Qualtrics International Inc.
Q3 2021 Earnings Call Transcript

Published: 20 Oct 2021

[Operator:]

Thank you for standing by and welcome to the Qualtrics Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today’s program may be recorded. I would now like to introduce your host for today's program, Steven Wu, Head of FP&A and Investor Relations. Please go ahead, sir.

[Steven Wu:]

Thank you. And welcome to Qualtrics' third quarter fiscal year 2021 earnings conference call. On the call, we have Zig Serafin, CEO; Chris Beckstead, President; and Rob Bachman, CFO. Following prepared remarks, we will open the line up to answer questions. Our results press release and a replay of today's call can be found on the Qualtrics Investor Relations website. During today's call, we will make statements that represent our expectations and beliefs concerning future events that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended December 31, 2020, and our quarterly report on Form 10-Q for the quarter ended September 30, 2021 that will be filed with the SEC. With that, I'll turn it over to Zig.

[Zig Serafin:]

Well, thank you, Steven. And also thank you, everyone, who is joining us here today. Q3 was an outstanding quarter, and our strong momentum continued as revenue in the quarter rose to $272 million, which is up 41% year-over-year. Subscription revenue rose to $220 million, up 49% year-over-year. And we ended the year with more than $782 million in current remaining performance obligations, which is a 58% increase year-over-year. And we're in the midst of a massive shift in how companies engage with and build relationships with their customers and their employees. And this shift is fueling the $60 billion-plus TAM for Experience Management. Our leadership position has never been stronger as we continue to innovate and define the category that we created and as companies accelerate their adoption of Qualtrics across industries. Let me give you just one example, which is from this quarter. Peloton, they're a phenomenal company. They're transforming the fitness world by delivering incredible member experience. Peloton is a long-time customer. And in Q3, they standardized on Qualtrics as their Experience Management platform. One of their core values is to obsess over every touch point of the member experience. I love this. They're using Qualtrics to listen to their community across these touch points and then just share feedback across the entire company. This drives their strategic priorities and then allows them to be able to improve member journeys at every turn. Qualtrics is about forging deep relationships between the organization and the people who matter most, which are the employees and their customers. And we have a single cloud-native platform that allows companies to bring together all of their experience data and their operational data across the four core experiences in any business

[Rob Bachman:]

