The Next IPO | Qualtrics [XM] | Initial Likes & Dislikes

When markets get choppy the last thing on an investor’s mind is the next growth software IPO. Hence, that is exactly where our clients can leverage our work. Our next idea: Qualtrics IPO. We are leaning mostly positive, but there are some items that hold us back at this point. We will extend a Call Invite to our clients when Qualtrics files pricing.

What do we like about Qualtrics?

• The company is trying to transition itself from enterprise survey software to becoming a broader data management and analytics platform.
• The company has outlasted and outperformed most of its peers in the survey category.
• We can imagine a wide list of potential acquirers of this company for a variety of reasons, including as marketing software (CRM, ADBE), sales or lead gen data (HUBS), customer service software (ZEN, CRM, and many others), visualization extension tools (DATA), a good on-ramp for data analytics companies…etc. You get the point!
• The company is growing faster than some of the recent software IPOs we have reviewed, with LTM subscription growth over 40% Y/Y. Key second derivative metrics continue to accelerate, such as rate of capture of large customers, rate of growth of deferred revenue, and $ growth of subscription revenue. The company is also FCF positive with decent incremental OCF margins (20-25%).
• Lastly, when a growth software company comes to market during chaos there is a chance that buyers will get a ‘free look’ at a decent price.

 

What makes us a bit shy on the opportunity after a first pass?

• After our first review, we aren’t sure if this market is still ahead of them or if adoption is mostly already in the numbers? Consider some data:
  • The positive second derivative signals (above) can mostly be attributable to the $ growth of existing customers, rather than to a new adoption curve. The data on growth of total customers (x-M&A) maybe isn’t all that romantic especially considering the go-go growth years when, for example, they added 600 customers in 4Q12 alone. Since that point, however, the company has added ~4k customers in almost 6 years.
  • Incremental subscription revenue (q/q) had slowed and then reaccelerated in the June-Q 2018; however, that was also the quarter in which Qualtrics closed its second acquisition ever, of a company with 1,500 clients, including Uber, Postmates, and Instacart, acquired for north of $20MM (according to Forbes, 4/12/18), and definitely added some inorganically derived revenue.
  • That over 75% of the Fortune 100 and 30% of the Global 2k are customers shows the company’s success and relevancy, but also maybe implies the company is well along the adoption curve.
  • Last, the spending category of software budgets for CMOs was a new thing in 2012 and has since exploded. But in 2018 are those new budgets still go-go growth land on a forward basis? We aren’t so sure.
• In 2018, public equity investment Zeitgeist shifted around the term ‘unicorn’. What before may have been hailed as ‘a unicorn!’, has become ‘ahhhh, unicorn’, as overzealous private-era valuations have saddled companies with tough opening acts in the public sphere. In the case of Qualtrics, at its core the company is a survey software company with relatively low barriers to entry, which isn’t meant to imply any company can do it well, but maybe points to the fact that valuation must be in the right zone rather than a buy-at-any-price situation. Qualtrics, for example, was blessed with a ~13x trailing / ~9x forward EV/S valuation at its last VC round. The same trailing brush might be a ~10x forward slate of color, which would be too pricey today for a (slowing) growth story where market adoption has slowed, in a category that may hit a cyclical pause in growth (marketing CMO software budgets), and where the company is likely too early to be valued for its FCF.  

That's all for now, stayed tuned for Call Details on our Qualtrics [XM] IPO Preview.

Please call or e-mail with any questions.

Ami Joseph

Managing Director

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Yosef Vaitsblit

Analyst

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