Two Picks in HR Software

Lazard Capital Markets

We remain buyers of Kenexa and SuccessFactors following recent weakness.
Negative economic data points coupled with company-specific concerns have resulted in 17% and 42% selloffs in Kenexa (ticker: KNXA) and SuccessFactors (SFSF), respectively, following their first-quarter 2011 earnings results.

We believe these names are oversold and represent attractive entry levels for two leaders in the on-demand human-capital-management (HCM) space.
At Kenexa (rated at Buy), overly discounting macro data, we continue to see upside to our above-consensus estimates, unsustainable valuation discount. Kenexa is down 17% since it reported first-quarter earnings on May 3, due to negative headline macro news and concerns over the business model's sensitivity to continued weak employment trends.
We believe Wall Street is overpenalizing the company based on prerecession business dynamics of its recruitment process outsourcing (RPO) business minimums, 23% of overall revenue and 6% of subscription revenue. During the recession Kenexa chose to renegotiate contracts for lower fixed amounts rather than lose customers, which exacerbated its revenue decline.

Currently, nearly all of the company's RPO customers are operating at their contracted minimums, choosing to pay higher-margin success fees. Furthermore, in the event of a broad-based macro slowdown in hiring, we don't view this business as carrying as much risk as the market appears to be pricing in.

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