Buy SuccessFactors for the Long Term

In February, SuccessFactors (NASDAQ: SFSF) released its results for Q4 and fiscal year 2007 that ended 31 December 2007. This was the first quarter since they went public in November. I recently did an interview with its CEO, Lars Dalgaard, which is available here.
I will summarize some thoughts here, but highly recommend that you read the interview to get an in-depth view into how this company is run. You will learn much, and most importantly, develop a gut feel for the management.

Q4 revenue was $19.2 million, up 70% y-o-y and 15% q-o-q. Net loss per share was $1.11. For the full fiscal year 2007, revenue was $63.4 million, up 95% y-o-y. Net loss was $75.5 million or $8.35 per share, more than double from $32 million in 2006. The increase in net loss was driven by heavy investments in sales and marketing.

Its intense efforts in sales and marketing resulted in the addition of more than 900 customers in 2007, taking the total to 1750, compared to just 175 in 2004. Number of customers rose by 350 in Q4. Customer retention rate was more than 90% or in other words churn was less than 10%.

At the end of 2007, the company had a backlog of $89.9 million compared to $42.7 in 2006 mainly due to increased number of new customers. In terms of contract value, 15 deals exceeded $1 million while 62 deals exceeded $500,000 and 135 deals exceeded $250,000. As disclosed in my interview, US Enterprise comprised 60% of the new business and small, medium, and Europe each comprised 10%. Revenue from US accounted for 90% of the total revenue, compared to 93% in 2006.

SuccessFactors has recently been in the news for its lawsuit against its rival Softscape for creating and distributing a misleading document about SuccessFactors. There is an interesting blog on this issue here. US District court recently granted preliminary injunction against Softscape.

SuccessFactor’s stock is currently trading around $9.5 and its market cap is around $500 million. It hit a 52-week low of $7.49 on March 3. A 95% growth is something you just can’t ignore and this stock sure looks promising despite its huge losses, which are a deliberate investment into building its rather promising future.