*SuccessFactors Files for Public Offering (*updated)
(This post was recently updated after conversations with
SuccessFactors VP of Product Marketing.)
Recently SuccessFactors Inc. filed their “S-1” statement, a prospectus to file for public offering. SuccessFactors is one of the most interesting and fast-growing software companies in the talent management market. Looking at the S-1 filing helps us understand many things about this marketplace, SuccessFactors, and the Software as a Service (SaaS) model.
Fig 1: SuccessFactors S-1
The Performance and Talent Management Systems Market
SuccessFactors plays in the market for enterprise performance and talent management systems. These systems enable companies to better manage the “soft” parts of HR; recruiting, hiring, performance management, succession planning, learning, and to a lesser degree, compensation.
This market is very large and still largely untapped. In the past, these applications were largely automated with spreadsheets, PCs, and mainframes. Today, a new market of “integrated talent management suites” has emerged. These systems give ocmpanies an integrated view of their talent: skills, performance, learning, potential, and more.
Our research into the addressible market for such software shows that there are around 20,000 organizations ready to absorb talent management software, ranging from global enterprises to enterprises to mid-market companies. Most of these companies have some form of HR software today (payroll and HRMS) and often are replacing, upgrading, or looking to implement different elements of a talent management suite. The new play in this market is the Software as a Service (SaaS) model, which enables companies to “rent” this software and implement it without ever installing any software.
Fig 3: Addressable Market for HR Talent Systems
(from published research LMS 2008: Facts, Practical Analysis, Trends, and Vendor Profiles)
As this market grows, it will expand. As more and more companies implement such software, more potential buyers become ready. Within this space there are five major segments: recruiting (formerly called applicant tracking), performance management (formerly called performance appraisal automation), learning management (LMS), compensation (which includes a variety of modules for incentive compensation, benefits, and pay-for-performance), and workforce/succession planning (an application area that is just emerging). We have market size data and growth rates for each segments (to be published this Fall) – but to summarize, each are growing, and the total market for these systems will be over $3 Billion within the next 6 years. The fastest growing segment is the one in which SuccessFactors is best positioned, the market for online Performance Management.
Today SuccessFactors, with more than 1,300 customers, has already penetrated the largest percent of this market (by number of corporate customers), and when measured by revenues, now commands between 10-15% of the Performance Management systems market. This is a very impressive position, given the rapid growth and number of vendors competing here. The company competes with more than 30 different companies, including Oracle/Peoplesoft, SAP, Authoria, CornerstoneOnDemand, Executrak/StepStone, Halogen, HRSmart, KnowledgePlanet, Kenexa, Learn.com, Plateau, Saba, Silkroad, Softscape, SumTotal, Vurv, Workstream, and most of the other LMS companies. Taleo is also soon entering this market.
SuccessFactors is a Very Fast Growing Player
In only 5-6 years, SuccessFactors has grown to a $32 Million company and is growing to become a $40-45 Million company this year. This growth rate makes them one of the fastest growing players in this segment. The company’s current quarterly sales were stated at $12.4 Million, which equates to several hundred new customers each quarter. The company currently has more than 1300 customers, which equates to an average revenue per customer of about $80,000 over the last five years and a compound growth rate of around 80%. This is blazing growth.
Fig 2: SuccessFactors Sales Revenue
This rapid growth seems to indicate that SuccessFactors is “making this market,” meaning that they are rapidly gaining market share. As it is, the overall performance management systems market is growing at around 30-35% and is currently the fastest growing segment of HR software.
SuccessFactors is Far from Profitable Today
One of the important findings in the S-1 is that the company is spending large sums of money in sales and marketing to grow at this rate. To generate the $32.6 Million in revenue in 2006, for example, SuccessFactors spent $32.3 Million in sales and marketing alone. This means that it took the company one dollar of sales and marketing expense to generate one dollar of revenue. A company with a similar business model, Salesforce.com, which is growing at a similar rate, spends about 57% of its revenue on sales and marketing, also a large number, but half of what SuccessFactors is currently spending.
In addition, the company is also spending 1/3 of its revenue on R&D. This heavy investment is being used to build out the company’s talent management suite. Comparing to the similarly fast growing Salesforce.com, this is more than 3X Salesforce.com’s average of 9.6% last year. One of the real financial stories of the Software as a Service (SaaS) model is ability for a company to leverage its R&D over an ever-increasing number of customers. Today SuccessFactors’ R&D costs are almost twice as high as their leading competitive traditional software company, SumTotal Systems, which is spending approximately 17% of sales on R&D. This high R&D investment is costly, but it is part of SuccessFactors’ goal to rapidly gain a leading market position.
If one totals up these expenses, plus the high expenses on G&A (23% of revenue), you find that for every $1.00 of revenue SuccessFactors obtains, it costs the company $2.00 in expenses. Adding up the accumulated losses for the company, it has cost the company has lost $49,000 for every customer they have obtained. The company is far from profitable today.
That said, there is a big upside here – the company’s “deferred revenue” – which is over $56 Million. This term refers to the ongoing fees which SuccessFactors can expect to receive each year from its multi-year contracts. In the Software as a Service (SaaS) model, when SuccessFactors books a 3-year contract with a client (as an example), the company only books 1/3 of the revenue each year. (Licensed software companies, on the other hand, would book it all up front – forcing them to find more and more such deals in order to grow.) This means that when SuccessFactors shows $32.5M of revenue, they also have another $56M or more of revenue “in the bank” for future years. So while the company is losing money now, at some time in the future there is a “tipping point” and these ongoing contracts start to bring in enough revenue to offset the high expenses on sales and R&D.
What Does this Mean to You?
First, as an HR manager or buyer, you are most interested in the company’s products and services, which are generally excellent. SuccessFactors has a very functional and successful product, excellent suppport and service, and a tremendously high-performing culture. In fact we have seen some of SuccessFactors innovative new software and the company is clearly investing to stay ahead of the market.
Do the financials matter? In some cases your CFO may want to look for vendors with profitable businesses. Remember that many HR software companies are small, private, and often unprofitable – and usually these are the companies with the most innovative and well designed products. Organizations which are conservative and only want to buy from Oracle, Peoplesoft, and SAP find that while their vendors are stable, their products may be behind and support may be lacking.
What the S-1 shows is that SuccessFactors has a big opportunity and is very well positioned. The company is clearly striving to become the “Salesforce.com” of the talent management software market. Talent management software (suites of HR process software) are important to all organizations of almost all sizes. Outside of payroll software and services, software to manage the “HRD” functions of HR are necessary to automate the process of managing goals, documenting performance appraisals, establishing succession plans, identifying leaders, onboarding new employees, and developing employees. Every well run company needs these processes.
If you are a small or mid-sized enterprise, SuccessFactors is proving the power of the SaaS model. SuccessFactors all SaaS strategy enables the company to serve this market very efficiently and effectively. Armed with $125 Million in new capital, we can expect the company to continue to grow and expand rapidly in this market.
Times are interesting – it feels like we are back in the internet boom of the late 1990s again. The Software as a Service (SaaS) business model has emerged as a breakthrough new way to deliver enterprise software. SuccessFactors is demonstrating that this model serves customers well and enables the company to grow rapidly. Hopefully profitability will come soon as well. We will continue to watch this marketplace and this important and exciting company.
PS. Come to the HR Technology Show in October to see and hear the results of our upcoming research on the entire market for talent management software.