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spk14: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1. Thank you for standing by, and welcome to Qualtrics' second quarter fiscal year 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I would now like to hand the call over to Steven Wu, head of FP&A and investor relations.
spk16: Please go ahead. Welcome to Qualtrics second quarter fiscal year 2022 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 release, and a 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 for 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 forelooking statements or outlooks. 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 filing with the SEC, including our quarterly report on Form 10-Q for the quarter ending June 30, 2022 that will be filed with the SEC. With that, I'll hand the call over to Zig.
spk05: Well, thanks, Stephen, and thank you all for joining us today. As you can see in the numbers, Q2 was another outstanding quarter of revenue growth and a solid quarter across the board, even in light of the current macro environment. Revenue for the quarter grew 43% year-over-year to $356 million, and subscription revenue was up 47% year-over-year to $301 million. And so while we continue to see strong demand for Qualtrics in the current environment, we are slightly lowering our FY22 revenue guidance to $1.424 billion at the midpoint of the range to reflect further macroeconomic uncertainty. Our customer relationships remain extremely strong, which is highlighted in our 126% net retention rate and in the number of customers spending more than $100,000 annually, which is an increase of 37% year-over-year. Our Q2 non-GAAP operating margin increased to 2%, up 80 basis points from Q1. And this is our second quarter of sequential operating margin improvement as we continue toward our long-term guidance. and we're confident in our ability to deliver long-term durable growth in both the top and bottom line. In our two decades as a company, we've seen that in uncertain times, companies focus their investments on what will help them win in their markets. And I've been on the road with customers in the U.S. and across Europe, and the themes are all very consistent. Companies want to quickly understand where the greatest friction points are in their businesses. They want to retain and engage their top talent. They want to know that they have the right products and services in the market, and they want to deliver them in a way that's efficient and convenient for their customers, especially now as consumer and business priorities are rapidly shifting. Qualtrics gives them the ultimate advantage. We help them understand what matters most so they can uncover unmet needs and deliver the products, services, and experiences that keep customers and employees coming back instead of going to a competitor. And we help them do that with empathy, speed, and scale. And as a result, we're seeing strong customer adoption across our product lines. In Q2, we expanded or formed new relationships with leading organizations, including Repsol, Roche, the PGA Tour, the New York City Department of Education, Toyota, and many more. One of the world's largest hotel chains selected Qualtrics to improve its customers' digital and support experiences. Qualtrics' advanced AI capabilities will help them improve service call resolution and make it easier for their customers to purchase reservations online, driving more digital revenue while reducing services costs. We're also increasingly seeing customers embrace multiple products. bringing more of their experience of data and applications onto Qualtrics. A great example is PNC Bank, one of the largest financial institutions in the U.S. PNC has been working with Qualtrics to develop a deeper understanding of their customers and deliver more unique and personal banking experiences across every touchpoint. In the quarter, they added EmployeeXM to better understand the drivers of employee engagement to increase productivity and retain their top talent. Like many of our customers, PNC understands that engaged employees deliver better customer experiences, and only Qualtrics can manage the full lifecycle of customer and employee experiences on a single platform. We continue to innovate and deliver new functionality across our product lines, And because all of our products are built on the foundation of our XM platform, our customers are able to unlock value faster. One of our key differentiators is experience ID, a single unified view of everything customers and employees have shared with a company over time. Experience ID ultimately helps our customers build deep, trusted relationships at scale. And this is a game changer. We now have more than 7.1 billion experience IDs in our system. That's a growth rate of 51% year over year. In the quarter, we introduced employee journey analytics, a new innovation powered by experience ID. This capability quickly unlocks new value for employee experience customers by helping them understand how individual moments in an employee's journey impact each other. Things like hiring, onboarding, manager interactions, technology experiences so with these insights they can take timely and contextually relevant actions to drive employee performance and retention and in customer experience we released the new quality management solution that helps improve agent effectiveness in the call center by capturing and analyzing voice and chat feedback from every interaction This helps organizations boost customer satisfaction and agent retention while reducing operational and compliance risks. We also launched Social Connect, a new digital customer service and social listening solution that enables companies to capture, analyze, and respond to the millions of customer service requests that they receive through chat, email, and social media. With intelligent routing and self-service automations, Social Connect helps customer teams achieve higher satisfaction and resolve more cases in less time. Our platform is operating at an incredible scale. In just the first six months of 2022, our customers executed more than 800 million automated actions on the XM platform. And XM Discover analyzed more than a billion feedback records. The more data and actions that our customers are entrusting to the XM platform, the more value they get with Qualtrics. We're also co-innovating with our partners to drive customer success. In Q2, we announced Qualtrics XM Discover for SAP Service Cloud, which uses advanced AI and machine learning to advance and analyze all structured and unstructured data coming into the Service Cloud, from agent notes and support conversations to chats and product reviews. Together, we'll give organizations a 360-degree view of their customers' purchases, their interactions, experiences, and feedback so they can take timely actions that help them resolve more cases faster, which improves costs and customer satisfaction. We also announced a joint solution with ServiceNow. that gives IT and customer service agents a single view of employee and customer experience data side-by-side with their operational data. The Qualtrics Embedded Insights app will help service desk agents and managers better understand not only how quickly they are solving customer and employee issues, but also how they feel about their experiences when engaging with a service desk on the international front. As we said last quarter, this is a critical time to extend our category leadership and to continue to invest with discipline in attractive market opportunities. And those investments are already paying off. Leaders like ABN Amro, Felron, Lloyds Bank, Merck in Germany, AirAsia, and Tata all chose Qualtrics to serve their customers and employees. Let me give you a bit more detail on Tata. With the demand for digital services driving economic growth in India, Tata expanded with Qualtrics to power all the customer insights for the Tata New Super App, which serves more than 120 million users. So to close, we delivered strong results in Q2 as more organizations turned to Qualtrics to help them find and keep customers and retain their top talent in these challenging times. And despite the uncertainty of macroeconomic environment, we continue to see strong forward indicators while we continue to manage for long-term durable growth. We're still in the early innings of an incredibly important category, and we're focused on building a great business that's not only a leader today or a year from now, but five, 10 plus years too. I'd like to thank our customers, our partners, as well as our employees who are delivering innovation and driving customer success with agility and focus. And with that, I'll hand it over to Rob to discuss more detailed results.
