Q3 2022 Qualtrics International Inc Earnings Call

October 24, 2022

Okay.

I would now like to hand, the conference over to Rodney Nelson head of Investor Relations. Please go ahead.

Thank you operator.

<unk> third quarter 2022 earnings conference call on the call, we have <unk>, chairman and CEO , Chris <unk>, President and Rob Bachman CFO .

<unk> prepared remarks, we will open the lineup for questions. Our adult press release and a replay of today's call can be found on <unk> 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.

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 32022 that will be filed with the SEC.

That I will hand, the call over to Jay.

Well, thank you all for joining us and welcome Rodney.

April to have you on the caltex 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 quadric place 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.

It's at $315 million.

And our current remaining performance obligations rose to $1 <unk> $5 billion.

34% year over year increase.

Coming off of the strong quarter, we are raising our revenue guidance for our fiscal year, the 145 $1 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 $100000 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 topline 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 or current expectation that this challenging macroeconomic environment will persist through 2023.

At the same time we.

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 quadrex, 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.

We're all focused on making the right investments across their business to win in this downturn.

They cannot afford customer churn.

Our low employee productivity.

Knowing what matters most to their customers and employees is mission critical.

Globally four three trillion dollars in customer spending is at risk each year due to poor customer experiences.

And our costs and organization six to nine months of an employee salary to.

To replace them the impact of losing a high performer as 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 Quadrex 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 increased productivity.

And we help our customers do it with empathy speed and scale.

In Q3 global leaders like Dominoes L L bean.

<unk> Bank in Korea.

<unk> centers for Medicare and Medicaid.

City Football group, Intermountain healthcare and the state of Missouri, All chose Quadrex.

To improve their most critical employee and customer experiences.

We expanded our relationship with one of the world's largest financial services companies.

Transformed the way that they deliver care.

To their millions of customers worldwide.

<unk> discovers advanced AI capabilities will analyzed every customer care conversation.

Our focus on resolving issues faster.

And with more empathy.

<unk> will help them boost agent productivity increased 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 based electric quadrex customer at Sam, including engage and discover to get a single view of their patients.

And optimize their experiences across every digital touch point, we're proud to help ascension deliver personalized and.

<unk> 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 Rick and the economy.

We added new capabilities in design XM and chose employee XM.

Increased their workforce productivity.

Stronger engagement from Sensus 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 and XM gives us and our customers a competitive advantage.

We have more experience data than anyone else.

Our platform brings together all of the feedback people 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.

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 color.

The actions.

Customers take with corporates are critical to improving the experience that they deliver.

Let me give you an example.

When a flight is delayed.

One leading global airline uses X flow.

<unk> informed flight attendants, so when a passenger on their flight will Miss the connection.

That allows them to be able to help.

<unk> re book and offer drinks or miles for the passenger leaves their plan.

Hundreds of thousands of these automated actions every month.

To deliver a superior customer experience.

I mentioned before the companies can't afford to make the wrong decision right now.

Has to be right.

And 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.

We've been focused on customer driven innovations critical to our key buyers with launches like the following.

Excellent benchmarks, which allows customers to uncover their biggest risks and opportunities based on the XM platforms billions of data points.

Another example.

Is real time agent assist.

It uses AI and automation.

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.

<unk> and survey responded feedback in their own words.

And we launched cross XM.

Which enables 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 retailers already using cross exemptive powerfully correlate how employees drive customer experiences and simplify complex decisions.

With cross XM they.

They discovered that when retail employees felt they had training to do their jobs.

And a new what was expected of them and.

And receive regular feedback from their manager those employee store saw higher performance and better customer satisfaction.

Be sure to watch our XM innovation event this week.

Youll see that.

There's going to be a powerhouse lineup of new products, they are especially relevant to what customers are needed 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 .

<unk> has become one of their fastest growing isd 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 automation and workflows those connections with leading CRM CDP and HRS systems bring more operational data onto the <unk> platform and.

And enrich experienced idd across our thousands of customers.

Experienced IV captures customers' feedback from call center transcripts, social media posts.

<unk> reviews, and more and in connected with the operational data from companies like us.

Salesforce service now and Genesis and this helps companies take the right action in the context of their business across each customer's journey with the company.

In Q3.

We reached $8 8 billion experienced in the <unk> directory.

This is the largest database of humans sentiment.

Now before I close I wanted to let you know that X for the.

The premier gathering of experienced management specialists in the world is coming back in March in 2023.

And you're all invited this will be our first large in person events since COVID-19.

And you don't want to Miss this one.

<unk> 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 the 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.

Putting their trust in contracts in the midst of uncertain times, they're investing more deeply with us and.

And finally, I am grateful for our employees all over the world.

We bring that customer obsession to the work that we do every day.

Now over to Europe .

Thanks, <expletive> and good afternoon, everyone as <expletive> 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 one $8 95 billion up 39% year over year. This metric includes both new and renewal software contract along with our professional services business.

Remaining performance obligations, which is all future revenue under contract that is expected to be recognized as revenue in the next 12 months was one O $4 7 billion.

Up 34% year over year.

Third quarter calculated billings were $331 million up.

Up 17% year over year.

FX movements resulted in a headwind of approximately two five percentage points to calculated billings in the third quarter.

<unk> 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 $100000 in annual recurring revenue grew 32% year over year to 2199 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 four 9% in Q3 of 2021.

The increase in our third quarter operating margin reflects our slower 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.

Compared to flat in the year ago period free cash flow in the quarter was negative $39 million compared to negative.

<unk> $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.

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 2020 to business outlook.

We are seeing a more measured buying environment as management teams apply more scrutiny to budget 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.

<unk> at the midpoint, we expect non-GAAP operating margin in the range of five 5% to six 5% and non-GAAP net income per share of <unk> <unk>, assuming 595 million weighted shares outstanding.

For fiscal year 2022, we expect total revenue in the range of 145 billion to $1 $4 five 2 billion.

And subscription revenue in the range of one to $1 9 billion to one $2 billion to $1 billion at the midpoint of the ranges. This represents the 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 <unk> and <unk>, assuming 590 million weighted shares outstanding.

