The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed below. You should review the sections titled
"Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a
discussion of forward-looking statements and important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis.
Overview
We created the first experience management platform to manage customer,
employee, product, and brand experiences. Our platform serves as a business
operating system for Experience Management. The Qualtrics Experience Management
Platform, or Qualtrics XM, is a system of action that helps companies design and
improve the experiences they provide to their many constituents across these
four core experiences.
Our revenue was $271.6 million and $192.8 million for the three months ended
September 30, 2021 and 2020, respectively, representing year-over-year growth of
41%. Our revenue was $759.6 million and $550.0 million for the nine months ended
September 30, 2021 and 2020, respectively, representing year-over-year growth of
38%. For the three months ended September 30, 2021 and 2020, our net loss was
$286.0 million and $85.7 million, respectively, and $749.4 million and
$258.0 million for the nine months ended September 30, 2021 and 2020,
respectively. The results of our operations for the three and nine months ended
September 30, 2021 and 2020 were impacted by equity and cash settled stock-based
compensation expense.
We generate revenue by selling subscriptions to our XM Platform and integrated
solutions, as well as professional services. Over 99% of our contracts have a
subscription period of one year or longer, and we primarily bill annually in
advance. Subscription revenue comprised 81% of our total revenue for each of the
three and nine months ended September 30, 2021. We have a diversified customer
base consisting of organizations of various sizes across virtually all
industries. Our largest customer accounted for less than 3% of revenue during
the three and nine months ended September 30, 2021, and our largest industries
by annual recurring revenue, or ARR, as of September 30, 2021 were financial
services, professional and business services, education, technology, government,
and healthcare. ARR is calculated by annualizing subscription revenue in the
last month of a period.
We price and package our software subscriptions solutions based on the capacity,
use case, and functionality needs of our customers. This pricing and packaging
includes volume of expected responses, number of users accessing our platform,
number of employees, and level of functionality provided, such as dashboards, iQ
functionality, and integrations. We have also recently begun to offer use case
pricing that simplifies pricing for customers seeking to address specific needs.
Our customers often expand their subscriptions as they increase volume of
responses, add solutions and integrations, grow users and employees, and
increase features and workflows within each solution.
Our professional services consist primarily of research services, through our
DesignXM offering, which allows customers to gain market intelligence by
procuring a curated group of respondents and returning actionable results, while
conforming to best-practice design and methodology, as well as implementations,
configurations, and integration and engineering services to help customers
deploy our XM Platform. Other professional services revenue consists of
consulting and training fees.
Acquisition of Clarabridge
On October 1, 2021, we completed our previously announced acquisition of
Clarabridge, Inc., or Clarabridge, a customer experience management software
company headquartered in Reston, Virginia, or the Clarabridge Acquisition,
pursuant to an Agreement and Plan of Reorganization and Merger, or the Merger
Agreement. Pursuant to the terms of the Merger Agreement, all outstanding shares
of Clarabridge capital stock were cancelled in exchange for aggregate
consideration of $1,125.0 million, subject to certain adjustments, in the form
of shares of our Class A common stock and cash, as provided by the Merger
Agreement. We issued a total of 25,038,955 shares of
                                       26
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Class A common stock, or Acquisition Shares. Pursuant to the terms of the Merger
Agreement, we agreed to register the Acquisition Shares for resale on a
registration statement within fifteen days from closing of the Clarabrdige
Acquisition and maintain effectiveness for 12 months from closing, or such
earlier time as all of the Acquisition Shares have been sold or are no longer
outstanding. Pursuant to joinder and lockup agreements signed by Clarabridge's
stockholders, they agree to only sell up to one-third of their shares when the
registration statement is declared effective, or the First Lockup Period, up to
an additional one-third thirty calendar days after the First Lockup Period, or
the Second Lockup Period, and up to the final one-third thirty calendar days
after the Second Lockup Period, all subject to adjustment for certain blackout
periods that may occur under the Merger Agreement.
In addition, pursuant to the terms of the Merger Agreement, (i) the Clarabridge
stock plans have been assumed, amended and restated by us, (ii) the options to
purchase shares of Clarabridge stock outstanding under the Clarabridge stock
plans have been assumed by us and converted into corresponding Qualtrics options
to purchase, in the aggregate, 3,203,885 shares of our Class A Common Stock, and
(iii) we will grant equity incentive awards to certain continuing employees of
Clarabridge and its subsidiaries under the 2021 Qualtrics International Inc.
Inducement Equity Plan, at our sole discretion.
We expect to continue to acquire or invest in businesses, people, or
technologies that we believe could complement, expand, or enhance our XM
Platform or otherwise offer growth opportunities.
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many
factors. While each of these factors presents significant opportunities for our
business, they also pose important challenges that we must successfully address
in order to sustain our growth and improve our results of operations.
Customer Acquisition and Expansion
We are focused on continuing to acquire new customers to support our long-term
growth. We have invested, and expect to continue to invest, heavily in our sales
and marketing efforts to drive customer acquisition. Our customers include
businesses of all sizes, academic institutions, and government organizations. We
define the number of customers at the end of any particular period as the number
of parties or individual legal entities that have entered into a separate
