Small Cap Values

So if your CEO steps down suddenly and the stock rallies 5%, what does that mean the market thought of the outgoing CEO?

Exactly.

Whether it was being poorly received while presenting at the HR Tech Shootout or his aggressive compensation (which continued with his severance package), I don’t think the market thinks he’s the man to lead Salary.com to the next level.  Which is a little saddening since he’s the man who founded the company and built it to where it is today.

So what does it mean that he stepped down so suddenly?  There was nothing on the recent earnings call that implied he would be leaving.  The press release pointed out the 35 straight quarters of revenue growth, if that was coming to an end, they probably wouldn’t mention it.  There were no disagreements (according to the 8-k) and he’s staying on as Chairman of the Board of Directors, so they didn’t want to completely get rid of him…

It’s definitely a strange situation, and I’ll be interested to see who they get to replace him.  Paul Daoust, the interim CEO while they search for a successor, appears like he would make a very good replacement, however part of me wonders if they’ll need to name a permanent CEO.  In my research I got the impression that Kent, in his role as founder of the company, couldn’t let his “baby” be sold to someone else.  So maybe they’ve been approached and he doesn’t want to be involved.  Of course, this is usually territory for the BOD and not the CEO, so staying on the Board wouldn’t make sense.  Not to mention his change in control agreement would have provided even more than the separation agreement did.

But back to that separation agreement.  It basically provides what his employment agreement says he is due if he is terminated without cause by the company or he resigns for good reason.  Looking at what constitutes good reason, about the only think that applies is if the company wanted to demote him and he refused.

So something doesn’t seem right;  either he was going to be fired and wanted to resign instead, or the company is just being nice with shareholder funds.  Plunkett receives a golden parachute consisting of a cash payment of $925k (or about 2% of the market value of the company), his pro-rated bonus for Fiscal 2010 of $148k, and immediate vesting of 191,250 (my count) unvested restricted stock worth $478k at $2.50/share.  Add all this up, and it’s over $1.5m. Not bad for a company with $45m in revenue.

Disclosure: Long SLRY.

Last week, Salary.com reported Q3 2010 earnings.  It was the 35th consecutive quarter of revenue growth.  Overall, the results were acceptable, not great, but not horrible either.  Advertising revenue declined, as expected, and subscription revenue was higher. They continue with 90% retention rates (when you look at revenue, they are signing larger customers so smaller ones are leaving are more than offset by the larger ones).

They had great news for sequential growth, in that the level of activity was picking up, and December was a great quarter for the company.  Comp data remains soft, however software is very strong (they said on the call the were seeing 30% declines in the comp data, which they did not see last recession because they were so small and growing faster — a 33% decline means customers are only buying data every third year).  They had 4 deals over $250k in the quarter, including one over $500k with Sallie Mae and a $350k win with a global gaming company.

The one big flag in the quarter was the loss of a large payroll client.  This caused a large increase in receivables.  Unfortunately they didn’t provide a lot of details as they were advised against it for legal reasons.  I can only speculate, however the initial thought that comes to mind is they may try to reduce the Genesis purchase price or recover some cash from the sellers as the loss of this deal materially negatively changed the value of Genesis.

They provided guidance for Q4 revenue of $11-$12m, which seems quite wide and puts them in danger of ending the quarterly sequential revenue growth string of almost 9 years.

On the call, management stated, “People look to us as the best in the world on compensation.  Deals start with compensation.”  This is the thesis behind my owning the shares, it’s good to realize that management still believes that as well.

The good news is that software is still growing over 30%, retention is over 90% on revenue, and when the job market improves, SLRY should see a large portion of their business come back very strong.  They don’t provide a revenue breakdown, but even a 30% growth rate on $5m in quarterly comp data revenue would be $1.5m per quarter in revenue, and with SLRY’s business model, most of that will flow to operating earnings.

Disclosure: Long SLRY.

SEC FORM 4.

Pursuant to the pre-determined trading plan, Salary.com CEO and largest shareholder Kent Plunkett purchased 2000 more shares on the open market.  He has done at the beginning of the month since March.

So for those of you keeping tack at home, that’s equivalent to 24,000 share per year or about $72,000 at $3 per share.  Impressive!  Ok, so not really impressive.  It’s basically pocket change, if he really had conviction that the shares were undervalued, then I suspect he would be buying more than 2k shares per month.

And maybe he would if not for the fact that he’s given so many shares, why is there any need to buy them himself?  On October 15th, Salary.com gave out ~315k shares (about 2% of the company) to 12 insiders and directors.  120k of these shares, or about 38%, went to a single person, that being Mr. Plunkett.  Clearly he doesn’t want to dilute his own ownership (as he shouldn’t!), I just wish he’d go about it differently — like by not issuing so many shares instead of grabbing more himself.

I had hoped that with the addition of William Martin to the board of directors, they might rein in dilution, however that does not appear to be the case…

Salary.com reports tonight, we’ll see if anyone asks him about it.

Disclosure: Long SLRY.

The HR Capitalist: HR Tech Rundown: Observations on the Talent Management Shootout from the Capitalist….

Details are available at the above blog.  I’m starting to see the benefit of twitter as I found that post by searching for #HRtechconf on twitter.com.

