Notes to Condensed Consolidated Financial Statements
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics has built the first experience management platform (“XM Platform”) to manage customer, employee, product, and brand experiences. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services, and engineering services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated balance sheet as of June 30, 2022, and the condensed consolidated statements of operations, comprehensive loss, and stockholders' equity (deficit) for the three and six months ended June 30, 2022 and 2021, and condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to state fairly the Company's financial position as of June 30, 2022, and its results of operations for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three and six month periods are also unaudited. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for any other future year or interim period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021, included in the Company's Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the standalone selling prices for the Company’s services, 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, valuation of certain intangible assets that were acquired as part of business combinations, valuation of the distribution liability related to the tax sharing agreement with SAP, valuation of deferred income tax assets, uncertain tax positions, contingencies, 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.
Foreign Currency Transactions
The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date and revenue and expense amounts are translated at the average exchange rate for the period. Foreign currency translation gains and losses are recorded in other comprehensive loss. Exchange rate differences resulting from translation adjustments are accounted for as a component of accumulated other comprehensive loss. Gains and losses, whether realized or unrealized, from foreign currency transactions (those transactions denominated in currencies other than the entities’ functional currency) are included in other non-operating income (expense), net.
Revenue Recognition
The Company recognizes revenue from its service/product lines when control is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the services. Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue. The Company accounts for revenue contracts with customers by applying the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606 – Revenue from Contracts with Customers (Topic 606), which includes the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in a contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, performance obligations are satisfied
Classes of Revenue
The Company derives revenue from two service/product lines:
Subscription Revenue
The Company generates revenue primarily from sales of subscriptions to access its XM Platform, together with related support services to its customers. Arrangements with customers do not provide the customer with the right to take possession of the software operating the XM Platform at any time. Instead, customers are granted continuous access to the XM Platform over the contractual period.
The Company’s subscription contracts generally have annual contractual terms while some have multi-year contractual terms. The Company generally bills annually in advance with net 30 payment terms. The Company’s agreements generally cannot be canceled for a refund.
Professional Services and Other Revenue
Professional services and other revenue mainly includes two types of services: research services and professional services. Research services is a solution provided to existing subscription customers with arrangements which are distinct from subscription revenue services. In addition, the Company provides professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.
Recognition of Revenue
Access to the Company’s XM Platform represents a series of distinct services as the Company continually provides access to and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer.
Revenue from professional services and other revenue related to research services is recognized upon completion because completion and delivery of the results is considered a separate performance obligation satisfied at a point in time. Revenue from professional services and other revenue related to customized software coding is recognized upon completion, because the customer consumes the intended benefit and assumes control upon final completion of the custom coding. Revenue from professional services and other revenue related to implementation and other ancillary services is recognized as the services are performed, because the customer consumes the benefit as the services are provided.
Judgment is required to determine whether revenue is to be recognized at a point in time or over time. For performance obligations satisfied over time, we need to measure progress using the method that best reflects 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 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 June 30, 2022 were $20.2 million and $15.5 million, respectively. The current and noncurrent portion of contract assets included in prepaid and other current assets and other assets as of December 31, 2021 were $18.1 million and $14.0 million, respectively.
The Company records contract liabilities to deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the customer prior to the related performance obligation being fulfilled. In certain circumstances, we receive consideration from customers in advance of a specific service being identified. Total consideration received in advance of a specific service being identified totaled $34.6 million and $33.0 million as of June 30, 2022 and December 31, 2021, respectively, and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue for each of the Company’s revenue generating solutions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Subscription revenue: | | | | | | | |
| Revenue included in prior period deferred revenue | $ | 162,426 | | | $ | 128,570 | | | $ | 390,642 | | | $ | 293,569 | |
| Revenue generated from same period billings | 138,152 | | | 75,968 | | | 190,744 | | | 97,865 | |
| Total subscription revenue | $ | 300,578 | | | $ | 204,538 | | | $ | 581,386 | | | $ | 391,434 | |
| Professional services and other revenue: | | | | | | | |
| Revenue included in prior period deferred revenue | $ | 22,239 | | | $ | 11,288 | | | $ | 46,029 | | | $ | 39,814 | |
| Revenue generated from same period billings | 33,548 | | | 33,519 | | | 64,597 | | | 56,740 | |
| Total professional services and other revenue | $ | 55,787 | | | $ | 44,807 | | | $ | 110,626 | | | $ | 96,554 | |
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 June 30, 2022 was $1,798.0 million, of which approximately $1,038.3 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, 2021 was $1,732.8 million. This estimate is based on the Company’s best judgment, as it needs to consider estimates of possible future contract modifications. The amount of transaction price allocated to the remaining performance obligations, and changes in this amount over time, are impacted by, among others, currency fluctuations and the contract period of our cloud contracts remaining at the balance sheet date and thus, by the timing of contract renewals.
