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Medallia Inc (NYSE:MDLA)
Q3 2020 Earnings Call
Dec 05, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to Medallia's third quarter of fiscal 2020 earnings conference call. Joining us today for today's call are Medallia's CEO, Leslie Stretch; and CFO Roxanne Oulman. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] With that, I would like to turn the call over to Roxanne Oulman for introductory remarks.

Roxanne?

Roxanne Oulman -- Chief Financial Officer

Thank you, Chris. Welcome to Medallia's third-quarter fiscal 2020 earnings conference call. We have issued our earnings release a short time ago and furnished the related Form 8-K to the SEC. To access the press release, please see the Investor Relations section of our website.

With me on the call today is Leslie Stretch, President and CEO of Medallia. The primary purpose of today's call is to discuss our third-quarter fiscal 2020 financial results. Before we begin, please remember, during the course of this call, we may make forward-looking statements about the operations and future results of Medallia that may vary and involve many assumptions, risks and uncertainties. If any of these risks or uncertainties develop or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements.

For a discussion of our risk factors associated with the forward-looking statements, please refer to the text in the company's press release issued today and to our periodic reports filed with the Securities and Exchange Commission, including our prospectus dated July 18, 2019 and Form 10-Q dated September 12, 2019. We disclaim any obligation to update any forward-looking statements. On today's call, we will refer to both GAAP and non-GAAP financial measures. The non-revenue financial figures discussed in today's call are non-GAAP, unless stated that the measure is a GAAP number.

Please refer to today's press release for the reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. Additionally, in conjunction with the release of our earnings report, we have posted on our website at medallia.com, under the Investor Relations section, additional charts that identify trended metric performance that we believe will aid in understanding and evaluating our performance over time. Now I'll turn the call over to Leslie.

Leslie Stretch -- Chief Executive Officer

Thanks, Roxanne. Good afternoon, everyone. Before I begin my prepared remarks, I would like to thank each and every Medallian for their hard work in Q3, our second public quarter. I started last quarter's report painting the picture of Medallia, our customers and the market that is so important to us.

Since we are still new to the public markets and customer experience management technology is new for many people, I wanted to continue that discussion. What sets us apart from traditional market research and survey vendors is our deep technology capability and our platform and signal story. In the Medallia Experience Cloud, in aggregate, across all of our clients, over 80% of our signal data is non-survey data, giving our customers unmatched insight into their customers' feedback and intent. This data includes IoT signals, transactional information, operational data from sales, marketing, service clouds and many other systems.

The Medallia Experience Cloud has been uniquely architected to capture this expanding signal field to interpret it securely and provide actionable insights that create enormous value for our customers in live time. The importance of Net Promoter Score is also central to our point of view. Medallia customers tracked from 2012 to 2018, for example, increased their NPS, Net Promoter Scores, by eight points, an improvement of 16% on average, in many cases leading to better customer traction and financial performance. Net Promoter Score and our other customer effort and frictionless business measurements are all part of the measurement regime of customer experience.

Importantly, our customers use Medallia across their organizations, not just in small market research or survey use cases. The Medallia platform is purpose-built to be fast, accurate and intuitive, displaying role-based information to ensure data relevance and actionability. The ease of use of the Medallia system and, in particular, our mobile apps, reduces the need for intensive training and is the reason behind our high levels of user adoption, with approximately 50% of mobile users logging in daily. This year, 54% of our customers have more than 1,000 active users.

On average, our large clients have over 25 integrations with sales, marketing, service cloud, call center systems, and other operational systems, as I have mentioned. With our easy-to-use technology, we have the ability to run simple feedback programs for all kinds of organizations of all shapes and sizes. But it is our unmatched ability to handle scale, integrate out of the box with core systems and our ability to securely distribute and connect feedback from relevant signal sources, not just survey, that means we win the majority of enterprise opportunities where we have feet on the ground and can engage. At each quarterly report, we will highlight one or two customer use cases in a specific vertical.

This quarter, we've chosen the retail grocery and retail pharmacy space. Almost exactly one year ago, we won the contract for a voice of employee implementation in one of the very largest retailers in the world. Fast forward one year later and we have over one and a half million employees in that particular program, and our success has positioned us now to move to voice of customer and e-commerce digital implementations in our current quarter, giving us a strong start to Q4 of fiscal 2020 and increasing our annual subscription in that case by over 400%. At the same time a year ago, we added CVS, one of the largest retail pharmacies in the world, to our platform for customer experience.

And within four months, they had gone live for orchestrated feedback in 6,000 stores. Today, we are up and running in nearly 10,000 stores, and we've now expanded to their voice of employee program. Land-and-expand opportunities like this exist across a very large part of our customer base. We're seeing small, medium and large customers looking to supercharge their customer experience and employee experience capabilities with Medallia.

At each quarterly call, we'll also focus on one of our experienced management domains a little more deeply. And today, we've chosen to showcase employee experience to highlight our progress. Our employee experience platform provides real-time feedback through multiple signals, including text, WeChat, WhatsApp, voice, and now video through partnerships with specialist companies like LivingLens and box property, and with workplace collaboration tools such as Slack and Facebook Workplace. Today, nearly 60 large customers have subscribed to our employee experience platform, including one of the largest retailers in the United States, as I mentioned earlier, and one of the U.S.'s largest automobile manufacturers.

Importantly, we are not tied to one HRIS, HCM or talent platform either, which positions us to do well in all the major ecosystems. For example, in Q3, we became an access tier software partner of Workday. At Workday Rising, they showcased our forthcoming integration with their Prism Analytics suite. We led a breakout session that highlighted the link between employee experience, customer experience and transformative business outcomes.

In addition, we demonstrated our idea management offerings from our new solution, Crowdicity. There are many more reasons that we lead: our data visualization technology; our out-of-the-box integrations with sales cloud, marketing cloud, service cloud and so on; our privacy capabilities; our personal identity and information security philosophy and capability; our massive, scalable data platform; and our emerging but broad and deep partner ecosystem. Before I turn to Q3 performance, I want to also highlight one of our recent tuck-in acquisitions. This quarter, I want to focus on Crowdicity.

