Talent Management Sector Getting Stronger

Last month, Taleo announced its plans to acquire Vurv for approximately $128.8 million. This acquisition adds scale and Taleo continues as a leader in the talent management sector. The combined company will have over 3,400 customers, including 48 of the Fortune 100, and more than 2,800 small and medium-sized businesses. However, Gartner says the acquisition will not enhance Taleo’s immediate market position beyond e-recruitment. In this post, I will review the performance of Taleo and its top competitor, SuccessFactors.

On May 6, along with the acquisition announcement, Taleo (TLEO) reported its Q1 results that beat analyst estimates. Revenue was up 30% y-o-y and 8% q-o-q to $37.2 million. Net income was $1.6 million, or $0.06 EPS compared to $0.9 million or $0.03 EPS last year. Non-GAAP net income was $3.9 million or $0.14 EPS. Analysts estimated EPS of $0.12 on revenue of $36.5 million. Earlier coverage is available here, here, and here. My interview with the CEO Michael Gregoire is available here.

Application revenue increased 28% to $30.2 million driven by the momentum from its new performance management product. Service revenue was $7 million in the quarter or 19% of total revenue. Deferred revenue was $40 million, up from $36.75 million in Q4.

Taleo added 197 new customers in the quarter, bringing the total number of customers to 1700, up 60% y-o-y. Among these, 185 customers were from the SMB market. Its SMB recruiting solution, Taleo Business Edition™, grew revenues by 145% y-o-y. In the enterprise business, it added 12 new customers and closed 5 deals with the first year ASP more than $250,000.

Taleo has been doing well outside US too. International revenues accounted for 11% of total revenue and grew 52% y-o-y. The Vurv acquisition will also help with its international sales, as Vurv has double Taleo’s European field presence. Its stock is currently trading around $19, after a 52-week high of $34.20 on December 27. Its market cap is around $495 million.

While Taleo has achieved profitability, SuccessFactors is yet to attain profitability but is getting there fast. Earlier coverage is available here and here. Also, read my interview with its CEO, Lars Dalgaard.

SuccessFactors (SFSF) on May 8 announced a strong first quarter that surpassed analyst expectations. Revenue grew 89% y-o-y and 22% q-o-q to $23.5 million beating analyst estimate of $20.8 million. Net loss per share was $0.37, compared to $1.11 in Q4. Non-GAAP net loss was $0.34 versus analyst estimate of $0.42.

It added 200 new customers in the quarter (much less than 350 in Q4), taking its total customers to 1950, up from 1750 in Q4 and up 94% from 1003 in Q1 2007. Customer retention rates continued to exceed 90%.

Deferred revenue was $112.8 million, up 99% y-o-y and 12% q-o-q. Non-GAAP gross margin improved to 61% from 53% in Q4 with savings of about $8 million. Non-GAAP operating margin was (77%), down from (109%) in Q4.

For Q2, SFSF expects revenue between $24 and $25 million. Non-GAAP net loss is expected between $0.39 and $0.41 per share. For the full year 2008, it raised its revenue guidance to $104 million to $106 million from the earlier guidance of $101 million to $103 million. Non-GAAP net loss is expected between $1.55 and $1.59, revised from $1.63 to $1.67.

Just two days back, SFSF filed a registration statement for offering 7.5 million shares, of which the company is selling 2.5 million. It is currently trading around $11, recovering from its 52-week low of $7.40 on March 3. Its market cap at around $594 million is higher than Taleo’s.

Overall, I am very bullish about the talent management sector, and both Taleo and Successfactors are excellent companies with strong management teams. As you can see from the growth rates, there is tremendous appetite for their solutions in the market, and the SaaS business model is a winner.

Another interesting directional observation is that just this week, IBM Global Services announced a partnership with SuccessFactors to roll-out talent management to their large corporate customers. This tells me that the nascent sector is fast gaining legitimacy, and the consulting and system integrator firms will all get behind it soon.

All this point to a sector that I would personally invest in.