Disaggregation of Revenue
The following table summarizes the revenue by region based on the address of customers who have contracted to use the Company’s cloud platform:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 246,992 | | | $ | 174,969 | | | $ | 483,634 | | | $ | 345,518 | |
| International | 109,373 | | | 74,376 | | | 208,378 | | | 142,470 | |
| Total revenue | $ | 356,365 | | | $ | 249,345 | | | $ | 692,012 | | | $ | 487,988 | |
No single country outside the United States accounted for 10% or more of revenue during the three and six months ended June 30, 2022 and 2021.
Stock-Based Compensation, including cash settled
Equity Awards
The Company records stock-based compensation based on the grant date fair value of the awards and recognizes the fair value of those awards as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, the Company recognizes expense using the accelerated attribution method if it is probable the performance conditions will be met.
The Company estimates the grant date fair value of RSUs based on the closing stock price of the Company’s publicly traded Class A common stock on the grant date. The Company estimates the grant date fair value of purchase rights issued under our Employee Stock Purchase Plan, or ESPP, based on the Black-Scholes option-pricing model using the estimated number of awards as of the beginning of the offering periods. The Company estimated the fair value of the converted Clarabridge options based on the intrinsic value of the awards on the acquisition date.
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 the awards are estimated based on the fair value of the underlying stock price of SAP SE. 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. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring. All awards that were not exchanged into Qualtrics RSUs are paid out in cash upon vesting.
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.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances. Accounts receivable are typically due within 30 days from the date of invoice. Customer balances outstanding longer than the contractual payment terms are considered past due.
The Company establishes allowances for bad debt and cancellations based on historical collection data and customer specific circumstances. The allowance for bad debt, as needed, is established with a charge to bad debt expense in the consolidated statements of comprehensive loss. The Company’s allowance for bad debt was $4.3 million and $1.5 million as of June 30, 2022 and December 31, 2021, respectively. Net additions (reductions) charged to bad debt expense were $3.1 million and not material during the three months ended June 30, 2022 and 2021, respectively. Net additions (reductions) charged to bad debt expense were $3.1 million and not material during the six months ended June, 2022 and 2021, respectively. The Company’s allowance for cancellations was $18.4 million and $17.5 million as of June 30, 2022 and December 31, 2021, respectively. During the three months ended June 30, 2022 and 2021, $0.6 million and $(1.0) million of net additions (reductions) were charged to revenue, respectively, and $3.7 million and $(6.0) million of net additions (reductions) were charged to deferred revenue, respectively. During the six months ended June 30, 2022 and 2021, $0.1 million and $(2.3) million of net additions (reductions) were charged to revenue, respectively, and $0.8 million and $(11.5) million of net additions (reductions) were charged to deferred revenue, respectively. The allowance for cancellations is established with a reduction to revenue and deferred revenue. In the event of lack of payment due to a bankruptcy or other credit-related issues of a customer, the Company writes off the related accounts receivable with a reduction to the allowance for bad debt. In the event of lack of payment from a customer for issues unrelated to credit risk, the Company cancels the customer’s subscription access or service and writes off the corresponding accounts receivable with reductions to the allowance for cancellations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, and accounts receivable. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. No customer accounted for more than 10% of accounts receivable at June 30, 2022 and December 31, 2021. No single customer accounted for 10% or more of total revenue during the three and six months ended June 30, 2022 and 2021.
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 $26.0 million and $20.3 million during the three months ended June 30, 2022 and 2021, respectively, and $52.8 million and $33.9 million during the six months ended June 30, 2022 and 2021, 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 $17.3 million and $12.0 million for the three months ended June 30, 2022 and 2021, respectively, and $33.1 million and $23.2 million for the six months ended June 30, 2022 and 2021, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of operations. There was no impairment loss in relation to the deferred costs for any period presented.