Thanks, Zig, and good afternoon, everyone. Today, I'll cover our Q3 results and our outlook for Q4. Q3 was another outstanding quarter as we had strong performance on both, the top and bottom line. Total revenue was $271.6 million in the third quarter, up 41% year-over-year. Subscription revenue in the third quarter was $220.3 million, up 49% year-over-year, driven by both strong new business sales and expansions. Professional services and other revenue was $51.3 million for the third quarter, representing 15% growth year-over-year. Our remaining performance obligations, representing all future revenue under contract, ended the quarter at $1.36 billion, up 67% year-over-year. This metric includes both new and renewal software contracts along with our professional services business. Current remaining performance obligations, which is all future revenue under contract that is expected to be recognized as revenue in the next 12 months, was $781.5 million, up 58% year-over-year. Current and total RPO continued to benefit from a lengthening of average contract duration for both new customers and renewals. In Q3, strong expansion across our customer base drove our dollar-based net retention rate to 125%. Customers spending more than $100,000 in annual recurring revenue grew 38% year-over-year to 1,668 customers. Turning to margins. Our Q3 non-GAAP gross margin was 79%, approximately 262 basis points higher than the year-ago period. This increase is mainly due to the continued mix shift towards subscription revenue and higher gross margins in our professional services business. Subscription has increased from 76.9% of our total revenue in Q3 of 2020 to 81.1% in Q3 of 2021 as we focus on driving software usage on our platform and continue to grow our partner ecosystem to provide expanded Experience Management services to our customers. Our non-GAAP operating profit for the third quarter was $13.3 million, resulting in a non-GAAP operating margin of 4.9% compared to 1.3% in Q3 of 2020. This expansion was driven by our strong top line performance and overall gross margins. Operating cash flow for Q3 was $0.4 million compared to negative $90 million in the year-ago period. Free cash flow in the quarter was negative $13.1 million compared to negative $107.2 million in Q3 of 2020 due to operating margin expansion and significantly lower cash payouts related to SAP equity-based awards. $2.9 million in cash flows -- cash outflows in Q3 was related to the cash settlement of stock-based payment liabilities compared to $96.9 million in the year-ago period. As a reminder, free cash flow may fluctuate on a quarterly basis due to the timing of cash collections, and we believe it's best to assess our cash flow performance over a longer term. We ended the quarter in a strong cash position with approximately $589.9 million in cash and cash equivalents. Turning for a minute now to the Clarabridge acquisition. Please note that the acquisition closed on October 1st. Clarabridge results are not included in our Q3 results, but are included in our Q4 guidance. As part of the purchase price accounting, the acquired deferred revenue will be written down significantly. Growth in operating margins will be negatively impacted by this write-down because for a period of time, we will incur 100% of the expense but won't recognize 100% of the revenue. Moving now to our Q4 and fiscal year 2021 business outlook. We expect total revenue for the fourth quarter to be $296 million to $298 million, representing 39% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $242 million to $244 million, representing 51% growth year-over-year at the midpoint. Clarabridge is expected to contribute $16 million in subscription revenue and $2 million in professional services revenue in the fourth quarter, after adjusting for the purchase price accounting of deferred revenue. We expect non-GAAP operating margin in the range of negative 1% to 0% and non-GAAP net loss per share of $0.04 to $0.02, assuming 550 million weighted shares outstanding. For the fiscal year 2021, we expect total revenue in the range of $1.056 billion to $1.058 billion and subscription revenue in the range of $854 million to $856 million. At the midpoint of the ranges, this represents a subscription revenue growth of 49% year-over-year and a total revenue growth of 38% year-over-year, respectively. We expect non-GAAP operating margin in the range of 2.5% to 3.5%. We expect a non-GAAP net income per share between $0.02 and $0.04, assuming 515 million weighted shares outstanding. Longer term, as we execute on our growth strategy, we believe that our best-in-class subscription gross margins will provide the leverage and flexibility to continue to invest into this large market opportunity. We believe this investment will provide durable and sustainable long-term growth. Thank you for joining today's call. With that, Zig, Chris and I are happy to take your questions, and we'll turn it over to the operator.

[Operator:]

Our first question comes from the line of Raimo Lenschow from Barclays. Your questions, please?

[Raimo Lenschow:]

Yes. Hey. Congrats on amazing quarter. Can you talk about the acquisition in a broader context? Again, a little bit like how broadly applicable will that be? And how do you see this kind of going into market with what you’re offering at the moment versus where you could expand into? So -- because it does seem like it's opening up a big avenue for you. Thank you.

[Zig Serafin:]

Great question, and thank you for asking. So, first off, we have published materials when we announced the acquisition that it's important to get that context as well. But I'll summarize, which is, number one, the acquisition of Clarabridge, and of course, we also acquired Usermind. But if you look at the combination, it just strengthens our position as the number one Experience Management platform. What it does? It helps organizations to even more deeply understand what their customers and their employees are doing to be able to ultimately advance experiences for those core stakeholders. If you look at Clarabridge, they're the industry-leading AI-powered NLP, natural language processing, natural language understanding capability that when it comes to experiential data. And infused into our platform, it will help people to be able to capture actionable insights from any form of customer interaction, any form of feedback channel. It could be social, it could be product reviews, it could be chat, call center, contact center, conversational-based interactions that are taking place. If you think about Qualtrics, Qualtrics is a system that helps you to be able to ask the right question at the right time, based upon the context of what a human being is doing, customer and employee. Clarabridge basically captures and connects with what people are sharing regardless of what's been asked. It's what they volunteer to tell people through different channels. What's their intention? What are their emotions? And that often comes in the form of unstructured signal, unstructured data, right? So, that combination just changes the game on the capability set that's available in the market in Experience Management. Usermind, I'll be very brief on that, is a journey orchestration system. It's a powerful platform that advances and accelerates some of the work that we've been doing organically in our system. The combination of these two capabilities are nicely connected to the innovation we have around Experience ID. And we think that the combination of those technologies, what we're doing at Experience ID further advances people's ability to be able to go build deeper relationships with customers as well as employees.

