Qualtrics International Inc (XM) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Qualtrics Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Steven Wu, Head of FP&A and Investor Relations. Please go ahead.

Welcome to Qualtrics' Fourth Quarter Fiscal 2020 Earnings Conference Call. Following prepared remarks, we will open the line up to answer questions. Our results, press release, SEC filings 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 considered 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 or Form 10-K for the fiscal year ended December 31, 2020.

In addition, during today's call, we will discuss non-GAAP financial measures which we believe are useful as supplemental measures of Qualtrics' performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation of the GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and investor presentation on our Investor Relations website.

The webcast replay of this call will be available on our company website under the Investor Relations link. Unless otherwise stated, all financial comparisons discussed on this call will be to our results for the comparable period of our 2019 fiscal year.

And with that, I would now like to turn the call over to Zig Serafin, CEO.

Thank you, Steven, and thank you all for joining us for our first quarterly earnings call. And I'm here today with our President, Chris Beckstead; and our CFO, Rob Bachman.

So look, first off, I hope all of you and your families are healthy and well. As you saw in our numbers in our earnings release, Q4 was an outstanding quarter, capping off a very strong year of growth for Qualtrics and highlighting the continued momentum of the XM category. In line with our pre-IPO flash numbers, our total revenue rose to $214 million in Q4, which is up 24% year-over-year; and subscription revenue grew to $160 million, which is an increase of 33% year-over-year. We also ended the year with more than $645 million in current remaining performance obligations for the next 12 months, which is up 49% over the same period last year. We're pleased to have achieved outstanding results, both in Q4 and in fiscal year 2020.

Coming into 2021, we're continuing to build on this momentum as Qualtrics is becoming increasingly mission-critical in every business. The next normal has already begun. With the acceleration of digital, all it takes to switch jobs or service providers is a few clicks. Organizations who don't actively design can continuously improve their everyday product, customer and employee experience will simply not be competitive. And that's why experience management, the category that we continue to pioneer, is one of the fastest-growing markets in software with a $60 billion total addressable market.

Experience management is becoming as critical to business success as any CRM or HR system, and experience data is becoming the most valuable data within an organization. We have a 10-year head start on this market, and we've also got a significant opportunity ahead. We built the operating system for experience management. And our XM operating system is a single, secure, cloud-native platform that enables our customers to bring together all of the experience data, analyze it and then easily take action with workflows to continually improve the experiences that they deliver. And our customers are designing new ways of working by listening to their employees and acting on their feedback. And they're able to attract and retain the best talent, increasing employee engagement and improving productivity. And they're using customer feedback to design products, services and experiences that their customers want next. And the result is decreased customer churn, increased lifetime value and reducing cost to serve.

We now have more than 13,500 customers who are using Qualtrics to shape and act on the most important business experiences in customer, employee, product and brand. In Q4, we formed new relationships and expanded with global organizations like Adobe, HSBC, Cardinal Health, GEICO Insurance and YKK Group in Japan. They all chose Qualtrics to help design and improve the products and services and experiences that their customers and employees want next. And these recent wins are just the tip of the iceberg. We have many more potential new customers that are going to benefit from the Qualtrics XM platform as well as opportunities that dramatically expand the solutions that we're providing to our existing customers.

Just look at how we've leveraged our platform to deliver innovative solutions to help our customers navigate the pandemic. More than 200 state and local governments are now using Qualtrics for contact tracing, symptom checking and patient assessment. And in Q4, we launched our Vaccine Navigator to help governments, like the State of Missouri, put the resident experience at the center of their vaccination process. I'm extremely proud of our team responding so quickly through the changing needs of our customers, both to these COVID solutions as well as in the pace of innovation across our entire portfolio.

We're releasing new products and innovation faster than in any time in the history of this company. For example, in Q4, we launched Employee XM for IT, which helps companies understand how well their IT systems are working. We help them pinpoint where employees are experiencing -- where they're experiencing technology gaps that reduce their productivity, and then we enable them to take action on closing those gaps. And if you look at our customer experience product line, we've introduced a new suite of products to help our customers master their digital and remote experiences, including Customer XM for digital, customer care, account management and many more. Because all of our products are built on the foundation of our XM platform with a single code base, we're able to innovate faster than our competition and we're able to deliver more value to our customers. And this gives our customers a competitive advantage and enables them to unlock value faster than ever before.

Our partnership with SAP also continues to perform very well. We're accelerating our joint product innovation and our go-to-market motion every quarter. Together in Q4, we closed Qualtrics first 8-figure expansion with one of the world's largest technology companies. This customer is moving away from using a variety of fragmented point solutions to running one end-to-end system on Qualtrics to manage all of their customer, employee, brand and product experiences. And we expect to see more large deals like this in the future.

Look, I get to hear from a lot of customers, hundreds of customers, every quarter. And I can tell you that our strategy and our products are resonating deeply with the world's most respected brands. The world's largest organizations are turning to Qualtrics. And one of the most exciting parts of the journey is how we're enabling a vast ecosystem of partners for quickly and easily building solutions on our cloud platform. By the end of 2020, we surpassed 300 partners in the EXIM ecosystem, and we're seeing partners build entire business practices around experience management. Our platform is a system of action. And when it's connected with an organization systems of record, such as their CRM or their HR systems, anyone can turn insights into action with clicks, not code.