Next quarter, we will review Zingle and its impact in hospitality and beyond. Rob Wilmot, the founder of Crowdicity, is a thought leader in applying technology to global issues. Crowdicity is a part of our employee experience domain because of the unique way their solution engages people and core missions. But its reach goes beyond this area.

The unique solution speeds our traditional market research by digitizing the processes previously managed by people and weak survey tools. The platform has also been used by public sector organizations to crowdsource citizen ideas and turn them into action. Rob will be presenting at our Washington, D.C. City Tour next week.

Now let's turn to our Q3 performance. The third quarter represented an important milestone for Medallia. With the $100 million quarterly revenue mark behind us, let's look forward to $500 million in annual revenues as soon as possible and then to $1 billion in annual revenues and beyond. These are the milestones I'm focused on because, at this scale, we continue to out-innovate and outperform others and continue to lead the customer experience market.

In Q3, we had record revenues and record SaaS revenues. We had solid business performance beating all of our forecasts. We were able to acquire two new technology tuck-ins in the quarter that add tremendous values to our platform and to our customers. We've already executed new Crowdicity and Zingle deals with major brands.

We ran 10 Medallia City Tours in Q3 and Q4 where we had packed audiences around the world, with the highest quality customer engagements I've seen in my career. We had approximately 50 customer experience and employee experience case studies presented, companies including Airbnb, Aeromexico, Walmart, IBM, Disney, BNP, Schneider Electric, Samsung, McDonald's, Four Seasons, Coach and others, shared ROI and the value Medallia brings to their organizations to packed audiences. We had nearly 2,000 high-quality executive attendees at these events, and my personal customer interactions supported my view of our opportunity in the short, medium and long term. We added nearly twice as many enterprise new logos in Q3 than a year ago.

Today, we have more productive sales capacity than ever and are able to show up in more active opportunities than ever before. In Q3, just some of our new business wins included Amadeus in the travel space, Amtrak, Hard Rock Cafe, Microsoft and Pizza Hut. In Japan, we closed our first major deals with SoftBank and Nomura Securities. In Latin America, we closed deals with Vivo Telefónica.

And Itau in Brazil, Itau in Chile, and Grupo Talisis in Mexico. We also had many expansion deals including Banner Health, Jones Lang LaSalle, Mass Mutual, UBS, and Wynn Las Vegas, just to name a few. I'm pleased to note that our mid-market team is beginning to see traction also. Some of the mid-market deals closed in Q3 included The Callaway Bank, Caribou Coffee for employee experience, ControlUp, Emissary, and Vivid Learning Systems.

Our partner channel also performed well. As you know, this is a relatively new capability for the company, and although it's in its early days, I'm pleased with the traction we are seeing. In Q3, we signed on another 10 partners including Global SI's advisory technology and delivery partners. This included new alliances for our emerging markets across EMEA, Latin America and Asia Pacific, as well as broadening our capabilities across speech and media.

In Q3, we also closed our first deals with newly signed strategic ISV partners, Adobe and ServiceNow. We launched our second integration on the ServiceNow store, giving us a full suite of capabilities that maps to their full product suite. We're now a premiere tier partner, and our employee experience integration is currently a featured offering on the ServiceNow store. We launched version two of our Adobe Analytics integration, seamlessly integrating our digital offering for Adobe customers.

This also deepens our live time capabilities as it allows customers to tailor digital experiences for customers based on instant feedback. We just attended Dreamforce in San Francisco where we had a superb event with great traction from a packed crowd. We had several hundred key customer meetings in four days, many attended by salesforce.com representatives keen to capitalize on our joint value proposition. Our professional services business continues to be a differentiator.

I'll remind you that our one-off implementation services represent less than 10% of our overall business. Majority of our professional services is ongoing managed services helping customers create programs and extend their adoption of our technology. I view this as a strategic theme that drives great value for customers through the best industry know-how and effective integration capability. Easy in survey software is often easy out and a poor platform to cross-sell from.

We're clearly differentiating through our value-added services and the services provided also by our partners. We continue to hire enterprise and mid-market sales executives and our progress as the market leader positions us as the most attractive customer experience play for real talent today. We're on target with our hiring plans this year, our time to productivity shows some exciting data points with several new sales executives delivering small, medium and high six-figure attainment in their very first quarter in the company. Turning to our pipeline in the future.

Our platform and signal story is resonating with customers and prospects and partners alike. Our scale and ability to out-innovate the market is being clearly recognized, and this positions us well for the future. We expect to continue our tuck-in M&A strategy and to effectively evaluate our buy versus build options as we seek to capture every signal our customers want to examine and act upon in their pursuit of customer experience excellence. Finally adding to my confidence is our strong start to Q4.

We landed two seven-figure global retail contracts in November and continued our land-and-expand deals across the globe. I'm very excited indeed about our immediate opportunity and about our prospects for growth in FY '21. I'll now hand over to Roxanne to provide more color on the Q3 financials and our outlook.

Roxanne Oulman -- Chief Financial Officer

Thank you, Leslie, and good afternoon, everyone. Across the board, we posted strong financial results, including total revenue growth, SaaS revenue growth, professional services revenue growth and operating margin improvement. As a quick reminder, unless otherwise noted, all numbers except the revenue mentioned during my remarks today are non-GAAP. You can find a reconciliation from GAAP to non-GAAP results in today's press release.

We ended the quarter with 698 enterprise customers, of which 44 came from our two acquisitions in the quarter. On an organic basis, we added 41 customers, nearly double from Q3 of the prior year. Total revenue was $103.1 million, an increase of $21.9 million or 27% over Q3 of fiscal 2019. Total revenue exceeded our expectations due to solid contribution from SaaS, managed services and implementation services.

