Attached files
file | filename |
---|---|
EX-31.1 - TALEO CORP | exhibit_31-1.htm |
EX-32.1 - TALEO CORP | exhibit_32-1.htm |
EX-31.2 - TALEO CORP | exhibit_31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
File Number: 000-51299
TALEO
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
52-2190418
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
Number)
|
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
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not check if a smaller reporting
company)
|
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
October 30, 2009, the registrant had 32,084,300 shares of Class A common stock
outstanding.
TALEO
CORPORATION
INDEX
PART
I — FINANCIAL INFORMATION
|
|
Item 1 Financial Statements
(unaudited)
|
2
|
Condensed Consolidated Balance Sheets at September
30, 2009 and December 31, 2008 (Restated)
|
2
|
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2009 and 2008
(Restated)
|
3
|
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2009 and 2008
(Restated)
|
4
|
Notes to Condensed Consolidated Financial
Statements
|
5
|
Item 2 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
20
|
Item 3 Quantitative and Qualitative Disclosures
About Market Risk
|
32
|
Item 4 Controls and
Procedures
|
32
|
PART II — OTHER INFORMATION
|
33
|
Item 1 Legal Proceedings
|
33
|
Item 1A Risk Factors
|
33
|
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds
|
49
|
Item 3 Defaults Upon Senior
Securities
|
49
|
Item 4 Submission of Matters to a Vote of Security
Holders
|
49
|
Item 5 Other Information
|
50
|
Item 6 Exhibits
|
50
|
Signatures
|
51
|
1
PART
I FINANCIAL INFORMATION
|
||||||||
ITEM
1. FINANCIAL STATEMENTS
|
||||||||
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
(Unaudited,
in thousands, except share and per share data)
|
||||||||
September 30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
As restated (1)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 76,513 | $ | 49,462 | ||||
Restricted
cash
|
617 | 521 | ||||||
Accounts
receivables, net of allowances of $807 at September 30, 2009 and $884 at
December 31, 2008
|
46,155 | 49,167 | ||||||
Prepaid
expenses and other current assets
|
10,622 | 10,977 | ||||||
Investment
credits receivable
|
6,973 | 6,087 | ||||||
Total
current assets
|
140,880 | 116,214 | ||||||
Property
and equipment, net
|
24,198 | 25,250 | ||||||
Restricted
cash
|
210 | 515 | ||||||
Goodwill
|
91,027 | 91,626 | ||||||
Other
intangibles, net
|
34,116 | 44,802 | ||||||
Other
assets
|
5,470 | 4,782 | ||||||
Total
assets
|
$ | 295,901 | $ | 283,189 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 21,094 | $ | 24,877 | ||||
Deferred
revenue - application services and customer deposits
|
55,714 | 54,421 | ||||||
Deferred
revenue - consulting services
|
16,841 | 16,221 | ||||||
Capital
lease obligations, short-term
|
573 | 1,101 | ||||||
Total
current liabilities
|
94,222 | 96,620 | ||||||
Long-term
deferred revenue - application services and customer
deposits
|
631 | 777 | ||||||
Long-term
deferred revenue - consulting services
|
12,424 | 9,594 | ||||||
Other
liabilities
|
4,239 | 3,258 | ||||||
Capital
lease obligations, long-term
|
162 | 519 | ||||||
Commitments
and contingencies (Note 8)
|
||||||||
Total
liabilities
|
111,678 | 110,768 | ||||||
Stockholders’
equity:
|
||||||||
Class A
Common Stock; par value, $0.00001 per share; 150,000,000 shares
authorized; 31,863,843 and 31,120,614 shares outstanding at
September 30, 2009 and December 31, 2008,
respectively
|
— | — | ||||||
Additional
paid-in capital
|
264,224 | 250,168 | ||||||
Accumulated
deficit
|
(81,622 | ) | (78,322 | ) | ||||
Treasury
stock, at cost, 34,548 and no shares outstanding at September 30,
2009 and December 31, 2008, respectively
|
(543 | ) | — | |||||
Accumulated
other comprehensive income
|
2,164 | 575 | ||||||
Total
stockholders’ equity
|
184,223 | 172,421 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 295,901 | $ | 283,189 | ||||
(1) See
Note 2 "Restatement of Condensed Consolidated Financial Statements" of
Notes to Condensed Consolidated Financial Statements.
|
||||||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
2
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
(Unaudited;
in thousands, except per share data)
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
As restated (1)
|
As restated (1)
|
|||||||||||||||
Revenue:
|
||||||||||||||||
Application
|
$ | 44,870 | $ | 37,469 | $ | 128,988 | $ | 98,362 | ||||||||
Consulting
|
5,866 | 9,177 | 18,924 | 22,015 | ||||||||||||
Total
revenue
|
50,736 | 46,646 | 147,912 | 120,377 | ||||||||||||
Cost
of revenue:
|
||||||||||||||||
Application
|
10,599 | 9,866 | 30,901 | 22,521 | ||||||||||||
Consulting
|
6,203 | 7,245 | 18,758 | 18,607 | ||||||||||||
Total
cost of revenue
|
16,802 | 17,111 | 49,659 | 41,128 | ||||||||||||
Gross
profit
|
33,934 | 29,535 | 98,253 | 79,249 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
16,481 | 15,879 | 49,536 | 38,471 | ||||||||||||
Research
and development
|
8,666 | 8,444 | 26,138 | 22,948 | ||||||||||||
General
and administrative
|
8,486 | 9,430 | 25,742 | 23,147 | ||||||||||||
Restructuring
and severance expense
|
- | 1,330 | - | 1,611 | ||||||||||||
Total
operating expenses
|
33,633 | 35,083 | 101,416 | 86,177 | ||||||||||||
Operating
income / (loss)
|
301 | (5,548 | ) | (3,163 | ) | (6,928 | ) | |||||||||
Other
income / (expense):
|
||||||||||||||||
Interest
income
|
52 | 261 | 246 | 1,556 | ||||||||||||
Interest
expense
|
(42 | ) | (58 | ) | (130 | ) | (144 | ) | ||||||||
Worldwide
Compensation purchase option write-off
|
(1,084 | ) | - | (1,084 | ) | - | ||||||||||
Total
other income, net
|
(1,074 | ) | 203 | (968 | ) | 1,412 | ||||||||||
Loss
before benefit from income taxes
|
(773 | ) | (5,345 | ) | (4,131 | ) | (5,516 | ) | ||||||||
Provision
for / (benefit from) income taxes
|
329 | 561 | (831 | ) | 89 | |||||||||||
Net
loss
|
$ | (1,102 | ) | $ | (5,906 | ) | $ | (3,300 | ) | $ | (5,605 | ) | ||||
Net
loss per share attributable to Class A common stockholders — basic
and diluted
|
$ | (0.04 | ) | $ | (0.20 | ) | $ | (0.11 | ) | $ | (0.21 | ) | ||||
Weighted-average
Class A common shares — basic and diluted
|
30,883 | 29,388 | 30,540 | 26,818 | ||||||||||||
(1) See
Note 2 "Restatement of Condensed Consolidated Financial Statements" of
Notes to Condensed Consolidated Financial Statements.
