SAP takes Qualtrics public – Surprise, Surprise

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The News

On July 26, 2020, not two years after announcing the acquisition of Qualtrics, SAP announced its intent to take Qualtrics public. The timeline is yet to be communicated.

What the press release basically says is that SAP’s cloud growth, including Qualtics was a ‘great success’. SAP itself wants to remain in control by keeping a majority stake in Qualtrics after the spin-off while Qualtrics founder Ryan Smith wants to be the ‘largest independent shareholder’.

SAP insists in it being fully committed to the Qualtrics XM platform as a key element of its Intelligent Enterprise strategy, but with Qualtrics being a part of the SAP ecosystem instead of being a part of SAP itself.

For your convenience the full press release is quoted here.

WALLDORF — SAP SE (NYSE: SAP) today announced its intent to take Qualtrics public through an initial public offering (IPO) in the United States.

Qualtrics is the market leader and creator of the Experience Management (XM) category, a large, fast-growing and rapidly evolving market. SAP intends to remain the majority owner of Qualtrics. SAP’s primary objective for the IPO is to fortify Qualtrics’ ability to capture its full market potential within Experience Management. This will help to increase Qualtrics’ autonomy and enable it to expand its footprint both within SAP’s customer base and beyond.

“SAP’s acquisition of Qualtrics has been a great success and has outperformed our expectations with 2019 cloud growth in excess of 40 percent, demonstrating very strong performance in the current setup,” SAP CEO Christian Klein said. “As Ryan Smith, Zig Serafin and I worked together, we decided that an IPO would provide the greatest opportunity for Qualtrics to grow the Experience Management category, serve its customers, explore its own acquisition strategy and continue building the best talent. SAP will remain Qualtrics’ largest and most important go-to-market and research and development (R&D) partner while giving Qualtrics greater independence to broaden its base by partnering and building out the entire experience management ecosystem.”

Qualtrics, which is part of SAP’s cloud portfolio, has operated with greater autonomy than other companies SAP had previously acquired. The founder and current management team of Qualtrics will continue to operate the company.

“When we launched the Experience Management category, our goal was always to help as many organizations as possible leverage the XM Platform as a system of action,” Qualtrics Founder Ryan Smith said. “SAP is an incredible partner with unprecedented global reach, and we couldn’t be more excited about continuing the partnership. This will allow us to continue building out the XM ecosystem across a broad array of partners.”

SAP agreed to acquire Qualtrics just four days before Qualtrics was to go public in 2018, recognizing the potential of bringing together experience and operational data (X+O) to help organizations take action. SAP currently owns 100 percent of Qualtrics shares. SAP will retain majority ownership of Qualtrics and has no intention of spinning off or otherwise divesting its majority ownership interest. Ryan Smith intends to be Qualtrics’ largest individual shareholder.

SAP is fully committed to Experience Management and the Qualtrics XM Platform as a key element of its intelligent enterprise strategy. SAP will remain Qualtrics’ closest and most important co-innovation and go-to-market partner.

A final decision on the IPO and its conditions and timing is pending and subject to market conditions.

Since SAP, as majority shareholder, will continue to fully consolidate Qualtrics, the transaction is not expected to have an impact on SAP’s 2020 or longer-term financial targets.

The Bigger Picture

As I have written back in 2018 in my analysis of the Qualtrics acquisition, data rules. This is still true, and I am still positive about the importance of combining transactional data with experience data. The value of data only increases these times, especially the value of volunteered data, as opposed to data that gets grabbed as a digital footprint by vendors via peoples’ activity on the web. The collection and use of data will be made increasingly difficult by regulations like the European Union GDPR or the California Consumer Privacy Act CCPA. That a focus on data protection has an impact is also shown by companies like Zoho expressing a strong emphasis on customer privacy.

Browsers will be more and more strict with the way they deal with third party cookies. Safari got stricter, Google Chrome changed, Firefox, too. And then there are a lot of privacy orientated browsers like Brave, or even Tor.

