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Qualtrics (NASDAQ:XM) Q2 Sales Beat Estimates But Stock Drops


Full Report / July 20, 2022
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Online survey software provider Qualtrics (NASDAQ:XM) reported Q2 FY2022 results that beat analyst expectations, with revenue up 42.9% year on year to $356.3 million. However, guidance for the next quarter was less impressive, coming in at $359 million at the midpoint, being 0.11% below analyst estimates. Qualtrics made a GAAP loss of $279.2 million, down on its loss of $263.4 million, in the same quarter last year.

Qualtrics (XM) Q2 FY2022 Highlights:

  • Revenue: $356.3 million vs analyst estimates of $344.8 million (3.34% beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of $0 ($0.04 miss)
  • Revenue guidance for Q3 2022 is $359 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $1.42 billion at the midpoint
  • Free cash flow was negative $13.1 million, down from positive free cash flow of $9.93 million in previous quarter
  • Gross Margin (GAAP): 70.6%, down from 74% same quarter last year

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 Internet has given customers more choice on whom to conduct business with and has also given them the power to easily share their experiences with other customers. These twin dynamics effectively have increased pressure on companies to both improve their customer service and also monitor their brand reputation online, driving the need for customer experience software offerings.

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 impressive over the last year, growing from quarterly revenue of $249.3 million, to $356.3 million.

Qualtrics Total Revenue

And unsurprisingly, this was another great quarter for Qualtrics with revenue up 42.9% year on year. On top of that, revenue increased $20.7 million quarter on quarter, a solid improvement on the $19.6 million increase in Q1 2022, and even a sign of slight acceleration of growth.

Guidance for the next quarter indicates Qualtrics is expecting revenue to grow 32.1% year on year to $359 million, slowing down from the 40.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 23.7% over the next twelve months.

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, licenses, technical support and other necessary running expenses was at 70.6% in Q2.

Qualtrics Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Qualtrics burned through $13.1 million in Q2, with cash flow turning negative year on year.

Qualtrics Free Cash Flow

Qualtrics has burned through $76.6 million in cash over the last twelve months, resulting in a negative 5.99% free cash flow margin. This below average FCF margin is a result of Qualtrics's need to invest in the business to continue penetrating its market.

Key Takeaways from Qualtrics's Q2 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 $7.36 billion and more than $786.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Qualtrics delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for both the next quarter and the full year narrowly missed expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 5.24% on the results and currently trades at $13 per share.

Is Now The Time?

When considering Qualtrics, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition costs are higher than we like to see, and its cash burn raises the question if it can sustainably maintain its growth.

Qualtrics's price to sales ratio based on the next twelve months is 5.1x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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