Recurring revenue consisting of staff and managed services continues to be at 90% of total revenue. In Q3, SaaS revenue was $79.7 million, an increase of $16.5 million or 26% year over year. Our SaaS revenue growth rate improvement benefited from the timing of new bookings in the quarter, as well as revenue contribution from the two acquisitions we completed in the quarter, which contributed approximately $700,000. Professional services revenue was $23.3 million for the quarter, which increased 30% year over year.

During the quarter, our services revenue benefited from strong demand for both managed services and implementation services. As a reminder, services revenue ebbs and flows based on a variety of factors. Medallia provides a high ROI to our customers, as evidenced by our strong renewal rates. During the 12 months ended October 31, 2019, our dollar-based net retention rate was 118%.

I'll now turn to our non-GAAP gross margins and operating expenses. SaaS revenue gross margin was 82%. We believe our SaaS margins are among the best in class for SaaS companies. In Q3, professional services gross margin was 116%, a dramatic improvement from 6% in Q3 of last year.

Looking ahead to Q4, this level of professional services margin may decline to below 15% due to the holiday season. In addition, we will continue to subcontract additional services with our partners as they continue to build out their Medallia consulting practices. Sales and marketing expenses were $38 million or 37% of revenue in Q3 as we continued to invest in our go-to-market initiatives. We continue to expand productive sales capacity and pipeline generation and anticipate an increase in expenses in Q4, given our large presence at Dreamforce and the continuation of City Tours, as Leslie discussed earlier.

R&D expense was $20 million for the quarter or 19% of revenue. R&D remains an important investment area as we expand our platform with new features and capabilities each quarter. G&A expenses were $12.9 million or 13% of revenue in the quarter. The increase was primarily related to incremental expenses associated with being a public company.

However, we expect additional leverage on the G&A line over time. Non-GAAP operating loss in the third quarter was $2 million, compared to a loss of $8.8 million in Q3 of fiscal 2019, an improvement of $6.8 million. Similarly, non-GAAP operating margin in the quarter was negative 2%, an improvement from negative 11% in the year-ago quarter. Non-GAAP net loss was $932,000, compared to a net loss of $9 million in Q3 of last year.

During the quarter, we generated $2 million in interest and other income, an increase of $1.8 million from the proceeds -- an increase of $1.8 million from prior year's quarter, primarily as a result of interest income earned on our IPO proceeds. We incurred $912,000 in non-GAAP income taxes in Q3. Our GAAP income tax benefit of $47,000 includes a $1 million one-time benefit related to the acquisitions in the quarter. During the quarter, our weighted average basic share count was 127.7 million shares.

Because we had a net loss on a GAAP basis, our diluted share count is the same on a basic count for both GAAP and non-GAAP EPS. Turning now to the balance sheet. We ended the third quarter with $319.3 million in cash and equivalents, down $98 million from the end of the second quarter, driven primarily by the use of $55.7 million in cash for the two acquisitions. Note that the two acquisitions in Q3 were primarily technology and talent-focused, therefore, our SaaS deferred revenue included de minimis amounts.

SaaS deferred revenue was $141.8 million, an increase of 33% over SaaS deferred revenue in Q3 of the prior year. Now let's move to SaaS calculated billings, which we define as SaaS revenue plus change in sequential SaaS deferred revenue and contract assets. As you know, there are a wide variety of factors that influence this metric. Therefore, quarter-to-quarter fluctuations in calculated billings should not be taken as an indication of changes in future revenue.

For example, billings will fluctuate quarter to quarter due to the timing of renewals and annual contracted billings. As we discussed in our last earnings call, we believe that the 12-month trailing SaaS billings growth rate is a more meaningful measure of our performance. For Q3 fiscal 2020, our trailing 12-month SaaS billings growth rate was 24%, which was down from the 33% in the prior quarter. The sequential decline in deferred revenue from the prior quarter was in line with what we communicated to you on our Q2 earnings call.

Q3 deferred revenue declined sequentially based on our typical seasonality. That said, we expect a significant increase in SaaS deferred revenue in Q4. Based on our historical seasonality, over 40% of our annual billings occur in the fourth quarter. Our remaining performance obligations or RPO totaled $585.7 million.

We expect to recognize approximately 50% of the RPO over the next 12 months. Note that the RPO metric may be impacted by contract duration and extensions, as well as the timing of renewals of large multiyear contracts. So while RPO provides for strong visibility, it may fluctuate from quarter to quarter. We generated a loss of $18.4 million in cash flow from operations for the quarter.

From a cash flow perspective, our operating cash flow fluctuates based on seasonal patterns that we have experienced historically due to the timing of bookings and cash collections. As a reminder, we've historically experienced seasonality in our cash flow from operations, given that over 40% of our billings occur in the fourth quarter. As a result, our cash collections in Q4 and Q1 are higher than other quarters. We anticipate this seasonality will continue.

On an annual basis, we continue to expect to trend positively and are reiterating our plan to be operating cash flow positive for the full fiscal year of 2021. Now let me turn to our financial outlook for Q4 and fiscal 2021. For Q4, we are projecting total revenue to be between $103.2 million and $105.2 million, representing a 20% to 22% growth rate over last year. For Q4, we are projecting SaaS revenue to be between $83.2 million and $84.2 million, representing growth of 23% to 24% over last year.

For Q4, we expect non-GAAP operating loss to be in the range of $3.5 million to $4.5 million. We expect other income and expense to be roughly $700,000, and income taxes to be in the range of $500,000 to $1 million. We expect basic weighted shares outstanding to be approximately 129 million. Finally, we remain on track for our capital expenditures to be $20 million for the second half of this year as we continue to expand our data center capabilities and the final phase of the buildout of our new customer briefing center in downtown San Francisco.

Based on this Q4 guidance, for the fiscal year 2020, we expect total revenue to be between $395.6 million and $397.6 million, representing a 26% to 27% growth over last year. We expect SaaS revenue to be between $309.2 million to $310.2 million, representing growth of 25% to 26% year over year, an acceleration from the 22% growth rate in fiscal 2019. We are keenly focused on driving SaaS accelerated growth on an annual basis. However, there will be quarterly fluctuations in our year-over-year growth rate.

