SAP to unload Qualtrics at $12-14.4bn valuation ahead of pivotal Q4 2020

Timing is everything so they say and Qualtrics filing its S-1 on a British public holiday is no exception. Assuming the company achieves the declared price of $20-24 per share, SAP values Qualtrics at around $14.4 billion at the upper end. SAP will continue to own some 80 percent of the company but will release around $3 billion in cash of the $8 billion SAP paid to acquire the company in 2018. Qualtrics co-founder and chairman Ryan Smith bought one percent of the company for $120 million and PE firm Silver Lake has agreed to acquire four percent of the company at a valuation of $550 million or $21.64 per share.

If Qualtrics achieves its stated IPO valuation, then the price will validate SAP's former CEO Bill McDermott's decision to buy the company at what many thought at the time was an insane valuation while at the same time helping to shore up SAPs share price which took a massive hit when SAP announced its Q3 FY 2020 results. Early indications suggest however the market is not exactly thrilled with the proposed IPO. Why?

According to the S-1 filing, Qualtrics benefits from its SAP ownership, recording sales up 36 percent in the year to 30th September 2020 at $550 million, a figure which accounts for some 7.4 percent of SAP's recorded cloud revenue for the same period. Of concern to those fixated on cloud growth as a measure of success, Qualtrics growth far outstrips SAP's overall cloud growth which the company stated was up 20 percent in the same period overall. On the upside, SAP gets to unload part of a company that's losing money, largely as a result of outsized stock compensation. According to the S-1 filing, Qualtrics lost $258 million in the nine months to 30th September 2020, of which $218 million was in stock compensation. 

Investors are clearly enamored of Qualtrics' growth prospects when compared with competitor Medallia, which trades at a valuation of around $5 billion but whose revenue grew 19 percent in the comparable period to $349 million or 63 percent of Qualtrics revenue in the same period. 

All eyes will now be on SAP's Q4 FY2020 earnings. While SAP talks loudly about its cloud chops, the reality is that much of its revenue rests on continuing to sell on-premises software in the shape of S/4HANA. And while there appears to be light at the end of the proverbial COVID tunnel, SAP needs a strong end to what has been a difficult year. The good news is that the Qualtrics IPO is a distraction that SAP can now put aside while at the same time benefitting from a controlling interest. 

The only question is whether Ryan Smith, who continues with Qualtrics as chairman and is widely considered pivotal to the company's success, will himself be distracted by his reported $1.6 billion purchase of his local basketball team, the Utah Jazz.