[Operator:]

Our next question comes from the line of Brent Bracelin from Piper Sandler. Your question, please?

[Brent Bracelin:]

Thank you. I guess, first one for Zig here. Three straight quarters of better than 45% subscription growth, certainly impressive. I guess, what stood out to me this quarter was the net retention rate of 125%. That's now above pre-COVID levels of 122%. Can you just talk a little bit about what is driving that? Is it just really stronger attach rate of employee experience? Trying to understand what is driving these net retention rates to go above pre-COVID levels.

[Zig Serafin:]

Sure. Great question. Thank you. First off, look, the underlying technology, as we said all along, is so important. We have a platform that we've designed to unlock the value with speed for customers. It's a single code base. It has been designed to very simply allow new use cases, new innovations, not only for us in what we deliver to the market, but also what customers are able to do. This is a really important differentiator. We've not -- we're not stitching together a whole combination of different things that have been bolted on a long time. It's been very intentionally designed. And even as we acquire, in some specific places, you're going to see us pump that into the platform, so the customers actually can get high utility and quickly, given the underlying functionality and how that works within the underlying XM OS. So, that's point number one. Point number two is that the fact that you can turn on capabilities around employee experience and the whole portfolio of capability there, along with customer experience, product experience, you're seeing more and more customers finding value in other departments, which opens up opportunities in other budget centers. And we're able to uniquely accommodate that frankly quickly as people look to get more and more utility out of the platform. And the fact that these products are running on that single system is also a unique advantage. Third thing, there's a market consolidation. And we're finding more and more examples of cases where legacy vendors, point solutions that have decades-old architecture are frankly limited in their ability to supply some of the capability that customers want, they're being replaced. And we had several large examples of that this quarter and many, many other examples where people are consolidating. And again, as we've said in previous earnings calls, this is really well -- we're well suited to meet the enterprise demands of customers as they make consolidation decisions where they can end up enabling the use of the system as an enterprise standard that goes alongside CRM and HRIS systems.

[Brent Bracelin:]

Certainly seems to be resonating with customers. I guess, one quick clarification for Rob on the Clarabridge. I think, at the time of the acquisition, you talked about that as a $100 million business growing 25%. You're guiding to, I think, $18 million contribution in Q4. Post purchase accounting, is that the right run rate? Should we think about this as an $18 million kind of business next year -- contribution to revenue next year?

[Rob Bachman:]

Yes. I think you're on the right track here. As mentioned in my prepared remarks, we do have that significant write-down to the deferred revenue, and that impacts Q4 as well as several quarters beyond that. So, if you were to annualize the $18 million guidance and then apply a 25% growth rate, as we previously indicated, you'll get approximately $90 million for the business. And a range of $90 million to $95 million would be a good initial estimate for 2022.

[Operator:]

Our next question comes from the line of Keith Weiss from Morgan Stanley. Your question, please?

[Keith Weiss:]

Excellent. Thank you, guys, for taking the question. Maybe sticking on the topic of Clarabridge, really interesting acquisition by you guys. Really opening up the scope of the data that's being brought into the system and that you guys could sort of run your AI models and machine learning models against. Probably for Zig, more of a product question. Is there any guidelines we should think about on a go-forward basis? Like, what type of data is the right data to bring into the broader kind of XM system? And what would be out of bounds? Like, is there kind of data types we shouldn't be thinking about like as you guys increase that scope over time? And then for Rob, a clarification question. I appreciate the $90 million to $95 million for calendar '22. In thinking about those deferred revenue impacts, the deferred revenue write-down, isn't it most stark in the first quarter out of the gate? And then, like as those customers get gold over time, the deferred revenue impacts tend to fade over time. So, should we think about a fading of that deferred revenue write-down over the next couple of quarters as you sort of rebuild those customers, if you will?