As we wrap up 2022 and plan for 2023, we're excited by the opportunity to take share as the category leader and experienced management, while delivering consistent progress toward our long term financial target of 20% plus operating margin and 25% plus free cash flow margin.

With that Zig, Chris and I are happy to take your questions I will turn it back to the operator.

Thank you to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Kirk <unk> with Evercore ISI. Your line is open.

Yes, thanks very much.

Can you just talk about the operating environment today versus maybe 90 days ago, and what Youre seeing in particular in terms of some of the softness in terms of new deals and maybe how that changes when you get into an expansion opportunity.

Then if I could just add one for Rob as well Rob can you just talk I know you don't like it.

Don't really guide to billings, but can you just talk a little bit about the gap between billings and <unk>. This quarter, just because there is a little wider and I'm sure we're going to get some questions on that thanks.

Alright, great.

<unk> off and then I'll hand, it over to Rob here just in a second.

So first off this is much more.

Much more than what Robin I, just talked about here and connected to that which is look there is.

Levels of uncertainty to continue I think thats 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 been my 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 win rates remain high.

And I think in particular, the reason behind that is.

There is.

A movement by customers to be able to understand what's the right around the corner with their own customers and their employees and being able to make sure that they are maintaining their existing customer base, knowing where to be able to invest product what customer journeys will matter. The most.

Know how to focus on being able to retain their customers.

And as uncertainty continues.

<unk> tend to zoom in and say, okay, let's make sure that we're paying most attention to our existing base of customers is where our platform has been quite relevant.

And so as a result, youre seeing win rates remained strong youre seeing that showing up in R&R.

And so by and large it's a continuation of themes that we've seen before.

And I'll, let Rob expand.

Yes, Thanks Kirk.

Wanted 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 youre seeing between the <unk> and the calculated billing. So a couple of things on the calculated billings, we highlighted that we did see the FX hedge.

<unk> about two 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 of other factors. This is as you likely know the last quarter, where we don't have clearbridge in the prior year. The Clair Ridge acquisition closed October one of 2021.

That has an impact on your calculated billings, if youre 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 multiyear deals where the first year billing amount is set to an amount that is lower than those future years. That's your primary difference between the CRP Po and the calculated billing.

But I wanted to give you. These factors because when you take the clearbridge impact into account and the delayed billings into account those two factors somewhat offset each other and what youre seeing in calculated billings is reasonably representative for what we're seeing in the business on a growth rate perspective.

Good.

That's super helpful. Thanks, guys.

Kevin.

Thank you please standby for our next question.

Our next question comes from the line of Gabriella Porges with Goldman Sachs. Your line is open.

Hi, good afternoon. Thanks for taking the question most of my questions are for Chris Chris Firstly any color on regions and markets are parts of the organization that are more willing to invest vessels less willing to invest and then as we think about the environment persisting.

2023.

Talk to us about your areas of focus within the sales organization from a training and enablement standpoint is there anything that youre doing differently or what are you focused on as you think about operating in the hottest selling environment.

Thanks, Deborah Keller happy there.

As areas.

One of the benefits of the quality of the 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 areas that towards.

Toward 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 a little bit stronger impacted due to the the war in Ukraine and some of the challenges in that environment as one example.

The other one is areas that are more in regulated industries may be a little bit stronger for example in the U S and so that diversification I think helps 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.

Putting in programs those customers are more likely to be stable and to expand their spend with <unk> because of that confidence in newer logos are taking increased deal scrutiny to be able to pull the trigger because they don't have the history with us during this current period.

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.

One area that where 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 Quad tricks brand our strength as the leader in this space and consolidations that are coming our way to be able to we view this as an opportunity to gain share. So we can emerge stronger once economic uncertainty starts to society and we can accelerate off of this.

Thanks for the color.

Thanks.

Thank you. Please standby for your next question.

Okay.

Our next question comes from the line of Keith Weiss with Morgan Stanley . Your line is open.

Excellent. Thank you guys for taking the question.

Maybe carrying on a little bit from Chris's comments, I think one of the advantages closer access in this type of environment is depressive your portfolio right. It's not just a solution for.

Your market or is this for HR is about your employees your customers or partners.

Does that breadth of platform in this type of environment do you start to see some consolidation benefits of that people say hey, listen this is a platform we use for multiple use cases, so we could push out some of the point solution. So one do you see that as a potential or.

Any means coming into the story as of yet.

And sort of part two on that question is does that gives us an ability to stabilize that NR number anytime soon because we've seen it tick down for a couple of quarters now and I think investors are interested kind of where where that flatten out or could we see some support on that metric.

Thank you Great question. Thank you. This is Doug and I'll answer the first part and let Rob comment on the other piece of it. So I mean first off you are absolutely right.

Suffocation of the product portfolio the datasets.

Frankly plays right back to the origins of how we built our system our single platform a single system that allows companies to quit.

Quickly.

Mind and understand where they are experienced gaps are fixed them automate scale and create advantages in their marketplace and these days. It's also are turning into how we're to take friction out of their business.

Were to become more effective and efficient.

And how they interact with their customers, but in ways that are more personal and how to connect that with the employee workforce.

They maintained and want to retain.

Innovations like cross next time, 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 out people interact with the business and you marry those two together you create significant adverse.

Vantages over and above anything else in the marketplace and it is part of what fuels why companies want to naturally invest more with quadrex, especially as they are increasingly trying to make mission critical decisions and the way that theyre running their companies.

So youre, absolutely right and we're seeing that play out in the mix of our.

Just in customer base, and then even though theres more deal scrutiny and process involved in bringing on the next new customer there also.

Very much attracted by the nature of what our system can do and actually it helps to drive consolidation effects moving away from single point solution vendors are ones that are much more outdated and their approaches.

Rob.

Yes.

Certainly pleased to deliver another strong quarter on the net retention rate of 124% historically that metric has stayed above 120% for qual tricks 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.