For 2020, we expect non-GAAP operating loss to be between $5.9 million and $6.9 million, which is a dramatic improvement from the operating loss of $47.7 million in fiscal 2019. For the full fiscal-year 2020, we expect basic weighted average shares outstanding to be a little over 83 million. I would now like to provide insight into our current thinking for fiscal 2021. We remain confident in our ability to sustain SaaS accelerated revenue growth, given our new go-to-market initiatives and Medallia's established position in a large addressable market.

This is a first glimpse into fiscal 2021. We want to be prudent with this preliminary outlook. We will update you on a regular cadence as we move forward to fiscal 2021. For the full fiscal-year 2021, we are projecting total revenue to be between $474 million and $483 million, representing a growth between 20% to 22% year over year.

We expect SaaS revenue to be between $382 million and $387 million, representing growth of 24% to 25% year over year. We expect revenue to follow a similar pattern to this year, with more than 50% of annual revenue to be recognized in the seasonally strong second half. We are committed to investing for growth while balancing growth and profitability and see the opportunity to show bottom-line leverage over time. In conclusion, we are very pleased with our third-quarter performance.

Leslie and I will now take questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question is from Kash Rangan with Bank of America Merrill Lynch. Your line is open.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Hi. Congratulations on spectacular results. Nice gift for the holidays from you guys. I had a couple of questions related to the net new customer adds.

I mean, Leslie, if I heard you right, you said you were more than two times relative to a year earlier. Right? Just wondering if you could clarify that, across the mid-market, or is it only for large enterprise? And depending upon whatever the answer is, I'm curious how that ties into your expectations for sales productivity that you laid out at the time of the IPO? And is it turning out to be a smidge better than you expected or just about in line with expectations? And consequently, how does that change your view or not change your view with respect to sales hiring as you look at the next fiscal year? Thank you.

Leslie Stretch -- Chief Executive Officer

Yeah. Yeah. Great question. I personally think there's more upside.

I mean, I think there's more productivity to come. I think that's good progress. But my discussions on a daily basis, I gave the example of Dreamforce, and that was enterprise customers, by the way. We've got a lot more mid-market transactions going on and coming, indeed.

But I'm looking for more upside. I think the productivity is there. We brought on some superb talent, SaaS talent, from a lot of different, great companies, and some from the customer experience space. We've been kind of successful.

So I'm very focused on driving upside in Q4 mode. So I'm focused on driving this to be a great quarter as well. That's my view of it.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Wonderful. So the customer count is more than two times relative to the year-earlier period, right, third quarter of last year?

Leslie Stretch -- Chief Executive Officer

So enterprise customers is approximately two times, nearly two times more than last year.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Three times, OK, three -- Got it. Got it.

Leslie Stretch -- Chief Executive Officer

Two times, two times. But there's more to come, way more to come.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Wonderful. And I know that at the time of the IPO, you said bound an expectation that 60% of SaaS revenue is coming from the installed base, and 40% that, over time, you'd look to have flipped the other way to get majority of your SaaS revenue growth from new customers. How are you making progress toward that, Leslie? And also, could that goal change as you get into the next fiscal year, since you're obviously winning new customers at a pretty fantastic pace?

Leslie Stretch -- Chief Executive Officer

I'll let Roxanne to take you through the specifics.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Sure. Sure. Absolutely.

Roxanne Oulman -- Chief Financial Officer

So we have significant land-and-expand opportunities, and you have heard Leslie highlight just some of them on the call. And so we are, as we've shared, looking at balancing our land and expand with our new logos. We continue to see roughly about 60% of our bookings coming from expansion as we saw last year. Over time, as we continue to add new logos, we would like to see this get to more than 50 to a 50-50.

However, what we're really focused at this point in time is we want to continue to see strong growth on SaaS revenue and the total revenue line.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Wonderful. Congratulations once again on across-the-board strong results here.

Operator

Your next question comes from Bhavan Suri with William Blair. Your line is open.

Bhavan Suri -- William Blair and Company -- Analyst

Hey, guys. Just to echo Kash, nice job. I want to touch on two questions. First, Leslie, to you, throughout your process, and even last quarter, messaging had been sort of building a growth acceleration story.

And this is a good quarter of strong print across all metrics. You touched on sort of near-term confidence in terms of some large deals in November. If I was to look at this sort of on a three-year basis, I'd love to understand how your confidence is versus going forward. You've been in the company since last August, I guess.

Do you think you're executing just really well on the initial strategy? Or you'd say success is trending ahead of what you expected and maybe you're more constructive in this for the next couple of years. How should we think about the confidence levels of that acceleration process over the next couple of years?

Leslie Stretch -- Chief Executive Officer

That's a great question. The way I think about it is I'm 5 quarters into this mission where we had a company that had a beautiful technical solution and reference customers, the most enviable reference customers, but a very small professionalized sales force, very small. We're now -- we have our hiring goals this year. We're way over where we were this time last year.

We've got a great contingent of quota-bearing salespeople. But if we were around 160, 100 -- I'm not going to give you the precise number 160 to 170 quota-bearing salespeople, a lot of them are still new, that's still a tiny sales force. That's still small coverage. Our partner channel was in its infancy.

Dreamforce was -- I've been to 10 Dreamforces. It was spectacular, 170,000 people. The quality and quality engagement with Salesforce, that's not coming home to roost yet. The new productive hires we're making this quarter aren't coming home to roost, 11 modules to sell.

I think in our cross-sell mission, we're doing OK. I think we can do a lot better. There's a ton of opportunity. But the biggest thing for me is I've really learned this business.

This marketplace has had a couple of really mediocre companies shooting fish in a barrel, right, and giving people a poor value service. That's a big opportunity for us. We're consuming other people's surveys into our platform. We're consuming so many signals into the platform that I gave a stat in my prepared remarks.

The upside is ahead of us, absolutely ahead of us. I have no doubt about it.