But, for some background, the HR Tech Conference has a contest between vendors, in real time, where attendees vote for who has the best software.  Here’s the details from http://www.hrtechnologyconference.com:

Our 13th Shootout – and signature event – will be an epic software battle now that two ERPs – Lawson and SAP – have agreed to go up against two Talent Management suite vendors – Plateau and Salary.com. For years, the smaller suite vendors have sold new customers by contending the ERPs’ applications for Talent Management are not as functionally rich or as integrated as theirs. While at the same time, ERPs like SAP and Lawson have been furiously building out and integrating their applications to meet that challenge. Now you can finally find out who was right, at least among these four. Each vendor will tackle a scripted scenario of problems – like those your managers and employees face every day – and show in live custom demonstrations how their software can help solve it. Leighanne Levensaler, Director of Talent Management Research for Bersin & Associates, will co-author the script, as she did the previous three. This one session will save you months of research and sales pitches. Come watch, listen, learn and then vote for your favorite.

I bolded that sentence, but seriously, winning this thing has to be a pretty big deal.  There were 3 scenarios  (individual performance, merit distribution and succession planning) and each segment was won by Salary.com.  The above blogger seems to think that Salary.com won despite a poor presenter, so that speaks even more for the quality of the product.

Note that this is a talent management product, not a compensation product, so this is quite impressive for Salary.com.  Hopefully many of the attendees will sign up for the Salary.com solution!

I wanted to point out a few other “tweets” from #HRTechConf that referenced salary.com:

kris_dunn Salary.com – had no idea they had all that under the hood….

kris_dunn Interested to know the cost of the salary.com solution vs the big boys. Lots of stuff…

@wiseconsulting Salary.com kicks major butt at the shoot out. Should have won it last year too. Congrats!

johnsumser Salary.comwins the Talent Management Shootout at #HRTechconf. Amazing. Inflection point.

ronhanscome #hrtechconf Note to all vendors: Screens are small with lots of text for viewers, only Salary.com solved this with cool ‘zoom-in’ capability

stelzner Hate to focus on this but Salary.com UI is also a bit lacking

karenbeaman Salary.com needs to change their name. [3 people "retweeted" this and agreed]

So overall, I think the conference was quite positive for Salary.com.  What’s not so positive for the share price is the second largest holder, Kinderhook Partners, filed last Friday and they have been selling their shares over the past month.  They’ve unloaded about 200k shares; if they continue to sell it could hold the share price down for a long time.  They seem to not sell below $3, however, so it doesn’t appear like they’ll drive the price down with their selling.

Disclosure: Long SLRY.

Two quick updates on Salary.com – first on their last earnings report and secondly on the recent trading volume.

Salary.com reported Q109 Earnings back in August, and they were slightly better than I had been expecting.  It was their 33rd straight quarter of sequential revenue growth and they managed to be operating (and free) cash flow positive a quarter sooner than I had been expecting.

What surprised me most was that strength in the quarter came from Advertising revenue, as it increased to $913k, an increase of 18% from Q4 and 46% from last year.  Management attributed the strength to redesigning some aspects of the home page which now require multiple page loads which shows more ads to the same number of people.

The one potential negative was that subscription revenue declined from the prior quarter, the first time that’s happened.  This continues a trend that started in Q3 last year, and is definitely something to watch.  Management claims that this is simply a timing issue with some deals delayed and not being able to recognize support/installation revenue associated with those deals, so if this is the case, it should bounce back rather nicely next quarter.  This is something I’ll be watching.

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Acquisition Outlook: Intuit, ADP | Sramana Mitra on Strategy.

Blogger, Author, and Forbes Columnist Sramana Mitra suggests that Salary.com could be a good fit for ADP.   I agree with this since ADP and Salary.com already have a partnership where ADP resells SLRY’s products.  According to the last SLRY conference call, the partnership was expanded and moved out of “beta” so more ADP sales people will be involved.  Apparently only a handful of ADP sales people sold SLRY’s products to over 100 new customers during the June Quarter.

Disclosure: Long SLRY.

SEC filing.

William Martin, head of Raging Capital Managment, was named to Salary.com’s board of directors.  This should come as no surprise as he’s one of the disgrunteled holders who was making noise about having board members who actually owned shares.

What is a surprise is he’s been trimming his shares as the stock got over $3.  Not a huge amount, and he was buying under $2 last month, but still surprising that he would sell anything at $3 considering he paid an average of $3.89 for his shares.  Not that the price you pay matters, but when he was paying that much, he thought the stock was worth more, and now he’s selling at less.  Maybe he’s just acting as a market maker as he was selling into the incredible run up it had.

Disclosure: Long SLRY.

Salary.com reported their 32nd consecutive quarter of sequential revenue growth.  Now this would be more impressive if acquisitions weren’t required for this to happen, but it’s still pretty impressive regardless.  Bookings were up a nice 17.5% yoy despite the poor economic climate.

Unfortunately, something is wrong with my Salary.com spreadsheet.  I think some formulas broke when I switched from full dollars to thousands.  So the bottom line is I don’t think the story has changed, but for now, all I’ve got are my notes from the call:

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