As <unk> talked about that the new logos are under more pressure on the bill 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 headwind can and will have some impact on the net retention rate, so youre seeing that impact on the <unk>.

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 they're operating the business. This is a combination of durable top line growth and expanding bottomline growth. So as you see the top line growth and the impacts 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 is stability in the top line growth and for where we are today, increasing operating margin increase in profitability. That's how we think about it and thats, how we are driving.

Forward.

Outstanding just one clarification am I right in thinking Clair ridge isn't part of that NR metric, yet because it hasn't been around for a year, yes correct.

Yes.

<unk> Corp, first quarter that it will be included.

Perfect. Thank you so much guys.

Thank you please standby for our next question.

Our next question comes from the line of Terry Tillman with tourists. Your line is open.

Great. Thanks, so much for taking the questions. This is Robert on for Terry.

We can understanding that its quite early hoping to get some color in kpis surrounding the new real time contact Center solutions announced earlier this month.

Uptake in win rates been like so far for the solutions that 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.

Robert I'll take that so I mean at a high level.

It is an area of importance for our customers that they get massively shows the importance of how our system allows companies to change the game in the way that they have.

You can.

Can use intelligence to operate.

Customer care contact center environment.

The beautiful thing about <unk> is you are bringing advanced AI and machine learning.

And to that environment.

It has the ability to not just support capabilities in the context of the customer care experience, but along the entire <unk>.

Continuum of the journey that the customer has and the way they have interacted with the product the way they entered our active with.

In person interaction inside of a store or the way the business takes delivery.

And.

Our approach to.

The intelligence in that system their approach to the data and the fact that its all running on a single platform is a game changer and as a result, we see a fairly significant.

Opportunity and already traction and 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.

Be sure to join the innovation of that which is in the U S coming on Wednesday to take a deeper look at not only that capability, but several which are customer driven.

Very much of significant importance to people.

<unk>.

This particular point in time in the economy at 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.

Awesome I appreciate that detail and then just following up great to see the cross XM announcement last week.

It seems like a logical next step in bringing together the CX index World.

I think you touched on this briefly but curious to understand what kind of upsell opportunity across XM presents and whether the solution can help bridge the gap for some customers currently sitting only on the CX or only on the <unk> side.

Well I mean.

One of them is important as 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 gained the benefit as a result of.

No.

Variation diversity there.

But there is also a strategic advantages and so this is a place where when you're creating the union of capability that helps to create a little bit of a springboard effect.

Across <unk>.

Multiple departments in companies, but probably most important it back to the big theme, which is helping companies to get closer to their customers closer to the way the employees effect, our customers interact with their business getting much more personalized whether you digitally accommodated whether it's <unk>.

Person directly involved whether it's a full digital interaction and we have a very unique advantage in how we do that.

It's hard to 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 cross that some but at the same time. It's also.

<unk> continuing to build on the themes, you've 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.

Thank you one moment for our next question.

Our next question comes from Mark Murphy with Jpmorgan. Your line is open.

Yes, thank you very much.

So 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 the some of the pressures in the.

Demand environment abated, a little bit or maybe maybe continued to Mount here in Q3, and then four.

Maybe for Rob or Chris I Am wondering what is your assessment of the set up for this clearer.

Clearbridge Q4, which I think is a seasonally very huge quarter for that business.

Is there a pipeline there to finish on a pretty solid note and maybe how did you feel about the.

Kind of the likelihood of converting on that pipeline in Q4 on the <unk> side.

Alright, let me start with the first part of the answer to that and then I'll, let Chris elaborate.

I mean look there is a.

Important set of themes, we haven't seen demand change, it's really important the nature of what we do.

People want to get behind the use of the technology.

And there is an adoption curve, but.

That demand.

Book continues to grow continues to expand for us at the same time, we are seeing.

<unk> of a more challenging buying environment.

It shows up in more deal scrutiny more deal cycles more deals cycling.

In the buying decision itself and particularly manifest with new logos.

Which is not unexpected right 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.

We see what we see within the existing customer base and what we see of new customers do come in where their entire new logos.

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.

The thing I'll reinforce here.

That.

When there is uncertainty we help companies navigate their businesses.

And we also matter a lot with things that really affect.

How they ultimately perform on topline revenue and how they perform on bottom line.

They end up putting our resources in the right places band up automating things that maybe you are taking too long using the capabilities of our workflow and ex slow 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.

Yes, I'll take your question regarding kind of the discover Clair Ridge 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 have been the broader coffee sales force 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.

We would want to given the seasonality of that business and what we would've expected.

Good.

Because it.

And that solution is just resonating a differentiation that at half of that is strong in the marketplace and our customers are excited about it.

Okay. Thank you.

Thank you one moment for our next question.

Our next question comes from the line of Keith Bachman with BMO. Your line is open.

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 in operating margin.

That is going to be the primary driver as 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.

The weakness at least relative to our model. This quarter was the billings came in below where we were thinking.

So Rob I think to an earlier question you talked about.

More than one quarter, but any comments you make you want to make specifically.

About fourth quarter billings in any kind of puts and takes that we should be considering as we try to model that that's it for me many thanks.

Yeah, Thanks, Keith Theyre very interrelated, so the seasonality that we're seeing in the billing. This year is moving more and more back into Q4, as very clearly, which historically has been our largest quarter from a billings perspective, but that seasonality is increasing even more.

So this year and that's a that's a function of more and more enterprise and then also a function of the macroeconomic environment that we're in as that 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 the Q1.

A potential for a very strong cash flow quarter. As you are collecting the billings that occur in Q4 and that Q1 timeframe. 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.

To my comment I think I believe for the first question just highlight again, we talked about the two five 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 <unk>.

Multiyear deals where the first year is set to a lower billing amount then 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 counter balance or offset to what you might think of as the.

<unk>, our normalized billings, because we have clearbridge billings in this quarter, where we didnt in the prior quarter. So when those two things balance out the growth rate that youre getting in calculated billings is reasonably representative for the business.

Okay Robin just to clarify when I was asking about kind of the longer term progression, which would be really year over year.

