Attached files
file | filename |
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EX-31.1 - CEO CERTIFICATION - TALEO CORP | exhibit_31-1.htm |
EX-10.5 - EQUINIX AGREEMENT - TALEO CORP | exhibit_10-5.htm |
EX-31.2 - CFO CERTIFICATION - TALEO CORP | exhibit_31-2.htm |
EX-32.1 - CEO & CFO SECTION 906 CERTIFICATION - TALEO CORP | exhibit_32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
|
þ
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2010
|
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to
Commission
File Number: 000-51299
TALEO
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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52-2190418
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification
Number)
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4140
Dublin Boulevard, Suite 400
Dublin,
California 94568
(Address
of principal executive offices, including zip code)
(925)
452-3000
(Registrant’s
telephone number, including area code)
________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting
company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
On April
30, 2010, the registrant had 39,759,859 shares of Class A common stock
outstanding.
TALEO
CORPORATION
PART
I — FINANCIAL INFORMATION
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5
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16
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28
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29
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29
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29
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43
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44
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44
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44
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44
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45
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PART
I FINANCIAL INFORMATION
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||||||||
TALEO
CORPORATION AND SUBSIDIARIES
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||||||||
(Unaudited,
in thousands, except share and per share data)
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||||||||
March 31,
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December
31,
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|||||||
2010
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2009
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|||||||
ASSETS
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||||||||
Current
assets:
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||||||||
Cash
and cash equivalents
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$ | 236,701 | $ | 244,229 | ||||
Restricted
cash
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409 | 409 | ||||||
Accounts
receivable, net of allowances of $590 at March 31, 2010 and $759 at
December 31, 2009
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42,017 | 43,928 | ||||||
Prepaid
expenses and other current assets
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12,136 | 10,126 | ||||||
Investment
credits receivable
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6,403 | 5,499 | ||||||
Total
current assets
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297,666 | 304,191 | ||||||
Property
and equipment, net
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28,752 | 23,510 | ||||||
Restricted
cash
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210 | 210 | ||||||
Goodwill
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102,650 | 91,027 | ||||||
Intangible
assets, net
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32,270 | 30,544 | ||||||
Other
assets
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5,771 | 6,895 | ||||||
Total
assets
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$ | 467,319 | $ | 456,377 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
Current
liabilities:
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||||||||
Accounts
payable and accrued liabilities
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$ | 27,375 | $ | 23,592 | ||||
Deferred
revenue - application services and customer deposits
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60,971 | 60,140 | ||||||
Deferred
revenue - consulting services
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17,194 | 17,523 | ||||||
Capital
lease obligations, short-term
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267 | 412 | ||||||
Total
current liabilities
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105,807 | 101,667 | ||||||
Long-term
deferred revenue - application services and customer
deposits
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929 | 201 | ||||||
Long-term
deferred revenue - consulting services
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13,391 | 13,220 | ||||||
Other
liabilities
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3,691 | 3,973 | ||||||
Capital
lease obligations, long-term
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85 | 107 | ||||||
Commitments
and contingencies (Note 9)
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||||||||
Total
liabilities
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123,903 | 119,168 | ||||||
Stockholders’
equity:
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||||||||
Class A
Common Stock; par value, $0.00001 per share; 150,000,000 shares
authorized; 39,657,833 and 39,507,837 shares outstanding at March 31,
2010 and December 31, 2009, respectively
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1 | 1 | ||||||
Additional
paid-in capital
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419,645 | 414,106 | ||||||
Accumulated
deficit
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(76,211 | ) | (77,029 | ) | ||||
Treasury
stock, at cost, 130,827 and 111,167 outstanding at March 31, 2010 and
December 31, 2009, respectively
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(2,945 | ) | (2,471 | ) | ||||
Accumulated
other comprehensive income
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2,926 | 2,602 | ||||||
Total
stockholders’ equity
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343,416 | 337,209 | ||||||
Total
liabilities and stockholders’ equity
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$ | 467,319 | $ | 456,377 | ||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements
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TALEO
CORPORATION AND SUBSIDIARIES
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||||||||
(Unaudited;
in thousands, except per share data)
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Three
Months Ended
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||||||||
March
31,
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||||||||
2010
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2009
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Revenue:
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Application
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$ | 47,564 | $ | 41,204 | ||||
Consulting
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7,482 | 6,879 | ||||||
Total
revenue
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55,046 | 48,083 | ||||||
Cost
of revenue:
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||||||||
Application
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11,313 | 9,685 | ||||||
Consulting
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6,485 | 6,273 | ||||||
Total
cost of revenue
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17,798 | 15,958 | ||||||
Gross
profit
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37,248 | 32,125 | ||||||
Operating
expenses:
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||||||||
Sales
and marketing
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17,060 | 15,909 | ||||||
Research
and development
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10,054 | 8,537 | ||||||
General
and administrative
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10,298 | 9,627 | ||||||
Total
operating expenses
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37,412 | 34,073 | ||||||
Operating
loss
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(164 | ) | (1,948 | ) | ||||
Other
income / (expense):
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||||||||
Interest
income
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127 | 141 | ||||||
Interest
expense
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(34 | ) | (41 | ) | ||||
Other
income (Note 10)
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885 | - | ||||||
Total
other income, net
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978 | 100 | ||||||
Income
/ (loss) before provision for / benefit from income taxes
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814 | (1,848 | ) | |||||
Provision
for / (benefit from) income taxes
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(4 | ) | 237 | |||||
Net
income / (loss)
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$ | 818 | $ | (2,085 | ) | |||
Net
income / (loss) per share attributable to Class A common stockholders
— basic
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$ | 0.02 | $ | (0.07 | ) | |||
Net
income / (loss) per share attributable to Class A common stockholders
— diluted
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$ | 0.02 | $ | (0.07 | ) | |||
Weighted-average
Class A common shares — basic
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39,156 | 30,262 | ||||||
Weighted-average
Class A common shares — diluted
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40,338 | 30,262 | ||||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements
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TALEO
CORPORATION AND SUBSIDIARIES
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(Unaudited;
in thousands)
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Three
Months Ended
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|||||||
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March 31,
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|||||||
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2010
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2009
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Cash
flows from operating activities:
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||||||||
Net
income / (loss)
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$ | 818 | $ | (2,085 | ) | |||
Adjustments
to reconcile net income / (loss) to net cash provided by operating
activities:
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Depreciation
and amortization
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6,321 | 6,662 | ||||||
Gain
on disposal of fixed assets
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58 | - | ||||||
Amortization
of tenant inducements
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(44 | ) | (38 | ) | ||||
Tenant
inducements from landord
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114 | - | ||||||
Stock-based
compensation expense
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3,177 | 2,269 | ||||||
Excess
tax benefit from stock options
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(16 | ) | - | |||||
Director
fees settled with stock
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60 | 64 | ||||||
Gain
on remeasurement of previously held interest in Worldwide Compensation,
Inc.
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(885 | ) | - | |||||
Bad
debt (reversal) / expense
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(93 | ) | 400 | |||||
Changes
in assets and liabilities, net of effect of acquisition:
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Accounts
receivable
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2,360 | 4,112 | ||||||
Prepaid
expenses and other assets
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(2,186 | ) | (279 | ) | ||||
Investment
credit receivable
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(714 | ) | 1,095 | |||||
Accounts
payable and accrued liabilities
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2,001 | (651 | ) | |||||
Deferred
revenue and customer deposits
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438 | 1,848 | ||||||
Net
cash provided by operating activities
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11,409 | 13,397 | ||||||
Cash
flows from investing activities:
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Purchases
of property and equipment
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(6,482 | ) | (2,162 | ) | ||||
Acquisition
of business
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(13,381 | ) | - | |||||
Net
cash used in investing activities
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(19,863 | ) | (2,162 | ) | ||||
Cash
flows from financing activities:
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Principal
payments on loan and capital lease obligations
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(414 | ) | (325 | ) | ||||
Excess
tax benefit from stock options
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16 | - | ||||||
Payments
for expenses associated with 2009 equity offering
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(678 | ) | - | |||||
Treasury
stock acquired to settle employee withholding liability
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(474 | ) | (118 | ) | ||||
Proceeds
from stock options exercised and ESPP shares
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2,307 | 176 | ||||||
Net
cash provided by / (used in) financing activities
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757 | (267 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
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169 | (105 | ) | |||||
Increase
/ (decrease) in cash and cash equivalents
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(7,528 | ) | 10,863 | |||||
Cash
and cash equivalents:
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||||||||
Beginning
of period
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244,229 | 49,462 | ||||||
End
of period
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$ | 236,701 | $ | 60,325 | ||||
Supplemental
cash flow disclosures:
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Cash
paid for interest
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$ | 7 | $ | 23 | ||||
Cash
paid for income taxes
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$ | 866 | $ | 201 | ||||
Supplemental
disclosure of non-cash financing and investing activities:
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Property
and equipment purchases included in accounts payable and accrued
liabilities
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$ | 4,325 | $ | 1,633 | ||||
Accrued
stock offering cost
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$ | 3 | $ | - | ||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
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TALEO
CORPORATION AND SUBSIDIARIES
(Unaudited)
1.
Nature of Business and Basis of Presentation
Nature of
Business — Taleo Corporation and its subsidiaries (“the Company”) provide
on-demand talent management solutions that enable organizations of all sizes to
assess, acquire, develop, compensate and align their workforces for improved
business performance. The Company’s software applications are offered to
customers primarily on a subscription basis.
The
Company was incorporated under the laws of the state of Delaware in May 1999 as
Recruitsoft, Inc. and changed its name to Taleo Corporation in March 2004. The
Company has principal offices in Dublin, California and conducts its business
worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands,
the United Kingdom, Singapore, and Australia. The subsidiary in Canada performs
the primary product development activities for the Company, and the other
foreign subsidiaries are generally engaged in providing sales, account
management and support activities.
Basis of
Presentation — The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been
condensed or omitted pursuant to such rules and regulations. For the three
months ended March 31, 2010, the Company recorded adjustments that accumulated
to $0.2 million that impacted revenue, net income and certain balance sheet
accounts. Such adjustments were assessed according to SAB 108 and
deemed immaterial to previously reported financial statements. These
interim condensed consolidated financial statements and notes thereto should be
read in conjunction with the Company’s consolidated financial statements and
notes thereto filed in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, filed on March 11, 2010. In the opinion
of management, all adjustments necessary for a fair presentation have been made
and include only normal recurring adjustments. Interim results of
operations are not necessarily indicative of results to be expected for the
year.
2.
Business Combinations and Dispositions
On
January 1, 2010, the Company completed the acquisition of Worldwide
Compensation, Inc. (“WWC”) which expands the Company’s solution offerings for
compensation management. Accordingly, the assets, liabilities and operating
results of WWC will be reflected in the Company’s consolidated financial
statements from the date of acquisition. Previously, in the third quarter
of 2008, the Company made an investment of $2.5 million for a 16% equity
investment in and an option to purchase WWC at a later date. In
connection with the acquisition, the Company negotiated more favorable terms
than the purchase option and also terminated the purchase
option. Accordingly, the total consideration paid by the Company for
the issued and outstanding capital stock, options and warrants of WWC that the
Company did not already own was approximately $14.1 million in cash, including
approximately $0.3 million in transaction costs and $0.4 million in incentive
compensation. Fifteen percent (15%) of the consideration was placed
into escrow for one year following the closing to be held as security for losses
incurred by the Company in the event of certain breaches of the representations
and warranties contained in the merger agreement or certain other
events. The Company has no contingent cash payments related to this
transaction.
Allocation
of Purchase Price
The
Company took control of WWC when it purchased the remaining 84% equity interest
from the former shareholders of WWC on January 1, 2010. Under the
acquisition method of accounting, the total purchase price paid for the 100%
equity interest has been allocated to the net identifiable assets based on their
estimated fair value at the date of acquisition. As part of the process, the
Company performed a valuation analysis to determine the fair values of certain
identifiable intangible assets of WWC as of the valuation date. The
determination of the value of these components required the Company to make
various estimates and assumptions. Critical estimates in valuing certain of the
intangible assets include but are not limited to the net present value of future
expected cash flows from product sales and services. The fair value of
deferred revenue was determined based on the estimated direct cost of fulfilling
the obligation to the customer while the fair value for all other assets and
liabilities acquired was determined based on estimated future benefits or legal
obligations associated with the respective asset or liability. The excess
of the purchase price over the net identifiable intangible assets, other
identifiable assets and liabilities acquired has been recorded to
goodwill. None of the goodwill recognized upon acquisition is
deductible for tax purposes. The preliminary allocation of the
purchase price was based upon preliminary valuations for certain deferred tax
assets and will be completed by the third quarter of fiscal year 2010. The
following table summarizes the preliminary fair values of assets acquired and
liabilities assumed as of January 1, 2010:
Allocation
of Purchase Price
Purchase
Price
|
Amount
|
|||
(In
thousands)
|
||||
Cash
|
$ | 13,381 | ||
Fair
Value 16% previously held equity interest
|
2,300 | |||
Total
purchase price
|
$ | 15,681 | ||
Allocation
of purchase price
|
Amount
|
|||
(In
thousands)
|
||||
Accounts
receivable, net
|
$ | 308 | ||
Other
current assets
|
6 | |||
Property
and equipment
|
166 | |||
Goodwill
|
11,623 | |||
Intangible
assets
|
4,800 | |||
Current
liabilities
|
(391 | ) | ||
Deferred
revenue
|
(831 | ) | ||
Total
purchase price
|
$ | 15,681 |
The
Company did not record any in-process research and development charges in
connection with the acquisition.
Remeasurement
of 16% Previously Held Equity Interest in WWC
On
January 1, 2010 when the Company closed the acquisition of the remaining 84%
equity interest in WWC, it took control of the entity and remeasured the 16%
previously held equity interest to its fair value. The difference
between the $1.4 million book value and the $2.3 million fair value of the 16%
previously held interest was recorded as a gain in the statement of operations
as other income for the three months ending March 31, 2010.
Remeasurement
of previously held interest in WWC
|
Amount
|
|||
(In
thousands)
|
||||
Fair
value of 16% previously held interest in WWC
|
$ | 2,300 | ||
Carrying
value of 16% previously held equity investment in WWC
|
(1,415 | ) | ||
Gain
on remeasurement of previously held interest in WWC
|
$ | 885 |
For the
three months ended March 31, 2010, $0.1 million in revenues related to WWC were
included in the Company’s results of operations. It is impractical to
determine results of operations for WWC on a standalone basis as the entity’s
operations have been integrated into the Company’s operations.
Unaudited
pro forma results of operations to reflect the acquisition as if it occurred on
the first date of the first three months of 2009:
Three
Months Ended March 31, 2009
|
||||
Condensed
Consolidated Proforma
|
||||
(In
thousands, except per share data)
|
||||
Revenue
|
$ | 48,255 | ||
Net
loss attributable to Class A common stockholders
|
$ | (3,115 | ) | |
Net
loss attributable to Class A common stockholders - basic and
diluted
|
$ | (0.10 | ) | |
Weighted
average Class A common shares - basic and diluted
|
30,262 |
3.
Revenue Recognition
The
Company derives its revenue from fixed subscription fees for access to and use
of its on-demand application services and from consulting fees from services to
support the implementation, configuration, education, and optimization of
the
applications.
The Company presents revenue and deferred revenue from each of these sources
separately in its consolidated financial statements.
In
addition to fixed subscription fees arrangements, the Company has on limited
occasions, entered into arrangements including perpetual licenses with hosting
services to be provided over a fixed term. For hosted arrangements, revenues are
recognized in accordance with the standards established by the FASB for hosting
arrangements that includes a right of the customer to use the software on
another entity’s hardware.
The
Company’s application and consulting fee revenue is recognized when all of the
following conditions have been satisfied:
|
•
|
persuasive
evidence of an agreement exists;
|
|
•
|
delivery
has occurred;
|
|
•
|
fees
are fixed or determinable; and
|
|
•
|
the
collection of fees is considered
probable.
|
If
collection is not considered probable, the Company recognizes revenues when the
fees for the services performed are collected. These arrangements generally do
not include performance terms, cancellation or termination clauses, or other
refund type provisions. However, if non-standard acceptance periods or
non-standard performance criteria, cancellation or right of refund
terms are required, the Company recognizes revenue upon the
satisfaction of such criteria, as applicable.
Application
Revenue
The
majority of the Company’s application revenue is recognized monthly over the
life of the application agreement, based on stated, fixed-dollar amount
contracts with its customers and consists of:
|
•
|
fees
paid for subscription services
|
|
•
|
amortization
of any related set-up fees; and
|
|
•
|
amortization
of fees paid for hosting services and software maintenance services under
certain software license
arrangements
|
Set up
fees paid by customers in connection with subscription services are deferred and
recognized ratably over the longer of the life of the application agreement or
the expected lives of customer relationships, which generally range from three
to seven years. The Company continues to evaluate the length of the
amortization period of the set up fees as it gains more experience with customer
contract renewals.
Consulting
Revenue
Consulting
revenue consists primarily of fees associated with application configuration,
integration, business process re-engineering, change management, and education
and training services. The Company’s consulting engagements are typically
billed on a time and materials basis. These services are generally performed
within six months after the consummation of the arrangement. From time to time,
certain of our consulting projects are subcontracted to third
parties. Customers of the Company may also elect to use unrelated
third parties for the types of consulting services that it
offers. The Company’s typical consulting contract provides for
payment within 30 to 60 days of invoice.
In
October 2009, the FASB amended the accounting standards for revenue recognition
for multiple deliverable revenue arrangements to:
|
•
|
Provide
updated guidance on how the deliverables of an arrangement should be
separated, and how the consideration should be
allocated;
|
|
•
|
Eliminate
the use of the residual method and require an entity to allocate revenue
using the relative selling price method;
and
|
|
•
|
Require
an entity to allocate revenue to an arrangement using the estimated
selling prices (“ESP”) of deliverables if it does not have vendor-specific
objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling
price.
|
Valuation
terms are defined as set forth below:
|
•
|
VSOE
— the price at which we sell the element in a separate stand-alone
transaction
|
|
•
|
TPE
— evidence from us or other companies of the value of a largely
interchangeable element in a
transaction
|
|
•
|
ESP
— our best estimate of the selling price of an element in a
transaction.
|
The
Company elected to early adopt this accounting guidance for our current fiscal
year ending December 31, 2010 on a prospective basis. The implementation
resulted in additional disclosures that are included below.