Bhavan Suri -- William Blair and Company -- Analyst

That's really helpful. I guess one other question now is sort of on the product roadmap side. So obviously, you brought a couple of little tuck-ins here. You've done a really nice job of sort of building journeys for folks, being able to route text messages and calls and signals around by investing and buying.

I guess as you think about the product roadmap, I'd love to get an update on sort of near-term focus areas, where are you guys thinking of driving the product roadmap in the near term?

Leslie Stretch -- Chief Executive Officer

Yes. Great question. So I don't want give too much away, but we did some great stuff on our City Tours with some video technology, so sensing sentiment from imaging and from facial expressions alongside, which turned into text, voice. It's all about frictionless, easy feedback at speed and at massive scale.

And that's why our technology architecture and our philosophy around technology is so powerful and sets us apart. So those are some of the things we're thinking about, even better data visualization, people want to look at the airline. We want to look at the cabin of the airplane. They want to look at the store.

They want to look at the hotel and visualize Net Promoter Score and experience across that field of vision, not just two-dimensional chart. So there's all kinds of learnings there without giving too much away. And we'll build as easily as much as we buy, easily as much as we buy. But our core build isn't stuff that isn't super exciting.

It's in privacy, scale, performance, robust reliability that just can't be matched by these people that are trying to graduate out of the survey business. Very hard for them to do.

Bhavan Suri -- William Blair and Company -- Analyst

Helpful. Thank you, guys. Appreciate it. Thanks for taking my question.

Operator

Your next question is from Walter Pritchard with Citigroup. Your line is open.

Drew Foster -- Citi -- Analyst

This is actually Drew Foster on for Walter. Leslie, I just want to double-click on the competitive side of things for a second. Can you just spend a little bit of time addressing the comments by Qualtrics and where exactly you're seeing them more? Is it that you're having more data against them down market as you build out your velocity sales business? Or are they pushing more into the enterprise space?

Leslie Stretch -- Chief Executive Officer

So I haven't made any commentary about that company. I'm not really close to them. I don't really understand fully what they do and what they're about. They're part of another very large company.

Now I'm focused on our opportunity. This is a massive market. There are thousands of little bit players in this market. There are many companies in this market who come from this old market research survey domain who don't understand technology.

That can be really exploited by us and our partners. And that's what we're setting about. We still have a relatively small sales force. Compared to some of those companies, our sales force is a fifth and now a third of the size of their sales force.

Right? But we're actually winning the lion's share on enterprise deals. We're more competitive. We have a better offer. I hear people talking about scrappiness and stupid things like that.

We have got the scrappiest, most entrepreneurial sales field and customer experience, bar none. Right? And the upside is ahead of us. So I'm not really focused on the competition, ever. I'm focused on our customers.

I'm focused on this market. It's a big market. If they don't do well, that's their issue. It's not because of us.

There's plenty of opportunity for them and others.

Drew Foster -- Citi -- Analyst

And then last quarter, you talked about having success in verticals like insurance and healthcare where you didn't have a large presence before. Was that the case again this quarter? Or do those verticals represent sort of a longer-term opportunity for you?

Leslie Stretch -- Chief Executive Officer

No. That's great. I think that we had a good spread of vertical performance. I read out just some of the wins in the prepared remarks, and I think, deliberately, we picked across different verticals.

So we did have some great experience in management banner, I think, some great insurance progress and so on. But we also had great retail, great hospitality, right across -- that's what's exciting is right across every industry. We're beginning to see some momentum in federal and in government now. We've got our D.C.

City Tour next week in Washington. It's over-subscribed already. So federal, I think, is going to be a strong future for us. I think that's a different mission, set an experience.

And patient experience in healthcare, I'm really pleased. We started that vertical this year and we've had great progress already. And verticals are the key, understanding the customers' business, be able to talk to them and take assets about the industry to them is very important. So you're going to see more vertical emphasis, not just in go to market, but in the way we build products and the way we think about service employment as well.

Drew Foster -- Citi -- Analyst

Really helpful. Thanks a lot.

Operator

Your next question comes from Terry Tillman with SunTrust Robinson Humphrey. Your line is open.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thanks for taking my questions. And I'll echo the congratulations. First question, maybe, Leslie, for you, but that is a great data point in terms of two times the number of enterprise wins.

What I'm curious about, and part of this might relate to just the maturation of the market and people getting it in terms of experience management and the importance of it, these landings, this increased number of landings that you had, or wins, what is the deal size like in their kind of -- how much are they buying initially versus maybe a year ago or six months ago? Are you seeing any discernible change in how much they're buying when they come on board? That's the first question.

Leslie Stretch -- Chief Executive Officer

Yes, we're definitely seeing more land-and-expand deals, six -- small six-figure, even under six-figure, $50,000 deals. We're definitely seeing more of that. But we are still seeing the large enterprise commitments because of capability that I'm trying to get people familiar with by my long-winded description of the platform and the technology on this call. We are definitely seeing that.

And I think the other thing is it's the dimension and the roles and the level of the dialogue that's going on. Just this week, I've been talking to several CEOs just this week of household name companies across the U.S. who really engaged. This is a strategic initiative, and they've just been underserved.

So a great opportunity, but more land and expand. I'm looking for more. I'm looking for more land and expand. I'm looking for more cross-sell.

And I'm looking for deployment of these beautiful new modules that we've added in these new Zingle parts that we've acquired.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

OK. And Roxanne, my follow-up question, thanks for the color on the acquisitions and the impact in 3Q. I think you said $700,000. So that's not that material, but just any commentary about like how to think about that in 4Q and/or like a deferred revenue writedown going the other way next year, is it more material in terms of contributing to sub revenue just a little bit more M&A color.

Roxanne Oulman -- Chief Financial Officer

So Terry, that's a great question. As I shared in my prepared remarks, we had about $700,000 in revenue with two acquisitions. We're very focused on technology and talent tuck-ins. But if you do the math based on the acquisition dates, we estimate that the revenue in Q4 associated with these acquisitions will be about $2 million.

