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spk09: Ladies and gentlemen, thank you for standing by. Welcome to Qualtrics' third quarter fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Rodney Nelson, head of investor relations. Please go ahead.
spk06: Thank you, operator. Welcome to Qualtrics' third quarter 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 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 a further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2022 that will be filed with the SEC. With that, I'll hand the call over to Vic.
spk04: Well, thank you all for joining us and welcome Rodney. We're grateful to have you on the Qualtrics team. So as you saw in the numbers, we delivered strong revenue growth and operating margin improvement in the quarter. This shows the critical role Qualtrics plays for our customers in this macroeconomic environment and the discipline our team is bringing to this moment. Revenue for the quarter grew 39% year over year to $378 million. Subscription revenue was up 43% year-over-year to $315 million. And our current remaining performance obligations rose to $1.05 billion, a 34% year-over-year increase. Coming off of this strong quarter, we are raising our revenue guidance for our fiscal year to $1.451 billion at the midpoint. Our customer relationships remain extremely strong, and they continue to grow, which is highlighted in the 32% year-over-year growth in customer spending more than $100,000 annually. Our Q3 non-GAAP operating margin rose to 6%, up 400 basis points from Q2. This is our third consecutive quarter of operating margin improvement. We've been investing with discipline, as we continue to deliver top-line growth. Against the backdrop of macroeconomic and geopolitical uncertainty, we are seeing a more measured buying environment and increased executive scrutiny on purchase decisions, particularly with new customers. Our current expectation that this challenging macroeconomic environment will persist through 2023. At the same time, we see compelling opportunities to deepen relationships with our customers and expand the ways that we support them. Our existing customers are continuing to invest more deeply with Qualtrics, even with constrained budgets. And you can see that in our 124% net retention rate. I was out on the road again in Q3, meeting with executives all over the world. And while everyone has a slightly different view of where the economy is headed, one thing is universal. They're all focused on making the right investments across their business to win in this downturn. They cannot afford customer churn or low employee productivity. Knowing what matters most to their customers and employees is mission critical. Globally, $4.3 trillion in customer spending is at risk each year due to poor customer experiences. And it costs an organization six to nine months of an employee's salary to replace them. The impact of losing a high performer is far greater, but knowing how to avoid these types of risks can be difficult, especially with competing priorities and intense pressure. And that's where Qualtrics gives organizations the ultimate advantage. Our platform helps them quickly identify and resolve points of friction across the customer journey from the website to the contact center. We also help organizations understand exactly why employees are frustrated. and what's preventing them from being successful so they can take real-time action to reduce unwanted attrition and increase productivity. And we help our customers do it with empathy, speed, and scale. In Q3, global leaders like Domino's, L.L. Bean, KB Bank in Korea, U.S. Centers for Medicare and Medicaid, City Football Group, Intermountain Healthcare, and the state of Missouri all chose Qualtrics to improve their most critical employee and customer experiences. We expanded our relationship with one of the world's largest financial services companies to transform the way that they deliver care to their millions of customers worldwide. Qualtrics XM discovers advanced AI capabilities, will analyze every customer care conversation, with a focus on resolving issues faster and with more empathy. Qualtrics will help them boost agent productivity, increase customer satisfaction, and reduce compliance risk, all at incredible scale. We also formed a new relationship with Ascension, one of the nation's leading health systems. They selected Qualtrics Customer XM, including Engage and Discover to get a single view of their patients and optimize their experiences across every digital touchpoint. We're proud to help Ascension deliver personalized and compassionate care to the diverse communities that they serve. And in the quarter, we expanded with the U.S. Census Bureau, the nation's leading provider of quality data about its people and the economy. They added new capabilities in DesignXM and CHOS EmployeeXM to increase their workforce productivity. Stronger engagement from census employees and external audiences will help the Bureau better understand how the economy, employment, health, and education impact the United States and all its residents. Being the leader in XM gives us and our customers a competitive advantage. We have more experienced data than anyone else. our platform brings together all of the feedback people have provided over time, billions of data points, and combines it with operational data such as digital click streams, call center frequency, and customer churn, as well as intelligence data like effort, emotion, and intent. And then we use sophisticated AI and automation to help our customers take the right action at the right time. For instance, We help them discover and take action on things like which service to offer a customer next or when to intervene with a frustrated caller. The actions that customers take with Qualtrics are critical to improving the experiences that they deliver. Let me give you an example. When a flight is delayed, one leading global airline uses Xflow to automatically inform flight attendants when a passenger on their flight will miss the connection. That allows them to be able to help rebook and offer drinks for miles before the passenger leaves their plane. They use hundreds of thousands of these automated actions every month to deliver a superior customer experience. I mentioned before that companies can't afford to make the wrong decision right now. They have to be right. we've been innovating to unlock data across our platform to help our customers make smarter decisions across their business our new products reflect this we've been focused on customer driven innovations critical to our key buyers with launches like the following xm benchmarks which allows customers to uncover their biggest risks and opportunities based on the xm platform's billions of data points another example is real-time agent assist, which uses AI and automation to deliver real-time coaching to