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

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.