So yes, it relates to 2023 free cash flow versus 2022, since presumably you normalize for that kind of billings.

<unk> is the primary driver in that situation going to be the lift in operating margins or is there anything else to think about and the question I should've sort of more clearly it was really related to 2023 versus 2022.

That is absolutely the primary driver of the added factor I would tell you is that as we are being disciplined in our investment decisions will 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 that they are on boarded so it's the combination of those two factors alright. Thank you very much Mr. Bachman.

Thank you.

Thank you. Please standby for your next question.

Our next question comes from the line of Raimo Lynch child with Barclays. Your line is open.

Thank you.

You talked already a decent amount about the XM discover 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 and if you think about more 23 and 24 ongoing.

There's always going to be like a Q4 story and then one follow up question for Rob.

When you talked earlier I think I understood that you said.

The building.

Adjusted for currency is probably a good indication for four underlying business.

Just trying to compare that to the bookings I'm getting when I using <unk>, 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.

Earlier comments, thank you and great great quarter.

But.

This is Ed I'll comment and then Chris will add in.

Then Rob Youre going to get all three of us here.

So briefly the way to think about ex them discover.

Is that it is integral to our overall platform.

And what that means is that we're weaving ad.

A very strong and differentiated capability into all of our product lines.

It is fit for purpose to change the game across the 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.

Two substantially advance.

What multiple buying centers can take advantage of.

Especially in a time, where some of the signals that that system provides.

These budget centers really matters, that's how to think about that so that's the strategy and the direction Chris.

Yes ill talk a little bit about how actually discovered to be incorporating and how that might impact seasonality. The primary reason historically why its been more fourth quarter is because of the larger deal size and the larger customers that they have.

Historically sold into and that effort will continue as part of the <unk> portfolio as we continue to focus on that area.

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.

We use it.

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.

Okay.

Yes, and Raimo in regards to the calculated billings in the <unk> bookings, so what I've called out as three factors that are impacting the calculated billings or the growth rate, which again are the FX headwinds the normalization for Clearbridge. As this is the last quarter, where you have inclusion.

Clare Bridge 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 CRP O to calculated billings is the increase in the delayed billings that we saw in the current quarter, but theres a nice.

<unk> set there for the current quarter relative to the impact of Clearbridge and the impact of the delayed billing those offset each other more or less.

Work in opposite directions, if youre working back towards the normalized growth rate for the business. So thats, what I was highlighting okay alright. Thank you.

Thank you. Please standby for your next question.

Okay.

And our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Perfect. Thank you.

Just like it sounds like Youre, adding a lot of new capabilities to the platform.

You talked about I think <unk> already but you have benchmarks you have real time agent assist and it seems like there is a little bit more to come in March.

Year, when Youll make some additional announcements I presume, but how do you think about the additional how do you capture some of this additional value that you're delivering to customers their pricing power that you have duties duties capabilities get monetize separately or is there more of an indirect benefit that you've seen in the business as you continue to innovate and.

The platform capabilities here.

I mean, one thing one thing I'll highlight argue with that.

But we're just getting started what's really important when people think about.

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 in February .

But that's been underway.

Underway.

Have involved customers who've been closely involved with us and.

Their priorities for them.

And that will continue and you are right about what's to come there will be more.

And when you think about monetization.

Does reflected.

What people are asking for over and above what they are 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.

Continue on the.

What they want to understand 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.

Call Center is one example of that but the unique nature of our system is that we help to automate create efficiency.

Many other departments inside companies in ways that were very difficult to do before across existing investments of technology.

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 with 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.

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.

How should we think about maybe the progression.

Your operating margin and then your free cash flow margin for some of the long term targets that you have out there if we look beyond Q4.

To more of a medium term.

Timeframe.

Yes.

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 and 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.

Our guide we see this as a 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.

Perfect. Thank you.

Thanks Jordan.

Thank you. Please standby for your next question.

Yes.

And our next question comes from the line of Bob <unk> Shah with Deutsche Bank. Your line is open.

Great. Thanks for taking my question I guess startup date for Chris you guys talk about guys continue to find improvement.

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 the operating changes being more transient and based on the macro versus more permanent.

Yeah, I'll jump in first and as Rob and then if Chris has any follow on comments Theres. A couple of places that we're looking at I think one of those areas that youre 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 its a very efficient channel for go to market and then as we have expanded internationally and significantly so since the time of the acquisition back in 2019 through to today.

There is a certain ramp that occurs as you land people in key geographies in key regions. We've hit scale in many of those areas and now is the time, where we will 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 is.

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. So this is Greg I only want to just summarize that we're just saying like look all along this is Ben.

Part of our strategy, which is to build.

A great business and also not to take knee jerk reactions to what we're doing as a strategy here, where we think there's compelling margin opportunity.

I also think that thinking medium and long term, we also see a significant market opportunity.

And we think that there isn't responsibility here to be managing to both even though you can't predict every single step along the way.

There is 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.

Super helpful and just a quick follow up for Rob.

Asking that calculated billings question, another way and focusing on deferred revenue Dr was down 7%.

Sequentially, which seems a bit unusual for us and something that we haven't seen in the back can you maybe just help the fact that decline and how much of that was due to that delay in billings impacting scope out earlier versus maybe the macro impacting new billings and then how should we think about these headwinds from a deferred revenue and billings perspective.

Well, it's a combination of both obviously, it's the macro as we've talked about and the scrutiny that exists on the new logos and then it is the added factor is the delay in billings or the increase in delay that we saw compared to prior year. So the reference points 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 Clare bridge and you've got numbers that we gave at the time of the <unk> 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 Youre looking for in terms of breaking down or quantifying the impact.

Very helpful and just quickly following up there, but should we expect these delayed invoicing and billing as kind of impact.

And <unk> as well.

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 thats, a possibility and should be appropriately considered.

I appreciate the insight and thanks for taking my questions.

Operator, do we have any.

Further questions.

We have a question for Brent <unk> with Piper Sandler Your line is open.

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 ESP 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.

Recessionary environments are so obvious outside looking at here.

