SAP to acquire CallidusCloud, beefs out CX and LMS offerings

Den Howlett Profile picture for user gonzodaddy January 29, 2018
SAP made a surprise acquisition in snagging CallidusCloud in a deal worth $2.4 billion. Here's my initial take.

Callidus from Q3 FY2017
CallidusCloud - from Q3 FY2017 earnings

In a move that caught this commenter by surprise but which certainly blew the early morning cobwebs out of the eyes, SAP has acquired CallidusCloud, known for its sales front office 'lead to cash' and learning solutions.

The deal, reported to be worth $2.4bn and funded from an unspecified mix of cash and acquisition term loan is expected to complete in Q2 FY2018 following the usual regulatory song and dance. The deal is a 21% premium on CallidusCloud 30-day weighted volume.

The press release on the acquisition focuses upon CallidusCloud's sales performance management (SPM) solutions that Gartner rates as the leader in that segment. CallidusCloud also appears in the leaders' segment for the configure, price, quote (CPQ) market as assessed by Forrester. The acquisition, which will be folded into SAP's hybris solution, positions SAP ahead of arch-rival Oracle.

It will be interesting to see what SAP decides to do with Litmos, CallidusCloud's learning management solution (LMS) which, in the last few years, has been on something of a tear, winning a slew of 'land and expand' deals as a high performance, high scale but economical solution.

CallidusCloud's earnings guidance for 2017 pitched a total target revenue of just under $250 million, with $196-197 million coming from SaaS solutions. Non-GAAP operating margin was expected to be 9-10% or about $24 million. As is common among high growth SaaS companies, CallidusCloud is running at a GAAP loss which amounted to $17 million at the end of Q3 FY2017. According to SAP, the acquisition will be neutral to earnings in FY2018 but accretive in FY2019.

My take

As I said at the top of this story, I didn't see this one coming.

CallidusCloud and SAP have been long-term partners (SAP is also a customer) so there is a degree of fit but then CallidusCloud has also been partners with Salesforce, ADP and Workday, vendors with which SAP competes in various guises. From that standpoint, it will be interesting to see how well SAP pushes the front office capabilities when competing with Salesforce, but also the impact this has on SuccessFactors ability to take more share of wallet in HCM related functions.

Callidus functional map

On the industries side, the acquisition gives SAP fresh functional scope across service industries like media, financial services and insurance. Looking at the headline logos CallidusCloud published last quarter, it is easy to see there will be plenty of cross and upsell opportunities. That fits well with the 'land and expand' strategy CallidusCloud has followed and which it believes drives some 40% of its planned growth. Right now, CallidusCloud says that only 20% of its deals are multi-product so there is a significant amount of scope for expansion.

I have two questions floating in my mind. The first relates to overall market penetration. While CallidusCloud and SAP share many global 2000 customers I have tended to view CallidusCloud as more of a mid-market play where it can provide a well-rounded solution set at affordable prices. That has also allowed CallidusCloud to be nimble when doing its own deals. What does SAP do here? Does it continue to play nimble (which has allowed CallidusCloud to grow at 20-30%) or does it attempt the much more difficult portfolio play with an eye on larger prizes? Those are very different sales modes.

Second, CallidusCloud has not been shy in acquiring assets of its own to bulk out the offering. According to Crunchbase, CallidusCloud has made 14 acquisitions of which four were made in 2017. SAP will now have to look at how CallidusCloud's portfolio fits technically, especially as SAP has hinted that CallidusCloud solutions will become part of the S/4 HANA portfolio. That's a whole lot of engineering.

Overall, this is a good deal for SAP, largely because it helps lift the hybris solution and puts SAP much closer to 'top of mind' in CPQ where Apttus leads the field. Which makes me wonder whether this forces Salesforce to think about making a run at Apttus. We shall see. On the LMS side, it's hard to see how the combination will sit well with Workday, SAP's HR nemesis. Again, we shall see how Workday responds in due course.

This story is unfolding and I have an SAP earnings call later in the day during which I may learn more. Expect this story to be updated.

UPDATE: On the earnings call, Luka Mucic, CFO SAP said that CallidusCloud has 16 pre-built integrations to SAP systems so the thinking is that the absorption of CallidusCloud to SAP (and vice versa) will be relatively straightforward. What was not said was whether customers will see a single view between those systems.

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