[Zig Serafin:]

Okay. So, let me take the first part of that, and I'll let Rob speak to the second. So, this is Zig here. So, first off, the type of data, Clarabridge platform is extremely impressive. We've been working with them for the last four years. My own background is partly -- I've spent time in the natural language understanding area. And there's something deeply to appreciate about how the Clarabridge team has built the platform focusing on industries. They have about 150 industry models that can analyze text and speech using deep and specific industry use cases. They can capture important nuances in conversational context as well as just basically any form of unstructured information. But, the idea of applying that to industry-specific scenarios, like say, a health care insurance provide and what that provider -- the signal might be between a provider and a member, or between an online shopper and a virtual associate on a chat, they have unmatched capabilities in the marketplace in their ability to be able to hone in and be able to not just understand and analyze the words, but having the ability to leverage the power to discover and understand critical human nuances, such as effort, emotion, intent, where is the friction. And so, there is nothing like that in the market that's operating at this level of scale, 23 languages plus that that system supports. And so, the form of data can be any form of human expression of which you're actually using that technology to indicate something about an experience that helps to be able to connect more with what human beings are even telling you indirectly. And that can be applied to social context, it can be applied to chat, it could be applied to contact centers. There's other use cases we've seen inside companies where they want to be able to pull in data that they have access to through just behavioral browsing patterns, and they want to be able to better understand use cases in that sense. So, we're not going to limit that, but at the same time, there's some really natural places where we're able to advance what our customers are doing today and give them even more value. And that was part of what we had outlined when we announced the acquisition, where we said, look, if you think about Qualtrics to this point, we've helped companies to be able to engage with their stakeholders, their customers and their employees by asking the right questions at the right time in the context of what that person is doing. And now, what we're doing is we're enabling the ability to discover the hidden signals and other things that are things that people are telling you in the context of customer care, in the context of the digital experience on a website or on an app. At the same time, that same capability can be used with specific models to what's going on around your brand. What's going around employee experience scenarios as an example as well. And so, we are well positioned to accelerate some of the things that they've been able to do with the technology by applying it to products that we've built, which will unlock more value for customers. So, that's how we think about it. Rob?

[Rob Bachman:]

Thank you. Thanks for your question. Yes, there is some modest fading of that deferred revenue haircut over time. And so, I agree with you on that point. The range that we've provided accounts for some of that in what we've indicated, that $90 million to $95 million.

[Operator:]

Our next question comes from the line of Kirk Materne from Evercore ISI. Your question, please?

[Kirk Materne:]

Yes. Thanks very much. And congrats on a nice quarter. Zig, I was wondering actually if you could talk a little bit about the appointment of your Chief Medical Officer, who I believe starts next month with you all. I just thought it was interesting, you guys have amazing sort of horizontal platform, but that appointment seems to also indicate that there are certain experiences in certain verticals that it might make sense to have more domain expertise around, in health care in this case. I was just kind of curious how we should think about that appointment relative to your maybe efforts in other verticals going forward, or if this is sort of a special case in obviously a somewhat unique industry. Great question. Thanks, Keith (sic) . First off, industries are very important to us. And it's -- the fact that we built our platform to generally serve a very wide number of industries is an advantage, and that shows up in the growth and the way which business is forming around our system. That said, there are many industries where we go really deep. Again, my reference point earlier to the Clarabridge kind topic where the 150 industry-specific models creates a further differentiation. And these models aren't built overnight. They've been built over many, many, many years. And they're tuned and there's a tooling environment. And, so that becomes something that further accelerates our strengths. And in healthcare specifically, we hired Dr. Adrienne Boissy who comes from the Cleveland Clinic. And she is a practicing neurologist, a really well-known and highly respected leader. And healthcare is an area that is deeply important to us as an organization, to us as people. It's part of the culture of Qualtrics. And frankly, it goes back to the roots of the company in some respects around just what we want to do to be able to advance the healthcare experience for people. But we're also finding that many of the companies and healthcare providers, both on the practitioner side as well as on the patient experience side, look at the power of our platform as an opportunity to partner deeply with that industry and ultimately advance things. And so, Dr. Adrienne Boissy is going to be playing an important role in that. I think this is building on momentum that we have in that industry today. And this is simply another very important step that we're taking along that path. So, Chris, do you want to elaborate a little bit on that? Chris Beckstead is here as well.

