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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the Qualtrics second quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and if you would like to ask a question during the session, you will need to press star 1 on your telephone keypad. If anyone should require assistance during the conference, please press star 0. I would now like to hand the conference over to your host, Mr. Stephen Wu. head of FP&A and investor relations. Please go ahead.
spk10: Thank you. Welcome to Qualtrics' second quarter fiscal year 2021 earnings conference call. On the call, we have Zig Serafin, CEO, Chris Beckstead, President, and Rob Bachman, CFO. Following prepared remarks, we will open the lineup to answer questions. Our results, press releases, and the replay of today's call can be found on the Qualtrics Investor Relations website. During today's call, we will make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with SEC. Include our annual report on Form 10-K for the fiscal year ended December 31st, 2020, and our quarterly report on Form 10-Q for the quarter ended June 30, 2021. That will be filed with SEC. With that, thank you.
spk09: Well, thank you, Stephen, and thank you, everyone, here for joining us for today. Q2 was an outstanding quarter, and it extends our momentum into this fiscal year. Revenue in the quarter rose to $249.3 million, which is up 38% year over year. And subscription revenue rose $204.5 million, which is up 48% year over year. And we ended the quarter with more than $754.8 million in current remaining performance obligations, which is up 61% year over year. And as you can see from our guidance, We're now on track to surpass $1 billion in revenue in 2021, which is an incredible milestone. Building on our strong growth in the first quarter, Q2 demonstrates accelerating demand for experience management, which is the category that we've created. The experiences that companies deliver have never been more critical to their success, and increasingly, experience management is a C-level and a board-level conversation. When it's easier than ever for employees to be able to change jobs or for people to be able to switch products or brands, they know that the experiences that they deliver are absolutely vital to their ability to compete and win. And that's why experience management is becoming as critical as CRM or HR systems. And many of the world's largest and most respected companies are investing in XM and they're transforming with Qualtrics. In fact, this quarter... the number of customers spending more than $100,000 annually with Qualtrics increased by 38% year-over-year. In Q2, we formed new relationships with industry leaders that include American Honda owners, they include Urban, Urban Outfitters, Circle K stores, DXC, Mitsubishi Heavy Industries, and the Financial Times. One of our great relationships from the quarter is M&T Bank. It's a Fortune 500 bank with deep community roots in the U.S. M&T will use our technology to simplify and enhance critical touchpoints like the branch, the contact center, and especially digital channels for personal and business services. Nine out of ten deposits are completed digitally, and nearly half of total sales are now happening over digital channels. And M&T Bank is designing and improving experiences at each digital touchpoint. They chose Qualtrics to more deeply understand their customers so that they can personalize everyday journeys with the bank and as well as offer products that are tailored to the individual needs at any moment in time. Another great example of an experience transformation is DXC. They're a Fortune 500 technology services company. They're one of the largest employers in the world, and they deliver technology as a platform for thousands of enterprises every day. They're also on a transformation journey with a laser focus on taking care of their customers and their colleagues who deliver for them every day. DXC chose to standardize on Qualtrics in Q2 as their experience management platform, both internally for their 130,000-plus employees and externally for their enterprise customers, all so that they can enhance and simplify their experiences. So our platform is going to be a critical part of DXC's modern workplace solution to help provide better collaboration, productivity, and engagement. In Q2, our growth numbers are actually accelerating as more companies like M&T Bank and DXC invest in experience management. Only Qualtrics can provide these companies a single, secure, cloud-native platform and then enable them to be able to bring together all of their experience data. We help them tap into how their customers and their employees think and feel about their company, how they feel about their products and their brands, and then we enable them to be able to take action across the business. At the beginning of Q2, we launched the XM operating system, which is based on three powerful services, the XM Directory, IQ, and XFlow. And together, these power all of our apps and products, and they're all backed by enterprise-grade securities. These interconnected services are analyzing experience data to deliver critical insights that our customers can take action on in the moment using a powerful workflow engine. Our platform is operating at massive scale. Our customers executed 450 million automated actions on our XM operating system in just the four months of this year, the first four months of this year. Things like, for example, alerting teams of a critical issue or updating essential records or sending loyalty rewards. That growth represents 640% year-over-year increase, and our customers are on track to complete a record 1.5 billion actions in 2021. With the highest R&D investment of any experience management company, we're delivering innovation that helps our customers stay ahead of their own customer and employee needs and then drive loyalty and retention, and then improve their bottom lines. In our customer XM product line, we launched new solutions for companies to be able to increase conversion rates across their digital channels, such as e-commerce experience optimization to help customers grow online revenue by closing more transactions, and then digital journey optimization to help companies personalize the interactions across the customer journey. The rapidly changing workplace is leading to the greatest employment shift in our lifetime, the great resignation. And more than 50% of workers say that they're looking to change jobs in the coming year. Every single leader I speak to is focused on retaining their highest performers, engaging their workforce, and then becoming employers of choice in this market. Critical to this is understanding that employees need and want and then taking the right actions to attract talent, drive engagement, and then improve retention. In the employee XM product line, our new candidate experience solution improves how customers recruit and how they hire by letting them act on feedback directly from job candidates. And then our spotlight insights give HR teams and leaders automated and actionable insights based on real-time feedback from employees. Just this last week, we launched experience design for hybrid work and workspaces. This new product helps organizations use employee feedback to create new work experiences and office environments that enhance productivity, innovation, and growth in the new world of work. The companies that are building their employee experience engines today to meet the changing needs of the future of work are the companies that will thrive in tomorrow's world of work. When we went public, we said we'd be selective