Now in regards to the deferred revenue, as I shared, the deferred revenue contribution was extremely small because most of these billings are monthly. So I don't expect any uptick next year from the removal of the deferred haircut. And there's one other thing that I would like to add. During my prepared remarks, I said that -- I talked about professional services.

Gross margin, I want to ensure that we heard that it was 16% for the professional services gross margin.

Operator

Your next question comes from Tom Roderick with Stifel. Your line is open.

Tom Roderick -- Stifel Financial Corp. -- Analyst

So Leslie, let me -- for the first one here, you, I know you spend a fair chunk of time visiting customers all over the world and particularly spend some time overseas. I would love to hear what your hearing from customers as you look at the international opportunity in Europe, in particular. Obviously, investors have been worried about Europe with Brexit and some of the other issues. But this market is so young that it would be interesting to hear your thoughts on any impact, if there is any, that you're seeing to the demand dynamics there.

And then bigger picture, how ready is that market on the CX side and EX side with respect to really thinking strategically about this market?

Leslie Stretch -- Chief Executive Officer

That's a great question. So let's take Europe first of all. I mean we called out some regional wins in Latin America and APAC grow, which we're very excited about. We've just -- we're just putting our legal entity in Korea for the business because we have some great customer traction there.

And obviously, we've got Japan up and running, which is super. Turning to EMEA. That opportunity is phenomenal for us. Our leaders out there, Estelle and Eduardo and Greg is our new leader in EMEA.

These people are real warriors, and they're taking down enterprise-level deals. So I think the market's there. I visited it. I'll give you just one example.

I mean, I visited a very large telco in Southern Europe. I don't want to be too specific. And they were -- it was a C-level meeting, COO, CEO, CMO, and they were, on the spot, committed immediately to doing business with us. They're just thrilled about the opportunity to communicate and have a dialogue in live time with their customers at our Paris City Tour.

I was visited by two of the biggest industrial concerns in France who had gone with one of these kind of old school survey vendors and they're paying a pretty penny for it as well. They came to our conference. They spend the day, and I spent 90 minutes with each of them. And my question is, "Why are you here, if you've got this great solution from this so-called great company?" And the truth is there's a ton of opportunity.

It's not a placement when we see people with survey or some kind of free stupid survey system. That's a great opportunity for us to ingest that data stream, put it into our platform and make real sense of it, and they see that. So I loved my time. I spent four weeks in Europe, I'm heading out to APAC, and I did Latin America twice in the last quarter.

The opportunity is just everywhere, hence, my earlier comments, which is I expect more. We still have a small sales force, remember. We've got to keep investing steadily in that sales force. The opportunity is phenomenal, and it's strategic and it's now not just giant deals of the past.

It's land and expand, show the value. And that's been great. And that's why I gave the example in the prepared remarks of the company that went 400% after they went and replaced the survey, replaced the survey solution for employee, went to a customer with e-commerce, 400% expansion. That's one of the things is out there across the customer base.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Fantastic. That's great. Follow-on question here, just curious for some more thoughts on Crowdicity. Really interesting acquisition, crowdsourced data gathering, a very nice opportunity to not only gather information for the CX side, but the employee experience side.

And I think you mentioned at least one, if not a couple, of sizable wins there that you've had some big reference account and employee experience. Can you just spend a second talking a bit more about the market reception for employee experience, and then how Crowdicity helps you expand and accelerate that product offering?

Leslie Stretch -- Chief Executive Officer

Yes. It's a great question. So as I mentioned in the prepared remarks, we had a very large company that was using a kind of old school survey tool, it didn't scale. They were looking for a digital daily pulse for their people.

And customers aren't cynical. They're looking for really to engage their employees. You can't do that on a monthly, quarterly, or sadly, as many people still do, an annual survey. The annual survey is that, it's no way to communicate with your employees.

While you're trying to do the annual survey, they are Slacking, they're Facebook Workplacing, and they're doing all kinds of other things. You need to engage them meaningfully and rendering a better company. And that's what our employee experience solution is all about. It's a deep technical solution.

Crowdicity's role is going to be even deeper than that. The Crowdicity capability is to create initiatives and ideas and challenges across companies, across organizations. We're taking it into the employee space, first of all. Rob Wilmot, who is a thought leader, is taking that solution worldwide.

It's a national and international organizations. And you can hear him, hopefully, we'll record his speech at our DC conference next week, but it really goes beyond employee. It goes to employees, customers and partners challenging one another, creating ideas rendering better products and services. But the real issue in the employee experience space is that's the way you get engagement.

It's by really encouraging your people to participate in ideas, product ideas, service ideas, M&A, using the hive mind of the corporation or the organization. That's what Crowdicity is all about. I'd love you to see a demo and listen to Rob's talk next week. Or just give him a call, he's a great entrepreneur.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Outstanding. Thank you. That's great. Nice job.

Operator

Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Great. Thanks so much, and I echo my congratulations on a great quarter. Leslie, I just got back from the Crédit Suisse tech conference where we heard from so many of your industry peers talking about digital transformation and how customer strategies need to be designed from the outside in rather than inside out. And to me, it really speaks to the need for customer experience solutions, especially those like value that can adjust limitless signals at massive sale.

But how should we think about your ability to complement the leading customer data platforms out there? And to what extent are your partnerships in the field tightly aligned to help drive broader digital transformation initiatives, which just seem to be so well-funded today?

Leslie Stretch -- Chief Executive Officer

Yes. I guess a super question. And I think that the customer is at the center, at the beginning and the end of digital transformation and customer experience first, because if we can do customer experience at scale, you can do anything. And that's why we're so focused on customer experience.

But I'll just give you one example. We've signed up our new app exchange deal with Salesforce. We were at Dreamforce. We look at their seats -- their customer 360 story as the core data backbone for customer feedback.

What we're about is this visceral, real-time, live time customer engagement at massive scale. Understanding that feedback, understanding how to distribute it securely to the right people, that's what our operational platform is all about. Our machine learning models are learning all the time how to understand and sense the feedback and represent it for action. And we look to Salesforce out of the platform for resource of hierarchy data and other key data.

