Qualtrics International Inc. (NASDAQ:XM) Q4 2022 Earnings Call Transcript

Qualtrics International Inc. (NASDAQ:XM) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Qualtrics Fourth Quarter and Fiscal Year 2022 Earnings Call. . 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.

Rodney Nelson : Thank you, operator. Welcome to Qualtrics fourth quarter and fiscal 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 line up to answer your questions. Our results, press release and a replay of today’s call can be found in 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 filing with the SEC including our annual report on Form 10-K for the quarter and fiscal year ended December 31, 2022, that will be filed with the SEC. With that, I’ll hand the call over to Zig.

Zig Serafin : Thank you, Rodney, and thank you all for joining. Q4 was a solid quarter, capping off a very strong year of growth and operating margin improvement. Revenue in the quarter was $389.1 million, up 23% year-over-year. And subscription revenue was $327.6 million up 26% year-over-year. 2022 annual revenue was $1.46 billion, which represents 36% annual growth. Our current remaining performance obligations grew to $1.2 billion at the close of the quarter and total remaining performance obligations grew to $2.17 billion. As customers around the world continue to grow their investments in Qualtrics and commit to multiyear deals. I’ve mentioned before that we’re building a generational business, focused both on growth and profitability.

And I’m pleased that we delivered Q4 non-GAAP operating margin 6.1%, up from breakeven in Q4 of last year. Looking ahead, we’re more committed than ever to helping our customers realize even greater value from the Qualtrics platform while focusing on both revenue growth and margin expansion. We believe that macroeconomic challenges will persist through 2023. This is reflected in our guidance as well as our focus on operating with discipline in 2023. We’re initiating full year 2023 revenue guidance of $1.665 billion at the midpoint of the range, representing 14% year-over-year growth and Q1 total revenue of $392 million to $394 million, representing 17% growth at the midpoint. And importantly, we expect more than double our full year 2023 non-GAAP operating margin at 10.5% at the midpoint, which is an increase of 650 basis points from last year.

We finished the year with more than 18,750 customers as organizations invest in Qualtrics for our proven leadership platform capabilities and innovation road map. The number of customers spending more than $100,000 with Qualtrics annually increased by 17%. And the number of customers spending more than $1 million annually increased 32% year-over-year. While we continue to see increased scrutiny of deals in Q4, our win rates remained strong. And our existing customers continue to invest in Qualtrics, which you can see in our 120% net retention rate. The Qualtrics platform is becoming central to how organizations make mission-critical customer and employee decisions and drive automated actions to protect their revenue, increase efficiency and improve their operations.

We help them quickly identify and resolve points of friction across all digital and human touch points. And that makes our business resilient even in times of macroeconomic uncertainty. In Q4, market leaders like Delta Airlines Principal Financial, Roche, Bridgestone, Farmers Insurance and Quanta grew their investments in Qualtrics because they understand the value of truly knowing their customers and employees so they can make the right decisions and take the right actions for them. And I couldn’t be more excited about our expansion with the BMW Group. BMW is focused on customer-centric innovation, and we’re proud to be their experience management partner. We’re working with them to manage every aspect of the customer experience, from how people build and order their vehicles online to test drive at the dealerships, to service management for owners.

With Qualtrics, they can bring all of their experience data together on a single platform to create a seamless experience across these channels. They’ll be able to identify issues faster and intervene in the moment. And this will help the BMW Group deliver more connected, holistic and personal experiences, building deeper relationships with their customers at every turn. Another customer that continues to invest across the Qualtrics product line is Young Brands. In Q4, they expanded in both customer experience and employee experience for KFC. At a time when frontline employees are in short supply, KFC will use Qualtrics Discover, engage and social connect to rapidly collect and analyze millions of data points across 27,000 restaurants. And they’ll be able to enhance the ordering and delivery experience across the network and give operators a real-time view of employee and guest feedback.

So franchisees can take immediate action to improve experiences on the ground. On the product. We’re leading the next wave of innovation and experience management with purpose-built solutions that help our customers do more with less for their customers and employees. As the leader in XM, we have a vast universe of experience data, advanced AI and analytics and a system of action that gives us and our customers a competitive advantage. In fact, in Q4, we passed a major milestone, doubling in 1 year to 10 billion Experience IDs on the XM platform. Experience ID captures structured feed bed across every touch point of the customer journey as well as unstructured feedback like effort, emotion and intent. We build this into a rich profile that allows customers to know their customers like never before and then take the right action at the right time.