about combining our organic innovation with smart acquisitions. Today, we announced that we've acquired UserMind, a next-generation journey orchestration platform. UserMind is transforming the way companies can use contextual data to proactively shape customer journeys in real time that increases customer retention, engagement, and lifetime value. UserMind further strengthens and accelerates our XM directory by bringing in contextual data from any channel to create richer customer and employee profiles that enable organizations to deliver personalized experiences at every touchpoint in their journey. We also talked about our ability to expand our ecosystem of partners to extend the benefits of our platform. So as you know, at the beginning of Q2, we formed a new strategic partnership with ServiceNow combining the power of ServiceNow digital workflows with our experience management technology on a single platform. And new companies will be able to bring sentiment data from Qualtrics into ServiceNow customer and IT workflows to quickly act on customer insights, increasing employee productivity and enhancing customer loyalty. We also formed a new partnership with Genesys, a leader that's in the cloud contact center software. And we did that to be able to bring together their engagement data with Qualtrics experience data. On the employee experience side of the business, the world's leading HR association, the Society for Human Resource Management, SHRM, is standardizing on the Qualtrics XM platform for their employees as well as more than 300,000 members around the world. So, look, we couldn't have achieved these outstanding results without our incredible Qualtrics team. They're all in on making our customers successful. And we're scaling our company to be able to meet the opportunity that's ahead of us. In Q2 alone, we added more than 400 employees, which is our second largest hiring quarter ever. And as we grow our team, we're focused on growing the right way with diversity that reflects the world around us and inclusion that far exceeds it. Just last week, we shared our first public diversity equity and inclusion report as part of our commitment to take action and then constantly improve. In that report, we reconfirmed that we are paying men and women equally at Qualtrics, and we're only at the beginning of our DEI journey. We still have a lot of work to do when it comes to diversity, but we're committed to taking action. I'm proud that we are using a DEI solution It's built on our XM platform to measure and then improve the inclusion and belonging experience among our employees. In closing, I'd like to thank our team as well as all of our customers who are putting their trust in us every day. These results are a testament to their success. And with that, I'll turn it over to Rob to talk about the numbers. Rob.
spk03: Thanks, Zig, and thank you, everyone, for joining us today. We are very excited to report another great quarter with outstanding and accelerating financial results. Continued customer demand for our experience management suite led to notable top-line growth at scale. We also demonstrated significant leverage in our business model with robust non-gap operating margin and record-free cash flow in the second quarter. Subscription revenue in the second quarter was $204.5 million, up 48% year over year. driven by both strong new business sales and expansions, favorable in-quarter linearity, and strong customer renewals. Professional services and other revenue was $44.8 million for the second quarter, representing 5% growth year over year. Total revenue was $249.3 million in the second quarter, up 38% year over year. Our remaining performance obligations, representing all future revenue under contract, ended the quarter at $1.296 billion, up 76% year-over-year. This metric includes both new and renewal software contracts along with our professional services business. Current remaining performance obligations, which is all future revenue under contract that is expected to be recognized as revenue in the next 12 months, was $754.8 million, up 61% year-over-year. Current and total RPO continued to benefit from a lengthening of average contract duration for both new customers and renewals. In Q2, strong expansion across our customer base drove our dollar-based net retention rate to 122%. Customers spending more than $100,000 in annual recurring revenue grew 38% year-over-year to 1,564 customers. Turning to margins. our non-GAAP gross margin was 78.2% in Q2, approximately 215 basis points higher than 76% in the year-ago period. This increase is mainly due to a continued increase in subscription revenue as a percentage of our total revenue. Subscription has increased from 76% of our total revenue in Q2 of 2020 to 82% in Q2 of 2021. as we focus on driving software usage on our platform and continue to grow our partner ecosystem to provide expanded experience management services to our customers. Our non-GAAP operating profit for the second quarter was $11.5 million, resulting in a non-GAAP operating margin of 4.6% compared to negative 1.9% in Q2 of 2020. This expansion was driven by our strong top-line outperformance, by stronger gross margins due to higher subscription mix shift, and by a continuation of reduced spend in travel and events. Operating cash flow for Q2 was $58.8 million compared to negative $90.5 million in the year-ago period. Free cash flow in the quarter was $53.7 million compared to negative $107.2 million in Q2 of 2020 due to operating margin expansion and significantly lower cash payout relating to SAP equity-based awards. $2 million of cash outflows in Q2 was related to the cash settlement of stock-based payment liabilities, compared to $88.8 million in the year-ago period. We saw a significant decline in cash settlement of stock-based payments, as most of our employee base elected to exchange their cash-settled SAP equity-based awards to stock-settled Qualtrics awards at the time of our IPO. As a reminder, free cash flow may fluctuate on a quarterly basis due to the timing of cash collections, and we believe it's best to assess our cash flow performance over a longer-term horizon. We ended the quarter in a strong cash position with approximately $635.1 million in cash and cash equivalents. Moving on to our Q3 and fiscal year 2021 business outlooks, For the third quarter of fiscal year 2021, we anticipate total revenue to be in the range of $257 million to $259 million, representing 34% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $209 million to $211 million, representing 42% growth year-over-year at the midpoint. We expect non-GAAP operating margin in the range of 0% to 1%, and non-GAAP net loss per share of 3 cents to 1 cents, assuming 515 million weighted shares outstanding. For the fiscal year 2021, we expect total revenue in the range of $1.007 billion to $1.011 billion, and subscription revenue in the range of $813 million to $817 million. At the midpoint of the ranges, this represents a subscription revenue growth of 42% year-over-year and total revenue growth of 32% year-over-year, respectively. We expect non-GAAP operating margin in the range of 0 to 1%. We expect a non-GAAP net loss per share of between 2 cents and 0 cents, assuming 510 million weighted shares outstanding. In closing, our runway for growth within our large market opportunity remains very exciting. We will continue to scale our business through strategic investments, extend our leadership in this market, and drive towards long-term profitable and durable growth. Thank you for joining today's call. And with that, Zig, Chris, and I are happy to take your questions, and we'll turn it back to the operators.