The
Company follows accounting guidance for revenue recognition of multiple-element
arrangements to determine whether such arrangements contain more than one unit
of accounting. Multiple-element arrangements require the delivery or performance
of multiple products, services and/or rights to use assets. To qualify as a
separate unit of accounting, the delivered item must have value to the customer
on a standalone basis. The Company’s consulting services have standalone value
because those services are sold separately by other vendors, and, the Company
has VSOE for determining fair value for consulting services based on the
consistency in pricing when sold separately. The Company’s application services
have standalone value as such services are often sold separately; however, the
Company uses ESP to determine fair value for its application services when sold
in a multi-element arrangement as the Company does not have VSOE for these
application services and TPE is not a practical alternative due to differences
in features and functionality of other companies offerings and lack of access to
the actual selling price of competitors standalone sales. If new
application services products are acquired or developed that require significant
services in order to deliver the application service, and these services cannot
support standalone value, then these services will be evaluated as one unit of
accounting. The Company determined its ESP of fair value for its
application services based on the following:
·
|
The
Company has defined processes and controls to ensure its pricing
integrity. Such controls include oversight by a pricing committee which
includes a cross functional team and members of executive management.
Significant factors considered when establishing pricing include market
conditions, underlying costs, promotions, and pricing history of similar
services. Based on this information, management establishes or modifies
pricing that is approved by the pricing
committee.
|
·
|
The
Company analyzed application services pricing history and stratified the
population based on actual pricing trends within certain markets and
established ESP for each market.
|
For
transactions entered into prior to 2010 that include both application and
consulting services, the related consulting revenues are recognized ratably over
the remaining subscription term. For consulting services sold
separately from application services, the Company recognizes consulting revenues
as delivered. In some instances the Company sells consulting services on a
fixed-fee basis and, in those cases, for consulting services sold separately
from application services, the Company recognizes consulting revenues using a
proportional performance model based on services performed. Expenses
associated with delivering all consulting services are recognized as incurred
when the services are performed. Associated out-of-pocket travel
costs and expenses related to the delivery of consulting services are typically
reimbursed by the customer and are accounted for as both revenue and expense in
the period the cost is incurred.
For
transactions entered into, or materially modified arrangements in 2010, the
Company allocates revenue in multi-element arrangements using the relative
selling price method. Revenue is then recognized as appropriate for each
separate element based on its fair value. As 2010 progresses, this change will
significantly increase services revenue and services gross margins as the
Company will continue to recognize previously deferred services revenue ratably
for multi-element arrangements that occurred prior to fiscal year 2010, while
consulting services revenue from new transactions in 2010 will generally be
recognized as performed. Consulting services revenue recognized in
2010 related to multi-element arrangements entered into prior to 2010
was approximately $3.6 million. For the quarter ended March 31, 2010,
the impact on our revenue under the new accounting guidance as compared to our
previous methodology resulted in approximately $0.4 million revenue recognized
as performed that would have previously been deferred and recognized
ratably. Revenue associated with transactions entered into
during the first three months of 2010 was generally not recognized as the
related services were not yet delivered.
4.
Fair Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, which include cash and
cash equivalents, restricted cash, accounts receivable, accounts payable, and
other accrued expenses, approximate their fair values due to their nature,
duration and short maturities.
5.
Stock-Based Plans
The
Company issues stock options, restricted stock and performance share awards to
its employees and outside directors and provides employees the right to purchase
stock pursuant to stockholder approved stock option and employee stock purchase
programs.
Stock-based
compensation expense
The
Company recognizes the fair value of stock-based compensation in its condensed
consolidated financial statements over the requisite service period of the
individual grants, which generally is a four year vesting period. The
Company recognizes compensation expense for the stock options, restricted stock
awards, performance share awards and Employee Stock Purchase Plan (“ESPP”)
purchases on a straight-line basis over the requisite service period. There was
no stock-based compensation expense capitalized during the three months ended
March 31, 2010 and 2009. Shares issued as a result of stock option exercises,
ESPP purchases, restricted stock awards and performance share awards are issued
out of common stock reserved for future issuance under the Company’s stock
plans.
The
Company recorded stock-based compensation expense in the following expense
categories:
|
Three
Months Ended
|
|||||||
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Cost
of revenue
|
$ | 538 | $ | 344 | ||||
Sales
and marketing
|
884 | 514 | ||||||
Research
and development
|
464 | 264 | ||||||
General
and administrative
|
1,291 | 1,147 | ||||||
Total
|
$ | 3,177 | $ | 2,269 |
Stock
Options
The
Company estimates the fair value of its stock options granted using the
Black-Scholes option valuation model. The Company estimates the expected
volatility of common stock at the date of grant based on a combination of the
Company’s historical volatility and the volatility of comparable companies,
consistent with the standards established by the FASB and the SEC. The
Company estimates the expected term consistent with the simplified method
identified by the SEC. The Company elected to use the simplified method due to a
lack of term length data as the Company completed its initial public offering in
October 2005 and its options meet the criteria of the “plain-vanilla” options as
defined by the SEC. The simplified method calculates the expected term as the
average of the vesting and contractual terms of the award. The dividend yield
assumption is based on historical dividend payouts. The risk-free interest rate
assumption is based on observed interest rates appropriate for the expected term
of employee options. The Company uses historical data to estimate pre-vesting
option forfeitures and record share-based compensation expense only for those
awards that are expected to vest. For options granted, the Company amortizes the
fair value on a straight-line basis over the requisite service period of the
options which is generally four years.
Annualized
estimated forfeiture rates based on the Company’s historical turnover rates have
been used in calculating the cost of stock options. Additional expense will be
recorded if the actual forfeiture rate is lower than estimated, and a recovery
of prior expense will be recorded if the actual forfeiture is higher than
estimated.
Common
Equity Plans
At March
31, 2010, 4,521,869 shares were available for future grants under the Company’s
2009 Equity Incentive Plan.
The
following table presents a summary of the stock option activity under all stock
plans for the three months ended March 31, 2010 and related
information:
Number of Options
|
Weighted - Average Exercise
Price
|
|||||||
Outstanding
— January 1, 2010
|
2,735,597 | $ | 15.22 | |||||
Granted
|
319,608 | $ | 21.13 | |||||
Exercised
|
(173,530 | ) | $ | 13.29 | ||||
Forfeited
|
(43,057 | ) | $ | 15.95 | ||||
Outstanding
— March 31, 2010
|
2,838,618 | $ | 15.99 |
The
weighted average grant date fair value of options granted during the three
months ended March 31, 2010 was $11.56 per option.
The total
intrinsic value of options exercised during the three months ended March 31,
2010 was $2.1 million. As of March 31, 2010, the Company had
2,838,618 options vested or expected to vest over four years with an aggregate
intrinsic value of $28.4 million and a weighted average exercise price of
$15.99.
The
aggregate intrinsic value for options outstanding and exercisable at March 31,
2010 was $20.5 million with a weighted-average remaining contractual life of 6.0
years.
The
Company recorded share-based compensation expense associated with Class A common
stock options of $1.3 million and $1.4 million for the three months ended March
31, 2010 and 2009, respectively. As of March 31, 2010, unamortized
compensation cost was $8.8 million, net of assumed forfeitures. This
cost is expected to be recognized over a weighted-average period of 2.5
years.
Restricted
Stock and Performance Shares
The fair
value of restricted stock and performance shares is measured based upon the
closing Nasdaq Global Market price of the underlying Company stock as of the
date of grant. The Company uses historical data to estimate pre-vesting
forfeitures and record share-based compensation expense only for those awards
that are expected to vest. Restricted stock and performance share awards are
amortized over the vesting period using the straight-line method. The
only performance condition for unvested performance shares outstanding as of
March 31, 2010 is continued service to the Company. Upon vesting,
performance share awards convert into an equivalent number of shares of common
stock. As of March 31, 2010, unamortized compensation cost was $13.7 million net
of assumed forfeitures. This cost is expected to be recognized over a
weighted-average period between 1.9 and 3.4 years.
The
following table presents a summary of the restricted stock awards and
performance share awards for the three months ended March 31, 2010 and related
information:
|
Performance
|
Restricted
|
Weighted—Average
|
|||||||||
|
Share
|
Stock
|
Grant-
|
|||||||||
|
Awards
|
Awards
|
Date Fair Value
|
|||||||||
Repurchasable/nonvested
balance — January 1, 2010
|
467,455 | 466,812 | $ | 17.01 | ||||||||
Awarded
|
241,577 | 2,503 | $ | 24.10 | ||||||||
Released/vested
|
(4,999 | ) | (46,299 | ) | $ | 15.73 | ||||||
Forfeited/cancelled
|
(8,550 | ) | (11,376 | ) | $ | 15.79 | ||||||
Repurchasable/nonvested
balance — March 31, 2010
|
695,483 | 411,640 | $ | 17.08 |
The
Company recorded share-based compensation expense for restricted stock and
performance share agreements of $1.6 million and $0.8 million for the three
months ended March 31, 2010 and 2009, respectively.
Employee
Stock Purchase Plan
The
Company recorded share-based compensation expense in connection with the ESPP of
$0.3 million and $0.1 million for the three months ended March 31, 2010 and
2009. Unamortized compensation cost was $0.1 million as of March 31,
2010. This cost is expected to be recognized over the month ending April 30,
2010. At March 31, 2010, there were 1,345,861 shares reserved for
future issuance under the Company’s ESPP.
Reserved
Shares of Common Stock
The
Company has reserved the following number of shares of Class A common stock as
of March 31, 2010 for the awarding of future stock options and restricted
stock awards, release of outstanding performance share awards, exercise of
outstanding stock options and purchases under the ESPP:
Stock
Plans
|
8,185,135 | |||
Employee
Stock Purchase Plan
|
1,345,861 | |||
Total
|
9,530,996 |
6.
Property and Equipment
Property
and equipment consist of the following at March 31, 2010 and December 31,
2009:
|
March
31,
|
December
31,
|
||||||
|
2010
|
2009
|
||||||
(In
thousands)
|
||||||||
Computer
hardware and software
|
$ | 68,511 | $ | 59,699 | ||||
Furniture
and equipment
|
3,615 | 3,550 | ||||||
Leasehold
improvements
|
4,086 | 4,036 | ||||||
76,212 | 67,285 | |||||||
Less
accumulated depreciation and amortization
|
(47,460 | ) | (43,775 | ) | ||||
Total
|
$ | 28,752 | $ | 23,510 |
During
the three months ended March 31, 2010, computer hardware and software increased
significantly primarily as a result of $7.2 million in equipment purchases for
our new data center in the Chicago, Illinois area. The Company will
begin depreciating these asset additions in the second quarter of
2010.
7.
Intangible Assets and Goodwill
As a
result of the Company taking control of WWC on January 1, 2010, it acquired
various identifiable intangible assets. The fair value of these
intangible assets was determined based on the present value of the expected
future cash flows from the WWC compensation products acquired. The
Company also added goodwill which represents the excess purchase price over the
net identifiable assets acquired in connection with the purchase of
WWC. The Company acquired WWC primarily for the compensation product
technology which is expected to complement its performance management
product. The Company also expects long-term synergies and other
benefits from integrating the acquired compensation products on to its unified
platform. As of March
31, 2010, the Company had not completed its purchase price allocation related to
the WWC acquisition as the Company is waiting for additional information to
conclude on the fair values of the net assets acquired. All goodwill
is reported in our application services operating segment. None of
the goodwill recognized upon acquisition is deductible for tax
purposes. The following schedule presents the gross carrying amount
of intangible assets and goodwill as of March 31, 2010 (in
thousands):
Beginning
Balance
|
Acquisition
of
|
Balance
as of
|
||||||||||
January
1, 2010
|
WWC
|
March
31, 2010
|
||||||||||
Existing
technology
|
$ | 11,811 | $ | 3,770 | $ | 15,581 | ||||||
Customer
relationships
|
41,297 | 1,000 | 42,297 | |||||||||
Trade
name and other
|
308 | 10 | 318 | |||||||||
Non-compete
agreements
|
410 | 20 | 430 | |||||||||
Total
intangible assets
|
53,826 | 4,800 | 58,626 | |||||||||
Goodwill
|
91,027 | 11,623 | 102,650 | |||||||||
$ | 144,853 | $ | 16,423 | $ | 161,276 |
March
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||||||
Estimated
Useful Life
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||||||
Existing
technology
|
4 | $ | 15,581 | $ | (8,074 | ) | $ | 7,507 | $ | 11,811 | $ | (7,088 | ) | $ | 4,723 | |||||||||||||
Customer
relationships
|
6 | 42,297 | (17,664 | ) | 24,633 | 41,297 | (15,668 | ) | 25,629 | |||||||||||||||||||
Trade
name and other
|
2 | 318 | (254 | ) | 64 | 308 | (218 | ) | 90 | |||||||||||||||||||
Non-compete
agreements
|
2 | 430 | (364 | ) | 66 | 410 | (308 | ) | 102 | |||||||||||||||||||
$ | 58,626 | $ | (26,356 | ) | $ | 32,270 | $ | 53,826 | $ | (23,282 | ) | $ | 30,544 |
Amortization
expense associated with intangible assets was $3.1 million and $3.6 million for
the three month periods ended March 31, 2010 and 2009,
respectively.
The
estimated amortization expenses for intangible assets for the next five years
and thereafter are as follows:
Estimated Amortization
Expense
|
(In
thousands)
|
|||
Remainder
of 2010
|
$ | 8,972 | ||
2011
|
7,314 | |||
2012
|
4,811 | |||
2013
|
4,534 | |||
2014
|
4,531 | |||
Thereafter
|
2,108 | |||
Total
|
$ | 32,270 |
8.
Income Taxes
The tax
benefit reported for the three months ended March 31, 2010 is $4,000 and is
based on the Company’s projected annual effective tax rate for fiscal year
2010, adjusted for discrete tax items recorded in the
period.
The
effective tax rate for the three months ended March 31, 2010 including
discrete tax items is (0.5)%, and 2% excluding discrete tax
items. The provision consists of foreign and U.S. state income
tax expense offset by discrete tax items which in the quarter included tax
benefits relating to expiring statute of limitations and stock option
exercises. The difference between the statutory rate of 34% and the
Company’s quarterly effective tax rate of 2%, exclusive of discrete items,
was due primarily to permanent differences related to non-deductible stock
compensation expenses, state taxes, adjustments related to the WWC acquisition,
Canadian research and development tax credits and the utilization of acquired
and operating net operating losses not previously benefited.
Effective January 1, 2007, the Company adopted the provisions of an accounting
standard relating to the recognition of an uncertain tax benefit in the
financial statements. As of March 31, 2010, the Company had uncertain tax
benefits of approximately $5.2 million which represents an increase of $0.1
million from the balance at December 31, 2010.
In
December 2008, the Company was notified by the Canada Revenue Agency
(“CRA”) of their intention to audit tax years 2003 through
2007. To date, CRA has issued proposed assessment notices for tax
years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and
CAD $6.9 million, respectively. These adjustments relate,
principally, to the Company’s treatment of Canadian Development Technology
Incentives (“CDTI”) tax credits and income and expense allocations recorded
between the Company and its Canadian subsidiary. The Company
disagrees with the CRA’s basis for its proposed adjustments and intends to
appeal its decision through applicable administrative and judicial
procedures.
There
could be a significant impact to the Company’s uncertain tax positions over the
next twelve months depending on the outcome of any audit. The Company has
recorded income tax reserves believed to be sufficient to cover any potential
tax assessments for the open tax years. In the event the CRA audit
results in adjustments that exceed both the Company’s uncertain tax
benefits and its available deferred tax assets, the Company’s Canadian
subsidiary may become a tax paying entity in 2010 or in a prior year and may be
required to pay penalties and interest. Any such penalties and interest
cannot be reasonably estimated at this time.
The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. At March 31, 2010, accrued interest related to uncertain tax
positions was less than $0.1 million. As the Company has net operating loss
carryforwards for federal and state purposes, the statute of limitation remains
open for all tax years to the extent the tax attributes are carried forward into
future tax years. With few exceptions, the Company is no longer subject to
foreign income tax examinations by tax authorities for years before
2002.
The
Company will seek U.S. tax treaty relief through the appropriate Competent
Authority tribunals for all settlements entered into with the
CRA. Although the Company believes it has reasonable basis for its
tax positions, it is possible an adverse outcome could have a material effect
upon its financial condition, operating results or cash flows in a particular
quarter or annual period.
9.
Commitments and Contingencies
The
Company leases certain equipment, internet access services and office facilities
under non-cancelable operating leases or long-term
agreements. Commitments to settle contractual obligations in cash
under operating leases and other purchase obligations have not changed
significantly from the “Commitments and Contingencies” table included in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009, except for the following agreement entered into during the first three
months of 2010:
On
March 31, 2010, the Company entered into a manual replacement statement of work
(the “Agreement”) with Equinix Operating Co., Inc. (“Equinix”) according to
which Equinix will provide colocation services to the
Company. According to the terms of the Agreement, Equinix will
provide space, electrical power and other colocation services at its web hosting
facilities in Chicago, Illinois area for the Company’s hosting
infrastructure. Under the terms of the Agreement, the Company will
pay Equinix aggregate fees of approximately $9 million through December,
2014.
Litigation
Kenexa
Litigations — Kenexa BrassRing, Inc., (“Kenexa”) filed suit against
the Company in the United States District Court for the District of Delaware on
August 27, 2007. Kenexa alleges that we infringed Patent Nos. 5,999,939 and
6,996,561, and seeks monetary damages and an order enjoining the Company from
further infringement. The Company answered Kenexa’s complaint on
January 28, 2008. On May 9, 2008, Kenexa filed a similar lawsuit
against Vurv Technology, Inc. (now known as Vurv Technology LLC) (“Vurv”) in the
United States District Court for the District of Delaware, alleging that Vurv
has infringed Patent Nos. 5,999,939 and 6,996,561, and seeking monetary damages
and an order enjoining further infringement. Vurv answered Kenexa’s complaint on
May 29, 2008. The Company acquired Vurv on July 1, 2008. The Company
has reviewed these matters and believe that neither its nor Vurv’s software
products infringe any valid and enforceable claim of the asserted patents. The
Company has engaged in settlement discussions with Kenexa, but no settlement
agreement has been reached. Litigation is ongoing with respect to these
matters.
On
June 30, 2008, the Company filed a reexamination request with the United
States Patent and Trademark Office (“USPTO”), seeking reconsideration of the
validity of Patent No. 6,996,561 based on prior art that we presented with
our reexamination request. Finding that our reexamination request raised a
“substantial new question of patentability,” the USPTO ordered reexamination of
Patent No. 6,996,561 on September 5, 2008. On November 13, 2008,
the USPTO issued an office action rejecting all of the claims of Patent
No. 6,996,561 because they are either anticipated by or unpatentable over
the prior art. After comments by both parties to the reexamination, on
June 4, 2009 the USPTO issued a subsequent action standing by its
determination that certain claims of Patent No. 6,996,561 are unpatentable,
but indicating patentability of other claims. Both parties have since provided
additional comments on this subsequent action and both parties have since filed
appeals to elements of the reexamination to the USPTO’s Board of Patent Appeals
and Interferences. Accordingly, the USPTO’s reexamination of Patent
No. 6,996,561 is ongoing.
