HUMAN CAPITAL MANAGEMENT: SPECIAL FOCUS on HR TECHNOLOGY Your Single Source for “All Things Human Capital®”
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HUMAN CAPITAL MANAGEMENT: SPECIAL FOCUS ON HR TECHNOLOGY Your Single Source For “All Things Human Capital®” Mergers & Acquisitions | Strategic Advisory & Growth Capital October 2019 www.delanceystreetpartners.com Five Tower Bridge | Suite 420 | 300 Barr Harbor Drive | West Conshohocken | PA | 19428 HR Technology Sector Review As part of our Human Capital Management sub- sector research, Delancey Street Partners (“DSP”) is pleased to present this HR Technology Edition. This HR Technology Sector Review provides an overview of the current HR Technology market as well as a look into recent M&A transactions and private equity financings. We also provide special commentary on two key subsectors, the video interviewing/assessment space, and the programmatic recruitment space. We also provide our DSP perspective on the Rule of 40 for SaaS businesses. Delancey Street Partners Delancey Street Partners is an independent, industry-focused investment bank. We serve CEOs, Entrepreneurs, Shareholders and Boards of Directors of high growth and middle market private and public companies. Our services include strategic advisory, capital raising and independent board advice. We advise on sell-side and buy-side M&A, growth capital financings and recapitalizations. Bill Filip leads DSP’s Business Services & Technology practice, which includes a strong focus on the Human Capital Management marketplace. Additional DSP sectors include Healthcare, Industrial & Industrial Technology, and Infrastructure. We form long-term partnerships with our clients and commit to managing each engagement with senior professionals who bring years of experience and insight. William J. Filip Patrick E. Dolan B. Andrew Schmucker Steven D. Higgins David K. Allebach Managing Director Managing Director Managing Partner Managing Director Director (484) 533-6312 (484) 533-6311 (484) 533-6313 (484) 533-6308 (484) 533-6315 [email protected] [email protected] [email protected] [email protected] [email protected] HCM: HR TECHNOLOGY SECTOR REVIEW 1 Contents DSP’s Human Capital Management: Special HR Technology Edition October 2019 Departments 29 Big Ideas: Q&A with Peter Cappelli 3 Opening Remarks 5 Market Performance and Valuation America’s leading HR academic, 16 Delancey Street Partners’ Observations Wharton professor Peter Cappelli rings 23 DSP Primer on the Rule of 40 the class bell with DSP to lecture us 29 Big Ideas Q&A with Peter Cappelli on new talent management trends 35 Get to Know Gotham Growth Group with and the future of all CEO David Hain things HR. 38 HR Technology News 56 Select HR Technology M&A Transactions How to Subscribe 74 Notes & Disclosures This was prepared by Delancey Street Partners and is for 76 About Delancey Street Partners & informational purposes only (see important disclosures). If Delancey Street Capital Partners you would like a free subscription (or reprints of prior editions) please e-mail Mitch Holtz at [email protected]. “All Things Human Capital®” HCM: HR TECHNOLOGY SECTOR REVIEW 2 Opening Remarks 3 Opening Remarks This DSP Human Capital Management sector report focuses on the always exciting world of HR Technology. By “technology” we are mainly referring to software, and specifically the highly desirable “SaaS subscription” pricing business model. Our PE/VC friends have done a great job communicating the nirvana-like software state that occurs when a business throws off 90%+ recurring revenue, has 80+% gross margins and achieves organically driven 20%-40% “platform” (i.e. land and expand, cross-sell, upsell) growth. Cool stuff, and when you combine that with deep functional or vertical workflow relevance and meaningful revenue scale (as low as $10-$15 million ARR, potentially) the 10x promised land may actually be an achievable oasis on the valuation horizon. But in this rapidly evolving world of HR Technology, we encourage our DSP readers to widen their business model purview to include non-SaaS technology driven revenue recognition models as well. Highly efficient “community” monetization models, gig models, technology-creative per drink/per location pricing, gain share and even technology-executed, project-based, cost- plus models exist. Miss these and risk missing out on some of the most creative, cutting edge HR Technology businesses changing the landscape today. So you tell us, what’s the difference between a “one to three year, auto renewal SaaS contract with a 30 day out” and