contact center agents so they can quickly take the next best action to solve customer issues. We also launched video feedback, which helps organizations capture customer, prospect, and survey respondent feedback in their own words. And we launched CrossXM, which enabled leaders to see how their employee, customer, and brand experiences impact one another so they can take action to drive the business forward. A leading global retailer is already using CrossXM to powerfully correlate how employees drive customer experiences and simplify complex decisions. With CrossXM, they discovered that when retail employees felt they had training to do their jobs, and they knew what was expected of them and received regular feedback from their manager, those employees' stores saw higher performance and better customer satisfaction. Be sure to watch our XM Innovation event this week. You'll see that there's going to be a powerhouse lineup of new products that are especially relevant to what customers are needing today. Our partner ecosystem. is a powerful driver of customer success, and it continues to grow in both breadth and depth. We've deepened our partnership with Amazon. Since launching in the AWS marketplace in February, Qualtrics has become one of their fastest-growing ISV partners in the horizontal business application space and a top-five seller in the AWS marketplace. And the XM platform becomes even more powerful as we grow our ecosystem and increase our automations and workflows. Those connections with leading CRM, CDP, and HRS systems bring more operational data onto the XM platform and enrich experience ID across our thousands of customers. Experience ID captures customers' feedback from call center transcripts, social media posts, product reviews, and more, and it connects it with the operational data from companies like SAP, Salesforce, ServiceNow, and Genesys. And this helps companies take the right action in the context of their business across each customer's journey with a company. In Q3, we reached 8.8 billion experience IDs in the Qualtrics XM directory. This is the largest database of human sentiment. Now, before I close, I wanted to let you know that X4, the premier gathering of experience management professionals in the world, is coming back in March in 2023, and you're all invited. This will be our first large in-person event since COVID, and you don't want to miss this one. X4 is our most powerful moment to launch products and to bring customers and partners together, and I look forward to seeing you there. Now, to close, our results continue to demonstrate the durability of our business. and the value of our platform in solving our customers' most critical challenges. We're the only company that brings together employee, customer, product, and brand experience management together on a single platform. And we remain well positioned to extend our market leadership through this cycle. As we embark on the last few months 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 20% free cash flow margin. I'd like to thank our customers and our partners for putting their trust in Qualtrics. In the midst of uncertain times, they're investing more deeply with us. And finally, I'm grateful for our employees all over the world who bring that customer obsession to the work that we do every day. Now over to you, Rob.
spk07: Thanks, Zig, and good afternoon, everyone. As Zig said, we generated strong growth and profitability in the third quarter. Total revenue was $377.5 million in the third quarter, up 39% year-over-year. Subscription revenue in the third quarter was $314.8 million, up 43% year-over-year. Professional services and other revenue was $62.8 million for the third quarter, representing 22% growth year-over-year. our remaining performance obligations representing all future revenue under contract ended the quarter at $1.895 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 $1.047 billion, up 34% year over year. Third quarter calculated billings were $331 million, up 17% year over year. FX movements resulted in a headwind of approximately 2.5 percentage points to calculated billings in the third quarter. Our XM platform is mission critical for customers in these uncertain times, as demonstrated by our net retention rate of 124%. while gross retention rate remained consistent with historical levels. Customers spending more than $100,000 in annual recurring revenue grew 32% year over year to 2,199 customers. Turning to margins, our Q3 non-GAAP gross margin was 76.2%, consistent with the prior quarter. Our non-GAAP operating profit for the third quarter was $22.6 million, resulting in a non-GAAP operating margin of 6% compared to 4.9% in Q3 of 2021. The increase in our third quarter operating margin reflects our slowed pace of hiring and ongoing investment discipline as we focus on durable and efficient growth. Operating cash flow for Q3 was negative $29 million compared to flat in the year-ago period. Free cash flow in the quarter was negative $39 million compared to negative $13 million for Q3 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 an annual cycle given the billing seasonality in our business. We ended the quarter in a strong cash position with approximately $732 million in cash and cash equivalents and no debt. Moving now to our Q4 and fiscal year 2022 business outlook. We are seeing a more measured buying environment as management teams apply more scrutiny to budgets and spend. We continue to remain disciplined with our investments, and our business is demonstrating both durable growth and improving profitability, which is reflected in our outlook. We expect total revenue for the fourth quarter to be $380 million to $382 million, representing 21% growth year over year at the midpoint. Within this, we expect subscription revenue to be in the range of $323 million to $325 million, representing 25% growth year over year at the midpoint. We expect non-GAAP operating margin in the range of 5.5% to 6.5%, and non-GAAP net income per share of 2 cents to 3 cents, assuming 595 million weighted shares outstanding. For fiscal year 2022, we expect total revenue in the range of $1.45 billion to $1.452 billion and subscription revenue in the range of $1.219 billion to $1.221 billion. At the midpoint of the ranges, this represents a subscription revenue growth of 40% year-over-year and a total revenue growth of 35% year-over-year, respectively. We expect non-GAAP operating margin of 4%, as implied by our Q4 guide. We expect a non-GAAP net income per share between 4 cents and 5 cents, assuming 590 million weighted shares outstanding. As we wrap up 2022 and plan for 2023, We are excited by the opportunity to take share as the category leader in experience management while delivering consistent progress toward our long-term financial targets of 20% plus operating margin and 25% plus 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.