[Chris Beckstead:]

Yes. I'd just add, I had the privilege of meeting with Dr. Boissy. And her long-held passion for the patient experience and the importance of transformation is just refreshing. If you watch some of her TED Talks, it's really inspiring to see how long she's been at work advocating for it. And so, the opportunity to join with Qualtrics to use technology to further advance that is there in an industry that's absolutely transforming. And we see that market alone is just tremendous for us in terms of when we think about the future for what this can be for the patient experience. So, just really excited about what she brings to the table and help us to win in that space and to have an impact.

[Zig Serafin:]

There are certain industries where you're seeing digital transformation opening up a complete experience transformation. And there's some there's just there's massive inflection points that are underway. And I would say healthcare is a really good example of that right now where the patient experience, the provider experience is undergoing a massive transformation. And that's partly what's driving our engagement and our focus.

[Operator:]

Our next question comes from the line of Mark Murphy from JP Morgan. Your question, please?

[Mark Murphy:]

Yes. Thank you. And I'll add my congrats on a great quarter. First question for Chris and Rob, I am curious if you're seeing any mix shift between the CX and EX bookings patterns? Basically interested if the effects of the pandemic and then reopening, the Great Resignation you mentioned and companies dealing with hybridized workforces, is it causing companies to reprioritize the employee sentiment and employee relationships a bit more than previously?

[Zig Serafin:]

I think that trend is absolutely there. We're seeing employee retention, employee hiring becoming a CEO priority. So, the conversation around that is elevated within the customers that we're talking to, which is fantastic. And so, definitely seeing momentum on the EX side, and that's being reflected in our numbers. So, we're really pleased with that, and that's a trend we only expect to continue going forward, with that product being really timely and really impactful for our customers. And so, that's definitely a trend.

[Mark Murphy:]

Okay, understood. Thank you. And Zig, as a quick follow-up, you mentioned what sounded like very aggressive plans to -- I think you said to double headcount in EMEA and to quintuple in APJ by 2024. I think, typically revenue tracks pretty closely with headcount for software companies. So, those are big numbers. Are you seeing more robust signals internationally that are may be driving you to want to hire so rapidly there?

[Zig Serafin:]

Well, Mark, I mean we're investing for growth. That's been part of our operating equation for quite a while, and we try to do so in a way where it enables durable growth over time. And that's the whole purpose behind that. I think, there's also really good evidence of examples of what our customers are seeing and what they're wanting to do with our platform. The names that I had called out in the earlier summary I think represents that, and we'll continue to see momentum. And that's what we're doing. We're investing for the future.

[Operator:]

Our next question comes from the line of Terry Tillman from Truist Securities. Your question, please?

[Terry Tillman:]

Yes. Thanks for taking my questions. And my preamble is congrats as well for me. And also good luck tonight with the Jazz opener. Two quick questions. And I don't know if this is for Zig or Chris, but I really enjoyed that October 19th press release. It was talking about like bad customer experiences and the correlation to revenue impact and lost loyalty or reduced loyalty. And there were industries that probably didn't want to be where they were on that list, like the ISPs, government mobile phone companies. And then further down like the fast food, streaming and supermarkets, actually were in the press release, it sounds like, right?