spk04: Thanks, Zig, and good afternoon, everyone. As Zig said, total revenue was $356.4 million in the second quarter, up 43% year over year. Subscription revenue in the second quarter was $300.6 million, up 47% year-over-year. Professional services and other revenue was $55.8 million for the second quarter, representing 25% growth year-over-year. Our remaining performance obligations, representing all future revenue under contract, ended the quarter at $1.798 billion, up 39% 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 $1.038 billion, up 38% year over year. Our XM platform is mission critical for customers in these uncertain times, as demonstrated by our net retention rate of 126%. Customers spending more than $100,000 in annual recurring revenue are grew 37% year-over-year to 2,146 customers. Turning to margins, our Q2 non-GAAP gross margin was 76.4%, consistent with the prior quarter. Our non-GAAP operating profit for the second quarter was $7.2 million, resulting in a non-GAAP operating margin of 2% compared to 4.6% in Q2 of 2021. Similar to Q1 results, Increases in travel during the current quarter compared to the prior year quarter contributed to an approximately 200 basis point reduction in operating margin. Operating cash flow for Q2 was $0.1 million compared to $58.8 million in the year-ago period. Free cash flow in the quarter was negative $13.1 million compared to $53.7 million in Q2 of 2021. 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. During Q2, we paid $36 million of cash for taxes related to net share settlement of equity awards. This amount will fluctuate quarter to quarter depending on if we sell to cover or use cash to cover the taxes relating to the vesting of equity awards. we ended the quarter in a strong cash position with approximately $786.6 million in cash and cash equivalents. Moving now to our Q3 and fiscal year 2022 business outlook. While demand remains strong, we continue to see the lengthening of some deal cycles in Q2. Our guidance reflects what we've experienced in the first half of 2022 and also takes into account further macroeconomic uncertainty. We expect total revenue for the third quarter to be $358 million to $360 million, representing 32% growth year over year at the midpoint. Within this, we expect subscription revenue to be in the range of $303 million to $305 million, representing 38% growth year over year at the midpoint. We expect non-GAAP operating margin in the range of 1.5% to 2.5%, and non-GAAP net loss per share of 2 cents to 4 cents, assuming 595 million weighted shares outstanding. For fiscal year 2022, we expect total revenue in the range of $1.422 billion to $1.426 billion, and subscription revenue in the range of $1.202 billion to $1.206 billion. At the midpoint of the ranges, this represents a subscription revenue growth of 38% year-over-year, and a total revenue growth of 32% year-over-year, respectively. We expect non-GAAP operating margin in the range of 1.5% to 3%. We expect a non-GAAP net loss per share between 7 cents and 9 cents, assuming 600 million weighted shares outstanding. As we embark on the second half of 2022, we will continue to be nimble and disciplined in how we invest for growth, while working toward our long-term financial targets of over 20% operating margin and over 25% free cash flow margin. With that, Zig, Chris, and I are happy to take your questions, and we'll turn it back to the operator.
spk14: As a reminder, to ask a question, you will need to press star 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kirk Maturne of Evercore ISI.
spk08: Thanks very much. And congrats on a good quarter. Zig, I've got one for Zig and one for Rob. Zig, I think the question that continues to come up when I'm discussing you all with investors is sort of your positioning and prioritization and budgets maybe today versus prior cycles. you know, and how discretionary you all are. I think people still maybe take a backwards looking view on that. And I was wondering if you just kind of, you know, give us some color or how would you answer that, you know, having spent some time with clients these days in terms of, you know, just how much more non-discretionary Qualtrics is, you know, this time versus maybe even back in the great financial crisis. And then Rob, Thanks for your comments on the guide. I think it's a tough time for everybody to try to thread this needle, but I appreciate you all trying to get in front of some of the macro uncertainty. Could you just give us a little bit more color on what you mean by being nimble and the things that maybe have some discretion for you to spend on in the back half of the year to continue to show progress on margins? Thanks.