|
||||||||||||||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
3
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(Unaudited;
in thousands)
|
||||||||
|
Nine
Months Ended
|
|||||||
|
September 30,
|
|||||||
|
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
As restated (1)
|
|||||||
Net
loss
|
$ | (3,300 | ) | $ | (5,605 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
20,581 | 10,582 | ||||||
Loss
on disposal of fixed assets
|
17 | - | ||||||
Amortization
of tenant inducements
|
(114 | ) | (114 | ) | ||||
Tenant
inducements from landord
|
6 | - | ||||||
Stock-based
compensation expense
|
8,165 | 8,468 | ||||||
Director
fees settled with stock
|
186 | 172 | ||||||
Excess tax benefit from stock options | (257 | ) | - | |||||
Worldwide
Compensation purchase option write-off
|
1,084 | - | ||||||
Bad
debt expense
|
704 | 259 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
2,248 | (4,539 | ) | |||||
Prepaid
expenses and other assets
|
(845 | ) | (2,483 | ) | ||||
Investment
credit receivable
|
(112 | ) | (2,055 | ) | ||||
Accounts
payable and accrued liabilities
|
(2,487 | ) | (3,413 | ) | ||||
Deferred
revenue and customer deposits
|
4,175 | 12,412 | ||||||
Net
cash provided by operating activities
|
30,051 | 13,684 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(7,720 | ) | (5,853 | ) | ||||
Change
in restricted cash
|
210 | 210 | ||||||
Purchases
of investment
|
- | (2,498 | ) | |||||
Acquisition
of business, net of cash acquired
|
- | (49,646 | ) | |||||
Net
cash used in investing activities
|
(7,510 | ) | (57,787 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Principal
payments on loan and capital lease obligations
|
(1,376 | ) | (344 | ) | ||||
Treasury
stock acquired to settle employee withholding liability
|
(661 | ) | (791 | ) | ||||
Excess
tax benefit from stock options
|
257 | - | ||||||
Proceeds
from stock options exercised and ESPP shares
|
5,566 | 8,221 | ||||||
Net
cash provided by financing activities
|
3,786 | 7,086 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
724 | (114 | ) | |||||
Increase
/ (decrease) in cash and cash equivalents
|
27,051 | (37,131 | ) | |||||
Cash
and cash equivalents:
|
||||||||
Beginning
of period
|
49,462 | 86,135 | ||||||
End
of period
|
$ | 76,513 | $ | 49,004 | ||||
Supplemental
cash flow disclosures:
|
||||||||
Cash
paid for interest
|
$ | 54 | $ | 33 | ||||
Cash
paid for income taxes
|
$ | 273 | $ | 207 | ||||
Supplemental
disclosure of non-cash financing and investing activities:
|
||||||||
Property
and equipment purchases included in accounts payable and accrued
liabilities
|
$ | 1,530 | $ | 2,691 | ||||
Class
B common stock exchanged for Class A common stock
|
$ | - | $ | 96 | ||||
Stock
and stock options issued in connection with Vurv
acquisition
|
$ | - | $ | 75,189 | ||||
(1) See
Note 2 "Restatement of Condensed Consolidated Financial Statements" of
Notes to Condensed Consolidated Financial Statements.
|
||||||||
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
|
4
TALEO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. 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, as amended, for
the fiscal year ended December 31, 2008, filed on October 27,
2009. 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.
Restatement of Condensed Consolidated Financial Statements
Stock-based
Compensation Expense Restatement
In
October 2009, the Company identified an error in its accounting for stock-based
compensation expense after upgrading to a new version of the equity program
administration software that the Company licenses from a third-party
provider. The third-party provider has advised its users that the new
version of the software corrects an error in the prior version with respect to
the calculation of stock-based compensation expense. Specifically,
the prior version of the software incorrectly calculated stock-based
compensation expense by continuing to apply a weighted average forfeiture rate
to the vested portion of stock option awards until the grant’s final vest date,
rather than reflecting actual forfeitures as awards vested, resulting in an
understatement of stock-based compensation expense in certain periods prior to
the grant’s final vest date. The correction of the error by the
Company results in changes to the timing of stock-based compensation expense
over the vesting period of the awards during the relevant periods, but does not
change the total stock-based compensation expense. As stock-based
compensation expense is a non-cash item, there is no impact to net cash provided
by operations in any period. In addition, the Company has corrected
the amount of antidilutive securities not included in the diluted net loss per
share calculation disclosed in Note 9 “Net Loss Per Share” of the “Notes to
Condensed Consolidated Financial Statements” for the three and nine months ended
September 30, 2008.
The
Company has restated its consolidated balance sheets as of December 31, 2008 and
condensed consolidated statements of operations for the three and nine months
ended September 30, 2008, and condensed consolidated statements of cash flows
for the nine months ended September 30, 2008. The after-tax effect of these
adjustments to the previously reported net loss for the three months ended
September 30, 2008 was a decrease in net loss by $0.3 million and for the nine
months ended September 30, 2008, net loss was decreased by $0.1
million.
The
Company’s condensed consolidated financial statements presented in this
Quarterly Report on Form 10-Q have been restated for 2008 to reflect the impact
resulting from the restatement adjustments described above, as follows (in
thousands):
5
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||
(Unaudited;
in thousands, except per share data)
|
||||||||||||
Three
months ended September 30, 2008
|
||||||||||||
Stock-based
Compensation Adjustments
|
||||||||||||
As
Previously Reported
|
As
Restated
|
|||||||||||
Revenue:
|
||||||||||||
Application
|
$ | 37,469 | $ | - | $ | 37,469 | ||||||
Consulting
|
9,177 | - | 9,177 | |||||||||
Total
revenue
|
46,646 | - | 46,646 | |||||||||
Cost
of revenue:
|
||||||||||||
Application
|
9,885 | (19 | ) | 9,866 | ||||||||
Consulting
|
7,257 | (12 | ) | 7,245 | ||||||||
Total
cost of revenue
|
17,142 | (31 | ) | 17,111 | ||||||||
Gross
profit
|
29,504 | 31 | 29,535 | |||||||||
Operating
expenses:
|
||||||||||||
Sales
and marketing
|
15,953 | (74 | ) | 15,879 | ||||||||
Research
and development
|
8,486 | (42 | ) | 8,444 | ||||||||
General
and administrative
|
9,593 | (163 | ) | 9,430 | ||||||||
Restructuring
and severance expense
|
1,330 | - | 1,330 | |||||||||
Total
operating expenses
|
35,362 | (279 | ) | 35,083 | ||||||||
Operating
income / (loss)
|
(5,858 | ) | 310 | (5,548 | ) | |||||||
Other
income / (expense):
|
||||||||||||
Interest
income
|
261 | - | 261 | |||||||||
Interest
expense
|
(58 | ) | - | (58 | ) | |||||||
Total
other income, net
|
203 | - | 203 | |||||||||
Income
/ (loss) before provision / (benefit) for income taxes
|
(5,655 | ) | 310 | (5,345 | ) | |||||||
(Benefit)
/ provision for income taxes
|
561 | - | 561 | |||||||||
Net
income / (loss)
|
$ | (6,216 | ) | $ | 310 | $ | (5,906 | ) | ||||
Net
income / (loss) per share attributable to Class A common stockholders
— basic
|
$ | (0.21 | ) | $ | 0.01 | $ | (0.20 | ) | ||||
Net
income / (loss) per share attributable to Class A common stockholders
— diluted
|
$ | (0.21 | ) | $ | 0.01 | $ | (0.20 | ) | ||||
Weighted-average
Class A common shares — basic
|
29,388 | 29,388 | 29,388 | |||||||||
Weighted-average
Class A common shares — diluted
|
29,388 | 29,388 | 29,388 | |||||||||
6
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||
(Unaudited;
in thousands, except per share data)
|
||||||||||||
Nine
months ended September 30, 2008
|
||||||||||||
As
Previously
|
Stock-based
Compensation Adjustments
|
As
|
||||||||||
Reported
|
Restated
|
|||||||||||
Revenue:
|
||||||||||||
Application
|
$ | 98,362 | $ | - | $ | 98,362 | ||||||
Consulting
|
22,015 | - | 22,015 | |||||||||
Total
revenue
|
120,377 | - | 120,377 | |||||||||
Cost
of revenue:
|
||||||||||||
Application
|
22,530 | (9 | ) | 22,521 | ||||||||
Consulting
|
18,540 | 67 | 18,607 | |||||||||
Total
cost of revenue
|
41,070 | 58 | 41,128 | |||||||||
Gross
profit / (loss)
|
79,307 | (58 | ) | 79,249 | ||||||||
Operating
expenses:
|
||||||||||||
Sales
and marketing
|
38,455 | 16 | 38,471 | |||||||||
Research
and development
|
22,885 | 63 | 22,948 | |||||||||
General
and administrative
|
23,379 | (232 | ) | 23,147 | ||||||||
Restructuring
and severance expense
|
1,611 | - | 1,611 | |||||||||
Total
operating expenses
|
86,330 | (153 | ) | 86,177 | ||||||||
Operating
income / (loss)
|
(7,023 | ) | 95 | (6,928 | ) | |||||||
Other
income / (expense):
|
||||||||||||
Interest
income
|
1,556 | - | 1,556 | |||||||||
Interest
expense
|
(144 | ) | - | (144 | ) | |||||||
Total
other income, net
|
1,412 | - | 1,412 | |||||||||
Income
/ (loss) before provision / (benefit) for income taxes
|
