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SAP & Qualtrics: What Were They Thinking?

SAP throws a curveball to the software and market research technology markets after acquiring Qualtrics for $8 Billion cash.

Editor’s Intro: The purchase of Qualtrics by SAP certainly was big news this week and has immense implications on many levels, but one of the most fundamental is valuation for technology companies in the insights space. Simon Chadwick, who I consider to be one of my mentors and gurus, agreed that a perspective that breaks down the deal pragmatically was needed and volunteered to share his thoughts. While no one is privy to all the thinking that went into this deal, there are a few things we can glean that Simon points out (and he and I have been saying for many years!): data synthesis is the key to unlocking insight-driven impact for brands, scalable technology offerings that help support that vision are in high demand, and the research industry has the opportunity to sit at the nexus of these trends. Time will tell whether the Qualtrics deal was a good financial decision and it’s impact on valuations for similar companies, but it’s certainly hard to debate the possible value of integrating consumer feedback and enterprise data. We’ll let Simon dig into the details in this “can’t miss” post. Enjoy!


SAP, the German software goliath, this week stunned the market research and financial markets by announcing that they were buying Qualtrics for $8 billion in cash. No earnouts, no deferred compensation, no stock. Cash.

This has led a number of industry analysts to scratch their heads and ask “what were they thinking?”. In the first nine months of this year, Qualtrics had revenues of $290 million on which they earned $1.5 million – or 0.5% of revenue. If the firm continues along its current growth path for the year of 87% and maintains its bottom line, the price paid will equate to 20.6 times revenue and 4,145 times net earnings. By comparison, SAP trades right now at a multiple of 26 times earnings and this is forecast to drop to 20x in the next two years. To put it mildly, this deal is massively dilutive to SAP.

Let’s do some basic math. To begin to break even on its investment, SAP would need to see a net present value of $8 billion in future cash flows which is going to take well over ten years even under the rosiest of scenarios. To get Qualtrics to stop being dilutive, it is going to have get to a point where it too is trading at 20 times net income. That would mean the company would have to earn net income of $400 million. Put that figure in the back of your mind for later use.

One of the reasons that Qualtrics earns so little at present is that it has been investing massively in growth, at which it has been very successful. It has received (and invested) over $450 million in venture capital and has invested significantly in both product and business development. Rumor has it that Qualtrics has the largest internal sales force in the industry. A corporate owner such as SAP, eager to end dilution, will want to see net income increase dramatically over a relatively short period of time. Healthy platform solutions such as Qualtrics should be earning 30% at the bottom line.

Let’s put those two figures together – 30% and a net income target of $400 million. That implies revenues of $1.33 billion – or 3.4 times as big as now. Qualtrics’ growth has been super-impressive over the years but it is difficult to foresee it continuing at its present rate ad infinitum, especially if it has to rein in business development expenses to promote greater profitability. Let’s assume that the company can grow 50% next year, 30% the year after that and 20% thereafter. Under that scenario, they could reach the revenue target I posited above and possibly – with really tight management – achieve 30% net income. By that time at least, Qualtrics will cease to be dilutive, but SAP still will not have recouped their investment. But – and it’s a big but – to get to this level of revenue, the firm would have to hold about 65% of the current online data collection market. This assumes that the likes of ResearchNow- SSI will go quietly into the night, which I rather doubt. (By the way, their merger which created a company twice the size of Qualtrics with 50 times the profitability was valued somewhere around $1 billion).

Clearly, these figures, while theoretically doable, will be very hard to achieve. So what does SAP know that we don’t that makes this a deal that is not only worth doing but imperative? Here’s what SAP CEO Bill McDermott had to say: the deal would be transformative because SAP would be able to merge its massive trove of operations data with Qualtrics’ collection of user experience data. But there are two slight problems with this: (1) clients who commission CX data usually believe that they own the data, not the data collector; and (2) in Europe, GDPR makes it very clear that the consumer owns the data. Expect rather serious data protection and/or legal problems if Qualtrics/SAP starts to claim that instead, it owns the data. Obviously, joint clients of the two could see their data merged but that begs the question as to why they weren’t doing so in the first place.

So, the financials are a serious stretch; the market assumptions are a stretch; and there could be serious legal issues if SAP starts to try and mine Qualtrics-collected UX, CX and research data. Which leads us back to the original question: what were they thinking? What does SAP know that we do not? What is so special that a company earning under $2 million a year is worth $8 billion?

One thing is certain: SAP has just thrown the software and market research technology markets the most massive curveball, as owners start to dream about selling their fledglings for massive amounts of money. Pity the poor investment banks and M&A advisors who are going to have to explain that real life is a little bit different.

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10 responses to “SAP & Qualtrics: What Were They Thinking?