Together, these Experience IDs form the largest database of human sentiment in the world. We’re the only ones with this technology, and it makes the Qualtrics platform incredibly sticky for our customers. Now I’d like to highlight a few new innovations from the quarter. We launched CrossXM, a new innovation that enables leaders to see how their employee, customer and brand experiences impact one another with just a few clicks. For example, CrossXM reveals how key employee metrics such as manager support, career development and recognition directly impact customer outcomes. So leaders can focus on initiatives that will drive their highest value. Qualtrics is the only company that manages these experiences together on a single platform. For customer, service is the number 1 reason customers switch brands.

And in Q4, we delivered new contact center innovations, including real-time agent assist and automated call summaries, to increase agent productivity, drive operational efficiency and improve customer service. Real-time agent assist uses advanced AI to analyze the support conversation while it’s happening and to deliver real-time informed recommendations and automated call summaries deliver instant call recaps like capturing all of the relevant details of the customer support call, including sentiment like confusion or frustration that only Qualtrics can discover, and then trigger what needs to happen next. In employee experience, we launched Manager Assist, which gives every manager of the data and the tools that they need to increase productivity to reduce unwanted attrition.

Manager assist brings sophisticated analytics to employee feedback, including engagement survey data as well as insights into feedback that they’re sharing on Slack and Help Desk conversations and even social sites like Glassdoor. A great example of the value of employee experience in this environment is the new relationship that we form with Qualcomm. Qualcomm is intensely focused on making the right investments in 2023, and they standardize on Qualtrics Employee XM replacing their stand-alone engagement systems. Now Qualcomm will be able to look at feedback holistically across the organization to identify high-impact actions that build confidence in the future of the company and improve both engagement and retention. In March, you’re going to have a chance to see these and other latest innovations and be with thousands of our customers live in person at X4 in Salt Lake City, and we hope you’re going to be able to join us.

Our ecosystem continues to be a key contributor to our growth. We have more than 400 partners in our network creating unique IP by leveraging the Qualtrics developer platform. And we continue to strengthen our strategic partnerships and work together to solve our customers’ most pressing challenges. In the quarter, Qualtrics and ServiceNow jointly closed a multimillion dollar deal with a Fortune 500 energy company. This company is going to bring together ServiceNow’s customer service management with Qualtrics customer XM Discover, to give service agents the tools that they need to automatically trigger actions based on feedback, uncover drivers for customer satisfaction and to improve their cost to serve. The XM platform is the system of action and is growing around workflow integrations like this across critical systems such as SAP, Microsoft, AWS and ServiceNow.

And these workflows continue to deliver increasing value for our customers. The number of customers using 5 or more Qualtrics’ workflow integrations more than doubled in Q4 compared to the year before. In closing, we continue to manage for long-term durable growth. And you’re going to see that in our strong net retention rate, our growing customer base and the number of customers that are spending $100,000 or more. We’ve been actively realigning our resources to the highest priorities of our business with an eye on both growth and efficiency. And as part of that, earlier this month, we made the difficult decision to eliminate approximately 270 roles globally across the company, which is less than 5% of our workforce. The decision was made after careful consideration, especially for those that are leaving.

And our priority is to support them in what’s next — and whether that’s a new role of Qualtrics or outside the company. Demand and loyalty from customers remain strong, which is going to give us an opportunity to accelerate our growth in an economic recovery. I’m proud of our team who continue to demonstrate their ability to adapt to dynamic markets and the changing customer needs in the marketplace. And of course, I’m grateful for our customers and our partners for putting their trust and Qualtrics. Now over to you, Rob.

Rob Bachman: Thanks, Zig, and good afternoon, everyone. As Zig said, we generated solid growth and profitability in the fourth quarter. Total revenue was $389.1 million in the fourth quarter, up 23% year-over-year. Subscription revenue was $327.8 million, up 26% year-over-year. Professional services and other revenue was $61.5 million, representing 8% growth year-over-year. Our remaining performance obligations representing all future revenue under contract ended the quarter at $2.174 billion, up 25% year-over-year. This metric includes both new and renewal software contracts, along with our professional services business. For reference, Q4 2021 RPO included an opening balance of $130 million related to the Clarabridge acquisition.

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 $1.202 billion, up 19% year-over-year. For reference, Q4 2021 current remaining performance obligations included an opening balance of approximately $78 million resulting from the Clarabridge acquisition. Fourth quarter calculated billings were $571.6 million, up 11% year-over-year. As a reminder, Q4 2021 deferred revenue included an opening balance of $36 million related to the Clarabridge acquisition. FX movements resulted in a headwind of just over $13 million or approximately 2.5 percentage points of growth to calculated billings in the fourth quarter. Fourth quarter subscription billings grew 14% on a reported basis and 17% on a constant currency basis.