Yes, the way I think we're going to think about this a little bit more I'm trying to do a little bit less of a cross sell of more integrating the technology into the solutions. We have for example in the call Center solutions into digital solutions and even into employee solutions.

As an opportunity for us to sell larger deals and to be able to expand and grow with existing customers as well as have a more compelling proposition for for new logos. Overall I do think you are spot on that in the in the new environment. It does help us in areas that I think are going to be stronger in the environment, including content.

Our solutions, we know Thats, a focus area, especially strong that technologies useful for for that area as well as the overall competitive environment. It resonates with the increase in unstructured data relative to structured data does play well into macro trends as well as.

The upcoming it back so I think it's going to play our strength and we're real happy to have that as part of our portfolio.

Super helpful color, there and then just Rob one follow up on the delayed billings just so we're clear here short term differed did declined $51 million sequentially I get FX I guess seasonality the delayed billings is that.

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 delayed billings headwind.

Provide a little more color there just given the drop in short term deferred yes, we start primarily in <unk>.

Some of our multi year contracts that were entered into in the current quarter, where the first year of that multiyear contract is that to a lower billing amount than the recurring billing amount and when we talked about consolidation a bit on the call earlier some of that is occurring when we're.

Turning a current customer off of existing point solutions onto <unk>.

That first year billing amount may be set to a lower amount to accommodate the customers' budgetary concerns or budget that's available as they transition off of bolt solutions consolidated on call tricks and then the recurring billing amount in years, two and beyond is that to a higher amount.

Got it and that delayed billings, that's happening for new lands or is it happening across renewals and new lands.

It's primarily on those new multiyear that I talked about that we saw in the current quarter. That's what we said okay.

Very helpful color. Thank you.

Thank you please standby for our last question.

And our last question comes from the line of Brian Peterson with Raymond James Your line is open.

Alright, guys. Thanks.

So just following up.

On the partner Channel question. So that that was mentioned is an area of efficiency I'm just curious where we are in the maturity of that effort in can we really start to see much more material kind of bookings contribution from our partners I guess does that come help from net new expanding.

Curious to get your thoughts there thanks guys.

Yes, I'd say, it's been a it's been a focus for us in terms of building the ecosystem out and the efficiency that can come through.

Through that I'd say, we're still early days however in terms of where we want to go on where we see that opportunity. Therefore, you saw the comments around our experience with the AWS marketplace.

The performance, we have had there as well as with the major <unk>.

So I'd say, we're starting to see the positive impact as Rob alluded to in terms of impacting our operating margin 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 theres a lot more head versus where we've been so far in terms of that opportunity.

Okay.

Alright. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Ladies and gentlemen, thank you for standing by and welcome to <unk> 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.

Thank you operator, welcome to <unk> third quarter 2022 earnings conference call.

On the call, we have <unk>, chairman and CEO , Chris <unk>, President and Rob Bachman CFO .

Following prepared remarks, we will open the lineup to answer your questions. Our results press release and a replay of today's call can be found at the <unk> 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.

With that I'll hand, the call over to Dave.

Well. Thank you all for joining us and welcome Rodney we're grateful to have you on the caltex team.

As you saw in the numbers, we delivered strong revenue growth and operating margin improvement in the quarter.

This shows the critical role Quadrex place 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.

At $315 million.

And our current remaining performance obligations rose to $1 <unk> 5 billion.

A 34% year over year increase.

Coming off of the strong quarter, we are raising our revenue guidance for our fiscal year, the 145 $1 billion at the midpoint.

Yeah.

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 $100000 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 topline growth.

Against the backdrop of macroeconomic and geopolitical uncertainty.

At the same time we.

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 quadrex, 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.

We're all focused on making the right investments or costs through business to win in this downturn.

They cannot afford customer churn.

Our low employee productivity.

Knowing what matters most to their customers and employees is mission critical globally, four three trillion and customer spending is at risk each year due to poor customer experiences.

Costs in organization six to nine months of an employee salary.

To replace them the impact of losing a high performer as 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 Quadrex 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 increased productivity.

And we help our customers do it with empathy speed and scale.

In Q3 global leaders like Dominoes L L bean.

<unk> Bank in Korea.

U S centers for Medicare and Medicaid.

City Football group Intermountain healthcare.

And the state of Missouri, all chose Quadrex.

To improve their most critical employee and customer experiences.

We expanded our relationship with one of the world's largest financial services companies.

<unk> formed the way that they deliver care.

Their millions of customers worldwide.

Quadrex Exxon discovers advanced AI capabilities.

Analyzed every customer care conversation with a focus on resolving issues faster.

And with more empathy.

<unk> will help them boost agent productivity increased customer satisfaction and reduce compliance risk all at incredible scale.

We also formed a new relationship with Ascension.

The nation, leading health systems based electric Quadrex customer at Sam, including engage and discover to get a single view of their patients.

And optimize their experiences across every digital touch point, 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 Rick and the economy. They added new capabilities in design XM and chose employee XM to increase their workforce productivity.

Yes.

Being the leader and XM gives us and our customers a competitive advantage.

We have more experience data than anyone else.

Our platform brings together all of the feedback people are 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.

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 color.

The actions.

The customers take with corporates are critical to improving the experience that they deliver.

Let me give you an example.

When a flight is delayed.

One leading global airline uses X flow.

To item adequate informed flight attendants when a passenger on their flight will Miss the connection.

Then it allows them to be able to help.

<unk> re book and offer drinks or miles before the passenger leaves their plan.

Hundreds of thousands of these automated actions every month.

To deliver a superior customer experience.

I mentioned before the companies can't afford to make the wrong decision right now.

Has to be right.

And 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.

We've been focused on customer driven innovations critical to our key buyers with launches like the following.

Exxon benchmarks.

Which allows customers to uncover their biggest risks and opportunities based on the XM platforms 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.

<unk> and survey responded feedback in their own words.

And we launched cross XM.

Which enables leaders to see how their employee customer and brand experiences and pack one another.

With cross XM they.