spk01: Thank you, sir. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Mark Murphy with JP Morgan. Your line is open.
spk04: Thank you very much, and congratulations on a fantastic quarter. Zig, I wanted to ask you, what do you see your most advanced forward-thinking customers doing with the Qualtrics platform that's maybe driving more of a complete experience transformation and might kind of light the pathway for some of the earlier stage customers. And I'm wondering if it's more of the operationalizing with Xflow or maybe getting into design XM or product XM side or perhaps something else that you're seeing.
spk09: Yeah, great question. So first off, If you look at some of the customers that are, I would say, forward-thinking, they realize how important experience is to the very essence of the way that they connect with their customers as well as their employees. It's the combination. And then, of course, as they do that, then how they express what they do about it through not only how they operate from the customer experience perspective, the channels that they use to engage, but also the way they end up innovating around product and the way that that shows up in their brand. And so, you know, there is a trend that we continue to see where people are consolidating and standardizing on Qualtrics XM as a platform in order to drive the four core experiences of their business. And as they do so, they end up taking advantage of products, functionality, solutions for many different departments across the companies. And the beautiful thing about the way we've designed our system is it allows them to be able to use the data that they learn about customers to then operationalize how they make decisions in product, how they make decisions in their brand, how to inform the way that they engage with their employees, how to make sure that they've got the right employees within the company, how to attract and recruit employees. It's all a connected system. And we're uniquely differentiated in the ability to do that because we're not piece-mealing different components. We've got a native system. We've got a native architecture that is designed to be able to bring that into a connected decision-making and actioning system. Now, that leads to the second part of your point, which is actioning. What's very unique about our platform is we've designed workflow right into the epicenter of our operating system. So you have the ability to make time-sensitive decisions and actions that sometimes are fully automated inside of a company and they end up integrating with applications, tools that are already running inside of a company. This isn't about going and learning a whole new tool. This is about plugging in to what's already running with your help desk, what's already running with your HR or front of line workforce kiosk, for example. And then you end up seeing the results of that on a daily, sometimes hourly, sometimes weekly level depending upon where someone is inside of an organization. There's also semi-automation, which is you're better enabling the employee to do something that would have taken a long time to go do. So that's what we're seeing people do, is it's the combination of the four core experiences, shared data, and a workflow engine that helps companies to develop a culture of action. And that was never possible before with individual systems of record that people might be using. And as a result, we're very uniquely positioned in why people are starting to standardize around our system.
spk04: Thank you. That's very helpful. If I may sneak in a quick one for Rob or Chris, I'm looking at the strength of Q2 where you have acceleration of subscription revenue and also the current RPO or backlog. And I don't know if you can ever discern, you know, what's company specific versus category specific or macro driven, but Would you say that the demand environment and budget environment is getting back to pre-COVID levels or even pushing beyond that, or is that yet to come in the back half? Hey, Mark.
spk03: Chris here. I'll take that one. When you look at the quarter's performance in terms of subscription growth, I think you're seeing a couple things. One, really pleased with the broad-based demand environment that we're seeing from our customers. both from an international perspective. We saw a really strong performance from our U.S. corporate business and saw a continuation from – you know, the enterprise held up more during the deep parts of the pandemic, and it was great to see customers that are smaller step up and invest more than we'd seen in previous quarters. So that was another positive trend that we saw. And then finally – So experience is mattering more than ever. Zig highlighted the employee experience and the current environment we're in from an employee perspective. That's a product that we've seen accelerate, even though we've seen the good demand across all of our products. That's one that really stood out in the quarter as it's becoming more important than ever in this competitive environment for companies to pay attention to attracting, retaining, and motivating their employees. And then finally, in that overall growth, you are seeing the impact from a more normal year this year. And last year, seasonality-wise, was backwards cues, as we covered in the past, where the first half of the year was lower from a CRPO and a calculated billings perspective as we had some of the billings pushed to the second half of the year. So you're also seeing some impact in the first half results on those metrics on an enhanced basis because this year was more normal and last year was more back-end loaded than we'd expect this year.
