SAP To Spin-Off Qualtrics. Yes, The Experience Market Is That Hot

This week SAP, which is now worth nearly $200B, decided to spin off its $8 Billion acquisition of Qualtrics, which happened less than two years ago. Why? Here’s what’s going on.

First, under SAP’s ownership, Qualtrics has been growing like a rocket.

Today SAP sales teams all over the world sell and embed Qualtrics into their deals and the product has been integrated into nearly all SAP products (SuccessFactors HXM is built around Qualtrics technology). As a result, the product line continues to grow at over 34% annually, generating $168M revenue in Q2. If you look at publicly traded companies with this trajectory (consider ServiceNow, the company Bill McDermott now leads), they can trade at up to 20X sales. This means the Qualtrics IPO could be worth as much as $20 Billion, roughly 2.5X what SAP paid in late 2018.

Second, the market for Experience Platforms is explosive.

One of the biggest tectonic shifts caused by the Pandemic is the massive shift in enterprise software toward experience-based systems. While every company needs an ERP platform, these systems are somewhat of a commodity. (Yes Workday is cool, but so is SAP and Oracle isn’t bad either.) The big action is in the “systems of engagement” used by customers and employees to buy, interact, communicate, and provide feedback. ServiceNow, the new nemesis of ERP providers, is now trading at 128-times earnings and I think the company has barely started to reach its potential. Qualtrics will become a darling in that market.

SAP, by the way, just announced solid earnings (21% cloud revenue growth) and now breaks out its revenue for “experience platforms” separate from ERP (SuccessFactors is now a Human Experience Platform.) 

Third, the emerging space for Employee Experience (EX) platforms is now emerging.

While most of these platforms were designed to help companies understand, support, and serve customers, the Pandemic has opened CEO’s and CHRO’s eyes that an even bigger opportunity is to serve employees. As our Big Reset Initiative of more than 600 companies have told us, every business is now providing a new breed of collaboration, communication, feedback, and learning tools to its employees. And with tremendous success. Qualtrics is positioned in the middle of this market.

And think of the huge new demand for attestation, mobile wellbeing, check-in, and other health-related apps for employees. Companies need a platform to deploy these types of tools, and the EX platform becomes even more important. (Qualtrics, Medallia, ServiceNow are all jumping into this fast.)  Qualtrics now offers Remote Work Pulse, Pre-screen and Routing, and Back to Work Pulse out of the box.

Fourth, in the EX space, Qualtrics has less competition than you think.

While there are many dozens of companies that sell survey tools, chatbots, and other employee experience platforms, the only big end-to-end competitor Qualtrics has today is Medallia, another fast-growing public company. I’ve been interviewing a set of Medallia customers and these companies use Medallia for customer interaction management, crowdsourcing, video and text interactions with customers, and all sorts of “action platforms” for customer interactions. This is essentially what every company wants for its employees too.

Consider a company like Bank of America, which has gone through a wrenching transformation as all its branch employees started working at home. How can the company keep track of employee learning needs, health and family needs, and continuously communicate training, news, new policies, and wellbeing and other support as these employees change their roles? They need “experience platform” to do this – the bank is using Medallia for all its customer apps, and now plans to do so for employees.

If you compare Qualtrics to Medallia you see quite a different history. Medallia grew up in the Customer Experience (CX) space, and has built a rich set of applications to help companies communicate with, survey, and listen to customer feedback. Qualtrics was founded as a tool to help researchers built complex surveys, and developed its platform around traditional survey functionality. Now both are moving in each others’ directions, so I expect a pretty healthy firefight as Qualtrics goes public. (Medallia’s customer count grew by 40% in the last year, revenue by 28%.)

This is a brilliant move by SAP. Not only does the company recoup all its original investment and more, SAP will now have majority ownership in one of the fastest growing segments of the corporate tech market, the “experience platform” space. And Bill McDermott looks smarter than ever.

Yes, some people thought the company may have paid too much for Qualtrics two years ago, but now it looks like a bargain.