(5,611 | ) | 95 | (5,516 | ) | |||||||
(Benefit)
/ provision for income taxes
|
89 | - | 89 | |||||||||
Net
income / (loss)
|
$ | (5,700 | ) | $ | 95 | $ | (5,605 | ) | ||||
Net
income / (loss) per share attributable to Class A common stockholders
— basic
|
$ | (0.21 | ) | $ | - | $ | (0.21 | ) | ||||
Net
income / (loss) per share attributable to Class A common stockholders
— diluted
|
$ | (0.21 | ) | $ | - | $ | (0.21 | ) | ||||
Weighted-average
Class A common shares — basic
|
26,818 | 26,818 | 26,818 | |||||||||
Weighted-average
Class A common shares — diluted
|
26,818 | 26,818 | 26,818 | |||||||||
7
TALEO
CORPORATION AND SUBSIDIARIES
|
||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||||||
(Unaudited;
in thousands)
|
||||||||||||
Nine
months ended September 30, 2008
|
||||||||||||
As
Previously
|
Stock-based
Compensation Adjustments
|
As
|
||||||||||
Reported
|
Restated
|
|||||||||||
(In
thousands)
|
||||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income / (loss)
|
$ | (5,700 | ) | $ | 95 | $ | (5,605 | ) | ||||
Adjustments
to reconcile net income / (loss) to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
10,582 | - | 10,582 | |||||||||
Amortization
of tenant inducements
|
(114 | ) | - | (114 | ) | |||||||
Stock-based
compensation expense
|
8,563 | (95 | ) | 8,468 | ||||||||
Director
fees settled with stock
|
172 | - | 172 | |||||||||
Bad
debt expense
|
259 | - | 259 | |||||||||
Changes
in assets and liabilities, net of effect of acquisition:
|
||||||||||||
Accounts
receivable
|
(4,539 | ) | - | (4,539 | ) | |||||||
Prepaid
expenses and other assets
|
(2,483 | ) | - | (2,483 | ) | |||||||
Investment
credits receivable
|
(2,055 | ) | - | (2,055 | ) | |||||||
Accounts
payable and accrued liabilities
|
(3,413 | ) | - | (3,413 | ) | |||||||
Deferred
revenue and customer deposits
|
12,412 | - | 12,412 | |||||||||
Net
cash by provided by operating activities
|
13,684 | - | 13,684 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of property and equipment
|
(5,853 | ) | - | (5,853 | ) | |||||||
Change
in restricted cash
|
210 | - | 210 | |||||||||
Purchase
of investment
|
(2,498 | ) | - | (2,498 | ) | |||||||
Acquisition
of business, net of cash acquired
|
(49,646 | ) | - | (49,646 | ) | |||||||
Net
cash used in investing activities
|
(57,787 | ) | - | (57,787 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Principal
payments on capital lease obligations
|
(344 | ) | - | (344 | ) | |||||||
Treasury
stock acquired to settle employee withholding liability
|
(791 | ) | - | (791 | ) | |||||||
Proceeds
from stock options, ESPP Shares and warrants exercised
|
8,221 | - | 8,221 | |||||||||
Net
cash provided by financing activities
|
7,086 | - | 7,086 | |||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(114 | ) | - | (114 | ) | |||||||
Decrease
in cash and cash equivalents
|
(37,131 | ) | - | (37,131 | ) | |||||||
Cash
and cash equivalents:
|
||||||||||||
Beginning
of period
|
86,135 | - | 86,135 | |||||||||
End
of period
|
$ | 49,004 | $ | - | $ | 49,004 | ||||||
Supplemental
cash flow disclosures:
|
||||||||||||
Cash
paid for interest
|
$ | 33 | $ | - | $ | 33 | ||||||
Cash
paid for income taxes
|
$ | 207 | $ | - | $ | 207 | ||||||
Supplemental
disclosure of non-cash financing and investing activities:
|
||||||||||||
Property
and equipment purchases included in accounts payable and accrued
liabilities
|
$ | 2,691 | $ | - | $ | 2,691 | ||||||
Class
B common stock exchanged for Class A common stock
|
$ | 96 | $ | - | $ | 96 | ||||||
Stock
and stock options issued in connection with Vurv
acquisition
|
$ | 75,189 | $ | - | $ | 75,189 | ||||||
8
3.
Recent Accounting Pronouncements
In
September 2009, the Financial Accounting Standards Board (“FASB”) approved new
accounting guidance for revenue arrangements that contain multiple components to
be delivered to a customer (“deliverable”). This standard provides
guidance for establishing fair value for a deliverable. When vendor-specific
objective evidence or third-party evidence of fair value for deliverables in an
arrangement cannot be determined, companies will be required to develop a best
estimate of the selling price of separate deliverables and allocate
consideration for the arrangement using the relative selling price
method. This guidance is effective as of the beginning of an entity’s
fiscal year that begins after June 15, 2010. However, early adoption is
permitted. The Company is currently evaluating when the Company will
adopt the new guidance. The Company expects this guidance will have a
significant impact on the Company’s revenue recognition policy and financial
statements, however, the Company has not determined the impact as of September
30, 2009.
In
December 2007, the FASB issued accounting guidance that establishes principles
and requirements for how an acquirer in a business combination recognizes and
measures the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree, and goodwill in the financial
statements of the acquirer. The new guidance also establishes financial
statement disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This guidance is
effective as of the beginning of an entity’s fiscal year that begins after
December 15, 2008. The Company adopted the guidance in the beginning of fiscal
year 2009 and the adoption did not impact its consolidated financial
statements.
In
September 2006, the FASB issued accounting guidance that provides enhanced
guidance for using fair value to measure assets and liabilities. The guidance
also responds to investors’ requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value and the effect of fair value measurements on
earnings. The guidance applies whenever other guidance requires or
permits assets or liabilities to be measured at fair value. This guidance does
not expand the use of fair value in any new circumstances. The
guidance is effective for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued additional guidance that defers the effective
date of the fair value guidance previously mentioned for one year for
non-financial assets and liabilities, except for items that are recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually). Consistent with the provisions of this guidance,
the Company elected to defer the adoption of fair value measurements for
non-financial assets and liabilities measured at fair value on a non-recurring
basis until January 1, 2009. The Company adopted the guidance
for using fair value measurements of non-financial assets and liabilities in the
beginning of fiscal year 2009 and the adoption did not impact its consolidated
financial statements.
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 nine months ended
September 30, 2009 and 2008. 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.
9
The
Company recorded stock-based compensation expense in the following expense
categories:
|
Three
Months
|
Nine
Months
|
||||||||||||||
|
Ended
|
Ended
|
||||||||||||||
|
September 30,
|
September 30,
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
As restated
|
As restated
|
|||||||||||||||
Cost
of revenue
|
$ | 535 | $ | 410 | $ | 1,355 | $ | 1,132 | ||||||||
Sales
and marketing
|
846 | 858 | 2,178 | 2,470 | ||||||||||||
Research
and development
|
441 | 380 | 1,114 | 1,071 | ||||||||||||
General
and administrative
|
1,241 | 1,354 | 3,518 | 3,795 | ||||||||||||
Total
|
$ | 3,063 | $ | 3,002 | $ | 8,165 | $ | 8,468 |
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
Stock Option Plans
At
September 30, 2009, 5,221,977 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
option plans for the nine months ended September 30, 2009 and related
information:
Number of Options
|
Weighted - Average Exercise
Price
|
|||||||
Outstanding
— January 1, 2009
|
3,302,307 | $ | 15.23 | |||||
Granted
|
63,000 | $ | 8.31 | |||||
Exercised
|
(31,946 | ) | $ | 5.36 | ||||
Forfeited
|
(185,024 | ) | $ | 22.88 | ||||
Outstanding
— March 31, 2009
|
3,148,337 | $ | 14.74 | |||||
Granted
|
237,000 | $ | 15.56 | |||||
Exercised
|
(68,435 | ) | $ | 9.87 | ||||
Forfeited
|
(48,198 | ) | $ | 18.98 | ||||
Outstanding
— June 30, 2009
|
3,268,704 | $ | 14.84 | |||||
Granted
|
37,000 | $ | 18.57 | |||||
Exercised
|
(318,540 | ) | $ | 12.28 | ||||
Forfeited
|
(38,169 | ) | $ | 16.97 | ||||
Outstanding
— September 30, 2009
|
2,948,995 | $ | 15.14 |
The
weighted average grant date fair value of options granted during the three and
nine months ended September 30, 2009 was $18.57 and $14.53 per option,
respectively.
The total
intrinsic value of options exercised during the three and nine months ended
September 30, 2009 was $2.3 million
10
and $2.8
million, respectively. As of September 30, 2009, the Company had 2,763,647
options vested or expected to vest over four years with an aggregate intrinsic
value of $21.6 million and a weighted average exercise price of
$15.06.
The
aggregate intrinsic value for options outstanding and exercisable at September
30, 2009 was $15.9 million with a weighted-average remaining contractual life of
6.27 years.
