Breakingviews - Cloud-software IPO deserves an equivocal “yes”

Servers for data storage are seen at Advania's Thor Data Center in Hafnarfjordur, Iceland August 7, 2015. REUTERS/Sigtryggur Ari

NEW YORK (Reuters Breakingviews) - Cloud-software firm Qualtrics deserves an equivocal “yes” from shareholders. The company wants a valuation of more than $4 billion in its upcoming initial public offering. It’s a stronger company than recently listed rival SurveyMonkey. But its undemocratic, double-barreled supervoting stock should give investors pause.

SurveyMonkey’s IPO in September showed that investors are hungry for growth. Sure, the firm has consistently lost money, but it has been growing revenue at about a 15 percent annual clip, and most customers repeatedly come back to use the service again. The stock popped over 40 percent on its first day of trading.

But it could not avoid the broad drop in tech valuations over the past month. The Nasdaq Composite Index has shed nearly 10 percent since the end of September, and firms like Amazon, Netflix and Nvidia have suffered far more. For its part, SurveyMonkey now trades below its IPO price.

Qualtrics has a similar business model, helping companies perform surveys to measure things like employee satisfaction and market research. But it has more traction than SurveyMonkey with enterprises.

Qualtrics also has more revenue, which is growing at a 40 percent annual rate, is profitable – and has been cash-flow positive every year since its inception in 2002.

The valuation is high. In the middle of the range, the company would be worth about 10 times the past 12 months’ revenue. is valued at about nine times. That’s perhaps defensible for speculators willing to gamble that the company will need little capital to continue its rapid growth.

Qualtrics’ corporate governance, though, is an exercise in voter suppression. New shareholders would own 15 percent of the company, but less than 2 percent of the voting power thanks to two other classes of stock owned by just 99 insiders.

Worse, if the company issues more common stock, the 22 holders of Class A-2 stock will be granted extra votes to ensure they control 51 percent of the ballot. That protection is only removed once the A-2 class accounts for less than a tenth of all outstanding stock – which would require a more than 25-fold increase in common stock – or 15 years have passed.

That cements management’s grip on power for the foreseeable future. Given Qualtrics’ growth, that may seem tolerable now. But new shareholders will have plenty of time to second-guess their investment.


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