, and disclosure of certain
information regarding leasing arrangements. The Company adopted this standard
effective January 1, 2019 using the transitional provision of ASU 2018-11,
"Leases (Topic 842) Targeted Improvements," which allows for the adoption of
Topic 842 at the beginning of the fiscal year of adoption. Prior periods were
not restated. The Company elected to apply practical expedients upon transition
to this standard, which allowed the Company to not reassess lease
classification, treatment of initial direct costs, or whether an existing or
expired contract contained a lease. The practical expedient to exclude leases
with a term of less than twelve months was also elected.
Under adoption of Topic 842, leases previously classified as operating leases
are now reported on the balance sheet. The Company recognized operating leases
related ROU assets of $52.6 million and lease liabilities of $55.8 million as of
January 1, 2019. In addition, the $2.9 million build-to-suit asset and related
liability previously recorded as of December 31, 2018 was derecognized. The new
guidance does not require recognition until control has been established.
Because there are no finance leases, the updated standard did not have a
material impact on the consolidated statements of income or cash provided by
operating activities.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses.
The update requires measurement and recognition of expected credit losses for
financial assets held at amortized cost, including accounts receivable. ASU
2016-13 was amended in November 2018 by ASU 2018-19, Codification Improvements
to Topic 326, Financial Instruments-Credit Losses, and again in April 2019 by
ASU 2019-04, Codification Improvements to Topic 326, Financial
Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825,
Financial Instruments, and in May 2019 by ASU 2019-05, Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief. ASU 2016-13,
as amended, is effective for annual reporting periods of emerging growth
companies beginning after December 15, 2022, including interim periods within
those fiscal years. Adoption of the standard will be applied using a modified
retrospective approach with a cumulative-effect adjustment to retained
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earnings. The Company is currently evaluating the impact on its consolidated
financial statements and cannot reasonably estimate the impact on its financial
statements at this time.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the
Accounting for Income Taxes. The new standard intended to simplify the
accounting for income taxes by eliminating certain exceptions related to the
approach for intraperiod tax allocation, the methodology for calculating income
taxes in an interim period and the recognition of deferred tax liabilities for
outside basis differences. The new guidance also simplifies aspects of the
accounting for franchise taxes and enacted changes in tax laws or rates and
clarifies the accounting for transactions that result in a step-up in the tax
basis of goodwill. The standard is effective for annual periods of emerging
growth companies beginning after December 15, 2021 and interim periods within
fiscal years beginning after December 15, 2022, with early adoption permitted.
Adoption of the standard requires certain changes to primarily be made
prospectively, with some changes to be made retrospectively. We are currently
assessing the impact of this standard on our financial condition and results of
operations.
3.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
                                      As of December 31,
in thousands                          2020           2019
Cash                              $  203,891      $ 42,247
Money market mutual funds                  -           220

Total cash and cash equivalents $ 203,891 $ 42,467




4.FAIR VALUE MEASUREMENTS
The Company's cash equivalents with regards to the money market mutual funds are
classified within Level 1 of the fair value hierarchy. See Note 2, "Summary of
Significant Accounting Policies" for additional details.
5.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
                                                  As of December 31,
in thousands                                      2020           2019
Internal-use software                         $   25,757      $ 23,365
Server equipment                                  27,551        21,995
Leasehold improvements                            28,377        16,539
Computer equipment                                15,589         9,073
Buildings                                         13,625         8,216
Furniture and fixtures                             2,217         2,214
Software                                             222           222
Construction in progress                          47,920           348
Total property and equipment                  $  161,258      $ 81,972

Accumulated depreciation and amortization (45,138) (30,905) Property and equipment, net

$  116,120      $ 51,067


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


                                                      Year Ended December 31,
in thousands                                      2020          2019          2018
Cost of revenue                                $ 18,588      $ 14,654      $ 11,248
Research and development                          2,010         1,181           638
Sales and marketing                               3,667         2,086         1,575
General and administrative                          738           316           277

Total depreciation and amortization expense $ 25,003 $ 18,237 $ 13,738

6.LEASES


The Company has operating leases for corporate offices under non-cancelable
operating leases with various expiration dates. There are no finance leases. The
leases have remaining terms of 1 to 13 years. Options to extend for up to 15
years have not been included because they are not reasonably certain.
The components of lease expense were as follows:
                                                As of
                                             December 31,
in thousands                              2020          2019
Operating lease cost                   $ 24,420      $ 13,177

Variable and short-term lease cost 6,171 1,291

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


                                                     As of
                                                  December 31,
in thousands                                  2020           2019

Operating lease right-of-use assets $ 195,372 $ 184,838 Operating lease liabilities, current

           7,125          7,893

Operating lease liabilities, non-current 235,620 182,274 Total operating lease liabilities $ 242,745 $ 190,167

Other information related to leases was as follows:


                                                        As of
                                                     December 31,
                                              2020               2019
Weighted average remaining lease term        11.8 years           12.8

years


Weighted average discount rate                  3.19  %              3.57  %


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As of December 31, 2020 and 2019, the maturities of lease liabilities under
non-cancelable operating leases, net of lease incentives, was as follows (in
thousands):
                                      As of
Fiscal Period                     December 31,
                                      2020
2021                                    14,597
2022                                    23,620
2023                                    23,951
2024                                    24,120
2025                                    24,803
Thereafter                             181,712
Total minimum lease payments     $     292,803
Less: imputed interest                 (50,058)
Total                            $     242,745



7.OTHER INTANGIBLE ASSETS, NET
Other intangible assets, net consisted of the following:
                                                   As of December 31,
               in thousands                         2020            2019
               Patents                        $      751          $   751
               Developed technology                3,070            3,070
               Customer relationships              2,100            2,100
               Developed content                     400              400
               Tradename                             550              550
               License agreements                  1,500            1,500
               Total intangible assets        $    8,371          $ 8,371
               Accumulated amortization           (4,412)          (2,957)
               Other intangible assets, net   $    3,959          $ 5,414


The Company recognized amortization expense to cost of revenue of $1.1 million,
$1.2 million, and $0.7 million, for the years ended December 31, 2020, 2019, and
2018, respectively. An immaterial amount of amortization expense was recorded to
sales and marketing and general and administrative for the years ended December
31, 2020, 2019, and 2018.
Estimated amortization expense for intangible assets for the next five years
consists of the following:
                As of December 31,
in thousands           2020
2021                         1,455
2022                         1,104
2023                           398
2024                           281
2025                           274
Thereafter                     447
Total          $             3,959


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8.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
                                              As of December 31,
in thousands                                  2020           2019
Accrued wages, bonuses and commissions    $   76,842      $ 45,238
Accrued payroll taxes                          2,753         1,742
Share deposit liability (1)                  120,000             -
Other accrued expenses                        22,037        21,602
Accrued income taxes                           3,414        11,447
Total accrued liabilities                 $  225,046      $ 80,029