Leases
Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement based on the present value of the minimum lease payments over the lease term. The Company utilizes certain practical expedients and policy elections available under Topic 842. Leases with a one-year term or less are not recognized on the balance sheet.
Internal-use Software
The Company capitalizes certain development costs incurred in connection with its internal-use software. These capitalized costs are primarily related to the software platforms that are hosted by the Company and accessed by its customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred as research and development costs. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life of 24 months. The Company recognized amortization expenses of $4.5 million and $3.3 million related to capitalized internal-use software for the three months ended June 30, 2022 and 2021, respectively, and $8.4 million and $6.7 million for the six months ended June 30, 2022 and 2021, respectively, within cost of subscription revenue.
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 prior to deconsolidation in October 2021 for U.S. federal income tax purposes, and the separate return method continues to apply for other jurisdictions where we file returns as part of a SAP Tax Group. The separate return method applies ASC 740 to the standalone financial statements of each member of the consolidated group as if the group members were a separate taxpayer and a standalone enterprise. As a result of deconsolidation for U.S. federal income tax purposes, we have updated our reported tax attributes in certain jurisdictions to reflect the tax attributes available for future use by the Qualtrics tax reporting entity that files returns separate from a SAP Tax Group.
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 for Qualtrics.
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 measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions, and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Recently Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, which creates an exception to the general recognition and measurement principles of ASC 805. The standard will result in companies recognizing contract assets and liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. The standard is effective for public companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company has not early adopted the standard and the impact will be dependent upon the occurrence and magnitude of any future acquisitions.
2.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
| | | | | | | | | | | |
| As of June 30, | | As of December 31, |
| in thousands | 2022 | | 2021 |
| Cash | $ | 145,631 | | | $ | 123,906 | |
| Money market mutual funds | 640,937 | | | 890,605 | |
| Total cash and cash equivalents | $ | 786,568 | | | $ | 1,014,511 | |
3.FAIR VALUE MEASUREMENTS
See Note 1, “Summary of Business and Significant Accounting Policies” for additional details related to fair value measurements.
Cash and cash equivalents
The Company’s cash equivalents with regards to the money market mutual funds are classified within Level 1 of the fair value hierarchy.
Tax sharing liability
Since the SAP Acquisition, we have been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, we deconsolidated from the SAP Tax Group for U.S. federal tax purposes. We expect to remain a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, we will make tax sharing payments to SAP related to certain share based payment awards that existed prior to or were granted at the time of the IPO, the Pre-IPO Awards. Upon deconsolidation from the SAP Tax Group, the initial tax sharing liability was recorded as a distribution payable to SAP in accounts payable and other liabilities and as reduction to additional paid-in capital. Changes in the fair value of the tax sharing liability are recorded through other non-operating income (expense), net. As of June 30, 2022 and December 31, 2021, the Company’s distribution liability for the tax sharing agreement with SAP based on an estimated fair value totaled $65.0 million and $71.5 million, respectively.