The
Company recorded for Class A common stock options, $1.4 million and $4.2 million
of compensation expense for the three and nine months ended September 30, 2009,
respectively, and recorded $1.8 million and $5.7 million of compensation expense
for the three and nine months ended September 30, 2008,
respectively. As of September 30, 2009, unamortized compensation cost
was $7.7 million, net of assumed forfeitures. This cost is expected
to be recognized over a weighted-average period of 2.2 years.
On April
17, 2009, 31,360 exercisable options held by terminated employees of the Company
were modified to extend their expiration date to May 30, 2009, which was 30 days
after the Company became current with its SEC filing
requirements. The modification of these options resulted in an
incremental share-based compensation expense of $47,000 during the second
quarter of 2009.
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
September 30, 2009 is continued service to the Company. Upon vesting,
performance share awards convert into an equivalent number of shares of common
stock. As of September 30, 2009, unamortized compensation cost was $11.6 million
net of assumed forfeitures. This cost is expected to be recognized over a
weighted-average period between 2.3 and 3.7 years.
The
following table presents a summary of the restricted stock awards and
performance share awards for the nine months ended September 30, 2009 and
related information:
|
Performance
|
Restricted
|
Weighted—Average
|
|||||||||
|
Share
|
Stock
|
Grant-
|
|||||||||
|
Awards
|
Awards
|
Date Fair Value
|
|||||||||
Repurchasable/nonvested
balance — January 1, 2009
|
39,278 | 432,710 | $ | 18.12 | ||||||||
Awarded
|
643 | 7,332 | $ | 8.01 | ||||||||
Released/vested
|
(3,749 | ) | (39,595 | ) | $ | 13.92 | ||||||
Forfeited/cancelled
|
- | (1,313 | ) | $ | 24.04 | |||||||
Repurchasable/nonvested
balance — March 31, 2009
|
36,172 | 399,134 | $ | 18.18 | ||||||||
Awarded
|
424,164 | 259,811 | $ | 15.43 | ||||||||
Released/vested
|
(13,672 | ) | (96,197 | ) | $ | 17.44 | ||||||
Forfeited/cancelled
|
(429 | ) | (2,250 | ) | $ | 19.93 | ||||||
Repurchasable/nonvested
balance — June 30, 2009
|
446,235 | 560,498 | $ | 17.02 | ||||||||
Awarded
|
31,000 | 3,248 | $ | - | ||||||||
Released/vested
|
(4,999 | ) | (47,519 | ) | $ | 15.56 | ||||||
Forfeited/cancelled
|
(5,800 | ) | (375 | ) | $ | 24.04 | ||||||
Repurchasable/nonvested
balance — September 30, 2009
|
466,436 | 515,852 | $ | 17.05 |
The
Company recorded for restricted stock and performance share agreements $1.3
million and $3.3 million of compensation expense for the three and nine months
ended September 30, 2009, respectively, and $1.0 million and $2.1 million for
the three and nine months ended September 30, 2008, respectively.
Employee
Stock Purchase Plan
The
Company recorded for the ESPP $0.3 million and $0.6 million of compensation
expense for the three and nine months ended September 30, 2009, respectively,
and $0.2 million and $0.6 million for the three and nine months ended September
30, 2008, respectively. Unamortized compensation cost was $0.1 million as of
September 30, 2009. This cost is expected to be recognized over the month ending
October 31, 2009. At September 30, 2009, there were 653,656 shares
reserved for future issuance under the Company’s ESPP.
11
Reserved
Shares of Common Stock
On May
28, 2009, the Company’s stockholders approved the adoption of the 2009 Equity
Incentive Plan (“EIP”) with a share reserve of 5,200,000. The 2009
EIP also assumes expired, unexercised options and forfeited or reacquired shares
granted under the 1999 Stock Plan, 2004 Stock Plan and the 2005 Stock Plan and
is currently the only stock plan used for issuance of future equity awards by
the Company.
The
Company has reserved the following number of shares of Class A common stock as
of September 30, 2009 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
|
8,652,478 | |||
Employee
Stock Purchase Plan
|
653,656 | |||
Total
|
9,306,134 |
6.
Intangible Assets and Goodwill
During
the three months ended September 30, 2009, goodwill remained flat, and during
the nine months ended September 30, 2009 goodwill decreased by $0.6
million. As of September 30, 2009, the Company had completed its
purchase price allocation related to the Vurv acquisition. All
goodwill is reported in our application services operating segment.
September
30, 2009
|
December
31, 2008
|
|||||||||||||||||||||||
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
Existing
technology
|
$ | 11,811 | $ | (6,292 | ) | $ | 5,519 | $ | 11,811 | $ | (3,904 | ) | $ | 7,907 | ||||||||||
Customer
relationships
|
41,297 | (12,977 | ) | 28,320 | 41,297 | (4,906 | ) | 36,391 | ||||||||||||||||
Trade
name and other
|
308 | (185 | ) | 123 | 280 | (83 | ) | 197 | ||||||||||||||||
Non-compete
agreements
|
410 | (256 | ) | 154 | 410 | (103 | ) | 307 | ||||||||||||||||
$ | 53,826 | $ | (19,710 | ) | $ | 34,116 | $ | 53,798 | $ | (8,996 | ) | $ | 44,802 |
Amortization
of intangible assets was $3.6 million and $10.7 million for the three and nine
month periods ended September 30, 2009, respectively, and $2.8 million and
$3.0 million for the three and nine months ended September 30, 2008,
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 2009
|
$ | 3,572 | ||
2010
|
11,311 | |||
2011
|
6,239 | |||
2012
|
3,736 | |||
2013
|
3,706 | |||
Thereafter
|
5,552 | |||
Total
|
$ | 34,116 |
7.
Income Taxes
For the
nine months ended September 30, 2009, the Company recorded an income tax benefit
of approximately $0.8 million. The tax provision consists of U.S. state
income taxes, foreign income taxes and a $1.3 million tax benefit relating to
the 2000 and 2001 Canadian income tax audit settlement. For the three
month period ended September 30, 2009, the Company recorded income tax expense
of approximately $0.3 million which consists of U.S. state income taxes and
foreign income taxes. The difference between the statutory rate of 34% and the
Company’s quarterly effective tax rate ended September 30, 2009 of 42.5% on a
loss before income taxes was due primarily to permanent differences related to
non-deductible stock compensation expenses, state taxes and the utilization of
acquired and operating net operating losses not previously
benefited.
12
Effective January 1, 2007, the Company adopted the provisions of an accounting
standard relating to the timing for recognition of an uncertain tax benefit in
the financial statements. As of September 30, 2009, the Company had
uncertain tax benefits of approximately $5.2 million which represents a decrease
of $1.4 million from the balance at June 30, 2009.
In
December 2008, the Company was notified by the Canada Revenue Agency
(“CRA”) of their intention to audit tax years 2003 through
2007. No proposed assessment notices have been issued with respect to
these open tax years. In June 2009, the Company was issued a notice
of assessment by the CRA to increase taxable income by approximately $3.8
million Canadian dollars with respect to its 2002 tax year. These
adjustments relate, principally, to its 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 2002 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 2009 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 September 30, 2009, 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.
8.
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 as amended for the fiscal year ended
December 31, 2008, except for the following agreements entered into during
the first nine months of 2009:
On March
12, 2009, the Company extended the lease of the Quebec, Canada facility to
December 31, 2012. Payments related to this operating lease total
$1.1 million over the term of the lease.
On
May 31, 2009, the Company entered into an amendment to its software license
and maintenance agreement for database software to be used in the production
environment. This amendment requires total payments of approximately
$5.4 million over the next two years. Of the $5.4 million total
payments, $2.0 million has been capitalized in property plant and equipment and
will be depreciated over the next five years.
On
September 14, 2009, the Company entered into an Amended and Restated Agreement
and Plan of Merger (the “Merger Agreement”) to acquire Worldwide Compensation,
Inc. (“WWC”), a private company with headquarters in California that provides
compensation management solutions. In accordance with the terms of
the Merger Agreement, the Company will pay up to $16 million in cash, subject to
adjustment for any outstanding debt, third-party expenses and certain other
specified items, in exchange for all of the issued and outstanding capital
stock, options and warrants of WWC that the Company does not already own.
