An early evaluation of SAP's $8 billion Qualtrics acquisition; Betting on growth

Tom Paine

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I was thinking of writing a comprehensive evaluation of SAP SE's proposed $8 billion acquisition of Qualtrics, but there are several things I don't understand well enough yet so that will have to wait. But theses are the key issues I'll be watching down the road:

First, some financial metrics.

Revenue for the first six months of 2018 were $184.2 million, vs $131.4 million for 2017's first six months. Qualtrics said it expects its full-year 2018 revenue to exceed $400 million and forecasts a forward growth rate of more than 40 percent, not including any positive impact from SAP. Revenue for 2019 is forecasted to be $575 million. The company is nominally profitable, which is better than most SaaS startups.

Qualtrics is a Cloud SaaS product, not a market research company, though it definitely has some serious domain expertise in survey research. It conducts some survey research, but the amount seems almost incidental. Its developed relationships with third-party vendors, such as Walker for B2B research. But Qualtrics should be measured against existing enterprise software industry metrics.

Concept: The basic premise of marrying SAP's transaction-oriented data with customer experience data is a good idea. The acquisition seems aimed at SAP's new CRM strategy (or Experience Management as Qualtrics refers to it), though ERP certainly can play a role.

Price: If I were a shareholder I might be concerned over how $5 billon went up to $6 billion and then to $8 billion in no time. I wouldn't be sure, if it had gone public, how the IPO aftermarket would have been a given the current shakiness of the tech market and the size of the offering.
I won't quibble with the acquisition price as long as Bill McDermott's grand strategy is working out. 

However, McDermott's large acquisitions at high PE ratios should hopefully exceed a high hurdle rate for paying back and exceeding the cost of SAP's investment over time. Its impressive to say Cloud revenue growth is high, but that should be measured against the amount of capital spent to buy it.

Product: Qualtrics is designed as a self-service product. It has many valuable industry functions built in to it. But self-service has limitations; some customers may not use it well.

With data visualization (dataviz) software, there's a gap between products that require some rigor in their data model and those that don't. Its easy to create colorful graphs, but they're of no use if the data is bad. The same for survey data.

There is risk that a Google or Microsoft could match what Qualtrics has. In particular, Microsoft's LinkedIn should have a strong interest in this market; its a natural fit with its product.

The better known Survey Monkey is also a competitor, but not as strong in the enterprise. Qualtrics is much larger and growing much faster.

There is a big difference between Consumer and B2B research, and the Qualtrics platform needs to handle both well if it will serve both segments..

Qualtrics owns this segment of the market with a tremendous head start on everyone else. Some traditional survey research firms have developed self service tools with varying results. One firm SAP knows well is GfK, formerly the third largest survey researcher behind Nielsen and IMS Health. It is based in Germany, and is in fact a SAP ERP customer. But last year it backed off of its faltering growth plan and was broken up into pieces. Market Research is not a business that scales well, unless its syndicated.

Outlook: No doubt that there's a market for Qualtrics, but I'm skeptical as to whether it can ever make a decent return financially to, and be closely integrated into SAP.