So we now have more than 100 integrations with companies like SAP, Salesforce, ServiceNow, Zendesk as part of our experience flow automation action engine. And so our customers are using this to be able to collect experience data and then quickly act on it in the systems that they're using every day; and key strategic partners like Accenture, Bain, Deloitte, E&Y, Korn Ferry, along with amazing delivery partners are helping us to make our experience management vision a reality for our customers. So for example, we expanded our partnership with Deloitte in Q4, and we saw great success working together to help CIOs expand the adoption of experience management in their own organizations.

Our IPO in late January was an incredible milestone on our journey. And as a public company with greater resources and brand recognition, we'll now be able to deliver more organic and inorganic innovation to our customers, expand our ecosystem of partners and continue to build the best team in tech. In the lead up to the IPO, we expanded our leadership team with new positions, and we welcomed some phenomenal leaders to Qualtrics. These are people who've helped grow and scale some of the best technology companies in the world. They include Microsoft -- people from Microsoft, Salesforce, Twilio and Adobe. Attracting and retaining talent like this has helped us build an incredible foundation for our company.

So to close, we're going to thank our nearly 3,500 employees all around the world who are all in on the XM vision. They made it possible for the outstanding results and the guidance that our CFO, Rob Bachman, is now going to share more detail. Rob, over to you.

Thanks, Zig, and good afternoon. Hello to everyone. As Zig noted, Q4 was an outstanding quarter driven by strong execution against an improved market backdrop as many companies, organizations and governments continued their digital transformation initiatives. I'm going to briefly recap our fourth quarter and fiscal 2020 results, provide our initial guidance for Q1 and fiscal year 2021 and then open it up for questions.

Before discussing detailed financial results, I'd like to point out that in addition to our GAAP results, I'll be discussing certain non-GAAP results. Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results, can be found in our earnings release and investor presentation on our Investor Relations website.

Subscription revenue for the fourth quarter was $160.4 million, up 33% year-over-year. For the full year, subscription revenue was $575.4 million, representing growth of 34% year-over-year. Professional services revenue was $53.2 million for the fourth quarter and $188.1 million for the full year, representing 2% and 17% growth year-over-year, respectively. Total revenue was $213.6 million in the fourth quarter, up 24% year-over-year and $763.5 million for the full year, up 29% year-over-year. Our remaining performance obligations, representing all future revenue under contract, ended the year at $1.1 billion, up 78% 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 $645.4 million, up 49% year-over-year. This performance was driven by strong new booking across both net new and add-on business, in addition to our subscription renewals. Q4 renewals were particularly strong due to a onetime catch-up of renewal billings that were originally scheduled for earlier in the year. Total RPO also benefited from a notable lengthening of average contract duration for both new customers and renewals.

In a pandemic-challenged year, we're particularly pleased with our net retention rate, which shows the year-over-year revenue growth from our existing customers. In Q4, our net retention was 120%, showing that existing customers are actively growing their usage of our Experience Management Platform. Qualtrics has never been more relevant or strategic in this new digital-first world. We're seeing this clearly in the growing number of customers spending more than $100,000 and $1 million annually with us. On a net basis, we added 132 customers in Q4, spending more than $100,000 and more than 300 customers in the full year 2020 for a total of 1,338 customers. Customer spending in excess of $100,000 annually still only represents approximately 10% of our overall customer base. We also ended the year with 74 customers spending more than $1 million annually, up 72% year-over-year from 43 customers at the end of 2019.

Total revenue outside the United States was $211.3 million in fiscal year 2020 or 28% of our total revenue. This compares to 23% and 26% in 2018 and 2019, respectively, which highlights our focus in key international markets and our ongoing partnership with SAP. We have and will continue to make investments to broaden our reach in key international markets. For example, the Asia Pacific and Japan region continues to be a big opportunity for us. And in Q4, we announced our newest data center in Singapore, which will help us continue to serve our growing customer base in the region.

Turning to margins. Our non-GAAP gross margin was 76.7% in Q4, approximately 360 basis points higher than 73.1% a year ago and roughly in line with Q3. This is mainly due to an increasing subscription mix as a percentage of our total revenue. Subscription has increased from 70% of our total revenue in the fourth quarter of 2019 to 75% in the fourth quarter of 2020 as we focus on driving software usage on our platform and expand our partner ecosystem to best service our customers.

Our non-GAAP operating loss for the fourth quarter was $4.7 million, resulting in non-GAAP operating margin of negative 2%. For the year, non-GAAP operating loss was negative $29.6 million or negative 4% of total revenue, an improvement of approximately 450 basis points from 2019. This expansion was driven by continued scale and efficiencies and other COVID-related moderation of expenses, including reduced spend for travel and events. Q4 operating margin decreased by 350 basis points sequentially due to increased sales and marketing spend, along with onetime IPO expenses.

Operating cash flow for Q4 was negative $98.5 million compared to negative $124.9 million in the year ago period. Free cash flow in the quarter was negative $145 million compared to negative $131.7 million in Q4 of 2019 due to higher capital expenditures related to the completion of build-outs in our Seattle co-headquarters and Sydney, Australia office. $104.6 million of cash outflows in Q4 was related to cash settlement of stock-based payment liabilities compared to $99.6 million in the year ago period. Our fiscal year 2020 operating cash flow and free cash flow was negative $410.7 million and negative $500.2 million, respectively, of which $388.6 million was related to the cash settlement of stock-based payment liabilities. Starting in Q2 of 2021, we will see a decline in cash settlement of these stock-based payment liabilities as the large majority of our employee base has elected to exchange their cash-settled SAP awards to stock-settled Qualtrics awards.