spk05: Great questions, and I'm going to take the liberty to elaborate a little bit more and give a lot of important color here. Look, I've sat down with more CEOs this last quarter, particularly throughout Europe, North America. And look, we have a very unique seat at the table. Most companies are using Qualtrics in one way or another. It's across a huge diversity of industries. And we get the visibility across different departments, whether it's marketing leaders, HR departments, sales customer success leaders, IT leaders. They're looking at the dimensions of various customer segments, employee segments in their companies, running their companies in different geographies. And we get to know what they're worried about. We're involved with how they think through critical decisions, strategies, and the way that they're running their companies. And I'd say, first off, it's like this market shift, it's a little different. You have companies that are feeling concerned. about a combination of pressures they're feeling some of those pressures depending upon the industry that they're in depending on the side of the company that they're at it's a combo of storing inflation and interest rate Heights they're calibrating on demand side uncertainty in some areas they're grappling with supply chain challenges talent retention rapidly changing consumer business preferences and so as a result you know there's some consistent themes that I'm seeing CEOs and other C-levels that report into their leadership teams are focused on what will help them win in their markets. And I sort of supplement that just with research that we've also done where leaders are saying, look, they're optimistic on growth. They expect revenue to increase in the next year. Many are planning to increase spending on tech in the next year. But they're also saying like, look, we're going to focus our time and our energy on things that help them quickly understand where the greatest friction points are in their business and how they end up actioning on it. They want to have and deliver not only the right products, but they want to do that in the right way into the marketplace, which means it's tuning into the expectations and adjustments and how businesses are doing businesses with them, or how consumers are looking to spend time and energy and money with them. And of course, at the same time, at a board level issue for companies, most companies are focusing on how do you retain the talent you have and how do you attract the best employees given what they're trying to do with their companies? I think what's important to know about all of this is we've seen different dimensions of these issues multiple times in our two decades as a company, right? And, you know, while some of the pressures that our customers are facing here are creating some challenges for us, which is what you see also just in terms of some of the context that we're providing on guidance, were also very well positioned to address their needs. That's what the Qualtrics platform has been built for the types of issues that I just described. And this is why, just from a demand signal perspective, we continue to see strong demand signal. And we're continuing to see strong win rates as well. And I would add to that the thing I said in my remarks, which is net retention rates are strong. You saw 100K plus spend also maintain high strength of growth. But we also have some deal cycles that are extending. There's people that are going through more approvals or going through a little bit more cycling on where they're putting their spend. And I think everyone across different industries is actually going to see different dimensions of that, especially where approval processes are taking longer, which is particularly the case in larger deals. Now, the good news, as I just said, we're continuously strong win rates. Given all of these things that we see just in the state of play, we're managing the dynamics. You're seeing us take on a healthy level of caution. We don't think it's wise to operate in any other way at this particular time. But I also want to reiterate this right before I turn over to Rob, which is like we're focused on building a great business here. And that doesn't mean just being a leader in the category and having a good business model today or the next couple of quarters. We're also leading and building this business in a way where a year from now, But also five, ten plus years from now, you have a great category leader and a business model that's highly attractive. Right. So, Rob, you want to add to that? Absolutely. Thanks for the question, Kirk.
spk04: In regards to margin, we see significant margin in this business. And that's why, in my prepared remarks, I again reiterated our long-term targets of over 20% operating margin and over 25% free cash flow. You can see that already in the sequential improvement in margins from Q4 to Q1 to Q2. Now, we have slowed hiring, and we have added even more rigor to our spend, making sure that we optimize our investments and that we drive that spend to the areas of greatest opportunities. And that's what gives us the confidence in the ongoing margin improvement that we see in the business. And you also see that as we have raised the low end of our margin guidance for the full year.
spk05: I'll cap that off by saying, look, we think our job here is not only to be the leader of the category, but also being strong business operators. And we're quite committed to building a great business as we're moving along and manage through the changes in the marketplace.
spk17: Thanks, guys. Appreciate the call.
spk15: Thank you.
spk14: Our next question comes from Keith Weiss of Morgan Stanley. Please go ahead.
spk03: Excellent. Can you guys hear me all right? Yeah, we got you. Okay. The operator just cut off there for a second. Thank you guys for taking the question. I wanted to try to juxtapose the very bullish commentary in the conference call about sort of the gray quarter and a little bit about kind of what you've been talking about, Dick, and with elongating deal cycles. Because when we look at some of the leading indicators in the quarter, like current RPO, it didn't grow very much sequentially. It was up like 8 million versus last year at this time, it was up like 80 million. Net retention rates slowed down a little bit. So I guess the question is, one, how do you start to see some of those impacts in your business, like the elongating deal cycles, which is pushing out some of that strength? And then two, I was hoping maybe you could give us a little bit more sort of a quantitative answer on sort of how much conservatism you've applied into the forecast on a go-forward basis, because subscription revenues is a very slow-moving beast. It amortizes off the balance sheet, so it's hard to see exactly sort of how conservative you guys are being. Can you help us out with that side of the equation?
