A Human-Resources Software Company Clocks In A Solid IPO

Tuesday November 20, 6:08 pm ET

Investors Business Daily, J. Bonasia

Mark down a good IPO as one factor in the early success of software company SuccessFactors.

The company made its initial public stock offering on Tuesday, going out at $10 a share and ending the day up 33%, at 13.25. The company raised about $100 million.

SuccessFactors of San Mateo, Calif., offers software to help companies manage their work force, and delivers the software online. It's part of a hot trend in business software known as on-demand software, or software-as-a-service.

"Investors love the on-demand model because there are no receivables and no inventory, as it's all Internet-based," said Francis Gaskins, head of IPOdesktop.com.

Other publicly traded on-demand HR companies are Taleo (NasdaqGM:TLEO - News), Ultimate Software (NasdaqGM:ULTI - News) and Kenexa (NasdaqGM:KNXA - News). Authoria and Vurv Technology are privately held rivals.

SuccessFactors offered 10 million common shares to investors, and some shareholders sold another 790,000 shares. Underwriters have an option to buy up to 1.6 million more shares by Monday.

Morgan Stanley and Goldman Sachs served as lead underwriters. The bankers had set a range of $8 to $10 for the shares.

SuccessFactors Chief Executive Lars Dalgaard rang the Nasdaq opening bell to celebrate the IPO. Dalgaard is known as a bit of a maverick in Silicon Valley. His firm's staff motto is "No A--holes."

"This company is built for the long term," he said in a May interview.

The company remains in the red today, however. It lost 97 cents per share last year on a 150% jump in sales, to $32.6 million. Through the first nine months of this year, the company says sales have more than doubled to $44.1 million from $21.2 million in the year-earlier period.

The losses don't tell the whole story, Gaskins says. Much of the company's on-demand revenue is deferred, so the bulk of new sales are recognized slowly over time.

"It looks like they're losing a lot of money, but it's not as bad as it seems," Gaskins said.

But David Menlow of IPOfinancial.com is skeptical of the continued losses. "This stock is really looking a bit ahead of itself, as its losses continue to grow. We'd like to see the losses diminish," Menlow said.

SuccessFactors targets an area known as performance management. Such software ties employee goals to overall business strategies. The goal is to help better align the efforts of a work force with the larger goals of the company.

This emerging market presents a "green-field opportunity" for SuccessFactors, says Nate Swanson, an analyst with ThinkEquity Partners, a boutique investment bank that has funded other on-demand firms. Some polls show that 85% of employees are not even aware of their job goals, Swanson says.

"Performance management is one of the fastest growing and most strategic areas of human capital management," he said.

Some analysts say HR is particularly ripe for on-demand software. That's because all workers in an organization depend on HR applications, not just one department. Also, the software helps a company recruit talent, which is becoming more important as outsourcing and globalization trends raise the stakes. Doing a better job managing a staff will also become even more critical as large numbers of baby boomers start to retire.

For customers, the software is low cost and low risk, Swanson says.

At least two other on-demand software companies have filed to go public. They are NetSuite, which offers a suite of business applications, and Initiate Systems, which provides data management wares