________________
(1)See Note 11 "Sale of Class A Common Stock" for further details
9.COMMITMENTS AND CONTINGENCIES
Leases
An unconditional bank guarantee for $0.8 million with an expiration date of
December 31, 2021, was outstanding as of December 31, 2020 and 2019. This bank
guarantee is required by the lease agreement on the Company's Sydney, Australia
office.
In March 2018, the Company entered into a lease commitment for additional office
space that is currently being constructed in Dublin, Ireland. Upon delivery of
the constructed office space, the Company will pay approximately $1.7 million
per annum to lease the space. The Company expects the constructed office space
to be delivered in 2021. The lease agreement is for 15-years, with a termination
option at the election of the Company at the end of the 8th year.
Legal Matters
From time to time, the Company is a party to a variety of claims, lawsuits, and
proceedings which arise in the ordinary course of business, including claims of
alleged infringement of intellectual property rights. The Company records a
liability when it believes that it is probable that a loss will be incurred, and
the amount of loss or range of loss can be reasonably estimated. Given the
unpredictable nature of legal proceedings, the Company bases its estimate on the
information available at the time of the assessment. As additional information
becomes available, the Company reassesses the potential liability and may revise
the estimate. The Company is not presently a party to any litigation the outcome
of which, it believes, if determined adversely to the Company, would
individually or in the aggregate have a material adverse effect on the business,
operating results, or financial condition.
10.REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company applies the SEC staff's guidance (included in ASC 480-10-S99, SEC
Materials) when evaluating the classification for its shares within the balance
sheets. A liquidation or winding up of the Company, a greater than 50% change in
control, or a sale of substantially all of its assets triggered a redemption of
these shares. Therefore, all shares of redeemable convertible preferred stock
outstanding as of December 31, 2018 were presented outside of permanent equity
as they were contingently redeemable.
As of December 31, 2020 and 2019, no redeemable convertible preferred stock was
outstanding after the restructuring of the 183,031,841 shares of redeemable
convertible preferred stock in January 2019.
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The following table summarizes the redeemable convertible preferred stock outstanding and liquidation preferences - prior to the capital restructuring - as of December 31, 2018:


                                                           Shares                            Per share price at          Liquidation
                                            Authorized                 Outstanding            issuance (in $)         preference (in $)
Series A-1                                        18,013,088                12,572,189       $          2.00          $         2,514
Series A-2                                        94,884,748                88,823,418                  2.00                  34,161,487
Series A-3                                         1,400,000                 1,399,993                  2.00                   2,800,000
Series B-1                                        35,000,000                35,000,000                  2.00                  70,000,000
Series B-2                                        27,102,163                27,102,161                  4.46                 120,833,333
Series B-3                                        20,204,436                10,102,212                 12.38                 124,999,996
Series B-4                                         5,607,344                 5,607,341                  5.36                  30,000,000
Series B-5                                   4,849,064                       2,424,527                 12.38                  30,000,001
Total                                      207,060,843                     183,031,841                                $   412,797,331


Upon a liquidation event, as defined in the then current certificate of
incorporation, the holders of Series A-1, Series A-2, Series A-3, Series B-1,
Series B-2, Series B-3, Series B-4, and Series B-5 redeemable convertible
preferred stock were entitled to receive, prior to and in preference to any
distribution of the proceeds of such liquidation to common stockholders, an
amount per share equal to $0.00, $0.38, $2.00, $2.00, $4.46, $12.38, $5.36, and
$12.38, respectively, plus any declared but unpaid dividends on such shares. If
the proceeds distributed among the holders of the redeemable convertible
preferred stock are insufficient to permit the redeemable convertible preferred
stock holders to receive the full payment noted above, then the entire proceeds
legally available for distribution would have been distributed ratably among the
holders of the redeemable convertible preferred stock in proportion to the full
preferential amount that each such holder were otherwise entitled to receive.
Dividends
Holders of the Company's redeemable convertible preferred stock were entitled to
receive dividends, when, as and if declared by the Company's Board of Directors,
on a pro-rata share ownership basis, prior to and in preference of any dividend
paid to holders of the Company's common stock. Such dividends were not
cumulative or mandatory. No dividends have been declared in any period
presented.
Voting
Each holder of redeemable convertible preferred stock had the right to 10 votes
for each share of Class A common stock into which the shares of redeemable
convertible preferred stock held by such holder could then be converted.
Conversion
In January 2019, the Company's redeemable convertible preferred stock were
converted to common stock as follows:
At the option of the holder thereof, each share of redeemable convertible
preferred stock was converted into a number of shares of Class A common stock
that results from dividing the applicable original issue price for such series
by the applicable conversion price in effect on the date of conversion (the
"Conversion Rate"). Each share of the 183,031,841 redeemable convertible
preferred stock was automatically converted into 183,031,841 shares of Class A
common stock at the Conversion Rate at the time in effect for such series of
redeemable convertible preferred stock upon the closing of the Company's sale
and restructured as discussed in Note 2.
11.COMMON STOCK
On January 23, 2019, with the completion of the SAP Acquisition, all shares of
redeemable convertible preferred stock and common stock were retired and new
shares of common stock were issued by the surviving corporation.
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On December 21, 2020, the Company amended its restated certificate of
incorporation to create new shares of preferred stock, Class A and Class B
common stock. The following description summarizes certain important terms of
our capital stock and of our amended and restated certificate of incorporation
and amended and restated bylaws.
Class A Common Stock and Class B Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred stock outstanding
at the time, the holders of outstanding shares of our Class A common stock and
Class B common stock are entitled to receive dividends, out of assets legally
available, sharing equally in all such dividends on a per share basis, at the
times and in the amounts that our board of directors may determine from time to
time.
Voting Rights
Except that holders of Class A common stock are entitled to one vote per share
while holders of Class B common stock are entitled to ten votes per share on all
matters to be voted on by our stockholders and except with respect to the
conversion, certain corporate actions that require the consent of holders of
Class B common stock and other protective provisions, the holders of Class A
common stock and Class B common stock have identical rights. Subject to any
rights of any series of preferred stock to elect directors, the holders of our
Class A common stock and the holders of our Class B common stock, voting
together as a single class, are entitled to elect all directors to our board of
directors. In the event that the rights of any series of preferred stock would
preclude the holders of our Class A common stock and the holders of our Class B
common stock, voting together as a single class, from electing at least one
director, the board of directors will increase the number of directors prior to
the issuance of that preferred stock to the extent necessary to allow these
stockholders to elect at least one director.
Right to Receive Liquidation Distributions
Upon our liquidation, dissolution or winding-up, the holders of our Class A
common stock and Class B common stock are entitled to share equally in all of
our assets remaining after payment of all liabilities and the liquidation
preferences of any outstanding preferred stock.
Conversion
If all or any portion of our Class B common stock is distributed by SAP America,
Inc. in a transaction that is intended to be tax-free for U.S. federal income
tax purposes (a "Distribution"), shares of our Class B common stock will no
longer be convertible into shares of Class A common stock. Prior to any
Distribution, all shares of Class B common stock will automatically be converted
into shares of Class A common stock upon the transfer of such shares of Class B
common stock by SAP to any party that is not beneficially owned by SAP. If a
Distribution has not occurred, each share of Class B common stock will also
automatically convert into a share of Class A common stock at such time as the
number of shares of common stock owned by SAP (and its affiliates) falls below
20% of the outstanding shares of our common stock. All conversions will be
effected on a share-for-share basis.
Preferred Stock
Our board of directors is authorized, subject to the approval of our Class B
stockholders and subject to limitations prescribed by Delaware law, to issue
preferred stock in one or more series, to establish from time to time the number
of shares to be included in each series and to fix the designation, powers,
preferences and rights of the shares of each series and any of its
qualifications, limitations or restrictions, in each case without further vote
or action by our stockholders. We have no current plan to issue any shares of
preferred stock.
Sale of Class A Common Stock
In December 2020, we entered into a stock purchase agreement with Q II, an
entity controlled by Ryan Smith, our founder and executive chair, pursuant to
which Q II purchased 6,000,000 shares of our Class A common stock at a price of
$20.00 per share for an aggregate purchase price of $120 million. The shares are
redeemable at the option of the Company for the 60-day period following June 30,
2021 unless the following conditions have been met: (i)
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the closing of our underwritten public offering shall have occurred prior to
that date and (ii) Ryan Smith shall remain employed by the Company on that date
or his employment shall have been terminated prior to that date by the Company
without cause or by him with good reason. If such conditions do not occur, the
Company will have 60 days following June 30, 2021 to repurchase the shares.
Based on the terms of purchase agreement, the funds received from the Q II
purchase are reported within accrued liabilities until the redemption options
have expired.
12.STOCK-BASED COMPENSATION
Stock-based compensation expense, including cash settled, for the years ended
December 31, 2020, 2019, and 2018 was recorded as follows:
                                                                   Year Ended December 31,
in thousands                                            2020                2019                2018
Cost of subscription revenue                        $    4,632          $   24,136          $        4
Cost of professional services and other revenue          6,737              17,168                 144
Research and development                                68,355             130,809               2,228
Sales and marketing                                     37,877             115,581                 708
General and administrative                             106,412             588,532               1,516
Total stock-based compensation expense, including
cash settled(1)                                     $  224,013          $  876,226          $    4,600