spk09: Thank you. To ask a question, you will need to press star 1-1 on your telephone number. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kirk Maturne with Evercore ISI. Your line is open.
spk12: Yeah, thanks very much. Zig, can you just talk about the operating environment today versus maybe 90 days ago and what you're seeing in particular in terms of you know, some of the softness in terms of, you know, new deals and maybe how that changes when you get into an expansion opportunity. And then, you know, if I could just add one for Rob as well. Rob, can you just talk? I know you don't like to, you know, we don't really, you don't guide the billings, but can you just talk a little bit about the gap between billings and CRPO this quarter, just because it's a little wider and I'm sure we're going to get some questions on that.
spk04: Thanks. All right. Great. Thanks. I'll start off and then hand it over to Rob here just in a second. So first off, this is much more in what Rob and I just talked about here and connected to that, which is, look, there is levels of uncertainty that continue. I think that's consistent with what we've seen in the previous quarter. And as a result of that, it's more challenging as far as the buying environment. There is increasing scrutiny. It's in the decision-making cycle. And I think in particular with respect to new logos new customers coming on But at the same time I would say we've been quite pleased with the execution of our sales team when rates remain high and I think in particular the reason behind that is there's a movement by customers to be able to understand what's right around the corner with their own customers and their employees and being able to make sure that they're maintaining their existing customer base knowing that where to be able to invest products, know what customer journeys will matter the most, know how to focus on being able to retain their customers. And as uncertainty continues, people tend to zoom in and say, OK, let's make sure that we're paying most attention to our existing base of customers. This is where our platform has been quite relevant. And so as a result, you're seeing win rates remain strong. You're seeing that showing up in our NRR. By and large, it's a continuation of themes that we've seen before, and I'll let Rob expand.
spk07: Yeah, thanks, Kirk. And I want to start and baseline a little bit on calculated billing, give you a couple of other points that I think are important, and part of that will then share the difference, the primary difference that you're seeing between the CRPO and the calculated billings. So, a couple things on the calculated billings. We highlighted that We did see the FX headwinds about 2.5% on the calculated billings this quarter as you compare that growth rate to the prior year. And I would note on that FX that we don't have a crystal ball, but if those FX movements remain consistent with where they're at today relative to prior year, you could anticipate a similar type of headwinds for our business into the next couple of quarters. Then you've got a couple other factors. This is, as you likely know, the last quarter where we don't have Clarabridge in the prior year. The Clarabridge acquisition closed October 1st of 2021. So that has an impact on your calculated billings if you're looking at a normalized versus the current comparable. And then we did see an increase in delayed billings. in the current quarter compared to prior period. That's primarily in multi-year deals where the first year billing amount is set to an amount that's lower than those future years. That's your primary difference between the CRPO and the calculated billings. But I wanted to give you these factors because when you take the Clarabridge impact into account and the delayed billings into account, those two factors somewhat offset each other. And what you're seeing in calculated billing is reasonably representative for what we're seeing in the business on a growth rate perspective.
spk12: That's super helpful. Thanks, guys.
spk09: Thank you. Please stand by for our next question. Our next question comes from the line of Gabriela Borges with Golden Saks. Your line is open.
spk01: Hi, good afternoon. Thanks for taking the question. Both of my questions are for Chris. So Chris, firstly, any color on regions and markets or parts of the organization that are more willing to invest versus less willing to invest? And then as we think about the environment persisting through 2023, talk to us about your areas of focus within the sales organization from a trading and enablement standpoint. Is there anything that you're doing differently or what are you focused on as you think about operating in a hardest-selling environment?
spk08: Thanks, Gabriella. Happy to hit both those areas. So one of the benefits of the Qualtrics portfolio is just the diversification that we have across geographies, across industries, and honestly across customer size. And I think that puts us in a position where we could pivot towards customers that are stronger, less impacted by the current environment. So we saw some ebb and flow across different areas of our customer base, in the current quarter. Clearly, as an example, Europe's a little bit stronger impacted due to the war in Ukraine and some of the challenges in that environment as one example. Another one is areas that are more in regulated industries may be a little bit stronger, for example, in the US. And so that diversification I think helped provide stability in our results as well as what was discussed previously about existing customers versus new logos where our existing customers who are currently getting value from the platform and seeing the ROI from putting in programs, those customers are more likely to be stable and to expand their send with Qualtrics because of that confidence and newer logos are taking increased deal scrutiny to be able to pull the trigger because they don't have that history with us during this current period of economic uncertainty. On your second question about what we're focusing on with the sales organization, definitely adapting to the current environment of focusing on near-term pain for our customers is one area that we're focused on, ramping our existing sales organization, and honestly just taking advantage of this opportunity to gain share in these times of economic uncertainty, given the strength of the Qualtrics brand, our strength as the leader in the space and consolidations that are coming our way, to be able to review this as an opportunity to gain share so we can emerge stronger once economic uncertainty starts to subside and we can accelerate off of this.