For a bridge of cash flow from operations to free cash flow, including cash outflows related to the settlement of liability classified stock-based awards and advisory and legal costs related to the SAP acquisition, please refer to our earnings press release and investor presentation on our Investor Relations website.

We ended the quarter in a strong cash position with approximately $204 million in cash, cash equivalents and short-term investments. Our total workforce at the end of the year consists of more than 3,450 employees, an increase of over 500 employees year-over-year, and we have begun to ramp up hiring in 2021. Overall, we are very pleased with the strong company-wide execution and our seasonally most important fourth quarter.

Moving on to our business outlook. For the first quarter of fiscal 2021, we anticipate total revenue to be in the range of $226 million to $228 million. Within this, we expect subscription revenue to be in the range of $176 million to $178 million. This implies a year-over-year growth rate of 38% for subscription revenue at the midpoint and a total revenue year-over-year growth rate of 29% at the midpoint. We expect non-GAAP operating margin in the range of negative 1% to negative 2% and non-GAAP net loss per share of $0.02 to $0.04, assuming weighted shares outstanding of 487 million.

For the fiscal year 2021, we expect total revenue in the range of $950 million to $954 million and subscription revenue in the range of $738 million to $742 million. At the midpoint of these ranges, this represents a subscription growth rate of 29% year-over-year and a total revenue growth rate of 25% year-over-year, respectively. We expect non-GAAP operating margin in the range of negative 4% to negative 5%. We expect a non-GAAP net loss per share of between $0.16 and $0.18, assuming 513 million weighted shares outstanding.

In closing, our runway for growth and large market opportunity remains very exciting. We will continue to scale our business through strategic investments. We will extend our leadership in this market and drive towards long-term profitable and durable growth.

Thank you for joining today's call. With that, Zig, Chris and I are happy to take your questions. Operator, we'll put -- send it back to you.

(Operator Instructions) Our first question comes from Keith Weiss with Morgan Stanley.

Excellent. A really nice end to the year, really tremendous growth you guys are seeing there in that Q4. A 2-part question, and I think it is somewhat related. Maybe the first one is more for Rob. But if we think about sort of how you guys did in the full year for calendar year '20, your current RPO is up 49% year-over-year. We calculate current RPO-based bookings up 35%. You accelerated into the back half of the year. And it sounds like you're expecting really good subscription revenue growth of, like, in line with that in Q1 at 38% growth. Can you help us flip that, like, 38% growth in Q1, the 35% bookings growth for the full year to the slowdown for the full year to 29%. Are there factors we should be aware of in terms of, like, mechanical factors that might be impacting subscription revenue? Or is this just conservatism about the macro environment? And then the follow-on question, maybe for Zig, is there anything in terms of go-to-market or how you guys are -- in your strategy for go-to-market that changes fundamentally post the spin-out with SAP that potentially could weigh on results in the year ahead that we should keep in mind?

Yes, Keith, thanks for the question, and happy to point out a couple of things here. Overall, we're really pleased with our Q4 results as, obviously, we went through the script. And as we look forward, we really have established this baseline for the long-term durable growth that we're focused on and looking to achieve. So as we look out at this year and the guidance that's provided, we are pleased with that and know that we're set up to deliver against that. And we're focused on continuing to drive across some of those key levers that I mentioned: the international expansion, the growth with our existing customer base and bringing those new customers on. So one other point that I would make is, as you look at the growth and the strengthening in the back half of the year, you'll see that we added over 2,000 net new customers during the year as well alongside of the addition of the $100,000-plus and the $1 million-plus customers.

And this is Zig here. Look, I'll comment on the broader, bigger picture. We've been building this company for the long run since the beginning. And we have an advantage, the underlying operating system that we built for experience management, single software code base. That's starting to play out. You're seeing that in the growth. You're seeing that in the fundamentals that customers are betting on. And at a macro level, experiences are becoming a major competitive advantage for companies. And that is especially true as we've watched the world shape and reshape and how industries are looking to be able to become more connected to their end customers, understand how to better engage their employees. And experience data is becoming a vital data element that you have to have running in every single company. How do you do that at scale? You need a platform. And so that's a fundamental piece.

Now by becoming an independent company, it's allowing us to be able to just continue to allow customers to leverage a larger part of the ecosystem. You can see the ecosystem and the partner results that I've talked about and the momentum that's building out. SAP continues to be a close partner. And our innovation is, frankly, accelerating, a lot of the work that we're doing across each of the major business lines. We just -- we believe we're just getting started. But in the same way, we also see other companies coming to us right now with customers, and they're saying, "Hey, how do we run our business effectively with other systems that we have. They're complementary to what you're doing with SAP," and that's creating a lot of additional opportunity, too. At the end of the day, it really comes down to XM. People are looking at XM as as important as some of the investments they've made in CRM systems, HR systems and so forth. So thanks for your question, Keith.

Our next question comes from Mark Murphy with JPMorgan.

I'll add my congrats. The question is probably for Zig or Chris. The leap in customers above the $1 million threshold and above the $100,000 threshold is impressive, and so I'm wondering what's behind that. Are you finding it easier to displace some of the old-fashioned kind of traditional analog market research budgets at these companies that get spent on, I guess, I'd call it, nondigital data? Just wondering if you saw any of that in Q4 and if you might see any of that in the pipeline.

