Salary.com: Where every day is payday
Are you being paid as much as the person in the next cubicle over? Or if you’re a business owner, what sort of compensation package should you offer to hold onto employees while remaining competitive with that company down the street?
Salary.com Inc. (Nasdaq: SLRY) can tell you. The Waltham, Mass., company, which held its initial public stock offering in February, calls itself “the market leader in on-demand compensation management software.” Fortune 500 clients include Wal-Mart Stores Inc. (NYSE: WMT), Home Depot Inc. (NYSE: HD), UPS Inc. (NYSE: UPS) and Cisco Systems Inc. (Nasdaq: CSCO).
Founded in 1999, Salary.com does have one big thing in its favor – solid brand awareness. In addition to the serious business of selling its software and services to companies big and small, Salary.com is better known for its public Web portal where anyone can check out how their paycheck stacks up to various averages. And some well-timed press releases have brought plenty of attention to the company’s services: the amount of each workday wasted in America (close to 20%), or the true value of a working mother to a household, compared with a stay-at-home mom ($138,095 this year) released before Mother’s Day.
While the IPO’s proceeds exceeded $51 million, Salary.com isn’t making money, and likely won’t be for at least a few years. Yet at least five analysts who cover the company continue to maintain a favorable view – three have it at “buy,” with two rating it a “strong buy.”
Kent Plunkett, the chief executive officer and Salary.com founder, has been explaining the company’s rationale during recent presentations and on analysts’ conference calls by saying something like this, from the May 15 conference call covering fiscal 2007:
“So, why then is a company about managing pay important? There’s really a couple of things to consider. Everybody gets paid. Everybody thinks about pay. … Pay is important to companies because, simply put, all companies pay people.”
Simple philosophy, true, but in posting losses as a public company, investors must seek the answer to whether it’s time to put money in Salary.com stock. The answer to that is not quite so simple.
For the quarter ended June 30, revenue increased 46% to $7.5 million from the year-ago period, and was up 18% from the previous quarter, for the company’s 25th quarter of revenue growth. Cash flow from operations was $1.6 million, but the net loss attributable to shareholders was $1.4 million, or $0.10 a share, compared with a net loss of $963,000, or $0.20, in the first quarter of fiscal 2007 the year before. On a non-GAAP basis, which takes out non-cash charges, the loss was $556,196, or $0.04, compared with a year-ago loss of $537,577, or $0.11.
In its first report as a public company, for its 2007 fiscal year, Salary.com reported revenue increased 51% to $23 million from the previous fiscal year. Still, the net loss to shareholders was $8.6 million, more than double the $3.6 million loss in fiscal 2006, on a GAAP basis. That triggered a 12% one-day drop in share price.
The February 15 IPO can be termed a success, after a $10.50 pricing that was above the $8-10 expected range. Shares closed on the first day up 19% at $12.50, and other than a few days in June when it slipped below that offering price, the stock has stayed positive, going as high as $14.40 on August 3.
In a March 13 story in The Wall Street Journal, chief financial officer Ken Goldman said profitability wasn’t a major factor behind the decision of when to hold a stock offering. “We could’ve waited a year or two until we were larger before going IPO, but we might’ve missed the market opportunity because IPO windows open and close.”
Salary.com is trying to take a big share of what it estimates is a $2 billion market in the United States for compensation management. Instead of an offline, old-world style of spreadsheets on paper, Salary.com wants to convert businesses to an online data service – a sector that’s growing 19% a year.
Since the IPO, the company has announced two acquisitions. When it released its fiscal 2007 report on May 15, it also said it was spending $10 million for ICR Limited and ICR International Ltd., which provide specialty compensation data in the United States and 70 other countries. It quickly closed in early August on a $2 million cash-and-stock deal for ITG Competency Group, a pioneer in competency management services.
Analysts covering Salary.com apparently still like what they see and hear from company executives. The average stock price target is $18, according to Thomson Financial data. On Friday, shares closed at $12.00.
Following the July 31 financial report, analyst Richard Davis of Needham & Co. upped his price target to $16 from $15, while reiterating a buy rating. He had initiated coverage in March with a buy rating and $14 target.
In early June, Brendan Barnicle of Pacific Crest Securities said a weakness in share price at almost $1 below the $10.50 IPO price represented a buying opportunity. “Pacific Crest believes the company’s proprietary compensation data provides a unique long-term advantage,” he wrote to clients. He had initiated coverage on March 27 with an outperform rating and a $21 target.
Also on March 27, Salary.com picked up some positive initial coverage from three other analysts. Tom Roderick of Thomas Weisel Partners gave it an overweight and a $15.50 fair value for shares, “given the company’s subscription software model and visible revenue and cash-flow growth.” Philip Rueppel of Wachovia Capital Markets started the company at outperform and a $13-15 price range, saying he projects near-term annual revenue growth above 25% as Salary.com expands it product mix and market penetration. William Blair & Co.’s Laura Lederman started coverage at outperform, saying, “We expect Salary.com to post strong sales growth of 34% over the next four years.”
But investors might have to remain patient before they see a return on their investment. So when will Salary.com turn a profit? During an August 9 presentation at the Canaccord Adams 27th annual Global Growth Conference in Boston, CEO Plunkett noted that the company has been cash flow positive since 2004, reiterating the previous outlook that Salary.com is predicting profitability in three to five years.
The company’s guidance for the current quarter calls for a loss in the range of $2.3 million to $2.7 million, on revenue in the range of $7.7 million to $8.1 million, excluding the recently announced deal for ITG. For fiscal 2008 ending next March, Salary.com is looking for revenue of $33.7 million to $34.9 million, including a contribution of $200,000 to $400,000 from ITG. The full-year loss is expected to fall in the range of $8.8 million to $9.2 million, with cash flow of $7.8 million to $8.2 million.
Salary.com does have brand recognition, but it’s also gaining competitors, both in software management and as a Web portal. Still-private PayScale.com said in July that it had raised nearly $9 million in venture capital, and the website expects to become profitable next year. That’s a quicker payday than Salary.com’s shareholders are likely to see.
Note: Salary.com is in the portfolio of Rising Star Stocks, an independent investment advisory published by Business Financial Publishing LLC, the owner of SmallCapInvestor.com. Salary.com was added to the Rising Star Stocks selection of growth stocks on May 21, at a price of $11.04 per share.