We also look to Salesforce to add value into sales cloud, service cloud and marketing cloud and others, of course. But that's just one example. And I think that's why we were getting so much traction at the conference because we have that shared vision, and we're doing very different things in a complementary way.

Brad Zelnick -- Credit Suisse -- Analyst

It seems that there's a lot of leverage to be had in these partnerships. Maybe if I could follow up, can you speak more about the Zingle acquisition? And specifically how should we think about these acquisitions improving or evolving the feedback loop? Like do they drive incremental ROI for your customers, and by extension, eventually perhaps drive incremental monetization for Medallia?

Leslie Stretch -- Chief Executive Officer

Great question. I know the hospitality industry really is represented by many thought leaders in customer experience, I would say. They're really ahead of the game because they're living with their customers on a daily basis. And if you think about it, you get a post-experience survey or you'll get a text in live time while you're staying in a property, but you'll also get the opportunities to order room service, the opportunity to book a dinner, book a show, do laundry or whatever through the Zingle application and have transactional experiences taking place.

And we can look at that transactional data alongside feedback data and create a much more comprehensive view of the customer. We can hear feedback saying one thing, we can see transactions saying another, and that's very exciting. And there's another great partnership there of course with Amadeus, a great partner of Zingle. And I said on my prepared remarks, I would showcase Zingle at the next earnings call in more detail, but very excited about the technology, great momentum in both of these little tuck-ins right out of the gate.

Brad Zelnick -- Credit Suisse -- Analyst

Very cool. Thanks so much, and happy holidays, everyone.

Operator

Your next question is from Brian Schwartz with Oppenheimer and Company. Your line is open.

Brian Schwartz -- Oppenheimer and Company -- Analyst

Yeah. Hi. Thanks for taking my questions this afternoon, Leslie. I was just wondering if I could follow up on your comments about the pipeline that you made in the introduction, as well as the Q&A, and just sort of what's built in on Roxanne's expectation for top line next year.

It's certainly better than what I previously modeled. But I'm just wondering really for the industry, are you expecting the experience management demand industrywide will kind of stay the same the way it's been this year or maybe last year? Or do you see opportunities next year for the industry demand to sort of pick up? And then I have a follow-up.

Leslie Stretch -- Chief Executive Officer

Yes. I think I'm -- my modeling or our modeling, Roxanne's modeling, is really focused on our opportunity set, right, which is comprised of our book of business, our new quota-bearing sales capacity, our new channel capacity and so on. And so we've got a lot of confidence around that. But I think you're hitting on something that's more exciting, which is people are really, really buying into this idea that customer is where you start when you think about digital transformation.

And I meet a lot of people who say, "I think I need to do some digital transformation, but where do I begin?" And you begin with customer. And I think Salesforce's view of the customer at the center of digital transformation is spot on. I think that though we have a fantastic view of that as well, so does ServiceNow. There's some great players out there that are, as to your point, are creating this motion in the market.

But I think above all that, there's now so much information about the return on investment from these implementations. But it's a no-brainer. I mean if you -- intuitively, if you're just not talking to your customer in live time and having dialogues at massive scale, you're missing out. It's like driving up a mountain road with your headlights off in the dark.

You're really missing out. You need to be having that digital interaction in live time. And that's what all of our signal capture is about. That's what our new acquisitions are about.

So I expect -- I absolutely expect that to be the case that the atmosphere is going to expand, the atmosphere of opportunity is going to expand, but we're basing our projections on a nice conservative view, our opportunity set. But I think all of these players in the space will do well if they just focus on customer experience.

Brian Schwartz -- Oppenheimer and Company -- Analyst

And then the follow-up question that I had, it's kind of building on the last question but just talking about the potential here for the number of opportunities to increase in the future. I'm just wondering competitively, Leslie, SAP, they've had Qualtrics in the operations for an entire year now. I'm just wondering if you're seeing that more in RFPs? Could SAP actually be helping driving more RFPs here in the market than maybe what you saw last year or in the previous year? And maybe any comments that you'd like to share in terms of the win rates against them and how that's trending.

Leslie Stretch -- Chief Executive Officer

Yes. I think they absolutely -- that's -- SAP is a great company. They absolutely are driving opportunity for everybody. There's no doubt about them.

They have great strength internationally. However, we're doing something very, very different. And that's all we do. We're not doing all of these other things.

We also have an opportunity to play with all of the open HR, CRM, marketing cloud, service cloud, sales [indiscernible] of all these other great companies, not just one. But it's definitely a good thing for the market, no doubt about it.

Operator

Your next question is from Scott Berg with Needham. Your line is open.

Josh Reilly -- Needham and Company -- Analyst

Hey there. This is Josh on for Scott. Congrats on the strong quarter. Can we get an update on the impact from go-to-market changes you've implemented over the last year, including realigning to a vertical sales strategy domestically from a geographic focus? And then you talked about the new international sales leaders, and where you are in that taking full effect for productivity?

Leslie Stretch -- Chief Executive Officer

Yes. I think it's still early days for full effect. It takes ramp -- we have ramp time when we bring on new people. We have a program called OK to Sell.

Right? We want to make people OK to sell as fast as reasonably possible, but they have to be able to learn in this space. I did give some examples, anecdotal examples of a few people, a few women and men who came into this company this year and were hitting it out of the park in their first 90 days or six months. But we still expect people to take a couple of quarters to get up to speed. So there's ramp time involved.

There's learning the new modules and how they fit and there's learning the industry. I still don't think we've gone as far as we can from a vertical perspective. I think understanding our customers' industry and how they operate is absolutely essential. And the very best cloud companies out like Salesforce and others have got strong vertical focus for that reason, and we shouldn't be any different.

We are in maybe the beginning of the second innings of the process on five quarters in the year. It's going great. I'm really pleased with it, but I think there's way more upside.