Our XM platform is mission-critical for customers in these uncertain times as demonstrated by our net retention rate of 120%, while gross retention remained consistent with historic levels. Q4 marked the first quarter Clarabridge began to contribute to our net retention rate, and its impact was consistent with our net retention rate for the quarter. Given we calculate net retention rate on a trailing 12-month basis, Clarabridge subscription revenue will continue to layer into our net retention rate calculation over the next 3 quarters. We ended 2022 with more than 18,750 customers an increase of approximately 2,000 compared to year-end 2021. customers spending more than $100,000 in annual recurring revenue grew 17%, year-over-year to 2,262 customers, and we finished the year with 189 customers spending more than $1 million annually, up from 143 at the end of 2021.

Turning to margins. Our Q4 non-GAAP gross margin was 75.9%, down slightly versus the prior quarter, while non-GAAP subscription gross margin of 87.5% was consistent with the prior quarter. Our non-GAAP operating profit for the third quarter was $23.9 million, resulting in a non-GAAP operating margin of 6.1% compared to 0.1% and in Q4 of 2021. The increase in our fourth 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 the fourth quarter was $23.9 million compared to $13.7 million in the year ago period. Free cash flow in the quarter was $8.9 million compared to negative $60.4 million in Q4 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 $720 million in cash and cash equivalents and no debt. Moving now to our Q1 and fiscal year 2023 business outlook. We are focused on delivering durable, efficient revenue growth despite what we believe will be a challenging macroeconomic environment throughout 2023. We are streamlining our go-to-market, including leveraging our partner ecosystem for both business development and services fulfillment. We see strong retention, growing pipeline and strong win rates across our business. This combination at our size and scale enables us to take share during macroeconomic uncertainty while driving significant operating leverage. These factors are reflected in our Q1 and 2023 guidance.

We expect total revenue for the first quarter to be $392 million to $394 million, representing 17% year-over-year growth at the midpoint. Within this, we expect subscription revenue to be in the range of $333 million to $335 million, representing 19% year-over-year at the midpoint. We expect Q1 non-GAAP operating margin in the range of 4% to 5%. As a reminder, we are excited to be holding our X4 Summit in March, and our guidance reflects an anticipated margin impact of approximately 350 basis points related to X4 in the quarter. We expect non-GAAP net income per share of $0.01 to $0.02, assuming 605 million weighted shares outstanding. We expect to incur approximately $5.8 million in onetime expenses associated with our reduction in force. The majority of these expenses will be incurred in the first quarter.

For fiscal year 2023, we expect total revenue in the range of $1.661 billion to $1.69 billion and subscription revenue in the range of $1.406 billion to $1.414 billion. At the midpoint of the ranges, this represents subscription revenue growth of 15% year-over-year and total revenue growth of 14% year-over-year, respectively. We expect non-GAAP operating margin in the range of 10% to 11%, implying 650 basis points of expansion at the midpoint, and we expect free cash flow margin to move more in line with non-GAAP operating margin for the full year. We expect non-GAAP net income per share between $0.20 and $0.24 assuming 625 million weighted shares outstanding. As we begin 2023, I’d like to echo Zig and thank all of our employees and partners for their continued hard work and for our customers who continue to recognize Qualtrics as the clear category leader in experience management.

We are in a strong position to take market share while delivering long-term durable growth through a challenging macroeconomic environment and to leverage our leading platform, size and scale to accelerate growth when the macroeconomic environment stabilizes. We’re thrilled to be bringing X4 back in person this year, and we’re looking forward to seeing many of you in Salt Lake City in March. With that, Zig, Chris and I are happy to take your questions, and we’ll turn it back to the operator.

Q&A Session

Operator: . Our first question comes from the line of Keith Weiss from Morgan Stanley.

Unidentified Analyst: This is Elizabeth on for Keith. You mentioned deal scrutiny continued into Q4. And I was wondering if you could provide any color on just the changes you saw in particular, around yield scrutiny over the last 3 months? And I’m curious if — there’s an opportunity to see some improvement in just the willingness to spend. Now that 2023 budgets are a little bit more firmed up and companies can get a bit more transparency on their go-forward plans.

Chris Beckstead: This is Chris Beckstead. I think what we saw in Q4 was pretty consistent with what we saw in the latter half of the year for 2022 and pretty broadly geographically overall. Inside of that, we saw continued strength in our win rates, especially from a competitive perspective. And so we felt like we continue to be very well positioned. With regards to entering the new year, we just got done with our field kickoff this week. And the field is excited to get off to a strong start for 2023. And it’s early days in terms of what’s going to happen with new budgets, but we’re excited and motivated and driven to go after and make 2023 a great year.

