Capital Markets

SAP publicly listing Qualtrics

German software group SAP announced on Sunday that they intend on publicly listing Qualtrics, an online survey business. The partial IPO will float the company just two years after SAP acquired Qualtrics for $8bn. This unexpected move is designed to optimise the autonomy of Qualtrics and allow the expertise of current management to dictate the company’s direction with Ryan Smith, co-founder and current Chief Executive, set to take the largest individual shareholding in the company.

Company backgrounds

Qualtrics is the sector leader in experience management, denoted “XM”, with over 12,000 customers, including Microsoft, Volkswagen, and the NHS. The company initially specialised in software for academics to carry out research, before expanding to measure and generate reports on customer and employee satisfaction. SAP, the market leader in enterprise application software, aims to optimise the digital operations of firms in all industries. As a global company, with 77% of world transaction revenues touching an SAP system, they assist over 440,000 businesses and help public customers operate profitably and adapt to the continuous change in business technology. SAP acquired Qualtrics back in late 2018 in a bid to drive diversification and reduce reliance on a shrinking corporate software business. This acquisition was completed at a multiple of 20x the projected sales revenue for the next 12 months and was the biggest acquisition in SAP’s history at $8bn.

Strong performance for Qualtrics and SAP

Qualtrics has been a very strong performer for SAP, with 2019 cloud growth in excess of 40%. Christian Klein, SAP Chief Executive Officer, remarked that Qualtrics’s success has been “above and beyond expectations” since the acquisition in 2018. SAP’s core applications have also performed very strongly during the COVID-19 crisis, offering relevant e-commerce and supply chain solutions for businesses to improve their resilience in a turbulent economic environment. This strong position is reflected by turnover growth of 34% to €168m in Q2 2020, compared to the same period in 2019, and a free cash flow forecast increase of 59%. These healthy 2020 free cash flow forecasts of around €4bn allow SAP to tightly manage their bottom line and invest in future growth drivers. Despite taking losses in other business units, most notably through the acquired Concur who focus on travel and business expense software, SAP has reported incredibly strong growth and liquidity in a difficult period for most businesses. The increased demand for cloud application software by firms during COVID-19 lockdown, illustrated by a 4% year-on-year Q2 increase in cloud and software revenues, has significantly benefited SAP. The partial IPO of Qualtrics comes at a time when the parent company is performing strongly and is thus not just a crisis-imposed solution to shoring up the balance sheet.

Aims of the IPO

This partial IPO of Qualtrics represents a strategic shift by SAP under new CEO Christian Klein. He reasons this IPO as a way to optimise the autonomy of Qualtrics, enabling the company to seek opportunities that would not be possible as a subsidiary of SAP. The primary aims are for Qualtrics to target a customer base beyond SAP customers, a market described by Klein to be high growth, and for the company’s management to develop its own acquisition strategies for inorganic growth. Although this points to much less integration between the two companies, Klein stresses that a strong partnership will be retained between SAP and Qualtrics. This will not only come through SAP retaining majority shareholding in Qualtrics, rumoured to be at least 75%, but also by maintaining a strong focus on co-innovation in experience management.

Details of the IPO

The timing of the public listing is still to be confirmed and is heavily dependent on how the market environment changes towards the latter stages of 2020. Luka Mucic, SAP Chief Financial Officer, declined to say how much of Qualtrics would be floated on the US stock market but suggested a range of 10-15% was of regular size, with the proceeds giving SAP the scope for further investments. Slower-growing competitors to Qualtrics, such as Medallia, were valued at a multiple of 10x if measured on recurring subscription revenues while faster-growing competitors, namely Okta and DocuSign, reached valuations of 30x projected 12-month turnovers. Through this relative analysis, along with the retrospective multiple of 20x used when SAP initially acquired Qualtrics, has led analysts to believe that this multiple of 20x 12-month projected turnover will remain. At present, on the basis of their current sales trajectory, Qualtrics will be valued at approximately $18.9bn. Morgan Stanley and JPMorgan Chase & Co. have both been sounded out as key banks for the public listing, with Goldman Sachs Group Inc. and several more banks also expected to be involved in the underwriting process as the listing draws closer.

Valuation of Qualtrics

Investor response to the announcement appears to be favourable, with SAP’s share price increasing by 3.5% in Frankfurt trading to €140.40 upon announcement, representing an expected valuation uplift of Qualtrics. Qualtrics’s positioning in the market seems to be strong heading into the future, with businesses relying more on tracking customers and employees remotely. The Nasdaq 100 Index, riding the tailwind of COVID-19 demand for technology, is at its highest point in more than 15 years. This current bull run in US tech stocks should provide an inflated value once the bell rings for the floated Qualtrics shares. Whether this is an accurate valuation will ultimately depend on whether Qualtrics can unlock value in a seemingly high growth market. The jury is currently out as to whether the stock market surge in US tech stocks is warranted or a bubble brewing under the surface.


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