Sure, this is Chris Beckstead. I'll take that one. So great question. I think when we think about the large customers that are coming onboard, it's due to a few underlying trends that we're seeing that are strong. One is, as you mentioned, the consolidation as customers are looking and thinking about a single platform by which to standardize, we're finding that they're determined that we're the clear choice, and that's driving a standardization across the categories on our platform. Another positive trend, I was recently talking to one of those customers that we added in the fourth quarter, and he spoke about how they are finding that they're moving away from thinking about it as a cost of doing business in terms of having the category versus the value creation that they're receiving and then putting some real data in terms of increased pipeline as a result of using the platform and really shifting away from thinking about it of how much do they need to spend to use it versus the value that they're deriving from the platform, whether it's with employee retention, whether it's with reduced churn of customers or increased sales.

And those trends, I think we're finding with our customers that they're seeing more and more value out of the platform. And as a result of the value they're getting, they're finding opportunities and ways to expand and grow their usage of Qualtrics to continue that trend. And I think that's the underlying driver as the category continues to mature. That's driving that increase in large customers that we're seeing.

Okay. That's great. And just as a quick follow-up, Rob, I agree with Keith, I think what is jumping off the page, the RPO backlog growth, I think both the total and the current portions, they're just way above our forecast, and it's just so far above the revenue glide path that, that feels like a very comfortable situation. But can you just help us understand what drove that spread so far above? And there was -- is there any contribution there from anything else we should think about, whether it's FX or any way to quantify the duration impact on RPO?

Yes. Appreciate the question and understand the question. Look, we are set up to drive this growth that I spoke about and to really see that perform consistently. And as we move throughout the year and continue to strengthen, we see opportunities to drive increased growth here, but it is for us to go and deliver that. And so where we sit today is a place that, again, fits with the long-term focus and the long-term commitment we have to durable growth for the business.

Our next question comes from Kirk Materne with Evercore.

I'll echo the congrats. I guess, Zig, based on some of the momentum you all saw in the fourth quarter, can you give us some color on maybe how the conversations are changing with customers maybe over the last quarter versus, say, 6 to 9 months ago? And any color, I guess, you could add on in terms of either industries or if they're looking at customer experience again now that the customer is hopefully coming back after the pandemic? I was just kind of curious if you got maybe a little bit more color on sort of the industries that are perhaps reopening, if they slowed down, and also sort of the use cases that are maybe coming to the floor now.

Yes. Kirk, thanks for the good question. So look, COVID just proved and the pandemic that we've all been living in has proved that every business problem, no matter what industry you're in, what organization you're in, what size of business you're in is an experience problem, especially in moments of uncertainty. And there's uncertainty all the time, right? And people are trying to figure out how to connect with their customers, know what decision to make about where they take their product next, understand how to evolve, the way that you operate and facilitate or enable your customer. And what we've seen the pandemic do is create a lot of momentum that's accelerating the importance of getting the experience dialed in right, especially when time matters, okay?

And you can see that is actually affecting the results of this business. You can see companies that are coming in and saying, like, "Look, I need to get my hands on the right kind of data." And so what you're seeing is experience management is proving to be an essential part of how businesses are operating. And we're seeing companies increasingly reaching out. They're trying to understand, "Hey, how do we use this platform as part of some specific problem that we have." And once they solve that problem, they expand into solving other areas. And then other teams and departments in those companies start to collaborate and work on the data that's there. And over time, what you're finding is it's blossoming inside companies, which is they say, "Look, the relationship between my customer tightly correlated to what I'm doing in my product area. It's tightly correlated to the way my brand is perceived."

And at the core of all of that is this experience data set. It's one of the most important data sets that could be flowing into an organization and where time is of the essence in knowing where they got to go next: people's emotions, people's perceptions, people's feedback and input that they're giving you about where to take the business next. And so we've seen that play out substantially during the course of the pandemic, especially as businesses are reshaping themselves. And that's creating a lot of demand and what we're seeing in the business. And it's fundamentally aligned well to the way that we built this platform which, as you know well, is not an overnight exercise. We've been at this for many years. And we believe we've got a 10-year advantage given the way we've built this -- built the underlying software core behind the platform. So thanks for the question.

Great. And then maybe just a quick one for Rob. Rob, I know you're not going to give any guidance on net retention ratios. But is the 120% kind of the right ballpark to be thinking about going forward for you all? And any, I guess, color or context we should think about over the next year in terms of things that might impact that for whatever reason?

Yes. I appreciate the question. Our overall land-and-expand motion, along with expansion within our customer base, continues to be a key go-to-market motion for us, and we continue to see that. And as I mentioned in my notes, I'm very pleased with the results that we had in Q4. We do, consistent with the guidance that we've provided on subscription revenue, see the ability and opportunity to stabilize and then to be in and around this rate. And so very pleased with the go-to-market motion we have here and the ongoing customer expansion.

Our next question comes from Terry Tillman with Truist.

Congratulations on the IPO but also congratulations on some of this top talent you brought in. I guess the first question, unless I got this wrong, I think you said an 8-figure renewal? That's definitely a striking kind of deal size. I'm curious if you could kind of double-click in terms of with a large expansion into other areas? And then I had a follow-up.

