Talent Management Sector Getting Stronger

Last month, Taleo announced its plans to acquire Vurv for approximately $128.8 million. This acquisition adds scale and Taleo continues as a leader in the talent management sector. The combined company will have over 3,400 customers, including 48 of the Fortune 100, and more than 2,800 small and medium-sized businesses. However, Gartner says that the acquisition will not enhance Taleo’s immediate market position beyond e-recruitment. In this post, I will review the performance of Taleo and its top competitor, SuccessFactors.

On May 6, along with the acquisition announcement, Taleo (TLEO) reported its Q1 results that beat analyst estimates. Revenue was up 30% y-o-y and 8% q-o-q to $37.2 million. Net income was $1.6 million, or $0.06 EPS compared to $0.9 million or $0.03 EPS last year. Non-GAAP net income was $3.9 million or $0.14 EPS. Analysts estimated EPS of $0.12 on revenue of $36.5 million. Earlier coverage is available here, here, and here. My interview with the CEO Michael Gregoire is available here.

Application revenue increased 28% to $30.2 million driven by the momentum from its new performance management product. Service revenue was $7 million in the quarter or 19% of total revenue. Deferred revenue was $40 million, up from $36.75 million in Q4.

Taleo added 197 new customers in the quarter, bringing the total number of customers to 1700, up 60% y-o-y. Among these, 185 customers were from the SMB market. Its SMB recruiting solution, Taleo Business Edition™, grew revenues by 145% y-o-y. In the enterprise business, it added 12 new customers and closed five deals with the first year's ASP being more than $250,000.

Taleo has also been doing well outside the U.S. International revenues accounted for 11% of total revenue and grew 52% y-o-y. The Vurv acquisition will also help with its international sales, as Vurv has double Taleo’s European field presence. Its stock is currently trading around $19, after a 52-week high of $34.20 on December 27. Its market cap is around $495 million.

While Taleo has achieved profitability, SuccessFactors is yet to attain profitability but is getting there fast. Earlier coverage is available here and here. You can read my interview with its CEO, Lars Dalgaard here.

On May 8, SuccessFactors (SFSF) announced a strong first quarter that surpassed analyst expectations. Revenue grew 89% y-o-y and 22% q-o-q to $23.5 million beating analyst estimate of $20.8 million. Net loss per share was $0.37, compared to $1.11 in Q4. Non-GAAP net loss was $0.34 versus analyst estimate of $0.42.

It added 200 new customers in the quarter (much less than 350 in Q4), taking its total customers to 1950, up from 1750 in Q4 and up 94% from 1003 in Q1 2007. Customer retention rates continued to exceed 90%.

Deferred revenue was $112.8 million, up 99% y-o-y and 12% q-o-q. Non-GAAP gross margin improved to 61% from 53% in Q4 with savings of about $8 million. Non-GAAP operating margin was (77%), down from (109%) in Q4.

For Q2, SFSF expects revenue between $24 and $25 million. Non-GAAP net loss is expected between $0.39 and $0.41 per share. For the full year 2008, it raised its revenue guidance to $104 million to $106 million from the earlier guidance of $101 million to $103 million. Non-GAAP net loss is expected between $1.55 and $1.59, revised from $1.63 to $1.67.

Just three days ago, SFSF filed a registration statement for offering 7.5 million shares, of which the company is selling 2.5 million. It is currently trading around $11, recovering from its 52-week low of $7.40 on March 3. Its market cap at around $594 million is higher than Taleo’s.

Overall, I am very bullish about the talent management sector, and both Taleo and SuccessFactors are excellent companies with strong management teams. As you can see from the growth rates, there is tremendous appetite for their solutions in the market, and the SaaS business model is a winner.

Another interesting directional observation is that just this week, IBM Global Services (IBM) announced a partnership with SuccessFactors to roll-out talent management to their large corporate customers. This tells me that the nascent sector is fast gaining legitimacy, and the consulting and system integrator firms will all get behind it soon.

All this point to a sector that I would personally invest in.

Disclosure: None

Comments

[David Lentz:]

It seems to me that these companies are doing little more than re-purposing CRM software and selling it to companies that have weak management and/or weak HRM departments. Well, there are certainly enough of those to constitute a viable market for their products.

But looking at the web sites of the companies under examination, it would seem that they could stand to turn their products on themselves, and identify/motivate those responsible for presenting the companies' faces over the web. Simply put, their corporate web sites suck, and could use a bit of talent applied to them.

I don't think I would be inclined to invest in companies that sell software to better apply/develop the talent within a company if their own presentation is so poor. It all smacks of a serious need for talent management software.

2008 Jun 07 09:19 AM

[HCMGuy:]

What are you thoughts on Softscape. Softscape is one of the industries most recognised vendors in the space with a much broader product base. Taleo is still a very eRecruitment focused vendor entering the Talent Management space very late.

2008 Jun 11 01:52 AM

[Not Practic...:]

Interesting comments from Lars interview reviewing the last quarter figures - SuccessFactors seemed to have lost more staff than ever which appears to me to a poor retention strategy or they are simply not a good employer. They cant simply be poor ar hiring staff. Lars also iindicated that they would focus on USA which may worry their international clients with regard to support. Also, their year on year net loss compared to revenue is widening so the more they sell, the further away from profitability they go. It's not a stock I would invest in.

2008 Jun 11 05:51 PM

[Lack of Tal...:]

I agree with teh last comment about SuccessFactors and their loss of GREAT Talent! They are aggressive at recruiting strong candidates and had some great plans in place to on-board them. But, once you get into the organization, you realize that SF is the worst at applying their own Performance Management philosophy in place for new hires. Once in the door...you are given sub-standard training and the environment is harsh. I've seen folks that have had a strong track of success fail miserablely at SF. Lars is dynamic...but he lacks maturity. I've heard Lars throw the "F-Bomb" on numerous calls. We used to all cringe during his ramblings.

2008 Jun 16 02:16 PM

[HappyNow:]

I think SFSF should change its slogan to "A**H***s Only Allowed." Terrible place to work. Demoralizing, cliquish, immature. I was one of the lucky ones who wasn't drummed out. I left on my own.


On Jun 16 02:16 PM Lack of Talent Management wrote:

> I agree with teh last comment about SuccessFactors and their loss
> of GREAT Talent! They are aggressive at recruiting strong candidates
> and had some great plans in place to on-board them. But, once you
> get into the organization, you realize that SF is the worst at applying
> their own Performance Management philosophy in place for new hires.
> Once in the door...you are given sub-standard training and the environment
> is harsh. I've seen folks that have had a strong track of success
> fail miserablely at SF. Lars is dynamic...but he lacks maturity.
> I've heard Lars throw the "F-Bomb" on numerous calls. We used to
> all cringe during his ramblings.

2008 Oct 07 06:41 PM