______________
(1)As a result of the SAP Acquisition, our stock-based compensation expense
reflects the recognition of both equity-classified awards and
liability-classified awards. Liability-classified awards are settled in cash in
accordance with SAP's employee equity compensation programs. 2020 stock-based
compensation expense consisted of $224.0 million of liability-classified awards.
During the year ended December 31, 2020 awards of $388.6 million were settled in
cash. 2019 stock-based compensation expense consisted of $185.8 million of
equity-classified awards that was recognized as a result of the SAP Acquisition,
and $690.4 million of liability-classified awards, of which $312.8 million were
settled in cash in 2019. 2018 stock-based compensation expense consisted
entirely of equity-classified awards. Liability-classified awards are recorded
according to mark-to-market accounting.
Equity Awards
2014 Stock Option and Grant Plan (2014 Plan)
Under the Company's 2014 Stock Option and Grant Plan, as amended (the "2014
Plan"), the Company may grant stock-based awards to purchase or directly issue
shares of common stock to employees, directors, and consultants. The Company
issued four types of equity awards under the 2014 Plan, 1) one-tier RSAs, 2)
two-tier RSAs, 3) two-tier RSUs, and 4) stock options. Each of these types of
equity awards were outstanding as of December 31, 2018, as follows:
•One-tier RSAs, which have a service-based vesting condition over a four-year
period. These awards have a cliff vesting period of one year and continue to
vest quarterly thereafter. The Company began granting one-tier RSAs under its
2014 Plan in April 2014. The last grant of one-tier RSAs in the 2014 Plan was in
August 2014. The Company recognizes compensation expense associated with
one-tier RSAs ratably on a straight-line basis over the requisite service
period. Additional one-tier RSAs have been issued subsequent to August 2014,
outside the 2014 Plan, in relation to business combinations.
•Two-tier RSAs, which have both a service-based vesting condition and a
performance vesting condition. The service-based vesting period for these awards
is four years with a cliff vesting period of one year and continue to vest
quarterly thereafter. The performance vesting condition is satisfied on the
earlier of (i) an acquisition or change in control of the Company or (ii) upon
the occurrence of an initial public offering by the Company. As of December 31,
2018, no compensation expense related to two-tier RSAs had been recognized,
because the performance vesting condition was not satisfied. In January 2019,
for two-tier RSAs, at the time the performance condition becomes probable, the
Company has recognized the
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cumulative stock-based compensation expense for the awards that have met their
service-based vesting condition using the accelerated attribution method of $1.1
million.
•Two-Tier RSUs, which have both a service-based vesting condition and a
performance vesting condition. The service-based vesting period for these awards
is generally four years with a cliff vesting period of one year and continue to
vest quarterly thereafter. The performance vesting condition is satisfied on the
earlier of (i) an acquisition or change in control of the Company or (ii) upon
the occurrence of an initial public offering by the Company. The Company began
granting two-tier RSUs under its 2014 plan in April 2014. Certain two-tier RSUs
contained change in control provisions and vesting was accelerated upon close of
the acquisition in January 2019. As of December 31, 2018, no compensation
expense related to two-tier RSUs had been recognized because the performance
vesting condition was not satisfied. In January 2019, for two-tier RSUs, at the
time the performance condition became probable, the Company recognized the
cumulative stock-based compensation expense for the awards that have met their
service-based vesting condition using the accelerated attribution method of
$125.2 million.
•Stock options, which have a service-based vesting period. The Company began
granting stock options under its 2014 plan in August 2016. The last grant of
stock options in the 2014 Plan was in October 2018. Certain stock options
contained change in control provisions and vesting was accelerated upon close of
the acquisition in January 2019. The Company records compensation expense
related to stock options granted to employees and contractors based on the fair
values estimated using the Black-Scholes pricing model on the measurement date.
This valuation model for stock-based compensation expense requires the Company
to make assumptions and judgments about the variables used in the Black-Scholes
pricing model, including the fair value of its common stock, expected term,
expected volatility, risk-free interest rate, and expected dividend yield. These
judgments are made as follows:
Fair Value of Common Stock
The absence of an active market for the Company's common stock required it to
estimate the fair value of its common stock for purposes of granting stock
options, RSAs as well as RSUs, and for determining equity and cash settled
stock-based compensation expense for the periods presented. The Company obtained
contemporaneous third-party valuations to assist in determining the estimated
fair value of its common stock. These contemporaneous third-party valuations
used the methodologies, approaches, and assumptions consistent with the American
Institute of Certified Public Accountants Practice Guide, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation.
The Company considered numerous factors in assessing the estimated fair value of
its common stock, including the rights, preferences, and privileges of its
redeemable convertible preferred stock relative to those of its common stock;
market multiples of comparable public companies in its industry as indicated by
their market capitalization and guideline merger and acquisition transactions;
the Company's performance and market position relative to its competitors, who
may change from time to time; the Company's historical financial results and
estimated trends and prospects for its future performance; the economic and
competitive environment; the likelihood and timeline of achieving a liquidity
event, such as an initial public offering or sale of the Company, given
prevailing market conditions; any adjustments necessary to recognize a lack of
marketability for its common stock; and precedent sales of or offers to purchase
its common stock.
Expected Term
The Company estimated the expected term using the simplified method, as the
Company did not have sufficient historical exercise activity to develop
reasonable expectations about future exercise patterns and post-vesting
employment termination behavior. The simplified method calculated the average
period the stock options were expected to remain outstanding as the midpoint
between the vesting date and the contractual expiration date of the award.
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Expected Volatility
The expected volatility rate was based on an average of the historical
volatilities of the publicly traded equity securities of several entities with
characteristics similar to those of the Company, as there had been no public
market for the Company's common stock to date and as a result the Company did
not have any trading history of its common stock
Risk-Free Interest Rate
The risk-free interest rate was based on the U.S. Treasury security in effect at
the time of grant for maturities corresponding with the expected term of the
option.
Expected Dividend Yield
The Company had not paid and does not expect to pay dividends. Consequently, the
Company used an expected dividend yield of zero.
The fair values of the stock options granted during the year 2018 were
calculated using the following assumptions:
                                                As of
                                            December 31,
                                                2018
Fair value of underlying common stock       $13.30 - $15.38
Expected term (in years)                          6.0 - 6.4
Expected volatility                                   45.0%
Risk free interest rate                         2.5% - 3.0%
Expected dividend yield                            -


