Over the weekend I built out a simple financial model for Qualtrics to see how it measures up to other public software companies. Here are the quick takeaways:
1) It has a great product, but Qualtrics is a sales and marketing machine foremost. Based on the company's trajectory, I forecast it will spend ~46% of revenue on Sales and Marketing in 2018, vs. ~16% on R&D. The most comparable public software company on this front is Salesforce (not bad company to be in).
Note: These numbers will likely change as Qualtrics comes public and starts to recognize stock based compensation, which is hard to account for from an S-1 alone.
2) Qualtrics has a nice blend of high growth and efficiency. I forecast 2018 gross profit growth in the mid-40s, with free cash flow margins in the mid-teens. This makes Qualtrics relatively fast growing compared to the public company universe, with about average free cash generation- a good combination.
Note: I used Free Cash Flow as typically defined, not FCFA (my own metric which penalizes companies for SBC) because it is hard to evaluate XM's SBC levels just yet.
3) All of this combines to point to a strong valuation multiple on gross profit and a company that will be worth $5-7bn on public markets. As I wrote over the weekend, investors are back to caring almost exclusively about growth when valuing companies. Given that there's nothing wildly atypical of Qualtrics' revenue model or level of profitability (if anything, it looks strong for the growth), I'd guess it will end up worth north of $6bn on public markets (after the IPO pop). The placement on the chart below assumes $5.5bn of enterprise value and ~$6bn of market cap based on just over 18x 2018 gross profit. If the roadshow goes well and management impresses, it isn't hard to imagine Qualtrics settling out north of $7bn on day one (roughly a 22x gross profit multiple), which would value it more or less in line with Atlassian (TEAM). In a downside case where the valuation is closer to New Relic (NEWR), which I view as somewhat unlikely, the company would be worth ~$5bn (a 14x gross profit multiple).
Given that Qualtrics raised $150m at a $2.5bn valuation 18 months ago, this should be a strong outcome for all involved, and a big win for the Utah tech ecosystem.