by Andrea Orr
[Posted on November 20, 2007 - 5:41 PM]
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DiggSuccessFactors Inc. on Tuesday kicked off a successful debut in the public markets as shares in the provider of online workforce management software rose 32% to close at $13.25.
The San Mateo, Calif., company this week raised roughly $108 million in the initial public offering after pricing shares at $10, the top end of the issue's proposed $8 to $10 per share range. Although SuccessFactors' revenue has grown rapidly, it has never turned a profit, with the company attributing its steep losses to reinvestment in the business. Yet SuccessFactors operates in a hot sector for investors, providing "software-as-a-service," or SaaS, technology that lets corporate customers effectively lease and use business software over an Internet-based network.
The company's revenues more than doubled to $32.6 million in 2006, from $13 million in 2005 and $10.2 million in 2004. Net losses over the same period grew to $32.1 million in 2006, from $20.8 million in 2005 and $5.3 million in 2004. In the most recent nine-month period SuccessFactors sales rose to $44.1 million, compared with $21.3 million in the year-ago period, while its net loss rose to $49.2 million from $22.9 million.
To put these numbers in some context, the company's investment in sales and marketing costs has in recent periods nearly equaled, or exceeded, total sales, with selling and marketing expenses over the last three quarters totaling 112% of revenues. SuccessFactors, which raised a total of $65 million in private funding, has not said when it expects to turn a profit.
The company's financial backers are Granite Global Ventures of Menlo Park, Calif.; Gre dylock Partners and Emergence Capital Partners of San Mateo, Calif.; Canaan Partners of Westport, Conn.; TPG Ventures of San Francisco; Cardinal Venture Capital of Menlo Park, Calif.; and Lighthouse Capital Partners of Greenbrae, Calif.
The company warns in its prospectus that building a SaaS business typically requires steep up-front investments, amassing revenue only gradually over the life of a commercial contract.
SuccessFactors' software helps enterprises align employee performance goals with overall business targets. Although most businesses strive to achieve that on their own, their internal processes are frequently paper-based and often fall short, especially at a time when more and more employees work remotely, the company says. SuccessFactors, which has more than 1,400 customers in 60 different industries, also says that its products can be rapidly deployed and customized for large and small businesses.
RBC Capital Markets analyst Robert Breza equates the technology with a more flexible version of what Peoplesoft Inc. created years ago before it was bought in 2004 by Oracle Corp. "As an on-demand software product, it lets you pay as you go, and price accordingly," he said.
While SaaS has long been championed by companies such as San Francisco-based Salesforce.com Inc. as the most practical way to provide software, SuccessFactors belongs to a group of companies operating in a smaller niche, offering software specifically related to employee management. Other companies in the segment include Taleo Corp. of Dublin, Calif., which now trades at about $25 per share, up from $13.60, where it closed on its first day of trading in 2005; and Kenexa Corp. of Wayne, Pa., whose stock price has risen from $12.68 when the company went public in 2005 to roughly $17 today.