a “very strong gross margin per drink or per location model that is deeply embedded in a client’s workflow?” Note: That per drink per location model has a nearly 70% core gross margin and is augmented with other value added services and has an average client length of relationship of more than 3.5 years. Not bad right? A friendly DSP reminder to take those SaaS blinders off once in a while. In this DSP HR Technology Edition we include a topical focus on two very active and, dare we say, breakout sectors: Video Interviewing (more appropriately, Video “Assessment”) and Programmatic Recruitment. Both sectors are evolving and moving fast, experiencing considerable thinning of the pack as a handful of providers vie to emerge as the true leaders. But watch out you standalone providers, the real traction may soon be beginning as the very large HR platforms are forced (buy, build or partner) into placing their bets in these areas - clearly, some fun HR Technology times ahead! We found ourselves in a pedagogical mood as we completed the Big Ideas Q&A Section (see below) so we felt compelled to review a golden oldie in SaaS evaluation with a short primer on the Rule of 40. This simple framework is often still misunderstood so we do our DSP best to give you the DSPNotes to applying this comparative SaaS metric. Finally, it was literally “back to school” for DSP in this edition as we met with famed HR Academic and DSP Big Ideas Q&A guest, Professor Peter Cappelli of the Wharton School of the University of Pennsylvania. Peter’s brand in HR academia is unrivaled and you will see why when you check out this must-read section of our report (with no risk of being cold called this time around). Thank you Peter! 4 Market Performance and Valuation 5 Key Labor Market Benchmarks: Employment Change in Employment (# in thousands) Trailing Six Months (# in thousands) 1,000 800 600 216 400 153 193 164 56 62 200 - (200) (400) (600) (800) 03-19 02-19 04-19 05-19 06-19 07-19 (1,000) 2003 2012 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Labor Statistics Change in Payrolls by Company Size (in thousands) Trailing Six Months 400 142 Small (1-49) Medium (50-499) Large (500-999) Enterprise (1,000+) 119 300 107 93 74 200 66 67 59 62 63 61 100 40 28 30 3033 24 24 24 20 2224 18 108 11 - (100) -13 (200) Small (1-49) -34 Medium (50-499) (300) Large (500-999) Enterprise (1,000+) (400) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 01-19 02-19 03-19 04-19 05-19 06-19 07-19 Source: ADP; American Staffing Association HCM: HR TECHNOLOGY SECTOR REVIEW 6 Key Labor Market Benchmarks: Unemployment U.S Unemployment Rate (U-3) Trailing Six Months 10.0% 10.0% 9.0% 9.0% 8.0% 8.0% 7.0% 7.0% 6.0% 6.0% 5.0% 5.0% 3.8% 3.8% 4.0% 4.0% 3.6% 3.6% 3.7% 3.7% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 02-19 03-19 04-19 05-19 06-19 07-19 Source: Bureau of Labor Statistics. U-3 rate defined as total unemployed persons as a percent of civilian labor force. Data is seasonally adjusted Labor Underutilization (U-3, U-5 & U-6) Trailing Six Months 18.0% U-3 U-5 U-6 U-3 U-5 U-6 16.0% 14.0% 12.0% 10.0% 8.0% 7.3% 7.3% 7.3% 7.1% 7.2% 7.0% 6.0% 4.7% 4.6% 4.4% 4.4% 4.6% 4.6% 3.8% 3.8% 3.6% 3.6% 3.7% 3.7% 4.0% 2.0% 0.0% 02-19 03-19 04-19 05-19 06-19 07-19 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Labor Statistics. U-5 rate defined as total unemployed persons, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force. U-6 rate defined as total unemployed persons, plus all persons marginally attached to the labor force, plus total persons employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. Data is seasonally adjusted HCM: HR TECHNOLOGY SECTOR REVIEW 7 DSP HR Technology Public Company Index ($ in millions) Recruitment Technology Enterprise/Core HRIS Company Logo Ticker Market CEO Company Logo Ticker Market CEO Cap Cap 51job JOBS $4,518 Rick Yan Oracle Corporation ORCL $193,899 Mark Hurd DHI Group DHX 196 Arthur Zeile William FRA: SAP SE DB: SAP 140,557 New Work 1,575 Thomas Vollmoeller McDermott NWO Workday, Inc. WDAY 37,433 Aneel Bhusri ASX: Andrew Bassat & Seek 5,192 SEK Ross Caldwell Payroll/Benefits Technology CareerBuilder N/A N/A Irina Novoselsky Company Logo Ticker Market CEO iCIMS N/A N/A Colin Day Cap Indeed (Division of N/A N/A Christopher Hyams Automatic Data ADP $70,204 Carlos Rodriguez Recruit Holdings) Processing Monster (Division of N/A N/A Sara Dyer Benefitfocus BNFT 759 Raymond August Randstad) Castlight Health CSLT 197 Maeve O’Meara Snagajob N/A N/A Fabio Rosati Ceridian HCM CDAY 7,019 David Ossip Learning/Performance/Assessment Holding Inc.