SuccessFactors IPO: blast-off or blow-off?

SuccessFactors had a successful Nasdaq IPO yesterday, but if it continues spending at its current rate, it'll have burnt through its freshly acquired cash pile by next summer. Is it 1999 all over again?
Written by Phil Wainewright, Contributor on

On a volatile day for the stock market, SuccessFactors had a successful IPO yesterday, pricing at the top of its forecast range and then rising a third to close at $13.25. Net of expenses, the offering has raised some $90.2 million. After paying off debt of about $21 million, the company says the proceeds will be used "for general corporate purposes and working capital, including potential investments in technologies, applications, software or assets, and acquisition of companies that complement our business."

If SuccessFactors wants to acquire, it'll have to move fast, and find a cash-rich target. The company posted a net loss of $20.2 million in the three months to September this year, bringing its trailing twelve months losses to $58.3 million (compared to TTM revenues of $55.5 million — in other words, it spent more than twice as much as it brought in from sales over the past twelve months). At that rate, it'll have burnt through the entirety of its newly acquired cash pile before the onset of next summer.

Opinion in the industry is divided as to whether SuccessFactors' spendthrift dash for growth represents a beacon of hope or a disaster in the making. I had a couple of emails from rival vendors seeking to comment on the IPO yesterday. Michael Gregoire, CEO of Taleo, which had its own IPO in September 2005, takes a negative view:

"SuccessFactor's IPO reminds me of 1999 all over again. But as we saw then, spending a ton of money to buy top-line growth is no guarantee for success," wrote Gregoire, contrasting SuccessFactor's loss-making against Taleo's record of profitability.

Putting the opposite view was Tod Loofbourrow, CEO of privately-held Authoria:

"SuccessFactors' market entry reflects the market's interest in and appetite for integrated talent management solutions. Knowledge Infusion estimated (just this week) that the market grew by 25 percent in 2006," he wrote. "What's clear is that between SuccessFactors' 2-million-plus on-demand users and Authoria's 4-million-plus, on-demand talent management applications are doing very well."

There's no doubt that talent management, in particular recruitment and performance-related compensation management, are very fast-growing application areas at the moment. While Taleo boasts of its profitability, its growth rate since IPO has idled around the industry average in the 25 to 30% a year range, rising in the most recent quarter ended September to 31.1% to post trailing twelve month revenues of $120 million. For the same period, SuccessFactors has posted year-on-year growth of 115.8%, more than doubling revenues to $55.5 million.

As I've surmised before, SuccessFactors is betting that it's worth investing in seizing the growth potential that exists in the market at present, but what it still has to demonstrate is that, as its growth rate starts to moderate, it can get its costs under control and start generating cash. As Gregoire notes, "profits are always in style, no matter what year it is."

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