Yes. This is Chris. It was an 8-figure expansion of an existing customer. Coming back to the earlier question about what we're seeing in terms of customers, so this is an example of a customer who's standardizing on the Qualtrics platform, a large company that is seeing that type of value and an indication of what this category is evolving into over time and the opportunity to grow and expand with customers kind of on the high end of what that could be down the road and in the future. As we're seeing that increase in customers over $1 million, it's fun to see a customer get over that $10 million hump and a precursor of what the future could hold down the road as we continue to innovate and have this category mature.

That's good. Maybe at some point, we'll have a figure, a milestone. But until then, maybe my follow-up question, more reined in, is what about vendor consolidation? As we move into the back half of the year, you could -- maybe this is for Zig, but you've got a broad product portfolio, you continue to innovate, a lot of R&D, but what about also just, like, the idea of just standardizing or actually saving money from that? Are you seeing that -- vendor consolidation?

Terry, great question. Thanks for the comments earlier as well. Look, part of what happens inside large enterprise customers, midsized customers, is they're looking at their budgets that they spent on point solution, legacy vendors that are very tactically maybe helping them measure a specific problem, but they've kind of hit a point of diminishing return on what they can actually end up doing. And they're saying -- customers are saying like, "Look, how do we just consolidate, save money, become more efficient and, at the same time, be able to get a much higher ROI of what we've been doing?" And so that certainly is one input of many inputs to the way that this business is growing.

I mean, clearly, the market is expanding as well. And we're taking our fair share of how that market is expanding and continuing to lead the market. But consolidation is certainly in the mix. And especially when people are saying, look, I've kind of run out of time on XYZ vendor, they're overcharging me all this or they're not actually as efficient as what they promised they would do. And then they come to a modern cloud-native based platform that is designed to be able to truly help hit experience breakthroughs within their company at a much faster pace than what they previously had. So it's a certain trend that we do see.

Our next question comes from Raimo Lenschow with Barclays.

Congrats from me as well. Two quick questions. First, since we're kind of in the middle of kickoff for the new year, like, what's the situation with the SAP sales force and incentive structure there, et cetera? Like, how is that going to play out now for you that you're kind of, like, independent -- obviously, not independent, but independent, like, what do you expect this year in terms of, like, momentum there? And then I have one follow-up.

Yes, this is Chris. I'll take that, Raimo. So we're excited about the continued partnership that we have with SAP. They've been an excellent partner with us for the last couple of years post the acquisition. And we're excited that the same model that we've had with them in the past will continue going forward, including having their sellers rewarded and motivated to bring us in to opportunities and rewarded as we sell successfully into SAP's existing customer base. This quarter, we got started with SAP's FCOM, and we're part of the whole kickoff for their year and excited. We're off to a great start with account planning alongside our SAP colleagues to talk about how we, together, can tell this experience management story and bring value to the existing SAP customers. And we're off to a great start to start the year to really continue that partnership with SAP. And we're equally excited about the opportunities that this unlocks for us to expand and really broaden our perspective well beyond the SAP customer base as well.

And so everything that we had in place before even though we are now a publicly traded company, we were able to continue those same models that worked so well over the last couple of years. And we're excited about the early signs of that continuing and continue to strengthen as we continue to refine the joint selling proposition that we have alongside them.

Yes. Okay. Perfect. Makes sense. And then a follow-up, like, maybe more longer-term strategic, like, so obviously, like, there's the customer feedback, there's employee feedback, there's brand feedback, the product. How do you think about that potential for expanding this further going forward? And I don't want to have a product -- a [front funding of] product, but like, is that -- are we kind of done with kind of those segments? Do you just expand deeper into them? Or do you see opportunities to kind of go -- broaden even further?

Yes, Raimo, good question. I mean, first off, if you think about our platform, this is really important, and it's what affects growth and efficiency and being able to scale a business, we have a single software core for experience management across all 4 core experiences on the platform, right? So it's employee, product, brand and your customer experience. And the combination of those things, if you think about any organization, those 4 things are the way that people run their businesses, right? And a decision you make on product, when you got your product right, is often affected by how well engaged your employees are and how they're helping to deliver that or how brand is perceived. These things are all deeply interrelated. And the way that this business is growing is absolutely validating the fact that you cannot stitch your way together into this marketplace. You cannot go out and, like, piecemeal stuff together. There's an important efficiency impact for customers and their rate in which they end up unlocking value. And there's also really important efficiency angle around how we scale this business. And that's what you're seeing over the last set of results that we just published.

The second thing to that, your point is, like, well, are we all done? No, we're just getting started. I can tell you every one of us here that are in this meeting and our management team and leaders across the company, we're looking at this as building a substantial, vibrant, long-term durable growth company. And if you were to ask how big this category was 10 years ago, right, people would have massively underestimated the opportunity. And only 2 years ago, 2.5 years ago, we were looking at the addressable market, it was about a $40 billion addressable market. We're looking at $60 billion today. And that's just because we're seeing companies rewire the way that they're making decisions around this important data source and the way that they're operating their businesses. So is there innovation and new product opportunity over and beyond what we have? Absolutely. Do we have things on the road map? Absolutely, ones that we haven't announced yet. And the fact that we're a public independent company also gives us a lot of optionality around being thoughtful and strategic play in the long run on both organic and inorganic investments that we end up making.