The tax sharing agreement liability is estimated based on the estimated future tax benefits associated with the Pre-IPO Awards. The liability is classified within Level 3 of the fair value hierarchy and is based on the discounted estimated future cash flows of the liability. The primary assumptions used in the valuation include the amount of the estimated future tax deductions related to the Pre-IPO Awards, the Company’s estimated future taxable income or loss excluding the Pre-IPO Awards, including the ability and timing of when the Company will be able to utilize the tax deductions from the Pre-IPO Awards using a hypothetical with and without tax calculation, and the estimated discount rate, which is based on current market rates for unsecured liabilities with similar maturities and credit quality. Estimating the tax sharing liability balance requires significant estimates and assumptions which are inherently uncertain and therefore actual results could differ from those estimates. During the three and six months ended June 30, 2022, the Company had no transfers in and out of Level 3 fair value measurements. The changes in the fair value of the tax sharing liability were as follows:
| | | | | |
| in thousands | |
| Balance as of December 31, 2021 | $ | (71,500) | |
| Change in the fair value reported in other non-operating income (expense), net | 6,500 | |
| Balance as of June 30, 2022 | $ | (65,000) | |
4.PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
| | | | | | | | | | | |
| As of June 30, | | As of December 31, |
| in thousands | 2022 | | 2021 |
| Internal-use software | $ | 37,004 | | | $ | 29,047 | |
| Server equipment | 28,022 | | | 28,176 | |
| Leasehold improvements | 88,290 | | | 80,301 | |
| Computer equipment | 26,693 | | | 21,470 | |
| Land | 13,383 | | | 13,383 | |
| Buildings | 61,345 | | | 61,346 | |
| Furniture and fixtures | 3,249 | | | 2,857 | |
| Software | 3,034 | | | 3,252 | |
| Construction in progress | 12,392 | | | 10,717 | |
| Total property and equipment | $ | 273,412 | | | $ | 250,549 | |
| Accumulated depreciation and amortization | (72,315) | | | (58,222) | |
| Property and equipment, net | $ | 201,097 | | | $ | 192,327 | |
The Company recognized depreciation and amortization expense related to its property and equipment as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Cost of revenue | $ | 6,530 | | | $ | 5,105 | | | $ | 12,627 | | | $ | 10,211 | |
| Research and development | 1,735 | | | 793 | | | 3,099 | | | 1,443 | |
| Sales and marketing | 2,166 | | | 1,455 | | | 4,171 | | | 2,666 | |
| General and administrative | 571 | | | 313 | | | 1,043 | | | 554 | |
| Total depreciation and amortization expense | $ | 11,002 | | | $ | 7,666 | | | $ | 20,940 | | | $ | 14,874 | |
5.LEASES
The Company has operating leases for corporate offices under non-cancelable operating leases with various expiration dates. There are no finance leases. The leases have remaining terms of 1 to 14 years. Options to extend for up to 10 years have not been included because they are not reasonably certain to be exercised.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | $ | 7,412 | | | $ | 5,421 | | | $ | 14,913 | | | $ | 11,125 | |
| Variable and short-term lease cost | 1,971 | | | 2,660 | | | 4,420 | | | 5,781 | |
Other information related to leases was as follows:
| | | | | | | | | | | |
| As of June 30, | | As of
December 31, |
| 2022 | | 2021 |
| Weighted average remaining lease term | 11.1 years | | 11.9 years |
| Weighted average discount rate | 2.06 | % | | 2.07 | % |
As of June 30, 2022, the maturities of lease liabilities under non-cancelable operating leases, net of lease incentives, were as follows:
| | | | | |
| As of June 30, |
| in thousands | 2022 |
| Remainder of 2022 | 10,906 | |
| 2023 | 14,872 | |
| 2024 | 28,780 | |
| 2025 | 30,939 | |
| 2026 | 31,587 | |
| Thereafter | 206,160 | |
| Total minimum lease payments | $ | 323,244 | |
| Less: imputed interest | (36,736) | |
| Total | $ | 286,508 | |
6.BUSINESS COMBINATIONS
Clarabridge, Inc.
On October 1, 2021, the Company acquired all outstanding stock of Clarabridge, Inc. (“Clarabridge”), a customer experience management software company headquartered in Reston, Virginia, pursuant to an Agreement and Plan of Reorganization and Merger (“Merger Agreement”). The acquisition was completed to strengthen the Company’s omnichannel conversational analytics and experience management platform.