spk09: Thanks for the call. Thank you. Please stand by for our next question. Our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open.
spk05: Excellent. Thank you, guys, for taking the question. Maybe carrying on a little bit from Chris's comments. I think one of the advantages Qualtrics has in this type of environment is the breadth of your portfolio, right? It's not just a solution for your marketers. It's for HRs, about your employees, your customers, your partners. Does that breadth of platform in this type of environment, do you start to see some consolidation benefits of that? People say, listen, this is a platform we use for multiple use cases, so we could push out some of the point solutions. So one, Do you see that as a potential or by any means coming into the story as of yet? And sort of part two on that question is, does that give us an ability to stabilize the NRR number anytime soon? Because we've seen it take down for a couple quarters now, and I think investors are interested in kind of where would that flatten out or where could we see some support on that metric?
spk04: Thank you. Great question. Thank you. This is big. And I'll answer the first part in that Rob comment on the other piece of it. So I mean, first off, you are absolutely right. The diversification of the product portfolio, the data sets, frankly, plays right back to the origins of how we built our system, you know, a single platform, a single system that allows companies to quickly find and understand where their experience gaps are, fix them, automate, scale, and create advantages in their marketplace. And these days, it's also turning into how to take friction out of their business, where to become more effective and efficient in how they interact with their customers, but in ways that are more personal, and how to connect that with the employee and workforce that they maintain and want to retain. innovations like CrossXM, I think, really shine a beautiful light on this, which is when you have a purpose-built technology around employee experience, you have a purpose-built system that spans digital to customer care and everything in between in terms of journeys and how people interact with the business, and you marry those two together, you create significant advantages over and above anything else in the marketplace. And it is part of what's fuels why companies want to naturally invest more with Qualtrics, especially as they're increasingly trying to make mission critical decisions in the way that they're running their companies. So you're absolutely right. And we're seeing that play out in the mix of our existing customer base. And then even though there's more deal scrutiny and process involved in bringing on the next new customer, there are also very much attracted by the nature of what our system can do and actually helps to drive consolidation effects moving away from single-point solution vendors or ones that are much more outdated in their approaches. Rob?
spk07: Yeah, we're certainly pleased to deliver another strong quarter on the net retention rate of 124%. Historically, that metric has stayed above 120% for Qualtrics, and it's clearly indicative of that strong upsell and expansion motion that we have. Now, during these times of economic uncertainty, we've highlighted, just as Zig talked about, that the new logos are under more pressure on the deal scrutiny, but it can also have some impact on the existing logos and on the net retention rate. And then I would additionally add that the FX headwinds can and will have some impact on the net retention rate. So you're seeing that impact on the net retention rate. I'll go just a little bit beyond that, Keith. I think it's really important for those on this call to understand how we think about and are operating the business. This is a combination of durable top line growth and expanding bottom line growth. So as you see the top line growth and the impact that we're experiencing there, you're also seeing us grow the operating margin and the profitability. And we believe that is core to running a great business that There's stability in the top-line growth, and from where we are today, increasing operating margin, increasing profitability. That's how we think about it, and that's how we're driving forward.
spk05: Outstanding. Just one clarification. Am I right in thinking Clarabridge isn't part of that NRR metric yet because it hasn't been around for a year yet? That's correct. Yep.
spk07: The next quarter, first quarter, that it will be included.
spk05: Perfect. Thank you so much, guys.
spk09: Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist. Your line is open.
spk07: Great. Thanks so much for taking the questions. This is Robert Dion for Terry. With the understanding that it's quite early, hoping to get some color in KPIs surrounding the new real-time contact center solutions announced earlier this month, what have uptake and win rates been like so far for the solution set, particularly versus more contact center-focused competitors? And more broadly, how is the contact center vertical performing in general versus other verticals? And then I had one follow-up. Thanks.
spk04: All right, Robert. I'll take that. So, I mean, at a high level, it is an area of importance for a customer. I think it massively shows the importance of how our system allows companies to change the game in the way that they have done. They can use intelligence to operate the customer care contact center environment. The beautiful thing about Qualtrics is you're bringing advanced AI machine learning into that environment. It has the ability to not just support capabilities in the context of the customer care experience, but along the entire continuum of the journey that a customer has in the way that they interacted with the product, the way they interacted with an in-person interaction inside of a store, or the way that business takes delivery. And our approach to the intelligence in that system, the approach to data, and the fact that it's all running on a single platform is a game changer. And as a result, we see a fairly significant opportunity and already traction in what we're doing in that space, and hence why you see The types of innovations with things like agent assist is one of many innovations that we have underway. And again, I'll call out what I said during the call. You know, be sure to join the innovation event, which is in the U.S. coming on on Wednesday to take a deeper look at not only that capability, but several which are customer driven and are very much of significant importance to people during COVID. this particular point in time in the economy. And these innovations are particularly relevant to people in ways that help to be able to sharpen their focus on things that are most important in their companies.
