Halogen Software focused on growing market share, looks globally

Halogen Software Inc.’s approach to the talent management software market suggests there is more to the Ottawa company than rising revenues and industry accolades.

The human resources software provider has seen a steady increase in revenue over the last few years, plus an expanding customer base. While these initial successes are promising, investors are watching the company for signs of growth.

Halogen’s goal is to improve organizations’ talent management practices, says Marc Brûlé, vice-president of client services.

“We’re a customer-centric organization. I’ve learned a lot from people on the front lines and people at senior levels,” Brûlé says. “It’s not just about the software that we sell.”

The company’s software products help mid-sized organizations manage compensation, succession, performance management, and hiring.

Gartner, a research firm, has Halogen’s product suite at number four on its 2014 talent management software magic quadrant rankings. Gartner says the company’s products score well because they integrate with other solutions such as Microsoft Outlook. Halogen’s customer service also helped it rank higher than IBM Corp., Towers Watson & Co., SilkRoad, Inc., and other brands, according to the report.

At the same time, Oracle Corp., SuccessFactors (owned by SAP SE), and Cornerstone OnDemand, Inc. remain industry leaders, according to the report, and Halogen’s products have less functionality than the offerings of these three companies.

Even though these three American firms are near the top of the talent management software world Halogen’s rising reputation is worth watching because the products are good and the company cares about long-term customer relationships, said Bruce Marks, an executive at Development Dimensions International Inc., a company that recently partnered with Halogen.

Some industries are starting to run Halogen’s software. The company has signed a number of major customers in healthcare, financial services, manufacturing, and the public sector. Mount Sinai Hospital, Credential Financial, SunRype and the City of Ottawa are just a few of its higher-profile buyers.

“There could be some things that a nursing manager has to deal with that some other managers do not have to deal with. And that’s why in those verticals, we’ve been able to notice there is a common thread, and put together services or product features that help them overcome those challenges,” says Brûlé.

More importantly, most Halogen customers renew their software, validating the company’s subscription-based business model. The company indicated a 90 per cent retention rate in its 2014 third-quarter report.

A high customer retention rate and the attention of the talent management market are two reasons for Halogen’s big investments in sales and marketing. The company spent about $7.6 million on sales and marketing in the third quarter of 2014, compared to $5.4 million in the same period the previous year. The company also hired more salespeople and appointed new sales vice-president within the past 12 months.

It appears to be money well spent because revenues are climbing.

Halogen’s 2014 third-quarter income statement for the three-month period ending Sept. 30 showed a year-over-year increase in recurring revenue, to $12.8 million from $10.7 million. Total quarterly revenues rose 17 per cent, to $14.4 million from $12.3 million in the same period a year earlier. The company earned $48 million in revenue in 2013, compared to $38 million in 2012 and $31 million in 2011.

The number of customers that renew their agreements—as indicated in recurring revenue—is one of most important metrics for the subscription software businesses, says Pete Low, the company’s chief financial officer. Higher recurring revenues are connected to more renewed subscriptions and fewer cancellations.

The company’s aggressive pursuit of subscriptions and market share has resulted in 2,000 customers worldwide; yet it has more than 300,000 companies in its target market. Halogen estimates the global talent management software market to be worth about $15 billion.

Some firms would be happy with Halogen’s subscriber base, but this company wants it all, says David Perry, a recruiter who helped the firm hire several senior executives.

“There was no question in my mind when I left that first meeting, that they had every intention of being on the world stage,” says Perry.

That drive is common in the technology industry, yet harder to find today in Ottawa compared to the tech boom of the 1990s. Halogen could grow to be a truly multinational organization because its leaders act on plans as soon as the course becomes clear, he says.

Halogen’s international strategy shows just how big the company wants to grow. In 2011, the software provider opened offices in the United Kingdom and Australia, and a portion of the $55-million raised in its 2013 initial public offering have financed further international expansion. Right now, the goal of Halogen’s international activities is to increase market share, says Low.

In the company’s 2014 third quarter that ended Sept. 30, international revenues rose 71 per cent to $1.6 million from $938,000 in the same period the year before. Although the percentage increases are large, non-North American revenues are a small part of Halogen’s total sales.

“What I like seeing about the large, year-over-year increases we’ve been able to generate so far, is that it gives me some comfort the money we’re spending is well spent,” Low says.

One caveat to Halogen’s growth strategy is the financial losses incurred prior to, and since, going public in May 2013.The company lost $12.8 million in 2013 and $19.6 million the year before, and its narrowing of losses year-to-year is attributed to an accounting adjustment of redeemable preferred shares. The company’s 2014 third quarter report showed a quarterly loss of $5 million, deeper than its loss of $718,000 in the same quarter one year earlier.

Halogen’s stock price has responded to the company’s revenues and prospects of competing internationally. The $11.50 initial public offering share price rallied to $15.70 per share in July 2013, and stayed above $10 per share through the fall and winter months. The stock then dropped below $10 in March 2014 and was worth about $8.85 per share on the TSX as of Dec. 4.

The company predicts revenues to grow next quarter and next year, though there has been no mention of reversing its string of quarterly losses. Investors may one day prioritize profits, but Halogen’s executives continue to stress that growing market share is the core focus the company.

“This is a pretty green field market opportunity that we’re in. It’s very early stage,“ says Low.