subscription contract with us. For avoidance of doubt, international
subsidiaries of parent entities are not separately counted, but business units,
brands, and academic institutions are counted if they are distinct legal
entities. A single organization or customer may have multiple paid business
accounts.
Our business model relies on rapidly and efficiently landing new customers and
expanding our relationship with them over time. We have a history of attracting
new customers, driving expanded use through upselling our XM Platform across the
enterprise, and cross-selling through the subsequent deployment of additional
solutions throughout the enterprise. Our relationship with SAP has resulted in
greater access to enterprise customers and increased cross-sell opportunities
through SAP's customer base.
Investing for Growth
Our investment for growth encompasses multiple critical areas, including
international growth, enterprise sales, and product expansion.
Our revenue outside of the United States represented 29% of our total revenue in
each of the three months ended September 30, 2021 and 2020 and 29% and 28% of
our total revenue in the nine months ended September 30, 2021 and 2020,
respectively. We initially started our expansion outside of the United States in
English-speaking countries, such as Ireland, the United Kingdom, Canada, and
Australia, as we were able to leverage our core technologies and go-to-market
motion. Since opening our first international office in Dublin, Ireland in 2013,
we now have over 30 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
                                       27
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Seattle and Poland to expand our engineering headcount. We continue to invest in
research and development to drive product innovation and development.
Strategic Partnerships
In 2018, we announced the launch of QPN. Since then, we have built out our
partner network to include over 200 global member companies partnering with us
on our platform to help drive breakthrough business outcomes for joint
customers. Since the SAP Acquisition in 2019, we have also developed joint
go-to-market and product integrations with SAP. We expect our partnerships to
extend our sales reach and provide implementation leverage both domestically and
internationally, as well as product and technology integrations that will
accelerate our product roadmap.
Key Business Metrics
We review a number of operating and financial metrics, including the following
key metrics to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
Large Customers
We define our large customers as those spending more than $100,000 in ARR on our
XM Platform. We believe that our ability to increase the number of large
customers is an indicator of our market penetration, strategic demand for our
platform, the growth of our business, and our potential future business
opportunities. Increasing awareness of our platform and its broad range of
capabilities, coupled with the mainstream adoption of cloud-based technology,
has expanded the diversity of our large customer base to include organizations
of different sizes across virtually all industries.
We continue to increase the number of customers who have entered into larger
subscriptions with us. We had 1,668 customers with ARR of $100,000 or more as of
September 30, 2021, up from 1,338 as of December 31, 2020. The number of
customers with ARR of $100,000 or more indicates the strategic importance of our
platform for enterprise customers and our ability to both initially land
significant accounts and grow them over time.
Net Retention Rate
We calculate our dollar-based net retention rate to measure our ability to
retain and expand subscription revenue from our existing customers and is an
indicator of the value our platform delivers to customers and our future
business opportunities. Our net retention rate compares our subscription revenue
from the same set of customers across comparable periods and reflects customer
renewals, expansion, contraction and churn.
We calculate our net retention rate on a trailing four-quarter basis. As of
September 30, 2021, our net retention rate was 125%. Our net retention rate was
120% as of December 31, 2020.
To calculate our net retention rate, we first calculate the subscription revenue
in one quarter from a cohort of customers that were customers at the beginning
of the same quarter in the prior fiscal year, or cohort customers. We repeat
this calculation for each quarter in the trailing four-quarter period. The
numerator for net retention rate is the sum of subscription revenue from cohort
customers for the four most recent quarters, or numerator period, and the
denominator is the sum of subscription revenue from cohort customers for the
four quarters preceding the numerator period.
SAP Acquisition
Since the SAP Acquisition in January 2019 and until the sale of 6,000,000 shares
of our Class A common stock to Q II in December 2020, we operated as a wholly
owned subsidiary of SAP. Accordingly, our financial results for the three and
nine months ended September 30, 2021 differ in comparison to the three and nine
months ended
                                       28
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September 30, 2020 primarily with respect to sales and marketing expenses and
equity and cash settled stock-based compensation expense.
The results of our operations include all revenue and costs directly
attributable and/or allocable to the Company, including costs for facilities,
functions, and services used by Qualtrics. Our results also include expenses of
SAP directly charged to Qualtrics for certain functions provided by SAP,
including, but not limited to, sales organization costs, insurance, employee
benefits, human resources and usage of data centers. We expect the revenue and
cross charges between us and SAP to continue in the near future. These amounts
may fluctuate from period to period based on the nature and extent of the
indirect benefits received and provided. See Note 15 "Related Party
Transactions" for further details in our condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
On January 28, 2021, we completed a voluntary exchange offer pursuant to which
5.4 million cash-settled Qualtrics Rights and 1.3 million cash-settled SAP RSU
awards were exchanged into 12.8 million equity-settled Qualtrics RSU awards,
representing 93% of the outstanding Qualtrics Rights and SAP RSU awards. During
the three months ended September 30, 2021 and 2020, we recorded $276.8 million
and $84.1 million, respectively, in equity and cash settled stock-based
compensation expense. The increase was primarily due to the issuance of RSU