[Zig Serafin:]

Yes.

[Terry Tillman:]

But I'm curious like is you're seeing strength in the new logos or existing customers that are really wanting to further lean into this. Are you seeing a more recent pattern recognition on those that aren't getting it right, right now on MPS or bad experiences, and they're feeling like, hey, we've got to do something, or does it tend to correlate more with the ones that are at the bottom of that list in that press release, in terms of they tend to be the ones that are really spending more money on your software right now? And then, I had a follow-up.

[Zig Serafin:]

Yes. I mean look, it's good to read the press release and some of the context that’s there. I also believe it comes down to the leadership in every major industry and who the company is. In every industry, there are the leaders who are transforming, the ones that are disrupting, and then there's the ones that are kind of iterating their way through. What I will tell you is, we're seeing a heightened level of focus on getting people's arms around not just seeing what the experience metric is but the actions that are being taken. And so, I think more than ever, we're seeing people realize that there's a very low tolerance for poor experiences. The switching costs are super low for consumers and their ability to be able to switch from one provider to another. Obviously, that -- the war for talent, being able to keep your employees, how do you run your company now in your organization in a way where experience deeply matters. And it's not just a function of what physical environment people come into, but there's a lot of other factors that are in play. And so, it's completely rewiring the way that people think about running their organization, regardless of the industry that they're in. And all of these types of things are heightening the attention and saying like, look, you got to operate a little differently. You've got to sort of step back and say, how do you look at things from an outside-in perspective? You need the right tools to design the right experiences and not take eight months to do so. Speed matters, agility matters. Being able to scale decisions that you're making on rewiring the way your product is being delivered into the market, making decisions that are time-sensitive, given what's going on with supply chain issues, making decisions around how do you attract a new part of the workforce that you need to get more than your fair share of the market of people that are out there looking to switch jobs as an example. And more than anything is operationalizing the customer experience side of the equation to basically make the systems that you've invested in, your CRM, your marketing automation system, your workflow engines, make those things actually perform in a much more focused way based upon that customer. And that's -- these are all of the dimensions that set up the Qualtrics Experience Management platform and how we built it to actually solve problems in a much more relevant way than ever. And that's also partly why you're seeing the move around consolidation and also people taking on more and more of the use cases of the platform.

[Terry Tillman:]

Got it. That's great. Thanks. And I guess, Rob, just real quick in terms of -- it's kind of been a repeated thing that you've been talking about and it's been good in terms of the contract duration lengthening both on renewals and new customers. How are you thinking about that into the fourth quarter or next year? Do you still have some more of that to come? Thank you.

[Rob Bachman:]

Yes. We still expect a bit more of this. We see a bit of runway for several quarters, given the fact that we've called it out for each quarter since our IPO. We'll certainly be clear with this group and publicly around when we see that actually tapering off, but we do see that continuing for several quarters in this.

[Operator:]

Our next question comes from the line of DJ Hynes from Canaccord. Your question, please?

[DJ Hynes:]

Hey. Thanks, guys. And congrats on the awesome results. Zig, just one from me. Is there a way to think about the mix of quantitative versus qualitative experience feedback that you deliver to customers, and maybe how that might change with Clarabridge? And the reason I ask there are a handful of companies out there kind of focused on the experience narrative, which is a bit different than what you're doing today. So, curious how you see that market and whether it fits in with the Qualtrics vision.

