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Qualtrics (NASDAQ:XM) Beats Expectations in Strong Q3, Stock Soars


Full Report / October 20, 2021
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Online survey software provider Qualtrics (NASDAQ:XM) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 40.8% year on year to $271.6 million. Guidance also came in very strong with next quarter revenues guided to $297 million, or 12.5% above analyst estimates. Qualtrics made a GAAP loss of $286 million, down on its loss of $85.6 million, in the same quarter last year.

Qualtrics (XM) Q3 FY2021 Highlights:

  • Revenue: $271.6 million vs analyst estimates of $258.1 million (5.21% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of -$0.02 ($0.03 beat)
  • Revenue guidance for Q4 2021 is $297 million at the midpoint, above analyst estimates of $263.9 million
  • Free cash flow was negative $13 million, down from positive free cash flow of $53.7 million in previous quarter
  • Gross Margin (GAAP): 75.3%, up from 74% previous quarter

Founded in 2002 by Utah-based entrepreneur Ryan Smith, along with his father and brother, Qualtrics (NASDAQ:XM) provides organizations with software to collect and analyze feedback from customers and employees.

Data is commonly stored in silos across the organization, making it difficult to generate efficient insights from the feedback received from customers, employees, and partners. Qualtrics makes it easy and efficient to extract and unify the data to generate actionable business insights.

For example, when JetBlue observed a spike in negative feedback and reduced customer satisfaction at one of their airport terminals, they investigated the issue and found the terminal speaker was broken and passengers couldn’t hear what the gate agent was saying. With Qualtrics, JetBlue was able to send an automated alert to the airport maintenance crew and the issue was fixed the same day.

The software platform was originally designed for academic researchers. This has led to its widespread adoption in universities around the world, an important factor that has contributed to its success to date. Qualtrics has since evolved its software for the business world, which is increasingly flooded with data.

The growing adoption of digital tools means that organizations are generating more data that can be used to analyze their brands and products. This trend should increase demand for experience management software in the years ahead.

The experience management space includes competitors such as Adobe (NASDAQ:ADBE), IBM (NYSE:IBM), SurveyMonkey (now called Momentive, NASDAQ:MNTV), and Medallia (NYSE:MDLA).

Sales Growth

As you can see below, Qualtrics's revenue growth has been very strong over the last year, growing from quarterly revenue of $192.8 million, to $271.6 million.

Qualtrics Total Revenue

And unsurprisingly, this was another great quarter for Qualtrics with revenue up an absolutely stunning 40.8% year on year. On top of that, revenue increased $22.2 million quarter on quarter, a very strong improvement on the $10.7 million increase in Q2 2021, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 19.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Qualtrics's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 75.3% in Q3.

Qualtrics Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like Qualtrics to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Qualtrics's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Qualtrics’s balance sheet, but we note that with a market capitalization of $23.4 billion and more than $589.9 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the very optimistic revenue guidance provided for the next quarter. And we were also glad that the revenue guidance for the rest of the year was upgraded. Zooming out, we think this was a great quarter and we have no doubt shareholders will feel excited about the results. The company is up 5.36% on the results and currently trades at $46.58 per share.

Is Now The Time?

Qualtrics may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Qualtrics we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its strong gross margins suggest it can operate profitably and sustainably, the downside is that its growth is coming at a cost of significant cash burn and its customer acquisition costs are higher than we like to see.

Given its price to sales ratio based on the next twelve months is 19.7x, Qualtrics is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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