SuccessFactors (SFSF) To Benefit Greatly From Downsizing In H.R. Departments, According To Industry Expert
March 12, 2010 - The Wall Street Transcript has just published Business & Application Software Report offering a timely review of the Multimedia Software sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Sasa Zorovic is a Managing Director of software research with Janney Montgomery Scott LLC. He was previously an Analyst for Goldman Sachs and Oppenheimer & Co. Mr. Zorovic holds a bachelor's degree from Harvard University, and a Ph.D. and MBA from Stanford.
TWST: In your SuccessFactors report, you wrote growth and spending would be the priority this year, as well as for the other software-as-a-service companies. Where do you expect the companies you follow to put those dollars? What will growth be like?
Mr. Zorovic: SuccessFactors (SFSF) as well as a couple of other companies, of course say that human resources or capital management. The human capital manager or human resources software sector, what they are benefiting from in that sense is a couple of trends. Number one is that a lot of the HR departments were experiencing a fair bit of layoffs during this downturn. So you are having smaller teams in HR departments still being asked to do the same amount of work that they had to do before, just with fewer people.
And so what they are opting to do is they are relying more on technology to help them out, and that's one of the reasons SuccessFactors as well as some other companies are benefiting as a result. For them, they are actually seeing a fair bit of a demand return. And we are hearing that loud and clear from their customers, prospective customers as well as some of their partners. Obviously, that was evident during the quarter. They just reported their fourth-quarter results and clearly their bookings were very strong, indicating that the backlog of business continues to build up quite nicely.
TWST: In which customer end markets do you see the biggest opportunities for the companies you cover?
Mr. Zorovic: What I would say is for the time being, it's more large companies that seem to be buying rather than smaller companies. We're hearing that loud and clear. Secondly, we're not really hearing that much difference in terms of end markets, meaning verticals. So we're hearing about the same amount buying roughly from the health care vertical, or from manufacturing or financial institutions and so forth - very different from when we were going into this last downturn back in 2008. So it was first the financial vertical and then it was kind of spreading out to one after another. And this time it seems to be relatively broad, at least what we're hearing at this point. So who benefits from that the most are the companies that have the biggest exposure to the large companies, so selling the most to the large companies.
Companies in our coverage that sell most to the large companies would be Salesforce.com, RightNow (RNOW), SuccessFactors and Taleo (TLEO). The companies that have more exposure to the smaller companies, such as NetSuite (N), for instance, would be the opposite of that. Also companies that have the greatest exposure to either North America or fast-growing Asia should be benefiting the most. So again, most software-as-a-services companies that by far collect the largest majority of their revenue domestically are the ones to benefit the most because that's where we're really seeing the most of the IT spending growth return. Obviously, exposure to Europe is the one that is mostly a drag. Similarly, depending on what's happening to the dollar, that's important to most of the mature software companies. So the largest software companies, like an Adobe or an Autodesk or a Parametric, that are deriving more than 50% of their revenue from abroad and obviously Europe, where they get most of their revenues. So how the euro tends to perform has big swing on them.
TWST: If you were buying today, what two or three names would you buy in this space?
Mr. Zorovic: For growth investors, our two names are RightNow as well as Taleo, specifically on the smaller-cap side. For larger-cap growth investors, we focus on Adobe and Intuit (INTU). For value investors, our top picks are CDC Software as well as Internet Capital Group (ICGE).
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