Talent Management Leans Toward Learning

The year 2010 saw a great deal of M&A activity in the talent management sector as Taleo (NASDAQ:TLEO) acquired Learn.com; SuccessFactors (NASDAQ:SFSF) acquired CubeTree, Inform, and YouCalc; and Kennexa acquired Salary.com. That trend looks set to continue this year: Taleo already announced an acquisition and Learn.com’s rival GeoLearning was acquired by talent management vendor SumTotal Systems. GeoLearning was a close partner for SuccessFactors, and this acquisition forces the latter to consider an acquisition in the space.

Jeff Freyermuth on Gartner says of the acquisition:

“GeoLearning’s partnership with talent management provider SuccessFactors will wind down after the acquisition, because SumTotal offers its own talent management products…SumTotal’s purchase concludes a brief phase of dramatic changes for the newer SaaS learning providers in the relatively mature CLS market. Cornerstone OnDemand filed its S1 at the end of September 2010 with plans of an IPO in the coming months; Taleo bought Learn.com in October 2010; and now GeoLearning has been acquired by SumTotal. But further acquisitions may occur as the CLS market merges with other human resource management vendors. SuccessFactors, now left without its CLS partner, may act to retain a presence in this space.”

Saba and Plateau are the other leading  companies in the corporate learning systems space and could also be acquisition prospects. We recently covered another player, Lattitude Learning, in our 1M/1M Deal Radar series. Its revenue is in the range of $5 million to $10 million. Learning management systems (LMS) represent an $860 million market, made up of more than 60 different providers. Approximately 40% of U.S. training organizations reported that they have an LMS installed. The small business market offers the greatest opportunity for growth, as only 36% of these companies are using an LMS.

SuccessFactors’ Financials
SuccessFactors recently reported non-GAAP fourth quarter revenue of $61.7 million, up 36% y-o-y and 15% q-o-q. On a GAAP basis, net loss widened to $4.1 million, or $0.05 per share, from a loss of $2.7 million, or $0.04 per share, last year. On a non-GAAP basis, net income was $0.262 million or $0.00 per share compared with net income of $0.339 million or $0.01 per share last year. Analysts expected breakeven earnings on revenue of $55.9 million.

Gross margin declined to 70.6% from 76.2% as expenses increased 40% to $47.0 million. Sales and marketing expenses increased 38% to $29.5 million while research and development expenses increased about 89% to $12.2 million. SuccessFactors ended the quarter with cash, cash equivalents and marketable securities at $356.5 million.

The company said higher costs from three of its acquisitions, CubeTree, Inform, and YouCalc, also contributed to the wider losses in the fourth quarter. However, these acquisitions also helped the company to expand its product line by offering applications for social networking, workplace analytics, and an integrated calculator feature and gain market share.

For the fourth quarter, SuccessFactors showed higher billings of $88.5 million, up 41%. Lars Dalgaard, SuccessFactors’ founder and CEO, said that this could be an indication of both a positive reception of new products and a general surge in billings across the industry.

For the full year 2010, non-GAAP revenue was $209.4 million, up 37% from $153.1 million in 2009. On a GAAP basis, net loss was $12.5 million or $0.17 per share compared to a loss of $12.6 million or $0.21 per share in 2009.  Non-GAAP net income was $5.313 million or $0.07 per share compared to a loss of $2.217 million or $0.04 per share in 2009. The company had earlier forecast non-GAAP EPS of $0.06 of $0.07 on 2010 revenue of $203.2 to $203.7 million.

For the first quarter, SuccessFactors expects to break even on non-GAAP revenue of $62.5 million to $63.5 million. For the full year, the company expects to break even on non-GAAP revenue of $265 million to $270 million. Analysts expect a first-quarter profit of $0.01 per share on revenue of $58.7 million, and a full-year profit of $0.10 per share on revenue of $254.6 million.
SuccessFactors is trading around $36.44 with market cap of about $2.77 billion. It hit a 52-week high of $37.69 on February 18.

Taleo’s Financials
Taleo recently reported fourth quarter revenue of $67.2 million, up 33% y-o-y, driven by a 24% increase in application revenue. Net loss was $0.62 million or $0.02 per share compared to net income of $4.6 million or $0.13 per share last year. Non-GAAP net income was $9.76 million or $0.24 per share compared to non-GAAP net income of $8.6 million or $0.25 per share last year.

For the full year 2010, revenue was $237.3 million, up 20%. Net income was $0.42 million or $0.01 per share compared to income of $1.3 million or $0.04 per share in 2009.

Taleo signed 304 new customers in the quarter and closed 16 new large enterprise deals with annual contract values in excess of $250,000. Cash flow from operations was $35.8 million, and the company ended the quarter with total cash of $141.6 million, a decrease of $102.6 million from the prior year. This total includes approximately $137.5 million in net outflow from Taleo’s acquisitions of Worldwide Compensation and Learn.com in 2010.

Taleo recently announced its plans to acquire Cytiva, a leading mid-market provider of on-demand recruiting software solutions, for approximately $11 million Canadian dollars in cash. Cytiva has grown over 30% in the past three years and has close to 300 customers, and Taleo expects this acquisition to strengthen its position in the recruitment space.

Taleo is trading around $33.26 with market cap of about $1.34 billion. It hit a 52-week high of $34.05 on February 10.

According to Claire Schooley in a Forrester Research report, The Four Pillars of Talent Management, published in 2010, there is trend to provide end-to-end talent management solutions, and recruitment, LMS, performance, and compensation form the four pillars of talent management.

Taleo’s recent acquisition has filled its gap in recruiting and LMS, while LMS is the only remaining gap in SuccessFactors’ portfolio now that the company has acquired GeoLearning.