Zig Serafin : Look, let me add a little bit, Elizabeth. This is Zig here. I mean, first off, no one’s immune to what we’re seeing in the marketplace, but there’s also been a continuation, as Chris said, of just the general pattern of people exercising more scrutiny, deal cycles extending. And so that’s been something that we’ve talked about. But we believe that we’re faring better than others because of the value of the platform, particularly right now where companies are honing in on technology and solutions that affect the way that they can drive performance in their own companies, things like how to drive revenue with customers, understanding what’s most important, how do you take the right actions in the right places, while at the same time, finding ways to be able to save costs and operate more efficiently.

And we happen to hone into areas that are at the intersection of those points, given the way that we’ve designed our platform. And it is why we continue to see demand remaining strong in spite of the fact that you see elongated deal cycles. So that’s the additional context.

Unidentified Analyst: Great. And I just wanted to quickly follow up on your comments about Clarabridge discover in the NRR, which ticked down from last quarter. Is the comment there that wasn’t a benefit in the quarter. And since that’s a trailing 12-month metric, we should — it should layer in over time. Just trying to think directionally, is Q4 kind of the bottom or NRR?

Rob Bachman: Yes, the comment relative to ClearBridge is that the NRR that it added coming in for this first quarter was consistent with the 120% that we represent that we recorded. Certainly, as we continue through the macroeconomic challenging time, you could see the NRR continuing to decrease until there’s more stability. And consistent with the comments I made in my prepared remarks, when macroeconomic times stabilize, we believe there is a very clear opportunity for us to reaccelerate where we’re at growth profile.

Operator: And our next question comes from the line of Gabriela Borges from Goldman Sachs.

Gabriela Borges: Rob, I wanted to ask about how you thought about the cadence of subscription revenue growth in 2023? I heard Chris talking about macro environment being consistent. And then I look at the subscription guidance implying a decel from 19% to 15% for the full year. So are you assuming that the macro environment gets worse? Maybe just a little more detail underpinning how you thought about linearity this year.

Rob Bachman: Yes. I think part of the question, Gabriela, is relative to the guidance, right, for the full year. And consistent with our guidance philosophy and methodology, we believe that it’s good to be prudent with how we guide for the full year, and our guidance takes into account a persistence of those macroeconomic challenges that we’re seeing. So Q1 is here and upon us. And so that guide is closer to us. And then as we look at the full year, there’s certainly, again, some prudence in that guidance for the full year.

Gabriela Borges: Okay. And for Chris, I appreciate the comments on leaning on partnerships in the channel. Give us a little more detail on how you’re executing on efficiencies in sales and marketing without potentially compromising the deal pipeline?

Chris Beckstead: Yes, great question. As you see in our operating margin our performance in 2022, we are seeing the leverage we expect from our business model, including the sales and marketing costs coming down as a percentage of revenue. One of the big changes for 2023 as we finished fully integrating Clarabridge, including from a go-to-market perspective. And so we’ve integrated the Clarabridge sellers in with our customer experience sellers and brought that together so that they’re both able to carry the full bag and run independently in a more efficient way. And then as — we set up our structure in a way that as we continue to scale the business and continue to grow based upon the unit economics, we see continued opportunity to improve our sales and marketing as a percentage of revenue based upon that business model.

And so we’re set up to scale and continue to have that support our long-term profitability objectives through continuing efficiency in sales and marketing.

Zig Serafin : Part of what also is important to note, we’ve talked about this before, is the nature of how we built our platform and the ability to efficiently expand into new use cases and how that then nicely ties in with the way that the sales force is starting to scale. And so that, frankly, is one of the innate capabilities of the company’s business model and how that nicely ties in with the way the technology has been designed in the first place.

Operator: And our next question comes from the line of Arjun Bhatia from William Blair.

Arjun Bhatia: I just wanted to touch on the $100,000 and $1 million customers. It seems like there was a pretty big tick up in Q4. Can you maybe just talk about how the business performed in Q4 in enterprise relative to some of your other segments, mid-market and SMB? And was Clarabridge or XM Discover, was that a part of the contributor to the big jump in large customers this quarter?

Chris Beckstead: Yes, thanks. In terms of looking at the business in Q4, in particular, we did see the macroeconomic challenges across the board. We did have some great examples of strong execution, especially with upselling, as Zig talked about in terms of some of the examples he gave of customers that are using the platform that have continued to expand and continue to bet on both customer experience and employee experience. So I think that upsell and strength with our existing customer base helped as that metric reflects both new customers but also customers that expand into larger organizations into the $100,000 plus customers as well as the $1 million plus customers. We also saw strong execution internationally. Zig gave the example of BMW that we are really pleased with that example.