As of December 31, 2018, 555,839 stock options were vested and exercisable,
respectively. The weighted-average exercise prices of the exercisable stock
options were $12.80 as of December 31, 2018. The weighted-average remaining
contractual term of the exercisable stock options was 7.7 years at December 31,
2018. The aggregate intrinsic value of options vested and expected to vest as of
December 31, 2018 was $48.4 million. The aggregate intrinsic value of options
exercisable as of December 31, 2018 was $13.8 million.
Founder Awards
In September 2018, the Company's board of directors approved co-founder equity
grants to Messrs. Ryan Smith and Jared Smith. These were the first equity grants
offered to the founders in the history of the Company. The grants issued were a
mix of time-based grants and performance grants based upon the future success of
the Company. The grants included RSUs with respect to 11.25 million shares of
Class B common stock in the aggregate, or, collectively, the Founder Grants, of
which 9.0 million RSUs were granted to Mr. Ryan Smith, our co-founder and then
Chief Executive Officer, and 2.25 million RSUs were granted to Mr. Jared Smith,
our co-founder and then President. Subject to satisfaction of a liquidity-based
vesting condition, 50% of the Founder Grants vest upon the satisfaction of a
service condition ("Founder Time Grants"), and 50% of the Founder Grants vest
upon the satisfaction of a service condition and achievement of certain stock
price goals ("Founder Performance Grants"), each as described below. The
liquidity-based vesting condition for each Founder Grant is the earlier to occur
of (i) a Sale Event (as defined in our 2014 Plan) or (ii) the consummation of an
initial public offering. Vesting is also contingent upon the individuals
maintaining certain positions with the Company.
The Founder Performance Grants were eligible to vest over the five-year period
following August 1, 2018. The Founder Performance Grants comprised five tranches
that were eligible to vest upon the first applicable vesting date, or Vesting
Date, to occur following the achievement of specified stock price goals, for
each, a Stock Price Target, measured as a ninety-day rolling average trading
price at any time during the 12-month period prior to a Vesting Date. The stock
price goals ranged from $35.56 to $71.12 and upon the achievement of each price
goal 20% of the shares would vest. In November 2019 the Founder Performance
Grants were modified such that upon the Merger
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with SAP the awards would be terminated and forfeited for no consideration,
which occurred in January 2019. No compensation expense related to the Founder
Performance Grants had been recognized.
The Founder Time Grants satisfy the service condition over the five-year period
following August 1, 2018, with the initial 20% satisfying the service condition
on August 1, 2019 and the remaining 80% satisfying the service condition in
sixteen equal quarterly installments thereafter. In addition, upon a Sale Event,
50% of any then-unvested portion of the Founder Time Grants would vest in full.
At the time the performance condition became probable as a result of the SAP
Merger, the Company recognized the cumulative stock-based compensation expense
of $52.1 million for the awards that had met the service-based vesting condition
using the accelerated attribution method.
In January 2019, the Company's board of directors approved co-founder equity
grants to Messrs. Ryan Smith and Jared Smith. The grants issued are time-based
grants. The grants include RSUs with respect to 6.1 million shares of common
stock in the aggregate ("Founder New Grants"), of which 4.07 million RSUs were
granted to Mr. Ryan Smith, our co-founder and then Chief Executive Officer, and
2.03 million RSUs were granted to Mr. Jared Smith, our co-founder and then
President. These awards are subject to the satisfaction of a service condition
over a two-year period from the closing date, with the initial 25% satisfying
the service condition on July 23, 2019 and the remaining 75% satisfying the
service condition in six equal quarterly installments thereafter.
Equity activity for the 2014 Plan - prior to the capital restructuring - was as
follows for the years ended December 31, 2019 and 2018:
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                                                                                  Stock options outstanding                                       One-Tier Restricted Stock Outstanding                       Two-Tier Restricted Stock Outstanding                                Two-Tier

Restricted Stock Units Outstanding


                                   Number of shares                                    Weighted average           Weighted average                                             Weighted average                                            Weighted average                                      Weighted average              Weighted average
                                    available for           Number of shares            exercise price               remaining             Number of shares                    grant date fair         Number of shares                    grant date fair         Number of shares              grant date fair                  remaining
                                  issuance under the       outstanding under              per share               contractual term


outstanding under                    value per share        outstanding under                    value per share        outstanding under              value per share               contractual term
in thousands                          2014 Plan              the 2014 Plan                  (in $)                    (years)               the 2014 Plan                           (in $)              the 2014 Plan                           (in $)              the 2014 Plan                     (in $)                       (years)
Balance at January 1, 2018                  563                   1,070                      12.79                       9.40                    2,231                                0.19                     995                                0.24                  18,230                          6.05                          5.80
Additional shares authorized             23,214                       -                          -                                                   -                                   -                       -                                   -                       -                             -
Shares granted                          (20,556)                    824                      14.57                                                   -                                   -                       -                                   -                  19,732                         14.90
Shares forfeited                            982                       -                          -                                                   -                                   -                       -                                   -                    (982)                         9.07
Shares repurchased                            -                       -                          -                                                 (40)                               0.26                       -                                   -                       -                             -
Balance at December 31, 2018              4,203                   1,894                      13.57                       8.20                    2,191                                0.18                     995                                0.24                  36,980                         10.68                          5.50
Shares granted                           (6,700)                      -                          -                                                   -                                   -                       -                                   -                   6,700                         34.92
Shares cancelled                          5,600                       -                          -                                                   -                                   -                       -                                   -                  (5,600)                        15.38
Shares forfeited                            192                       -                          -                                                   -                                   -                       -                                   -                    (192)                         2.33
Shares settled                                -                  (1,498)                     13.50                                              (2,191)                               0.18                    (995)                               0.24                 (14,277)                         7.52
Shares exchanged                              -                    (396)                     13.81                                                   -                                   -                       -                                   -                 (23,611)                        18.46
Cancelled authorized shares              (3,295)                      -                          -                                                   -                                   -                       -                                   -                       -                             -
Balance at December 31, 2019                  -                       -                                                                              -                                                           -                                                           -


