by Will Ashworth | May 20, 2013 12:25 pm
Ever heard of HCM? The acronym stands for “human capital management” — a subset of HR which usually refers to the process of acquiring, training, managing, and retaining employees in a given organization.
In order to make this process more efficient, software companies have developed all kinds of applications to sell to Fortune 500 companies (and many much smaller). Especially hot, unsurprisingly, are those in the cloud.
One illustrative example is Taleo, which was sold to Oracle (ORCL[1]) for $1.9 billion last year. Yes, Larry Ellison paid almost $2 billion for a user experience that most job seekers would equate to getting a root canal.
Of course, since then, others have jumped into the fray. Let’s take a look at three companies that are making big moves in the HCM arena … and whose stocks have been climbing.
Workday (WDAY[2]) is a California-based company that went public last October. It gained almost 75% in its first day of trading and has tacked on over 40% more since.
So what’s Workday doing to see such gains? Well, go to the Human Capital Management page on its website and check out its list of customers[3]. These big-name companies evaluate vast amounts of information across different business segments and geographic regions … and applications that make this process simpler and more efficient are critical to their success.
Workday does just that by providing cloud-based, software-as-a-service. It allows employees to access timely data from almost anywhere in the world.
Workday now has over 400 customers — most of them large enterprises. It’s also been growing revenue impressively. In fiscal 2013, sales jumped 104% to $274 million. Unfortunately, the company also generated a non-GAAP operating loss of $91 million — 23% higher than in 2012.
Combing through its Q4 and year-end numbers, the best news besides its growth in customers and revenues is that Workday generated operating cash flow of $11.2 million — a 181% increase year-over-year. Plus, with $790 million in cash and marketable securities, the company’s got plenty for the next few years.
Currently, Workday spends about $800,000 to acquire a new customer which then generates $740,000 in annual revenue. As it becomes better known, the gap between these two numbers will close and then reverse themselves. At that point, it should be making money.
Still, for now, Workday is trading at almost 41 times sales. Its enterprise value is $10.5 billion for just $274 million in revenue. While it’s products are well-regarded, you really have to believe in the future of cloud-based HCM in order to justify buying near $70.
The Ultimate Software Group (ULTI[4]) has been in this business for over two decades. Its Ultipro enterprise solution is geared to companies with more than 1,000 employees, while its workplace solution is for companies with less then that. At the end of 2012, it had approximately 2,500 customers. That means 11% market share for businesses with more than 1,000 employees and 3% for smaller ones.
With 2012 revenue of $332 million, it generates approximately $133,000 per customer — significantly less than Workday. Still, while ULTI’s not making as much per customer or growing nearly as fast as WDAY, it is making money, which is always a good thing. This past year it made 52 cents per share compared to a loss of $1.62 per share for Workday.
And in the past five years ULTI has averaged revenue growth of 17% and operating cash flow growth of almost 8%. Neither is spectacular, but when you consider that it’s increased its revenue year-over-year in each of the last 10 years using very little debt, it’s achieved what you could call “controlled” growth.
Heck, for those brave enough to have bought its stock at the March 2009 bottom, it’s up around 800%. And can it continue? Well, its non-GAAP operating margin in Q1 2013 was 16% — 800 basis points higher than a year earlier with revenues that grew 25%.
Absolutely it can keep going.
Like the other two before it, Concur Technologies (CNQR[5]) is pushing through a 52-week high. Interestingly, all three are up around 20%-25%, beating the broader market. The difference, though is that Concur doesn’t compete in HCM per se. Instead, it helps companies of all sizes keep track of their travel and other expenses … allowing them to control costs, save time and boost productivity by streamlining the expense management process.
On a non-GAAP basis, CNQR expects revenues to grow 23% in 2013 with an operating margin between 16% and 19%. And by almost every metric, Concur and Ultimate are valued equally. Each has an enterprise value of nine times revenue, for one.
Although travel and expense management is an important part of any business, I think human capital management is even more important. Therefore, I’d have a hard time picking Concur over one of the others.
Workday has a very popular product and is in the early stages of its growth. On the other hand, The Ultimate Software Group is much more mature but still growing … as is Concur Technologies.
If I had to choose one, it would definitely be Ultimate Software. Its large and growing customer base provides greater protection against any industry downturns than a hot newcomer like Workday.
A second possibility is to buy the Cloud Computing portfolio[6] available through Motif Investing[7]. It has no management fees, while you get all three companies and a whole bunch more.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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