awards in connection with our initial public offering. During the three months
ended September 30, 2021 and 2020, we settled $2.9 million and $96.9 million,
respectively, of liability-classified awards. During the nine months ended
September 30, 2021 and 2020, we recorded $764.6 million and $218.0 million,
respectively, in equity and cash settled stock-based compensation expense. The
increase was primarily due to the issuance of RSU awards in connection with our
initial public offering. During the nine months ended September 30, 2021 and
2020, we settled $76.9 million and $284.0 million, respectively, of
liability-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 three and nine months
ended September 30, 2021 compared to the three and nine months ended
September 30, 2020. 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 took broad actions to mitigate the
impact of this public health crisis on our business. We 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. We have begun relaxing
some of these measures in certain offices where possible in compliance with
local restrictions and orders, but many of them are ongoing. Our employees'
health and safety is our top priority, and we continue to monitor local
restrictions across the world, the administration of vaccines, and the number of
new cases, as well as the evolving and competing legal requirements around
COVID-19 protocols and vaccine mandates in the United States and elsewhere. Our
customers and partners have similarly been impacted. Our XM Platform enables
customers to focus on managing their customer, employee, product, and brand
experiences, which is increasingly important in a digitally connected world.
Although we believe our business is well-suited to navigate the current
environment, the ultimate duration and extent of the COVID-19 pandemic cannot be
accurately predicted at this time, and the direct and indirect impact on our
business, results of
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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, supply of goods and services provided by
third parties, collections of accounts receivable, our IT and other expenses,
our ability to focus time and attention on our core business, our ability to
recruit, and the ability of our employees to travel, all of which could
adversely affect our business, results of operations, and financial condition.
We have also experienced, and may continue to experience, certain positive
impacts on other aspects of our business, including an increase in sales of our
platform to state, local, and federal governments and non-profit organizations
to help them navigate through the pandemic as well as sales of vaccine
verification solutions on our XM Platform. Moreover, we have seen a reduction in
certain operating expenses due to reduced business travel, deferred hiring for
some positions, and the virtualization or cancellation of customer and employee
events. At our virtual event this year, titled Work Different, we explored how
successful organizations are listening to and taking action on the feedback from
their customers and employees to reimagine the future of work. Additionally, we
believe that the COVID-19 pandemic could also accelerate customer transformation
into digital businesses, which we expect will generate additional opportunities
for us in the future.
The global impact of COVID-19 continues to rapidly evolve, including as a result
of new variants of the virus and the rapidly changing legal landscape, and we
will continue to monitor the situation and the effects on our business and
operations closely. We do not yet know the full extent of potential impacts on
our business or operations. In particular, due to our subscription-based
business model, the effect of the COVID-19 pandemic may not be fully reflected
in our revenue until future periods. Given the uncertainty, we cannot reasonably
estimate the impact on our future results of operations, cash flows, or
financial condition. For additional details, see "Risk Factors."
Components of Our Results of Operations
Revenue
We generate revenue from sales of subscriptions to our XM Platform and related
professional services.
Subscription revenue is recognized ratably over the related contractual term,
generally beginning on the date that our XM Platform is made available to our
customer. Our subscription agreements generally have annual contractual terms,
with a growing number having multi-year contractual terms. Our agreements
generally cannot be canceled 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 for a refund. We typically bill in advance for professional services
and other revenue. Amounts that have been billed are initially recorded as
deferred revenue until the revenue is recognized. We continue to increase
deployment of partners to fulfill certain of these services, especially
implementation services, and we generally expect professional services and other
revenue to decrease as a percentage of total revenue in the long term, although
this percentage may fluctuate from period to period.
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Cost of revenue and gross margin
Cost of revenue. Our cost of subscription revenue includes expenses related to
operating our XM Platform in data centers, depreciation of our data center
equipment, and the amortization of our capitalized internal-use software and
acquired technology. Subscription cost of revenue also includes employee-related
costs associated with our customer support and XM Platform operations
organizations. Our cost of professional services and other revenue includes
vendor costs and employee-related costs associated with the delivery of these
services. Additionally, we make allocations of certain overhead costs, primarily
based on headcount, to each of these costs of revenue. Allocated overhead
includes costs such as facilities, including lease expense, utilities,
depreciation on leasehold improvements, and shared information technology costs.
We expect our cost of revenue will increase in absolute dollars in future
periods as we continue to invest in our business.
Gross margin. Gross margin is gross profit expressed as a percentage of revenue.
Our gross margin may fluctuate from period to period based on the timing of
capital expenditures and the related depreciation expense, or other changes in
equity and cash settled stock-based compensation, employee-related costs,
infrastructure costs, revenue mix, timing of completion of professional services
projects, as well as revenue fluctuations. Excluding the impact of equity and
cash settled stock-based compensation expense, we generally expect our gross
margin to remain relatively consistent in the near term and to increase modestly