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Cash Awards
Cash Awards Replacing Pre-Acquisition Qualtrics Awards (Qualtrics Rights)
In conjunction with the acquisition, unvested Restricted Share Awards (RSAs),
Restricted Share Units (RSUs), and options held by employees of Qualtrics were
exchanged into stock-based cash awards (Qualtrics Rights).
The replacement awards closely mirror the terms of the replaced awards except
that:
•The replaced awards were planned to be settled by issuing equity instruments,
whereas the replacement awards are settled in cash.
•RSAs, RSUs, and options granted before 2018 and unvested as at the closing date
of the Qualtrics acquisition were converted into the right to receive, at the
originally agreed vesting dates, an amount in cash equal to the number of RSAs
and RSUs held as at the vesting date multiplied by $35.00 per share. The
respective amount of options equals the number of options held as at the vesting
date multiplied by $35.00 per share less the originally-agreed exercise price.
•RSAs and RSUs granted in 2018 and thereafter and unvested as at the closing
date of the Qualtrics acquisition were converted into awards that are indexed to
SAP's share price as follows: SAP's consideration per share ($35.00) was divided
by the average closing price of the SAP share over the five trading days on the
closing date (€91.28), translated into US$ ($103.75), and the result (Equity
Award Exchange Ratio of 0.3373) was multiplied by the average closing price of
the SAP share over the five trading days prior to the exercise or vesting date.
There were 24.7 million unvested Qualtrics Rights as at the closing date of the
acquisition, representing a fair value of $848 million. Of the total fair value,
$244 million was allocated to pre-modification service, while $604 million was
allocated to future services to be provided. Post-modification compensation
expense will be recognized as the awards vest over the remainder of the original
vesting terms. The remaining vesting periods for such Qualtrics Rights are in a
range of up to five years from closing date. In January 2019, at the time of the
modification, the Company recognized the cumulative stock-based compensation
expense for the awards that have been exchanged of $173.5 million.
The unvested Qualtrics Rights include the converted Founder Grants. All awards
are paid out in cash upon vesting. SAP is contractually obligated to contribute
the required cash to settle the awards.
From January 23, 2019, through December 31, 2019, 7.8 million Qualtrics Rights
vested and were settled by an amount of $311 million in cash. During the year
ended December 31, 2020, 7.8 million Qualtrics Rights vested and were settled by
an amount of $337 million in cash. The unrecognized expense related to Qualtrics
Rights was $69 million and $252 million as of December 31, 2020 and 2019, and
will be recognized over a remaining vesting period of up to three years and four
years, respectively.
As of December 31, 2020 and 2019, 5.5 million and 11.7 million outstanding
Qualtrics Rights were valued based on the SAP share of €107.22 and €120.32,
respectively, multiplied by the Equity Award Exchange Ratio translated into US$
and 2.0 million and 4.3 million, respectively, outstanding Qualtrics Rights were
valued at $35.00. The weighted-average remaining contractual term of the
Qualtrics Rights was 1.5 and 1.7 years at December 31, 2020 and 2019,
respectively. The weighted average SAP share price for the Qualtrics Rights
settled in 2020 and 2019 is €113.34 and €106.15, respectively.
Move SAP Plan (SAP RSU Plan)
To retain and motivate executives and certain employees, SAP grants virtual
shares representing a contingent right to receive a cash payment determined by
the SAP share price and the number of share units that ultimately vest.
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Granted share units will vest in annual tranches over a three year service
period.
•Move SAP RSUs have a service-based vesting condition over a three-year period.
These awards have a cliff vesting period of one year and continue to vest
annually thereafter. The Company began granting under Move SAP Plan in March
2019. The Company recognizes compensation expense associated with the RSUs
ratably on a straight-line basis over the requisite service period. All awards
are paid out in cash upon vesting.
The fair values of the cash awards at the December 31, 2020 and 2019 were
calculated using the following assumptions:
                                                                                      SAP RSU Plan
                                                                                   As of December 31,
                                                                         2020                               2019
Fair value of underlying common stock                                   €107.22                            €120.32
Weighted average remaining life at year end (in years)                    1.2                                1.5
Weighted average fair value at year end                                 €105.28                            €118.08
Risk free interest rate                                           (0.58%) to (0.14%)                 (0.53%) to (0.13%)
Expected dividend yield                                                  1.54%                              1.26%


For these awards, the fair value is calculated by subtracting the net present
value of expected future dividend payments, if any, until maturity of the
respective award from the prevailing share price as at the valuation date. The
risk-free interest rate is derived from German government bonds with a similar
duration. The SAP dividend yield is based on expected future dividends.
In 2020, 0.3 million Move SAP RSUs vested and were settled by an amount of $44.0
million in cash. The unrecognized expense related to Move SAP RSUs was $143.0
million as of December 31, 2020 and will be recognized over a remaining vesting
period of up to three years. There were no SAP RSUs that vested and therefore no
cash settlements for the year ended 2019.
Changes in Outstanding Awards Under Our Cash-Settled Plans
in thousands           Qualtrics Rights       SAP RSU Plan
12/31/2018                      -                   -
Granted                    24,666               1,051
Transferred in/out              -                   1
Settled/exercised          (7,776)                  -
Forfeited                    (883)                 (1)
12/31/2019                 16,007               1,051
Granted                         -                 873
Transferred in/out              -                   4
Settled/exercised          (7,790)               (324)
Forfeited                    (699)               (177)
12/31/2020                  7,518               1,427


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in thousands                                                      Qualtrics Rights              SAP RSU Plan

Total carrying amount of liabilities as at December 31, 2020 241,485

                      44,428

Total carrying amount of liabilities as at December 31, 2019 423,081

                      25,147

Total expense recognized in 2020                                       154,321                      62,467
Total expense recognized in 2019                                       663,309                      25,076


