OK, I’m technically not working in this space any more - or else I might refrain from commenting on this, but looking over the SuccessFactors IPO (thanks Jason) just makes me cringe.

Gravity defying claims of success, shrinking client size, profligate management spending and serious questions about SF’s ability (and track record) to produce financial statements consistent with GAAP and compliant with SarBox really make me wonder.

SuccessFactors sv1

SuccessFactors numbers are just ugly. And not just in a “we’re growing really fast” kind of way. The faster they grow, the more money they lose. Right now, Their annual loss > annual revenue. Breakeven is not even contemplated.

And it isn’t just sales and service costs driving the loss, but G&A grows faster than revenue. In ‘06 and ‘07 SF opened offices in Denmark, the United Kingdom, France, Germany, Australia, Hong Kong, Korea, Italy, and Singapore. These offices (combined) managed to contribute managed to contribute 3.6% of sales. Spend, spend, spend.

No disclosure on revenue by segment - my guess is they are selling 2 of the 8 claimed suites - goal management and performance management and really struggling with the other 8. (Gotta love this quote from the sv1 on why they do not report segment information: The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis

Customer size? Went from 1.3 MM users @ 400 customers (thanks to Joshua Greenbaum) to 2.0 MM users @ 1,300 customers. Average client size dropped from 3,250 users/client to 1,358 users/client. Or, if you assume the old clients stayed, the new clients averaged 778 users/client. This is a pretty radical turn in client size, and I can’t imagine SF can possibly support a global, high comp direct sales model selling to customers with only 778 users each. Just doesn’t make sense.

Not to mention the holy grail of HRO, which is profitable (well, for the rest of us) implementation and service delivery for clients with less than about 3,000 or so users. My experience is that more smaller customers is very hard to do profitably - and impossible with a direct sales model. I think Employease is the only company that has really been successful implementing HRO technologies for smaller clients profitably, but they did it with channels. (SF reports only 10% of revenue comes from channel partners.)

Then you look at financial controls - their auditors cite material weaknesses relating to revenue recognition, stock-based compensation, deferred commissions and accrued liabilities (2005) and similar material weaknesses for year ending 2006 - and I think it should be enough to put anyone off of this IPO.

Put me down for a short on this one if it ever comes out.

TO’B