Pursuant to the terms of the Merger Agreement, all outstanding shares of Clarabridge capital stock were cancelled in exchange for consideration in the form of shares of Class A common stock of the Company and cash, as provided by the Merger Agreement. The number of shares of Class A common stock issued to the sellers was fixed at 24,142,065 shares (“Acquisition Shares”) valued at $43.88 per share (the Company’s stock price on the acquisition date). The acquisition date fair value of the consideration transferred for Clarabridge consisted of the following:
| | | | | |
| in thousands | |
| Cash, net of cash acquired | $ | 81,189 | |
| Fair value of shares issued | 1,059,354 | |
| Fair value of stock options assumed | 127,139 | |
| Total | $ | 1,267,682 | |
The allocation of the purchase price is preliminary related to income tax balances as the Company is in the process of obtaining and analyzing additional supporting tax related information. Below is the allocation of the purchase price:
| | | | | |
| in thousands | Clarabridge
(October 2021) |
| Accounts receivable | 18,538 | |
| Prepaid expenses and other assets | 2,888 | |
| Property and equipment | 6,414 | |
| Customer relationships | 101,160 | |
| Developed technology | 151,530 | |
| Tradenames | 1,240 | |
| Goodwill | 1,065,335 | |
| Total assets acquired | 1,347,105 | |
| Accounts payable | (2,724) | |
| Accrued liabilities | (9,455) | |
| Deferred revenue | (36,421) | |
| Deferred tax liabilities | (26,466) | |
| Other liabilities | (4,357) | |
| Total assets acquired, net | $ | 1,267,682 | |
Estimating the fair value of the acquired intangible assets requires significant estimates and assumptions which are inherently uncertain and therefore actual results could differ from those estimates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their fair values, with the exception of deferred revenue, which was reduced to its fair value as of the acquisition date.
The goodwill arising from the acquisition consists largely of the synergies the Company is expected to achieve from combining the acquired assets and operations with its existing operations. Goodwill related to Clarabridge is not deductible for tax purposes.
Other acquisitions
On July 20, 2021, the Company acquired all of the outstanding stock of Usermind, Inc. (“Usermind”) in exchange for cash, net of cash acquired. The acquisition was completed to strengthen the Company’s experience orchestration and management platform. The assets, liabilities, and operating results of Usermind are reflected in the Company’s consolidated financial statements from the date of acquisition.
On December 3, 2021, the Company acquired all of the outstanding stock of SurveyVitals, Inc. (“SurveyVitals”), in exchange for primarily cash, net of cash acquired. The acquisition was completed to strengthen the Company’s healthcare experience offerings. The assets, liabilities, and operating results of SurveyVitals are reflected in the Company’s consolidated financial statements from the date of acquisition.
The aggregate purchase price of these two acquisitions was $61.9 million, net of cash acquired. The allocation of the purchase price for Usermind is subject to adjustments based upon the finalization of tax related assumptions. The allocation of the purchase price for SurveyVitals is based on preliminary information and is subject to adjustments based upon the completion of the valuation of the intangible assets, working capital adjustments, and
finalization of tax related assumptions. The allocation of the purchase price for the Usermind and SurveyVitals acquisitions is as follows:
| | | | | |
| in thousands | Usermind and SurveyVitals |
| Developed technology | $ | 5,070 | |
| Customer relationships | 8,440 | |
| Licenses and certifications | 6,350 | |
| Tradenames | 100 | |
| Goodwill | 47,504 | |
| Other assets, net | 1,086 | |
| Total assets acquired | 68,550 | |
| Other liabilities, net | (6,607) | |
| Total assets acquired, net | $ | 61,943 | |
Adjustments in purchase price allocations during the six months ended June 30, 2022 related to adjustments to the intangible asset valuation models and decreased intangible assets by $0.8 million with a corresponding increase to goodwill. The goodwill arising from the acquisitions consists largely of the synergies the Company is expected to achieve from combining the acquired assets and operations with its existing operations. Goodwill related to the acquisitions is not deductible for tax purposes.
7.GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Changes in the carrying amount of goodwill were as follows:
| | | | | |
| in thousands | |
| Balance as of December 31, 2021 | $ | 1,118,768 | |
| Adjustments in purchase price allocations | 780 | |
| Balance as of June 30, 2022 | $ | 1,119,548 | |
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill and acquired assets and liabilities assumed during the periods in which the adjustments are determined.