And so I’d say nothing particular to point out other than we feel like we’re executing relatively well in the current challenging environment we have overall, and our existing customers continue to grow and expand.

Zig Serafin : I want to add to that just for a second. I mean, one of the characteristics of this business is the fact that we have strength in the enterprise. We also have strength in the mid-market, and we’re diversified across many different industries. And that plays in nicely as you go through the ebbs and flows of the economic cycles. And that will also act as fuel to the way that we manage and grow the business towards some of the long-term growth objectives that we have. So the markers that we highlighted, a $1 million-plus customers, $100,000 plus are very much in tune with some of the milestones and objectives we set for ourselves of where we want to be growing the business as people take more and more advantage of capabilities that are built into the platform. And so we think that is an important signal an indicator for how we’re building the business. And frankly, experience management overall is growing as a category.

Arjun Bhatia: And if I can ask on some of the innovation that you have in the contact center offerings. It seems pretty exciting, especially the real-time agent assist. Does that change the core buyer and from the rest of the Qualtrics platform? And what does that mean for your go-to-market motion?

Zig Serafin : It’s nice about it. And yes, they are exciting new innovations, but what’s nice about it is it naturally extends on the set of buyers that are already working with us. One of the beautiful things about our technology is using the ability to reason on the data, create insights that are highly actionable. And now what we’re doing is we’re taking the additional next step, which is to create purpose-built solutions that create highly efficient actions at high — that create high level of value for customers. And I think the one you pointed out Real-time Agent Assist is one of several examples. But again, back to the core of your question, which is it extends on the buyer universe we’re working with. However, also expands the budget pool that we can be working with. And it actually fuels the consolidation of larger sets of budgets that are coming our way that are uniquely tied to the nature of the intelligence in our system.

Operator: And our next question comes from the line of Kirk Materne from Evercore ISI.

Peter Burkly: This is actually Peter Burkly on for Kirk. So Zig, I appreciate your comments on the macro. Just curious, what would have to happen to see sort of reacceleration in your business over the course of the year relative to your current expectations? Like are there any verticals or regions or perhaps use cases that you would call out there holding up better today or worse?

Zig Serafin : Well, look, it’s a good question, but — and I’ll let Chris expand on this if he has any additional comments. But one thing is important to keep in mind is that we continue to see demand grow for our technology. And in fact, the nature of what we’re doing, there are more strategic decisions that are being made around the use of our platform, and that’s informing larger budget pools that are becoming available to the types of solutions that we can end up providing and often far more effectively than pre-existing legacy systems who might be using or even service-oriented-type solutions that they might have put together. So demand continues to grow, right? Now we also have highlighted the fact that we’re seeing deal cycles extend.

There’s more scrutiny, more process, that’s quite consistent across many different technology universes. So part of your question is, you would actually see that speed up effectively, right? And it would be done consistently across geographies and frankly, across different industries. So Chris, do you want to add anything?

Chris Beckstead: Yes. The only thing I’d add is from an industry perspective, high tech has been an area, I think it’s been well documented. It’s been challenging with a lot of conservatism built in, especially in the U.S. So we’re anticipating that to continue to be challenging. But if that were to improve, that could also help us improve our results as well from an industry perspective. But as Zig pointed out earlier, one of the beautiful things about Qualtrics is we’re diversified, right? We fell into health care, we saw in the public sector and a variety of places. And so we feel like we’re positioned to — regardless of what happens, to do relatively well.

Peter Burkly: That’s really helpful. Maybe just a quick one for you, Rob. You guys have all taken a pretty thoughtful approach just in terms of discussing your ability to perhaps deliver more margin upside if growth were to see some pressure given the macro. And I think your fiscal ’23 guide sort of kind of reflects that reality. So just curious how you guys are thinking about that balance today and what leverage you’re finding in the business to drive those higher margins?

Rob Bachman: Yes. Chris talked about some of those earlier in terms of the sales efficiencies that we’re seeing. This is something very important that I want to emphasize again. We are operating from a position of strength given our size, our scale and our category leadership we have the ability to continue to deliver durable top line growth while also delivering the margin improvement. So really pleased to see how we’re moving that margin up in the current year up to our guide between 10% and 11%. But I would also emphasize that, that is a step along the way in our margin expansion and would reiterate our long-term targets for fiscal year 2026, where we’ll achieve over 20% operating margin and over 25% free cash flow.