They discovered that when retail employees felt they had training to do their jobs.

And a new what was expected of them and.

And receive regular feedback from their manager those employee stores saw higher performance and better customer satisfaction.

Be sure to watch our XM innovation event this week.

Youll see that.

There's going to be a powerhouse lineup of new products, they are especially relevant to what customers are needed today.

Our partner ecosystem.

As 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 <unk> has become one of their fastest growing ISP partners in the horizontal business application space and a top five seller in the AWS marketplace.

And enrich experienced idd across our thousands of customers.

<unk> IV captures customers' feedback from call center transcripts, social media posts product reviews, and more and in connected with the operational data from companies like Salesforce.

Salesforce service now and Genesis and this helps companies take the right action in the context of their business.

Each customer's journey with the company.

In Q3.

We reached $8 8 billion experienced <unk> in the <unk> directory.

This is the largest database of human sentiment.

Now before I close I wanted to let you know that X for the.

The premier gathering of experienced management pressures in the world is coming back in March in 2023.

And you're all invited this will be our first large in person events since COVID-19.

And you don't want to Miss this one.

<unk> 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.

And we remain well positioned to extend our market leadership through the cycle.

Yes.

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.

Putting their trust in <unk> in the midst of uncertain times, they're investing more deeply with us and.

And finally, I am grateful for our employees all over the world.

We bring that customer obsession to the work that we do every day.

Now over to Europe .

Thanks, <expletive> and good afternoon, everyone as <expletive> 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 one $8 95 billion up 39% year over year.

This metric includes both new and renewals software contract 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 one O $4 $7 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 two five percentage points to calculated billings in the third quarter.

Our <unk> 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.

Customers spending more than $100000 in annual recurring revenue grew 32% year over year to 2199 customers.

The increase in our third quarter operating margin reflects our slower 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.

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.

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 2020 to 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.

<unk> at the midpoint, we expect non-GAAP operating margin in the range of five 5% to six 5% and non-GAAP net income per share of <unk> to three <unk>.

Assuming 595 million weighted shares outstanding.

For fiscal year 2022, we expect total revenue in the range of $1 $4 5 billion to $1 $4 five 2 billion.

And subscription revenue in the range of one to $1 9 billion to one $2 billion to $1 billion.

At the midpoint of the ranges. This represents the 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 <unk> and <unk>.

Assuming 590 million weighted shares outstanding.

As we wrap up 2022 and planned for 2023, we're excited by the opportunity to take share as the category leader in experience management, while delivering consistent progress towards our long term financial target of 20% plus operating margin and 25% plus free cash flow margin.

With that Zig, Chris and I are happy to take your questions I will turn it back to the operator.

Thank you to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Kirk <unk> with Evercore ISI. Your line is open.

Yes, thanks very much.

Then.

If I could just add one for Rob as well Rob can you just talk I know you don't like it we don't really guide to billings, but can you just talk a little bit about the gap between billings and <unk>. This quarter, just because there is a little wider and I'm sure we're going to get some questions on that thanks.

Alright, Greg first I'll start off and then I'll hand, it over to Rob here just in a second.

So first off this is much more.

Much more than what Robin I, just talked about your and connected to that which is look there is.

Levels of uncertainty to continue I think thats 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 of can 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 win rates remain high.

And I think in particular, the reason behind that is.

There is.

A movement by customers to be able to understand what's the 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 where to be able to invest product no 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, okay, 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, youre seeing win rates remained strong youre seeing that showing up in R&R.

And so by and large it's a continuation of themes that we've seen before.

And I'll, let Rob expand.

Thanks Kirk.

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 youre seeing between the <unk> and the calculated billings. So a couple of things on the calculated billings, we highlighted that we did see the FX hedge.

Wins about two 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 are 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 of other factors. This is as you likely know the last quarter, where we don't have clearbridge in the prior year. The Clair Ridge acquisition closed October one of 2021, so that has an impact on your calculated billings if youre 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 multiyear 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 CRP Po and.

The calculated billings, but I wanted to give you. These factors because when you take the clearbridge impact into account and the delayed billings into account those two factors somewhat offset each other.

And what Youre seeing in calculated billings is reasonably representative for what we're seeing in the business on a growth rate perspective.

That's super helpful. Thanks, guys.

Kevin.

Thank you please standby for our next question.

Okay.

Our next question comes from the line of Gabriella barges with Goldman Sachs. Your line is open.

Hi, good afternoon. Thanks for taking the question most of my questions are for Chris Chris Firstly any color on regions and markets are parts of the organization.

Willington vast vessels less willing to invest and then as we think about the environment persisting through 2023.

Thanks Diary Ela help you there.

Areas.

One of the benefits of the quality of the portfolio was 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 areas that towards.

Toward customers that are.

Stronger less impacted by the current environment. So we thought.

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 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 U S and so that diversification I think helps 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.

I'm putting in programs. So those customers are more likely to be stable and to expand their spend with <unk> because of that confidence and newer logos are taking increased deal scrutiny to be able to pull the trigger because they don't have the history with us during this current period.

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.

One area, where we're focused on ramping our existing sales organization.

And honestly, Jeff taking advantage of this opportunity to gain share.

In these times of economic uncertainty given the strength of the qual tricks brand our strength as the leader in this space and consolidations that are coming our way to be able to we view this as an opportunity to gain share. So we can emerge stronger once economic uncertainty starts to subside and we can accelerate off of it.

Thanks for the color.

Thanks.

Thank you. Please standby for your next question.

Okay.

Our next question comes from the line of Keith Weiss with Morgan Stanley . Your line is open.

Excellent. Thank you guys for taking the question.

Maybe carrying on a little bit from Chris's comments I think what are the advantages <unk> has in this type of environment is depressive your portfolio right. It's not just a solution for.

Your market or is this for HRS about your employees your customers or partners.

You mean coming into the story as of yet.

Thank you great question. Thank you this is Greg and ill answer the first part and let Rob comment on the other piece of it. So I mean first off you are absolutely right.

The diversification of the product portfolio the datasets.