in the long term, although our gross margin may fluctuate from period to period
depending on the interplay of all of these factors.
Operating expenses
Research and development. Our research and development expenses consist
primarily of employee-related costs for our engineering, product, and design
teams, and allocated overhead.
We plan to continue to hire employees for our engineering, product, and design
teams to support our efforts to enhance the functionality and improve the
reliability, availability, and scalability of our XM Platform. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
our research and development expenses to increase in absolute dollars in future
periods, to remain relatively consistent as a percentage of our revenue in the
near term, and to decrease as a percentage of our revenue over the long term,
although our research and development expenses may fluctuate as a percentage of
our revenue from period to period due to the timing and extent of these
expenses.
Sales and marketing. Our sales and marketing expenses relate to both inside and
outbound sales activities, as well as expansion efforts with our current
customers. The expenses consist primarily of employee-related costs, marketing
programs and events, lead generation fees, indirect benefits received from SAP
net of indirect benefits we provide to SAP, and allocated overhead. Sales
commissions earned by our sales team and the related payroll taxes, that we
consider to be incremental and recoverable costs of obtaining a contract with an
organization, are deferred and amortized over an estimated period of benefit of
five years.
We plan to continue to invest in sales and marketing to grow our customer base
and increase our brand awareness. The trend and timing of sales and marketing
expenses will depend in part on the timing of marketing campaigns. Excluding the
impact of equity and cash settled stock-based compensation expense, we expect
that sales and marketing expenses will increase in absolute dollars in future
periods; however, we expect our sales and marketing expenses to decrease as a
percentage of our revenue over the long term, although our sales and marketing
expenses may fluctuate as a percentage of our revenue from period to period due
to the timing and extent of these expenses.
General and administrative. Our general and administrative expenses consist
primarily of employee-related costs for our finance, legal, people operations,
and other administrative teams, as well as certain executives. In addition,
general and administrative expenses include allocated overhead, outside legal,
accounting and other professional fees, and non-income based taxes.
We expect to incur additional general and administrative expenses to support our
growth as well as our transition to being a publicly traded company. Excluding
the impact of equity and cash settled stock-based compensation expense, we
expect that general and administrative expenses will increase in absolute
dollars in future
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periods. Our general and administrative expenses may fluctuate as a percentage
of our revenue from period to period due to the timing and extent of these
expenses.
Other non-operating expense, net
Other non-operating expense, net consists of other non-operating gains or
losses, including those related to interest income and expense and foreign
currency transaction gains and losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes related to the
U.S. and other foreign jurisdictions in which we conduct business. We maintain a
full valuation allowance against our U.S. deferred tax assets as we have
concluded that it is not more likely than not that the deferred tax assets will
be realized. Our effective tax rate is affected by tax rates in foreign
jurisdictions and the relative amounts of income we earn in those jurisdictions,
as well as non-deductible expenses, such as share-based compensation, and
changes in our valuation allowance.
Income taxes as presented in our condensed consolidated financial statements
attribute current and deferred income taxes of SAP to our standalone financial
statements in a manner that is systematic, rational and consistent with the
asset and liability method prescribed by FASB ASC Topic 740: Income Taxes, or
ASC 740. Accordingly, our income tax provision was prepared following the
separate return method. The separate return method applies ASC 740 to the
standalone financial statements of each member of the consolidated group as if
the group members were a separate taxpayer and a standalone enterprise. As a
result, actual transactions included in the consolidated financial statements of
SAP may not be included in our separate condensed consolidated financial
statements. Similarly, the tax treatment of certain items reflected in our
condensed consolidated financial statements may not be reflected in the
consolidated financial statements and tax returns of SAP. Therefore, such items
as net operating losses, credit carry-forwards and valuation allowances may
exist in the standalone financial statements that may or may not exist in SAP's
consolidated financial statements. As such, our income taxes as presented in
these condensed consolidated financial statements may not be indicative of the
income taxes that we will generate in the future.
As described above, we have calculated the income taxes in our condensed
consolidated financial statements on a separate return basis. However, we were
in actuality included in the consolidated, combined or unitary U.S. federal and
state income tax returns with SAP America and its affiliates. As a result, a
portion of our net operating losses 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.
As a result of the Clarabridge Acquisition, described in Note 16 to our
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q, SAP America no longer holds 80% of the value of our
outstanding stock, and as such, we will no longer be a member of SAP America's
consolidated group for U.S. federal income tax purposes, which we refer to as a
U.S. Consolidated Group, as of October 1, 2021. We will continue to be a part of
the U.S. Consolidated Group for other tax jurisdictions. The tax attributes that
had been utilized by U.S. Consolidated Group, and are not available for use by
Qualtrics International Inc., will no longer be reflected in our consolidated
financial statements beginning in the fourth quarter of 2021, resulting in an
expected reduction in both our deferred tax assets and valuation allowance.
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Results of Operations The following table sets forth our results of operations for the periods presented:


                                          Three Months Ended September 30,            Nine Months Ended September 30,
                                              2021                2020                   2021                   2020
                                                                          (In thousands)
Revenue:
Subscription                             $   220,314          $  148,259          $        611,748          $  415,000
Professional services and other               51,320              44,590                   147,874             134,956
Total revenue                                271,634             192,849                   759,622             549,956
Cost of revenue(1)(2):
Subscription                                  23,802              16,362                    65,865              46,974
Professional services and other               43,041              32,674                   127,522             100,060
Total cost of revenue                         66,843              49,036                   193,387             147,034
Gross profit                                 204,791             143,813                   566,235             402,922
Operating expenses(1)(2):
Research and development                      83,875              62,065                   226,552             168,985
Sales and marketing                          161,570             103,008                   449,446             322,775
General and administrative                   236,810              60,731                   637,944             155,225
Total operating expenses                     482,255             225,804                 1,313,942             646,985
Operating loss                              (277,464)            (81,991)                 (747,707)           (244,063)
Other non-operating expense, net              (3,160)               (556)                   (6,091)               (483)
Loss before income taxes                    (280,624)            (82,547)                 (753,798)           (244,546)
Provision (benefit) for income taxes           5,409               3,141                    (4,424)             13,481
Net loss                                 $  (286,033)         $  (85,688)         $       (749,374)         $ (258,027)