spk04: Okay, excellent.
spk03: Thank you very much for taking my questions.
spk01: We have your next question from Brent Bracelin with Piper Sandler. Your line is open.
spk07: Thank you and good afternoon. I guess this is for Rob or Zig. The subscription growth outlook for the full year was raised, I think, 42%. I think entering the year, it was actually looking at less than just a little bit under 30%. Could you just rank order as you think about what surprised you the most in the first two quarters of the year? that's driving the optimism. I think you mentioned international a little bit, but any color there from a rank perspective would be super helpful just given the acceleration you're seeing.
spk03: Thanks, Brent. I'll jump in and take that. This is Rob. I wouldn't necessarily rank these. We really did get strength across a handful of categories. There is strength in the new business, and there's strength in the customer renewal base. And you see that in the net retention rate uptick to 122% this quarter. And as Chris talked about, there's strength internationally. There's strength in our EX and other CX products. So all up, what we're seeing is continued momentum and growth in the business. And coming back to what Zig said, as experiences matter more so than ever, and customers are standardizing and consolidating on the Qualtrics platform.
spk07: Great. Well, it's certainly encouraging to see. And then maybe as a follow-up for Zig, obviously we're all looking at a return back to work. You flagged employee experience as one of the areas that kind of really stood out. What's the adoption rate of existing customers that have embraced, fully embraced experience, the employee experience, you know, product? Is it broadly adopted? Is there a lot of cross-sell opportunity? Any sort of insights you could share around just the the pipeline, the interest, the value add of employee experience would be super helpful. Thanks.
spk09: Well, look, this is obviously one of several major areas of our business that continues to differentiate what we provide. We've got a purpose-built system that is around understanding how to authentically engage with employees. It's a system that's connected to the life cycle of what happens in and around the way that you recruit Can you candidate into a company to the way that you end up driving further engagement? And some of the most important decisions that are made along the life cycle of an employee, which is a multi-factor decision-making sort of spectrum of things that people have to deal with, from how leaders are engaging to what best-in-class looks like and the data that you use to be able to do that and the decision-making that comes along with it. And then, of course, actioning around that. And we're seeing all around the world, people are throwing out the old playbook around what the future of the work experience looks like. And that means that people are in the midst of redesigning the physical work experience. They're in the midst of being more intentional about what the digital experience needs to look like. IT leaders are getting involved in that. They're partnering up with HR leaders. You've got conversations happening right now more than ever around the intersection between highly engaged employees and the impact that that actually has on the customer experience. So it's no longer, you know, less the case where people look at things in silos and you can see the relationship between that. So, you know, we're being brought in to help on the experience design side, but it's also, you know, sort of this indispensable part of the way that people think about the employee system altogether. And it's highly complementary to the HIRS platforms with which, you know, many companies, you know, a large enterprise is still running a variety of different types of HIRS systems we can plug in with combinations. And then, of course, in the mid-market, they may standardize on one, but they need the employee experience part in order to make some of the most critical decisions. So those are the macro things that we're seeing in the employee experience area, and we're extremely well positioned there given the innovations that we've had there over the last four to five years. Very intentional. You know, we saw the future of where this was going to go as part of overall experience management. And the beautiful thing about it is building on the platform, the underlying XM platform that we've got at least a 10-year advantage on at this point. So, Chris, do you want to add to that?
spk03: Yeah, the only other thing I'd say is, as reflected in some of the metrics we share, for example, the net retention rate, the number of customers spending over $100,000 – We see the trend of customers that more fully adopt the platform are our larger spenders, and we're seeing good momentum and growth of customers buying more and more products. But it's still a lot of runway ahead in terms of the opportunity we have for customers to adopt additional products and additional use cases within the platform, giving us a great opportunity to continue to expand our existing customers and feel like we're still early days.
spk07: Appreciate the call. Thank you.
spk01: We have your next question from Kate Weiss with Morgan Stanley. Your line is open.
spk08: Excellent. Thank you guys for taking the question and outstanding quarter. Really nice to see the acceleration across a lot of these metrics. I want to dive into the user mind acquisition a little bit. It seems super interesting. Can you, one, tell us a little bit about kind of where does this fit into the portfolio? It seems like a CDP, and I kind of think about your guys as having a CDP at a certain extent. So what looks like the net new functionality you're getting, number one? Number two, it looks like these guys are very marketing focused and about sort of those marketing journeys. So does this get you into more direct competition with the likes of like an Adobe Experience Cloud or the marketing suite from Salesforce? And number three, can you give us any details on the size and scale of the company? It seems like they've been around for a while, from like 2013. So anything about purchase price or the revenue run rates or expected impacts on financials on a go-forward basis would be great. Thanks so much.