spk07: Awesome. Appreciate that detail. And then just following up, great to see the CrossXM announcement last week. You know, definitely seems like a logical next step in bringing together the CX and EX world's Zig, I think you touched on this briefly, but curious to understand what kind of upsell opportunity CrossXM presents and whether this solution could help bridge the gap for some customers currently sitting only on the CX or only on the EX side. Thanks.
spk04: Well, I mean, look, one of the things that's important is it plays in along the same themes that we've had all along, which is that we are relevant to multiple buying centers, multiple budget centers inside companies. We gain the benefit as a result of variation, diversity there, but there's also strategic advantages. And so this is a place where when you're creating the union of capabilities, it helps to create a little bit of a springboard effect across multiple departments and companies, but probably most important, back to the big theme, which is helping companies to get closer to their customers and closer to the way that employees affect how customers interact with their business, getting much more personalized, whether it's digitally accommodated, whether it's a person directly involved, whether it's a full digital interaction. And we have a very unique advantage in how we do that. It would be hard for independent individual vendors to try to stitch together the capabilities that we have all under one roof. And the agility that we provide for a company, the ability to dynamically adjust given different trends, all of that plays into the opportunity that we see with CrossXM. But at the same time, it's also continuing to build on the themes you see all along with selling to multiple buying centers and then unlocking areas of capability that customers can't do with existing vendors. Makes sense. Thanks. Thank you, Robert.
spk09: Thank you. One moment for our next question. Our next question comes from Mark Murphy with JPMorgan. Your line is open.
spk16: Yes, thank you very much. So, Zig, I was trying to parse what you said earlier. Did you observe that the demand environment stepped down in Q2 and then held steady? in Q3, or are you trying to say that some of the pressures in the demand environment abated a little bit or maybe continued to mount here in Q3? And then maybe for Rob or Chris, I'm wondering what is your assessment of the setup for this ClearBridge Q4, which I think is a seasonally very huge quarter for that business. Is there a pipeline there to finish on a pretty
spk04: solid note and and maybe how did you feel about the uh kind of the likelihood of converting on that pipeline in q4 on the clara bridge side all right let me start with uh the first part of the answer to that and then i'll let chris elaborate um i mean look there's a important set of themes we haven't seen demand change it's really important you know the nature of what we do People want to get behind the use of the technology, and there's an adoption curve, but that demand book sort of continues to grow, continues to expand for us. At the same time, we are seeing a continuation of a more challenging buying environment, and that sort of shows up in more deal scrutiny, more deal cycles, more deal cycling in the buying decision itself. And it particularly manifests with new logos, which is not unexpected, right? It just takes longer and you can't necessarily time everything out perfectly. But at the same time, the fundamentals of what we provide, people want to get involved and they want to take advantage of the capabilities, which is partly why, you know, we see what we see within the existing customer base and what we see as new customers do come in with their entire new logos. you know, come in for a lot of the same reasons, which is why demand continues to remain consistent. Win rates continue to remain high. And these are important. And, you know, the thing I'll sort of reinforce here is that when there's uncertainty, we help companies navigate their businesses. And we also matter a lot with things that really affect how they ultimately perform on top line revenue and how they perform on bottom line. because they end up putting their resources in the right places. They end up automating things that maybe are taking too long using the capabilities of our workflow and Xflow platform or that part of our platform. So those themes are why we see the dynamic, both more increased scrutiny, but also continuation of demand and that growth all along. Chris?
spk08: Yeah, to take your question regarding kind of the Discover Clarebridge technology that we've incorporated into many of our solutions, We're really pleased with how we've executed on the integration of that team. And during early quarters post-acquisition, we were closing a lot of the deals that existed prior to the acquisition. But over the course of this year, the broader Qualtrics Salesforce has been trained and out there evangelizing, and it's been resonating with our broader customer base as well as prospects. And so I would characterize the pipeline build as strong over the course of the year, setting us up for a good, strong fourth quarter performance. as we would want to given the seasonality of that business and what we would have expected. We're in a good position, and that solution is just resonating. The differentiation that it has of that is strong in the marketplace, and our customers are excited about it.
spk04: Thank you.
spk09: Thank you. One moment for our next question. Our next question comes from the line of Keith Bachman with BMO. Your line is open.
spk03: Hi. Many thanks for taking the question. I wanted to ask a little bit about the cadence of free cash flow and how we should be thinking about it. And more specifically, as we think about the progression and operating margin. Is that going to be the primary drivers we look out over the next few quarters, more than just the fourth quarter, as to think about the potential improvement for cash flow? And my related question is on the billings. And the weakness, at least relative to our model this quarter, was the billings came in below where we were thinking. And so, Rob, I think to an earlier question, you talked about, you know, look more than one quarter, but any comments you want to make specifically about fourth quarter billings and any kind of puts and takes that we should be considering as we try to model that? That's it for me. Many thanks.
