Sector Watch: On-demand software
Small and medium-sized businesses are increasingly turning to on-demand software downloaded from the Internet as an effective way to reduce IT spending; Salary.com, Inc. (Nasdaq: SLRY) and Taleo Corporation (Nasdaq: TLEO) are two leading providers that are reaping the benefits of the growing software need.
Gartner, a research firm, expects sales of on-demand software to grow to $11.5 billion by 2011 from $5.1 billion this year. That growth outlook is three to four times higher than projections for conventional business software. The advantages of on-demand software are that it is relatively inexpensive to implement and easily integrated with packaged software already in place. On-demand software is widely deployed in payroll, merchant services, human resources and customer relationship management applications.
Salary.com provides on-demand compensation software that helps small businesses manage payroll and reduce employee turnover while avoiding significant investments in hardware and IT staffing.
Salary.com software is integrated with a proprietary compensation database that lists market pricing for over 3,000 positions across numerous industries.
The company has more than 4,500 customers that include well-known names such as The Home Depot, Inc. (NYSE: HD), Honeywell International, Inc. (NYSE: HON), Covad Communications Group, Inc. (AMEX: DVW) and the New York Stock Exchange. Customers pay annual subscriptions fees ranging from approximately $2,000 to $100,000.
An emerging leader in the on-demand compensation software market, Salary.com receives over two million visitors per month to its website. During this year’s September quarter, Salary.com recorded 56% year-over-year revenue growth and its 26th consecutive quarter of rising revenues. In addition, 369 net new customers were added during the September quarter and enterprise subscriptions were 21% higher than the June quarter.
Salary.com recently introduced a product upgrade, CompAnalyst, featuring an intuitive Web 2.0 interface, and more advanced functionality and pay analytic capabilities, expected to fuel additional revenue growth.
During the first six months of fiscal 2008, Salary.com’s revenues climbed 51% year-over-year to $16 million from $10.6 million, but net losses were higher at $3.9 million, or $0.29 per share, versus $2.2 million, or $0.46 per share, one year earlier due to higher sales and marketing and research and development expense. The company forecasts a 50% increase in full-year fiscal 2008 revenues to a range of $34.6 million to $35.4 million.
Analysts look for Salary.com to produce 47% growth and improved profitability next year and generate 23% annual growth over the longer-term. My $18 price target for Salary.com is higher than the current share price of $13.25 at Tuesday’s close. The stock has ranged between $9.67 and $16.32 over the last 52 weeks.
Another leader in the on-demand software sector is Taleo Corporation, a provider of on-demand software for employee recruiting, screening and tracking. Its software helps businesses manage a variety of staffing types, including professional, hourly, traditional, contingent and project-based workers. The company markets its software directly and through strategic partnerships with human resources outsourcing providers.
More than one million users have relied on Taleo software to process 71 million job candidates from over 100 countries. The small cap has approximately 1,380 customers, including large enterprises such as Abercrombie & Fitch Co. (NYSE: ANF), LM Ericsson Telephone and Tesoro Corporation (NYSE: TSO) and 35 of the Fortune 500 companies. As a testament to the company’s growth, over 200 new customers were added in this year’s September quarter.
Taleo is particularly strong in the small- to-medium-size business (SMB) market; it currently has approximately 1,000 SMB customers and estimates the sales potential of this market at 226,000 customers and their value at $1.4 billion. During the first nine months of 2007, Taleo Corp. increased revenues 34% year-over-year to $93.4 million from $70.5 million and increased net income to $1.4 million or $0.06 per share from a net loss of $3.2 million, or $0.16 per share, for the same period one year ago. The company has increased its full-year 2007 revenue guidance to a $127 million range from a $124 million range and targets 30% growth and profitability in 2007.
More recently, Taleo announced a strategic alliance with Paychex, Inc. (Nasdaq: PAYX), a leading provider of payroll and administrative human resources services, whereby Paychex will market Taleo’s online recruiting and hiring tools to Paychex customers. In addition, Taleo Corp. is partnering with AIRS, a leader in recruitment training, technology and outsourcing, to launch Taleo TalentReach, a CRM and sourcing tool that will enable businesses to more effectively source talent by giving them access to millions of passive candidates.
Analysts estimate Taleo will generate 40% growth next year and 20% annual growth over the next five years. My $35 price target for Taleo (TLEO) is above the current share price of $26.51 at Tuesday’s close. Over the last 52 weeks, shares have ranged between $11.94 and $32.41.