Frankly plays right back to the origins of of how we built our system. Our single platform a single system that allows companies to quit.

Quickly.

Mind and understand where they are experienced gaps are fix them automate scale and create advantages in their marketplace and these days. It's also turning into how we're to take friction out of their business.

Were to become more effective and efficient.

How they interact with their customers, but in ways that are more personal and how to connect that with the employee workforce.

They maintained and want to retain.

Significant advantages over and above anything else in the marketplace and it is part of what fuels why companies want to naturally invest more with quadrex, especially as they are increasingly trying to make mission critical decisions and the way that theyre running their companies.

So youre, absolutely right and we're seeing that play out in the mix of our existing customer base, and then even though theres more deal scrutiny and process involved in bringing on the next new customer there also.

Rob.

Yes.

Certainly pleased to deliver another strong quarter on the net retention rate of 124% historically that metric has stayed above 120% for quad tricks 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.

As <unk> 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 headwind can and will have some impact on the net retention rate, so youre seeing that impact on the <unk>.

Retention rate.

<unk>, 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 is stability in the top line growth and for where we are today, increasing operating margin increase in profitability. That's how we think about it and thats, how we are driving.

Forward.

Outstanding just wanted clarification am I right in thinking Clara bridge isn't part of that NR metric, yet because it hasn't been around for a year, yes correct.

The next question.

First quarter that it will be included.

Perfect. Thank you so much guys.

Thank you. Please standby for your next question.

Our next question comes from the line of Terry Tillman with curious your line is open.

Great. Thanks, so much for taking the questions. This is Robert on 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 in 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.

Robert I'll take that so I mean at a high level.

It is an area of importance for our customers that they get massively shows the importance of how our system.

Allows companies to change the game in the way that they have.

<unk>.

We can use intelligence to operate the customer care contact center environment.

The beautiful thing about Quadrex is.

Youre, 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 the customer has and the way they have interacted with the product the way they ended our acted with.

An in person interaction inside of a store or the way the business takes delivery.

And our.

Our approach to.

The intelligence in that system their approach to the data and the fact that its all running on a single platform is a game changer and as a result, we see a fairly significant.

Be sure to join the innovation of that which is in the U S coming on Wednesday to take a deeper look at not only that capability, but several which are customer driven.

Very much of significant importance to people.

<unk>.

This particular point in time in the economy.

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.

Awesome I appreciate that detail and then just following up great to see the cross XM announcement last week.

It seems like a logical next step in bringing together the CX index World.

Well I mean.

One of them is important as 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 gained the benefit as a result of.

No.

Variation diversity there.

But there is also a strategic advantages and so this is a place where when you're creating the union of capability that helps to create a little bit of a springboard effect.

Across <unk>.

Multiple departments in companies, but probably most important it back to the big theme, which was helping companies to get closer to their customers closer to the way the employees effect, our customers interact with their business getting much more personalized whether you digitally accommodated whether it's <unk>.

Person directly involved whether it's a full digital interaction and we have a very unique advantage in how we do that.

It's hard to.

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 cross docks, but at the same time. It's also.

<unk> continuing to build on the themes, you've 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.

Thank you one moment for our next question.

Our next question comes from Mark Murphy with Jpmorgan. Your line is open.

Yes, thank you very much.

Demand environment abated, a little bit or maybe maybe continued to Mount here in Q3, and then four.

Maybe for Rob or Chris I Am wondering what is your assessment of the set up for this clearer.

Clearbridge Q4, which I think is a seasonally very huge quarter for that business.

Is there a pipeline there to finish on a pretty solid note and maybe how did you feel about the.

Kind of the likelihood of converting on that pipeline in Q4 on the <unk> side.

Alright, let me start with the first part of the answer to that and then I'll, let Chris elaborate.

I mean, there is a.

Important set of themes, we haven't seen demand change, it's really important the nature of what we do.

People want to get behind the use of the technology.

And there is an adoption curve, but.

That demand.

Book continues to grow continues to expand for us at the same time, we are seeing a continuation of a more challenging buying environment.

It shows up in more deal scrutiny more deal cycles more deal cycling.

In the buying decision itself and particularly manifest with new logos.

Which is not unexpected right 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.

We see what we see within the existing customer base and what we see of new customers do come in where their entire new logos.

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.

The thing I'll.

Reinforce here.

That.

When there is uncertainty we help companies navigate their businesses.

And we also matter a lot with things that really affect.

How they ultimately perform on topline revenue and how they perform on bottom line.

They end up putting our resources in the right places band up automating things that maybe are taking too long using the capabilities of our workflow and ex slow 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.

Yes, I'll take your question regarding kind of the discover Clair Ridge technology that we've incorporated into many of our solutions.

Really pleased with how we've executed on the integration.

Pipeline build as strong over the course of the year setting us up for a good strong fourth quarter performance.

We would want to given the seasonality of that business and what we would've expected.

And a good.

Because it.

And that solution is just resonating a differentiation that at half of that is strong in the marketplace and our customers are excited about it.

Okay. Thank you.

Thank you one moment for our next question.

Our next question comes from the line of Keith Bachman with BMO. Your line is open.

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 in operating margin.

It's going to be the primary driver as 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.

Look more than one quarter, but any comments you make you want to make specifically.

About fourth quarter billings in any kind of puts and takes that we should be considering.

As we try to model that that's it for me many thanks.

Yes. Thanks.

They are very interrelated so the seasonality that we're seeing in the billing. This year is moving more and more back into Q4, as very clearly, which historically has been our largest quarter from a billings perspective, but that seasonality is increasing even more so this year.

That's a function of more and more enterprise and also a function of the macroeconomic environment that we're in as that 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 youre collecting the billings that occur in Q4 and that Q1 timeframe. 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.

To my comment I think I believe for the first question just highlight again, we talked about the two five percentage points impact from FX headwinds in the current quarter as well as the delayed billings, where we saw an increase in delayed billing this quarter compared to prior periods that again was primarily.