Fifteen percent (15%) of the consideration will be 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
acquisition has been approved by both companies’ boards of directors and is
subject to customary closing conditions. The Merger Agreement
provides that the closing of the acquisition shall not occur before January 1,
2010 and contains certain termination rights for both the Company and
WWC. Previously, in the third quarter of 2008, the Company made an
initial 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 execution of
the Merger Agreement, the Company negotiated more favorable terms than the
purchase option and also terminated the purchase option. Accordingly,
we wrote-off the $1.1 million carrying value of the purchase option in the third
quarter of 2009.
13
On
September 16, 2009, the Company entered into a lease for office space in the
United Kingdom. The lease has a term of five years, with an option to
renew in September 2014 at the then-market rate. Monthly payments
related to this operating lease range from $10,000 to $19,000, with a total
payment of 1.0 million for the five year term of the lease.
On July
1, 2008, the Company completed its acquisition of Vurv Technology, Inc.
(“Vurv”), now known as Vurv Technology LLC. On July 10, 2009, the
Company informed the former Vurv stockholders of indemnification claims against
the 0.5 million shares in escrow for losses incurred by the Company as a result
of certain breaches of the representations and warranties contained in the
Agreement and Plan of Reorganization. The Company requested
approximately 238,000 shares be released to the Company to cover such losses and
approximately 240,000 shares be released to the former Vurv
stockholders. While the Company believes it has a valid claim against
the 238,000 shares that remain in escrow, the former Vurv stockholders have
objected to all of the Company’s escrow claims and the outcome of these claims
is uncertain. The Company may not recover any of the amounts
claimed. As of September 30, 2009, the Company remained in
negotiations with the former Vurv stockholders.
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 the
Company 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’s management has reviewed these matters and
believes that neither the Company’s 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 the Company presented
with the Company’s reexamination request. Finding that the Company’s
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
are awaiting a further action from the USPTO. Both parties will have
an opportunity to appeal any further determination to the 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 the Company for tortious interference with
contract, unfair competition, unfair trade practices, and unjust enrichment
arising from the Company’s refusal to allow Kenexa Technology employees to
access and use the Company’s proprietary applications to provide outsourcing
services to a Taleo customer. 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’s
unauthorized access and use of the Taleo products in the course of providing
outsourcing services to the Company’s customers, and seeking declaratory
judgment, monetary damages, and injunctive relief. The Company filed
a motion to dismiss Kenexa’s claims on July 21, 2009 and a motion for
preliminary injunction to enjoin Kenexa employees from accessing the Company's
solutions deployed at joint customers of both companies on July 22,
2009. These motions are pending before the Court and 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 Taleo, a current Taleo employee and a
former Taleo employee 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 Taleo and two current employees of
Taleo. 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,
14
computer
fraud and abuse. Vurv removed the complaint to the United States District
Court for the District of Massachusetts and Taleo and Vurv, along with two other
defendants, answered the complaint on October 5, 2009. Additionally, four
other defendants (current and former employees of Taleo) moved to dismiss for
lack of jurisdiction on October 5 and October 26, 2009. These motions are
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. A hearing regarding the motion to dismiss
is scheduled for November 13, 2009.
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 has accrued for
estimated losses in the accompanying condensed consolidated financial statements
for matters where the Company 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’s management 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 the Company’s
financial position or results of operations. However litigation is subject to
inherent uncertainties and the Company’s views 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
the Company’s 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.
9.
Net Loss Per Share
For the
three and nine months ended September 30, 2009, the Company had net losses of
$(1.1) million and $(3.3) million, respectively. During the three and
nine months ended September 30, 2008, the Company had net losses of $(5.9)
million and $(5.6) million, respectively. Diluted net income per share is
calculated based on outstanding Class A common stock, stock options, ESPP shares
and exchangeable shares. Exchangeable shares are represented by shares of Class
B common stock. Each exchangeable share was convertible into one share of Class
A common stock. Therefore, exchangeable shares are included in the
calculation of fully diluted earnings per share during periods in which the
Company had net income. No exchangeable shares were outstanding
during the three and nine months ended September 30, 2009.
For the
three and nine months ended September 30, 2009, antidilutive securities,
consisting of stock options, unvested restricted stock and unvested restricted
stock units aggregated on a weighted average share basis to 3,014,388 and
1,807,486, respectively, were not included in the diluted net income per share
calculation. For the three and nine months ended September 30, 2008,
antidilutive securities, consisting of stock options, unvested restricted stock
and unvested restricted stock units aggregated on a weighted average share basis
to 3,879,979 and 3,609,565, respectively, were not included in the diluted net
income per share calculation.
15
Allocation
on net loss is as follows:
Three Months Ended September
30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
Common
|
Common(1)
|
Common
|
Common(1)
|
|||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
As
restated
|
||||||||||||||||
Allocation
of net loss
|
$ | (1,102 | ) | $ | - | $ | (5,906 | ) | $ | - | ||||||
Weighted-average
shares outstanding — basic and diluted
|
30,883 | - | 29,388 | 462 | ||||||||||||
Net
loss per share — basic and diluted
|
$ | (0.04 | ) | $ | - | $ | (0.20 | ) | $ | - | ||||||
|
Nine Months Ended September
30,
|
|||||||||||||||
|
2009
|
2008
|
||||||||||||||
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
Common
|
Common(1)
|
Common
|
Common(1)
|
|||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
As
restated
|
||||||||||||||||
Allocation
of net loss
|
$ | (3,300 | ) | $ | - | $ | (5,605 | ) | $ | - | ||||||
Weighted-average
shares outstanding — basic and diluted
|
30,540 | - | 26,818 | 495 | ||||||||||||
Net
loss per share — basic and diluted
|
$ | (0.11 | ) | $ | - | $ | (0.21 | ) | $ | - |
(1)
|
Class
B common stock is non-participating in periods of net income or net losses
and as a result has no attribution of earnings or losses for the purposes
of calculating earnings per share.
|
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.
10.
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.
16
The
following table presents a summary of operating segments:
Application
|
Consulting
|
Total
|
||||||||||
(In
thousands)
|
||||||||||||
Three
Months Ended September 30, 2009:
|
||||||||||||
Revenue
|
$ | 44,870 | $ | 5,866 | $ | 50,736 | ||||||
Contribution
margin(1)
|
$ | 25,605 | $ | (337 | ) | $ | 25,268 | |||||
Three
Months Ended September 30, 2008
|
||||||||||||
Revenue
|
$ | 37,469 | $ | 9,177 | $ | 46,646 | ||||||
As restated
|
As restated
|
As restated
|
||||||||||
Contribution
margin(1)
|
$ | 19,159 | $ | 1,932 | $ | 21,091 | ||||||
|
Application
|
Consulting
|
Total
|
|||||||||
(In
thousands)
|
||||||||||||
Nine
Months Ended September 30, 2009:
|
||||||||||||
Revenue
|
$ | 128,988 | $ | 18,924 | $ | 147,912 | ||||||
Contribution
margin(1)
|
$ | 71,949 | $ | 166 | $ | 72,115 | ||||||
Nine
Months Ended September 30, 2008
|
||||||||||||
Revenue
|
$ | 98,362 | $ | 22,015 | $ | 120,377 | ||||||
As restated
|
As restated
|
As restated
|
||||||||||
Contribution
margin(1)
|
$ | 52,893 | $ | 3,408 | $ | 56,301 |
(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 September
30,
|
Nine Months Ended Sepetmber
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
As
restated
|
As
restated
|
|||||||||||||||
Contribution
margin for operating segments
|
$ | 25,268 | $ | 21,091 | $ | 72,115 | $ | 56,301 | ||||||||
Sales
and marketing
|
(16,481 | ) | (15,879 | ) | (49,536 | ) | (38,471 | ) | ||||||||
General
and administrative
|
(8,486 | ) | (9,430 | ) | (25,742 | ) | (23,147 | ) | ||||||||
Restructuring
and severance expense
|
- | (1,330 | ) | - | (1,611 | ) | ||||||||||
Interest
and other income, net
|
(1,074 | ) | 203 | (968 | ) | 1,412 | ||||||||||
Loss
before provision for / (benefit from) income taxes
|
$ | (773 | ) | $ | (5,345 | ) | $ | (4,131 | ) | $ | (5,516 | ) |
Geographic
Information:
Revenue
attributed to a country or region includes sales to multinational organizations
and is based on the country of location of the legal entity that is the
contracting party for the Company. The Company’s U.S. entity is the contracting
party for all sales agreements in the United States and the Company’s Canadian
entity is the contracting party for all Taleo Enterprise sales agreements in
Canada. Prior to January 1, 2005, certain of the Company’s subsidiaries outside
of North America were the contracting parties for sales transactions within
their regions. After January 1, 2005, the Company’s U.S. entity has been the
contracting party for all new sales agreements and renewals of existing sales
agreements entered into with customers outside of North America. While Vurv
generally contracted with customers outside of the U.S. via a local subsidiary,
renewals of such existing agreements going forward will be with a U.S.
entity. Accordingly, the geographic mix of total revenue identified
to our subsidiaries outside of North America should decline. Revenues
as a percentage of total revenues based on the country of location of the
Company’s contracting entity are as follows:
17
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
United
States
|
96 | % | 95 | % | 96 | % | 94 | % | ||||||||
Canada
|
4 | % | 4 | % | 4 | % | 5 | % | ||||||||
Rest
of the world
|
0 | % | 1 | % | 0 | % | 1 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
The
geographic mix of application services revenue based on the location of the
customer’s contracting entity in the three and nine months ended September 30,
2009 was as follows:
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
United
States
|
96 | % | 95 | % | 96 | % | 94 | % | ||||||||
Canada
|
4 | % | 4 | % | 4 | % | 5 | % | ||||||||
Rest
of the world
|
0 | % | 1 | % | 0 | % | 1 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
During
the three and nine months ended September 30, 2009 and 2008, there were no
customers that individually represented greater than 10% of the Company’s total
revenue or accounts receivable, respectively.