So Raimo, it's a great question. It's probably a lot more than you wanted to know, but I wanted to make sure that context is something that everyone's keeping in mind.

No, I like the comprehensive answer. Congrats again.

Thank you, Raimo.

Our next question comes from Brent Bracelin with Piper Sandler.

One for Zig and one for Chris, if I could. Zig, I wanted to get your thoughts on Microsoft. Obviously, on one hand, entering the employee experience and engagement market last month validates how big the size is. I think they're talking much bigger figures than you guys are as far as how big that market is. On the other hand, it does suggest that you do have a new competitor. So I'd love to get your views on Microsoft in the market. What does this mean for Qualtrics? And then how do you differentiate versus a company like Microsoft?

Yes. I mean, look, several of us continued -- I mean several of us came from Microsoft. I've got a lot of respect for Microsoft. And I think amongst many companies like them, you're going to see people continuing to innovate and try to contribute to some of the fundamentals of how businesses operate. And so Microsoft moved with a product they call Veeva that they've announced that's focused on corporate intranet collaboration experiences, right? And yes, absolutely, it helps to be able to operationalize employee experience better, in other words, the way that people connect, the way they get their information, the way they collaborate. But that's not what we do, right? What we do is we're focused on the human factor part of the equation, which is people's emotions, people's perceptions, needs, understanding. We've designed a purpose-built platform that's focused on that particular part of the equation in order to be more predictive in the way that you end up accommodating your employees, in order to be able to be more predictive in the way that you end up managing and enabling your customers, right?

And so if you think about that, that's not something that you can go and do overnight. We've been at this for about 20 years as a company, and we probably got about 10-year head start on the technology that's behind this. The ease of use, the flexibility, the ability to handle complex use cases at scale for global companies, the scalability in the platform, it's highly complementary to what you see happening in the broader ecosystem of companies that are doing everything from HR systems, the corporate intranet collaboration systems, content management platforms, workflow engines. And so being independent allows us to play a much larger ecosystem. And as a result, that unlocks more opportunities for how customers end up betting on the use of the Qualtrics platform as a platform that is as important as some of the other operational investments that they're making. Does that make sense?

Super helpful. Absolutely very helpful color there. And then, I guess, Chris, for you, just as you think about the guide in Q1 here, in particular, a lot of momentum in the business. Could you just maybe compare and contrast pre-COVID, post-COVID tailwinds. Are those durable, sustainable? Just help us think about the momentum of the business going in and how sustainable some of these post-COVID tailwinds are for the business.

Sure. Happy to take that. As we went through 2020, it was interesting to see the kind of initial reaction of our customers of kind of pausing and then really encouraging to see, as time went on and as they got ready for the next normal that we've talked about, they realized that experience management was going to be absolutely mission-critical to how they were going to be able to operate both during the time of the pandemic but, honestly, even beyond as they recognize the importance with employees working from home about the importance of staying close to understand the sentiment of your employees. And those are trends that are not going to go away as a result of COVID ending.

We view it as an acceleration of some of those trends that were already underway, of the movement towards digital, of needing to stay close to your employees and really understand what's going on, be able to intervene and act as well as -- another thing that was interesting is with a rapidly changing environment that the whole aspect of designing experiences is mission-critical, when you think about where in the world, where the way that customers sell, the way that employees work is going to be different. And if you don't have that data to be able to design the experiences that are going to work for your employees, for your customers, for your product then you're going to be at a competitive disadvantage to others in the marketplace. And so we're encouraged by the trends we saw over the course of last year and continue to be encouraged that we can see continued momentum as we go into 2021.

Another trend, just to build on that earlier question too and connecting to what Chris was saying, is ecosystem. Companies are looking at their platforms. Microsoft is a great partner of ours. You got companies like Adobe. You've got companies that are workflow providers, workflow leaders. I mean they're looking at Qualtrics and they're saying, "How do I now use this in order to be able to action the way that I'm operating my business?" So systems of record, CRM systems, HR systems, other -- any employee infrastructure people have that are looking to tie that in with our platform, and that's another trend that we think is going to continue to play out. And it plays to our advantage given how we've designed the architecture of our platform.

Our next question comes from DJ Hynes with Canaccord.

Maybe one for Chris and then a quick follow-up for Zig. So Chris, we obviously heard the enterprise strength, which is great to see. The velocity of that has been really strong, too, right, almost 1,500 net new customers in the back half of the year. I guess, it begs a question about the corporate inside sales group, which I think was hit probably the hardest during the pandemic. Any comments on what you're seeing from that team?

Yes, a great question. Honestly, I love that you highlighted the combination of strength that we saw in the back half of the year, both the growth of large customers and expansion to the enterprise, but we were equally thrilled with what you just highlighted, which is the growth of overall customer base. That was a combination of the international opportunity that we saw of adding new customers but also a significant strengthening of that corporate sales motion and continuing to make sure that we have that land motion alive and well overall as a company. And so that was an equally encouraging trend that we saw because, as time goes on, we need to make sure we have the right balance between continuing to expand that customer base that we can then grow as they receive value on the platform. And so that sales team, we believe, is the best inside sales teams that we have that's on the planet, and we are excited about their motivation. And they're going into 2021 remaining motivated to continue the vital role they play in the company's future.