In a
separate action filed on June 25, 2008 in the United States District Court
for the District of Delaware, Kenexa’s parent, Kenexa Technology, Inc. (“Kenexa
Technology”), asserted claims against us for tortious interference with
contract, unfair competition, unfair trade practices, and unjust enrichment
arising from our refusal to allow Kenexa Technology employees to access and use
the Company’s proprietary applications to provide outsourcing services to a
customer of the Company. Kenexa Technology seeks monetary damages and injunctive
relief. The Company answered Kenexa Technology’s complaint on July 23,
2008. On October 16, 2008, the Company amended its answer and filed
counterclaims against Kenexa Technology, alleging copyright infringement,
misappropriation of trade secrets, interference with contractual relations, and
unfair competition arising from Kenexa Technology’s unauthorized access and use
of the Company’s products in the course of providing outsourcing services to its
customers. The Company sought declaratory judgment, monetary damages, and
injunctive relief. The Company filed a motion to dismiss Kenexa Technology’s
claims on July 21, 2009 and a motion for preliminary injunction to enjoin
Kenexa Technology employees from accessing its solutions deployed at joint
customers of both companies on July 22, 2009. These motions are pending
before the Court. In addition, Kenexa has joined the litigation, and
claims similar to those discussed above have been asserted against and by
Kenexa. This matter is ongoing.
On
November 7, 2008, Vurv sued Kenexa, Kenexa Technology, and two of Vurv’s
former employees (who now work for Kenexa and/or Kenexa Technology) in the
United States District Court for the Northern District of Georgia. In this
action, Vurv asserts claims for breach of contract, computer theft,
misappropriation of trade secrets, tortious interference, computer fraud and
abuse, and civil conspiracy. The defendants answered Vurv’s complaint on
December 12, 2008 without asserting any counterclaims. This matter is
ongoing.
On
July 17, 2009, Kenexa and Kenexa Recruiter (together, the “Kenexa
Plaintiffs”) filed suit against the Company, a current employee of the
Company and a former employee of the Company in Massachusetts Superior Court
(Middlesex County). The Kenexa Plaintiffs amended the complaint on
August 27, 2009 and added Vurv Technology LLC, two former employees of the
Company and two current employees of the Company. The Kenexa Plaintiffs
assert claims for breach of contract and the implied covenant of good faith and
fair dealing, unfair trade practices, computer theft, misappropriation of trade
secrets, tortious interference, unfair competition, unjust enrichment,
computer fraud and abuse. Vurv removed the complaint to the United States
District Court for the District of Massachusetts and the Company and Vurv, along
with two other defendants, answered the complaint on October 5,
2009. Additionally, four other defendants (current and former employees of
the Company) moved to dismiss for lack of jurisdiction on October 5 and
October 26, 2009. The Court dismissed the case for lack of
personal jurisdiction as to two individual defendants; the motion
pertaining to the other two defendants is pending before the court and the
matter is ongoing.
Securities
Claims — On November 14, 2008, following the
announcement that the Company was re-evaluating certain of the Company’s
historical and then current accounting practices, a shareholder class
action lawsuit entitled Brett Johnson v. Taleo Corporation, Michael Gregoire,
Katy Murray, and Divesh Sisodraker, CV-08-5182 SC, was filed in the United
States District Court for the Northern District of California. The
complaint alleged violations of §10(b) of the Exchange Act and SEC Rule
10b-5. The Johnson lawsuit was dismissed without prejudice on December 22,
2008. On December 17, 2008, a second substantially similar
shareholder lawsuit entitled Terrence Popyk v. Taleo Corporation, Michael
Gregoire, Katy Murray, and Divesh Sisodraker, CV 08-5634 PH, was filed in the
Northern District of California; the Popyk lawsuit was dismissed without
prejudice on January 20, 2009. On January 13, 2009, a third
shareholder lawsuit entitled Scott Stemper v Taleo Corporation, Michael
Gregoire, Katy Murray, and Divesh Sisodraker, CV 09-0151 JSW, was filed in the
United States District Court for the Northern District of
California. On February 9, 2009, the court renamed the Stemper
action “In re Taleo Corporation Securities Litigation” and appointed the
Greater Pennsylvania Carpenter’s Pension Fund as lead plaintiff (the
“Plaintiff”). On June 15, 2009, the Plaintiff filed an amended complaint
naming Taleo Corporation, Michael Gregoire, Katy Murray, and Divesh Sisodraker
as defendants (the “Amended Complaint”).
The
Amended Complaint alleges that defendants engaged in securities fraud in
violation of §10(b) of the Exchange Act and SEC Rule 10b-5. The fraud
allegations include a failure to apply GAAP in the reporting of quarterly and
annual financial statements and securities prospectuses from the time of the
Company’s initial public offering to recent filings with the SEC. The
complaint seeks an unspecified amount of damages on behalf of a purported class
of individuals or institutions who purchased or acquired shares of the Company’s
common stock between September 29, 2005 and November 12, 2008. In
response to the Amended Complaint, the defendants filed a motion to dismiss the
lawsuit on July 31, 2009. On February 17, 2010, the Court granted
defendants' motion and dismissed the Amended Complaint. The Court also
granted Plaintiff leave to amend and gave Plaintiff until March 12, 2010 to file
a second amended complaint. Plaintiff chose not to file a second amended
complaint. The court thereafter dismissed the action and entered judgment in
favor of defendants on March 15, 2010.
Other Matters
— In addition to the matters described above, the Company is subject
to various claims and legal proceedings that arise in the ordinary course of its
business from time to time, including claims and legal proceedings that have
been asserted against the Company by customers, former employees and advisors
and competitors. The Company is also subject to legal proceedings or
discussions that may result in litigation in the future. For
instance, the Company is currently responding to
subpoenas
from the Department of Homeland Security’s inspector general’s office relating
to the Company’s commercial pricing for the Transportation Safety Administration
contract, a government entity that accessed the Company’s services through a
third party private contractor, and the Company was recently notified by two
customers that an intellectual property licensing firm has inquired as to
whether a usability feature of the Taleo software was subject to patents held by
the intellectual property licensing firm. The Company has
accrued for estimated losses in the accompanying consolidated financial
statements for matters where it believes the likelihood of an adverse outcome is
probable and the amount of the loss is reasonably estimable. Based on
currently available information, the Company does not believe that the ultimate
outcome of these unresolved matters, individually or in the aggregate, is likely
to have a material adverse effect on its financial position or results of
operations. However litigation is subject to inherent uncertainties and its view
on these matters may change in the future. Were an unfavorable outcome to
occur in any one or more of those matters or the matters described above, over
and above the amount, if any, that has been estimated and accrued in the
Company’s condensed consolidated financial statements, it could have a material
adverse effect on our business, financial condition, results of operations
and/or cash flows in the period in which the unfavorable outcome occurs or
becomes probable, and potentially in future periods.
10. Other
Income
On
January 1, 2010, we completed our acquisition of WWC. In accordance
with the acquisition method of accounting for a business combination, the
Company’s 16% previously owned equity investment was remeasured to its $2.3
million fair value on the acquisition date and the $0.9 million difference
between the fair value of equity investment and the $1.4 million carrying value
was recorded as a gain in the first quarter of 2010. See Note 2
“Business Combinations and Dispositions" for additional information about the
acquisition.
11.
Net Income / (Loss) Per Share
Basic net
income (loss) per share is calculated by dividing net income (loss) available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per share is calculated by using
the weighted-average number of common shares outstanding during the period,
increased to include the number of additional shares of common stock that would
have been outstanding if the shares of common stock underlying the Company’s
outstanding dilutive stock options, restricted stock and performance shares had
been issued. The dilutive effect of outstanding options and restricted stock is
reflected in diluted earnings per share by application of the treasury stock
method. Under the treasury stock method, the amount the employee must pay for
exercising stock options, the amount of compensation cost for future service
that the Company has not yet recognized, and the amount of tax benefits that
would be recorded in additional paid-in capital when the award becomes
deductible are assumed to be used to repurchase shares. The following table sets
forth the computation of basic and diluted net income (loss) per
share:
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
Class A Common
|
||||||||
Numerator:
|
(In
thousands, except per share data)
|
|||||||
Net
income / (loss)
|
$ | 818 | $ | (2,085 | ) | |||
Denominator:
|
||||||||
Weighted-average
shares outstanding (1)
|
39,156 | 30,262 | ||||||
Effect
of dilutive options, restricted shares and performance
shares
|
1,182 | - | ||||||
Denominator
for dilutive income / (loss) per share
|
40,338 | 30,262 | ||||||
Net
income / (loss) per share — basic
|
$ | 0.02 | $ | (0.07 | ) | |||
Net
income / (loss) per share — diluted
|
$ | 0.02 | $ | (0.07 | ) | |||
Potentially
dilutive securities (2)
|
619 | 4,130 | ||||||
(1)
Outstanding shares do not include unvested restricted stock or unvested
performance shares.
|
||||||||
(2)
The potentially dilutive securities are excluded from the computation of
diluted net income / (loss) per share for the above periods because their
effect would have been anti-dilutive.
|
Effective
for interim and annual periods beginning after December 15, 2008, and applied
retrospectively, the FASB issued an accounting standard that requires use of the
two-class method to calculate earnings per share when non-vested restricted
stock awards are eligible to receive dividends (i.e., participating securities),
even if the Company does not intend to declare dividends. Although the Company’s
unvested restricted stock awards are eligible to receive dividends, they are not
significant as compared with total weighted average diluted shares outstanding
and there is no impact on the Company’s earnings per share calculation in
applying the two-class method.
12.
Segment and Geographic Information
The
Company is organized geographically and by line of business. The Company has two
operating segments: application and consulting services. The application
services segment is engaged in the development, marketing, hosting and support
of the
Company’s
software applications. The consulting services segment offers implementation,
business process reengineering, change management, and education and training
services. The Company does not allocate or evaluate assets or capital
expenditures by operating segments. Consequently, it is not practical to show
assets, capital expenditures, depreciation or amortization by operating
segment.
The
following table presents a summary of operating segments:
Application
|
Consulting
|
Total
|
||||||||||
(In
thousands)
|
||||||||||||
Three
Months Ended March 31, 2010:
|
||||||||||||
Revenue
|
$ | 47,564 | $ | 7,482 | $ | 55,046 | ||||||
Contribution
margin(1)
|
$ | 26,197 | $ | 997 | $ | 27,194 | ||||||
Three
Months Ended March 31, 2009:
|
||||||||||||
Revenue
|
$ | 41,204 | $ | 6,879 | $ | 48,083 | ||||||
Contribution
margin(1)
|
$ | 22,982 | $ | 606 | $ | 23,588 |
(1) The
contribution margins reported reflect only the expenses of the segment and do
not represent the actual margins for each operating segment since they do not
contain an allocation for selling and marketing, general and administrative, and
other corporate expenses incurred in support of the line of
business.
Profit
Reconciliation:
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Contribution
margin for operating segments
|
$ | 27,194 | $ | 23,588 | ||||
Sales
and marketing
|
(17,060 | ) | (15,909 | ) | ||||
General
and administrative
|
(10,298 | ) | (9,627 | ) | ||||
Interest
and other income, net
|
978 | 100 | ||||||
Income
/ (loss) before provision for / benefit from income taxes
|
$ | 814 | $ | (1,848 | ) |
During
the three months ended March 31, 2010 and 2009, there were no customers that
individually represented greater than 10% of the Company’s total revenue or
accounts receivable, respectively.
13.
Comprehensive Income / (Loss)
Comprehensive
income / (loss), net of income taxes, includes foreign currency transaction
losses.
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Net
income / (loss)
|
$ | 818 | $ | (2,085 | ) | |||
Net
foreign currency translation adjustments
|
(324 | ) | (322 | ) | ||||
Comprehensive
income / (loss)
|
$ | 494 | $ | (2,407 | ) |
This
Form 10-Q including “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
statements identify prospective information, particularly statements referencing
our expectations regarding revenue and operating expenses, cost of revenue, tax
and accounting estimates, cash, cash equivalents and cash provided by operating
activities, the demand and expansion opportunities for our products, our
customer base, our competitive position, and the impact of the current economic
environment on our business. In some cases, forward-looking statements can be
identified by the use of words such as “may,” “could,” “would,” “might,” “will,”
“should,” “expect,” “forecast,” “predict,” “potential,” “continue,”
“anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“is scheduled for,” “targeted,” and variations of such words and similar
expressions. Such forward-looking statements are based on current expectations,
estimates, and projections about our industry, management’s beliefs, and
assumptions made by management. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under
“Risk Factors” or included elsewhere in this Quarterly Report on Form
10-Q. Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
The following discussion should be
read in conjunction with our unaudited condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q.
Overview
We are a
leading global provider of on-demand talent management software solutions. Our
goal is to help our customers improve business results through better talent
management. We offer recruiting, performance management, compensation,
succession planning, leadership development and analytics software solutions
that help our customers attract and retain high quality talent, more effectively
match workers’ skills to business needs, reduce the time and costs associated
with manual and inconsistent processes, ease the burden of regulatory
compliance, and increase workforce productivity through better alignment of
workers’ goals, career plans and compensation with corporate objectives. In
addition, our solutions are highly configurable which allows our customers to
implement talent management processes that are tailored to accommodate different
employee types (including professional and hourly), in different locations,
business units and regulatory environments.
We offer
two suites of talent management solutions: Taleo Enterprise and Taleo Business
Edition. Taleo Enterprise is designed for medium and large enterprises with more
complex needs. Taleo Business Edition is designed for smaller, more centralized
organizations, stand-alone departments and divisions of larger organizations,
and staffing companies. Our revenue is primarily earned through
subscription fees charged for accessing and using these solutions. Our customers
generally are billed in advance for their use of our solutions, and we use these
cash receipts to fund our operations. Our customers generally pay us on a
quarterly or annual basis.
We focus
our evaluation of our operating results and financial condition on certain key
metrics, as well as certain non-financial aspects of our business. Included in
our evaluation of our financial condition are our revenue composition and
growth, net income, and our overall liquidity that is primarily comprised of our
cash and accounts receivable balances. Non-financial data is also evaluated,
including purchasing trends for software applications across industries and
geographies, input from current and prospective customers relating to product
functionality and general economic data. We use the financial and
non-financial data described above to assess our historic performance, and also
to plan our future strategy. We continue to believe that our strategy and our
ability to execute that strategy may enable us to improve our relative
competitive position in a difficult economic environment and may provide
long-term growth opportunities given the cost saving benefits of our solutions
and the business requirements our solutions address.
However,
if general economic conditions worsen or fail to improve, we will likely
experience increased delays in our sales cycles, increased pressure from
prospective customers to offer discounts higher than our historical practices,
and pressure from existing customers to renew expiring software
subscription agreements at lower rates. Additionally, certain of our
customers have become or may become bankrupt or insolvent as a result of the
recent economic downturn. To date, we have not been negatively
impacted in a material way by customer bankruptcies but if a significant
customer were to declare bankruptcy, we could lose all revenue from such
customer or payments might be delayed during bankruptcy
proceedings.
On
January 1, 2010, we took control of Worldwide Compensation, Inc. (“WWC”), a
private company with headquarters in California that provides compensation
management solutions, when we purchased the remaining 84% equity interest from
the former shareholders of WWC. Accordingly, the assets, liabilities and
operating results of WWC will be reflected in our consolidated financial
statements from the date of acquisition. The total consideration paid by us
for the portion of WWC that we did not already own was approximately $14.1
million in cash, including approximately $0.3 million in transaction costs and
$0.4 million in incentive compensation. No contingent cash payments
remain for this transaction. Additionally, we remeasured the 16%
previously held equity interest to its fair value resulting in a $0.9 million
gain being recorded in the statement of operations for the three months ending
March 31, 2010. We expect the WWC compensation technology to complement our
existing performance management product in our talent management product
suite.
Sources
of Revenue
We
derive our revenue from two sources: application revenue and consulting
revenue.
Application
Revenue
Application
revenue generally consists of subscription fees from customers accessing our
applications, which includes the use of application, data hosting, and
maintenance of the application. The majority of our application subscription
revenue is recognized ratably on a monthly basis over the life of the
application agreement, based on a stated, fixed-dollar amount. The majority of
our application revenue in any quarter comes from transactions entered into in
previous quarters.
The term
of our application agreements signed with new customers purchasing Taleo
Enterprise in the first quarter of 2010 and 2009 was typically three or more
years. The term of application agreements for new customers purchasing Taleo
Business Edition in the first quarter of 2010 and 2009 was typically one
year. Our customer renewals on a dollar basis have historically been
greater than 95%.
Application
agreements entered into during the three months ended March 31, 2010 and 2009
are generally non-cancelable, or contain significant penalties for early
cancellation, although customers typically have the right to terminate their
contracts for cause if we fail to perform our material obligations.
|
Consulting
Revenue
|
Consulting
revenue consists primarily of fees associated with application process
definition, configuration, integration, change management, optimization,
expansion and education and training services. From time to time, certain
of our consulting projects are subcontracted to third parties. Our customers may
also elect to use unrelated third parties for the types of consulting services
that we offer. Our typical consulting contract provides for payment within 30 to
60 days of invoice.
For
transactions entered into prior to 2010 that include both application and
consulting services, the related consulting revenues are recognized ratably over
the remaining subscription term. For engagements sold
separately from application services, the Company recognizes consulting revenues
as delivered. In some instances the Company sells consulting services on a
fixed-fee basis and, in those cases, for engagements sold separately from
application services, the Company recognizes consulting revenues using a
proportional performance model based on services performed. Expenses
associated with delivering all consulting services are recognized as incurred
when the services are performed. Associated out-of-pocket travel and
expenses related to the delivery of consulting services is typically reimbursed
by the customer. This is accounted for as both revenue and expense in the period
the cost is incurred.
For
transactions entered into in 2010, the Company allocates revenue in
multi-element arrangements using the relative selling price method. Revenue is
then recognized as appropriate for each separate element based on its fair
value. As 2010 progresses, this change will significantly increase services
revenue and services gross margins as the Company will continue to recognize
previously deferred services revenue ratably for multi-element arrangements that
occurred prior to fiscal year 2010, while consulting services revenue from new
transactions in 2010 will generally be recognized as
performed.