11.
Comprehensive Loss
Comprehensive
loss, net of income taxes, includes foreign currency transaction gains and
losses.
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
As
restated
|
As
restated
|
|||||||||||||||
Net
loss
|
$ | (1,102 | ) | $ | (5,906 | ) | $ | (3,300 | ) | $ | (5,605 | ) | ||||
Net
foreign currency transaction gain / (loss)
|
897 | (221 | ) | 1,589 | (451 | ) | ||||||||||
Comprehensive
loss
|
$ | (205 | ) | $ | (6,127 | ) | $ | (1,711 | ) | $ | (6,056 | ) |
18
12.
Restructuring, Severance and Exit Costs
Restructuring
During
the second quarter of 2008, the Company initiated a restructuring plan (the
“Plan”) to reorganize the Company as a result of the Vurv
acquisition. The Plan was completed in the fourth quarter of 2008 and
resulted in the termination of approximately 34 persons throughout the
organization and the closure of certain U.S. and international
facilities. During the nine months ended September 30, 2009, the Company
incurred no restructuring expense.
At
September 30, 2009, the Company had no future liability related to restructuring
charges in its condensed consolidated balance sheet. In accordance with the FASB
standard, the Company records a liability for restructuring costs in its
financial statements when it has a payment obligation to an employee or external
party.
Severance
|
Facility
closure
|
Total
liability
|
|
Restructuring
expense
|
(In
thousands)
|
||
Liability
at January 1, 2009
|
$ 271
|
$ -
|
$ 271
|
Cash
payments in the first quarter of 2009
|
(271)
|
-
|
(271)
|
Liability
at September 30, 2009
|
$ -
|
$ -
|
$ -
|
Exit
Costs –San Francisco Lease
During
July 2006, the Company moved its corporate offices from San Francisco,
California to Dublin, California. As a result of this relocation, the Company
has recorded a provision for the exit from the San Francisco
facility. As a part of this provision, the Company has taken into
account that on October 19, 2006, it entered into an agreement to sublease its
San Francisco facility, consisting of approximately 12,000 square
feet. The total cost associated with the exit from the San Francisco
facility was $0.4 million. As of September 30, 2009, the sublease
and lease had expired and no future cash payments remain to be made related
to
19
this
lease. Additionally, no expense was recorded for the San Francisco
facility during the nine months ended September 30, 2009.
Lease
payments
|
Sublease
rental income
|
Net
liability
|
||||||||||
Liability
for the Remaining Net Lease Payments for the San Francisco
Facility
|
(In
thousands)
|
|||||||||||
Liability
at January 1, 2009
|
$ | 227 | $ | (170 | ) | $ | 57 | |||||
Cash
receipts / (payments)
|
(97 | ) | 73 | (24 | ) | |||||||
Liability
at March 31, 2009
|
130 | (97 | ) | 33 | ||||||||
Cash
receipts / (payments)
|
(97 | ) | 73 | (24 | ) | |||||||
Liability
at June 30, 2009
|
33 | (24 | ) | 9 | ||||||||
Cash
receipts / (payments)
|
(33 | ) | 24 | (9 | ) | |||||||
Liability
at September 30, 2009
|
$ | - | $ | - | $ | - |
13. Subsequent Events
On
October 28, 2009, The Company filed a Registration Statement on Form S-1 in
connection with a proposed public offering of 6.5 million shares of its Class A
common stock. The underwriters will have an option to purchase a
maximum of 975,000 additional shares of Class A common stock to cover
over-allotments of shares.
The
Company has evaluated subsequent events through November 1, 2009, the date the
Company filed its Form 10-Q for the quarter ended September 30,
2009.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, our proposed public offering of shares
of our Class A common stock, 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, and in our Annual
Report on Form 10-K, as amended, for the fiscal year ended December
31, 2008. 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.
Restatement
of Condensed Consolidated Financial Statements
We have restated our audited condensed
consolidated balance sheet as of December 31, 2008, the unaudited condensed
consolidated statement of operations for the three and nine months ended
September 30, 2008, and the unaudited condensed consolidated statement of cash
flows for the nine months ended September 30, 2008, including applicable notes
as reflected in this Form 10-Q to reflect our restatement. For additional
information about the restatement, please see Note 2 to the Condensed
Consolidated Financial Statements, “Restatement of Condensed Consolidated
Financial Statements” in Part I, Item 1 of this Form 10-Q.
Overview
We are a
leading global provider of on-demand unified talent management software
solutions. We offer recruiting, performance management, compensation management,
internal mobility and other talent management 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 and career
plans with corporate objectives.
20
We offer
two suites of talent management solutions: Taleo Enterprise and Taleo Business
Edition. Taleo Enterprise is designed for larger, more complex organizations.
Taleo Business Edition is designed for smaller, less complex organizations,
standalone 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 pay us
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
continue to experience the conditions that began in the first quarter of 2008 of
increased delays in our sales cycles and increased pressure from prospective
customers to offer discounts higher than our historical
practices. Additionally, while our renewal rates on a dollar-for-dollar
basis in the first nine months of 2009 were strong, we may experience increased
pressure from existing customers to renew expiring software subscriptions
agreements at lower rates, and certain of our customers may attempt to negotiate
lower software subscription fees for existing arrangements because of downturns
in their businesses. Additionally, certain of our customers have become or may
become bankrupt or insolvent as a result of the current 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
September 14, 2009, we entered into an Amended and Restated Agreement and Plan
of Merger (the “Merger Agreement”) to acquire Worldwide Compensation, Inc.
(“WWC”), a private company with headquarters in California that provides
compensation management solutions. In accordance with the terms of
the Merger Agreement, we will pay up to $16 million in cash, subject to
adjustment for any outstanding debt, third-party expenses and certain other
specified items, in exchange for all of the issued and outstanding capital
stock, options and warrants of WWC that we do not already own. Fifteen percent
(15%) of the consideration will be placed into escrow for one year following the
closing to be held as security for losses incurred by us in the event of certain
breaches of the representations and warranties contained in the Merger Agreement
or certain other events. The acquisition has been approved by both
companies’ boards of directors and is subject to customary closing
conditions. The Merger Agreement provides that the closing of the
acquisition shall not occur before January 1, 2010. The Merger
Agreement contains certain termination rights for both us and
WWC. Previously, in the third quarter of 2008, we made an initial
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 execution of the
Merger Agreement, we negotiated more favorable terms than the purchase option
and also terminated the purchase option. Accordingly, we wrote-off
the $1.1 million carrying value of the purchase option in the third quarter of
2009.
In July
2008, we acquired Vurv Technology, Inc. (“Vurv”), a provider of on demand talent
management software. The Vurv acquisition provided new customer
relationships and intellectual property. This acquisition also had a
significant impact on revenue and expenses.
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. Revenue associated with our Taleo Contingent solution
was recognized based on a fixed contract percentage of the dollar amount
invoiced for contingent labor through use of the application. Effective March
2007, we ceased entering into agreements to provide time and expense processing
as a component of our Taleo Contingent solution. As a result, Taleo Contingent
time and expense processing activity declined in 2007 and ended during the three
months ended June 30, 2008.
