Qualtrics: Every Enterprise Empire Needs a Mentat
Q2 2022 results were solid, if not muddled by tough comps
Qualtrics (Ticker: XM) is an experience management company. It extends far beyond measuring Net Promotor Score – Qualtrics is relied upon by over 16,750 organizations around the world to listen, understand, and take action on experience data for its employees, customers, products, and brands. In Q1 2022, the company added marquee logos like Chipotle, Kroger and Hyundai to its list of customers.
So the next time you shop at Kroger (I do all the time) and you are asked to provide feedback – or you may simply shoot straight to airing your thoughts on social media – remember, Qualtrics is listening.
A few opening points on RPO and billings – two of my favorite forward-looking metrics to gauge where subscription-based companies might be headed in the upcoming quarters. However, note that year-on-year numbers for 2022 are slightly obfuscated due to its acquisition of Clarabridge, which closed on October 1, 2021. Also, 2021 quarters were unusually elevated, as 2020 went through pullbacks before snapping back in late 2020 and much of 2021. In addition, Q1 is seasonally a weak quarter for enterprise sales motion, as activities are usually concentrated around Q4. Accordingly, RPO and billing numbers for this quarter may not be as informative when looking at year-on-year or sequential trends.
o RPO grew by 48% year on year – this does, however, include Clarabridge
o Billings, which also include Clarabridge, grew by 44%
Organically, it is hard to tell how RPO and billings grew – I reckon the growth rates to be around mid-30s for both. Solid, considering tough comps from 2021.
Subscription revenue, which is also key metric to watch (albeit more of a lagging indicator compared to the above numbers) for business health, grew by 50%. Organically, it was likely in the high-30s, which is solid despite tough comps (Q1 2021 grew an elevated 46%). Revenue from professional services (low margin business) is not something I pay much attention to, especially when Qualtrics is pivoting towards having external partners perform more of the integration works for customers.
Frustratingly, Qualtrics does not report customer count on a quarterly basis, only annually. In terms of $100k+ customer cohort, it continues to grow strongly at 41%, corroborating with management’s assertion that customers are standardizing various third-party tools on Qualtrics. Sequentially, it added 120 net new customers to this cohort, matching the pace in Q1 2021.
DBNR is holding up very nicely at 128%, which is a record high for Qualtrics. This is organic, so expansion motion is intact, despite macro concerns.
Q1 2022 non-GaaP operating margin was essentially breakeven. Hiring continued to ramp up, with headcount rising to 5,100+. I like to track headcount, as it is a sign of management’s level of confidence in the business.
Note that FY 2022 subscription revenue is projected to grow by 38% (~30% organic) based on the latest management guidance. Qualtrics has been beating and raising in prior quarters, so I would not be surprised if actual growth turned out to be another 5-10 points higher. FY 2021 subscription revenue was originally projected to grow at 29%; actual was 48% (without Clarabridge), albeit the world in general had panned out better than expected in 2021. Judging from RPO and billing growth rates, expansion rate of 128%, and pace of customer add, I am inclined to believe an eventual organic subscription revenue growth rate closer to 40% than 30%, even with tough comps from 2021.
Other points to note from the earnings call:
Situation in Ukraine has caused a few deals in Europe to slip in Q1; some wait-and-see amongst customers there
Qualtrics has integrated Clarabridge by launching a new hybrid product called XM Discover
Continues to build up its partnership ecosystem, which is key to any go-to-market motion for enterprise-grade offerings. Qualtrics is currently paired with E&Y, Accenture, Deloitte, Infosys, and Korn Kerry, among others.
Conclusions from Q2 2022 results:
Qualtrics is the leader in the experience management space, holding a slight advantage over Medallia in terms of size and quality of offering. By the way, Medallia was taken private by Thomas Bravo for $6.4 billion in 2021.
Qualtrics is in a fairly new space, and you may wish to think of it as sort of like a Survey Monkey on steroids, with a much larger brain to help customers compute more than just surveys. Or a Mentat for enterprises, in Dune speak.
Q2 2022 results were consistent with its growth thesis, although the numbers are slightly muddled by tough comps from 2021 and Clarabridge acquisition. Growth rate post 2022 should show up better, more in line with a company than expands at 125%+++, continues to add large customers at a 30-40% pace, and operates in a sector that has plenty of runway.
Every enterprise empire needs a Mentat to make sense of what is going on, and Qualtrics is best-in-class.
(Author is a shareholder of Qualtrics)
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