Multiyear deals where the first year is set to a lower billing amount then the subsequent years, but I was calling out earlier. So I'll go through briefly again here is that delay in billings is a pretty good counter balance or offset to what you might think of as the.

Okay Robin just to clarify when I was asking about kind of a longer term progression, which would be really year over year.

So yes, it relates to 2023 free cash flow versus 2022, since presumably you normalize for that kind of billings.

<unk> is the primary driver in that situation going to be the lift in operating margins or is there anything else to think about and the question I should have sort of more clearly it was really related to 2023 versus 2022.

That is absolutely the primary driver of the added factor I would tell you is that as we are being disciplined in our investment decisions will 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 are on boarded so it's the combination of those two factors alright. Thank you very much Mr. Bachman.

Thank you.

Thank you. Please standby for your next question.

Our next question comes from the line of Raimo Lynch child with Barclays. Your line is open.

Thank you.

You talked already a decent amount about the XM discover and.

The pipeline that has been linked quarter 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 and if you think about more 23 and 24 ongoing.

There's always going to be like a Q4 story and then one follow up question for Rob.

When you talked earlier I think I understood that you said.

The building.

Adjusted for currency is probably a good indication for for like underlying business.

Just trying to compare that to the bookings I'm getting when I using <unk>, which is coming in at a better clip and I'm just trying to understand the <unk>.

Moving pieces that you see or maybe I misunderstood you and your earlier comments, thank you and great quarter.

Okay.

This is Greg I'll comment and then Chris will add in.

Then Rob Youre going to get all three of us here.

So briefly the way to think about them discover.

Is that it is integral to our overall platform.

And what that means is that we're weaving ad.

A very strong and differentiated capability into all of our product lines.

Is fit for purpose to change the game across the 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.

Two substantially advance.

What multiple buying centers can take advantage of.

Especially in a time, where some of the signals that that system provides.

These budget centers really matters, that's how to think about that so that's the strategy and the direction Chris.

Yes ill talk a little bit about how actually discovered to be incorporating and how that might impact seasonality. The primary reason historically why it's been more in fourth quarter is because of the larger deal size and the larger customers that they have.

Historically sold into and that effort will continue as part of the <unk> 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.

We use it to continue.

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.

Okay.

Of the Clare bridge 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 CRM to calculated billings is the.

And the delayed billings that we saw in the current quarter, but there is a nice offset there for the current quarter relative to the impact of Clare bridge and the impact of the delayed billing those offset each other.

Unless they work in opposite directions, if youre working back towards the normalized growth rate for the business. So that's what I was highlighting.

Alright, thank you.

Thank you. Please standby for your next question.

And our next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Perfect.

U S.

It sounds like Youre, adding a lot of new capabilities to the platform. We've talked about I think <unk> already but you have benchmarks you have real time agent assist and it seems like there is a.

Little bit more to come in March next.

Next year, when you would make some additional announcements I presume, but how do you think about the additional how you capture some of this additional value that you're delivering to customers their pricing power that you have duties duties capabilities get monetize separately or is there more of an indirect benefit that you've seen in the business as you continue to innovate and.

The platform capabilities here.

I mean, one thing one thing I'll highlight on that.

But we're just getting started what's really important when people think about the b.

Stope in 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.

These announcements in February .

Thats been.

Under way.

Have involved customers who've been closely involved with us and.

Their priorities for them.

And that will continue and you are right about what's to come there will be more.

And when you think about monetization.

Does reflected.

What people are asking for over and above what they are buying today. So it does create an uplift of opportunity. It doesn't all come overnight to super clear about that as well.

But it naturally sort of follows.

Continuum of.

What they want to understand 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.

Call Center is one example of that but the unique nature of our system is that we help to automate create efficiency.

Many other departments inside companies in ways that were very difficult to do before across existing investments of technology.

A CRM system for instance, now now we're lighting up capabilities that.

Weren't possible before because we have a stronger signal of understanding the intent behind with 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.

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.

How should we think about maybe the progression.

Your operating margin and then your free cash flow margin for some of the long term targets that you have out there if we look beyond Q4.

To more of a medium term.

<unk> timeframe.

Yes.

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 a 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.

Perfect. Thank you.

Yep, Thanks Jordan.

Thank you. Please standby for your next question.

Okay.

And our next question comes from the line of Bob <unk> Shah with Deutsche Bank. Your line is open.

Great. Thanks for taking my question I guess for Chris you guys talk to guys continue to find improvements.

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 at the very efficient channel for go to market and then as we have expanded internationally and significantly so since the time of the acquisition back in 2019 through.

Today, there is a certain ramp that occurs as you land people in key geographies in key regions. We've hit scale in many of those areas and now is the time, where we will see increased efficiency come through primarily in the sales and marketing, but also across other areas of the P&L.

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 targets. So this is Greg I only want to just summarize that we're just saying like look all along this is Ben.

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 as a strategy here, where we think there's compelling margin opportunity, but we also think that.

Thinking medium and long term, we also see a significant market opportunity.

We think that there isn't responsibility here it could be managing to both even though you can't predict every single step along the way.

There is 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.

Super helpful. Just a quick follow up for Rob.

Asking that calculated billings question, another way and focusing on deferred revenue Dr was down 7%.

<unk>, which seems a bit unusual for us and something that we haven't seen in the past can you maybe just help the fact that decline and how much of that was due to that delayed billings impacting slip out earlier versus maybe the macro impacting your billings and then how should we think about these headwinds from a deferred revenue and billings perspective.

Well, it's a combination of both obviously, it's the macro as we've talked about and the scrutiny that exist on the new logos and then it is the added factor is the delay in billings or the increase in delay that we saw compared to prior year. So the reference point that 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 declare bridge and you've got numbers that we gave at the time of the <unk> acquisition around the size and the seasonality of our billing and a quick reminder, there when we acquired them they were about $100 million run rate business.

Super helpful and just quickly following up there, but should we expect these delayed.

Invoicing and billing as kind of impact.

And <unk> as well.

I appreciate the insight and thanks for taking my questions.

Operator, do we have any.

Q3 2022 Qualtrics International Inc Earnings Call

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