March 11, 2010 - 2:56pm EST by
2010 2011
Price: 20.30 EPS $0.00 $0.00
Shares Out. (in M): 79 P/E NM NM
Market Cap (in $M): 1,612 P/FCF NM NM
Net Debt (in $M): -323 EBIT 0 0
TEV ($): 1,289 TEV/EBIT NM NM
Borrow Cost: NA

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 SuccessFactors is a software-as-a-service (SaaS) company that provides human resources software for recruiting and talent management (performance reviews).  It is extremely expensive and there are quite a few potential ways to win here.  SFSF has a market cap of $1.6B and $300M of cash.  It generated $155M of revenues last year and consensus estimates are for $180M of revenues for 2010.  It has never generated any profits.  So, you are paying 8.5x trailing revenues and 7.2x forward revenues, for a company that is growing 16% off of a depressed year.


In the last few months, many (if not all) of the universe of public SaaS companies have followed a similar pattern: guided revenues up slightly (as required) and further reduced profitability.  All have said the same thing: that the opportunities are so great that they must hire more salespeople to capitalize on them.  We have called many industry people in the last week and have come away with a different set of explanations.  What is interesting is how many potential headwinds there are here.


1) HR software doesn't grow the top line, so it is being given the back seat; also, in an environment where no one is hiring, why buy recruiting software

2) SaaS companies cut costs aggressively in 2009, it was never sustainable

3) When selling a small point solution, it could go to the HR director without approval; now that these companies are all selling "suites" of software, it must have C-level approval so sales cycles are lengthening

4) More competition from other SaaS companies (who all acquired in the last year to enter each other's spaces- "TLEO is cutting price to take share from SFSF"), from large CRM companies ("peoplesoft/oracle's new HR release of a few months ago is identical to SFSF's offering"), and from small private companies ("'s executives are all venture funding small HR SaaS companies that run off their platform")

5) Many companies cut costs across the board last year and got SaaS companies to agree to 2010 renewals 15-20% lower than 2009-we heard this consistently

6) Very difficult to sell to smaller/ middle-market companies-one ex-salesman from SFSF said two years ago only 1 of 30 mid-market salespeople made quota

7) SFSF is about getting the sale, not profitability, and their service is bad enough that customers then disconnect it because they never really "bought in"

8) When SaaS companies buy competitors, they fire the sales force, and these salespeople go to other companies and take customers with them


Put all this together, and I think the chance of a revenue miss is better than zero, which is what the stock is pricing in.  Generally speaking, I think of SaaS like the internet in 1999.  It is a great concept, but there are no barriers to entry-instead of installing software and paying a hefty license, you go to an outside website, so switching costs are very low. 


Even the most bullish analysts have $21 price targets on this one, so there is a potential for near-term downgrades as well.  Finally, they changed auditors a few weeks ago to everyone's surprise, and this is a business where revenue recognition and bookings can change based on the aggressiveness of the accountants.


P/Sales of 10x is not sustainable

Revenues and bookings could disappoint

Analyst downgrades

Something more comes out of auditor change

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