In addition, information that is volunteered by users, especially if asked for in meaningful and little increments that are in context, tends to be more reliable than data gathered via tracking users’ web exhaust. Means it is much easier to generate actions out of it.

And please note my use of the words information and data here, as it is deliberate. What users willingly give is information, not data!

This all means that the market for first person data will only become more important.

My PoV and Analysis

This news comes quite unexpected. Although, during SAP’s 2020 SAPPHIRE Now conference last month I learned that there is not only a Customer Experience (CX) but also an Experience Management (XM) stream …

And I am not the only one who is sort of surprised. See Denis Howlett’s quite readable piece on Diginomica.

Looking at the (non-existent) timeline of the IPO in the press release I would not think that there is any major impact in this fiscal year that is not caused by the surprising press release – in combination with the to be communicated CX strategy – in itself. And there is some uncertainty in the market that I observe at the moment.

Btw, yes, I do know that there is a series of ‘strategy and roadmap’ webinars going on right now. These cover the next six to twelve months, at most.

On the longer run, I do think that a going public of Qualtrics is a good move, probably even the best possible option.

Why do I think so? Glad you asked …

First and foremost I continue to think that the acquisition of Qualtrics was a good move. The price tag of $ 8 bn US has been real steep, but then this acquisition denied the competition access to the IP and the data that Qualtrics has. With a then planned IPO target value of $ 4.8 bn US, this means that SAP wasn’t the only pursuer. Still, it will be interesting to see the Qualtrics valuation when SAP acts on this announcement.

Denis Howlett wrote that messaging might improve as a result of this announcement. “Removing Qualtrics from the equation allows SAP to simplify its market messaging for its core offerings and focus directly on S/4HANA which has to succeed if SAP’s future is to be cemented”. This is certainly a point, also in the light of SAP showing up in the current Gartner Magic Quadrant for Cloud ERP for Product Centric Enterprises only by way of a honorable mention – due to not having enough live customers. On the other hand, supply side processes, ERP processes, forecasts, rely on good data. And not having this data, or not talking about it, is not going to help the story of the intelligent enterprise. And then SAP insists in remaining “Qualtrics’ closest and most important co-innovation and go-to-market partner”, which means that the investments and the story stay pretty much the same. The one thing that changes is the representation of Qualtrics on the price list and revenue recognition. Placing Qualtrics as a partner solution is not necessarily an advantage. On top of that the CX story doesn’t get stronger, too.

The timing of the announcement, on the evening before the release of the quarter an half year numbers, is strange. Is it because of the these numbers? Well, they are known for a week, since their pre-announcement of July 20. This press release basically showed a better than situation than expected in April.

If I am wrong with this assessment – the subterfuge certainly worked …

Else, in the light of the Qualtrics announcement the pre-announcement of the quarter numbers makes much more sense to me now.

Looking at the strong cash flow and the updated cash flow expectations with an expected free cash flow of € 4 bn (up from € 3.5 bn), I do not think that SAP needs to sell Qualtrics for liquidity reasons.

According to SAP’s Q2/2020 statement the Qualtrics revenues grew by 34 percent year over year in Q2. On the other hand, the Qualtrics segment margin degraded by a quarter from 5.6 per cent in Q2/2019 to 4.3 per cent in Q2/2020. This is probably due to the significant integration cost that needed to be spent (and continue to be needed) in order to make Qualtrics an integral part of SAPs solutions. I can only speculate that an activist investor like Elliot does not really like to see this. Especially after looking at the premium that SAP paid for Qualtrics. With Qualtrics becoming an own entity these number should somewhat go down, partly also because one could suspect that Qualtrics standalone can run a leaner development process than Qualtrics as part of SAP.