Other intangible assets, net
Other intangible assets, net consisted of the following:
| | | | | | | | | | | |
| As of June 30, | | As of December 31, |
| in thousands | 2022 | | 2021 |
| Patents | $ | 751 | | | $ | 751 | |
| Developed technology | 159,670 | | | 159,665 | |
| Customer relationships | 111,700 | | | 111,965 | |
| Developed content | 400 | | | 400 | |
| Tradename | 1,890 | | | 1,915 | |
| Licenses and certifications | 6,350 | | | 6,845 | |
| License agreements | 1,500 | | | 1,500 | |
| Total intangible assets | $ | 282,261 | | | $ | 283,041 | |
| Accumulated amortization | (45,314) | | | (18,541) | |
| Other intangible assets, net | $ | 236,947 | | | $ | 264,500 | |
The Company recognized amortization expense related to its acquired intangible assets as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Cost of revenue | $ | 7,505 | | | $ | 265 | | | $ | 15,077 | | | $ | 531 | |
| Sales and marketing | 5,531 | | | 51 | | | 11,058 | | | 102 | |
| General and administrative | 320 | | | 47 | | | 638 | | | 94 | |
| Total amortization of acquired intangible assets | 13,356 | | | 363 | | | 26,773 | | | 727 | |
Estimated amortization expense for intangible assets for the next five years consists of the following:
| | | | | |
| As of June 30, |
| in thousands | 2022 |
| Remainder of 2022 | $ | 26,531 | |
| 2023 | 51,002 | |
| 2024 | 50,885 | |
| 2025 | 49,934 | |
| 2026 | 41,366 | |
| Thereafter | 17,229 | |
| Total | $ | 236,947 | |
8.ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| | | | | | | | | | | |
| As of June 30, | | As of December 31, |
| in thousands | 2022 | | 2021 |
| Accrued wages, bonuses and commissions | $ | 56,589 | | | $ | 93,021 | |
| Accrued payroll taxes | 8,608 | | | 7,295 | |
| Other accrued expenses | 44,534 | | | 44,037 | |
| Accrued income taxes | 8,192 | | | 23,049 | |
| Total accrued liabilities | $ | 117,923 | | | $ | 167,402 | |
(1)
9.COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company is a party to a variety of claims, lawsuits, and proceedings which arise in the ordinary course of business, including claims of alleged infringement of intellectual property rights. The Company records a liability when it believes that it is probable that a loss will be incurred, and the amount of loss or range of loss can be reasonably estimated. Given the unpredictable nature of legal proceedings, the Company bases its estimate on the 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.STOCK-BASED COMPENSATION
Stock-based compensation expense, including cash settled, for the three and six months ended June 30, 2022 and 2021 was recorded as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| in thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Cost of subscription revenue | $ | 4,334 | | | $ | 3,382 | | | $ | 8,878 | | | $ | 6,006 | |
| Cost of professional services and other revenue | 8,243 | | | 6,754 | | | 16,309 | | | 11,184 | |
| Research and development | 45,556 | | | 34,381 | | | 86,831 | | | 55,713 | |
| Sales and marketing | 50,865 | | | 35,489 | | | 99,918 | | | 58,266 | |
| General and administrative | 154,057 | | | 204,767 | | | 319,380 | | | 356,603 | |
| Total stock-based compensation expense, including cash settled | 263,055 | | | 284,773 | | | 531,316 | | | 487,772 | |
Cash Awards
During the three months ended June 30, 2022 and 2021, less than 0.1 million Qualtrics Rights and Move SAP RSUs vested and were settled for $1.3 million and $2.0 million in cash, respectively. During the six months ended June 30, 2022 and 2021, less than 0.1 million and 1.7 million Qualtrics Rights and Move SAP RSUs vested and were settled for $4.0 million and $74.0 million in cash, respectively. The unrecognized expense related to Qualtrics
Rights and Move SAP RSUs was $1.3 million and $4.4 million as of June 30, 2022 and December 31, 2021, respectively, and will be recognized over a remaining vesting period of up to two years.
Equity Awards
Qualtrics RSUs
The following table sets forth the outstanding Qualtrics RSUs and related activity for the six months ended June 30, 2022:
| | | | | | | | | | | |
| Number of RSUs (in thousands) | | Weighted-Average Grant Date Fair Value |
Outstanding as of December 31, 2021 | 82,164 | | | $ | 43.11 | |
| Granted | 19,268 | | | 26.54 | |
| Vested | (22,777) | | | 42.63 | |
| Forfeited/Canceled | (2,158) | | | 37.88 | |
Outstanding as of June 30, 2022 | 76,497 | | | $ | 39.23 | |
The total fair value of RSUs that vested during the three months ended June 30, 2022 and 2021 was $154.0 million and $118.9 million, respectively. The total fair value of RSUs that vested during the six months ended June 30, 2022 and 2021 was $683.8 million and $169.1 million, respectively. As of June 30, 2022, there was $2,421 million of unrecognized stock-based compensation expense related to outstanding Qualtrics RSUs, which is expected to be recognized over a weighted-average period of 2.7 years.