Cost
of Revenue and Operating Expenses
Cost
of Revenue
Cost of
application revenue primarily consists of expenses related to hosting our
application and providing support, including employee-related costs,
depreciation expense associated with computer equipment and amortization of
intangibles from acquisitions. We allocate overhead such as rent and occupancy
charges, information system cost, employee benefit costs and depreciation
expense to all departments based on employee count. As such, overhead expenses
are reflected in each cost of
revenue
and operating expense category. We currently deliver our solutions from nine
data centers that host the applications for all of our customers. In
the first quarter of 2010, we added two data center facilities in San Jose and
Los Angeles, California in connection with our acquisition of WWC and opened our
new facility in the Chicago, Illinois area. We also closed data
center facilities in both San Francisco, California and Atlanta, Georgia, as
part of our plan to consolidate our U.S. production data center operations for
our Taleo Enterprise Solution into a new single facility in the Chicago,
Illinois area in 2010.
Cost of
consulting revenue consists primarily of employee-related costs associated with
these services and allocated overhead. The cost associated with providing
consulting services is significantly higher as a percentage of revenue than for
our application revenue, primarily due to labor costs. We also subcontract to
third parties for a portion of our consulting business. We recognize
expenses related to our consulting services in the period in which the expenses
are incurred. To the extent that our customer base grows, we intend
to continue to invest additional resources in our consulting services. The
timing of these additional expenses could affect our cost of revenue, both in
dollar amount and as a percentage of revenue, in a particular quarterly or
annual period.
Sales
and Marketing
Sales and
marketing expenses consist primarily of salaries and related expenses for our
sales and marketing staff, including commissions, marketing programs, allocated
overhead and amortization of intangibles from acquisitions. Marketing programs
include advertising, events, corporate communications, and other brand building
and product marketing expenses. As our business grows, we plan to continue to
increase our investment in sales and marketing by adding personnel, building our
relationships with partners, expanding our domestic and international selling
and marketing activities, building brand awareness, and sponsoring additional
marketing events.
Research
and Development
Research
and development expenses consist primarily of salaries and related expenses,
allocated overhead, and third-party consulting fees. Our expenses are net of the
provincial investment credits we receive from the province of
Quebec. We focus our research and development efforts on increasing
the functionality and enhancing the ease of use and quality of our applications,
as well as developing new products and enhancing our
infrastructure.
General
and Administrative
General
and administrative expenses consist of salaries and related expenses for
executive, finance and accounting, human resource, legal, operations and
management information systems personnel, professional fees, board compensation
and expenses, expenses related to potential mergers and acquisitions, other
corporate expenses.
In our
“Results of Operations” below, we have included two types of tables: period over
period changes in income statement
line
items, and summaries of the key changes in expenses by natural category for each
expense line item.
Critical
Accounting Policies and Estimates
Our
unaudited condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States, or GAAP. The
preparation of these unaudited condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses and related disclosures. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. In many instances, we
could have reasonably used different accounting estimates, and in other
instances changes in the accounting estimates are reasonably likely to occur
from period to period. Accordingly, actual results could differ significantly
from the estimates made by our management. To the extent that there are material
differences between these estimates and actual results, our future financial
statement presentation, financial condition, results of operations and cash
flows will be affected.
In many
cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application,
while in other cases, management’s judgment is required in selecting among
available alternative accounting standards that allow different accounting
treatment for similar transactions. Our management has reviewed these critical
accounting policies, our use of estimates and the related disclosures with our
audit committee.
We derive
revenue from fixed subscription fees for access to and use of our on-demand
application services and from consulting fees from services to support the
implementation, configuration, education, and optimization of the applications.
We present revenue and deferred revenue from each of these sources separately
in our consolidated financial statements.
In
addition to fixed subscription fee arrangements, we have on limited occasions,
entered into arrangements including perpetual licenses with hosting services to
be provided over a fixed term. For hosted arrangements, revenues are recognized
in accordance
with the standards established by the FASB for hosting arrangements that
includes a right of the customer to use the software on another entity’s
hardware.
Our
application and consulting fee revenue is recognized when all of the following
conditions have been satisfied:
|
•
|
persuasive
evidence of an agreement exists;
|
|
•
|
delivery
has occurred;
|
|
•
|
fees
are fixed or determinable; and
|
|
•
|
the
collection of fees is considered
probable.
|
If
collection is not considered probable, we recognize revenues when the fees for
the services performed are collected. These arrangements generally do not
include performance terms, cancellation or termination clauses, or other refund
type provisions. However, if non-standard acceptance periods or
non-standard performance criteria, cancellation or right of refund
terms are required, we recognize revenue upon the satisfaction of
such criteria, as applicable.
Application
Revenue
The
majority of our application revenue is recognized monthly over the life of the
application agreement, based on stated, fixed-dollar amount contracts
with our customers and consists of:
|
•
|
fees
paid for subscription services
|
|
•
|
amortization
of any related set-up fees; and
|
|
•
|
amortization
of fees paid for hosting services and software maintenance services under
certain software license
arrangements
|
Set up
fees paid by customers in connection with subscription services are deferred and
recognized ratably over the longer of the life of the application agreement or
the expected lives of customer relationships, which generally range from three
to seven years. We continue to evaluate the length of the
amortization period of the set up fees as we gain more experience with
customer contract renewals.
Consulting
Revenue
Consulting
revenue consists primarily of fees associated with application configuration,
integration, business process re-engineering, change management, and education
and training services. Our consulting engagements are typically billed on
a time and materials basis. These services are generally performed within six
months after the consummation of the arrangement. From time to time, certain of
our consulting projects are subcontracted to third parties. Customers
may also elect to use unrelated third parties for the types of consulting
services that we offer. Our typical consulting contract provides
for payment within 30 to 60 days of invoice.
In
October 2009, the FASB amended the accounting standards for revenue recognition
for multiple deliverable revenue arrangements to:
|
•
|
Provide
updated guidance on how the deliverables of an arrangement should be
separated, and how the consideration should be
allocated:
|
|
•
|
Eliminate
the use of the residual method and require an entity to allocate revenue
using the relative selling price method;
and
|
|
•
|
Require
an entity to allocate revenue to an arrangement using the estimated
selling prices (“ESP”) of deliverables if it does not have vendor-specific
objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling
price.
|
Valuation
terms are defined as set forth below:
|
•
|
VSOE
— the price at which we sell the element in a separate stand-alone
transaction
|
|
•
|
TPE
— evidence from us or other companies of the value of a largely
interchangeable element in a
transaction
|
|
•
|
ESP
— our best estimate of the selling price of an element in a
transaction.
|
We
elected to early adopt this accounting guidance for our current fiscal year
ending December 31, 2010 on a prospective basis. The implementation resulted in
additional disclosures that are included below.
We follow
accounting guidance for revenue recognition of multiple-element arrangements to
determine whether such arrangements contain more than one unit of accounting.
Multiple-element arrangements require the delivery or performance of multiple
products, services and/or rights to use assets. To qualify as a separate unit of
accounting, the delivered item must have value to the customer on a standalone
basis. Our consulting services have standalone value because those services are
sold separately by other vendors, and we have VSOE for determining fair value
for consulting services based on the consistency in pricing when sold
separately. Our application services have standalone value as such services are
often sold separately; however, we use ESP to determine fair value for our
application services when sold in a multi-element arrangement as we do not have
VSOE for these application
services
and TPE is not a practical alternative due to differences in features and
functionality of other companies offerings and lack of access to the actual
selling price of competitors standalone sales. If new application
services products are acquired or developed that require significant services in
order to deliver the application service, such services would not be considered
to have standalone value; therefore, the entire arrangement will be evaluated as
one unit of accounting. We determined our ESP of fair value
for our application services based on the following:
·
|
We
have defined processes and controls to ensure our pricing integrity.
Such controls include oversight by a pricing committee which includes a
cross functional team and members of executive management. Significant
factors considered when establishing pricing include market conditions,
underlying costs, promotions, and pricing history of similar services.
Based on this information, management establishes or modifies pricing that
is approved by the pricing
committee.
|
·
|
We
analyzed application services pricing history and stratified the
population based on actual pricing trends within certain markets and
established ESP for each market.
|
For
transactions entered into prior to 2010 that include both application and
consulting services, the related consulting revenues are recognized ratably over
the remaining subscription term. For engagements sold
separately from application services, we recognize consulting revenues as
delivered. In some instances we sell consulting services on a fixed-fee
basis and, in those cases, for engagements sold separately from application
services, we recognize consulting revenues using a proportional performance
model based on services performed. Expenses associated with
delivering all consulting services are recognized as incurred when the services
are performed. Associated out-of-pocket travel costs and expenses
related to the delivery of consulting services are typically reimbursed by the
customer and are accounted for as both revenue and expense in the period the
cost is incurred.
For
transactions entered into in 2010, we allocate revenue in multi-element
arrangements using the relative selling price method. Revenue is then recognized
as appropriate for each separate element based on its allocated value. As
2010 progresses, this change will significantly increase services revenue and
services gross margins as we will continue to recognize previously deferred
services revenue ratably for multi-element arrangements that occurred prior to
fiscal year 2010, while consulting services revenue from new transactions in
2010 will generally be recognized as performed. Consulting services
revenue recognized in 2010 related to multi-element arrangements entered into
prior to 2010 was approximately $3.6 million. For the quarter ended
March 31, 2010, the impact on our revenue under the new accounting guidance as
compared to our previous methodology resulted in approximately $0.4 million
revenue recognized as performed that would have previously been deferred and
recognized ratably. Revenue associated with transactions
entered into during the first three months of 2010 was generally not recognized
as the related services were not yet delivered.
Results
of Operations
The
following tables set forth certain unaudited condensed consolidated statements
of operations data expressed as a percentage of total revenue for the periods
indicated. Period-to-period comparisons of our financial results are not
necessarily meaningful and you should not rely on them as an indication of
future performance.
|
Three Months Ended
March 31,
|
|||||||
|
2010
|
2009
|
||||||
Condensed
Consolidated Statement of Operations Data:
|
||||||||
Revenue:
|
||||||||
Application
|
86 | % | 86 | % | ||||
Consulting
|
14 | % | 14 | % | ||||
Total
revenue
|
100 | % | 100 | % | ||||
Cost
of revenue (as a percent of related revenue):
|
||||||||
Application
|
24 | % | 24 | % | ||||
Consulting
|
87 | % | 91 | % | ||||
Total
cost of revenue
|
32 | % | 33 | % | ||||
Gross
profit
|
68 | % | 67 | % | ||||
Operating
expenses:
|
||||||||
Sales
and marketing
|
31 | % | 33 | % | ||||
Research
and development
|
18 | % | 18 | % | ||||
General
and administrative
|
19 | % | 20 | % | ||||
Total
operating expenses
|
68 | % | 71 | % | ||||
Operating
income / (loss)
|
0 | % | -4 | % | ||||
Other
income (expense):
|
||||||||
Interest
income
|
0 | % | 0 | % | ||||
Interest
expense
|
0 | % | 0 | % | ||||
Other
income (expense):
|
2 | % | 0 | % | ||||
Total
other income
|
2 | % | 0 | % | ||||
Income
/ (loss) before provision for / benefit from income taxes
|
1 | % | -4 | % | ||||
Provision
for / (benefit from) income taxes
|
0 | % | 0 | % | ||||
Net
income / (loss)
|
1 | % | -4 | % |
Comparison
of the Three Months Ended March 31, 2010 and 2009
Revenue
Three Months Ended
|
|
|
||||||||||||||
March 31,
|
||||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Application
revenue
|
$ | 47,564 | $ | 41,204 | $ | 6,360 | 15 | % | ||||||||
Consulting
revenue
|
7,482 | 6,879 | 603 | 9 | % | |||||||||||
Total
revenue
|
$ | 55,046 | $ | 48,083 | $ | 6,963 | 14 | % |
Application
revenue increased due to successful renewals of existing customers, sales to new
customers, sales of additional applications and broader roll out of our
applications by existing customers. Application revenue from
our products for medium and larger more complex organizations increased by $6.2
million for the three months ended March 31, 2010 and application revenue from
small business product lines remained flat for the three months ended March 31,
2010. Our list prices for application services have remained
relatively consistent on a year-over-year basis, and renewals of application
services for medium and larger more complex organization, on a dollar-for-dollar
basis, remained strong at greater than 95%. For the remainder of
2010, we expect to see renewals in the same percentage range, but unexpected
events, such as bankruptcy filings within our customer base, may negatively
impact our renewal trends. We expect total application revenue to increase over
the remainder of the year as we continue to increase our sales of new and
existing applications into our installed customer base as well as to new
customers.
Our
consulting revenue comes from two kinds of engagements: standalone consulting
engagements which are not associated with new product implementations and
consulting engagements which are associated with new product implementations
that are sold in multi-element arrangements with application services.
Standalone consulting engagement revenue is generally recognized when the
services are performed. Consulting revenue for engagements which are associated
with new product implementation entered into prior to 2010 is generally
recognized ratably over the term of the associated application services
term with a significant portion of revenue deferred to periods beyond the
period in which services were performed. Consulting revenue for engagements
which are associated with new product implementation entered into during 2010 is
generally recognized when the services are performed.
For
the three months ended March 31, 2010, consulting revenue increased slightly as
a result of an increase in revenue recognized from consulting services delivered
in past periods that was associated with new product
implementations. Consulting revenue recognized as the consulting
services were performed, remained constant when compared to the same period in
2009. We expect total consulting revenue to increase over the
remainder of the year as we continue to recognize previously deferred revenue
from prior year multi-element arrangements and recognize revenue as consulting
services are performed for transactions entered into during 2010.
Cost
of Revenue
Three Months Ended
|
|
|
||||||||||||||
March 31,
|
||||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Cost
of revenue - application
|
$ | 11,313 | $ | 9,685 | $ | 1,628 | 17 | % | ||||||||
Cost
of revenue - consulting
|
6,485 | 6,273 | 212 | 3 | % | |||||||||||
Cost
of revenue - total
|
$ | 17,798 | $ | 15,958 | $ | 1,840 | 12 | % |
Cost
of revenue – application- summary of changes
Change from 2009 to 2010
|
||||
Three Months Ended
|
||||
March
31,
|
||||
Hosting
facility cost
|
$ | 1,053 | ||
Employee-related
costs
|
431 | |||
Amortization
|
185 | |||
Various
other expense
|
(41 | ) | ||
$ | 1,628 |
During
the three months ended March 31, 2010, the increase in cost of application
revenue was primarily driven by an increase in hosting facility
expenses. Hosting facility expenses increased primarily due to
additional third-party software costs, internet bandwidth costs, depreciation
and other costs resulting from hosting infrastructure investments made in 2009
and support cost associated with our new U.S. production data center operations
in the Chicago, Illinois area. Employee-related cost increased
due to an increase in compensation costs for international employees due to
unfavorable foreign exchange rates, merit pay raises, and an increase in
incentive compensation as compared to the prior year. Our
amortization expense increased due to the amortization of intangible assets
obtained in connection with the January 1, 2010 acquisition of
WWC. We expect cost of application revenue to increase in terms of
absolute dollars for the remainder of the year as a result of expenses
associated with our new production data center.
Cost
of revenue – consulting - summary of changes
Change from 2009 to 2010
|
||||
Three Months Ended
|
||||
March
31,
|
||||
Employee-related
costs
|
$ | 436 | ||
Professional
services
|
(268 | ) | ||
Various
other expense
|
44 | |||
$ | 212 |
Expenses
associated with delivering consulting services are generally recognized as
incurred when the services are performed. For the three months ended
March 31, 2010, cost of consulting revenue increased as a result of an increase
in employee-related costs as compared to the same period in
2009. Employee-related cost increased as a result of the hiring of
additional employees in connection with the acquisition of WWC on January 1,
2010, an increase in compensation cost for international employees due to
unfavorable foreign exchange rates, merit pay raises and an increase in
incentive compensation as compared to the same period in the
year. These increases were partially offset by a reduction in
outsourced consulting services cost as we have converted a substantial portion
of legacy Vurv customers to Taleo products in 2009 and therefore reduced the
demand for outsourced consulting services for the three months ended March 31,
2010. We expect cost of consulting revenue to increase in terms of
absolute dollars for the remainder of the year.
Gross
Profit and Gross Profit Percentage
Three Months Ended
|
|
|
||||||||||||||
March 31,
|
||||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Gross
profit
|
||||||||||||||||
Gross
profit — application
|
$ | 36,251 | $ | 31,519 | $ | 4,732 | 15 | % | ||||||||
Gross
profit — consulting
|
997 | 606 | 391 | 65 | % | |||||||||||
Gross
profit — total
|
$ | 37,248 | $ | 32,125 | $ | 5,123 | 16 | % |
Three Months Ended
|
||||||||||||
|
March 31,
|
|
||||||||||
|
2010
|
2009
|
% change
|
|||||||||
Gross
profit percentage
|
||||||||||||
Gross
profit percentage — application
|
76 | % | 76 | % | 0 | % | ||||||
Gross
profit percentage — consulting
|
13 | % | 9 | % | 4 | % | ||||||
Gross
profit percentage — total
|
68 | % | 67 | % | 1 | % |
Gross
profit – application
Gross
profit percentage on application revenue during the three months ended March 31,
2010 remained unchanged from the same period in 2009 due to an overall increase
in application revenue being offset by an increase in hosting
costs. We increased the scalability of our hosting environment during
the prior year resulting in higher on-going hosting costs in the first three
months of 2010. We expect gross profit on application revenue to
remain constant as a percentage of application revenue for the remainder of the
year.
Gross
profit – consulting
A
significant percentage of consulting revenue is recognized ratably over the term
of the subscription agreement while expenses associated with delivering these
services are recognized as incurred when the services are
performed. The difference of the timing of revenue recognition
compared to the timing of recognizing expenses as performed can cause
fluctuations in gross profit for consulting services.
The
higher gross profit percentage on consulting revenue in the three months ended
March 31, 2010 compared to the same period in 2009 resulted from an increase in
revenue from consulting services delivered in prior periods. During
the first quarter of 2010, we benefited from recognizing revenue for which the
related expense was recorded in the prior period. In 2010, gross
margins on consulting will be positively affected by the recognition of
previously deferred revenue with no related expense for engagements entered into
prior to 2010, and the change in accounting guidance in 2010 whereby consulting
revenue for new engagements will be generally recognized when the services are
performed.