spk07: Yeah, thank you. They're very interrelated. So the seasonality that we're seeing in the billings, this year is moving more and more back into Q4 as very clearly, which historically has been our largest quarter from a billing perspective, but that seasonality is increasing even more so this year. And that's a function of more and more enterprise and also a function of the macroeconomic environment that we're in. As that's occurring, the cash flow will be set up to where it's it's more challenged in the q2 q3 and even a bit into q4 whereas q1 a potential for a very strong cash flow quarter as you're collecting the billings that occur in q4 in that q1 time frame so that's why in my prepared remarks you hear me talk about looking at cash flow over an annual period because that will take out the seasonality of those billings that are occurring in that regard and then On the calculated billings and the growth rate, a bit to my comment, I think I believe for the first question, just highlight again, we talked about the two and a half percentage points impact from FX headwinds in the current quarter, as well as the delayed billings where we saw an increase in delayed billings this quarter compared to prior periods. That again was primarily in multi-year deals where the first year is set to a lower billing amount. than the subsequent years. What I was calling out earlier, so I'll go through briefly again here, is that delay in billings is a pretty good counterbalance or offset to what you might think of as the organic or normalized billings, because we have Clarabridge billings in this quarter where we didn't in the prior quarter. So when those two things balance out, growth rate that you're getting in calculated billings is reasonably representative for the business.
spk03: Okay. Robin, just to clarify, when I was asking about kind of a longer-term progression, which would be really year over year, say as it relates to 2023, free cash flow versus 2022, since presumably you normalize for that kind of billings seasonality, is the primary driver in that situation going to be the list and operating margins, or is there anything else to think about? And the question, I should have said it more clearly, was really related to 2023 versus 2022.
spk07: That is absolutely the primary driver. The added factor, I would tell you, is that as we're being disciplined in our investment decisions, we'll also look closely at the CapEx part of free cash flow and where spend may be or may not be needed going into next year, particularly that CapEx comes into play relative to real estate facilities and to some degree new employees as they're onboarded. So it's the combination of those two factors.
spk03: All right. Thank you very much, Mr. Bachman. Thank you.
spk09: Thank you. Please stand by for our next question. Our next question comes from the line of Ramo Lynch-Chow with Parkways. Your line is open.
spk11: Thank you. You talked already a decent amount about the XM Discover and and the pipeline that is building for the fourth quarter. Can you talk a little bit about what you're seeing in the market in terms of, like, how that will change for you as you integrate it into the other products in terms of creating a slightly better linearity for that if you think about more 23 and 24 and ongoing, or is this always going to be like a Q4 story? And then one follow-up question for Rob. Like, when you talked earlier, I think I understood that you said the billings adjusted for currency is probably a good indication for underlying business. I'm just trying to compare that to the bookings I'm getting when I'm using CRPO, which is coming in at a better clip, and I'm just trying to understand the moving pieces there to see, or maybe I misunderstood you in your earlier comments. Thank you, and great quarter.
spk04: Thank you. This is Zig. I'll comment, and then Chris will add, and then Rob. You're going to get all three of us here. um so what briefly the way to think about accent discover is that it is integral to our overall platform what that means is that we're weaving in a very strong and differentiated capability into all of our product lines and it is fit for purpose to change the game across a whole variety of areas in which unstructured data and analytics around unstructured data and being able to detect sentiment emotion effort and a lot of other capabilities to substantially advance what multiple buying centers can take advantage of especially in a time where you know some of the signals that that system provides in these budget centers really matters that's how to think about that so that's the strategy in the direction chris
spk08: Yeah, to talk a little bit about how XM Discover is getting incorporated and how that might impact seasonality. The primary reason historically why it's been more fourth quarter is because of the larger deal size and the larger customers that they've historically sold into. And that aspect will continue as part of the Qualtrics portfolio as we continue to focus on that area. However, as we do incorporate that technology into our other solutions, including across employee experience and other areas, that it will start to have a benefit across the portfolio as we use it to continue to differentiate ourselves in the marketplace. And so that will provide an overall lift as well. But the core aspect of it being a bit more of a solution that has larger deal size and focus a bit more on the enterprise space will persist as you think about kind of the seasonality of billings.
spk07: Yeah. And Ramo, in regards to the calculated billings and the CRPO or CRPO bookings, So what I've called out is three factors that are impacting the calculated billings or the growth rate, which again are the FX headwinds, the normalization for Clarabridge, as this is the last quarter where you have inclusion of the Clarabridge results in the current quarter, but you don't have it in the prior quarter, and then the increase in the delayed billings that we saw. The primary difference, if you're just comparing from CRPO to calculated billings, is the increase in the delayed billings that we saw in the current quarter, but there's a nice offset there for the current quarter relative to the impact of Clarabridge and the impact of the delayed billings. Those offset each other more or less. They work in opposite directions if you're working back towards a normalized growth rate for the business. So that's what I was highlighting. Okay.