________________

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


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



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


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

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


                                             Three Months Ended September 30,                 Nine Months Ended September 30,
                                               2021                     2020                    2021                     2020
                                                                            (as a % of revenue)
Revenue:
Subscription                                          81                     77                        81                     75
Professional services and other                       19                     23                        19                     25
Total revenue                                        100  %                 100  %                    100  %                 100  %
Cost of revenue:
Subscription                                           9                      8                         9                      9
Professional services and other                       16                     17                        17                     18
Total cost of revenue                                 25                     25                        26                     27
Gross profit                                          75                     75                        74                     73
Operating expenses:
Research and development                              31                     32                        30                     31
Sales and marketing                                   59                     53                        59                     59
General and administrative                            87                     31                        84                     28
Total operating expenses                             177                    116                       173                    118
Operating loss                                      (102)                   (41)                      (99)                   (45)
Other non-operating expense, net                      (1)                     -                        (1)                     -
Loss before income taxes                            (103)                   (41)                     (100)                   (45)
Provision (benefit) for income taxes                   2                      2                        (1)                     2
Net loss                                            (105) %                 (43) %                    (99) %                 (47) %


Comparison of the three months ended September 30, 2021 and 2020
Revenue
                                        Three Months Ended September 30,
                                            2021                2020              $ Change               % Change
                                                           (In thousands)
Subscription revenue                   $   220,314          $  148,259          $   72,055                        49  %
Professional services and other
revenue                                     51,320              44,590               6,730                        15  %
Total revenue                          $   271,634          $  192,849          $   78,785                        41  %


Subscription revenue increased by $72.1 million, or 49%, for the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020. This increase was due primarily to increased demand for our solutions from
new and existing customers. Of the increase in subscription revenue for the
three months ended
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September 30, 2021 compared to the three months ended September 30, 2020,
approximately $48.9 million was attributable to existing customers and
approximately $23.2 million was attributable to new customers. The increase in
revenue from existing customers was driven by upgrades of current subscription
solutions and the purchase of additional solutions within our platform. Pricing
changes were not material to the increase in revenue. Professional services and
other revenue increased $6.7 million, or 15%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020. 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
                                          Three Months Ended September 30,
                                              2021                   2020              $ Change               % Change
                                                             (In thousands)
Cost of subscription revenue           $        23,802           $   16,362          $    7,440                        45  %
Cost of professional services and
other revenue                                   43,041               32,674              10,367                        32  %
Total cost of revenue                           66,843               49,036              17,807                        36  %

Subscription gross profit                      196,512              131,897              64,615                        49  %
Professional services and other gross
profit                                           8,279               11,916              (3,637)                      (31) %
Total gross profit                     $       204,791           $  143,813          $   60,978                        42  %

Subscription gross margin                           89   %               89  %
Professional services and other gross
margin                                              16   %               27  %
Total gross margin                                  75   %               75  %


Cost of subscription revenue increased $7.4 million, or 45%, for the three
months ended September 30, 2021, as compared to the three months ended September
30, 2020, consistent with the increase in subscription revenue growth over the
same period. This increase was driven by a $3.0 million increase in
employee-related costs from headcount growth, a $2.0 million increase in server
costs, a $1.8 million increase in stock-based compensation expense, and a $0.6
million increase in amortization of internal use software. Cost of professional
services and other revenue increased $10.4 million, or 32%, for the three months
ended September 30, 2021, as compared to the three months ended September 30,
2020. This increase was driven by a $4.4 million increase in stock-based
compensation expense, a $3.8 million increase in professional services vendor
costs, and a $2.2 million increase in employee-related costs from headcount
growth.
Our gross margins were 75% during the three months ended September 30, 2020 and
the three months ended September 30, 2021, due primarily to continued strong
subscription gross margins, partially offset by a decrease in professional
services and other gross margins based on the changes discussed above.
Operating Expenses
Research and development
                                                  Three Months Ended September 30,
                                                      2021                   2020              $ Change               % Change
                                                                     (In thousands)
Research and development                       $         83,875          $   62,065          $   21,810                        35  %


Research and development expenses increased $21.8 million, or 35%, for the three
months ended September 30, 2021, as compared to the three months ended September
30, 2020. This increase was driven by an $11.2 million increase in
employee-related costs from headcount growth as we continue to add to and
enhance our products, a $9.8 million increase in stock-based compensation
expense, and a $0.7 million increase outside vendor costs.
                                       35