Operating
expenses
Three Months Ended
|
|
|
||||||||||||||
|
March 31,
|
|||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Sales
and marketing
|
$ | 17,060 | $ | 15,909 | $ | 1,151 | 7 | % | ||||||||
Research
and development
|
10,054 | 8,537 | 1,517 | 18 | % | |||||||||||
General
and administrative
|
10,298 | 9,627 | 671 | 7 | % | |||||||||||
Total
operating expenses
|
$ | 37,412 | $ | 34,073 | $ | 3,339 | 10 | % |
Sales
and marketing- summary of changes
Change from 2009 to 2010
|
||||
Three Months Ended
|
||||
March
31,
|
||||
Employee-related
costs
|
$ | 1,232 | ||
Stock-based
compensation
|
370 | |||
Amortization
|
(700 | ) | ||
Various
other expenses
|
249 | |||
$ | 1,151 |
During
the three months ended March 31, 2010, the increase in sales and marketing
expense was primarily driven by an increase in employee-related
expenses. Employee-related costs increased due to merit pay raises,
an increase in compensation cost for international employees due to unfavorable
foreign exchange rates, an increase in incentive compensation due to an increase
in sales, and one-time severance and relocation costs. These
increases were partially offset by a decrease in amortization expense related to
intangible assets acquired in connection with the Vurv
acquisition. We amortize Vurv intangible assets in proportion to our
conversion of Vurv customers to Taleo products. There are fewer
customers to convert in 2010 than 2009 resulting in a reduction in amortization
expense for the three months ended March 31, 2010 compared to the same period in
the prior year. We expect sales and marketing costs to increase in
terms of dollars for the remainder of the year.
Research
and development– summary of changes
Change from 2009 to 2010
|
||||
Three Months Ended
|
||||
March
31,
|
||||
Employee-related
costs
|
$ | 1,284 | ||
Various
other expenses
|
233 | |||
$ | 1,517 |
During
the three months ended March 31, 2010, the increase in research and development
expense was primarily driven by an increase in employee-related costs.
Employee-related costs increased primarily due to an increase in headcount by 14
persons, merit pay raises, an increase in compensation cost for international
employees due to unfavorable foreign exchange rates and an increase in incentive
compensation costs when compared to the same period in the prior
year. Also, during the three months ended March 31, 2010, other
research and development operating expenses were adversely affected by the
negative impact of foreign currency movements against the U.S.
dollar. We expect research and development costs to increase in the
second quarter of 2010.
General
and administrative– summary of changes
Change from 2009 to 2010
|
||||
Three Months Ended
|
||||
March
31,
|
||||
Employee-related
costs
|
$ | 677 | ||
Legal
|
700 | |||
Audit
|
(182 | ) | ||
Bad
debt reserve
|
(493 | ) | ||
Consultants
/ temporary help
|
(582 | ) | ||
Various
other expenses
|
551 | |||
$ | 671 |
For
the three months ended March 31, 2010, expenses increased as compared to the
same period in 2009 primarily resulting from increased employee-related costs
associated with increase in incentive compensation costs, increased legal cost
associated with on-going litigation and transaction costs associated with
acquisition of WWC on January 1, 2010, offset by a decrease in non-recurring
2009 consulting and audit fees associated with an evaluation of our historical
revenue practices during the first quarter of 2009, and lower bad debt expense
in 2010. We expect general and administrative costs to increase in
absolute dollars for the remainder of the year.
Contribution
Margin – Operating Segments
Three Months Ended
|
|
|
||||||||||||||
|
March 31,
|
|||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Contribution
Margin (1)
|
||||||||||||||||
Contribution
margin — application
|
$ | 26,197 | $ | 22,982 | $ | 3,215 | 14 | % | ||||||||
Contribution
margin — consulting
|
997 | 606 | 391 | 65 | % | |||||||||||
Contribution
margin — total
|
$ | 27,194 | $ | 23,588 | $ | 3,606 | 15 | % |
(1) The
contribution margins reported reflect only the expenses of the segment and do
not represent the actual margins for each operating segment since they do not
contain an allocation for selling and marketing, general and administrative, and
other corporate expenses incurred in support of the line of
business.
Application
contribution margin increased primarily due to an increase in
revenue. This increase was offset by an increased hosting cost and an
increase in product development expenses. The explanation for the
change in consulting contribution margin is consistent with the explanation for
the change in consulting gross profit.
Other
income (expense)
Three Months Ended
|
|
|
||||||||||||||
|
March 31,
|
|||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Interest
income
|
$ | 127 | $ | 141 | $ | (14 | ) | -10 | % | |||||||
Interest
expense
|
(34 | ) | (41 | ) | 7 | -17 | % | |||||||||
Other
income
|
885 | - | 885 | * | ||||||||||||
Total
other income, net
|
$ | 978 | $ | 100 | $ | 878 | * | |||||||||
|
||||||||||||||||
*
not meaningful
|
Interest income — The
decrease in interest income is attributable to a $0.1 million interest payment
received from the Canadian government related to 2006 and 2005 CDTI credits in
the first quarter of 2009 as compared to same period in 2010. This
decrease was offset by an increase in interest income due a higher cash
balance during the first three months of 2010 compared to the same period in the
prior year. Our stock offering in November 2009 resulted in our cash
balance during the first quarter of 2010 to be significantly higher than the
prior year balance. Interest rates remained unchanged between the two
periods.
Interest expense
— There was no significant change in interest expense during the three
months ended March 31, 2010 compared to the same period in the prior
year.
Other income - On
January 1, 2010, we completed our acquisition of WWC. In accordance
with the acquisition method of accounting for a business combination, our 16%
previously owned equity investment was remeasured to its $2.3 million fair value
on the acquisition date and the $0.9 million difference between the fair value
of the equity investment and the $1.4 million carrying value was recorded as a
gain in the first quarter of 2010.
Provision
for / (benefit from) income taxes
Three Months Ended
|
|
|
||||||||||||||
|
March 31,
|
|||||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Provision
for / (benefit from) income taxes
|
$ | (4 | ) | $ | 237 | $ | (241 | ) | -102 | % |
The tax
benefit reported for the three months ended March 31, 2010 is $4,000 and is
based on our projected annual effective tax rate for fiscal year
2010, adjusted for discrete tax items recorded in the
period.
The
effective tax rate for the three months ended March 31, 2010 including
discrete tax items is (0.5)%, and 2% excluding discrete tax
items. The provision consists of foreign and U.S. state income
tax expense offset by discrete tax items which in the quarter included tax
benefits relating to expiring statute of limitations and stock option
exercises. The difference between the statutory rate of 34% and our
quarterly effective tax rate of 2%, exclusive of discrete items, was due
primarily to permanent differences related to non-deductible stock compensation
expenses, state taxes, adjustments related to the WWC acquisition and the
utilization of acquired and operating net operating losses not previously
benefited.
At March
31, 2010, we maintained a valuation allowance against our U.S. deferred tax
assets, excluding U.S. federal alternative minimum tax credits, as we determined
it was more likely than not these assets would not be realized. If we are to
conclude the U.S. deferred tax assets will more likely than not be realized in
the future, we will reverse the valuation allowance, which would likely have a
material impact on our financial results in the form of reduced tax expense or
increased tax benefits in the period the reversal occurs. There can
be no assurances we will reverse the valuation allowance in 2010.
We provide for income taxes on interim periods based on the estimated effective
tax rate for the full year. We record cumulative adjustments to tax provisions
in the interim period in which a change in the estimated annual effective rate
is determined. The effective tax rate calculation does not include the effect of
discrete events that may occur during the year. The effect of these events, if
any, is reflected in the tax provision for the quarter in which the event occurs
and is not considered in the calculation of our annual effective tax
rate.
Liquidity and Capital
Resources
At March
31, 2010, our principal source of liquidity was a net working capital balance of
$191.9 million, including cash and cash equivalents totaling $236.7
million.
|
Three Months Ended
|
|
|
|||||||||||||
|
March 31,
|
|
|
|||||||||||||
|
2010
|
2009
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Cash
provided by operating activities
|
$ | 11,409 | $ | 13,397 | $ | (1,988 | ) | -15 | % | |||||||
Cash
used in investing activities
|
(19,863 | ) | (2,162 | ) | (17,701 | ) | 819 | % | ||||||||
Cash
provided by (used in) financing activities
|
757 | (267 | ) | 1,024 | -384 | % |
Net cash
provided by operating activities was $11.4 million for the three months ended
March 31, 2010 compared to $13.4 million for the three months ended March 31,
2009. Consistent with prior periods, cash provided by operating activities has
historically been affected by changes in working capital accounts, and net
income / (loss) adjusted for add-backs of non-cash expense items such as
depreciation and amortization, and the expense associated with stock-based
awards. Specifically, stock-based compensation expense for the three months
ended March 31, 2010 was $3.2 million versus $2.3 million during the three
months ended March 31, 2009. This increase resulted from new grants to executive
staff partially offset by reductions from fully vested, fully amortized stock
options, which are no longer expensed in 2010. Additionally,
depreciation and amortization expense decreased by $0.3 million in the first
three months of 2010 compared to the same period in the previous year, primarily
due to intangible assets associated with the acquisition of Vurv becoming fully
amortized. The change in accounts receivable decreased due to the
timing of billings and collections compared to the same period in
2009. The change in deferred revenue decreased in the current
period due to fluctuations resulting from the mix of annual and quarterly
application billings combined with the timing of billings and the timing of the
application revenue recognized associated with those
contracts. The change in accounts payable and accrued
liabilities increased in the current period due to the timing of additional
liabilities and payments in general, and does not reflect any significant change
in the nature of accrued liabilities.
Net cash
used in investing activities was $19.9 million for the three months ended March
31, 2010 compared to net cash used in investing activities of $2.2 million for
the three months ended March 31, 2009. The increase resulted from a $13.4
million cash outlay to complete the acquisition of WWC on January 1, 2010.
Additionally, we increased capital expenditures in connection with our new
production data center in the Chicago, Illinois area resulting in an increase in
payments for property and equipment.
Net cash
provided by financing activities was $0.7 million for the three months ended
March 31, 2010, compared to net cash used in financing activities of $0.3
million for the three months ended March 31, 2009. This increase was primarily
due to a $2.1 million increase in proceeds from stock option exercises resulting
primarily from the increase in our stock price over the three months ended March
31, 2009, partially offset by $0.7 million in payments for accrued costs
associated with our November 2009 public offering and increases in treasury
stock tax withholdings and capital lease payments.
We
believe our existing cash and cash equivalents and cash provided by operating
activities will be sufficient to meet our working capital and capital
expenditure needs for at least the next twelve months. Our future
capital requirements will depend on many factors, including our rate of revenue
growth, the expansion of our sales and marketing activities, the timing and
extent of spending to support product development efforts and expansion into new
territories, the timing of introductions of new applications and enhancements to
existing applications, the continuing market acceptance of our applications and
the extent to which we acquire or invest in complimentary business products or
technologies. To the extent that existing cash and cash equivalents,
and cash from operations, are insufficient to fund our future activities, we may
need to raise additional funds through public or private equity or debt
financing. We will likely enter into agreements or letters of intent with
respect to potential investments in, or acquisitions of, complementary
businesses, applications or technologies in the future, which could also require
us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.
Contractual
Obligations
Our
principal commitments consist of capital leases, obligations under leases for
office space, operating leases for computer equipment and for third-party
facilities that host our applications. Our commitments to settle contractual
obligations in cash under operating leases and other purchase obligations has
not changed significantly from the “Contractual Obligations” table included in
our Annual Report on Form 10-K for fiscal year ended December 31, 2009
except for the following agreement entered into during the first three months of
2010:
On
March 31, 2010, we entered into a manual replacement statement of work (the
“Agreement”) with Equinix Operating Co., Inc. (“Equinix”) according to which
Equinix will provide colocation services to us. According to the
terms of the Agreement, Equinix will provide space, electrical power and other
colocation services at its web hosting facilities in the Chicago, Illinois area
for our hosting infrastructure. Under the terms of the Agreement, we
will pay Equinix aggregate fees of approximately $9 million over the next five
years.
Legal
expenditures could also affect our liquidity. We are regularly subject to legal
proceedings and claims that arise in the ordinary course of business. See Note 9
of the Notes to Unaudited Condensed Consolidated Financial Statements
“Commitments and Contingencies” in Part I, Item 1 of this Form
10-Q. Litigation may result in substantial costs and may divert
management’s attention and resources, which may seriously harm our
business, financial condition, operating results and cash flows.
Foreign Currency
Exchange Risk
Our
revenue is generally denominated in the local currency of the contracting party.
The majority of our revenue is denominated in U.S. dollars. In the three
months ended March 31, 2010, 6%, 5% and 5% of our revenue was denominated in
Canadian dollars, euros and other remaining currencies, respectively. Our
expenses are generally denominated in the currencies in which our operations are
located. Our expenses are incurred primarily in the United States and Canada,
including the expenses associated with our largest research and development
operations that are maintained in Canada. Additionally a portion of
expenses are incurred outside of North America where our other international
sales offices are located and third party development is
performed. Our results of operations and cash flows are therefore
subject to fluctuations due to changes in foreign currency exchange rates,
particularly changes in the Canadian dollar, and to a lesser extent, to the
Australian dollar, British pound sterling, Euro, Singapore dollar and New
Zealand dollar, in which certain of our customer contracts are denominated. For
the three months ended March 31, 2010, the Canadian dollar strengthened by
approximately 17% against the U.S. dollar on an average basis compared to the
same period in the prior year. This change in value did not have a significant
effect on our earnings and should not have a significant effect on future
earnings as the foreign currency exchange risk impact on revenues is offset by
the impact on expenses. If the currencies noted above uniformly fluctuated
by plus or minus 500 basis points from our estimated rates, we would expect our
results to change by approximately minus or plus $1.6 million. We do not
currently enter into forward exchange contracts to hedge exposure denominated in
foreign currencies or any derivative financial instruments for trading or
speculative purposes. In the future, we may consider entering into hedging
transactions to help mitigate our foreign currency exchange risk.
Interest
Rate Sensitivity
We had
cash and cash equivalents of $236.7 million at March 31, 2010. This compares to
$244.2 million at December 31, 2009. These amounts were held primarily
in cash or money market funds. Cash and cash equivalents are held for working
capital purposes, and restricted cash amounts are held as security against
various lease obligations. We do not enter into investments for trading or
speculative purposes. Due to the short-term nature of these investments, we
believe that we do not have any material exposure to changes in the fair value
of our investment portfolio as a result of changes in interest rates. Declines
in interest rates, however, will reduce future interest income.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, re-evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2010. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Our
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by this quarterly
report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of March 31, 2010, our
disclosure controls and procedures were effective at the reasonable assurance
level.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
The
information set forth in Note 9 of the Notes to Unaudited Condensed Consolidated
Financial Statements “Commitments and Contingencies” in Part I, Item 1 of this
Form 10-Q is incorporated herein by reference.
Because
of the following factors, as well as other variables affecting our operating
results and financial condition, past performance may not be a reliable
indicator of future performance, and historical trends should not be used to
anticipate results or trends in future periods.
Risks
Related to Our Business
We
have a history of losses, and we cannot be certain that we will achieve or
sustain profitability.
With the
exception of the years ended December 31, 2007 and 2009, we have incurred
annual losses in every year since our inception. As of March 31, 2010, our
accumulated deficit was $76.2 million, comprised of aggregate net losses of
$62.4 million and $13.8 million of dividends and issuance costs on preferred
stock. In the three months ended March 31, 2010, we reported net income of
$0.8 million. We cannot be certain that we will be able to achieve or sustain
profitability on a quarterly or annual basis in the future. As we
continue to incur costs associated with initiatives to grow our business, which
include, among other things, acquisitions, international expansion and new
product development, any failure to increase revenue or manage our cost
structure could prevent us from achieving or sustaining profitability. For
instance, in the three months ended March 31, 2010, our profitability was
negatively impacted by amortization expense associated with
acquisitions. In the near term, we expect to continue to incur
significant amortization expense associated with both the July 1, 2008
acquisition of Vurv Technology, Inc. (“Vurv”) and the January 1, 2010
acquisition of Worldwide Compensation, Inc. (“WWC”). In addition, we may incur
losses as a result of revenue shortfalls or increased expenses associated with
our business. As a result, our business could be harmed and our stock price
could decline.
Unfavorable
economic conditions and reductions in information technology spending could
limit our ability to grow our business.
Our
operating results may vary based on the impact of changes in economic conditions
globally and within the industries in which our customers operate. The revenue
growth and profitability of our business depends on the overall demand for
enterprise application software and services. Our revenue is derived from
organizations whose businesses may fluctuate with global economic and business
conditions. Historically, economic downturns have resulted in overall reductions
in corporate information technology spending. Accordingly, any downturn in
global economic conditions may weaken demand for our software and services. In
addition, an economic decline impacting a particular industry may negatively
impact demand for our software and services in the affected industry. Many of
the industries we serve, including financial services, manufacturing (including
automobile manufacturing), technology and retail, have recently suffered a
downturn in economic and business conditions and may continue to do so. A
softening of demand for enterprise application software and services, and in
particular enterprise talent management solutions, caused by a weakening global
economy or economic downturn in a particular sector would adversely affect our
business and likely cause a decline in our revenue.
If economic
conditions do not continue to improve, we may experience longer sales cycles,
increased pricing pressure, and decreased demand for certain of our products and
services.
If general economic conditions do not continue to improve, we may
experience increased delays in our sales cycles and increased
pressure from prospective
customers to offer discounts higher than our historical practices. We may also
experience increased pressure from existing customers to renew expiring software
subscriptions agreements at lower rates. In addition, certain of our customers
may attempt to negotiate lower software subscription fees for existing
arrangements because of downturns in their businesses. If we accept certain
requests for higher discounts or lower fees, our business may be adversely
affected and our revenues may decline. Also, in a difficult economic
environment, our existing customers may elect not to purchase additional
software solutions or education and consulting services from
us. Additionally, certain of our customers have become or may become
bankrupt or insolvent as a result of the recent economic downturn, and we may
lose all future revenue from such customers and payment of receivables may be
lower or delayed as a result of bankruptcy proceedings.
We
may not achieve the anticipated benefits of our acquisition of Vurv, which could
adversely affect our operating results and cause the price of our common stock
to decline.
On
July 1, 2008, we completed our acquisition of Vurv, our largest acquisition
to date. We have limited experience in integrating an acquired company of Vurv’s
size, and our acquisition of Vurv subjects us to a number of risks, including
the following:
•
|
we
may have difficulty renewing former Vurv customers at the expiration of
their current agreements;
|
•
|
we
may be unable to convert certain Vurv customers — including in particular
those that previously entered into perpetual licenses and customer
on-premise hosting arrangements — to the Taleo platform and our
vendor-hosted subscription model;
|
•
|
we
may find it difficult to support or migrate Vurv customers that are using
specific customized versions of the Vurv software to our solutions, as we
historically have maintained a single version of each release of our
software applications without customer-specific code customization.
