SAP To Gain Experience Management Tools With Qualtrics Buy

SAP SE (DE:SAPG) (NYSE:SAP) recently inked a deal to buy Qualtrics for $8 billion in cash. The terms of the deal represent the purchase of all outstanding shares of Qualtrics and the unvested incentive compensation of employees.

Qualtrics specializes in providing Software-as-a-Service (SaaS) based experience management (“XM”) software. Notably, the XM provider had filed for an initial public offering (IPO) in the past month.

Both the companies’ board of directors and Qualtrics’s shareholders have approved the deal. The buyout is expected to conclude in the first half of 2019 following other regulatory approvals.Per the terms of the deal, SAP will acquire Qualtrics’s cash post acquisition.

Notable Developments

SAP has obtained €7 billion (approximately $ 7.9 billion) assecured financing in a bid to fund the deal. The company anticipates refinancing parts of the amount by issuing debt securities, going forward.

Post the buyout, Qualtrics will operate as an individual entity under SAP’s Cloud Business Group. The financials pertaining to Qualtrics will be reported under SAP’s Customer Experience segment.

Notably, in the third quarter of fiscal 2018, revenues from Customer Experience segment surged 54% from the year-ago quarter on a constant currency basis to €232 million.

Qualtrics is also anticipated to continue to preserve its headquarters in both the locations —Provo, Utah, and Seattle, Washington, after acquisition is complete.

Key Takeaways

The buyout of Qualtrics’s comprehensive XM software, encompassing customer, brand, employee and product experience solutions is anticipated to strengthen SAP’s intelligent enterprise platform.

We believe SAP is well poised to gain from Qualtrics’s projected total addressable market (“TAM”) of more than $44 billion in 2018. This is likely to complement the parent company’s anticipated TAM exceeding $350 billion.

Qualtrics’s customer base comprises notable names including Microsoft (NASDAQ:MSFT) , Volkswagen (DE:VOWG_p), BlackRock, Mastercard (NYSE:MA) , among others, which only adds on to the positives.

Qualtrics competitors include SurveyMonkey (NASDAQ:SVMK) , Willis Towers Watson, Medallia and Aon (NYSE:AON) Hewitt. We believe under SAP’s umbrella Qualtrics is anticipated to strengthen its competitive position by leveraging the parent company’s go-to-market capabilities, consequently upscaling its business operations.

Per the press release, Qualtrics is projected to report revenues exceeding $400 million in 2018 and anticipates forward growth rate around 40%, without considering the synergies from SAP acquisition.

Cash Position

SAP ended the third quarter of fiscal 2018 with cash and cash equivalents of approximately €4.51 billion compared with the previous quarter’s figure of €4.52 billion.

The company generated operating cash flow of almost €499 million in the quarter compared with previous quarter’s reported figure of €407 million.

Free cash flow came in at €171 million in the quarter compared with previous quarter’s reported figure of €16 million.

Risks Remain

Although the company attempts to enhance prospects with strategic buyouts in the cloud-based software market, the move is keeping margins under pressure. Notably, integration of Callidus in particular, limited margin expansion in the third quarter.

Higher investments to enhance cloud-based offerings and risks from currency fluctuations remain headwinds.

Zacks Rank

SAP carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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