What I do think is that making Qualtrics ‘independent’ keeps the doors into competitors’ ecosystems open. Previous experience with the acquisitions of Hybris, Gigya and Callidus show that traction in the non SAP markets gets lost when an acquired company becomes SAP. All these companies grew within the Salesforce ecosystem. These beachheads are gone.

The addressable market has become far smaller.

As an ‘independent’ company, Qualtrics can play in multiple ecosystems, therefore creating a valuable beachhead in more than one ecosystem.

Why do I put the word independent into quotes? Well, with SAP being a majority shareholder the company will not be really independent, but independent enough to appear as an independent entity.

To sum it up: I see a strong move that attacks the competition. Time will show the truth.

What do you think?

4 COMMENTS

  1. Thomas i am glad you wrote this article, because the move was also puzzling to me. With a $8billion purchase price about a year ago you would think SAP would want to take that investment and create greater value integrating with their CRM systems. My suspicion is a bit less sanguine than yours. Just speculation, but perhaps SAP discovered that integrate such disparate systems was a bit too daunting and perhaps they were better off perhaps cashing out now. I am doubtful that Qualtrics will achieve an $8b valuation in the free market, but i have been consistently wrong in the irrational exuberance of some of these tech valuations.

  2. Hi Dave, thanks for taking the time to read and comment. For sure there is more behind the scenes and I would agree that the 8 bn that SAP paid for Qualtrics are beyond a rational valuation. I heard voices that value the co between 7 and 7.5 bn (which in my eyes still is high).

    From a technology point of view I am still bullish about Qualtrics being a good fit for SAP. It is nicely complementing the transactional data and it has a pretty good ‘analytics engine’ with machine learning behind that helps in identifying solutions to challenges. I guess that the cultural fit is somewhat lower …

    I think that, in spite of the financials, SAP wins on several frontiers
    – integrated scenarios could speed up (become cheaper to implement) as I suspect that Qualtrics can maintain a faster cycle with lower overhead
    – as written, Qualtrics can act as a beachhead into other ecosystems
    – SAP can showcase their ecosystem play by not owning everything but playing with partners
    – on further thought and after some enlightening conversation: SAP has one less topic to deal with while Christian Klein in person can be seen as making decisive moves
    There is a good article by Dennis Howlett from Diginomica and another one on Techcrunch, giving opinions of different people.
    https://diginomica.com/sap-ipo-qualtrics-we-called-it-2019
    https://techcrunch.com/2020/07/28/sap-decision-to-spin-out-qualtrics-20-months-after-spending-8b-surprises-industry-watchers/

  3. Hallo Thomas,
    Thomas, excellent article, I think the acquisition of Qualtrics was of great value for both, and if this would not have happened, the entire European continent would still being a sleeping laggard moving in slow motion, regarding CX, EX and simplification. SAP last year (end of 2018) invested 850 million Euros to create easy, simplified, and easy to generate adoption enterprise apps, integrations, and better intuitive design. Both internally and externally, related to simplifying integrations, intuitive design, and pricing modeling. This was a requirement done by customers to Bill M. the great previous CEO. I honestly believe knowing a bit the politics and how SAP operates since we are helping them on the simplification of CX, that the story which was told to us, is not exactly the accurate facts. First, the co CEO abruptly left, now Qualtrics. This acquisition changed the perception from the EU companies stand point toward the importance of CX, EX, Simplification… Time will say what happened, but what I read last week was that SAP will retain 51% anyway as also you mentioned.
    Ich wünsche Ihnen ein schönes Wochenende und bleiben Sie sicher. Wir sprechen bald . Mit freundlichen Grüßen R.

  4. Hi Ricardo,

    yes, we need to talk again. Well, they never tell the full strategy behind it, don’t they? 😉 – but I, too, believe, that SAP is quite committed to CX, but as a part of the overall story, which is the intelligent enterprise, or rather networks of intelligent enterprises. This story requires CX and UX on various layers.

    Thanks for reading and commenting
    Thomas

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