spk11: All right.
spk07: Thank you. Well done.
spk09: Thank you. Please stand by for our next question. And our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.
spk13: Perfect. Thank you. Zig, it sounds like you're adding a lot of new capabilities to the platform. We talked about, I think, CrossXM already, but you have benchmarks, you have real-time agent assist, and it seems like there's a little bit more to come in March next year when you'll make some additional announcements, I presume. But how do you think about the additional capabilities how you capture some of this additional value that you're delivering to customers, their pricing power that you have, do these, do these capabilities get monetized up early or is there more of an indirect benefit that you see to the business as you continue to innovate and broaden the platform capabilities here?
spk04: I mean, one thing, one thing I'll highlight Arjun is that, that we're just getting started. And it's really important when people think about the, the, the scope and size and what's possible with this category. We literally think that we're just at the very beginning of what the opportunity is ahead. And these innovations that we've announced are, frankly, a good example of what customers are asking of us. A lot of these announcements and work that's been underway have involved customers who have been closely involved with us and their priorities for them. And that will continue. And you're right about what's to come. There will be more. And when you think about monetization, it does reflect in what people are asking for over and above what they're buying today. So it does create an uplift of opportunity. It doesn't all come overnight. Just super clear about that as well. But it naturally sort of follows this continuum of what they want to understand of their customers, how they want to interact with their customers, and frankly, the actions that people want to take across many different departments inside of a company. You know, call center is one example of that. But the unique nature of our system is that we help to automate and create efficiency in many other departments inside companies in ways that were very difficult to do before. across existing investments of technology. You know, you take a CRM system, for instance, now we're lighting up capabilities that weren't possible before because we have a stronger signal of understanding the intent behind their customer. And that opens up the door for use of data, like benchmarks, for instance, or capabilities like agent assist and the call center and so forth. So that's how to think about the work that's underway here, but again, I'll reinforce the fact that this is just the beginning.
spk13: Okay. Got it. And then just maybe for Rob, as you think about some of the changes that you've made in the business, drive more operational discipline, how should we think about maybe the progression of your operating margin and your free cash flow margin to some of the long-term targets that you have out there, you know, if we look beyond Q4 into, you know, more of a medium-term timeframe?
spk07: Yeah, we're, as you would imagine, pleased with the improvement that we see in the operating margin to 6% in this quarter. It's clearly another indication of the overall operating margin that we see in the business. And we see that significant operating margin along those long-term targets. As indicated by the Q4 guide, we see this as sustainable operating margin improvements that we've made and the continuation on our path to those long-term targets, which, as we've previously mentioned, we believe we can achieve over the next four to five years.
spk04: Perfect. Thank you. Yep. Thanks, Jordan.
spk09: Thank you. Please stand by for our next question. And our next question comes in line of Bob and Shaw with Deutsche Bank. Your line is open.
spk15: Great. Thanks for taking my question. I guess we'll start off with Chris. You guys continue to find improvements from an operating leverage standpoint. Can you just talk about where within the company you guys are finding these additional efficiencies and how we should think about these operating changes being more transient and based on the macro versus more permanent?
spk07: Yeah, I'll jump in first. This is Rob. And then if Chris has any follow-on comments. There's a couple of places that we're looking at. I think one of those areas that you're seeing is in the sales and marketing area. And it's an item that we've talked about with investors and analysts in the past. We know that there is increased efficiency potential in our sales and marketing. It comes across a couple of points. One is our partner ecosystem. As we continue to work closely with them and as that channel increases, it's a very efficient channel for go-to-markets. And then as we have expanded internationally, and significantly so since the time of the SAP acquisition back in 2019 through to today, there's a certain ramp that occurs as you land people in key geographies and key regions. We've hit scale in many of those areas, and now is the time where we'll see increased efficiency come through, primarily in the sales and marketing, but also across other areas of the P&L As we move in the medium to long term and as subscription revenue becomes more and more of our total revenue, the strong subscription margins that we have will drive up gross margins, again, over the medium to long term. And then there's ongoing operating leverage opportunities in R&D and G&A as well. So all of those are the path that we take from where we're at today to our long-term target.
spk00: This is big.
spk04: I only want to just summarize that, which is saying like, look, all along, this has been a part of our strategy, which is to build a great business and also not to take knee-jerk reactions to what we're doing. There's a strategy here where we think there's compelling margin opportunity. We also think that Thinking medium and long-term, we also see a significant market opportunity. And we think there's a responsibility here to be managing to both. Even though you can't predict every single step along the way, there's a bigger picture view that we have, which has built an incredibly compelling, great business that we can be proud of on both top and bottom line basis.