spk05: Okay, well, first off, I'd say that... we work from the signals that we've always used and you know, we see strong demand and our win rates continue to be strong. And I think that that's a really important part that we've actually factored into the context. We also see in some places deal cycles taking a bit longer as people hone in on and scrutinize all sorts of spend across their companies. Right. And again, And so, you know, our view is, hey, let's just take on a healthy level of caution here. We think that's the right thing to do, given the dynamics of some deal cycles, not all. And the fact that, you know, a lot of people are operating in a greater degree of uncertainty. And so in some places, approvals will take a bit longer. But again, the other point is, as I make, you know, around wind rates is we're not seeing cancellations. We're just seeing some cycling take a bit longer. And that's, I think, important color to keep in mind. Rob?
spk04: Yeah, and what I would tell you and just reiterate here is that we're taking into account the further macroeconomic uncertainty that exists. We're building that into our assessment of what is appropriate and conservative guidance for us in the back half of the year. And as we do that, we have the same comfort level that we have had in the past relative to the guidance that we provide, and that's That's very important to us in how we operate and how we deliver guidance.
spk05: So it's more about approval processes take a bit longer, but also being, you know, sort of paying attention to the fact that you've got to be operating with a healthy level of caution.
spk03: Got it. And just to be clear, Rob, it sounds like you have taken down sort of expectations for expense growth a little bit, slowing down hiring in the face of that macro uncertainty. Is that a fair commentary?
spk16: Absolutely right. Yep.
spk03: Excellent. Thank you, Jason.
spk05: Where it makes sense to actually also have and capitalizing on attractive opportunities that we see. I think that's part of the responsibility of the business. Makes sense. Thank you.
spk14: Thank you. Our next question comes from the line of Brian Peterson of Raymond James. Brian Peterson, your line is open.
spk17: Sorry, guys, I was confused by that mute button again. But, Zig, hey, guys, thanks for taking the question. So, Zig, you've had a lot of experience. You've seen some cycles. I'm actually curious, you know, what is your stance on this market and Qualtrics specifically in terms of, you know, vendor consolidation? I know you're creating a category here, so a lot of this spend may be net new. But have you been more of a beneficiary of spend coming off of other vendors in this space? I'm just curious if that's happened so far in 2022.
spk05: Simple answer is yes. And I think a lot of that has to do with just the nature of trends and people validating our approach to the way we built our technology platform, single platform that works across different departments in a company. creates a single source of truth. I think a really important indicator also is the growth in the experience ID that I've mentioned. And, you know, this is both represented in trends we've seen so far and examples I've shown and talked about with customers, but also with what we're seeing in the demand signal.
spk17: Understood. And Rob, maybe real quick, if you mentioned this, I apologize. Any impact on FX on the quarter or the guide that you would call out? Thanks, guys.
spk04: Yeah, nothing that I would call out material for you there on FX. It continues to have certainly some impact, but not to the point that we would call it out as material or move to any sort of constant currency.
spk17: Understood. Thanks, Rob.
spk04: Yep.
spk14: Thank you. Our next question comes from the line of Gabriela Borges of Goldman Sachs. Gabriela Borges, your line is open.
spk00: Hi, good afternoon. Thanks for taking the question. Zaghanab, you noticed some deals lengthening, but not all deals. So I'd love to hear a little bit of color on the commonalities between the types of deals that are lengthening. I know you mentioned larger deals. Any additional color on region, vertical, the types of businesses, the types of deals that continue to go through with good momentum versus the ones that are slowing?
spk05: I'm going to let Chris speak to this one.
spk04: Yeah. Hey, Gabrielle. I appreciate the question. You know, we've taken a close look at our win rates across geographies, product lines, et cetera. And what we're seeing across the board is a great deal of consistency in terms of the high win rates that we've experienced historically, which is really encouraging. One of the great things about Qualtrics, as Vic talked about earlier, is we have a really diverse product portfolio and a diverse set of industries that we sell into, which gives us an ability to have different solutions depending upon the specific priorities of customers and what's most urgent and important for them overall and allow us to continue to win.
spk00: Understood. And maybe the follow-up to that is the implied 4Q guidance by my math has the company slowing down into the high teams range, recognizing that this isn't a normal environment. How do we think about the normalized growth profile of the company When you do have medium-term planning assumptions, give us a little bit of color on how we should think about what normal growth looks like and what is the path from the high teens and full Q through 2023, 2024. Sure.
spk04: I appreciate the question, Gabriella. As we've done in the past, we will provide our 2023 guidance when we Release our q4 earnings and I know you know this and others the back half of the year is incredibly important to us Particularly q4 and the results that we drive there now I would reiterate what we've called out here, which is that we have been conservative and set guidance at a level that we believe is appropriate for the uncertainty that we see in the market and and You need to take that into account as you think about what is implied in the 4Q guidance and how that may impact the rest of the year. So I think you factor all those things in and know that we're out to execute against the back half of the year, and we'll provide updates at the completion of the year on our 2023 forward-looking.
spk00: Thanks for the call.
spk04: Yep.
