Growth (but not enough) for Halogen Software

Measuring success is a notoriously complex process in business.

Since its initial public offering in 2013, Kanata-based Halogen Software has experienced revenue growth in every quarter. The software-as-a-service firm has ambitiously tackled international markets in an attempt to convince a large market of potential customers to subscribe to its talent management solutions.

Yet, after peaking a few months following its IPO in 2013, Halogen’s stock has fallen to nearly half its initial offering price.

For a company yet to turn a profit, growth is the key metric for investors. Halogen has growth, but it’s not the right growth. Whether or not it ever gets to the level it needs may depend on what it does next.

Halogen sells its talent management modules as a subscription service primarily to medium-sized enterprises. Its software provides companies with solutions for employee recruitment, training, succession, and performance management, to name just a few.

According to Halogen’s MD&A reports, the company isn’t focused on profit right now: it’s focused on expanding its base of more than 2,000 international customers.

Building on initial success

Robert Young, an analyst with Canaccord Genuity, says that after its IPO, Halogen benefited from a stream of early adopters to its software in a market with plenty of potential. Maintaining that initial success, however, is difficult.

“As you eat through that, you get into a position where you have to do a lot more to sell to the next group,” Young says.

“So, the company has been beefing up its sales and marketing capability. But this hasn’t resulted in the growth that we’d expect.”

Initially, Young says, Halogen was expected to grow at a rate of mid-20 per cent each quarter. Headed into 2016, the company is showing revenue growth of 15 per cent in its most recent quarter, pulling in total revenues of US$16.6 million in Q3, up from US$14.4 million in 2014. While the company is not yet profitable, losses in Q3 were reduced to US$3.8 million from US$5 million a year previous.

These results are good, but they’re not good enough for investors. Falling short of its anticipated targets has caused the stock’s poor performance.

Why Halogen’s momentum has slowed isn’t obvious. Young says that there’s a large market for talent management products like Halogen’s, and that there’s room for growth between competitors like Ultimate Software, SuccessFactors and Cornerstone. He adds that Halogen has a strong product, though the company needs updates to its offerings.

The software-as-a-service, or enterprise software sector, is still growing. The market is disruptive, meaning it’s uprooting pre-existing solutions and creating a new demand with its products.

“Competitive, disruptive companies like Halogen, there’s a lot of opportunity for them,” Young says.

Focus on marketing

More than likely, the problem for Halogen lies in its sales execution. Winning over hesitant clients has been a priority and a significant expense for the company in recent quarters, but those dollars may not be providing enough return.

“I would say that is the factor that needs to be fixed to get growth back,” Young says.

Whether or not Halogen passes this hurdle is, for the first time, the responsibility of someone new. Paul Loucks stepped down from his role as CEO and president of Halogen in July. Much of the company’s early success was widely attributed to Loucks’ management in his 15 years at the helm.

Leslie Rechan, a member of Halogen’s board of directors, stepped into Loucks’ role first on an interim basis, but was made the permanent president and CEO in November of this year. This leadership transition has reset expectations for Halogen, but that’s not necessarily a good thing.

“Anytime you get a change, there’s volatility,” Young says.

Christine Riordan, an expert in corporate leadership, writes in her article on “Navigating Through Leadership Transitions” that entering in a volatile situation can make or break a leader.

“If they are to demonstrate and retain their value, leaders must steer their organizations through various transitions,” she writes.

Experienced leadership

Rechan, to this point, has had more than 20 years of experience in information technologies. He served as the COO of Ottawa firm Cognos until IBM acquired the company in 2008. Rechan stayed on in the analytics division of IBM, first as the VP of sales and later becoming the branch’s general manager.

Young has high hopes for Rechan and his impact on Halogen.

“The person who has stepped in as CEO is a very, very experienced, very strong person with a good background in sales,” he says, noting that Rechan has begun to bring in people to form a familiar team around him. Just a month into his tenure, it’s too soon to tell just how many changes Rechan has planned.

One might see a hint of irony, though, if Halogen fares poorly in its leadership transition – orchestrating successful successions is one of the touted features of its talent management software.

However Rechan fares as leader, Young is not advising shareholders to expect to turn a profit on Halogen in the near future. You’ll have to settle in for the long-term to discover whether Halogen can fulfill the lofty expectations it set for itself in 2013.