Qualtrics Options
On October 1, 2021, in connection with the acquisition of Clarabridge, the Company assumed the outstanding Clarabridge stock option plans and converted all outstanding stock options into Qualtrics options. The following table sets forth the outstanding common stock options and related activity for the six months ended June 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (in thousands) | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Term (years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding as of December 31, 2021 | 1,855 | | | $ | 4.84 | | | 6.3 | | $ | 56,684 | |
| Exercised | (140) | | | 4.33 | | | | | |
| Forfeited/Expired | (23) | | | 6.35 | | | | | |
| Outstanding as of June 30, 2022 | 1,692 | | | $ | 4.86 | | | 5.7 | | $ | 12,939 | |
| Vested and exercisable at June 30, 2022 | 885 | | | $ | 4.50 | | | 5.7 | | $ | 7,094 | |
The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option. The intrinsic value of options as of June 30, 2022 is based on the market closing price of the Company's Class A common stock on that date. The aggregate intrinsic value of options exercised was $0.2 million and $3.2 million for the three and six months ended June 30, 2022, respectively.
As of June 30, 2022, there was $16.2 million of unrecognized stock-based compensation expense related to outstanding stock options which is expected to be recognized over a weighted-average period of 2 years.
Qualtrics Employee Stock Purchase Plan
In December 2020, the Company's board of directors approved the 2021 Qualtrics International Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective in January 2021. Each employee who is a participant in the ESPP may purchase shares by authorizing contributions at a minimum of 1% up to a maximum of 20% of his or her compensation for each pay period. Accumulated contributions are used to purchase shares on the last business day of the purchase period at a price equal to 85% of the fair market value of the shares on the first business day of
the offering period or the last business day of the offering period, whichever is lower, provided that no more than the number of shares of Class A common stock determined by dividing $15,000 by the fair market value of the shares on the first business day of the offering period may be purchased by any one employee during each purchase period. An employee may also purchase no more than $25,000 worth of shares of Class A common stock for each calendar year in which a purchase right is outstanding. The Company recognized compensation expense associated with the ESPP of $5.2 million and $4.7 million during the three months ended June 30, 2022 and 2021, respectively, and $10.3 million and $7.6 million during the six months ended June 30, 2022 and 2021, respectively.
11.NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table sets forth the calculation of basic net loss per share attributable to common stockholders during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| in thousands (except share amount) | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net loss attributable to common shareholders | $ | (279,245) | | | $ | (263,487) | | | $ | (571,570) | | | $ | (463,341) | |
| Denominator: | | | | | | | |
| Weighted-average shares outstanding for basic loss per share | 582,320,377 | | | 513,507,669 | | | 579,028,759 | | | 497,970,385 | |
| Basic loss per share | $ | (0.48) | | | $ | (0.51) | | | $ | (0.99) | | | $ | (0.93) | |
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented:
| | | | | | | | | | | |
| As of June 30, 2022 | | As of December 31, 2021 |
| Qualtrics restricted stock units | 76,497,224 | | | 82,163,894 | |
| Qualtrics options | 1,692,113 | | | 1,854,965 | |
| Qualtrics employee stock purchase program | 1,314,818 | | | 687,000 | |
12.INCOME TAXES
The Company has an effective tax rate of (2.9)% and 4.1% for the three months ended June 30, 2022 and 2021, respectively, and (1.8)% and 2.1% for the six months ended June 30, 2022 and 2021, respectively. The Company has incurred U.S. operating losses and has minimal profits in its foreign jurisdictions. Our effective tax rate is affected by tax rates in both U.S. and foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.
In prior years, the Company had calculated the income taxes in its consolidated financial statements on a separate return basis. However, the Company was in actuality included in the consolidated, combined or unitary U.S. federal and state income tax returns with SAP America, Inc. and its affiliates. As a result of the federal tax deconsolidation from SAP in the fourth quarter of 2021, net operating losses and credits were updated to reflect actual attributes available for use by the Company. The Company is now required to file separate U.S. federal tax returns for each of its U.S. taxable entities. The Company is subject to a tax sharing agreement with SAP that requires the Company to reimburse SAP, or be reimbursed by SAP, for the Company's taxable income, or loss in the
case of reimbursement, that is included on consolidated tax returns with SAP, such as certain combined or unitary state returns, subject to adjustments for hypothetical tax attributes and certain simplifying conventions.