Zig Serafin : I’ll just add to that, and we’ve said this before, but it’s always worth repeating. We see significant margins in this business, and a lot of that ties in with the long-term margin targets that we’ve set out. And you’re seeing evidence of our progress against that given the sequential quarter-to-quarter margin improvements that we’ve been making. And it’s a big focus. We believe that our responsibility is to be strong business operators. We’re committed to doing that both on the top and the bottom line. That’s the making of a great business.

Operator: And our next question comes from the line of Mark Murphy from JP Morgan.

Unidentified Analyst: This is on for Mark Murphy. Just a quick question on — you guys have referenced elongation in scrutiny a couple of times now. Are you guys seeing anything in the way of deal compression or people selling projects kind of indefinitely? Or has it just been contained to that elongation?

Chris Beckstead: Definitely, it’s more on the elongation as we’re working through deals. We’re consistently finding that there’s additional levels of approval that our customers are needed to additional buy and across different organizations, whether it’s procurement or the CFO or whatever. And what we’re hearing from our buyers themselves is that they are very interested in the Qualtrics platform, and they’re wanting to move forward. And we’re working to help provide the material to be able to coach through and get through that process. But it’s just taking longer and additional scrutiny that’s driving the longer one. But we’re not seeing a change to our win rates, for example, as a result of that.

Zig Serafin : And we’re also not seeing a change in share gains that we’re making as well, which is really important, both in expanding and consolidating as well as net new customers that are coming our way, which is reflected in the update on the total number of customers.

Unidentified Analyst: Got it. And one thing that you guys have talked around a little bit. But are your customers finding new applications for CX or EX any for products as their priorities have changed from kind of growth to more balanced approach to a little more caution? Or is it maybe new departments that are coming up that didn’t maybe 6 months ago?

Zig Serafin : No. What we’re seeing is people really honing in on the purpose-built use cases we’ve developed, a lot of that ties in with the themes around how we help companies drive revenue and how we actually create cost efficiencies for them. And what we found is that people are prioritizing our platform. And the way that we can play a role to achieve those objectives at scale where you can see material benefits to their companies, especially at a time where you’ve got to make the right choices and where you’re going to spend your money. And the way we’ve designed our platform happens to actually help to hone in on the higher priorities that exist in some of these buying centers.

Operator: And our next question comes from the line of Bhavin Shah from Deutsche Bank.

Bhavin Shah: I guess I’ll start off with one for Chris. I know you talked a little about sales kickoff. Just how are you guys thinking about evolving the go-to-market strategy given the macro, both across all of your solutions, but in particular, with XM Discover given that solution traditionally has been a longer and more heavier sales cycle.

Chris Beckstead: Yes. So no major change to our sales strategy other than what I indicated earlier, which is that where you’re now into the Clarabridge acquisition that enables us to be able to merge in essence, the Clarabridge sales organization with our existing CX sales organization. And that’s a great opportunity for both efficiency and also great for our customers because now we have a single seller who can sell the combined solution, which is also how we’ve designed our product portfolio is to have a single overall customer experience solution across both engage and discover as well as some of the other innovations that we’ve talked about that are coming out. And we believe that model will drive efficiency with a single sales organization focused on driving that and seeing some great gains there.

Zig Serafin : Like the thing I’ll comment at the top is Discover and our Engage capability, those are platform-level technologies. And they are now showing up in a variety of applications that are built on top of our platform. And they then materialize as product capabilities that buying centers can efficiently procure to solve real business problems that they want to go after, right? So we’re making it easier and much more convenient for how companies can take advantage of solutions that are designed specific to those opportunities in the marketplace.

Bhavin Shah: Super helpful. Just following up one for Rob. You’ve always talked about seasonality of billings and RPO becoming more back-end loaded with the inclusion of Clarabridge among other factors. Obviously, today, you’re running into a more difficult macro. So I guess in the context of deal cycles lengthening from 4Q, how do we think about the seasonality of billings into fiscal ’23, in particular for 1Q?

Chris Beckstead: Yes. I think as we’ve talked about the challenges that we’re seeing, which I think a lot of the market and the technology world is seeing with the additional scrutiny and bill cycle lengthening is not new to Q4. We’ve seen that for the majority of we saw that for the majority of 2022, and we expect that to persist into 2023. So given that, there’s nothing that I would call out in terms of changes in the seasonality if those things persist, then we would presume that the seasonality would stay fairly similar to what we saw in 2022.

Operator: And our next question comes from the line of Terry Tillman from Truist.