[Zig Serafin:]

Yes. We -- our platform enables both qual and quant and the mix of both. So, for example, as you learn more about the experience of a particular stakeholder, particular customer segment for instance, and you're, let's say, designing a new product and you want to test it, you want to do AB testing, you'll use our platform to hone in, to zoom in. There's also an ecosystem of partners that are building on top of our platform that extend specific, I would say, sometimes industry-specific use cases. And so, that's also the beautiful thing about our environment is that because it creates consistency, speed, you leverage the same data set. And then probably most important is like what do you do with that information. Like you can do quant and qual maybe to design a product, how do you put that into the market, how do you get it right in terms of the positioning of the branding around it, the packaging. The beautiful thing about that is that we enable that full life cycle, right? And then once you put it in the market, how do you keep tuning it and making sure that you're not only getting it right with one customer, but getting it right with the different segments of customers in the moments that matter the most for different types of customers. And that's where the actioning and workflow part of our system is a massive differentiator. And I would say probably most important is what this platform does, once you have quant and qual data and you've got statistically significant information about what to go do, put it into action, operationalize and make a difference for a company. So, that's part of the design points of how we've been operating.

[Operator:]

Our next question comes from the line of Yun Kim from Loop Capital Markets. Your question, please?

[Yun Kim:]

Thank you. Hey. Congrats on the quarter. I have a question on the Experience ID. Can you just talk about the monetization strategy there and how it fits with your XM directory products that you have? And then also, strategically, is this really to drive broader adoption of your existing solutions, or are you looking to -- or is this a precursor to more new products that's going to be released that takes advantage of that? Thanks.

[Zig Serafin:]

Yes. Thanks for asking. So look, Experience ID is a major new innovation in our platform, and it builds on the XM Directory. Frankly, sort of it becomes the super set. We have about 4 billion profiles today in our XM Directory. The Experience ID takes that forward. It brings in capabilities from Clarabridge and for -- and from Usermind. It captures every form of customer feedback, so from the call center transcripts, the social media post, product reviews, survey data, you can pull in data from third-party platforms into the system. It helps teams to understand an individual's emotion, effort, intent. And here's the thing across the entire journey within a company, right, and of that customer based upon different segments. You've got segmentation, you've got journey orchestration. So, it's not like you're just visualizing a journey. You're actually putting into an operating system the ability to now scale what happens when one customer has a great experience, how do you accentuate that? But another type of customer or customer segment might have something that is negatively affecting what would be expected and how do you action on that and create workflow quickly. So, XID is core. It's this core kernel where you start to understand more authentic, more intimate understanding of what the relationship opportunity is between an organization and the customer or the employee, right, and then, how do you end up operationalizing that at larger scale, given the fact that not every human being is the same. You've got different segments. You've got different things that people expect, given where they might be in their life cycle with that customer. So, how we monetize that? It's part of the platform and actually enables the applications that are built on top of the platform. And there's effectively a different level of functionality that we deliver through the packaging of apps that are built on the platform. It's a huge differentiator. And this is why it's been built into the XM operating system.

[Yun Kim:]

Okay, great. So, should we expect to see more new releases of product that leverages that, or do you expect your existing solutions to take advantage of that technology?

[Zig Serafin:]

Well, we already have solutions that are taking advantage of it, and there certainly will be more. So, we're very, very excited about what we're doing with this capability and frankly, how it just changes the game around how customers build deeper relationships with their own customers and employees.

[Yun Kim:]

Sounds good. Looking forward to it. Rob, I have a quick question on strong net expansion rate. You already explained a lot of it. But, how much did early renewals contribute to that strength in that number?

[Rob Bachman:]

Yes. There's no material impact here to the early renewals. If you look into the calculation methodology, it's a revenue-based metric that we use. So, what you're seeing is the revenue derived from the customers over the last one year period compared to that same cohort in the year prior is 125% greater.

[Yun Kim:]

Got you. So, I'm assuming if they are renewing, they're renewing at a much larger deal, right, in their existing renewal?

[Rob Bachman:]

It is the same customer cohort or a group of customers are now at 125% spend compared to where they were a year ago prior.

[Operator:]

Our next question comes from the line of from William Blair. Your question, please?

[Unidentified Analyst:]

Thanks. Zig, I have a question for you. I want to touch on Clarabridge again. It certainly seems like an ambitious vision to compare or to combine rather solicited and unsolicited feedback. I would love to hear how mature you think your customers are in their data strategies to be able to marry the solicited feedback that they're getting from Qualtrics with the unsolicited feedback from social contact center, et cetera. Are customers there all ready, or do you anticipate that you’ll have to maybe guide them through how to best leverage that and implement those data strategies?