Yes. Good to hear. And then, Zig, one for you. You just hit on kind of the importance of ecosystem in answering Brent's question. I wanted to ask, do you think the spinout materially changes the pace at which that ecosystem build out may happen? In other words, are more partners now interested in working with Qualtrics as an independent entity? Any thoughts would be helpful.

Yes. And a very simple answer is yes, big capital yes. And it just makes it a lot easier for people to take advantage of the way that the system is built, but it's also unambiguously clear that SAP is making -- helping to make Qualtrics an ecosystem asset. And that's what the customers have been asking for as well given the design points of the system but also the desire for them to be able to innovate on the platform in conjunction with other infrastructure investments that they've made themselves. It's a great question. Thank you.

Our next question comes from Keith Bachman with Bank of Montreal.

I have 2 questions. And Zig, I want to start with you on the partner side related to the previous comment. Now that you are independent, how do you prioritize those partners? And who would you say are your most strategic partners or a handful of strategic partners as you look out over the next 12 to 18 months and really wondering how much the data integration helps you priority those partners? I mean part of the reason why SAP made the acquisition was, as you said, to integrate kind of the XM side with the systems of record. So I'm just wondering as you prioritize your partner, how important is the data layer, so to speak, in terms of prioritization? And I have a follow-up cash flow question, please.

Yes. I mean, first off, if you look at the larger landscape, many of the large tech vendors are increasingly viewing experience management as key to the way that they can help enhance and add value to their underlying systems of record or system of engagement that they might have, if you look at a ticketing vendor, if you look at a workflow vendor, if you look at a CRM vendor, if you look at an HR systems vendor, the list is long. And so the idea that we can now partner with other systems of record -- again, it doesn't require a lot of incremental work on our platform because of the way we've designed the ability to couple data, pull data into our platform, easily automate actioning and solutions that can be built on top of our system. I mean we've got cutting-edge programs that are being built on the platform that then connect with platforms or systems that customers have made investments in. So we're going to continue to build on that.

And then in addition to that, I mentioned earlier, we have partnerships with Accenture, Deloitte, EY, Korn Ferry. These are examples. And all of them obviously have different advantages. They've got innovation that they want to be able to bring in conjunction with the installed base that they have currently in their systems of record, systems of engagement. And they want to bring that together and be able to unlock new avenues for growth for themselves as well as unlock new value for the customers that they end up delivering services and strategy to. So that's how we think about that big picture. And again, the key point to reemphasize here is the XMOS is an ecosystem asset. And you're going to see us invest in that way, [work hard] in that way with our customers as well as some of the strategic partnerships that we're going to continue to build.

Okay. Great. And Rob, maybe to the cash flow question. You guided operating margins to negative 4% to negative 5%. A, any puts and takes that we should be thinking about as it relates to the cash flow for '21? And b, is there any numbers you want to give us for the cash settlement impact in either Q1 or, more importantly, the first half of the calendar year?

Yes. So I think you've hit on the one item there for sure, Keith which is, as noted, though, that cash settlement of those SAP awards has been a big factor on our cash flow while we were a wholly-owned subsidiary of SAP, and that will trail off. But it will still be a meaningful factor in 2021, particularly in Q1, and then it trails off to less meaningful beyond that. Look, this company has a long history of driving free cash flow and very proud of that history. As you look forward at the strength of our subscription margin and then overall margins, we're well positioned in the mid to long term to drive positive free cash flow.

Okay. Congratulations on the quarter, gentlemen.

Thank you.

Your next question comes from Chris Merwin with Goldman Sachs.

So I wanted to ask you about the expansion that you're seeing. Obviously, you called out the really strong renewal. But more broadly than that, can you maybe dissect for us a bit the components of that expansion, how much of that is cross-sell to some of your other modules versus upsell and maybe any particular areas of strength outside of customer experience where you're seeing much stronger attach?

Thanks, Chris. I'll take that. This is Chris Beckstead. As we look to the results in Q4 and as we go into 2021, really pleased with the balance that we had in terms of where the growth came from, both balance in terms of both continued in the U.S. and internationally but also a good balance between net new customers, we spoke earlier about the additional customers that we added last year, both in terms of overall customer base but also $100,000 and $1 million-plus spending customers by product. Really just the overall summary is that there's multi -- it's a multifaceted land-and-expand engine that's resulted in sustaining this 120% net retention rate. And we see a good healthy mix of customers that are growing within a use case or cross-selling to additional use cases and really no one specific path of growth that's spiking well above the others. It's just really good balance. And we're pleased with that because, for us, it indicates there's good sustainability to that growth.

Okay. Great. Maybe just a quick follow-up. As it relates to the billings acceleration, I know you mentioned that there was, like, a catch-up in renewals. If we were to back that out, is there a way we can think about a normalized billings growth number just as we think about the potential for top line next year?

Yes. It represents about 3% to 4% of that overall billings growth in Q4, and so that would help you get to a more normalized rate.

Our next question comes from Drew Foster with Citigroup.

First one is for Zig. Zig, I'm curious your view of how this market will evolve over the next 3 to 5 years. As you continue to see customers who adopted Qualtrics for specific use cases and then evolved the usage of the platform to more of a system of action where the technology is actually operationalized, I guess, my question is, how much of the addressable market do you think ends up using the technology in that fashion over time? And what do you think are the key barriers to adoption you're facing as you're thinking about going back into your installed base to encourage that type of usage?