The Company has evaluated all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and has determined that it is more likely than not that the net deferred tax assets for some of the Company’s U.S. entities will not be realized. Due to uncertainties surrounding the realization of the deferred tax assets in these entities, the Company maintains a full valuation allowance against its net U.S. deferred tax assets.
13.RELATED PARTY TRANSACTIONS
Since the SAP acquisition in 2019, SAP and its affiliates are related parties to the Company. The Company has entered into certain arrangements for services and products with SAP and its affiliates.
The consolidated statements of operations and comprehensive loss include all revenue and costs directly attributable and/or allocable to the Company, including costs for facilities, functions, and services used by Qualtrics. The condensed consolidated statement of operations also includes expenses of SAP directly charged to Qualtrics for certain functions provided by SAP, including, but not limited to, sales organization costs, insurance, employee benefits, human resources and usage of data centers. The Company directly charges SAP for certain functions provided to SAP, including sales support. These charges were determined based on actual expenses incurred on Qualtrics’ or SAP’s behalf or by usage.
During the three months ended June 30, 2022 and 2021, the Company recognized revenue of $11.0 million and $5.6 million, respectively, from SAP and its affiliates in exchange for services and products. During the six months ended June 30, 2022 and 2021, the Company recognized revenue of $21.0 million and $10.8 million, respectively, from SAP and its affiliates in exchange for services and products. Total costs charged from SAP and its affiliates to the Company were $9.9 million and $15.3 million during the three months ended June 30, 2022 and 2021, respectively, and $21.9 million and $27.2 million during the six months ended June 30, 2022 and 2021, respectively. Total costs charged from the Company to SAP and its affiliates were $3.3 million and $5.0 million during the three months ended June 30, 2022 and 2021, respectively, and $8.1 million and $9.1 million during the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the outstanding receivable and payable balance with SAP and its affiliates was $16.8 million and $8.6 million, respectively. As of December 31, 2021, the outstanding receivable and payable balance with SAP and its affiliates was $42.0 million and $13.3 million, respectively.
Because of the SAP Acquisition, we had been included in SAP America’s consolidated group for U.S. federal income tax purposes. In October 2021, we deconsolidated from the SAP Tax Group for U.S. federal income tax purposes. We expect to remain a member of the SAP Tax Group for certain state filings. Pursuant to the tax sharing agreement with SAP, for taxable periods beginning after December 31, 2020, we will make certain tax sharing payments to SAP. As of June 30, 2022, the Company’s distribution liability for the tax sharing agreement with SAP totaled $82.0 million, consisting of $17.0 million based on our separate tax liability included on SAP Tax Group returns and $65.0 million based on an estimated fair value of the liability related to Pre-IPO Awards. As of December 31, 2021, the Company’s distribution liability for the tax sharing agreement with SAP totaled $88.5 million, consisting of $17.0 million based on our separate tax liability included on SAP Tax Group returns and $71.5 million based on an estimated fair value of the liability related to Pre-IPO Awards.
In January 2021, and in connection with the initial public offering, the Company declared a $2,392 million dividend in the form of two promissory notes payable from Qualtrics to SAP AMERICA, INC. Promissory Note 1 was issued with a principal amount of $1,892 million and paid in full on February 1, 2021. Promissory Note 2 was issued with a principal amount of $500 million and interest rate of 1.35% compounded semi annually. The outstanding principal of $500 million and accrued interest related to Promissory Note 2 was paid in full on November 9, 2021.
Certain Board members of the Company and certain Supervisory Board and Executive Board members of SAP SE currently hold, or held within the last year, positions of significant responsibility with other entities. We have relationships with certain of these entities in the ordinary course of business. During the three and six months ended June 30, 2022, and 2021, revenue and charges from these related parties were immaterial.
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. 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, under which we were billed $1.1 million and $1.9 million during the three months ended June 30, 2022 and 2021, respectively, and $2.3 million and $3.8 million during the six months ended June 30, 2022 and 2021, respectively.