spk15: Thanks, Gabriella.
spk14: Our next question comes from the line of Mark Murphy of J.P. Morgan. Mark Murphy, your line is open.
spk06: Thank you very much. Zig, wondering if you could clarify on the topic of the lengthening of some of the deal cycles. Was that contained to Europe or has that broadened out relative to what you saw in the March quarter? Has that broadened out, for instance, into the U.S.? ? And then, Rob, I wanted to ask you on the composition of the Q2 results, compared to prior years, you actually had higher sequential revenue growth and then lower sequential backlog growth, looking at the CRPO number. Could you perhaps help us understand what was the underlying dynamic there or why those would have kind of moved in opposite directions?
spk05: Okay, so I'll take the first one and let Rob answer that. Look, on the deal cycle side, I would emphasize the word some deal cycles lengthening because we're continuously robust demand for products in a variety of geographies, quite broadly speaking as well. And so it's a mix depending upon the company, the industry, the size, but we've seen it a bit more in just sort of deal scrutiny, especially on larger deals. But again, that varies, and it may also vary. In some cases, it might be days, might be weeks, might be a quarter, depending upon the nature of the situation. And the other thing I'll do is I'll reiterate that there's strength in several of the core metrics that we end up watching. So things like the demand signal, which includes things like pipeline, pipeline generation. As I said earlier, wind rates continue to be strong. We look at factors like retention of our sales organization. That continues to be solid. And so the combination of these things are what feed into what Rob had commented on earlier are factors that we take into consideration, and it reflects the guidance and the context that we're providing with a degree of conservatism.
spk04: Yeah, and then, Mark, in regards to the revenue sequentially and then the CRPO and your look at that on a historical and then quarter over quarter, I think As we know, the revenue is that lagging indicator that comes in over time. So you're seeing the strength of Q4 and when that revenue comes on, as well as a very strong Q1 results driving the sequential revenue that's delivered in Q2. And then exactly to the point of what we're talking about, some of the lengthening of deal cycles and the overall results that we read in the current quarter then impact the RPO at the end of this quarter. And so those are the two main factors that I would point you to.
spk06: Okay. So just to clarify, the lengthening of deal cycles, is that contained to Europe? Is that a fair statement?
spk05: No. As I said, it's actually a bit of a mix depending upon the market. And so, you know, there are parts of Europe that don't have parts of that issue, and there's other ones that actually have had some of it. But I mean, the reality is I don't think there's anybody that actually is not seeing this right now. And, you know, everyone will face a level of scrutiny and, you know, more, I'll call it approval processes that companies have to go through. And regardless of the geography that you're in, but there are also many instances where it's not an issue. And so I think that's the context in color and sort of the dynamic that we think we're managing.
spk06: Yeah, that makes sense. Thank you for the clarity.
spk14: Thank you. Our next question comes from the line of Bhavin Shah of Deutsche Bank. Bhavin Shah, your line is open.
spk13: Great. Thanks for taking my question. I guess just following up on that line of questioning, in terms of what you're seeing real time with deal cycles lengthening, I know last quarter you talked about that mostly being focused on new logos and not really impact on expansion. But in terms of expansions and churn rates, have you seen any impact thus far, if at all?
spk15: All right, Chris.
spk06: Yeah, happy to.
spk04: I think we've seen it happening, as Vic just mentioned, across industries. I think it is a little bit more slanted, as you'd expect, towards new logos because existing customers, it's easier to expand the spend and they've got confidence in history with us in terms of delivering value on the platform. But it really is just, I think, reflective of the macro environment we're in where people are a bit more cautious. There's an additional Signature is sometimes required to get deals across the finish line. It's still questions being answered. It's just lengthening out the time to get deals done. And it's why we're monitoring so closely the actual win rates to ensure that we continue to have the leadership position and that's all signaling in the right direction. So we're real happy with the underlying signals of our business. It's just taking longer.
spk05: And not in all cases. That's what's important. I want to make sure that that's not painted with a broad brush, which is the fact that we see it, it comes up, and that's what we're factoring in. There's uncertainty. There's very few companies that probably won't have the same thing happening. One of the benefits that we have in this case is that we have, as Chris mentioned earlier, a diverse product portfolio, and we operate in a diverse set of industries across a diverse set of geographies, which helps us in the way that we look at managing the different dynamics, and that's part of our responsibility.
spk13: I completely get it and appreciate it. Yeah, I imagine you guys won't be the only ones. But a quick follow-up for Rob, just in terms of the assumptions on the guidance, and I know you're seeing the macro worsening, but I need some of the clarity on where your assumptions are changing the most. Is it mostly on close rates with new logos? Are you also maybe being a little bit more concerned on expansion or churn or anything like that?
spk04: Yeah, look, the guidance is going to take into account the same commentary that you just asked the questions on, which makes a lot of sense, which is looking how it impacts the broad base of the portfolio. I would just add this again on the guidance. Previously, I mentioned that we're going to set guidance at a level where we have a similar level of comfort to where we've set guidance in the past. Now, in times when there's more uncertainty, it's natural that you build in more conservatism into the guidance to get to the same level of comfort. So I want you to take away that connection point here as I talk about our level of comfort and consistency in the way we set guidance. When you factor in that uncertainty, it adds that level of caution that we've discussed.