spk15: Super helpful. Just a quick follow-up for Rob. Just asking that calculated billings question another way and focusing on deferred revenue. DR was down 7% sequentially, which seemed a bit unusual to us and something that we haven't seen in the past. Can you maybe just help dissect that decline and how much of that was due to that delayed billings impact you spoke about earlier versus maybe the macro impact in new billings? And then how should we think about these headwinds into 4Q from a deferred revenue and billings perspective?
spk07: Well, it's a combination of both, obviously. It's the macros we've talked about and the scrutiny that exists on the new logos. And then it is the added factor is the delay in billing, so the increase in delay that we saw compared to prior years. So the reference point I've given you there is that that delay is more or less an offset to the increase that we're incurring in the current quarter relative to Clarabridge. And You've got numbers that we gave at the time of the Clara Bridge acquisition around the size and the seasonality of their billings. And a quick reminder there, when we acquired them, they were about 100 million run rate business. And about 50% of their billings happen on a somewhat equal basis over the first three quarters, and then about 50% in Q4. So that can help you, I believe, get to what you're looking for in terms of breaking down or quantifying the impact.
spk15: Super helpful. And just quickly following up there, should we expect these delayed invoicing and billings kind of impact occurring in 4Q as well?
spk07: I think it's certainly possible in the current environment. It's important that we will partner with our customers and work with them to close deals where they have value and growth and to do so in a manner that works for both sides. So I think that's a possibility and should be appropriately considered.
spk15: Appreciate the insight and thanks for taking that question.
spk10: Operator, do we have any further questions?
spk09: We have a question for Brent Bracklin with Piper Sandler. His line is open.
spk02: Good afternoon. Thanks for taking the question here. Zig or Chris, I wanted to go back to Clara Bridge now that you've owned this asset for a year and specifically dive into the cross-sell opportunity. On one hand, it is a more challenging macro environment. It's a larger ASP deal. Should we think about maybe a slower cross-sell ramp heading into kind of next year, or are there specific pain points around XM Discover that could maybe resonate in a recessionary environment that aren't so obvious outside looking in here?
spk08: Yeah, the way I think we're going to think about this a little bit more in terms of a little bit less of a cross-sell and more integrating the technology into the solutions we have, for example, in the call center solutions, in the digital solutions, and even into employee solutions. as an opportunity for us to, you know, sell larger deals and to be able to expand and grow with existing customers, as well as have a more compelling proposition for new logos overall. I do think you are spot on that in the new environment, it does help us in areas that I think are going to be stronger in the environment, including call center solutions. We know that's a focus area. It's especially strong that technology's useful for that area as well as the overall competitive environment. It resonates with the increase in unstructured data relative to structured data. It does play well into macro trends as well as the upcoming environment. So I think it's going to play our strength, and we're real happy to have it as part of our portfolio.
spk02: Super helpful color there. And then just, Rob, one follow-up on the delayed billings, just so we're clear here. Short-term deferred did decline $51 million sequentially. I get FX. I get seasonality. The delayed billings, is that a change in renewal terms where they're pushing out the volumes? Is it a change in just the payment timing around shifting from annual prepays to quarterly or semiannual, just trying to get a little more color on when you say a delayed billings headwind, provide a little more color there, just given the drop in short-term deferred.
spk07: Yeah, we thought primarily in some of our multi-year contracts that we're entered into in the current quarter, where the first year of that multi-year contract is set to a lower billing amount than the recurring year. billing amount. And when we talked about consolidation a bit on the call earlier, some of that is occurring when we're transitioning a current customer off of existing point solutions onto Qualtrics. So that first-year billing amount may be set to a lower amount to accommodate the customer's budgetary concerns or budget that's available as they transition off of old solutions consolidated on Qualtrics. And then the recurring billing amount in years two and beyond is set to a higher amount.
spk02: Got it. And that delayed billings, that's happening for new lands or is it happening across renewals and new lands?
spk07: It's primarily on those new multi-year that I talked about that we saw in the current quarter. That's what we saw.
spk02: Okay. Very helpful, Keller. Thank you.
spk09: Thank you. Please stand by for our last questions. And our last question comes the line of Brian Peterson with Raymond James. Your line is open.
spk14: Hey, guys. Thanks for putting me in. So just following up on the partner channel questions, so that was mentioned as an area of efficiency. I'm just curious where we are in the maturity of that effort, and can we really start to see much more material kind of bookings contributions from the partners? And I guess does that come help from net new, expanding? I'd just be curious to get your thoughts there. Thanks, guys.
spk08: Yeah, I'd say it's been a focus for us in terms of building the ecosystem out and the efficiency that can come through that. I'd say we're still early days, however, in terms of where we want to go and where we see that opportunity. There, of course, you saw the comments around our experience with the AWS marketplace and the good performance we have had there, as well as with the major GSIs. So I'd say we're starting to see the positive impact, as Rob alluded to, in terms of impacting our operating market performance. As you think about going forward, I think that is going to be a key driver in continuing to show operating leverage in the sales and marketing line. But there's a lot more ahead versus where we've been so far in terms of that opportunity.
spk09: All right. This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly.
spk01: To raise your hand during Q&A, you can dial star 1 1.
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