SuccessFactors ups guidance

SuccessFactors is not a company many ZDN readers may have heard about but you should. This is an on-demand vendor that primarily sells talent management solutions. My Irregular colleagues Jason Corsello and Thomas Otter follow this space. For the last year, they have been saying that talent management represents one of the truly innovative and bright areas within the enterprise market.

Jason in particular has been gung-ho about the upcoming on-demand offerings as providing the right service at the right time and at the right price. Today, SuccessFactors rewarded his faith, reporting  Q3 earnings, upping guidance for the future and anticipating accelerated positive operational cash flow. Highlights from the release:

• Revenue: was $29.7 million, compared to $16.7 million for the same period last year, an increase of 77%, and an increase of 16% sequentially from Q2 08.
• Customers: Added approximately 220 new customers during the quarter. The company had approximately 2,360 customers as of September 30, 2008, an increase of 69% from 1,400 customers as of September 30, 2007, and an increase of 10% from 2,140 customers as of June 30, 2008.
• Margins: Non-GAAP gross margin improved to 67% for the quarter ended September 30, 2008, up from 65% for the quarter ended June 30, 2008, and from 62% for the third quarter of 2007. Non-GAAP operating margin improved by 9 full percentage points to (61%) for the quarter ended September 30, 2008, compared to (70%) for the quarter ended June 30, 2008 and (109%) for the third quarter of 2007.

The company upped revenue guidance for the full year, albeit slightly, from $107-108 million to $109.9 to $110.4 million. It also said it expects to achieve a cash flow positive position by Q2 2009 and not Q3 2009 as originally planned.

Whichever way you cut it, this is a solid performance. But what is leading to this relative success when traditional vendors like SAP are scrapping forecasts and even saas suite entrants like NetSuite are paring back forecasts?

Any direct comparison is difficult. SuccessFactors is playing in an attractive niche across more than 60 verticals. It is in the fortunate position that it has no more than 8% in any one single vertical and no single customer accounts for more than 5% of revenue. This gives it plenty of places to spread risk. It is also a relatively small business so you'd expect to see high levels of growth. Despite all the doom and gloom currently swirling around, some markets remain strong. Healthcare for instance remains a bright spot with SuccessFactors signing a $1 million deal in the second from last day of the quarter. Even so and despite its overall confidence, the company reported a slowing in bookings during the final weeks of the quarter.

On the cost side, the company has implemented what it says are sophisticated marketing program tracking system. These allow it to quickly spot which programs are working and which are worthless. "You want to deal with these things quickly and effectively right from the start," said Lars Dalgaard, SuccessFactors CEO during today's earnings call.

Talent management is an area that cuts across economic conditions and SuccessFactors has found that attendance at webinars that address downsizing issues have tripled in recent times. Talking to the issues impacting the financial services industry, Dalgaard said: "Our Lehmans Broths contract will be assumed by Barclays, despite the bankruptcy...Fannie Mae, now under the control of the US government believes the succession management product they brought from us is instrumental in right sizing while maintaining current and future leadership."

I asked Jason Corsello for his comments on the general market: "We [Knowledge Infusion] had our best month ever in October, the rest of the year is looking great and as far as we can tell, 2009 looks to be at least on par." Asked why this segment should be particularly good, Jason said: "People need talent management. There is little or no appetite for ERP/HR style applications. 80 to 85% of the deals we are seeing are for saas. In the deals we see, Oracle turns up but can't compete against best of breed on usability although it is fair to say they, along with SAP continue to advance their products."

Whether talent management is a leading indicator for growth in on-demand offerings remains to be seen. Regardless, it is abundantly clear that applications which add demonstrable value are winning across many industries, even in a down trending economy. Companies like SuccessFactors are demonstrating that even when there's a head wind, they can turn a profit and be cash flow positive. Both factors are essential to ensuring survival and ending up on selection short lists.