March 19, 2007, 6:25 am

SLRY

As SLRY has drifted back to pricing, thought might be a good pick for this week's free blog piece. This piece was available to subscribers at http://www.tradingipos.com before SLRY debuted.

2007-02-10
SLRY - Salary.com

SLRY - Salary.com plans on offering 5.75 million shares (including over-allotments) at a range of $8-$10. 1.5 million shares in the offering will be sold by insiders. Weisel is lead managing the deal, Wachovia, Pacific Crest, Needham, and William Blair co-managing. Post-offering SLRY will have 14.3 million shares outstanding for a market cap of $129 million on a pricing of $9. IPO proceeds will be used to repay debt and for general working capital.

Founder, President, Chairman and CEO Kent Plunkett will (directly and indirectly) own 25% of outstanding shares post-offering.

From the prospectus:

'Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending.'

Salary and compensation data - To me this sounds as if it would be a nice piece of a larger company's business line, not the entire business itself. SLRY goal is (and has been) to replace the traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software applications and spreadsheets. SLRY believes their website enables companies to determine how much to pay new and existing employees and to manage overall compensation programs.

SLRY's data sets include pay and benefits data that cover position titles held by 73% of the US workforce as well as comparison data for top executives in over 10,000 US public companies. SLRY offers two products: 1) the flagship CompAnalyst which is a suite of compensation management applications that integrates SLRY's data, third party survey data and a customer’s own pay data in a complete analytics package; 2) TalentManager - employee life-cycle performance management application that links employee pay to performance.

Both CompAnalyst and TalentManager are offered in annual or multi-year subscription packages. Current subscriber base is over 1,700 companies who spend between $2,000 and $100,000 annually. Customer base includes Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. In addition, SLRY offers information to individuals and small businesses for a fee through their website salary.com.

In 2006, Salary.com was ranked in the top 10 websites for 'Financial Information & Advice.' Currently on Alexa.com, salary.com is ranked as the 5,081 most popular website in the world.

Market - In an independent study conducted in April 2006, the compensation management technology market, which includes software and online compensation data offerings, is estimated at approximately $320 million for 2006. This is not a large market at all, that is a small overall pie for a public company. SLRY believes however that revenues from compensation consulting firms and human resource business process outsourcers should be included in their overall target market. Including those revenues would bump the market size up to $1.2 billion annually. For our purposes, SLRY's target market then derives somewhere between $320 million and $1.2 billion annually.

SLRY currently employs approximately 200 people.

My question is, 'Where does SLRY derive their proprietary salary and compensation data?' The answer - a number of sources, including major consulting firms, SEC filings, US Government agency studies and data, 'other' third parties, and from SLRY’s own research efforts.

Note - In 2/07 Mercer, the consulting arm of March and McLennan filed a complaint against SLRY alleging copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations.

Financials:

$2 a share in cash, no debt.

Revenues - SLRY does run ads on their site, however advertising revenues account for only 10%-15% of revenues annually. The bulk of SLRY's revenues are derived from corporate subscriptions.

Revenues were essentially in start-up stage in 2002 and for FY '06 (ending 3/31/06) totaled $15.3 million. SLRY has increased revenues sequentially quarter to quarter for 3 years now. Normally I look at this as a positive with a small growing company. However with SLRY we should note two negatives: 1) Even with 12 straight quarterly revenue increases, SLRY has yet to book a break even quarter operationally, and 2) Even with folding out stock compensation charges, SLRY is increasing revenues quarterly only by about as much as they're increase their 'sales & marketing' expense line. The latter to me indicates there is no surging demand for their product; the growing revenues are simply a function of throwing more money at sales & marketing. In other words, SLRY appears to be 'buying' their revenue growth. Factor in the fact that other expenses are increasing about the same rate too and for years now SLRY has been losing in the $600k to $1.2 million ballpark operationally quarter after quarter. So yes they've increased revenues sequentially, but for the past few years have been doing no better than 'running in place' at a quarterly operational loss.

FY 2006 (ending 3/31/06) - Revenues were $15.3 million, a healthy increase over FY '05's $10 million. Gross margins were in the 80% ballpark. Unfortunately overall operating expenses were approximately equal to revenues themselves. Result was a loss of $0.20.

FY '07 (ending 3/31/07) - Through first 3 quarters, revenues look to increase by 45% or so to $22.1 million. Again the top-line % growth looks good, however keep in mind that operating expenses are keeping pace growth-wise as well here. Gross margins look like they're contracting slightly to 78%. Again, operating expenses equaled overall revenues, meaning more losses. Due to increased stock compensation charges SLRY looks to lose approximately $0.35 in FY '07. Note that operationally when folding out stock compensation charges, the loss here would mirror FY '06's.

Conclusion - I usually like small online ipos and I do like the topline growth here. However SLRY appears to be really just a small niche company and that plays out in their overall revenue base and lack of operating margins. With their current business model, they don't seem to be gaining any margin traction whatsoever. Yes they're growing revenues. However that growth appears due to increased money spent on sales & marketing expenses, not organic revenue growth. In fact revenues have been growing annually on a 1 to 1 basis to operating expense growth. Factor in also the overall small market pie here and SLRY appears to be more suited as an arm of another larger company's business, not a single standing public company. Pass here.

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