Additionally, certain customized versions of the legacy Vurv software may
not have been subject to the same level of data security review that Taleo
has historically required;
|
•
|
we
may incur more expense than expected to maintain and support the legacy
Vurv product lines while customers are migrated to the Taleo platform;
and
|
•
|
we
may find it difficult to integrate Vurv’s hosting infrastructure and
operations with our own hosting
operations.
|
There can
be no assurance that we will be successful in overcoming these risks or any
other problems encountered in connection with our acquisition of Vurv. To the
extent that we are unable to successfully manage these risks, our business,
operating results, or financial condition could be adversely affected, and the
price of our common stock could decline.
Because
we recognize software subscription revenue over the term of the agreements for
our software subscriptions, a significant downturn in our business may not be
reflected immediately in our operating results, which increases the difficulty
of evaluating our future financial position.
We generally recognize revenue from
software subscription agreements ratably over the terms of these agreements,
which are typically three or more years for our Taleo Enterprise customers and
one year for our Taleo Business Edition customers. As a result, a substantial
majority of our software subscription revenue in each quarter is generated from
software subscription agreements entered into during prior periods.
Consequently, a decline in new software subscription agreements in any one
quarter may not affect our results of operations in that quarter, but will
reduce our revenue in future quarters. Additionally, the timing of renewals or
non-renewals of a software subscription agreement during any one quarter may
affect our financial performance in that particular quarter or may not affect
our financial performance until the next quarter. For example, because we
recognize application revenue ratably, the non-renewal of a software
subscription agreement late in a quarter will have very little impact on revenue
for that quarter, but will reduce our revenue in future quarters. Accordingly,
the effect of significant declines in sales and market acceptance of our
solutions may not be reflected in our short-term results of operations, which would make these
reported results less indicative of our future financial results. By contrast, a
non-renewal occurring early in a quarter may have a significant negative impact
on revenue for that quarter and we may not be able to offset a decline in
revenue due to such non-renewals with revenue from new software subscription
agreements entered into in the same quarter. In addition, we may be unable to
adjust our costs in response to reduced revenue.
Because
of the way we recognize our consulting revenue under applicable accounting
guidance, consulting revenue reported for a particular period may not be
indicative of trends in our consulting business, which increases the difficulty
of evaluating our future financial position.
During
2009 and prior years, when we sold software subscriptions and consulting
services in a single arrangement, we recognized revenue from consulting services
ratably over the term of the software subscription agreement, which is typically
three or more years, rather than as the consulting services were delivered,
which is typically during the first six to nine months of a software
subscription agreement. Accordingly, a significant portion of the revenue for
consulting services performed in any quarterly reporting period prior to 2010
was deferred to future periods. As a result, our consulting revenue for any
quarterly
reporting
period may not be reflective of the consulting services delivered during the
reporting period or of the business trends with respect to our consulting
services business. Further, since we recognize expenses related to our
consulting services in the period in which the expenses are incurred, the
consulting margins we report in any quarterly reporting period may not be
indicative of the actual gross margin on consulting services delivered during
the reporting period.
In
October 2009 the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance for revenue arrangements that contain multiple components to
be delivered to a customer which we adopted on January 1, 2010. Under the new
standard each revenue component is considered a separate deliverable and the
standard provides guidance for establishing fair value for each deliverable.
When vendor-specific objective evidence or third-party evidence of selling price
for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price of each separate
deliverable and allocate consideration for the arrangement using the relative
selling price method.
In the
context of our typical arrangements in which software subscriptions and
consulting services are sold together, the new guidance will result in the
consulting services revenue in such arrangements being recognized as delivered.
Substantially all of our revenue from consulting service arrangements entered
into on or after January 1, 2010 will be recognized as the consulting
services are delivered, while consulting revenue from combined software
subscription and consulting services arrangements entered into prior to 2010
will continue to be recognized ratably over the term of the software
subscription agreement. The application of these two revenue recognition
methodologies will result in our consulting revenue for the foreseeable future
including a mix of revenue from consulting services delivered during the
reporting period and consulting services delivered in previous reporting
periods.
If
our existing customers do not renew their software subscriptions and buy
additional solutions from us, our business will suffer.
We expect
to continue to derive a significant portion of our revenue from renewal of
software subscriptions and, to a lesser extent, service fees from our existing
customers. As a result, maintaining the renewal rate of our software
subscriptions is critical to our future success. Factors that may affect the
renewal rate for our solutions include:
•
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the
price, performance and functionality of our
solutions;
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•
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the
availability, price, performance and functionality of competing products
and services;
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•
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the
effectiveness of our maintenance and support
services;
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our
ability to develop complementary products and services;
and
|
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the
stability, performance and security of our hosting infrastructure and
hosting services.
|
Most of
our Taleo Enterprise customers enter into software subscription agreements with
duration of three years or more from the initial contract date. Most of our
Taleo Business Edition customers enter into annual software subscription
agreements. Our customers have no obligation to renew their subscriptions for
our solutions after the expiration of the initial term of their agreements. In
addition, our customers may negotiate terms less advantageous to us upon
renewal, which may reduce our revenue from these customers. Under certain
circumstances, our customers may cancel their subscriptions for our solutions
prior to the expiration of the term. Our future success also depends, in part,
on our ability to sell new products and services to our existing customers. If
our customers terminate their agreements, fail to renew their agreements, renew
their agreements upon less favorable terms, or fail to buy new products and
services from us, our revenue may decline or our future revenue may be
constrained.
If
our efforts to attract new customers are not successful, our revenue growth will
be adversely affected.
In order
to grow our business, we must continually add new customers. Our ability to
attract new customers will depend in large part on the success of our sales and
marketing efforts. However, our prospective customers may not be familiar with
our solutions, or may have traditionally used other products and services for
their talent management requirements. In addition, our prospective customers may
develop their own solutions to address their talent management requirements,
purchase competitive product offerings, or engage third-party providers of
outsourced talent management services that do not use our solution to provide
their services. If our prospective customers do not perceive our products and
services to be of sufficiently high value and quality, we may not be able to
attract new customers. In addition, certain of our prospective customers may
delay the purchasing of, or choose not to purchase, our products as a result of
the current negative general economic conditions or downturns in their
businesses.
If
we do not compete effectively with companies offering talent management
solutions, our revenue may not grow and could decline.
We have
experienced, and expect to continue to experience, intense competition from a
number of companies. Our Taleo Enterprise solution competes with enterprise
resource planning software from vendors such as Oracle Corporation and SAP AG,
and also with products and services from vendors such as ADP, Cezanne,
Cornerstone OnDemand, Halogen Software, HRSmart, Jobpartners, Kenexa, Kronos, Mr
Ted, Peopleclick Authoria, Pilat, Plateau, Saba, Salary.com, Softscape,
StepStone,
SuccessFactors,
SumTotal Systems, Technomedia, Workday, and Workstream. Our Taleo Business
Edition solution competes primarily with ADP, Bullhorn, Ceridian, Halogen
Software, iCIMS, Monster, SilkRoad Technology, SuccessFactors and Ultimate
Software. Our competitors may announce new products, services or enhancements
that better meet changing industry standards or the price or performance needs
of customers. Increased competition may cause pricing pressure and loss of
market share, either of which could have a material adverse effect on our
business, results of operations and financial condition.
Certain
of our competitors and potential competitors have significantly greater
financial, technical, development, marketing, sales, service and other resources
than we have. Some of these companies also have a larger installed base of
customers, longer operating histories and greater brand recognition than we
have. Certain of our competitors provide products that incorporate capabilities
which are not available in our current suite of solutions, such as automated
payroll and benefits, or services that we do not currently offer, such as
recruitment process outsourcing services. Products with such additional
functionalities may be appealing to some customers because they can reduce the
number of different types of software or applications used to run their business
and such additional services may be viewed by some customers as enhancing the
effectiveness of a competitor’s solutions. In addition, our competitors’
products may be more effective than our products at performing particular talent
management functions or may be more customized for particular customer needs in
a given market. Further, our competitors may be able to respond more quickly
than we can to changes in customer requirements.
Our
customers often require our products to be integrated with software provided by
our existing or potential competitors. These competitors could alter their
products in ways that inhibit integration with our products, or they could deny
or delay access by us to advance software releases, which would restrict our
ability to adapt our products to facilitate integration with these new releases
and could result in lost sales opportunities. In addition, many organizations
have developed or may develop internal solutions to address talent management
requirements that may be competitive with our solutions.
We
have had to restate our historical financial statements.
In October 2009, we announced that,
after upgrading to a new version of the equity program administration software
that we license from a third-party provider, we identified differences in the
stock-based compensation expense of prior periods and, after reviewing such
differences, identified an error in our accounting for stock-based compensation
expense. As a result of identifying the error, in October 2009, we concluded
that accounting adjustments were necessary to correct certain previously issued
financial statements. Accordingly, we restated those financial statements and
recorded total cumulative additional stock-based compensation expense of
approximately $2.6 million for
the fiscal years ended December 31, 2008, 2007 and 2006 and the quarters
ended June 30, 2009 and March 31, 2009. Specifically, we recorded
increases in stock-based compensation expense of approximately $1.3 million in
fiscal 2007, $1.2 million in fiscal 2006 and $0.3 million in the quarter ended
June 30, 2009, and recorded reductions in stock-based compensation expense
of approximately $0.1 million in fiscal 2008 and $0.1 million in the quarter
ended March 31, 2009. In connection with this restatement, we determined
that there was a material weakness in our internal control over financial
reporting as of December 31, 2008, March 31, 2009, June 30,
2009 and September 30, 2009. Specifically, our controls to calculate
stock-based compensation expense related to the application of the forfeiture
rate were not designed effectively, and a material weakness existed in the
design of the controls over the calculation of stock-based compensation expense
related to the application of the forfeiture rate as of those
periods.
In
addition, in March 2009, we announced that we had completed a review of our
revenue recognition practices and, as a result of this review, we restated
certain financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2008. The restatement resulted in the deferral to future
periods of $18 million of consulting services revenue and approximately $0.2
million in application revenue previously recognized through June 30, 2008.
Amounts in our previously issued consolidated financial statements for the years
ended December 31, 2003 through 2007, and the interim consolidated
financial statements for each of the periods ended March 31, 2008 and
June 30, 2008, have been corrected for the timing of revenue recognition
for consulting services revenue during these periods, as well as to correct an
error relating to the timing of revenue recognition for set-up fees, an element
of our application services revenue. In connection with such review we
identified certain control deficiencies relating to the application of
applicable accounting literature related to revenue recognition. These
deficiencies constituted a material weakness in internal control over financial
reporting as of September 30, 2008, which led to items requiring correction
in our historical financial statements and our conclusion to restate such
financial statements to correct those items. Specifically, the control
deficiencies related to our failure to correctly interpret the multi-element
accounting guidance in determining the proper accounting treatment when
application and consulting services are sold together.
We cannot
be certain that the measures we have taken since these restatements will ensure
that restatements will not occur in the future. Execution of restatements like
the ones described above could create a significant strain on our internal
resources and cause delays in our filing of quarterly or annual financial
results, increase our costs and cause management distraction.
Failure
to implement and maintain the appropriate internal controls over financial
reporting could negatively affect our ability to provide accurate and timely
financial information.
Prior to
the filing of our financial results for the period ended March 31, 2007, we
identified a material weakness in connection with the evaluation of the
effectiveness of our internal controls as of March 31, 2007 related to the
identification of a
material
required adjustment, which affected cash, accounts receivable and cash flow from
operations. Additionally in the third quarter of 2008, we identified certain
control deficiencies relating to the application of applicable accounting
literature related to revenue recognition. These deficiencies constituted a
material weakness in internal control over financial reporting as of
September 30, 2008. In October 2009, we determined that there was a
material weakness in our internal control over financial reporting as of
December 31, 2008, March 31, 2009, June 30, 2009 and
September 30, 2009. Specifically, our controls to calculate stock-based
compensation expense related to the application of the forfeiture rate were not
designed effectively, and a material weakness existed in the design of the
controls over the calculation of stock-based compensation expense related to the
application of the forfeiture rate as of those periods.
As part
of our ongoing processes we will continue to focus on improvements in our
controls over financial reporting. We have discussed deficiencies in our
financial reporting and our remediation of such deficiencies with the audit
committee of our board of directors and will continue to do so as required.
However, we cannot be certain that we will be able to remediate all deficiencies
in the future. Any current or future deficiencies could materially and adversely
affect our ability to provide timely and accurate financial
information.
Our
financial performance may be difficult to forecast as a result of our historical
focus on large customers and the long sales cycle associated with our
solutions.
The
majority of our revenue is currently derived from organizations with complex
talent management requirements. Accordingly, in a particular quarter the
majority of our bookings from new customers on an aggregate contract value basis
are from large sales made to a relatively small number of customers. As such,
our failure to close a sale in a particular quarter will impede desired revenue
growth unless and until the sale closes. In addition, sales cycles for our Taleo
Enterprise clients are generally between three months and one year, and in some
cases can be longer. As a result, substantial time and cost may be spent
attempting to secure a sale that may not be successful. The period between our
first sales call on a prospective customer and a contract signing is relatively
long due to several factors such as:
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the
complex nature of our solutions;
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the
need to educate potential customers about the uses and benefits of our
solutions;
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the
relatively long duration of our
contracts;
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the
discretionary nature of our customers’
purchases;
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the
timing of our customers’ budget
cycles;
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the
competitive evaluation of our
solutions;
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fluctuations
in the staffing management requirements of our prospective
customers;
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announcements
or planned introductions of new products by us or our competitors;
and
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•
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the
lengthy purchasing approval processes of our prospective
customers.
|
If our
sales cycles unexpectedly lengthen, our ability to forecast accurately the
timing of sales in any given period will be adversely affected and we may not
meet our forecasts for that period.
A
portion of our revenue is generated by sales to government entities, which are
subject to a number of challenges and risks.
Sales to
U.S. and foreign federal, state and local governmental agency end-customers have
accounted for a small portion of our revenue, and we may in the future increase
sales to government entities. Sales into government entities are subject to a
number of risks. Selling to government entities can be highly competitive,
expensive and time consuming, often requiring significant upfront time and
expense without any assurance that we will successfully sell our products and
services to such governmental entity. Government entities may require contract
terms that differ from our standard arrangements. In addition, government
demand and payment for our products may be affected by public sector budgetary
cycles and funding authorizations, with funding reductions or delays adversely
affecting public sector demand for our products. Most of our sales to government
entities have been made indirectly through third-party prime contractors
that resell our solutions. Government entities may have contractual or other
legal rights to terminate contracts with our resellers for convenience or due to
a default, and any such termination may adversely impact our future results of
operations.
Governments
routinely audit and investigate government contractors, and we may be
subject to such audits and investigations. For example, we have been
subject to government contract audits in the past and we have received
and are currently responding to a subpoenas from the Department of Homeland
Security’s inspector general’s office relating to our commercial pricing
for the Transportation Security Administration contract, a government entity
that accessed our services through a third party prime contractor. As a
result of an audit or investigation, we may be subject to civil or criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines, and suspension or
prohibition from doing business with the government entity. In addition, we
could suffer serious reputational harm if allegations of impropriety were made
against us.
If
we fail to develop or acquire new products or enhance our existing products to
meet the needs of our existing and future customers, our sales will
decline.
To keep
pace with technological developments, satisfy increasingly sophisticated
customer requirements, and achieve market acceptance, we must enhance and
improve existing products and continue to introduce new products and services.
For instance, the Taleo Talent Grid, a foundation for sharing industry
knowledge, technology and candidates, became generally available to our
customers in September 2009, and Taleo 10, the newest version of our talent
management solutions, became generally available to our customers in February
2010. Additionally, on January 1, 2010, we completed our acquisition of
WWC, which allows us to offer a compensation management solution directly to our
customers. Any new products we develop or acquire may not be introduced in a
timely manner and may not achieve the broad market acceptance necessary to
generate significant revenue and may generate losses. If we are unable to
develop or acquire new products that appeal to our target customer base or
enhance our existing products or if we fail to price our products to meet market
demand or if the products we develop or acquire do not meet performance
expectations or have a higher than expected cost structure to host and maintain,
our business and operating results will be adversely affected. Our efforts to
expand our solutions beyond our current offerings or beyond the talent
management market may divert management resources from existing operations and
require us to commit significant financial resources to an unprofitable
business, which may harm our existing business.
We expect
to incur additional expense to develop software products and to integrate
acquired software products into existing platforms to maintain our competitive
position. For example, our acquisition of WWC will require significant effort to
integrate existing WWC products into our platform and hosting infrastructure
over time. In addition, we have invested in software development locations other
than the locations where we traditionally developed our software. For example,
we have invested in development locations in Eastern Europe and Ukraine and we
may invest in other locations outside of North America in the future. In
addition, we plan to continue to invest in Jacksonville, Florida, as a software
development location. We may engage independent contractors for all or portions
of this work. These efforts may not result in commercially viable solutions, may
be more expensive or less productive than we anticipate, or may be difficult to
manage and result in distraction to our management team. If we do not manage
these remote development centers effectively or receive significant revenue from
our product development investments, our business will be adversely
affected.
Additionally,
we intend to maintain a single version of each release of our software
applications that is configurable to meet the needs of our customers. Customers
may require customized solutions or features and functions that we do not yet
offer and do not intend to offer in future releases, which may disrupt our
ability to maintain a single version of our software releases or cause our
customers to choose a competing solution.
Acquisitions
and investments present many risks, and we may not realize the anticipated
financial and strategic goals for any such transactions, which would harm our
business, operating results and overall financial condition.