spk09: Okay. Great series of questions. Let me just kind of tease out the big themes here. Number one, just I want to reiterate something. that we've said from the very beginning about our approach to M&A. You're going to see us be very disciplined, thoughtful, and opportunistic on where we see moves that will further our lead in the market. When we do it, you're going to see it be something that is accretive to our addressable market or growth that further accelerates and builds on the strengths that we have. That's a really important principle here. When you take a look at our experience management OS, the work that we have been leading on with experience management directory, enabling customers to better understand their own customers far more authentically, far more in a way where they can understand perceptions, emotions, and where things are going. What UserMind does is It just simply accelerates some of the work that we've been doing there around journeys, around orchestration, but in a way that natively connects with a lot of the way that we've designed our platform. They're a very unique company. They've built a technology architecture that is extremely different from anything that we've seen in the market, and we found it to be highly complimentary. They're based in Seattle. We have a significant R&D workforce in Seattle, so it plugs right in and we found this to be almost like picking up another development and engineering team that's been working inside of Qualtrics that beautifully connects in with the way that we've designed our system. So what you should expect is that our ability to further the leadership and the advantage that we have with the momentum around the experience management directory, the way that customers use that, in order to be able to create Think of it as a master record or an experience that nicely complements what people are doing with CDPs in order to address some of the most critical decisions that take place in companies. What's going to drive increase in customer retention? How do you think about that in the context of different stages in which a customer might be in their journey with that particular entity? How do you enable actioning? in a timely manner. The way that they architected the system allows us to be able to nicely dovetail that in with our workflow engine. So they're small, innovative companies, approximately 30 employees. Think of it as mostly R&D and engineering that effectively will allow us to plug right in and accelerate our leadership and our advantage in this space.
spk08: Got it. And in terms of a competitive environment, does this it gets you more competitive with the core marketing suites?
spk09: We don't look at the market. We've never built this company in a way where we're trying to shape ourselves into any one way in how the market is defined. I mean, as you very well know, we started and we defined the experience management category, and we haven't been trying to read off of any books of what people define as certain market spaces. Everything we do is customer-led. And what we're hearing from customers is a lot to build on the unique architecture of our system. And this is where they see it going, and it will actually end up affecting some of the most important decisions that they make for their own customers as well as their employees. And that, in many respects, will inform marketing decisions. It will inform customer-facing operating decisions. It will inform product decisions and so forth. So that's how we look at it.
spk08: Got it. All right. Thank you, guys. Thank you.
spk01: We have your next question from Keith Backman with Bank of Montreal. Your line is open.
spk05: Hi. Thank you very much. I wanted to start my first question and ask a little bit about the net retention rate. It was a good uptrend this quarter. A year ago, you were doing 124s, 125s. What are the puts and takes that we should be thinking about the net retention rate over the next couple quarters. And to ask it a little bit differently, if you thought about some of the quartiles, if you will, of the net retention rate, that is to say some of your more aggressive adopters of your technology, what would the net retention rate look like for some of those customers?
spk03: I'll take the first part. And, hey, Keith, this is Rob. I'll take this. And then if Chris wants to add on, I'll turn it over to him. What you're seeing is along the lines of what we indicated in prior quarters where we saw this stabilizing and with a potential uptick, we realized that uptick. We see continued stability in this rate above 120% in the short to medium term. It speaks to some of what Chris talked about previously in terms of the runway both for upsell and cross-sell within our existing customer base. So we're incredibly pleased with where it's at, and growing that existing customer base will continue to be a key focus for us as we continue to build and grow the business. Yeah, Keith, Chris, to add a little more color, as we talked about during kind of the IPO process, there's multiple avenues we have to expand customers across additional use cases within an individual product organization. or when they go across and add additional products and adopt the full XM platform. When you think about that net retention rate, the biggest impact is those customers that fully adopt the platform. So you get some increase for sure when a customer more fully expands within CX, but it is much more significant for those customers that truly capture the vision and see the value of the multiple pillars of experience and adopt the full platform. So that trend is, This emerged again of customers adopting the full platform that we've seen in recent quarters. It's definitely helped drive that rate and helping it to recover and increase, like we've seen it, of those full adopters of the platform really moved the needle on that.
spk05: Okay. As my follow-up, let me ask about seasonality. And I want to put it in the context of you actually had some upside relative to cash flow. this quarter. And while not part of your guidance, just wanted to know if there's anything you wanted to call out from a seasonality perspective related to cash flow and understand that some of the issues behind SAP stock, I think, are largely behind you. So that should be a tailwind. Just anything you wanted to call out, including the billings growth trajectory that you look at here in the September and December quarters, the comps are getting a little bit harder to But anything you wanted to call out from a seasonality perspective related to cash flow and or billings would be helpful. Thank you.
spk03: Yeah, happy to comment on that. So, again, Keith, as we look at the cash flow, as I said in my prepared remarks, we do believe looking at the cash flow results over a longer-term horizon is more representative of the results that we're having. As we went into In Q1, we mentioned that there were a handful of accounts that could have collected either in Q1 or Q2. They did collect in Q2. So when you look at the first half cash flow, what you'll see on that, if you exclude the SAP equity awards, you'll see a relationship to the non-GAAP operating income where the free cash flow is a bit higher on a percentage basis. And that's a relationship that we would expect to exist, again, over the medium to long term. I'm happy to reiterate this point that you highlighted, which is in 2020, with that uniquely impacted year by COVID, each quarter sequentially got better for us as a business on a billing basis. And so as we move into 2021, the first half had more favorable comparable periods, and our back half of 2021 has more challenging comparable periods on the calculated billing.
spk05: Okay, great. Many thanks and congratulations to a solid quarter.
spk01: Thank you. We have your next question from DJ Hines with Conacord. Your line is open.