[Zig Serafin:]

Yes. The beautiful thing about our decision to take the next step with Clarabridge is that we've been partnering with them for four years. And I think through that we also had about 40% of the Clarabridge customer base was also using Qualtrics, and we have a lot to learn from that. And so, this is simply accelerating what customers were already doing and wanting to expand into more use cases and frankly, more customers wanting to take advantage of the combination of the two systems. And also, one other thing I'll reiterate is all the respect that we built for the Clarabridge team and the Clarabridge technology as we worked with them and realized how much depth of innovation, IP was in that platform, and that frankly the combination of bringing that together under one roof, connecting that to the XM OS would unlock new opportunities in the marketplace as well as in the ways that customers can use the system.

[Unidentified Analyst:]

Perfect. And then, maybe a follow-up. I noticed there was a pretty nice new logo slide, and you mentioned some of those new logos on the call as well. Can you just talk about how the landing point has changed? Are you seeing customers buy the entire platform upfront? Are they maybe landing more with employee experience, given how much elevation that's getting into the C suite? How should we think about landing ACVs and how they're evolving?

[Rob Bachman:]

Yes, great question. A lot of the logos that we mentioned on the call, a lot of them were expansions. We see a lot of success from customers who get onto the platform, see value and then grow their spend. I think you're also seeing that reflected in the 125% net retention rate, demonstrating continued strength along those lines. But, we are also seeing new customers come in. So, continue to see. I wouldn't say there's been a material shift other than just overall increasing momentum. But just recently, I can think about a recent conversation with a customer who had such a great experience on their employee experience implementation, how fast they got up and the value they got that it just made it so much easier to have the conversation about expanding to a company-wide CX type of program where even though they aren't fully connecting the two, the success they've seen with the platform makes them more likely to choose us for additional products and expansions and increases our win rate when that occurs.

[Unidentified Analyst:]

Perfect. That's very helpful. Thank you. And congrats on the quarter.

[Operator:]

Our final question for today comes from the line of Shelby Seyrafi from FBN Securities. Your question, please?

[Shelby Seyrafi:]

Yes. Thank you very much. My question is on the organic revenue. If you assume $18 million in Clarabridge revenue for Q4, it appears that the organic revenue growth will decelerate about 10 percentage points to 31% from 41% in Q3. I want to know how much of that is conservatism versus other factors?

[Rob Bachman:]

Yes. Thanks for the question. I think you gathered this from our tone in the Q&A and also in our prepared remarks. We're really pleased with the outstanding results that delivered in Q3 and also really pleased with the updated guidance in Q4 and for the annual period. If you look at our annual guidance that we provided last quarter, we're raising that guidance by $48 million for the full fiscal year. And I can break that down for you quickly. $18 million of that is the Clarabridge that we disclosed; $13.5 million of that is from the performance that we had in Q3; and there's an additional raise in there of $16.5 million indicative of the strength in the business that we're seeing. And, if you take a look at the total, then take a look at the subscription revenue. With Clarabridge, we're guiding that at 51%. If you do take that Clarabridge portion out, we're guiding the subscription revenue of 42%. We continue to see great strength in that subscription growth and really pleased with the guidance that we have now for the full fiscal year.

[Shelby Seyrafi:]

Okay. And one more. The net retention rate, very impressive. You were at 120% about a year ago. Do you think you can maintain the mid-120s for the foreseeable future?

[Rob Bachman:]

Yes. When you look at us historically, and I know you're doing that, you'll see that stability at above 120%. And given the market opportunity that we have and the customer base that we have, we do see stability above that 120% mark.

[Zig Serafin:]

Thank you. Thanks everybody for joining us.

[Operator:]

This does conclude the question-and-answer session as well as today's program. Thank you everyone for your participation. You may now disconnect. Good day.