SaaS Goes IPO (again): SuccessFactors Files, and Now the Questions Begin

SaaS Goes IPO (again): SuccessFactors Files, and Now the Questions Begin

Summary: SuccessFactors, the latest poster-child for SaaS, is now headed for the IPO market, following NetSuite, and everyone's archetype SaaS IPO (if you're an investor), Salesforce.com.

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TOPICS: Legal, Cloud
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SuccessFactors, the latest poster-child for SaaS, is now headed for the IPO market, following NetSuite, and everyone's archetype SaaS IPO (if you're an investor), Salesforce.com. SuccessFactors' S-1 filing was first pointed out to me by fellow Enterprise Irregular Jason Corsello, who has blogged on this IPO and Successfactors in general several times. Jason has some of his own excellent analysis, which I won't repeat, so let me try to add to the coverage with some analysis of my own. Here goes:

SuccessFactors is a major force in the SaaS world right now, having garnered the usual glowing publicity that surrounds iconoclast CEOs in iconoclast markets (c.f. Marc Benioff, to whom SuccessFactors CEO Lars Dalgaard would not like to be compared, thank you very much.) The company is also getting glowing reports from sources I trust (as opposed to afore-linked article in Forbes, the same magazine that christened Tom Siebel as the "man who sees around corners" right before market forces hiding in plain sight knocked the stuffing out of Siebel's stock.) This is clearly a hot company and its IPO promises to be a hot number.

But before you jump in to grab a share in the next rocket ship to fame and fortune, or Dotcom 2.0, here's a few questions raised by my own analysis of Successfactors' S-1 filing. Many of these questions come from a comparison of notes from a meeting I had with SuccessFactors last year and the data they are presenting to investors today.

Is the customer acquisition rate as strong as the company would like its investors to believe? The S-1 lists 1300 customers and two million users, while last year at this time SuccessFactors told me they had 400 customers and 1.3 million users. The customer growth is spectacular, but the user growth makes me wonder what kind of customer they have been able to attract in the last year. If customers grow at 300+ percent and users grow at 50+ percent, you can be sure that the company isn't meeting its stated goals of growing in the big enterprise market. These numbers may mean they are taking on a lot of SMB customers, which isn't bad but puts SuccessFactors in the same quandary as Salesforce.com: You can't compete with the big boys if you don't do big implementations.

Is the company running a tight financial ship? Jason's blog highlights some of the problems with spending and profitability, or lack thereof. I was particularly struck by the following statement in the S-1: Our independent registered public accounting firm identified numerous material audit adjustments, all of which we subsequently recorded, and noted certain material weaknesses in our internal control over financial reporting. Hmmm.... I hate to think that some of the people running the financial side of the company got out of hand (after, SuccessFactors' product is all about managing people, no?)

Does the company's product strategy have legs, or is it a one-trick pony? SuccessFactors has a product suite with eight different modules, but the S-1 reveals that the company is really only selling two of them, performance management and goal management. This makes me wonder whether this company is vulnerable to a more comprehensive HRMS on-demand offering (such as what Workday is coming out with), of which SuccessFactors' two main products would simply be a subset.

Will this company succeed in stealing market share inside the customer bases of the big suite vendors? This is, in my mind, the billion-dollar question. And it's one that the S-1 dodges completely, other that to say that SAP and Oracle are major competitors. But there is some indication that SuccessFactors is making inroads in these markets, based on our meeting last year. At that point Oracle/PeopleSoft customers acccounted for 24 percent of the SuccessFactors customer base, while SAP accounted for six percent. That's not a bad start, considering how much these two companies spend on trying to be effective in the overall HRMS space. But the customer growth number cited above make me wonder how well the company has done against the big guys in the last year.

It's a tricky question, and one that requires some guesswork. At our meeting last year, I was told that 60 percent of the users were users of the enterprise edition, intended for installations of 1500 or more users. Meanwhile, 60 percent of the total customers were using the smaller professional and managers editions, targeted at up to 1500 users and less than 25 users, respectively. If those percentages held throughout this year, then large accounts would have grown from 160 out of a total of 400 to 520 out of a total of 1300, which looks great. But the user counts have dropped relative to customer wins, which means that a year ago the average large enterprise deal had 4800 users, while over the last year the average came out to only 2300.

This begs a final question: Could it be that SuccessFactors is penetrating the big accounts but selling fewer seats (which may explain why it is unable to sell more than two of its eight modules)? Which would then mean that the company is really overlapping, and not replacing, traditional on premise HRMS. At which point SuccessFactors' ability to be a major disruptive force in the market -- a key requirement for investors -- would be questionable. It's hard to tell, and we won't know unless someone at SuccessFactors cares to tell us.

But, until the question is fully answered, the success of SuccessFactors has to have this little asterisk next to it: is this a company making a play for the traditional turf of the on-premise suite vendors, or is it really operating as an adjunct to a traditional on-premise HRMS implementation? The answer to the question will determine if this really is the next super-heated SaaS IPO, or just an interesting investment that won't last the test of time. As with all tests of time, only time will tell.

Topics: Legal, Cloud

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5 comments
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  • I'm going short on this one

    Hi Joshua:

    Do you really think this issue will go to market? Seems like a stretch to me.

    Profligate spending, plummeting client size, decreasing gross margins and
    questionable accounting practices?

    More here:

    www.tomob.wordpress.com

    Tom O'Brien
    tomob
  • Successfactors premature IPO magnifies the profitability and revenue lies

    The key thing I've read in all of the articles about Successfactors IPO is that all of the revenue and profitability figures they have been claiming (even in their customer conference two months ago) have been flat out lies. During the conference (which I attended) the CEO claimed to be "approaching $100M revenue" and that the company was profitable. As an analyst who wants to remain anonymous I feel annoyed that I believed any of the words they were spreading.

    From their S1 you see a company who will run out of cash in Q3, and who has a lot of itchy wealthy investors looking to pull as much out before the cash ends and they have to do massive layoffs.

    Salesforce was much, much, much healthier prior to its IPO. Cannot even compare the two. If they do go out I will be one of the first to short their stock, this thing will be at 50 cents within 12 months.
    anonguest
  • European players in Talent Management space

    In addition to looking at US companies readers should also consider looking at non US companies in the same space. Here I declare my interest as CFO of StepStone. Our Solutions business (which offers hosted e-Recruitment and talent management products) is generating around $12m per quarter, growing organically at 50% and throwing off both profits and cash. Our customers (who are primarily European companies) are increasing taking us global, including into the US, South America, Russia and China

    Anyone interested should take a look at http://www.stepstone.com/EN/IR/ for a more global perspective on this market

    Ian Cole
    Ian Cole
  • Agreed

    The key issue to consider in SuccessFactors and any other SaaS vendor is the "deferred revenue," which is the revenue which is sold but not yet booked. SuccessFactors has nearly $60M of this (these are multi-year contracts) and they represent both
    growth potential as well as ongoing liabilities/commitments to clients. In many ways, its hard to value a company solely on revenue because this deferred revenue is an annuity. More info on our blog, at http://bersin.wordpress.com ..
    jbersin
  • Key question: what is a user?

    In performance management, a user may be synonymous with number of employees. Each employee will potentially use the system for goal updates and peer feedback. Seen in this light, the progress on the"enterprise" side of the business looks alot like the upper end of the mid-market.
    VilanoD