spk10: Hey, thanks guys. I'll echo all the congrats. Zig, you talked about employee experience in your response to Brent's question. I want to ask a slightly different question. It seems to me like there are more and more HR vendors getting into the game with productized efforts around employee experience. Can you just talk about what you see in terms of selling against them? Is there any incumbency advantage there in the sense that, you know, XM decisions for employees are made out of the HR department. They probably have a close relationship already with their HR vendor or, you know, there's a Qualtrics pitch around, you know, the innovation unified platform system of action. Does that resonate with those folks? Maybe just walk through kind of the pros and cons of that dynamic with employee XM. Sure.
spk09: Sure. So first off, the word employee experience tech, you know, those three words are, you know, sort of used in order to describe technology built for employees, right, and people are referring to that terminology. But if you double-click on that and you say, okay, now let's look at the people that are focused on employee experience management, That's a uniquely sort of focused area that complements other employee experience tech. So like take, for example, Slack. That's an employee experience technology tool that enables collaboration, communication, information flow, et cetera, et cetera. Where employee experience management as a system comes into the equation is understanding people's intentions, emotions, what drives engagement. What drives a deeper connection to a brand? How well do employees feel they are set up to be successful within the organization that they join? Are they likely to stay? Are they likely to leave? How is the leader actually affecting the way that a particular team or a workforce feels about the brand that they're a part of? How is the technology that they're using actually affecting the way that that employee feels? Where are they likely to be more engaged versus less engaged? And I could keep going on and on. The point of it is that this is a very unique domain. It starts with research sciences. It requires the type of platform that we've built for 10-plus years. This is not about a cute template that you send out a cute question to someone once in a while. This is about making it possible for people to make some of the most important, time-critical, human-oriented decisions that actually affect top-line and bottom-line results for companies. And we've designed this system based upon our experience management at OS to not only tune in and listen and remember to the information that's coming in through a variety of ways of connecting with employees, colleagues, teammates, providers in healthcare, for example, teachers, academic leaders, but then be able to separate the noise and actually amplify the signal and do something in a time-sensitive way, and you create this virtuous cycle. It's highly complementary to employee experience tech, which is why companies in the employee experience tech space are partnering with us, and they want to be able to leverage Qualtrics in conjunction with what they're trying to do to make their tool sets relevant. So that's the difference here, and it's an important distinction. You know, we've been at this for years now, and we continue to see not only a lot of momentum, but we're actually seeing acceleration because of how relevant our system is right now around the design of the employee experience and then the continuous everyday improvement decisions that can be made that span a variety of time-critical things that people are focused on right now. As a result, the partnership between the people leader, the HR leader, And the customer experience leader in a company or the head of IT or the CEO has never been more relevant. And it's what puts us at the center of some of the most important decisions that companies and organizations are making because what they're doing is they're making XM platform decisions. They're not looking at it and saying, oh, I want some one-off tool to sort of work in a silo. Those that have or might go that direction, as it starts to get real for them, realize that they run out of steam really fast and they come back to us. And that's where we're uniquely positioned. And we've got to this point by just partnering with our customers, taking a long-run attitude around how we've designed our system. And so people make multi-year decisions on our platform as a result. So that's the context. Hopefully that helps you understand the dynamic. Super helpful.
spk10: And then, Rob, maybe my follow-up question, can you just peel back the onion a bit more on what's happening in the services business? Is it that the product's getting more intuitive, that program design services are less required? Just help me understand what's driving the change in the model.
spk03: Yeah, so I want to reiterate this point that I mentioned in my prepared remarks, which is you are seeing that shift, that mixed shift to a higher percentage of our revenue in subscription. And that is consistent with how we've talked about this, and that is a trend that we expect to continue. Along those same lines, you will get some variation quarter to quarter in the services business. We've also indicated that, and you'll see that in our historical results. The demand continues to be strong across our services. So what we saw is some variability here, and we've updated the model and our guidance in accordance with that variability that we experienced in the current quarter. Okay, perfect.
spk10: Thanks, guys. Congrats again. Thank you.
spk01: We have your next question from Terry Tillman with Risk Securities. Your line is open.
spk03: Yeah, good afternoon, Zig, Chris, and Rob. And congrats as well for me on the strong results. You know, I don't know who this question is for. I'll just throw it out there. But, you know, I'm really intrigued with the concept of digital experience solutions, you know, whether it's kind of improving the web experience or the in-app experiences. There's a lot of product analytics vendors. There's a lot of companies that say they do digital experience. How much traction do you have at this point? How meaningful to the business is your digital experience solution use cases? And what do you see typically? Are you replacing something or nothing? Yeah, great question.