Josh Reilly -- Needham and Company -- Analyst

OK. Great. And then just one more. With a number of new modules being released or acquired, including now Zingle, Crowdicity and a new one that was highlighted at Dreamforce Action Intelligence, how should we think about the decision to include these new features in the core platform versus cross-selling or upselling for features?

Leslie Stretch -- Chief Executive Officer

Well, I think they're added value. And I think, platforms, we do multiple releases in the cloud every year and platforms evolve over time, and the core platform gets richer by definition. These are very clearly defined new pieces of value and functionality for customers. So we expect to get value back for that, right? So we're looking for cross-sell motions there.

It's not always the same, it's not always as much as the core platform. It may be a fraction of the core platform in some cases, but we haven't bought or built anything yet that isn't added value. And I don't think we bought or built anything yet that has failed to sell either. So we've got confidence around that approach.

Josh Reilly -- Needham and Company -- Analyst

Great. Thank you.

Operator

Your next question comes from James Rutherford with Stephens Inc. Your line is open.

James Rutherford -- Stephens Inc. -- Analyst

Hey. A couple for me here. I guess the first one is we're hearing that Medallia is getting much more aggressive on price in the market. I'm just wondering if that is a strategic decision across the business? And is it a reflection of you being willing to sign a smaller deal and expand over time? Or is it more a willingness to be flexible around price to win that initial deal? And then I have a follow-up, please.

Leslie Stretch -- Chief Executive Officer

Yes. Good. Yes. I think that we want to be competitive, but we also want to maintain our margins.

And the way we look at deals and evaluate deals, to give you some insight, is as long as we're maintaining our margins, let's give the customer value. I think what's more critical is we're prepared to land and expand. But we just did one deal which was in this other company's ecosystem. We didn't name them on the prepared remarks here, where actually the competitor was about a tenth of our price initially.

They then came up to our price, and we still won the deal. It was a kind of odd dynamic. But we are focused on maintaining SaaS margins, and we're focused on land and expand and taking territory. And why shouldn't we give a three-dimensional live time radar scope of customer experience to small, medium and large companies? We have a partner that can implement an individual business, a gym membership business, a restaurant business or a single hotel in a day.

Right? So why shouldn't we give the three-dimensional radar scope of customer experience or experience management to small companies as long as we maintain our margins? That's really the only governor for us.

James Rutherford -- Stephens Inc. -- Analyst

OK. That's very helpful. And then I would like to dig in a little bit on the expand motion as well. I know that there's a focus to add additional bookings from new customers, but a significant portion here is still from existing.

So I'm just curious, is there anything going on within your business that might cause an inflection in customer signing that second, third, fourth module onto the core and really what you're doing to drive that as a focus for your business?

Leslie Stretch -- Chief Executive Officer

Great question. I had a conversation with a U.S. CEO this week where he said, "I want a commercial regime with my customer experience partner that incentivizes me to capture more signals. I want to know everything about my customer, everything I possibly can about my customer.

I want to integrate with the Salesforce data hierarchy. I want to look at the Medallia feedback data. And I want to be able to do that without having a pricing regime that inhibits me." And we've been able to do that very well while we maintain our margins. So we're really focused on giving our customers every possible signal that we can and not giving them any reason to de-prioritize a digital signal, a text signal, WhatsApp, WeChat, voice, video or whatever.

So we're going to continue with that program, as I say, as long as we maintain our SaaS margins. And that represents, I think, upside for us.

James Rutherford -- Stephens Inc. -- Analyst

Excellent. Thank you.

Operator

Your next question comes from Richard Baldry with ROTH Capital. Your line is open.

Richard Baldry -- ROTH Capital Partners -- Analyst

Thanks. It looks like your initial guide on '21 is quite a bit stronger than I guess we would have expected, and I think The Street as well. Do you -- would you attribute that to faster sales hiring, faster ramping of productivity, changes in your win rates sort of across the board? Where do you feel like that strength is coming from? And how sustainable do you think it looks like?

Leslie Stretch -- Chief Executive Officer

I think it's thanks to more effective sales hiring. I think it's great sales leadership and sales management around the company now with some longtime served Medallia leaders that are phenomenal, some new leaders that have come in and made an impact. I think it's better sales enablement, professional sales enablement. I think it's waking up to the expanding opportunity.

I think it's our partner channel, too, is nascent, right, but it's beginning to contribute. And also the platform signal story and our ability to capture and understand these other signals, oh, and some of them partnered with some of them is really unique. And the way our team and our customers articulate -- this platform single story comes from the customer. And the way our customers articulate this business problem and opportunity is really what's driving us.

So it's all of those things.

Richard Baldry -- ROTH Capital Partners -- Analyst

And you've talked before about growing quota-bearing capacity, I think, at like a 40% clip. Do you think that that's sustainable for several years. Or do you think that's sort of law of large numbers as that number would come in a little bit? How do we think about that investment maybe for fiscal '21 now?

Leslie Stretch -- Chief Executive Officer

Yes. Well, certainly for fiscal '21, I think we need to maintain that run rate. We need to maintain that expansion clip rate.

Richard Baldry -- ROTH Capital Partners -- Analyst

Great. Thanks.

Leslie Stretch -- Chief Executive Officer

And we do have time for one more question.

Operator

[Operator instructions] Our last question comes from Chad Bennett with Craig-Hallum. Your line is open. Chad Bennett with Craig-Hallum, your line is open. OK.

Ladies and gentlemen, there are no more questions in queue. I will now turn the call back over to Leslie Stretch, CEO, for concluding remarks.

Leslie Stretch -- Chief Executive Officer

Thanks for taking the time with us, everyone. I look forward to seeing you on the road in Q4. Happy holidays.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Roxanne Oulman -- Chief Financial Officer

Leslie Stretch -- Chief Executive Officer

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Bhavan Suri -- William Blair and Company -- Analyst

Drew Foster -- Citi -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Brian Schwartz -- Oppenheimer and Company -- Analyst

Josh Reilly -- Needham and Company -- Analyst

James Rutherford -- Stephens Inc. -- Analyst

Richard Baldry -- ROTH Capital Partners -- Analyst

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