Own SAP Plan (Own)
Starting in July 2019 under Own, employees have the opportunity to purchase, on
a monthly basis, SAP shares without any required holding period. The investment
per each eligible employee is limited to a percentage of the respective
employee's monthly base salary. The Company matches the employee investment by
40% and adds a subsidy equivalent of €20 per month for non-executives. The
number of shares purchased under this plan was 185,709 and 53,293 in 2020 and
2019, respectively. The Company recognized compensation expense associated with
the match of $7.2 million and $2.0 million in 2020 and 2019, respectively.
As a result of our stock-based payments transactions, the Company has
commitments to grant SAP shares to employees. The Company intends to meet these
commitments through SAP by reissuing treasury shares or through an agent who
administers the equity-settled programs and purchases shares on the open market.
The Company has fulfilled the obligations of Own through an agent.
Sale of Class A Common Stock
As discussed in Note 11, regarding the sale of Class A common stock to Q II, the
6,000,000 shares have certain vesting conditions including the completion of our
IPO and the continued employment of Ryan Smith through June 30, 2021. Based on
the terms of purchase agreement, the sale of our Class A common stock to Q II is
accounted for as an early exercise of a stock option award. The IPO is
considered a performance condition that upon occurring in January 2021 results
in a cumulative catch-up of recognizing expense of the fair value of the option
for the pro-rata portion of the vesting period that had occurred and the
remaining expense will be recorded over the remaining vesting period.
13.NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the calculation of basic net loss per share
attributable to common stockholders during the periods presented.
Due to the impact of the SAP acquisition of Qualtrics, the Company's capital
structure for the years ended December 31, 2019 and 2018 are not comparable. As
a result, the presentation of net loss per share for the year ended prior to the
transaction is not meaningful and only net loss per share for periods subsequent
to the SAP acquisition of Qualtrics are presented herein.
                                                                     Year Ended           January 23 through
in thousands (except share amount)                                  December 31,             December 31,
                                                                        2020                     2019

Numerator:


Net loss attributable to common shareholder                       $     (272,502)         $      (743,010)
Denominator:
Weighted-average shares outstanding for basic loss per share         423,334,994              423,170,610
Basic loss per share                                              $        (0.64)         $         (1.76)


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14.INCOME TAXES
For the years ended December 31, 2020, 2019, and 2018, the Company's (loss) from
continuing operations before provision for income taxes was as follows:
                                      Year Ended December 31,
in thousands                   2020             2019            2018
Domestic                   $ (297,724)     $ (1,016,772)     $ (41,919)
Foreign                        41,699            22,138          8,967
Loss before income taxes   $ (256,025)     $   (994,634)     $ (32,952)


The federal, state and foreign income tax provisions are summarized as follows:
                              Year Ended December 31,
in thousands              2020          2019         2018
Current taxes:
Federal                $      -      $   (127)     $     -
State                       166           175          (23)
Foreign                   6,970        18,326        4,135
Total current taxes    $  7,136      $ 18,374      $ 4,112
Deferred taxes:
Federal                $      -      $    127      $  (515)
State                         -             -         (261)
Foreign                   9,341        (5,502)       1,020
Total deferred taxes      9,341        (5,375)         244
Total                  $ 16,477      $ 12,999      $ 4,356

A reconciliation of the statutory U.S. federal income tax rate to the Company's effective income tax rate is as follows:


                                                    Year Ended December 31,
in %                                            2020                2019

2018


Tax at U.S. statutory rates                            21.0  %      21.0  %      21.0  %
State tax, net of federal tax effect                    3.4  %       5.5  %       4.5  %
Foreign taxes                                          (3.2) %      (1.0) %      (8.4) %
Items not deductible for tax                           (0.3) %      (0.6) %      (3.6) %
Equity compensation                                    (0.3) %       8.4  %      (1.1) %
Tax credits                                             6.7  %       3.1  %      27.6  %
Changes in valuation allowance                        (27.6) %     (36.7) %     (45.4) %
Changes in tax reserves                                (5.0) %      (1.0) %      (7.8) %
Other items, net                                       (1.1) %         -  %         -  %
Effective income tax rate                              (6.4) %      (1.3) %     (13.2) %


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Significant components of the Company's deferred tax assets (liabilities) are as
follows:
                                                   As of December 31,
in thousands                                      2020           2019
Deferred tax assets:
Investment in partnership                      $ 112,190      $ 111,172
Tax credits                                       61,616         40,660
Charitable contribution carryovers                   711            665
Stock compensation                                 9,031          8,171
Net operating loss carryovers                    310,462        250,071
Other                                             11,574          2,721
Gross deferred tax assets                        505,584        413,460
Valuation allowance                             (481,822)      (403,033)
Net deferred tax assets                           23,762         10,427
Deferred tax liabilities:
Compensation accruals                            (18,474)        (4,096)
Other                                            (11,166)        (3,018)

Total net deferred tax assets (liabilities) $ (5,878) $ 3,313




The Company conducts the majority of its operations through a limited liability
company that is wholly owned within the consolidated group. Accordingly, the
outside basis difference in the limited liability company is reflected as a
deferred tax asset, shown as "investment in partnership." During 2020, the
Company effectuated an internal restructuring, which removed certain foreign
entities from the limited liability company ownership structure. As a result,
the deferred tax balances of those foreign entities are now presented separately
from the partnership deferred tax asset.
ASC 740, Income Taxes, provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. In assessing the need for a
valuation allowance, the Company considered all available evidence, both
positive and negative, including historical levels of income, legislative
developments, expectations, and risks associated with estimates of future
taxable income, and prudent and feasible tax planning strategies. The valuation
allowance for deferred tax assets was $481.8 million and $403.0 million at
December 31, 2020 and 2019, respectively. During 2020, the valuation allowance
increased by $78.8 million primarily due to current year pre-tax book losses in
the United States.
As of December 31, 2020, the Company had approximately $1,239.3 million of
consolidated federal net operating loss carryforwards and $892.1 million of
state net operating loss carryforwards available to offset future taxable
income, respectively. If unused, federal net operating loss carryforwards of
$38.4 million will expire between 2033 and 2037. $1,200.9 million of federal net
operating loss carryforwards can be carried forward indefinitely. If unused,
state net operating loss carryforwards of $609.6 million will expire between
2023 and 2040. $282.5 million of state net operating loss carryforwards can be
carried forward indefinitely. The Company has $3.2 million of foreign
jurisdiction net operating loss carryforwards that will expire beginning in
2040. The Company has federal research tax credit carryforwards of $36.7 million
and Utah research tax credit carryforwards of $3.7 million, which if not
utilized, will expire between 2033 and 2040, and 2028 and 2034, respectively.
The Company has foreign tax credit carryforwards of $15.7 million which will
expire between 2024 and 2030, if not utilized.
As described above, the Company has calculated the income taxes in its
consolidated financial statements on a separate return basis. However, the
Company was in actuality included in the consolidated, combined or unitary U.S.
federal and state income tax returns with SAP America, Inc. and its affiliates.
As a result, a portion of the Company's net operating loss and credit
carryforwards would not be available for the Company's use in future tax periods
as the net operating losses, or underlying deductions, and credits have already
been partially absorbed by SAP America, Inc.
                                      114
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Undistributed earnings of certain of the Company's foreign subsidiaries amounted
to approximately $58 million at December 31, 2020. Those earnings are considered
to be indefinitely reinvested; accordingly, no provision for state, local and
foreign withholding income taxes has been provided hereon. Upon repatriation of
those earnings, in the form of dividends or otherwise, the Company could be
subject to withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred income tax liability is not
practicable due to the complexities associated with its hypothetical
calculation.
ASC 740 requires the Company to recognize the financial statement effects of a
tax position when it is more likely than not, based on the technical merits,
that the position will be sustained upon examination. The following table
summarizes the activity related to unrecognized tax benefits for the periods
December 31, 2020 and 2019:
                                                          As of December 31,
in thousands                                              2020           2019
Beginning balance                                     $   15,041      $  4,970