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Sales and marketing
                                Three Months Ended September 30,
                                      2021                      2020         $ Change      % Change
                                                (In thousands)
Sales and marketing     $         161,570                    $ 103,008      $ 58,562           57  %


Sales and marketing expenses increased $58.6 million, or 57%, for the three
months ended September 30, 2021, as compared to the three months ended September
30, 2020. The increase in sales and marketing was primarily driven by a $24.7
million increase in employee-related costs from headcount growth, a $24.6
million increase in stock-based compensation expense, an $8.0 million increase
in marketing spend, and a $1.3 million increase in travel-related expenses.
General and administrative
                                                  Three Months Ended September 30,
                                                      2021                2020              $ Change               % Change
                                                                     (In thousands)
General and administrative                       $   236,810          $   60,731          $  176,079                       290  %


General and administrative expenses increased $176.1 million, or 290%, for the
three months ended September 30, 2021, as compared to the three months ended
September 30, 2020. The increase in general and administrative expenses was
primarily driven by a $152.2 million increase in stock-based compensation
expense, a $13.4 million increase in acquisition related costs, and an increase
in employee-related costs from headcount growth.
Other non-operating expense, net
Other non-operating expense, net decreased $2.6 million for the three months
ended September 30, 2021, as compared to the three months ended September 30,
2020. This change for the periods was primarily driven by a $1.7 million
increase in interest expense, the results of 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 $2.3 million for the three months ended
September 30, 2021, as compared to the three months ended September 30, 2020,
and our effective tax rate was (1.9)% for the three months ended September 30,
2021, as compared to (3.8)% for the three months ended September 30, 2020. The
change was primarily due to the recording of an uncertain tax liability,
partially offset by tax benefits related to the finalization of tax returns in
various foreign jurisdictions, both recorded as discrete items in the three
months ended September 30, 2021.
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, foreign taxes, and
the impact of valuation allowances recorded against current year losses in the
United States.
Comparison of the nine months ended September 30, 2021 and 2020
Revenue
                                           Nine Months Ended September 30,
                                              2021                   2020              $ Change               % Change
                                                             (In thousands)
Subscription revenue                   $        611,748          $  415,000          $  196,748                        47  %
Professional services and other
revenue                                         147,874             134,956              12,918                        10  %
Total revenue                          $        759,622          $  549,956          $  209,666                        38  %


                                       36

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Subscription revenue increased by $196.7 million, or 47%, for the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020. This increase was due primarily to increased demand for our solutions from
new and existing customers. Of the increase in subscription revenue for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020, approximately $127.0 million was attributable to existing customers and
approximately $69.7 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 $12.9 million, or 10%, for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020. 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
                                           Nine Months Ended September 30,
                                              2021                   2020              $ Change               % Change
                                                             (In thousands)
Cost of subscription revenue           $        65,865           $   46,974          $   18,891                        40  %
Cost of professional services and
other revenue                                  127,522              100,060              27,462                        27  %
Total cost of revenue                          193,387              147,034              46,353                        32  %

Subscription gross profit                      545,883              368,026             177,857                        48  %
Professional services and other gross
profit                                          20,352               34,896             (14,544)                      (42) %
Total gross profit                     $       566,235           $  402,922          $  163,313                        41  %

Subscription gross margin                           89   %               89  %
Professional services and other gross
margin                                              14   %               26  %
Total gross margin                                  75   %               73  %


Cost of subscription revenue increased $18.9 million, or 40%, for the nine
months ended September 30, 2021, as compared to the nine months ended September
30, 2020, consistent with the increase in subscription revenue growth over the
same period. This increase was driven by a $6.3 million increase in
employee-related costs from headcount growth, a $4.7 million increase in
stock-based compensation expense, a $4.7 million increase in server costs, and a
$3.2 million increase in amortization of internal use software. Cost of
professional services and other revenue increased $27.5 million, or 27%, for the
nine months ended September 30, 2021, as compared to the nine months ended
September 30, 2020. This increase was driven by a $12.0 million increase in
stock-based compensation expense, a $10.1 million increase in professional
services vendor costs, and a $5.9 million increase in employee-related costs
from headcount growth, partially offset by a $0.5 million decrease in
travel-related expenses.
Our gross margins increased from 73% during the nine months ended September 30,
2020 to 75% during the nine months ended September 30, 2021, due primarily to an
increase in subscription gross margins, partially offset by a decrease in
professional services and other gross margins based on the changes discussed
above.
Operating Expenses
Research and development
                                  Nine Months Ended September 30,
                                        2021                     2020         $ Change      % Change
                                                  (In thousands)
Research and development   $        226,552                   $ 168,985      $ 57,567           34  %