  1. Simon’s math is tough to refute and the likelihood of immediate returns on the investment are not great. I’d agree that 8 bn USD is a bit too much for Qualtrics, particularly in the MR world, but I’m not so sure about the SAAS world. I think enterprise businesses are seeking greater data integration from marketing to experience to operations; I think that enterprise businesses are looking for ways to fish for themselves, rather than have their insights meal served to them; I think that they are looking for someone to come along with a solution set that makes that possible. Can SAP and Qualtrics leverage their combined sales forces and software development capabilities to meet that need? Can they provide those solutions at a price point that is less than buying Qualtrics and SAP services separately? These are the really interesting questions and very likely the bet that SAP is making. Investments, like SAP’s full cash acquisition of Qualtrics can be managed over many time horizons. I’m very curious to see what they bring to the market over the next three to five years in terms of data gathering, management, analysis, visualization and insights that can help business leaders see their entire business, assess risks and make smarter decisions. These are interesting and unnerving times for insights professionals.

  2. To add a couple of other data points. 1) The ESOMAR GMR has been showing that Survey Research has been a declining share of the market research total for some time (and is now around 40-45% of all MR dollars). 2) The ESOMAR GPS study shows a decline in the price of conventional, standarised online survey research.

    Even if Qualtrics grows its share, it will be racing against the decline of the sector.

    The final thought relates to disruption. We are likely to see automation (and AI) disrupt the survey business, which will reduce cost, reduce prices, and increase the range of projects where MR will be viable. Somebody will profit from this, and many will hurt. If SAP has reason to believe Qualtrics might prosper in this change, that could interesting?

  3. Interesting analysis and I’m also curious what SAP knows more about these developments…. Well, I believe that Qualtrics is able to add and sell more products if they have to. Their sales approach is one of the best in the market…

    What are your thoughts about the IPO of SurveyMonkey? Their share price is currently fluctuating between $11-$12 and Qualtrics was aiming at $13-$15 per share in case they would go public. Do you think that the share price from SM would go up, now the market has seen the acquisition of Qualtrics?

  4. This deal brings to SAP customers the opportunity to more seamlessly combine their operational and customer feedback data to more effectively understand the impact of operations on the customer experience. Predictive analytics could be built to model the impact of a proposed operational change on the customer experience.

  5. I see it as a very positive sign for the insights industry. This will be shot in the arm for the industry and the direction of investment that will take place in the years ahead. Can’t disagree with Simon’s analysis but an encouraging trend that needs to be monitored closely

  6. Simon’s analysis is spot-on and irrefutable. SAP turns out to be a sap. The huge investments by Qualtrics to inflate its growth rate is not sustainable. On a positive note, perhaps this will help offset the U.S. trade deficit.

  7. It is difficult to defend what SAP paid for Qualtrics. I can understand that SAP believes they can grow Qualtrics rapidly but one element which is missing is that the Democrats in the House of Reps. in the U.S. are soon going to go after Facebook, Google and others – perhaps even major money center banks – over what is in their database of consumers and users on their platforms. This will be followed by a push for more federal regulation and even calls for cash payments to be made to consumers for their user experience data and information. I doubt this has been figured into SAP’s financial analysis for Qualtrics.

  8. Good analysis though I’m not sure a comparison to the RN/SSI deal is a fair one as you’re comparing a saas business to one that simply isn’t. What we are yet to find out is the 1+1=3 calculations that I’m sure the SAP did very carefully. Not to mention, all the assumptions so far are that Qualtrics business doesn’t evolve and the keep doing what they are doing today. I’m sure part of the plan is to evolve and get to that 1+1=3.

  9. there is no arguing with Simon’s math and the question of will this deal pay off. i find that many of these types of acquisitions lead to big wins or big loses, very little in between. Especially when companies are relatively young in their evolution and the jury is still out on their ability to scale up, both from a revenue and profitability perspective for this sized valuation. in this case it is a “go big or go home” type of play. this is a big bet for SAP but don’t forget there is probably underlying leverage that we are not seeing – could be commercialization, operational, a specific data play, who knows. highly unlikely SAP went into this blind, they surely have a plan. The key is will the plan play out. Plenty of others have made bets similar to this with both big wins (Instagram by Facebook) and big loses (Skype by Microsoft)

    regardless, it is a good for our industry. it brings attention to the opportunities that are out there and the value we deliver today and maybe even more so in the future.

    congrats to the team at Qualtrics

  10. I think Qualtrics is a good example of what happens when you pivot from market research software to an enterprise SAAS application. Qualtrics executed on this pivot very well as is evident from the revenue growth they have been able to show. This is a strategic deal rather than a pure financial deal. My guess is that SAP sees this as a way to get into an area where they have been weak. Data collected through Qualtrics can be integrated with other SAP apps and provide additional benefits to their customers- they will also have a significant opportunity to cross-sell the Qualtrics offering to their current customer base with relatively lower sales cost. Good to see what the Qualtrics team has been able to achieve.

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Simon Chadwick

Simon Chadwick

Managing Partner, Cambiar Consulting