Okay, Drew, thanks for the good question. Look, I've been at building new categories for a long time. When I was at Microsoft, myself, along with the team, I mean we built a product called Lync that became the capabilities that over time now is part of Microsoft Teams. There's no book you're reading from when you're building new categories. What you're paying attention to is customers. You're paying attention to the things that people are not telling you. And then you focus on a set of core principles, building a great platform, fundamentally important, especially if you're playing the long game. We're not shooting here for the quarter-to-quarter, even though you're going to see us provide long-term durable growth in what we do. I mean we're thinking about 4, 5 years from now. And a lot of what customers are looking for is very similar, and that helps us.

And there's one market, which is a research spend marketplace that we participate in, is also a very large market in software of which people are saying, "Look, hey, how do I deploy capital? How do I spend my money in order to be able to improve by product in the market? How do I increase my share of wallet? How do I decrease churn with my customers? How do I increase loyalty with my customers? How do I do a better job in the way my brand is represented in the market?" And one of the interesting things is there's never been a technology system that's been built to help solve the relationship between those things really, really well in a predictive way. And that's what we're working on. And in order to do that, you have to be focused on the right data set. And it isn't any old data that you're pulling, you got to be able to, ultimately, first capture the data in the right way, make it statistically significant, make it something that you can end up betting your business on and then how that'll be something that ends up operationalizing the way your business runs.

And so back to what Chris Beckstead was saying earlier, we're seeing an interesting balance of how people are taking advantage of the combination of the portfolio across customer -- Product XM, Customer XM, Employee XM, Brand XM. But what's really differentiating things is the underlying operating system, this combination of actually being able to listen and observe people over time and be able to understand who they are, help the customer be able to do a better job with how they end up serving their customers, help to be able to create the right focus and then actioning. The entire workflow aspect of our system and the automation that ends up being enabled is something that travels across departments inside companies.

Most systems of record, if you think about it, are departmentally focused, okay? Where is CRM get used? Highly departmental, right? Where is HR system gets used? Yes, managers touch and dive and connect with it once in a while, but it's an HR system. This is a unique platform because it actually has the ability to be able to touch many different dimensions of the company. And we think that we're just getting started with the type of value unlock that we end up creating for people who are solving the kinds -- solving for some of the kinds of problems that start at the beginning. So I think that this market is going to continue to expand. You've seen the TAM expand over the last couple of years. We think it's going to continue to grow because people are going to put more of -- the ways in which they're solving their problems should be focused on human beings, focused on the human factor data, the human factor weighted actions, which is what XM is all about.

So that's how I think about this as a category. You can't do any of this if you're optimizing for the short run. Everything we're doing is long-run thinking here. And that's something that we hope to be able to live up to on a quarter-by-quarter basis. But every couple of years out from now, you'll see the decisions that we made today that continue to play out through the advantage of what we're doing with our customers, our partners and our shareholders.

I had just one follow-up on -- also on drivers of strength and the large deal metrics in the quarter. Can you just highlight anything you changed from a go-to-market perspective as far as an expansion playbook over the last 12 months as you've invested into that organization, hired some top talent, et cetera? And how much more evangelizing do you think you need to do in this market to sort of consistently deliver those $1 million deals over time as you go back into your installed base?

Yes. I wouldn't highlight anything substantial other than continued progress with how we're partnering with SAP, especially internationally and as we are running the consolidation playbook that we've continued to evolve and get better at. The other piece that I would add would just be continued evolution and making sure we're doing a really good job of executive selling and really pulling in our executive leadership team in. And so I would say just to continue as the category evolves and grows for us to drive continued selling value of the platform overall.

And our last question comes from Brian Peterson with Raymond James.

Congrats on a very strong quarter, guys. It seems like you're keeping pace with the jazz there. So just one question for me. Chris, you mentioned the consolidation playbook that's clearly working. I'm curious, as you think about the TAM or the pipeline or however you want to look at it, how much of that is actually an approach to this today, whether that's software or research versus truly being a greenfield opportunity? Is there any way to kind of segment that?

Yes, great question. I think coming back to the earlier answer, we see a good healthy balance between the two where there are situations where we see customers that have started to achieve value from the platform with individual use cases. And one thing we love about our platform is the flexibility and quick time to value that it provides for our customers. And so as they get on, we sign them up and they get value in the platform, it becomes a natural evolution for them to figure out how they can use more of it, to continue to get more value and even better returns. And that translates into that consolidation playbook.

But also as the category continues to mature and evolve, and as it becomes more and more apparent in the marketplace that experience management is mission-critical to how companies operate, we're seeing companies that are maybe a little bit late to the game recognizing that they need to have an experience management platform. And some will come in pretty strong right after the get-go of establishing a more significant program, whether it's on the customer side or whether it's on the employee side or in the product or brand side, and so a good healthy mix. Every company is at its own stage in their evolution of how they're maturing their program. And so we love that we can meet customers where they're at today, whether it's early stage or whether they're ready to consolidate and grow and really custom our solution to meet them where they're at and help them evolve and grow and differentiate in the marketplace.

I would now like to turn the call back over to Zig Serafin for any closing remarks.

Yes. And Brian, thanks for that last question, and thanks, everyone, for a great set of questions and insights as well, so very much appreciate it. So look, Q4 was an outstanding quarter, and we look forward to talking about Q1 results here very soon. So we'll look forward to reconnecting with all of you. Have a great evening.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.