Additions for tax positions related to current year 13,089 9,301 Additions for tax positions related to prior year

              -           910
Reductions for settlements                                     -          (140)
Ending balance                                        $   28,130      $ 15,041


The Company does not anticipate material changes within 12 months of the
reporting date to its unrecognized tax benefits as of December 31, 2020. At
December 31, 2020, the Company had $28.1 million of total unrecognized tax
benefits, of which, if recognized, $14.3 million would impact the Company's
effective tax rate. Of the $28.1 million of 2020 unrecognized tax benefits,
$13.8 million is offset to deferred tax assets and the remaining $14.3 million
is recorded as a long term liability. At December 31, 2019, the Company had
$15.0 million of total unrecognized tax benefits, of which, if recognized, $5.7
million would impact the Company's effective tax rate. Of the $15.0 million of
2019 unrecognized tax benefits, $9.3 million is offset to deferred tax assets
and the remaining $5.7 million is recorded as a long term liability.
The Company recognizes interest and penalties related to unrecognized tax
benefits as part of pre-tax book income or expense, which totaled $1.5 million,
$0.1 million, and $0.8 million for 2020, 2019, and 2018, respectively. The
Company's accrual for interest and penalties totaled $2.4 million and $0.9
million at December 31, 2020 and 2019, respectively.
The Company files federal, state, and foreign income tax returns in various
jurisdictions such as Australia, Ireland, the United Kingdom, and the United
States, with varying statutes of limitations. The tax years from 2017 forward
remain subject to examination for the Company and its U.S. subsidiaries. Tax
filings for the Company's foreign subsidiaries remain subject to examination by
local tax authorities from 2016 and onward.
The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was
enacted by the United States on March 27, 2020, and the Consolidated
Appropriations Act, 2021 (the "Appropriations Act") was enacted on December 27,
2020. Neither the CARES Act nor the Appropriations Act have a material impact on
the Company's provision for income taxes for 2020.
15.RELATED PARTY TRANSACTIONS
On January 23, 2019, SAP acquired all outstanding shares of Qualtrics
International Inc. Since the acquisition, SAP and its affiliates are related
parties to the Company. The Company has entered into certain arrangements for
services and products with SAP and its affiliates.
The consolidated statements of operations and comprehensive income statements
include all revenues and costs directly attributable and/or allocable to the
Company, including costs for facilities, functions, and services used by
Qualtrics. The year ended December 31, 2020 and 2019 consolidated statement of
operations also includes expenses of SAP directly charged or allocated to
Qualtrics for certain functions provided by SAP, including, but not limited to,
sales organization costs, insurance, employee benefits, human resources and
usage of data centers. Certain costs
                                      115
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are allocated to the Company based on direct usage/benefit where identifiable,
with the remainder allocated on a pro rata basis of revenues or headcount.
These charges were determined based on actual expenses incurred on Qualtrics'
behalf or by usage. The total costs charged from SAP and its affiliates were
$38.4 million and $34.1 million during the year ended December 31, 2020 and
2019, respectively. There were no costs charged by SAP in 2018 due to Qualtrics
being a standalone company. During the year ended December 31, 2020 and 2019,
the Company received revenues of $11.8 million and $2.4 million, respectively,
from SAP and its affiliates in exchange for services and products. As of
December 31, 2020 and 2019, the Company had outstanding accounts receivables
from SAP's affiliates of $0.2 million and $0.0 million, respectively, and
outstanding trade payables to SAP and its affiliates of $13.6 million and $14.4
million, respectively. All open items within both balances are due within one
year.
Certain costs incurred by SAP for Qualtrics' benefit, including salaries and
benefits of SAP's sales staff totaled $19.2 million and $15.2 million during the
year ended December 31, 2020 and 2019, respectively. In order to compensate for
Qualtrics' efforts to support SAP sales, SAP received an indirect benefit, such
as salaries and benefits of Qualtrics' sales staff in the amount of $20.2
million and $8.7 million during the year ended December 31, 2020 and 2019,
respectively. Qualtrics' expenses as a separate, standalone company in the
future could differ materially from the historical results presented herein.
These direct charges and allocations may not include all of the actual expenses
that would have been incurred by the Company and may not reflect its
consolidated results of operations, financial position and cash flows had it
been a standalone company during the periods presented. It is not practicable to
estimate actual costs that would have been incurred had Qualtrics been a
standalone company during the periods presented. Actual revenues and expenses
that might have resulted had we been a standalone company would depend on a
number of factors, including the chosen organizational structure, what functions
we might have performed ourselves or outsourced and strategic decisions we might
have made in areas such as information technology and infrastructure.
Management believes that the allocations are a reasonable reflection of the
services received or the costs incurred on behalf of Qualtrics and its
operations and that the consolidated statement of operations for the year ended
December 31, 2020 and 2019.
Certain Supervisory Board and Executive Board members of SAP SE currently hold,
or held within the last year, positions of significant responsibility with other
entities. We have relationships with certain of these entities in the ordinary
course of business. During the year ended December 31, 2020 and 2019, the
recorded revenue with these related parties totaled $0.5 million and $0.3
million, respectively. Accounts receivable from these related parties as of
December 31, 2020 and 2019 totaled $0.0 million and $0.3 million, respectively.
During 2015, the Company entered into a 10-year property lease agreement with an
entity owned by certain Company founders. For the year ended December 31, 2018,
the Company paid $2.2 million related to the lease agreement. In October 2018,
the Company terminated its 10-year lease agreement with an entity owned by
certain Company founders and entered into a new lease agreement for the same
property with an unrelated entity.
As of December 31, 2017, the Company had an outstanding loan of $1.0 million to
an executive of the Company. This loan was entered into during 2017. The loan
matured and became due on the earlier of May 23, 2022, 60 days following the
date of termination of employment, or immediately prior to the Company's initial
filing of a registration statement under the Securities Act of 1933 covering the
offer and sale of the Company's equity securities. Until that time, the loan
accrued interest at 2.04% per annum, compounded annually. The loan was repaid in
full in July 2018.
In December 2020, Ryan Smith, our Founder and Executive Chair, acquired a
majority interest in the Utah Jazz basketball franchise, the associated venue,
and certain related sports teams and operations and business interests. The
Company has ongoing sales revenue with the Utah Jazz that totaled $0.3 million
for the year ended December 31, 2020. In 2019, the Company entered into
multi-year agreements with the Utah Jazz related to ticket purchases,
advertising, sponsorships, and the Utah Jazz Five for the Fight Campaign. Sales
and marketing and general and administrative expenses with the Utah Jazz totaled
$2.9 million for the year ended December 31, 2020.
                                      116
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16.DEFINED CONTRIBUTION PLAN
In 2018 and through June 30, 2019, the Company had a 401(k) plan covering
eligible employees of the Company. Eligible employees were U.S. full-time or
part-time employees who were at least 18 years of age and who met a 90-day
minimum service requirement. The 401(k) plan was subject to the provisions of
the Employee Retirement Income Security Act of 1974 (ERISA). Eligible
participants could contribute up to 90% of compensation. Participants directed
the investment of their contributions into various investment options offered by
the 401(k) plan. From 2016 until June 30, 2019, the Company contributed, at its
discretion, 3% of eligible U.S. employee compensation to the 401(k) plan.
Since July 1, 2019, the Company has had a 401(k) plan administered by SAP, with
employer contributions funded by the Company. Eligible employees are able to
contribute up to 25% of their compensation to the 401(k) plan each pay period,
and then the Company automatically makes partial matching contributions of up to
4.5% of their compensation, up to a maximum employer contribution of $12,825 in
2020 and $12,600 in 2019. The employer matching contributions partially vest
after two years and fully vest after three years of employee service. The
Company's contributions to the 401(k) plans for the years ended December 31,
2020, 2019, and 2018 totaled $16.7 million, $8.2 million, $4.0 million,
respectively.
17.SUBSEQUENT EVENTS
On December 28, 2020, we initiated a voluntary exchange offer pursuant to which
we offered our eligible employees, including our executive officers, the ability
to exchange their existing Qualtrics Rights and SAP RSUs for awards with
underlying shares of our Class A common stock. The terms of the voluntary
exchange offer, including the exchange ratio, were designed to preserve the
intrinsic value of the Qualtrics Rights and SAP RSUs that were tendered. Upon
completion of the exchange offer on January 28, 2021, 5.4 million of Qualtrics
Rights and 1.3 million SAP RSU awards were exchanged into 12.8 million Qualtrics
RSU awards, representing 93% of the outstanding Qualtrics Rights and SAP RSU
awards.
In January 2021, our board of directors authorized the issuance of new RSU
awards representing approximately 61.4 million shares of our Class A common
stock. These awards were granted to eligible employees and the executive
officers of the Company on January 28, 2021. Approximately 44.2 million of the
RSU awards are subject to time-based vesting, with 25% vesting on February 1,
2022 and ratably thereafter for twelve quarters, such that this portion of the
RSUs will be fully vested on the fourth anniversary of their vesting
commencement date. The remaining 17.2 million RSU awards vest in four equal
annual installments based on the achievement of certain performance conditions,
as established by our board of directors and measured annually, with vesting of
100% of each installment in the event that the performance targets are achieved
and ratable downward adjustments in the event that the performance targets are
partially achieved.
On January 5, 2021, our board of directors approved a one-time optional salary
adjustment program that provided eligible employees with the opportunity to
reduce their annual cash base salary, effective as of February 1, 2021 and on an
ongoing basis, in exchange for a one-time RSU grant valued at a multiple of the
cash forgone as a result of an employee's participation in the program. RSUs
granted pursuant to this program totaled 2.5 million and vest quarterly over
four years, with a vesting commencement date of February 1, 2021.
In January 2021, we declared a $2.4 billion dividend to SAP, payable in two
notes. The first note totaled $1.9 billion and was paid on February 1, 2021. The
second note totaled $500 million and bears an interest rate of 1.35%, compounded
semi annually. The second note and accrued interest is payable on or before the
earlier of January 2031 or the date at which cash raised in additional public
offerings exceeds $500 million.
On February 1, 2021, we closed our initial public offering, or IPO, in which we
issued and sold 59,449,903 shares of Class A common stock at $30.00 per share
for aggregate net proceeds of $1,688 million, after deducting underwriters'
discounts and offering expenses payable by us. On February 1, 2021, the various
agreements between SAP and us, as described in our final prospectus filed with
the SEC on January 28, 2021 pursuant to Rule 424(b)(4), became effective.
                                      117
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On December 23, 2020, Silver Lake Partners VI DE (AIV), L.P. ("Silver Lake")
agreed to purchase $550 million of shares of our Class A common stock,
comprising (a) 15,018,484 shares at $21.64 per share and (b) $225 million of
shares at the initial public offering price of $30 per share, in a concurrent
private placement transaction (the "Silver Lake investment"). On February 1,
2021, we closed our private placement transaction with Silver Lake.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our
principal executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act , as of December 31, 2020. The term "disclosure controls and
procedures," means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Based on such evaluation of our
disclosure controls and procedures as of December 31, 2020, our principal
executive officer and principal financial officer have concluded that as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
Management's Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management's
assessment regarding internal control over financial reporting or an attestation
report of our independent registered public accounting firm due to a transition
period established by the rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that
occurred during the quarter ended December 31, 2020 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and procedures
or our internal control over financial reporting will prevent all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with policies or
procedures may
                                      118
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deteriorate. Due to inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information
None.
                                      119