Research and development expenses increased $57.6 million, or 34%, for the nine
months ended September 30, 2021, as compared to the nine months ended September
30, 2020. This increase was driven by a $29.1 million
                                       37

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increase in employee-related costs from headcount growth as we continue to add
to and enhance our products, a $26.2 million increase in stock-based
compensation expense, and a $2.1 million increase outside vendor costs.
Sales and marketing
                               Nine Months Ended September 30,
                                     2021                     2020         $ Change       % Change
                                               (In thousands)
Sales and marketing     $        449,446                   $ 322,775      $ 126,671           39  %


Sales and marketing expenses increased $126.7 million, or 39%, for the nine
months ended September 30, 2021, as compared to the nine months ended September
30, 2020. The increase in sales and marketing was primarily driven by a $63.5
million increase in employee-related costs from headcount growth, a
$60.0 million increase in stock-based compensation expense, and a $7.3 million
increase in marketing spend, partially offset by a $4.1 million decrease in
travel-related expenses.
General and administrative
                                                     Nine Months Ended September 30,
                                                        2021                   2020              $ Change               % Change
                                                                       (In thousands)
General and administrative                       $        637,944          $  155,225          $  482,719                       311  %


General and administrative expenses increased $482.7 million, or 311%, for the
nine months ended September 30, 2021, as compared to the nine months ended
September 30, 2020. The increase in general and administrative expenses was
primarily driven by a $443.6 million increase in stock-based compensation
expense, a $13.4 million increase in acquisition related costs, and an increase
in employee-related costs from headcount growth.
Other non-operating expense, net
Other non-operating expense, net decreased $5.6 million for the nine months
ended September 30, 2021, as compared to the nine months ended September 30,
2020. This change for the periods was primarily driven by a $4.6 million
increase in interest expense, the results of 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 (benefit) for income taxes
Provision (benefit) for income taxes decreased $17.9 million for the nine months
ended September 30, 2021, as compared to the nine months ended September 30,
2020, and our effective tax rate was 0.6% for the nine months ended September
30, 2021, as compared to (5.5)% for the nine months ended September 30, 2020.
The change was primarily due to the net benefit related to the change in
uncertain tax liabilities and tax benefits related to the finalization of tax
returns in various foreign jurisdictions, both recorded during the nine months
ended September 30, 2021.
Liquidity and Capital Resources
As of September 30, 2021 we had cash and cash equivalents of $589.9 million. Our
cash and cash equivalents consist primarily of cash and money market funds. As
of September 30, 2021, we had $16.3 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
liability-classified stock-based awards.
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We believe our existing cash and cash equivalents, together with cash provided
by operations, will be sufficient to meet our needs for at least the next 12
months. Our future capital requirements will depend on many factors, including
our revenue growth rate, subscription renewal activity, the timing and extent of
spending to support further infrastructure development and research and
development efforts, the timing and extent of additional capital expenditures to
invest in existing and new office spaces, the satisfaction of tax withholding
obligations 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. On January 28, 2021, we completed a voluntary
exchange offer pursuant to which 5.4 million cash-settled Qualtrics Rights and
1.3 million cash-settled SAP RSU awards were exchanged into 12.8 million
equity-settled Qualtrics RSU awards, representing 93% of the outstanding
Qualtrics Rights and SAP RSU awards, significantly reducing our stock-based
awards liability. On September 13, 2021, we completed an additional voluntary
exchange offer for certain employees in Australia that were not eligible for the
January 28, 2021 exchange, pursuant to which less that 0.1 million cash-settled
Qualtrics Rights and SAP RSU awards were exchanged and modified into
equity-settled Qualtrics RSU awards. We may in the future enter into
arrangements to acquire or invest in complementary businesses, services, and
technologies, including intellectual property rights. We may be required to seek
additional equity or debt financing. In the event that additional financing is
required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital when
desired, our business, results of operations, and financial condition would be
materially and adversely affected.
Our cash flow activities were as follows for the periods presented:

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