The term
of our application agreements signed with new customers purchasing Taleo
Enterprise in the third quarters of 2009 and 2008 was typically three or more
years. The term of application agreements for new customers purchasing Taleo
Business Edition in the third quarters of 2009 and 2008 was typically one
year. Application agreements entered into during the three and nine months
ended September 30, 2009 and 2008 are generally non-cancelable, or contain
significant penalties for early
21
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 primarily consists of fees associated with application configuration,
integration, business process re-engineering, change management, 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 the
customer’s receipt of invoice.
Our
consulting revenue comes from two kinds of engagements: standalone consulting
engagements which are not associated with new product implementations and
bundled consulting engagements which are associated with new product
implementations. Standalone consulting engagement revenue is
generally recognized when the services are performed, while bundled consulting
engagement revenue 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. As
a result, consulting revenue recognized in a quarter may vary significantly
depending on the mix of standalone and bundled engagements within the current
and previous quarters.
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 ten data centers that host the applications
for all of our customers. In the fourth quarter of 2009, we expect to
consolidate two of our data centers into existing data centers to reduce future
cost.
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
tax credits we receive from Revenue Quebec and the Canada Revenue
Agency. 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, foreign exchange gains / (losses) and allocated
overhead.
In our
“Results of Operations” below, we have included two types of tables: period over
period changes in income statement
22
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.
Due to an
error identified in stock-based compensation expense as described in Note 2 of
the Notes to Unaudited Condensed Consolidated Financial Statements “Restatement
of Condensed Consolidated Financial Statements” in Part I, Item 1 of this Form
10-Q, we changed our estimates for stock-based compensation
expense. There have been no other significant changes in our critical
accounting policies and estimates during the first nine months of 2009 as
compared to the critical accounting policies and estimates disclosed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in our Annual Report on Form 10-K, as amended for the
fiscal year ended December 31, 2008.
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.
23
24
|
Three Months Ended
September 30,
|
Nine Months Ended September
30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Condensed
Consolidated Statement of Operations Data:
|
||||||||||||||||
Revenue:
|
||||||||||||||||
Application
|
88 | % | 80 | % | 87 | % | 82 | % | ||||||||
Consulting
|
12 | % | 20 | % | 13 | % | 18 | % | ||||||||
Total
revenue
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost
of revenue (as a percent of related revenue):
|
||||||||||||||||
Application
|
24 | % | 26 | % | 24 | % | 23 | % | ||||||||
Consulting
|
106 | % | 79 | % | 99 | % | 85 | % | ||||||||
Total
cost of revenue
|
33 | % | 37 | % | 34 | % | 34 | % | ||||||||
Gross
profit
|
67 | % | 63 | % | 66 | % | 66 | % | ||||||||
Operating
expenses:
|
||||||||||||||||
Sales
and marketing
|
32 | % | 34 | % | 33 | % | 32 | % | ||||||||
Research
and development
|
17 | % | 18 | % | 18 | % | 19 | % | ||||||||
General
and administrative
|
17 | % | 20 | % | 17 | % | 19 | % | ||||||||
Restructuring
and severance expense
|
0 | % | 3 | % | 0 | % | 1 | % | ||||||||
Total
operating expenses
|
66 | % | 75 | % | 68 | % | 72 | % | ||||||||
Operating
income / (loss)
|
1 | % | -12 | % | -2 | % | -6 | % | ||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
0 | % | 1 | % | 0 | % | 1 | % | ||||||||
Interest
expense
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Investment
purchase option write-off
|
-2 | % | 0 | % | -1 | % | 0 | % | ||||||||
Total
other income, net
|
-2 | % | 0 | % | -1 | % | 1 | % | ||||||||
Loss
before provision / (benefit) for income taxes
|
-2 | % | -11 | % | -3 | % | -5 | % | ||||||||
Provision
/ (benefit) for income taxes
|
1 | % | 1 | % | -1 | % | 0 | % | ||||||||
Net
loss
|
-2 | % | -13 | % | -2 | % | -5 | % |
25
Comparison
of the Three and Nine Months Ended September 30, 2009 and 2008
Revenue
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Application
revenue
|
$ | 44,870 | $ | 37,469 | $ | 7,401 | 20 | % | $ | 128,988 | $ | 98,362 | $ | 30,626 | 31 | % | ||||||||||||||||
Consulting
revenue
|
5,866 | 9,177 | (3,311 | ) | -36 | % | 18,924 | 22,015 | (3,091 | ) | -14 | % | ||||||||||||||||||||
Total
revenue
|
$ | 50,736 | $ | 46,646 | $ | 4,090 | 9 | % | $ | 147,912 | $ | 120,377 | $ | 27,535 | 23 | % |
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, and the addition of customers through our
acquisition of Vurv on July 1, 2008. Application revenue from
our products for larger more complex organizations increased by $6.9 million and
$26.3 million for the three and nine months ended September 30, 2009,
respectively. Application revenue from small business product lines increased by
$0.5 million and $4.3 million for the three and nine months ended September 30,
2009, respectively. Application product revenue for the nine months
ended September 30, 2009 includes legacy Vurv customer revenue for the entire
period. Application product revenue for the nine months ended
September 30, 2008 includes legacy Vurv customer revenue only after the
acquisition date of July 1, 2008. The difference amounts to approximately $13.3
million. During the nine months ended September 30, 2009,
new sales of our products for smaller, less complex organizations were more
negatively affected by the economic downturn than new sales of our product for
larger, more complex organizations. Our list prices for application
services have remained relatively consistent on a year-over-year basis, and
renewals of application services for larger more complex organization, on a
dollar-for-dollar basis, remained strong at greater than 95%. For the
remainder of 2009, 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 in the
fourth quarter to remain consistent with the application revenue in three months
ended September 30, 2009.
26
Our
consulting revenue comes from two kinds of engagements: standalone consulting
engagements which are not associated with new product implementations and
bundled consulting engagements which are associated with new product
implementations. Standalone consulting engagement revenue is
generally recognized when the services are performed, while bundled consulting
engagement revenue 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.
For
the three and nine months ended September 30, 2009, consulting revenue decreased
due to a decrease in standalone consulting engagements, where revenue
is recognized as the consulting services are performed, compared to the same
period in 2008, and a reduction in consulting services for legacy Vurv
products. During the third quarter of 2009, consulting services
revenue for legacy Vurv engagements decreased significantly compared to the same
period in the prior year as we have completed the consulting engagements assumed
in connection with the July 2008 acquisition of Vurv. We have entered
into a very limited number of new consulting agreements related to legacy Vurv
products since we no longer sell those products. We expect total
consulting revenue to remain flat over the remainder of the year.
Cost
of Revenue
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Cost
of revenue - application
|
$ | 10,599 | $ | 9,866 | $ | 733 | 7 | % | $ | 30,901 | $ | 22,521 | $ | 8,380 | 37 | % | ||||||||||||||||
Cost
of revenue - consulting
|
6,203 | 7,245 | (1,042 | ) | -14 | % | 18,758 | 18,607 | 151 | 1 | % | |||||||||||||||||||||
Cost
of revenue - total
|
$ | 16,802 | $ | 17,111 | $ | (309 | ) | -2 | % | $ | 49,659 | $ | 41,128 | $ | 8,531 | 21 | % |
Cost
of revenue – application- summary of changes
Change from 2008 to 2009
|
||||||||
Three Months Ended
|
Nine Months Ended
|
|||||||
September
30,
|
September
30,
|
|||||||
Employee-related
costs
|
$ | (117 | ) | $ | 1,976 | |||
Hosting
facility cost
|
1,004 | 3,715 | ||||||
Depreciation
and amortizaton
|
(38 | ) | 1,526 | |||||
Various
other expense
|
(116 | ) | 1,162 | |||||
$ | 733 | $ | 8,379 |
During
the three and nine months ended September 30, 2009, the increase in cost of
application revenue was primarily driven by an increase in hosting facility
expenses. Hosting facility expenses increased primarily due to the
opening of our production data center in Amsterdam in the fourth quarter of
2008. For the nine months ended September 30, 2009, we also incurred
additional hosting facility costs, including third-party software costs,
internet bandwidth costs, depreciation and other costs associated with legacy
Vurv hosting facilities added July 1, 2008, as compared to the same period in
2008. Our net headcount increased by 16 persons as compared to
the same quarter in the prior year as we added customer service and technical
support to meet our customers’ needs. Additionally, for the nine
months ended September 30, 2009, we incurred additional amortization expenses
attributable to the amortization of intangible assets obtained from the
acquisition of Vurv as compared to the same period in 2008. We expect
cost of application revenue to increase slightly in terms of absolute dollars
for the remainder of the year.