spk13: Thanks for that, Colin. Thanks again for taking my question.
spk15: Thank you.
spk14: Thank you. Our next question comes from the line of Remo Lencho of Barclays. Remo Lencho, your line is open.
spk10: Thank you. Two quick questions. Obviously, macro is what it is, and you kind of manage that. It sounds like you're managing it pretty well so far. Is there anything that the changes have caused to kind of rethink or reprioritize? And Rob, you mentioned already kind of more stringency on hiring. Maybe talk a little bit about what you're doing in terms of managing that process of getting more signatures. Is there more focus in terms of the new sales hires on the existing accounts? How do you think about the expansion into Europe that was a big priority for this year? Just kind of give us an idea how to reprioritize a little bit in this environment. And then the other point is, and I apologize not to ask a macro question, but anything on Clarabridge in terms of you now selling it under your own branding since I think February, how is that going so far? Thank you.
spk05: Sure. Hey, Randall. Thanks for the questions. So first off, I mean, look, we've been through different cycles. We've operated in different modes. One of the elements of this company is that we are able to hone in on areas of opportunity. Part of the culture of the company is to be fast and scrappy in making sure that we are learning and at the same time adjusting. And, you know, part of that is actually all factored into the way that you run a business, right? And we look at that both for top line as well as bottom line. You know, Rob did mention earlier that also making sure that we're optimizing our investments to the greatest areas of opportunity. And in other places, as part of that, in places we have slowed hirings. As an example, we're taking hiring off entirely and redeploying resources to where we see opportunities. And that's just part of the dynamics of how we run and operate the business that's here. You asked about the Clarabridge side. It's a great question. At the beginning of the year, we integrated the operations, the engineering, the sales teams of Clarabridge. We don't refer to Clarabridge anymore. It's called XM Discover. It's a new layer of the XM platform. And it's performing consistent with what our expectations are for the business. It's an incredibly powerful addition that helps companies to tune into any form of unstructured feedback in a company. So it's diving us into support of conversations, chat, social media posts, you know, other sources of unstructured data. We're now beautifully coupling that with how you automate some of the more manual and time intensive things that companies want to do that helps them to hone in on areas of friction, create more efficiency, save significant money for our customers as a result, increase their relationship to their customers. The beautiful thing about all of that is that wasn't possible before when it was a standalone company. And we're materializing that as part of our existing product portfolios and SKUs that people can end up expanding into. And so again, this is performing consistent with our expectations. And I'll hand the earlier comments about making sure that we're focused on the right opportunities. Okay. Thank you.
spk15: Thank you.
spk14: Our next question comes from the line of Arjun Bhatia of William Blair. Arjun Bhatia, your line is open.
spk12: Thank you, guys, for taking the question. Zig, maybe I want to start with one for you. You mentioned the diverse product portfolio you have that gives you a lot of maybe expansion and landing points with new customers. I'm curious, as you see this spending environment maybe get a little bit more cautious into the back half of the year and into 2023, do you change at all which products you're prioritizing, the messaging that you lead with for new customers and expansion deals between employee XM Discover or customer experience? Is there any change that you're making to that go-to-market motion at all?
spk05: Yeah, Arjun, great, great, great, great question. Thank you. I mean, first off, I'll point back to what I said around demand signal. Demand signal is strong, and that's coupled with strong win rates. And that's a really important point because you then zoom in and say, are you relevant? Are you zooming into things that people care about, where they're going to be putting their money and their time and attention for consideration, as well as where they would want to redeploy budgets? And that points to the agility of our product portfolio and time to value that people can get out of using different capabilities in our platform, things like DesignXM, for example, things like our digital customer experience offering, and as you pointed out, on the employee experience side. But just as much, getting closer to customers is important as well. So, you know, the fact that we have that portfolio, the fact that you can actually motion across different capabilities quickly works to our advantage. And the fact that you don't have to actually go through long-term deployment cycles and having to go retrain people, a whole new set of tools. You can turn on modules in this system and pick up where people left off and leverage new capabilities and leverage get access to data that might have been used in another part of the company's department, for instance, and then up-level that for different use cases, for example. So all of that is factored in, and it is dialing into the way that we're operating the go-to-market, as well as the way that customers are engaging with us.
spk12: That's very helpful. And maybe just to follow up on that, have you noticed how your presence in your existing customers has changed in terms of the departments that you live in? How much is still marketing versus sales? And it seems like customer service in the contact center is a big area of focus with Exxon Discover, but also with the SAP partnerships and ServiceNow. How much has that actually shifted thus far with your existing customers?
