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?

The News

On November 11, 2018 SAP announced that it has entered a definitive agreement to acquire Qualtrics, the “global pioneer of the experience management (XM) software category”. Here is the full announcement for you to read: WALLDORF, Germany, PROVO, Utah, SEATTLE, Wash. — SAP SE(NYSE: SAP) and Qualtrics International Inc. (Qualtrics) today announced they have entered into a definitive agreement under which SAP SE intends to acquire Qualtrics, the global pioneer of the experience management (XM) software category that enables organizations to thrive in today’s experience economy.

• Together, SAP and Qualtrics to accelerate the new XM category by combining experience data and operational data to power the experience economy
• Creates a highly differentiated offering for businesses to deliver superior customer, employee, product, and brand experiences
• Ryan Smith to continue to lead Qualtrics; Qualtrics to maintain dual headquarters in Provo, Utah, and Seattle, Wash.

Under the terms of the agreement, SAP will acquire all outstanding shares of Qualtrics for US$8 billion in cash. SAP has secured financing in the amount of €7 billion to cover purchase price and acquisition-related costs. The purchase price includes unvested employee incentive compensation and cash on the balance sheet at close. Subject to customary closing conditions and attainment of regulatory clearances, the acquisition is expected to close in the first half of 2019. The Boards of Directors of SAP and Qualtrics have approved the transaction. Qualtrics’ shareholders have also approved the transaction. SAP CEO Bill McDermott said: “We continually seek out transformational opportunities – today’s announcement is exactly that. Together, SAP and Qualtrics represent a new paradigm, similar to market-making shifts in personal operating systems, smart devices and social networks. SAP already touches 77 percent of the world’s transactions. When you combine our operational data with Qualtrics’ experience data, we will accelerate the XM category with an end-to-end solution with immediate global scale. For Qualtrics, this introduces a dynamic new partner with the belief, passion and scale to bring experience management to millions of customers around the world.” McDermott added: “The combination of Qualtrics and SAP reaffirms experience management as the groundbreaking new frontier for the technology industry. SAP and Qualtrics are seizing this opportunity as like-minded innovators, united in mission, strategy and culture. We share the belief that every human voice holds value, every experience matters and that the best-run businesses can make the world run better. We can’t wait to stand beside Ryan and his amazing colleagues for the next chapters in the experience management story. The best for Qualtrics and SAP is yet to come!” Ryan Smith, CEO of Qualtrics, said: “Our mission is to help organizations deliver the experiences that turn their customers into fanatics, employees into ambassadors, products into obsessions and brands into religions. Supported by a global team of over 95,000, SAP will help us scale faster and achieve our mission on a broader stage. This will put the XM Platform everywhere overnight. We could not be more excited to join forces with Bill and the SAP team in this once-in-a-generation opportunity to power the experience economy.”

SAP and Qualtrics Will Together Deliver the Transformative Potential of Experience Data (X-Data) Combined with Operational Data (O-Data)

XM focuses on obtaining and tapping the value of outside-in customer, employee, product and brand feedback. Combining Qualtrics’ experience data and insights with SAP’s unparalleled operational data will enable customers to better manage supply chains, networks, employees and core processes. Together, SAP and Qualtrics will deliver a unique end-to-end experience and operational management system to power organizations.

SAP Will Accelerate Qualtrics’ Growth and Further Its Mission by Offering Global Scale, Reach and Resources

Leveraging SAP’s more than 413,000 customers and global salesforce of around 15,000, Qualtrics will be able to scale rapidly around the world. SAP has a strong track record of accelerating growth for the innovative companies it acquires, as exemplified by the rapid success of SAP’s recent acquisitions. Qualtrics expects full-year 2018 revenue to exceed US$400 million and projects a forward growth rate of greater than 40 percent, not including potential synergies of being part of SAP. Following the closing of the transaction, Qualtrics is expected to maintain its leadership, personnel, branding and culture, operating as an entity within SAP’s Cloud Business Group. Ryan Smith will continue to lead Qualtrics, and Qualtrics is expected to continue to maintain dual headquarters in Provo, Utah, and Seattle, Washington. Qualtrics was advised on the transaction by Qatalyst Partners and Goodwin Procter, LLP. J.P. Morgan acted as financial advisor and Jones Day acted as legal advisor to SAP. The plan is to improve the ability to build “customer experiences” by combining SAP’s existing access to more than three quarters of business transactions with data about actual experiences, which is what Qualtrics does deliver. SAP pays the enormous amount of 8 billion USD for Qualtrics, a company that predicts to have revenue of 400 million USD in 2018. This makes it the biggest acquisition ever done by SAP. Additionally, a multiple of 20 on the revenue is high; even considering a growth rate of 40 per cent. Even more interestingly, SAP makes this an all cash acquisition.

The Bigger Picture

Data rules the world. The market of consumer data and data about business relationships is largely distributed between Google, Facebook, Amazon, Alibaba, Apple, the media companies, and Microsoft. Where there still is a gap, is in the actual linkage of transactions and experiences. This is what companies usually try to cover with surveys. Experience is not only about customer experience but also about other stakeholders, for example employees. On the other hand, customer experience, as a category, is not manageable. Customer experience is the customer’s perception of a company that was developed over time. Once could define it as the sum total of all interactions and experiences that a customer had with the company in this time. What is manageable, are the individual engagements that at the end of the day create this customer experience. At least it is possible to influence these experiences. So, on an atomic level companies can work on how they are perceived. And one of the core ingredients for this is asking the customers.

My PoV and Analysis

While I have my issues with “Customer Experience Management” being a software category Qualtrics is a good fit. It delivers a lot of data that is complementing SAP’s existing data sets, plus the AI capabilities that are necessary to convert the raw data into insight. Qualtrics is capable of providing insight into individual experiences, which then using SAPs vast product portfolio, can get used to improve those very experiences in real time. The coverage of not only customer experience but also the related brand experience and product experience plus employee experience that Qualtrics sells is a very good strategic fit for SAP. It emphasizes on the SAP Customer Experience Suite story that got unveiled during SAPphire and the intelligent enterprise messaging that surrounds it. As a side effect SAP gets access to a strong survey suite that augments the existing one. Qualtrics, on the other side, gets the power of a huge sales force and partner ecosystem. This should enable it to scale globally fast.

But what do customers get?

In the near term … not much. Integration of the two solution sets will take some time. Even more so, if the Qualtrics software shall get migrated onto the SAP Cloud Platform (which I doubt). An exception might be pre-trained models and/or the corresponding algorithms. And finally there is the 1,000 dollar question: How about the Open Data Initiative? ODI is all about connecting data. Adding the capabilities of Qualtrics to the mix is of value to all customers. Hence it is to all members of the initiative. It will be interesting to see how this pans out. If Qualtrics becomes part of it then ODI is truly open. Else it is a line of defence also against Microsoft (as Oracle and Salesforce are no members of ODI).