We have
made, continue to make and are actively evaluating acquisitions or investments
in companies, products, services, and technologies to expand our product
offerings, customer base and business. For example, in 2008, we completed our
acquisition of Vurv, which is our largest acquisition to date. In January 2010,
we completed our acquisition of WWC. We have limited experience in executing
acquisitions and investments. Acquisitions and investments involve a number of
risks, including the following:
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being
unable to achieve the anticipated benefits from our
acquisitions;
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discovering
that we may have difficulty integrating the accounting systems,
operations, and personnel of the acquired business, and may have
difficulty retaining the key personnel of the acquired
business;
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our
ongoing business and management’s attention may be disrupted or diverted
by transition or integration issues and the complexity of managing
geographically and culturally diverse
locations;
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difficulty
incorporating the acquired technologies or products into our existing code
base;
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problems
arising from differences in applicable accounting standards of the
acquired business (for instance, non-U.S. businesses may not prepare their
financial statements in accordance with
GAAP);
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problems
arising from differences in the revenue, licensing, support or consulting
model of the acquired business;
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customer
confusion regarding the positioning of acquired technologies or
products;
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difficulty
maintaining uniform standards, controls, procedures and policies across
locations;
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difficulty
retaining the acquired business’ customers;
and
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problems
or liabilities associated with product quality, data privacy, data
security, technology and legal
contingencies.
|
The
consideration paid in connection with an investment or acquisition also affects
our financial results. If we should proceed with one or more significant
acquisitions in which the consideration includes cash, we could be required to
use a substantial portion of our available cash to consummate any such
acquisition. To the extent that we issue shares of stock or other rights to
purchase stock, existing stockholders may be diluted and earnings per share may
decrease. In addition, acquisitions may result in our incurring debt, material
one-time write-offs, or purchase accounting adjustments and restructuring
charges. They may also result in recording goodwill and other intangible assets
in our financial statements which may be subject to future impairment charges or
ongoing amortization costs, thereby reducing future earnings. In addition, from
time to time, we may enter into negotiations for acquisitions or investments
that are not ultimately consummated. Such negotiations could result in
significant diversion of management time, as well as incurring expenses that may
impact operating results.
If
our security measures are breached and unauthorized access is obtained to
customer data or personal information, customers may curtail or stop their use
of our solutions, which would harm our reputation, operating results, and
financial condition.
Our
solutions involve the storage and transmission of customers’ proprietary
information and users’ personal information, including the personal information
of our customers’ job candidates. As part of our solution, we may also offer
third-party proprietary solutions which require us to transmit our customers’
proprietary data and the personal information of job candidates to such third
parties. Security breaches could expose us to loss of this information, and we
could be required to undertake an investigation, notify affected data subjects
and appropriate legal authorities and regulatory agencies, and conduct
remediation efforts, which could include modifications to our current security
practices and ongoing monitoring for users whose data might have been subject to
unauthorized access. Accordingly, security breaches may result in investigation,
remediation and notification expenses, litigation, liability, and financial
penalties. For example, in May 2009, a legacy Vurv customer using a customized
version of the Vurv software informed us that email addresses contained in its
candidate database, which we host, were used by an unauthorized third party to
solicit additional personal information from job candidates. While it has not
been determined that this incident resulted from a breach of our security
measures, our customer has been sued with respect to this incident and we cannot
be certain that a claim will not be asserted against us or that we will not
incur liability or additional expense with respect to this matter.
While we have administrative,
technical, and physical security measures in place, and we contractually require
third parties to whom we transfer data to have appropriate security measures, if
any of these security measures are breached as a result of third-party action,
employee error, criminal acts by an employee, malfeasance, or otherwise, and, as
a result, someone obtains unauthorized access to customer data or personal
information, our reputation will be damaged, our business may suffer and we
could incur significant liability. Techniques used to obtain unauthorized access
or to sabotage systems change frequently and generally are not recognized until
launched against a target. As a result, we and our partners to whom we transfer
data may be unable to anticipate these techniques or to implement adequate
preventative measures. We do not encrypt all data we store for our customers
while such data is at rest in the database. Applicable law may require that a
security breach involving certain types of data be disclosed to each data
subject or publicly disclosed. If an actual or perceived breach of our security
occurs, the market perception of our security measures could be harmed and we could lose sales and
customers. Our insurance policies may not adequately compensate us for any
losses that may occur due to failures in our security
measures.
We
may lose sales opportunities if we do not successfully develop and maintain
strategic relationships to sell and deliver our solutions.
We have partnered with a number of
business process outsourcing, or BPO, and human resource outsourcing, or HRO,
providers that resell our solutions as a component of their outsourced human
resource services and we intend to partner with more BPOs and HROs in the
future. If customers or potential customers begin to outsource their talent
management functions to BPOs or HROs that do not resell our solutions, or to
BPOs or HROs that choose to develop their own solutions, our business will be
harmed. In addition, we have relationships with third-party consulting firms,
system integrators and software and service vendors who provide us with customer
referrals, integrate their complementary products with ours, cooperate with us
in marketing our products and provide our customers with system implementation
or other consulting services. If we fail to establish new strategic
relationships or expand our existing relationships, or should any of these
partners fail to work effectively with us or go out of business, our ability to
sell our products into new markets and to increase our penetration into existing
markets may be impaired.
If
we are required to reduce our prices to compete successfully, our margins and
operating results could be adversely affected.
The
intensely competitive market in which we do business may require us to reduce
our prices. If our competitors offer discounts on certain products or services,
we may be required to lower prices or offer our solutions on less favorable
terms to compete successfully. Some of our larger competitors have significantly
greater resources than we have and are better able to absorb short-term losses.
Any such changes would likely reduce our margins and could adversely affect our
operating results. Some of our competitors may provide bundled product offerings
that compete with ours for promotional purposes or as a long-term pricing
strategy. These practices could, over time, limit the prices that we can charge
for our products or services. If we cannot
offset price reductions with a corresponding increase in the quantity of
applications sold, our margins and operating results would be adversely
affected.
Defects
or errors in our products could affect our reputation, result in significant
costs to us and impair our ability to sell our products, which would harm our
business.
Our
products may contain defects or errors, which could materially and adversely
affect our reputation, result in significant costs to us and impair our ability
to sell our products in the future. The costs incurred in correcting any product
defects or errors may be substantial and could adversely affect our operating
results. While we test our products for defects or errors prior to product
release, defects or errors have been identified from time to time by our
customers and may continue to be identified in the future.
Any
defects that cause interruptions in the availability or functionality of our
solutions could result in:
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lost
or delayed market acceptance and sales of our
products;
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loss
of customers;
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product
liability and breach of warranty suits against
us;
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diversion
of development and support
resources;
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injury
to our reputation; and
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increased
maintenance and warranty costs.
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While our
software subscription agreements typically contain limitations and disclaimers
that should limit our liability for damages related to defects in our software,
such limitations and disclaimers may not be upheld by a court or other tribunal
or otherwise protect us from such claims.
If
we fail to manage our hosting infrastructure capacity satisfactorily, our
existing customers may experience service outages and data loss, and our new
customers may experience delays in the deployment of our solution.
We have
experienced significant growth in the number of users, transactions, and data
that our hosting infrastructure supports. Failure to address the increasing
demands on our hosting infrastructure satisfactorily may result in service
outages, delays or disruptions. For example, we have experienced downtimes
within our hosting infrastructure, some of which have been significant, which
have prevented customers from using our solutions from time to time. We seek to
maintain sufficient excess capacity in our hosting infrastructure to meet the
needs of all of our customers. We also maintain excess capacity to facilitate
the rapid provisioning of new customer deployments and expansion of existing
customer deployments. The development of new hosting infrastructure to keep pace
with expanding storage and processing requirements could be a significant cost
to us that we are not able to predict accurately and for which we are not able
to budget significantly in advance. Such outlays could raise our cost of goods
sold and be detrimental to our financial results. At the same time, the
development of new hosting infrastructure requires significant lead time. If we
do not accurately predict our infrastructure capacity requirements, our existing
customers may experience service outages that may subject us to financial
penalties, financial liabilities and the loss of customers. If our hosting
infrastructure capacity fails to keep pace with sales, customers may experience
delays as we seek to obtain additional capacity, which could harm our reputation
and adversely affect our revenue growth.
In addition, we may in the future
consolidate certain of our data centers with our other existing data centers, or
move certain data center operations to new facilities. For example, we plan to
consolidate our U.S. production data center operations for our Taleo Enterprise
solution into a new facility in the Chicago, Illinois area in
2010. If we consolidate these data center operations, we will need to
relocate existing hardware, purchase new hardware, and migrate all of our Taleo
Enterprise customers’ proprietary information and their users’ personal
information. Although we take reasonable precautions designed to mitigate the
risks of such a move, such transitions create increased risk of service disruptions,
outages and the theft or loss of important customer and user data that could
harm our reputation, subject us to financial liability, and adversely affect our
revenue and earnings.
Any
significant disruption in our computing and communications infrastructure could
harm our reputation, result in a loss of customers and adversely affect our
business.
Our
computing and communications infrastructure is a critical part of our business
operations. Our customers access our solutions through a standard web browser.
Our customers depend on us for fast and reliable access to our applications.
Much of our software is proprietary, and we rely on the expertise of members of
our engineering and software development teams for the continued performance of
our applications. We have experienced, and may in the future experience, serious
disruptions in our computing and communications infrastructure. Factors that may
cause such disruptions include:
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human
error;
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physical
or electronic security breaches;
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telecommunications
outages from third-party providers;
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computer
viruses;
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acts
of terrorism or sabotage;
|
•
|
fire,
earthquake, flood and other natural disasters;
and
|
•
|
power
loss.
|
Although
we back up data stored on our systems at least daily to disks in our data
centers, and weekly to automated tape which is stored offsite, our
infrastructure does not currently include real-time, or near real-time,
mirroring of data storage and production capacity in more than one
geographically distinct location. Thus, in the event of a physical disaster, or
certain other failures of our computing infrastructure, customer data from
recent transactions may be permanently lost.
We
currently deliver our solutions from nine data centers that host the
applications for all of our customers. The Taleo Enterprise platform is hosted
from four facilities: U.S. facilities leased from Equinix, Inc. in the Chicago,
Illinois area and San Jose, California; a U.S. facility leased from Internap
Network Services Corporation in New York City, New York; and a European data
center facility also leased from Equinix in Amsterdam, the Netherlands. Internet
bandwidth and access is provided by Internap in the three U.S. facilities and by
Equinix in the Netherlands. The Taleo Business Edition is hosted from three
facilities in the U.S.: facilities located in San Jose, California and Ashburn,
Virginia, both operated via a managed services arrangement, and a facility
located in Jacksonville, Florida to host the legacy Vurv product for small and
medium-sized organizations. Opsource, Inc. provides hardware, internet
bandwidth, and access in the San Jose, California and Ashburn Virginia hosting
facilities through the managed services arrangement. Internet bandwidth and
access for the legacy Vurv small and medium-sized organization recruiting
product is provided by Peak 10 in the Jacksonville, Florida
facility.
The Vurv
legacy enterprise recruiting product is hosted through three facilities located
in Jacksonville, Florida, San Jose, California, and Amsterdam, the Netherlands.
Internet bandwidth and access for the Vurv legacy enterprise recruiting product
is provided by Peak 10 in the Florida facility, by Internap in San Jose and by
Equinix in Amsterdam.
The Taleo
Compensation solution is currently hosted from two facilities leased from
Internap in San Jose, California, and Los Angeles, California. Internap also
provides the Internet bandwidth and access services for both of these
locations.
We do not
control the operation of these facilities and must rely on these vendors to
provide the physical security, facilities management and communications
infrastructure services to ensure the reliable and consistent delivery of our
solutions to our customers. In the case of Opsource and Vurv locations that are
managed service locations, we also rely upon the third-party vendor for hardware
associated with our hosting infrastructure. Although we believe we would be able
to enter into a similar relationship with another third party should one of
these relationships fail or terminate for any reason, we believe our reliance on
any third-party vendor exposes us to risks outside of our control. If these
third-party vendors encounter financial difficulty such as bankruptcy or other
events beyond our control that cause them to fail to secure adequately and
maintain their hosting facilities or provide the required data communications
capacity, our customers may experience interruptions in our service or the loss
or theft of important customer data. We plan to consolidate our U.S. production
data center operations for our Taleo Enterprise Solution into a new single
facility in the Chicago, Illinois area in 2010. We may elect to open computing
and communications hardware operations at additional third-party facilities
located in the United States, Europe or other regions. We are not experienced at
operating such facilities in jurisdictions outside the United States and doing
so may pose additional risk to us.
We have
experienced system failures in the past. If our customers experience service
interruptions or the loss or theft of their data caused by us, we may be
required to issue credits pursuant to the terms of our contracts and may also be
subject to financial liability or customer losses. Such credits could reduce our
revenues below the levels that we have indicated we expect to achieve and
adversely affect our margins and operating results.
Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems.
The
consolidation or acquisition of our competitors or other similar strategic
alliances could weaken our competitive position or reduce our
revenue.
There has
been vendor consolidation in the market in which we operate. For example,
recently StepStone Solutions was acquired by private equity firm HgCapital, and
Peopleclick was acquired by Bedford Funding, a private equity firm that also
acquired Authoria in 2008. Additional consolidation within our industry may
change the competitive landscape in ways that adversely affect our ability to
compete effectively.
Our
competitors may also establish or strengthen cooperative relationships with our
current or future BPO partners, HRO partners, systems integrators, third-party
consulting firms or other parties with whom we have relationships, thereby
limiting our ability to promote our products and limiting the number of
consultants available to implement our solutions. Disruptions in our business
caused by these events could reduce our revenue.
We
must hire and retain key employees and recruit qualified personnel or our future
success and business could be harmed.
Our
success depends on the continued employment of our senior management and other
key employees, such as our chief executive officer and our chief financial
officer. If we lose the services of one or more of our senior management or key
employees, or if one or more of them decides to join a competitor or otherwise
to compete with us, our business could be harmed. We do not maintain key person
life insurance on any of our executive officers. Additionally, our continued
success depends, in part, on our ability to attract and retain qualified
technical, sales and other personnel. It may be particularly challenging to
retain employees as we integrate newly acquired entities, like Vurv, due to
uncertainty among employees regarding their career options and cultural
differences between us and the newly acquired entities.
We
currently derive a significant portion of our revenue from international
operations and expect to expand our international operations. However, we do not
have substantial experience in international markets, and may not achieve the
expected results.
During
the three months ended December 31, 2009, application revenue generated
outside of the United States was 19% of total revenue, based on the location of
the legal entity of the customer with which we contracted, of which 4% was
revenue generated in Canada. Our primary research and development
operation is in Quebec, Canada, but we conduct research and development in other
international locations as well. We currently have international offices outside
of North America in Australia, France, the Netherlands, and the United Kingdom,
which focus primarily on selling and implementing our solutions in those
regions. In the future, we may expand to other international locations. Our
current international operations and future initiatives will involve a variety
of risks, including:
•
|
Potentially
deteriorating general economic conditions and credit environments in
Europe and elsewhere;
|
•
|
unexpected
changes in regulatory requirements, taxes, trade laws, tariffs, export
quotas, custom duties or other trade
restrictions;
|
•
|
differing
regulations in Quebec, Canada with regard to maintaining operations,
products and public information in both French and
English;
|
•
|
differing
labor regulations, especially in the European Union and Quebec, Canada
where labor laws are generally more advantageous to employees as compared
to the United States, including deemed hourly wage and overtime
regulations in these locations;
|
•
|
more
stringent regulations relating to data privacy and the unauthorized use
of, or access to, commercial and personal information, particularly in
Europe and Canada;
|
•
|
reluctance
to allow personally identifiable data related to non-U.S. citizens to be
stored in databases within the United States, due to concerns over the
United States government’s right to access personally identifiable data of
non-U.S. citizens stored in databases within the United States or other
concerns;
|
•
|
greater
difficulty in supporting and localizing our
products;
|
•
|
greater
difficulty in localizing our marketing materials and legal agreements,
including translations of these materials into local
language;
|
•
|
changes
in a specific country’s or region’s political or economic
conditions;
|
•
|
challenges
inherent in efficiently managing an increased number of employees or
independent contractors over large geographic distances, including the
need to implement appropriate systems, policies, benefits and compliance
programs;
|
•
|
limited
or unfavorable intellectual property protection;
and
|
•
|
restrictions
on repatriation of earnings.
|
If we
invest substantial time and resources to expand our international operations and
are unable to do so successfully and in a timely manner, our business and
operating results will suffer.
Fluctuations
in the exchange rate of foreign currencies could result in currency transaction
losses, which could harm our operating results and financial
condition.
We
currently have foreign sales denominated in foreign currencies, including the
Australian dollar, British pound sterling, Canadian dollar, the euro, New
Zealand dollar, Singapore dollar and Swiss franc and may in the future have
sales denominated in the currencies of additional countries. In
addition, we incur a substantial portion of our operating expenses in Canadian
dollars and, to a much lesser extent, other foreign currencies. Any fluctuation
in the exchange rate of these foreign currencies may positively or negatively
affect our business, financial condition and operating results. For instance, in
2009, the impact of changes in foreign currency exchange rates compared to the
average rates in effect during 2008 was a $2.1 million increase in income before
income taxes. In 2010, the volatility in exchange rates for foreign currencies
has continued and may continue and, as a result, we may continue to see
fluctuations in our revenue and expenses, which may impact our operating
results. We have not previously engaged in foreign currency hedging. If we
decide to hedge our foreign currency exposure, we may not be able to hedge
effectively due to lack of experience, unreasonable costs or illiquid
markets.
If
we fail to defend our proprietary rights aggressively, our competitive advantage
could be impaired and we may lose valuable assets, experience reduced revenue,
and incur costly litigation fees to protect our rights.
Our success is dependent, in part, upon
protecting our proprietary technology. We rely on a combination of copyrights,
trademarks, service marks, trade secret laws, and contractual restrictions to
establish and protect our proprietary rights in our products and services. We do
not have any issued patents. We do not rely on patent protection. We will not be
able to protect our intellectual property if we are unable to enforce our rights
or if we do not detect unauthorized use of our intellectual property. Despite
our precautions, it may be possible for unauthorized third parties to copy our
products and use information that we regard as proprietary to create products
and services that compete with ours. Some license provisions protecting against
unauthorized use, copying, transfer and disclosure of our licensed products may
be unenforceable under the laws of certain jurisdictions and foreign countries
in which we operate. Further, the laws of some countries do not protect
proprietary rights to the same
extent as the laws of the United States. To the extent we expand our
international activities, our exposure to unauthorized copying and use of our
products and proprietary information may increase. We enter into confidentiality
and invention assignment agreements with our employees and consultants and enter
into confidentiality agreements with the parties with whom we have strategic
relationships and business alliances. No assurance can be given that these
agreements will be effective in controlling access to and distribution of our
products and proprietary information. Further, these agreements do not prevent
our competitors from developing technologies independently that are
substantially equivalent or superior to our products. Initiating legal action
has been and may continue to be necessary in the future to enforce our
intellectual property rights and to protect our trade secrets. Litigation,
whether successful or unsuccessful, could result in substantial costs and
diversion of management resources, either of which could seriously harm our
business.
Current
and future litigation against us could be costly and time consuming to
defend.