spk05: Yeah, that's a good question, too. So look, first off, if I look back two, three years ago, you see the number of departments that we had, you know, call it beach heads in or connections to, they've been expanding. And that is just because the idea around using experience-based decision-making, getting closer to customers, getting closer to employees, creating a much more connected system that works across the different channels that a company uses to connect with their market. And you take, for instance, if you think about five years ago, how many different touch points customer may have had with a company and then you look at today the number of touch points has increased to 3x very easily and so that means you have a lot more data flowing into your company but it can be hyper disconnected and so we bring all of that market and you take for instance if you think about five years ago how many different touch points a customer may have had with a company and then you look at today the number of touch points has increased to 3x very easily and so that means you have a lot more data flowing into your company but it can be hyper disconnected and so we bring all of that together and in so doing we actually help inform things like for instance supply chain decision makers to be in a position where available to them and that's helped to your point through a relationship like with sap because they have access to that type of a buyer with sap or reba as an example so they can use capabilities from our platform that help them to make more expedient decisions in the way that they manage their supply chain. That's just one example. So in a nutshell, we see the aperture expanding in terms of the number of different types of departments that's driving increasing use cases. But the other thing that's important, and this is also embedded in your question, is we're getting deeper with certain departments like customer care, as you pointed out really, really well. And that's exposing us to an even greater budget pool. Naturally, as part of that, you get access to bigger deals too, right? And when you do that, then you get to go manage some of the cycles of bigger deals. And that is, again, that's not, you know, we can't paint that with a single paintbrush either. Because in some cases, the approval cycles are straightforward. In other cases, more decision makers get involved as well, right? But in the end, if you look at the core of the core of what we have to offer for companies, the value footprint is expanding significantly. That's very helpful. Thank you, Zig.
spk15: You're welcome. Thank you.
spk14: Our next question comes from Adam Regeer of Bank of America. Adam Regeer, your question, please.
spk01: Hey, great. Thank you. So looking at the implied Q4 revenue numbers, If my math is correct, I see that non-subscription revenue may actually decline year-over-year in Q4. Is there anything to call out there? Obviously, you don't manage the business to that, but are you, for example, maybe lapping a major project from a customer a year ago, that sort of thing?
spk04: Yeah, there's no major projects or otherwise that I would call out. I think something that we've highlighted in the past and would reiterate again is that we continue to drive a lot of our professional services business to our growing ecosystem, and so you should expect the services revenue to grow at a much slower pace than the subscription revenue on a go-forward basis.
spk01: Got it. That's great to hear. And then, is there anything to call out in terms of differences in demand on the employee side versus the more customer success type use cases? And looking further out, you know, in the unfortunate scenario, we do slip into a recession. Are there any key differences in how you're thinking about the two categories and the resilience of spending each? Thank you.
spk05: I'm going to I'll point back to my earlier point about what we're hearing and seeing in the market, especially from CEOs and other executives. They're in a place where, number one, understand the greatest friction points in your business and know how to act on them. Some of these things actually are everything to do with how you're serving your customers or not serving them or not enabling them. with the right way of how you're delivering your product or service into the market. Some of these actually are at the intersection of what your employees are not able to do. And other things are having to do with keeping your highest, most important talent engaged and retaining them in a very different way of working across many different industries. And so the signals people are using to make significant budget decisions on how they engage their workforce how they retain the people that they just spent a lot of money hiring engaged inside their company, and then the relationship between that and the way that they're working and operating on customer factors, especially in a market where consumer and business trends and decision-making behaviors changing quarter to quarter, every six months to six months, requires them to actually be able to get better ground-proof data and a system that allows them to action on that information at a larger scale. This is why Qualtrics is extremely relevant, you know, and it's why we're built for these cases, right? So that's the context I would reiterate on that because I think it's a good question.
spk01: Great. Thank you very much.
spk15: Thank you.
spk14: Thank you. Our next question comes from the line of Patrick Walravens of GMP Securities. Patrick Walravens, your line is open.
spk02: Oh, great. Thank you. And thank you guys for continuing to go through this in so much detail. We appreciate it. Look, so you raised money at $42 and the stock is currently, you know, around $13. Isn't this a good time to consider a buyback? How do you think about that?
spk04: Well, I mean, part of this, Pat, is that we continue to see significant opportunity to invest in the business and also to make sure that we have appropriate capital to on our balance sheet relative to our market cap, relative to our operations that is wise for the business. So we have not considered a situation where we would do what you characterized as a stock buyback. Now the point that you do see in the commentary is that as stock is vesting for our employees, we have determined up to this point that it makes sense to use cash to settle the tax portion. rather than to sell additional shares into the market. And so there is some natural impact that we're using our cash to not dilute further when we have employee vesting, but to date we haven't considered a stock buyback because of our overall capital position that we want to achieve as a business and, and the investment opportunities that we also see in the market.
spk02: Okay. And then Robin, you might not like this one, but is it, I mean, is it reasonable for us to take your Q4 growth rate and at least for now apply that to next year?
spk04: So, this is, I'll go through this again because I do want this to be clear. I'm not going to comment on 2023 right now. We'll provide the 2023 guidance when we release our Q4 earnings. And I wanted to highlight for folks that we have set a certain amount of conservatism in the guidance given the uncertainty that we see. And so I think you need to take that into consideration as you think about the go-forward numbers. But certainly, you also see how we're guiding the current quarter and how that is different than how we've guided in the past in terms of the overall cautiousness that we're approaching with the guidance. So I think you factor all those things in. No, this is top of mind for a lot of folks. Okay, thank you.