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City of Corona Partners with Qualtrics to Increase Resident Engagement and Boost Employee Satisfaction	23-10-18	CI
Qualtrics International Inc. Launches XM/os2	23-07-19	CI
Qualtrics International Inc.(NasdaqGS:XM) dropped from S&P Software & Services Select Industry Index	23-06-29	CI
Qualtrics International Inc.(NasdaqGS:XM) dropped from S&P Global BMI Index	23-06-29	CI
Qualtrics International Inc.(NasdaqGS:XM) dropped from S&P TMI Index	23-06-29	CI
Insider Sell: Qualtrics International	23-06-28	MT
Qualtrics International Inc. Announces Change of Directors	23-06-28	CI
Qualtrics International Inc.(NasdaqGS:XM) dropped from NASDAQ Composite Index	23-06-28	CI
Qualtrics International Inc. announced that it has received funding	23-06-27	CI
Silver Lake Management, L.L.C. and CPP Investments acquired remaining 95.9% stake in Qualtrics International Inc. (NasdaqGS:XM) from SAP America, Inc., The Vanguard Group, Inc. and others, in a going private deal.	23-06-27	CI
Qualtrics and Bain & Company Introduce Early Access to NPS® Outer Loop, an End-to-End Way to Manage Customer Experience Enhancement Opportunities	23-06-13	CI
Qualtrics Announces General Availability of Customer Journey Optimizer	23-06-01	CI
Qualtrics Opens New EMEA Headquarters in Dublin City Centre	23-05-31	CI
Qualtrics International Inc. Announces General Availability of New Frontline Care Solutions	23-05-24	CI
New Qualtrics Pulse Innovations Help Leaders Stay in Step with Employee Feedback and Drive Better Outcomes	23-05-23	CI
SAP Boosts Total Revenue Forecast for 2025, Announces Share Repurchase Program	23-05-16	MT
SAP takes aim at 2025 slightly higher than expected - sale of Qualtrics	23-05-16	DP
SAP raises 2025 outlook, launches 5 billion euro share buyback	23-05-16	RE
SAP to buy back shares for billions with money from Qualtrics sale	23-05-16	DP
Insider Sell: Qualtrics International	23-05-08	MT
Insider Sell: Qualtrics International	23-05-05	MT
Insider Sell: Qualtrics International	23-05-05	MT
Insider Sell: Qualtrics International	23-05-05	MT
Insider Sell: Qualtrics International	23-05-05	MT
Insider Sell: Qualtrics International	23-05-05	MT

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Qualtrics International Inc.

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XM

US7476012015

Software

QUALTRICS INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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