spk09: So first off, if you think about the role of digital, people are in a mode now where you've kind of gone beyond this idea of, hey, we want to digitally transform, and people are focused on experience now. So like the end destination is, have you defined an experience that differentiates you in your own market uniquely, right? And how does the role of digital play in your ability to redefine who you are as a brand or further accentuate your differentiation, shape the way that you end up engaging with your customers, your employees? Really important to keep that in mind. So it's not just about, hey, I'm going to give you the guts of the system, give you some pipe to implement, and then like, oh, I'm all good. What really matters now is have you designed an experience that uniquely differentiates your position in the market? We've got brands that during the pandemic have created an entirely new business, for instance, and they have used Qualtrics to design the experience, and then they put it into the market and they're tuning it every single day. and continuously improving. There's a lot of companies out there that obviously are tracking operational data around experience, how many clicks, you know, what's the, you know, replay of a session on the Internet or on the web, you know, with your app, you know, what's the conversion metric data look like based upon an ad that you put out there, how effective is your campaign, et cetera, et cetera, et cetera, et cetera. But where we come into the equation is we bring in the human factor dimension. Why is this cohort, why is this segment doing something? What's the propensity to do something or not? Why? How does that actually reflect on where your top line business might go with a particular cohort of customers you're trying to go after or customers you don't have? How does that same thing play out with respect to employees? And what is the intersection of the two? Because it's not like just running in an isolated way with digital. Usually there's a relationship between digital and what happens in an offline experience where an employee or, you know, a colleague or a flight attendant gets involved, for example, in affecting and shaping the experience. So it's a multidimensional system. Where we're uniquely positioned is we're getting connected in with a lot of the other, call it digital fabric that people are putting in place, and we end up being involved as part of A, number one, understand the customer, their journeys, where they're likely to go, who are they, depending upon the segment that they're in, and how do you get a holistic view, not just digital. What are they doing when they call the call center? What are they doing when they walk into the store? What are they doing when they end up interacting with an employee? And so, you know, that's really important because a lot of the rest of the technology ecosystem is point-specific solutions focused operationally. We come in, we help to be able to connect and view that entire experience for a human being, right, a customer, an employee. And then given the workflow engine that we have, it enables you to be able to ingest the data from those digital, call it operational systems, and then act on the data once you actually get better signal and Qualtrics is connected to it. And as a result, regardless of what technology vendor a company's bet on, whether it's Google, whether it's Adobe, whether it's, you know, XYZ startups, Qualtrics is very relevant. And, you know, all of that ties back to the XMLS and the way that we end up enabling many different departments to leverage the combination of experiential and operational data. So hopefully that helps and gives you some further context.
spk03: It does. I appreciate that. And just a real quick follow-up for Rob is just the theme of longer contract durations and getting longer-term commitments from your customers. Is this something that's got some legs to it? Because it clearly does help, in particular, that total RPO. So, like, where are we in terms of are we going to continue to see some benefits from this lengthening of the contract duration? Thank you. I think we still have a little bit of legs here. As you look at the performance that we've had recently, it continues to show strongly with significantly more new contracts this year signing onto multi-year deals as opposed to the prior year. I think we can still drive that up a bit more in the short to medium term. So a bit more to go.
spk01: We have your next question from Daniel Bartis with Bank of America. Your line's open.
spk02: Great. Hey, guys. Thanks for taking the question here. Maybe first for you, Chris. I actually wanted to just ask more directly on CDPs, which seem to be getting more and more attention. How do you think about CDPs? Are they potential competitors or partners? And is Qualtrics becoming more of a CDP over time?
spk09: Yeah, look, I'm going to play back what I said earlier, which is really important. I think that when we follow the path of where customers want us to go, we end up uniquely leading with and defining this category and this technology foundation in the way that we have. And we started it years ago. We defined what experience management is about. We've defined the properties of what we think is an operating system or enabling a system of action inside of a company. And our conversations with customers usually are not about, hey, where do I kind of plug you in, and more about, wow, how do I use this system to become more connected to the way that our customers want to do business with us and then end up shaping the operating environment of our company? So as it turns out, what's happening is people are connecting our system to, I would say, pockets of CDPs that might be running inside their company. And I say that pockets is because if you look at that space, you've got the MarTech area that's building out, you know, a holistic understanding of a customer given the data they have in their environment. You go to the CRM space, they're doing their own thing, right? And if you go, you just keep going down through the list. While you've got a myriad of different, I would say, fragments of understanding of customer's We're coming in and we're saying, look, let's just focus on the experience. Look at the entirety of the journey. Look at what made someone make a decision to want to engage with your business more or less. How did it get shaped by what your employees did? How did it get shaped by the way your brand shows up? And then that data can be going into, you know, think of it as a data lake or maybe a CDP repository. It varies substantially. And that's why you're seeing lots of fragments in that CDP area. Where Qualtrics comes in is we're saying, look, we can help to master the experiential information, and then you can plug it in, and it can coexist and or help to further your better understanding of your customer. Many customers are actually plugging in their operational data around a customer with wherever it might be coming from, BDP or just a data lake in which they're pulling that information together, and they're plugging it into Qualtrics. That's where it all shows up as part of our experience management directory. And it's why you've seen the momentum, and I think we've shared some public data around the momentum on the experience management directory. And it far exceeds that of any particular individual CDP player. And we're continuing to see high growth in that area because of the approach that we're taking.
spk02: That's great. Thanks for all that. And then maybe as a follow-up for Chris or any of you, can you just give us the latest on how much of the strength you're seeing is from tapping into the SAP base? And how much more can you tap into it? Could that be upside going forward? Thanks.