spk14: Thank you. Our next question, sorry. Our next question comes from the line of Yun Kim of Loop Capital Markets. Yun Kim, your line is open.
spk11: All right, thank you. So question on the initial land dynamics. Obviously, there's a lot of uncertainty there Can you just give us a little bit more details regarding, you know, are you seeing a sizable change in the new customer deal size, any change in the product mix in the initial land deal? And more importantly, how is the role of your partners really changing in terms of generating these customer leads and closing those new deals in the current environment?
spk04: Yeah, nothing that I'd overly call out to you. I think you can see some of our metrics are really strong as it relates to customer spend and customer size in terms of the number of customers we have spending over 100K. Really pleased with that and what it signals in terms of just the sheer number of customers that are spending at the enterprise level overall. And not seeing anything major in terms of dynamics around landing with one product differently versus another set of product portfolio. I'd say continuation as we've seen in the past, and so nothing really out there. And on the partner side, you asked about that question. You want to comment on that, Chris? Yeah, it's an area of focus for us as we think about building the business for the medium and long term is to continue. We've been investing for several years in our partner ecosystem, and that's a continued, I'd say, major focus for us as we look to continue to scale the business, to continue to make it efficient to drive operating leverage overall. And so, I think you will continue to see that grow. We're early days in terms of the opportunity there and really excited about what that can drive for our business long-term and for our customers. And so, that continues to be a major focus for us and excited about what that's going to mean for our long-term durable growth.
spk11: Okay.
spk05: Thanks for that. Just context on that. A lot of our partners are connecting experience management to core operational Practices they have like say for example service now and start innovation or service now is one of many examples, but then you know other partners will then go out to customers that have the install base of Some of these partners and they'll start to connect in the Qualtrics experience management system as a complement to that operational system and that further deepens the footprint that exists in the use of our platform in that department alongside our the corresponding SaaS platform that they might be using on the operational side, if that makes sense for you.
spk11: Thanks for that. And I have a quick question for Rob. Any change in contract length that we should be aware of? In the current environment, are customers both new and existing, are they asking for a shorter contract length?
spk04: No, we're not seeing any trend that way. So our overall contract length has continued consistent with what we shared in the past. Okay, great. Thank you so much.
spk14: Thank you. Our next question comes from the line of Terry Tillman of Truist. Terry Tillman, your line is open.
spk04: Yeah, thanks for fitting me in. I'll just make it easier and just have one question here. I mean, a lot of this might be unanswerable, but really, I think things are going to take their cue from how your CRPO and billings are in the second half of the year. I know you typically don't guide to that, but Is there anything at all you can share about thoughts into the second half of the year as it relates to those really important KPIs we're all going to be watching? I know previously you did say, I think, Rob, that there would be more of a back-end loaded nature this year because of Clarabridge. So just any more color you can share with us given all these things we're talking about macro. Thank you. Well, again, relative to Q4, yes, we do expect that will be an even larger gap. quarter for us on a seasonality basis, given our ongoing move into the enterprise, as well as bringing Clarabridge, XM Discover now into the equation. And so what you'll actually see here is that the calculated billings for the first three quarters, although we don't provide guidance on that, should be fairly similar in size. And then you'll have a large Q4, you know, even larger than we've had historically. That's I think you take that into account as well as the guidance we've provided on where we do guide and see how that would carry forward in the models relative to calculated billings or otherwise.
spk16: Okay, thank you.
spk14: Yep. Thank you, Chair. Thank you. Our next question comes from the line of D.J. Hines of Canaccord Genuity. D.J., your line is open.
spk15: DJ, I can't hear you.
spk14: Pardon me. Again, DJ, your line is open. Can you guys hear me?
spk07: Yep. Now we got you. All right. Got it. Hey, thanks for taking the question. I don't know if it's better for you, Zig, or Chris, but I'm curious, how granular can you get in terms of helping prospects think about ROI or payback period? And I ask because we've spoken to customers in the past, and it's not easy, right? We get a lot of you know, we know it's the right thing to do for the business. We're getting incredible insight or, you know, it's a top down mandate, but, but I think quantifying return on spend has been challenging for some, I'm just curious how much of a focus is that today and how are you navigating it?
spk05: Well, I look at the heart of our core value proposition and in our approach to experience management, our approach to customer experience, many of the capabilities on our platform is helping people to understand what drives what frankly. and then taking action on it. And the old school approach to experience and the pilot point solutions that have been in the marketplace, they'll give you a score. They'll give you a customer satisfaction data point, for instance. But you have no sense of the correlation between that and what's actually happening on things like churn rate reduction or things like, hey, what's going to drive revenue in my most important customer segments? And not just telling me the what, but, like, what did you do about it yesterday and tomorrow? And so, like, it's an extremely important dimension, and it's actually a differentiating dimension of our platform. So I'm glad you brought the question up, and it's actually part of what drives the demand signal that we see in the marketplace.
spk16: Got it. Thank you. Thank you.
spk14: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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