SuccessFactors IPO – My Take and What It Means for HCM

On Friday, SuccessFactors filed their S-1, entering themselves into the relm of a soon-to-be publicly-traded company (with a new fancy logo and everything). A copy of the S-1 filing can be found here. This has been rumored for a few months now. As recently as last month, someone suggested to me that they had already selected banks.

SuccessFactors is a company I have written a lot about here and here. Bill Kutik also has a great article on the company in his recent article in HR Executive Magazine. The IPO announcement has promoted the BlackBerry to buzz all weekend. Many questions from “what do you think” to “I didn’t realize they were operating at such as loss” to “they need to get out fast at the rate they are going”. Although I am not a financial analyst, a quick review of the S-1 provides an interesting peek into the company. A couple of observations…

1. The company is losing a staggering amount of money. The company incurred net losses of $32m in 2006 and is on track to loss $50m this year
2. 2006 revenues were only $32.5m, significantly lower than I had previously estimated in some market forecasts. They are currently on pace to achieve approximately $65m in revenue this year. As a SaaS vendor, deferred revenue is important. SuccessFactors deferred revenue is currently $56.8m.
3. Sales and marketing expense is nearly 100% of revenue. The company is spending a lot of money with most of it going towards a blue-chip direct sales force. In comparison, Netsuite, another SaaS vendor who also recently filed their S-1, is operating at about 65% of revenue.
4. The company is investing heavily in product development. In 2006, 33% of revenues went towards R&D. Netsuite, in comparison, was at about 21% in the same period. Also similar to Netsuite, the company only operates one data center in the USA, something my friend Jason Wood expressed concerns with NetSuite. Interestingly, SuccessFactors operates 2 data centers in Europe although the region only accounts for about 3% of revenue.

What does this mean for the industry? A successful IPO will be great news for the industry, providing increased visibility in the HCM market, something that all vendors in the market should be cheering. The company is obviously taking a “cold war” approach to the market, focused on outspending the competition. This strategy will pose a significant challenge to many vendors that don’t have the financial resources nor the ambition to dominate the market. They are betting big and it shouldn’t go unnoticed that their are some significant risks attached to their strategy.

Why now? The financial markets are strong and the IPO window has obviously opened for many technology companies. Although it is always tough to predict market timing, and many are already predicting a short IPO window of opportunity, now seems to be a good time for a public offering. The company obviously could use the capital to fuel its growth plans too.

SuccessFactors is operating in a competitive market with some great companies including Authoria, Halogen, Plateau, Cornerstone OnDemand and Vurv to mention a few. Taleo also has a much anticipated release of their performance management solution due out in the next few months…and I wouldn’t write off Oracle or SAP yet. Each one of these companies has taken a unique approach to the market and time will tell which approach will be the most successful.