Consider SuccessFactors for the Long Term

In February, SuccessFactors (NASDAQ: SFSF) released its results for Q4 and fiscal year 2007 that ended 31 December 2007. This was the first quarter since it went public in November. I recently did an interview with its CEO, Lars Dalgaard, which is available here. I will summarize some thoughts here, but highly recommend that you read the interview to get an in-depth view into how this company is run. You will learn a lot from reading it, but most importantly, it allows you to develop a gut feeling for the management.

Q4 revenue was $19.2 million, up 70% y-o-y and 15% q-o-q. Net loss per share was $1.11. For the full fiscal year 2007, revenue was $63.4 million, up 95% y-o-y. Net loss was $75.5 million or $8.35 per share, which is more than double from $32 million in 2006. The increase in net loss was driven by heavy investments in sales and marketing.

Its intense efforts in sales and marketing resulted in the addition of more than 900 customers in 2007, taking the total to 1750, compared to just 175 in 2004. The number of customers rose by 350 in Q4. Customer retention rate was more than 90%, or in other words churn was less than 10%.

At the end of 2007, the company had a backlog of $89.9 million compared to $42.7 in 2006 mainly due to increased number of new customers. In terms of contract value, 15 deals exceeded $1 million while 62 deals exceeded $500,000 and 135 deals exceeded $250,000. As disclosed in my interview, U.S. Enterprise comprised 60% of the new business and small, medium, and Europe each comprised 10%. Revenue from the U.S. accounted for 90% of the total revenue, compared to 93% in 2006.

SuccessFactors has recently been in the news for its lawsuit against its rival Softscape for creating and distributing a misleading document about SuccessFactors. There is an interesting blog on this issue here. A U.S. District court recently granted a preliminary injunction against Softscape.

SuccessFactor’s stock is currently trading around $9.5, and its market cap is around $500 million. It hit a 52-week low of $7.49 on March 3. Growing 95% is something you just can’t ignore, and this stock sure looks promising despite its huge losses, which are a deliberate investment into building its rather promising future.

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Comments

[Pete Winston:]

Disagree 100%

Sorry – but I really disagree this time. I battled to go w/this stock but gave it up. This is not a quality stock for long-term or anytime. I almost went with this stock 3 days ago but really did my due diligence: dissected financial data, carefully read the SEC 10-K & archived files, multiple visits to SF’s web site, reviewed all blogs, watched a demo online, & analyzed competitive stocks & products. I’ll give SF 18-24 months before they’ve exhausted all avenues of digging themselves out of debt & fold: 2007 Net Profit Margin: (minus) -119.11%; 2007 Operating Margin (minus)-110.13%. Net loss increased from (-20.8), (-32.0), (-75.5 million) (2005-2007) Accumulated 2007 deficit: (-141.3 million) ROE=minus (-5,731.41%) If they do survive – they’ll never show a profit.

Per the SEC 10-K the growth of smaller customers (SME) outpaced larger customers (Enterprise) in 2007. The future is in the small to mid-size marketplace - not Enterprise. So, the ongoing trend will be smaller customers. Bleeding marketing costs have marginally impacted the spacious small to mid-size market. Bloated salaries & overhead are expected to continue uninterruptedly so that sales/marketing can chase smaller customers whose revenue can’t cover the debt ratio. The CEO & CFO both need a refresher course in Basic Accounting 101.

Per Sec 10-K the sales/marketing expenses will escalate. As % of revenue - these expenses were 127% in 2005; 99:% in 2006 & 112% in 2007. Fiscally responsible customers may eschew upgrades in this tight economy. With the risk of SaaS tech price wars raging daily, expensive training costs, fewer upgrades, renewal cancellations, recession, currency fluctuations in SFSF global markets, SF’s revenue might get further swallowed-up in debt.

This bearish market offers stronger performing stocks at 2004-2005 prices – so why SFSF? Call me when they crash!

2008 Apr 14 04:39 PM