Terry Tillman : Chris and Rob, 2 questions for me. First one, and I don’t know if this is for you, Zig or Chris, but you were talking about ServiceNow, so maybe I’ll point it at you, but whoever wants to go out and go for it. I like hearing about the multimillion-dollar deal. What I’m curious about with ServiceNow. And I think last quarter, you all talked about being a top 5 marketplace seller in AWS and then SAP. If we could look at those 3, where are we terms of the resources really being up to speed? They know the game plan. They have their marching orders. And how much are you starting to mature actually pipeline activity versus maybe more opportunistic early on type stuff? I’m trying to understand if we could hear more of this kind of resonating each and every passing quarter as there’s more pattern recognition with either of those 3 partners? And then I had a follow-up for Rob.

Zig Serafin : Okay. Yes. So I’ll start, and Chris can add. I mean, first off, it’s really important to point out the power of the ecosystem that’s being built around our platform and both on how partners build off of our platform from a software integration and innovation standpoint as well as how partners construct solutions and build services that unlocked value on specific business opportunities or business problems that customers are working on. And so companies like E&Y, for example, in the way that they end up constructing solutions that might tie in with business transformations that their customers are working on. I think we’re in very early stages as a company. We’re very focused on ecosystem. But frankly, relative to the opportunity that we have ahead.

We’re taking measure approaches. We’re focused. We’ve got milestones. There’s objectives, there’s accountability, but we’re in very early stages of the opportunity that we see ahead. And we think that, that will materialize both in market opportunity, pipeline growth as well as in efficiency and leverage that we get for the business model as the larger ecosystem and constructing and building solutions around the system, as I have just described. You pointed out ServiceNow, that’s a beautiful example. I think we’re in the early stages, but I think that there’s really good indication that we’re on the things that. We’ll have a lot of other customers that will want to go and replicate and they come both in small, medium and large opportunities.

And we’ve pointed out one example in what I described during the earnings call as well. So thanks, Terry. What’s your next question?

Terry Tillman : Sure. It’s for Rob. In terms of €“ somebody already asked about seasonality for billings, so I won’t ask that. But Rob, I mean, should we think about 120% is like the flag in the ground in terms of the NRR as we progress through €˜23? Or is there some cushion actually kind of how you’ve put your forecast together and maybe it could actually be a little bit below that? Just a little bit more on that.

Rob Bachman: Yes. I think it definitely could drop below that 120%. And given where we’re seeing the business and the growth and the guidance that we’ve provided, I think that’s natural to understand on the subscription revenue growth. We’re guiding at 15% at the midpoint. So you would expect in line with that, the NRR to come down some, but it will continue to be a key part of how we grow this business is with our existing customer base, and we continue to see significant opportunity for expansion and cross-sell with that customer base.

Operator: And our next question comes from the line of DJ Hynes from Canaccord Genuity.

Unidentified Analyst: This is Luke on for DJ. So given employee experience with such a hot area of investment during what has been a really seeded job market over the last year, with things finally softening in the labor market? I’m curious to what degree you’ve seen a change in maybe the urgency or priority of adoption around that solution relative to the rest of your offerings, if at all?

Zig Serafin : Yes. So I think it’s really important to recognize that it’s not one solution, it’s a portfolio of applications that are designed around the employee life cycle from everything from the onboarding experience of new employees to transition that happens all the way through to understanding the well-being and things that actually drive performance and impact. And that’s really important is that because we have a large portfolio, we’re able to orchestrate the right combination of applications for problems that customers are looking to solve. In addition, though, it’s really important to understand that they are built on the same platform that our customer experience, product experience and brand experience-related solutions are built on.

And as a result, we’re innovating. I mentioned one of the new innovations called CrossXM. And CrossXM is a very unique system because of the ability to be able to understand correlation that takes place between what is happening with an employee base and the impact its having on customer-facing performance metrics within the business. If you look at Yum! Brands and what they’re doing with KFC, they’re trusting Qualtrics as a sole platform for employee experience and customer experience across 27,000 restaurants, leveraging the capabilities that we built at that intersection. And we’re seeing a lot of that. And so it plays in nicely in the advantages regardless of what timing customers might take to fully realizing all of the capabilities. But because you can unlock off that same system, turn it on, it actually helps to drive a desire to leverage Qualtrics strategically.

And over time, turn on additional solutions as necessary. So we’re seeing employee experience far well in the marketplace, given the nature of how it tunes into the things that companies are paying attention to. The other interesting statistic, there’s a recent LinkedIn reports that came out. It shows the fastest-growing roles within companies. And it was interesting, we noted that 3 of the 5 fastest-growing roles are employee experience-specific roles. And they’re roles that have to do with solutions that we’ve built for them. So that’s another interesting indicator of just trends that we think are tuned in really well with the way that we’ve been innovating and creating value and partnering with customers.

Unidentified Analyst: That’s great and very helpful. And then just maybe one for Rob. And it’s been talked about a lot already, but just thinking about your NRR of 120% in the context of your 15% subscription growth next year, do you see maybe that growing as a percentage of the overall growth mix sort of that existing customer base contribution?

