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Summary of Business and Significant Accounting Policies
 3 Months Ended
Mar. 31, 2023
Accounting Policies [Abstract]  
Summary of Business and Significant Accounting Policies SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Qualtrics International Inc. (“Qualtrics” or “the Company”) was incorporated in the state of Delaware in September 2014. Qualtrics pioneered a new category of software, experience management, or XM, that enables organizations to find and fix broken experiences and drive operational improvements to improve customer loyalty, increase employee retention, and become a brand that people love.
The Company’s technology helps organizations find and keep customers, retain and engage employees, and improve their competitive position in their product categories and talent markets. The XM Platform helps organizations listen to their employees and customers, understand their feedback, and then take action in response. The Company sells subscriptions to its XM Platform and provides professional services primarily consisting of research services, implementation services and engineering services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated balance sheet as of March 31, 2023, and the condensed consolidated statements of comprehensive loss, stockholders' equity, and cash flows for the three months ended March 31, 2023 and 2022 are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to fairly state the Company's financial position as of March 31, 2023 and its results of operations and cash flows for the three months ended March 31, 2023 and 2022. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other future year or interim period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2022, included in the Company's Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the standalone selling prices for the Company’s services, valuation of the distribution liability related to the tax sharing agreement with SAP, and valuation of deferred income tax assets. Actual results could differ from those estimates.
Revenue
The Company derives revenue from two service/product lines:
Subscription Revenue
The Company generates revenue primarily from sales of subscriptions to access its XM Platform, together with related support services to its customers. Arrangements with customers do not provide the customer with the right to take possession of the software operating the XM Platform at any time. Instead, customers are granted continuous access to the XM Platform over the contractual period.
The Company’s subscription contracts generally have annual contractual terms while some have multi-year contractual terms. The Company generally bills annually in advance with net 30 payment terms. The Company’s agreements generally cannot be canceled for a refund.
Professional Services and Other Revenue
Professional services and other revenue mainly includes two types of services: research services and professional services. Research services is a solution provided to existing subscription customers with arrangements which are distinct from subscription revenue services. In addition, the Company provides professional services associated with new and expanding customers requesting implementation, integration services, and other ancillary services. These services are distinct from subscription revenue services.
Contract Balances
The Company bills in advance for annual contracts, and at times enters into non-cancelable multi-year deals. Non-cancelable multi-year deals typically include price escalations each year. The Company recognizes revenue on a straight-line basis over the non-cancelable term and accounts for the difference between straight-line revenue and invoiced amounts as a contract asset. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of March 31, 2023 were $22.1 million and $21.7 million, respectively. The current and noncurrent portion of contract assets included in prepaid expenses and other current assets and other assets as of December 31, 2022 were $22.3 million and $19.9 million, respectively.
The Company records contract liabilities to deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the customer prior to the related performance obligation being fulfilled. In certain circumstances, the Company receives consideration from customers in advance of a specific service being identified. Total consideration received in advance of a specific service being identified totaled $30.0 million and $31.3 million as of March 31, 2023 and December 31, 2022, respectively and is included in deferred revenue. The following table shows the amount of revenue included in prior period deferred revenue and revenue generated from same period billings for each of the Company’s revenue generating solutions:
Three Months Ended March 31,
in thousands20232022
Subscription revenue:
Revenue included in prior period deferred revenue$270,659 $228,216 
Revenue generated from same period billings69,144 52,592 
Total subscription revenue$339,803 $280,808 
Professional services and other revenue:
Revenue included in prior period deferred revenue$43,069 $23,790 
Revenue generated from same period billings26,898 31,049 
Total professional services and other revenue$69,967 $54,839 
Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Amounts of a customer contract’s transaction price that are allocated to the remaining performance obligations represent contracted revenue that has not yet been recognized. They include amounts recognized as contract liabilities and amounts that are contracted but not yet due. The expected future revenue related to unsatisfied performance obligations as of March 31, 2023 was $2,135.1 million, of which approximately $1,206.0 million is expected to be recognized as revenue over the next twelve months. The amount of transaction price allocated to the remaining performance obligations and changes in this amount over time are impacted by, among others, currency fluctuations and the contract period of the Company’s cloud contracts remaining at the balance sheet date and thus, by the timing of contract renewals.