spk03: Yeah, Chris, I'll take that. One of the things we're excited about is that we've seen continued momentum with the support from SAP. I think one of the areas that's highlighted is the continued momentum we've experienced internationally. It was a really strong international quarter. From a billings perspective, it was the highest percentage of billings internationally versus the U.S. that we've had, signifying continued momentum there, as well as great growth internationally in terms of those $100,000-plus customers coming from international. So that's where we're seeing it the most is continued acceleration internationally from an SAP support perspective, given their global customer base. And I'd say we anticipate that continue. We're also making investments in our own, you know, global workforce to be able to then take those customers that we have to land them but then also expand them and help them to be wildly successful as time goes on. And then the other exciting part is the ability we have to partner beyond SAP, like we announced last quarter with ServiceNow and other partners that we can now tap into, you know, and leverage that experience we've had with SAP to other partners as well.
spk02: Great. Thanks so much, guys.
spk01: We have your next question from Pat Walravens with JMP Securities. Your line is open.
spk11: Oh, great. Thank you. I'll add my congratulations. Hey, Zig, several times today you've talked about the role of data from Qualtrics to help companies make some of their most important decisions. So if you have a good example, I would love to hear what one of the most important decisions is that Qualtrics had to make recently and how you would have maybe leveraged the data you get to make that.
spk09: Yeah, I'll give you an example. Obviously, just like many other companies, employee experience matters more than ever. So how you recruit new candidates, we hired 400 new employees just in Q2. And then how you retain people in your company during a time where it's an extremely competitive market, not just in tech but across many different industries. And, you know, there's not an executive across many different industries I've spoken with. There's not a board that I've interacted with where this is at the top of my topic. But within Qualtrics, we're using our own platform to tune in and listen to employees around what they need in order to be able to be successful in many different regions of the world today. We've got over 4,000 employees in the company. And the realities of people are quite different depending upon the region and territory you're operating in. The pandemic is actually having impacts at different levels for people. It's not, you know, a boilerplate approach that you have to take. So using our system to design the experience for our workforce, both digitally as well as in the physical office work environment that addresses the the things that are top of mind for people. They're both personal, team-based, things that actually resonate with the brand, social factors that actually are top of mind for people, that affect the way they come to work and engage. And all of these things are not a one-and-done thing. It's a dynamic system. The decisions that we made in August of last year are different than the decisions that we're having to make right now and where we want to be end of August, where we want to be end of October. Frankly, there's new factors that people are dealing with, and they're different depending upon the region of the world that you're operating in. So we use our employee experience system to design the workplace experience, to make decisions on what drives performance, what are the needs that our leaders need to be able to best accommodate them. Sometimes they're budget-oriented. Other times they're leadership-oriented. There's infrastructure decisions that we're making. It's a dynamic system. And all of these things actually end up affecting the way we engage with our customers, which is deeply important to us in the way that we go up with our customers and how we operate. So we're connecting that data with what we are learning and tuning into on the customer experience side. Often there's a deep intersection between the two. Highly engaged employees usually lead to happy customers. which leads to high retention rates and expansion rates. So that's a little bit of a sneak peek into the way it plays out.
spk11: Yeah, that's great. Thank you.
spk01: We have your next question from Kurt Maturin with Evercore ISI. Your line's open.
spk06: Thanks very much, and I'll add my congrats on the quarter. Zig or Chris, can you guys just give us an idea of, you have many more stakeholders, I think, interested in experience right now within most of your big customers. When you're going into these bigger engagements or renewals, are you seeing that? Meaning, are there more people at the table from both the HR organization, the sales service organizations? And if they make a decision on Qualtrics from a platform perspective, do they attack it all at once? Meaning, do they try to do experience in sales? customer at the same time, or is that staged? I was just kind of curious how that sort of dynamic is playing out right now, because in your NRR numbers, it would seem that you're obviously being able to go after more stakeholders across an organization. So I was just wondering if you could comment on that. Thanks.
spk03: Yeah, great question, Kirk. I think this will be our last question for today. So what we're seeing in terms of customers is, number one, while there typically is a member of the executive team who drives The decision whether it's employee experience, oftentimes it's your chief people officer. It's on the marketing side. It will be your CMO or otherwise. A couple things we're seeing. Number one, CEOs are involved more and more in the decision-making and care about what's happening. They're not fully delegating. They're caring about the experience, whether that's across your customer or your brand or your employees. So their involvement is happening. And then the second one is that while you may not see – the deployment's happening simultaneously, they're definitely talking to each other and thinking about the value and benefits of being on a single platform. And so when they're making a decision in one area, whether it's on the employee experience side, they're paying attention to what they have deployed and understanding the benefits that they can have from one area to the other. And that consolidation trend and the benefits they're seeing of a single platform from a technology, IT being involved, they're wanting to consolidate and seeing the value of having a single platform overall. So I'd say sometimes you're seeing companies that are deploying across the board, sometimes they have multiple initiatives going on that they're talking to each other, and it's definitely helping us when they're thinking about, hey, I want to make a decision here, but I also want to be able to leverage the cross benefits of a single platform as I'm making a decision for my area of what's being used in other areas of the company and gives us a leg up. Okay, helpful.
spk06: Thanks, Chris.
spk01: I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Ziggs Serafin, CEO, for any closing remarks.
spk09: Well, thank you all for joining us today. We appreciate your time, and we look forward to talking with you soon.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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