Sector Watch: Sales management software
Last year, U.S. employers spent approximately $7.5 trillion on labor, which represented approximately 56% of total U.S. GDP, according to the Bureau of Economic Analysis.
While many businesses have implemented software for systematizing best practices in enterprise resource planning, customer relationship management and supply chain management, few have brought this level of sophistication to their human resource areas.
Companies generally limit the use of their HR information systems to compiling basic employee information for payroll and benefits purposes, or rudimentary applicant tracking systems. Competition for qualified employees is intensifying though, as baby boomers retire, the U.S. economy becomes more service-oriented and the overall job market strengthens. As a result more companies are beginning to systemize best practices for employee hiring and sales incentives and are purchasing software to assist with this effort.
Callidus Software, Inc. (Nasdaq: CALD) and Kenexa Corporation (Nasdaq: KNXA) are two small caps that offer software and services that help businesses improve employee recruiting and employee sales incentive plans.
Kenexa Corporation provides software and services for recruiting and retaining employees. The company’s software solutions include automated applicant tracking systems for streamlining the recruiting process, and assessment software for ensuring job candidates have the skills, personality and experience necessary for their positions. Kenexa also provides employee performance management tools for automating career tracking activities, designing and administering employee surveys and implementing mentoring programs.
Kenexa’s software addresses the ineffectiveness of current hiring practices, including:
• Inefficiency – Many organizations rely on paper-based processes and can’t effectively manage the large number of applicants presented by today’s recruiting resources.
• Redundancy – Few companies maintain easily searchable databases of processed candidates. As a result, hiring searches are often redundant.
• Ineffectiveness – Hiring decisions are frequently based on subjective criteria and can’t match candidates with positions that leverage their unique experience.
• Inconsistency – Inconsistent hiring practices make recruiting programs less effective and expose the company to potential lawsuits.
• High cost – Organizations must either maintain large HR departments or purchase third-party services to meet their recruiting goals.
Kenexa added 40 new “preferred partner” customers (customers who spend more than $50,000 annually) during the June quarter, increased annual revenues from its top 80 customers by nearly 40% to more than $1.1 million, and acquired StraightSource, a leading provider of recruitment outsourcing services to Fortune 500 companies. During the first six months of 2007, Kenexa’s revenues grew 83% year-over-year to $87.4 million from $47.7 million. Net income rose 60% year-over-year to $10.5 million, or $0.43 per share, from $6.6 million, or $0.34 per share. Kenexa targets full-year EPS at between $1.18 and $1.25, up at least 23% from 2006. Analysts forecast this company will produce 30% growth next year and 25% annual growth over the next five years. My $50 price target for Kenexa is 60% above the recent share price.
Shares of Kenexa closed at $32.13 on Tuesday. Over the last 52 weeks, shares have ranged between $25.58 and $42.44.
Callidus Software is a leading provider of Sales Performance Management (SPM) and Enterprise Incentive Management (EIM) software that allows companies to manage incentive payments to employees, distributors, brokers and channel partners. Its customers include six of the 10 largest U.S. banks, three of the five largest telecommunications companies and five of the 12 largest U.S. insurance carriers. Over 1.7 million salespeople, brokers and others have their sales performance managed by Callidus Software.
Sales incentive management software, the industry in which Calidus participates,,grew 15% last year and research firm Evaluserve expects it to grow 30% annually through 2010. Companies deploy this software to improve their processes for defining and tracking sales rewards (specifically commissions and bonuses).
The opportunity is significant: only 5% of sales organizations have already deployed sales incentive management software and Gartner Group estimates that vendors of this software collectively captured $250 million in revenues last year. Key factors driving demand for sales incentive management software include low market penetration, the migration of large companies from outdated or custom-built software, the need for improvements in compensation support and the software’s ability to reduce costs and improve efficiencies.
During the first six months of 2007, Callidus’ revenues increased 48% year-over-year to $51.4 million from $34.6 million. Net losses declined to $6.2 million, or $0.22 per share, from $6.3 million, or $0.23 per share. Significant ongoing investments in new products and in creating a sales and marketing infrastructure are the reasons for the net losses.
Shares of Callidus closed at $9 on Tuesday. Over the last 52 weeks, share have ranged from $4.76 to $10.11. Analysts anticipate this company will turn profitable and double its revenue next year. Longer-term growth is forecasted at 23% annually. My $15 price target for Callidus is 75% above the current share price.