We are
sometimes subject to legal proceedings and claims that arise in the course of
business. For example, we are currently defendant in a suit alleging patent
infringement and were defendants in a recently-dismissed suit alleging
securities fraud, both of which are described in more detail in Note 9 of
the Notes to Condensed Consolidated Financial Statements in Part I, Item 1
of our Quarterly Report on Form 10-Q for the quarter ended March 31,
2010. Litigation may result in substantial costs, including
lengthened or discontinued sales cycles due to concerns of existing or
prospective customers with respect to litigation, and may divert management’s
attention and resources, which may seriously harm our business, overall
financial condition, and operating results. In addition, legal claims that have
not yet been asserted against us may be asserted in the future. See Note 9
of the Notes to Condensed Consolidated Financial Statements in Part I,
Item 1 of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010, for further information regarding pending and threatened
litigation and potential claims.
Our
results of operations may be adversely affected if we are subject to a
protracted infringement claim or a claim that results in a significant award for
damages.
Software
product developers such as us may continue to receive infringement claims as the
number of products and competitors in our space grows and the functionality of
products in different industry segments overlaps. For example, Kenexa, a
competitor, filed suit against us for patent infringement in August
2007. Additionally, in the first quarter 2010, two of our customers
notified us that an intellectual property licensing firm has inquired as to
whether a usability feature of the Taleo software was subject to patents held by
the intellectual property licensing firm. Other infringement claims have been
threatened against us. We can give no assurance that such claims will not be
filed in the future. Our competitors or other third parties may also challenge
the validity or scope of our intellectual property rights. A claim may also be
made relating to technology that we acquire or license from third parties. If we
were subject to a claim of infringement, regardless of the merit of the claim or
our defenses, the claim could:
•
|
require
costly litigation to resolve and the payment of substantial
damages;
|
•
|
require
significant management time;
|
•
|
cause
us to enter into unfavorable royalty or license
agreements;
|
•
|
require
us to discontinue the sale of our
products;
|
•
|
damage
our relationship with existing or prospective customers and disrupt our
sales cycles;
|
•
|
require
us to indemnify our customers or third-party service providers;
or
|
•
|
require
us to expend additional development resources to redesign our
products.
|
We
entered into standard indemnification agreements in the ordinary course of
business and may be required to indemnify our customers for our own products and
third-party products that are incorporated into our products and that infringe
the intellectual property rights of others. Although many of the third parties
from which we purchase are obligated to indemnify us if their products infringe
the rights of others, this indemnification may not be adequate.
Our
insurance policies will not compensate us for any losses or liabilities
resulting from patent infringement claims.
We
use open source software in our products, which could subject us to litigation
or other actions.
We use
open source software in our products and may use more open source software in
the future. From time to time, there have been claims challenging the ownership
of open source software against companies that incorporate open source software
into their products. As a result, we could be subject to suits by parties
claiming ownership of what we believe to be open source software. Litigation
could be costly for us to defend, have a negative effect on our operating
results and financial condition or require us to devote additional research and
development resources to change our products. In addition, if we were to combine
our proprietary software products with open source software in a certain manner,
we could, under certain of the open source licenses, be required to release the
source code of our proprietary software products. If we inappropriately use open
source software, we may be required to re-engineer our products, discontinue the
sale of our products or take other remedial actions.
We
employ technology licensed from third parties for use in or with our solutions,
and the loss or inability to maintain these licenses or errors in the software
we license could result in increased costs, or reduced service levels, which
would adversely affect our business.
Our
hosted solutions incorporate certain technology obtained under licenses from
other companies, such as Oracle for database software. We anticipate that we
will continue to license technology and development tools from third parties in
the future. Although we believe that there are commercially reasonable software
alternatives to the third-party software we currently license, this may not
always be the case, or we may license third-party software that is more
difficult or costly to replace than the third party software we currently
license. In addition, integration of our products with new third-party software
may require significant work and require substantial allocation of our time and
resources. Also, to the extent that our products depend upon the successful
operation of third-party products in conjunction with our products, any
undetected errors in these third-party products could prevent the implementation
or impair the functionality of our products, delay new product introductions and
injure our reputation. Our use of additional or alternative third-party software
would require us to enter into license agreements with third parties, which
could result in higher costs.
Difficulties
that we may encounter in managing changes in the size of our business could
affect our operating results adversely.
In order
to manage our business effectively, we must continually manage headcount in an
efficient manner. In the past, we have undergone facilities consolidations and
headcount reductions in certain locations and departments. As a result, we have
incurred, and may incur, charges for employee severance. We may experience
additional facilities consolidations and headcount reductions in the future. As
many employees are located in jurisdictions outside of the United States, we are
required to pay the severance amounts legally required in such jurisdictions,
which may exceed those of the United States. Further, we believe reductions in
our workforce and facility consolidation create anxiety and uncertainty, and may
adversely affect employee morale.
These
measures could adversely affect our employees that we wish to retain and may
also adversely affect our ability to hire new personnel. They may also
negatively affect customers.
Failure
to manage our customer deployments effectively could increase our expenses and
cause customer dissatisfaction.
Enterprise
deployments of our products require a substantial understanding of our
customers’ businesses, and the resulting configuration of our solutions to their
business processes and integration with their existing systems. We may encounter
difficulties in managing the timeliness of these deployments and the allocation
of personnel and
resources by us or our customers. In certain situations, we also work with
third-party service providers in the implementation or software
integration-related services of our solutions, and we may experience
difficulties in managing such third parties. Failure to manage customer
implementation or software integration-related services successfully by us or
our third-party service providers could harm our reputation and cause us to lose
existing customers, face potential customer disputes or limit the rate at which
new customers purchase our solutions.
Our
ability to conclude that a control deficiency is not a material weakness or that
an accounting error does not require a restatement can be affected by a number
of factors, including our level of pre-tax income.
Under the
Sarbanes-Oxley Act of 2002, our management is required to assess the impact of
control deficiencies based upon both quantitative and qualitative factors, and
depending upon that analysis we classify such identified deficiencies as either
a control deficiency, significant deficiency or a material
weakness.
One
element of our analysis of the significance of any control deficiency is its
actual or potential financial impact. This assessment will vary depending on our
level of pre-tax income or loss. For example, a smaller pre-tax income or loss
will increase the likelihood of a quantitative assessment of a control
deficiency as a significant deficiency or material weakness.
Because
our pre-tax income is relatively small, if management or our independent
registered public accounting firm identify an error in our interim or annual
financial statements, it is more likely that such an error may be determined to
be a material weakness or may meet the quantitative threshold established under
Staff Accounting Bulletin No. 99, “Materiality”, that could, depending upon
the complete quantitative and qualitative analysis, result in our having to
restate previously issued financial statements.
Our
reported financial results may be adversely affected by changes in generally
accepted accounting principles or changes in our operating history that impact
the application of generally accepted accounting principles.
Accounting
principles generally accepted in the United States, or GAAP, are subject to
interpretation by the FASB, the SEC, the American Institute of Certified Public
Accountants, or AICPA, the Public Company Accounting Oversight Board and various
other organizations formed to promulgate and interpret accounting principles. A
change in these principles or interpretations could have a significant effect on
our historical or future financial results.
The
application of GAAP to our operations may also require significant judgment and
interpretation as to the appropriate treatment of a specific issue. These
judgments and interpretations are complicated by the relative newness of the
on-demand, vendor-hosted software business model, also called
software-as-a-service, or SaaS, and the relative lack of interpretive guidance
with respect to the application of GAAP to the SaaS model. For example in
October 2009, the FASB issued accounting guidance related to the recognition of
multiple element arrangements, which superseded the guidance used during 2009.
The new guidance, which we adopted as of January 1, 2010, will generally
require us to recognize the majority of consulting services revenue from
multiple element arrangements as the consulting services are delivered for
arrangements we have entered into after January 1, 2010. We cannot ensure
that our interpretations and judgments with respect to the application of GAAP
will be correct in the future and any incorrect interpretations and judgments
could adversely affect our business.
If benefits currently available under
the tax laws of Canada, the province of Quebec and other jurisdictions are
reduced or appealed, or if we have taken an incorrect position with respect to
tax matters under discussion with the Canadian Revenue Agency or other domestic
or foreign taxing authorities, our business could suffer.
The
majority of our research and development activities are conducted through our
Canadian subsidiary, Taleo (Canada) Inc. We participate in a provincial
government program in Quebec that provides refundable investment credits based
upon qualifying research and development expenditures. These expenditures
primarily consist of the salaries for the persons conducting research and
development activities. We have participated in the program since 1999, and
expect that we will continue to receive these refundable investment tax credits
through December 2010. In 2009, we recorded a $2.4 million reduction in our
research and development expenses as a result of this program. We anticipate the
continued reduction of our research and development expenses through application
of these credits through 2010. If these investment tax benefits are reduced or
eliminated, our financial condition and operating results may be adversely
affected.
In
addition to the provincial research and development refundable investment credit
program described above, our Canadian subsidiary is participating in a
scientific research and experimental development, or SRED, program administered
by the Canadian federal government that provides income tax credits based upon
qualifying research and development expenditures. For tax year 2009, we recorded
an estimated SRED credit claim of approximately $1.0 million. Our Canadian
subsidiary is eligible to remain in the SRED program for future tax years as
long as its development projects continue to qualify. These Canadian federal
SRED tax credits can only be applied to offset Canadian federal taxes payable
and are reported as a credit to our tax provision to the extent they reduce
taxes payable to zero with any residual benefits recorded as a net deferred tax
asset. We believe that our Canadian subsidiary is in compliance with these
government programs and that all amounts recorded will be fully realized. If
these SRED investment credits are reduced or disallowed by the federal Canada
Revenue Agency (“CRA”), our financial condition and operating results may be
adversely affected.
In
December 2008, we were notified by the CRA of their intention to audit tax years
2003 through 2007. To date, CRA has issued proposed assessment
notices for tax years 2002 and 2003 seeking increases to taxable income of CAD
$3.8 million and
CAD $6.9
million, respectively. These adjustments relate, principally, to our
treatment of Canadian Development Technology Incentives (“CDTI”) tax credits and
income and expense allocations recorded between our parent company and our
Canadian subsidiary. We disagree with the CRA’s basis for these
adjustments and intend to appeal their decision through applicable
administrative and judicial procedures.
There
could be significant unrecognized tax benefits over the next twelve months
depending on the outcome of any audit. We have recorded income tax reserves
believed to be sufficient to cover any potential tax assessments for the open
tax years. In the event the CRA audit results in adjustments that
exceed both our unrecognized tax benefits and available deferred tax assets, we
may become a tax paying entity in 2010 or in a prior year and may be required to
pay penalties and interest. Any such penalties and interest cannot be
reasonably estimated at this time.
We will
seek U.S. tax treaty relief through the appropriate Competent Authority
tribunals for all settlements entered into with the CRA. Although we
believe we have reasonable basis for our tax positions, it is possible an
adverse outcome could have a material effect upon our financial condition,
operating results or cash flows in a particular quarter or annual
period.
In 2008
and 2009, the state of California suspended the usage of prior year tax loss
carryforwards used to reduce taxable income in California. We cannot
be certain in 2010 whether California or another state will impose a similar
restriction which could negatively impact our operating results resulting in
additional tax expense.
As we continue to expand domestically
and internationally, we are increasingly subject to reviews by various U.S. and
foreign taxing authorities which could negatively impact our financial results.
While we have recorded reserves for these uncertainties and do not expect the
outcomes of these reviews to be material to our operations, our current assessment as to the potential
financial impact of these reviews could prove incorrect and we may incur
additional income tax expense in the period the uncertainty is
resolved.
Evolving
regulation of the Internet or changes in the infrastructure underlying the
Internet may adversely affect our financial condition by increasing our
expenditures and causing customer dissatisfaction.
As
Internet commerce continues to evolve, increasing regulation by federal, state
or foreign agencies may become more likely. We are particularly sensitive to
these risks because the Internet is a critical component of our business model.
For example, we believe increased regulation is likely in the area of data
privacy, and laws and regulations applying to the solicitation, collection,
processing or use of personal or consumer information could affect our
customers’ ability to use and share data, potentially reducing demand for
solutions accessed via the Internet and restricting our ability to store,
process and share data with our customers via the Internet. In addition,
taxation of services provided over the Internet or other charges imposed by
government agencies or by private organizations for accessing the Internet may
also be imposed. Legislation has been proposed that may impact the way that
internet service providers treat Internet traffic. The outcome of such proposals
is uncertain but certain outcomes may negatively impact our business or increase
our operating costs. Any regulation imposing greater fees for internet use or
restricting information exchange over the Internet could result in a decline in
the use of the Internet and the viability of internet-based services, which
could harm our business.
The rapid
and continual growth of traffic on the Internet has resulted at times in slow
connection and download speeds among Internet users. Our business expansion may
be harmed if the Internet infrastructure cannot handle our customers’ demands or
if hosting capacity becomes insufficient. If our customers become frustrated
with the speed at which they can utilize our software over the Internet, our
customers may discontinue use of our products and choose not to renew their
contract with us.
Our
stock price is likely to be volatile and could decline.
The stock
market in general and the market for technology-related stocks in particular
have been highly volatile. As a result, the market price of our stock is likely
to be similarly volatile, and investors in our stock may experience a decrease
in the value of their stock, including decreases unrelated to our operating
performance or prospects. The price of our stock could be subject to wide
fluctuations in response to a number of factors, including those listed in this
“Risk Factors” section and others such as:
•
|
our
operating performance and the performance of other similar
companies;
|
•
|
overall
performance of the equity markets;
|
•
|
developments
with respect to intellectual property
rights;
|
•
|
publication
of unfavorable research reports about us or our industry or withdrawal of
research;
|
•
|
coverage
by securities analysts or lack of coverage by securities
analysts;
|
•
|
speculation
in the press or investment
community;
|
•
|
general
economic conditions and data and the impact of such conditions and data on
the equity markets;
|
•
|
terrorist
acts; and
|
•
|
announcements
by us or our competitors of significant contracts, new technologies,
acquisitions, commercial relationships, joint ventures or capital
commitments.
|
We may need to raise additional capital,
which may not be available, thereby adversely affecting our ability to operate
our business.
If we
need to raise additional funds due to unforeseen circumstances, we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all, and any additional financings could result in additional dilution to
our stockholders. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to meet our business objectives, our stock
price may fall and you may lose some or all of your investment.
If
securities or industry analysts do not publish research or publish misleading or
unfavorable research about our business, our stock price and trading volume
could decline.
The
trading market for our common stock depends in part on the research and reports
that securities or industry analysts publish about us or our business. If no or
few securities or industry analysts cover our company, the trading price for our
stock would be negatively impacted. If one or more of the analysts who covers us
downgrades our stock or publishes misleading or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts
ceases coverage of our company or fails to publish reports on us regularly,
demand for our stock could decrease, which could cause our stock price or
trading volume to decline.
Provisions
in our charter documents and Delaware law may delay or prevent a third party
from acquiring us.
Our
certificate of incorporation and bylaws contain provisions that could increase
the difficulty for a third party to acquire us without the consent of our board
of directors. For example, if a potential acquirer were to make a hostile bid
for us, the acquirer would not be able to call a special meeting of stockholders
to remove our board of directors or act by written consent without a meeting. In
addition, our board of directors has staggered terms, which means that replacing
a majority of our directors would require at least two annual meetings. The
acquirer would also be required to provide advance notice of its proposal to
replace directors at any annual meeting, and will not be able to cumulate votes
at a meeting, which will require the acquirer to hold more shares to gain
representation on the board of directors than if cumulative voting were
permitted.
Our board
of directors also has the ability to issue preferred stock that could
significantly dilute the ownership of a hostile acquirer. In addition,
Section 203 of the Delaware General Corporation Law limits business
combination transactions with 15% or greater stockholders that have not been
approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation. These provisions may apply even if the offer may be considered
beneficial by some stockholders.
Issuer
Purchases of Equity Securities (1)
|
||||||||||||||||||||
Period
|
Total
Number of Shares Purchased (2)
|
Price Paid
per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Dollar Value of Shares that May Yet be Purchased
under the Plans or Program
|
||||||||||||||||
January
1, 2010 through January 31, 2010
|
19,660
|
$
|
24.10
|
-
|
-
|
|||||||||||||||
February
1, 2010 through February 28, 2010
|
-
|
-
|
-
|
|||||||||||||||||
March
1, 2010 through March 31, 2010
|
-
|
-
|
-
|
|||||||||||||||||
19,660
|
$
|
24.10
|
(2
|
)
|
-
|
-
|
||||||||||||||
(1) In connection with
our restricted stock and performance share agreements, we repurchase
common stock from employees as consideration for the payment of required
withholding taxes.
|
||||||||||||||||||||
(2) Represents the price
per share purchased during the three months ended March 31,
2010.
|
None.
None.
Exhibit
Number
|
Description
|
|
10.1
|
Amended
and Restated Contract of Employment between Taleo (Canada) Inc. and Guy
Gauvin dated January 18, 2010 (incorporated herein by
reference toExhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.2
|
Neil
Hudspith First Amended and Restated Employment Agreement dated January 18,
2010 (incorporated
herein by reference toExhibit 10.2 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.3
|
Katy
Murray First Amended and Restated Employment Agreement dated January 18,
2010 (incorporated
herein by reference toExhibit 10.3 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.4
|
Michael
P. Gregoire Employment Agreement dated January 25, 2010 (incorporated herein by
reference toExhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on January 29,
2010).
|
|
10.5†
|
Manual
Replacement Statement of Work dated March 31, 2010 by and between the
Registrant and Equinix Operating Co., Inc.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
|
32.1
|
Certifications
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
†
Confidential treatment has been requested for portions of this
exhibit
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TALEO
CORPORATION
|
|||
By:
|
/s/Katy Murray | ||
Katy
Murray
|
|||
Executive
Vice President and Chief Financial Officer
|
Date: May
7, 2010
Exhibit
Index
Exhibit
Number
|
Description
|
|
10.1
|
Amended
and Restated Contract of Employment between Taleo (Canada) Inc. and Guy
Gauvin dated January 18, 2010 (incorporated herein by
reference toExhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.2
|
Neil
Hudspith First Amended and Restated Employment Agreement dated January 18,
2010 (incorporated
herein by reference toExhibit 10.2 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.3
|
Katy
Murray First Amended and Restated Employment Agreement dated January 18,
2010 (incorporated
herein by reference toExhibit 10.3 to the
Registrant’s Current Report on Form 8-K, filed on January 21,
2010).
|
|
10.4
|
Michael
P. Gregoire Employment Agreement dated January 25, 2010 (incorporated herein by
reference toExhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on January 29,
2010).
|
|
Manual
Replacement Statement of Work dated March 31, 2010 by and between the
Registrant and Equinix Operating Co., Inc.
|
||
Certification
of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
||
Certification
of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
||
Certifications
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||
†
Confidential treatment has been requested for portions of this
exhibit