Rob Bachman: Yes. It’s something we’ve talked about in terms of where we’re seeing more impact from the macro is relative to landing those new logos. And so when you think about going forward, there is certainly the potential that a larger portion of our growth comes from the existing customer base for a period of time, but that’s also, we believe, gives a lot of opportunity as the macro stabilizes for us to then go and increase the customer base along the way. Certainly, the growth will continue to come from both places. You see that in the total number of customers increasing this year. But as a percentage of the total for the, let’s call it, the near term, you could see the existing customer base become a slightly larger part of the overall growth.

Operator: And our next question comes from the line of Adam Bergere from Bank of America.

Adam Bergere: I had a quick question just to make sure I was understanding the billings number correctly. So I’m taking out the Clarabridge portion out of last year’s Q4, is that correct?

Rob Bachman: That’s right. Yes. that was included there.

Adam Bergere: Yes. And then if I do the same thing for CRPO when I look at current bookings, I’m taking out $78 million from last year’s Q4 CRPO. Is that also correct?

Rob Bachman: Yes.

Adam Bergere: Okay. And then just to get — is it like possible to give like the — how much of it was currency impacted for current bookings? I know you guys gave it for subscription billings.

Rob Bachman: Yes. The overall impact is about that 2.5 percentage points of growth, and that’s for the total billings. That is almost entirely subscription billings. But — so you could think of them as one and the same in terms of the FX impact.

Adam Bergere: Okay. Got it. And then just last question on these. Can you explain like the delta between CRPO growth and the total RPO growth?

Rob Bachman: Yes, the CRPO growth is the current. So as we continue to do multiyear deals that have 2 or 3 years or maybe longer under total contract you can see the CRPO — the RPO, which is all revenue under contract grow faster than the CRPO in any given period.

Operator: And our next question comes from the line of Brian Schwartz from Oppenheimer.

Brian Schwartz: It’s a question on your customer conversations. It’s either for Chris or Zig. I guess it’s relating towards your expansion opportunities and activities. You’re talking about, clearly, you’re seeing more deal scrutiny is elongated cycle like everyone is seeing. My question is, what is underlying that? If I — how much of the scrutiny is related to customers absorbing what the maybe had previously spent on Qualtrics and what they had bought versus what your customers are seeing in terms of demand changes to their own business?

Chris Beckstead: Yes. I would say it’s not customers absorbing. We have great adoption and usage and renewal rates from our using customers. I think it’s more of the customers themselves and their scrutiny themselves in terms of their financials and spending money and putting in additional controls and looking at, especially for new programs of looking at that and having additional approvals or CFO looking at those types of things. And so when our buyers are going in there and they’re interested in expanding a program, it’s harder to get things out internally within our customer base, and they’ve got to go through additional approvals to get it done. So I don’t think it’s reflective of them absorbing what they’ve already purchased from us. It’s more a matter of internal budget approvals within our customer base themselves.

Brian Schwartz: Can I ask you one follow-up? Can you comment or share with us the terms that you’re seeing with the top of the funnel activity? Lots of comments on — we understand what’s going on with the cycles. But what are you seeing in the very early stages. How is the top of the funnel trending compared to what you’ve seen in prior quarters?

Chris Beckstead: Awesome question. As Zig mentioned earlier, demand remains really strong for our platform and program for our customers that continue to put this as a priority area of spend. And we’re entering this year with significantly stronger pipeline that we entered last year overall. And so that has us as excited, and is it’s positive signal that this is an area of prioritization of spend across all of the solutions that we have overall. And so that’s real positive. We had a real focus on continuing to expand our pipeline development, even seek out opportunities, and that’s borne fruits. So we see that positive signal at the same time, as we’ve discussed, we do continue to expect this deal scrutiny to persist. And so we’re just uncertain on the timing of the conversion of that pipeline. But the pipeline itself is starting out significantly stronger than we did last year.

Zig Serafin : The other important trend around pipeline, and I referred to this earlier, is that more budget centers are looking to consolidate relatively less efficient point solutions that they’ve been running, for example, in the call center. And there’s many other examples like that. And so the color and the mix of the type of pipeline coming our way is unlocking access into adjacent budget centers and/or maybe deeper levels of budget that people want to deploy towards our system, which also contributes to the building up of increasingly higher levels of pipe and also expands the opportunity. That said, keep in mind what Chris said also, which is deal cycles still are elongated and people have more process that they’re actually applying to the way that they end up making decisions.

Operator: This does conclude the question-and-answer session as well as today’s program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.