Disaggregation of Revenue
The following table summarizes revenue by region based on the address of customers who have contracted to use the Company’s cloud platform:
Three Months Ended March 31,
in thousands20232022
United States$286,367 $236,642 
International123,403 99,005 
Total revenue$409,770 $335,647 
No single country outside the United States accounted for 10% or more of revenue during the three months ended March 31, 2023 and 2022.
Stock-Based Compensation, including cash settled
Equity Awards
The Company records stock-based compensation based on the grant date fair value of the awards. The Company recognizes the fair value of restricted stock awards that do not contain a performance condition as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, the Company recognizes expense using the accelerated attribution method based on the probability that the performance conditions will be met.
The Company estimates the grant date fair value of RSUs based on the closing stock price of the Company’s publicly traded Class A common stock on the grant date. The Company estimates the grant date fair value of purchase rights issued under the Qualtrics Employee Stock Purchase Plan, or ESPP, based on the Black-Scholes option-pricing model using the estimated number of awards as of the beginning of the offering periods.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances. Accounts receivable are typically due within 30 days from the date of invoice. Customer balances outstanding longer than the contractual payment terms are considered past due.
The Company establishes allowances for bad debt and cancellations based on historical collection data, customer specific circumstances and expected losses. The allowance for bad debt, as needed, is established with a charge to bad debt expense in the consolidated statements of comprehensive loss. The Company’s allowance for bad debt was $8.3 million and $8.6 million as of March 31, 2023 and December 31, 2022, respectively. Bad debt expense was $3.4 million during the three months ended March 31, 2023 and not material during the three months ended March 31, 2022. The Company’s allowance for cancellations was $25.1 million and $28.8 million as of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023, $(3.4) million of net additions (reductions) were charged to revenue and $(0.3) million of net additions (reductions) were charged to deferred revenue. During the three months ended March 31, 2022, $(0.4) million of net additions (reductions) were charged to revenue and $(3.0) million of net additions (reductions) were charged to deferred revenue. The allowance for cancellations is established with a reduction to revenue and deferred revenue. In the event of lack of payment due to a bankruptcy or other credit-related issues of a customer, the Company writes off the related accounts receivable with a reduction to the allowance for bad debt. In the event of lack of payment from a customer for issues unrelated to credit risk, the Company cancels the customer’s subscription access or service and writes off the corresponding accounts receivable with reductions to the allowance for cancellations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, and accounts receivable. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. No customer accounted for more than 10% of accounts receivable at March 31, 2023 and December 31, 2022. No single customer accounted for 10% or more of total revenue during the three months ended March 31, 2023 and 2022.
Deferred Contract Acquisition Costs, net
Deferred contract acquisition costs, net is stated at gross deferred contract acquisition costs less accumulated amortization. Sales commissions and related payroll taxes for initial software-as-a-service (SaaS) subscription contracts earned by the Company’s sales force are considered to be incremental and recoverable costs of obtaining a contract with a customer. As a result, these amounts have been capitalized as deferred contract acquisition costs on the consolidated balance sheets. The Company capitalized additional deferred incremental costs of obtaining a contract of $34.7 million and $26.8 million during the three months ended March 31, 2023 and 2022, respectively.
Amortization of deferred contract acquisition costs were $22.4 million and $15.8 million for the three months ended March 31, 2023 and 2022, respectively. Amortization of deferred contract acquisition costs are included in sales and marketing expense in the accompanying consolidated statements of comprehensive loss. There was no impairment loss in relation to the deferred costs for any period presented.
Internal-use Software
The Company capitalizes certain development costs incurred in connection with its internal-use software. These capitalized costs are primarily related to the software platforms that are hosted by the Company and accessed by its customers on a subscription basis. The Company recognized amortization expenses of $7.4 million and $3.9 million related to capitalized internal-use software for the three months ended March 31, 2023 and 2022, respectively, within cost of subscription revenue. The Company capitalized $17.0 million and $6.8 million of expenses to internal-use software during the three months ended March 31, 2023 and 2022, respectively.
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, which creates an exception to the general recognition and measurement principles of ASC 805. The standard will result in companies recognizing contract assets and liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. The standard is effective for public companies for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company adopted the standard as of January 1, 2023. The impact will be dependent upon the occurrence and magnitude of any future acquisitions.