SuccessFactors Files Initial Public Offering

By Staff Report

Jul. 23, 2007

HR software company SuccessFactors has filed to go public, despite mounting losses that totaled $32 million last year.

SuccessFactors on Friday, July 20, filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common stock. The company, which offers applications such as performance and recruiting management software, said the number of shares to be offered and the price range for the offering have not yet been determined.

The company’s public filing gave a window into its operations. SuccessFactors, which launched in 2001 and competes in the fast-growing arena of talent management software, said its revenue rose from $10.2 million in 2004 to $13 million in 2005 and $32.6 million in 2006. It took in $12.4 million in revenue for the first three months of this year.

But the San Mateo, California-based company’s losses are climbing as well. SuccessFactors recorded net losses of $5.3 million in 2004, $20.8 million in 2005 and $32 million last year. For the first three months of 2007, SuccessFactors weathered a net loss of $12.6 million.

SuccessFactors may be bleeding cash, but it operates in a healthy market. Research firm AMR Research calls human capital management software the fastest-growing segment of the business applications market, with revenue expected to grow 11 percent annually during the next five years to $10.6 billion.

The IPO filing comes as a number of other HR software and services firms have been moving from public to private ownership. Among them are software firms Kronos and Workbrain.

Jason Corsello, an executive at consulting firm Knowledge Infusion, said in a blog posting Monday, July 23, that SuccessFactors is investing heavily in sales and marketing and in product development.

“The company is obviously taking a ‘cold war’ approach to the market, focused on outspending the competition,” Corsello wrote. “This strategy will pose a significant challenge to many vendors that don’t have the financial resources or the ambition to dominate the market.”

SuccessFactors faces competition from a variety of rivals, including the giants of the field Oracle and SAP as well as talent management specialists such as Halogen and Authoria.

In its public filing, SuccessFactors also acknowledged a hurdle within its walls. The company’s independent registered public accounting firm “noted certain material weaknesses in our internal control over financial reporting,” SuccessFactors stated in the filing.

“Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results,” the company said.

SuccessFactors plans to use about $10.4 million of the net proceeds of the IPO to replay a loan.

“We expect to use the remaining net proceeds from this offering for general corporate purposes and working capital, which may include potential acquisitions,” the company said.

Should investors overlook the financial reporting trouble and growing losses to buy up SuccessFactors’ stock, it will amount to a win for HR software vendors overall, Corsello suggested.

“A successful IPO will be great news for the industry,” he wrote, “providing increased visibility in the HCM market, something that all vendors in the market should be cheering.”

—Ed Frauenheim

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