Cost
of revenue – consulting - summary of changes
Change from 2008 to 2009
|
||||||||
Three Months Ended
|
Nine Months Ended
|
|||||||
September
30,
|
September
30,
|
|||||||
Employee-related
costs
|
$ | (114 | ) | $ | 819 | |||
Professional
services
|
(657 | ) | (583 | ) | ||||
Travel
and entertainment
|
(224 | ) | (400 | ) | ||||
Various
other expense
|
(47 | ) | 316 | |||||
$ | (1,042 | ) | $ | 152 |
Expenses
associated with delivering consulting services are generally recognized as
incurred when the services are performed. During the three months
ended September 30, 2009, cost of consulting revenue decreased primarily due to
a reduction in outsourced consulting services and a reduction in
employee-related cost. In the past, we have outsourced a portion of
consulting services engagements to third-party providers however, as a result of
the overall decrease in demand for consulting
27
services
during 2009, our need for these third-party providers has decreased as
well. This decrease was partially offset by an increase in need for
outsourced consulting services to convert legacy Vurv customers to Taleo
products. Additionally, employee headcount decreased during the three
months ended September 30, 2009 due to a decrease in demand for consulting
services. During the nine months ended September 30, 2009, cost of
consulting revenue increased due to employee-related costs associated with a net
headcount increase of 30 persons as a result of the July 2008 Vurv acquisition
which increased costs in the first six months of 2009 compared to same period in
2008. This increase was offset by the net decrease in professional
services cost due to a decrease in the demand for consulting services in
2009. We expect cost of consulting revenue to remain flat in absolute
dollars for the remainder of the year.
Gross
Profit and Gross Profit Percentage
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Gross
profit
|
||||||||||||||||||||||||||||||||
Gross
profit — application
|
$ | 34,271 | $ | 27,603 | $ | 6,668 | 24 | % | $ | 98,087 | $ | 75,841 | $ | 22,246 | 29 | % | ||||||||||||||||
Gross
profit — consulting
|
(337 | ) | 1,932 | (2,269 | ) | -117 | % | 166 | 3,408 | (3,242 | ) | -95 | % | |||||||||||||||||||
Gross
profit — total
|
$ | 33,934 | $ | 29,535 | $ | 4,399 | 15 | % | $ | 98,253 | $ | 79,249 | $ | 19,004 | 24 | % |
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||
|
September 30,
|
|
September 30,
|
|
||||||||||||||||||||
|
2009
|
2008
|
% change
|
2009
|
2008
|
% change
|
||||||||||||||||||
Gross
profit percentage
|
||||||||||||||||||||||||
Gross
profit percentage — application
|
76 | % | 74 | % | 2 | % | 76 | % | 77 | % | -1 | % | ||||||||||||
Gross
profit percentage — consulting
|
-6 | % | 21 | % | -27 | % | 1 | % | 15 | % | -14 | % | ||||||||||||
Gross
profit percentage — total
|
67 | % | 63 | % | 4 | % | 66 | % | 66 | % | 0 | % |
Gross
profit – application
The
higher gross profit percentage on application revenue during the three months
ended September 30, 2009 compared to the same period in 2008 resulted from an
overall increase in application revenue. The decrease in gross profit
during the nine months ended September 30, 2009 compared to the same periods in
2008 was driven predominantly by increased hosting costs associated with
increasing the scalability of the existing Taleo hosting environment and
incremental hosting costs as a result of the Vurv
acquisition. Additionally, Vurv’s gross profit percentage on
application revenue was lower than Taleo’s on a standalone basis and as a result
negatively impacted the consolidated gross profit percentage on application
revenue for the nine months ended September 30, 2009. Gross profit
was further reduced by additional costs incurred to improve the quality of our
customer service and amortization of intangibles associated with the acquisition
of Vurv.
Gross
profit – consulting
For
services performed on new product implementations, revenue is generally
recognized ratably over the term of the associated application services
agreement with a significant portion of revenue deferred to periods beyond
the period in which services were performed. We generally recognize revenue for
services performed on stand-alone consulting engagements as the services are
performed. 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 lower
gross profit percentage on consulting revenue in the three and nine months ended
September 30, 2009 compared to the same periods in 2008 resulted from a
reduction in standalone consulting engagements, where revenue and the related
expenses are typically recognized in the same period. There was also an increase
in cost of consulting revenue resulting from increased headcount and various
other expenses compared to the same periods in 2008. Gross profit on
consulting was negative for the three months ended September 30, 2009 due to a
reduction in revenue related to legacy Vurv consulting engagements, a reduction
in stand-alone consulting engagements, and deferral of revenue related to
certain bundled agreements being deferred to future periods while the related
expenses are reflected in the current period. In future periods,
gross margins on consulting will be positively affected by the recognition of
previously deferred revenue with no related expense.
Operating
expenses
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Sales
and marketing
|
$ | 16,481 | 15,879 | $ | 602 | 4 | % | $ | 49,536 | $ | 38,471 | $ | 11,065 | 29 | % | |||||||||||||||||
Research
and development
|
8,666 | 8,444 | 222 | 3 | % | 26,138 | 22,948 | 3,190 | 14 | % | ||||||||||||||||||||||
General
and administrative
|
8,486 | 9,430 | (944 | ) | -10 | % | 25,742 | 23,147 | 2,595 | 11 | % | |||||||||||||||||||||
Restructuring
and severance expense
|
- | 1,330 | (1,330 | ) | * | - | 1,611 | (1,611 | ) | * | ||||||||||||||||||||||
Total
operating expenses
|
$ | 33,633 | $ | 35,083 | $ | (1,450 | ) | $ | 101,416 | $ | 86,177 | $ | 15,239 | |||||||||||||||||||
*
not meaningful
|
Sales
and marketing- summary of changes
Change from 2008 to 2009
|
||||||||
Three Months Ended
|
Nine Months Ended
|
|||||||
September
30,
|
September
30,
|
|||||||
Amortization
|
$ | 777 | $ | 6,373 | ||||
Employee-related
costs
|
20 | 2,523 | ||||||
Marketing
expenses
|
(95 | ) | 1,335 | |||||
Various
other expense
|
(100 | ) | 834 | |||||
$ | 602 | $ | 11,065 |
During
the three and nine months ended September 30, 2009, the increase in sales and
marketing expense was primarily driven by an increase in amortization expenses
attributable to the amortization of intangible assets obtained from the
acquisition of Vurv. Employee-related expenses increased due to a net
headcount increase of 16 persons as compared to the same period in the prior
year and marketing expenditures (including travel) related to tradeshows and
demand generation efforts primarily related to our Taleo Business Edition
product. Additionally, during the three months ended September 30,
2009, various other expenses decreased due to overall cost management in all
areas. These savings were offset by increases during the nine months
ended September 30, 2009 as a result of the acquisition of Vurv and the overall
expansion of our operations. We expect sales and marketing cost to
remain constant in terms of dollars for the remainder of the year.
Research
and development– summary of changes
Change from 2008 to 2009
|
||||||||
Three Months Ended
|
Nine Months Ended
|
|||||||
September
30,
|
September
30,
|
|||||||
Employee-related
costs
|
$ | 476 | $ | 2,857 | ||||
Software
support
|
(16 | ) | (359 | ) | ||||
Various
other expense
|
(238 | ) | 692 | |||||
$ | 222 | $ | 3,190 |
During
the three and nine months ended September 30, 2009, the increase in research and
development expense was primarily driven by a net headcount increase of 41
persons as compared to the same period in the prior year. These
research and development cost increases were partially offset by cost savings
resulting from product release costs incurred in the first half of 2008, but not
in the first half of 2009. Also, during the nine months ended
September 30, 2009, research and development expenses were favorably affected
due to the positive impact of foreign currency movements against the U.S.
dollar. Additionally, various other expenses decreased due to cost
management in all areas. These savings were offset by cost increases
during the nine months ended September 30, 2009 as a result of the acquisition
of Vurv and the overall expansion of our operations.. We expect
research and development cost to increase in absolute dollars for the remainder
of the year.
General
and administrative– summary of changes
Change from 2008 to 2009
|
||||||||
Three Months Ended
|
Nine Months Ended
|
|||||||
September
30,
|
September
30,
|
|||||||
Employee-related
costs
|
$ | 434 | $ | 1,363 | ||||
Consultants
/ temporary help
|
(83 | ) | 748 | |||||
Audit
|
(411 | ) | (471 | ) | ||||
Bad
debt reserve
|
17 | 446 | ||||||
Foreign
currency (gain) / loss
|
(439 | ) | 291 | |||||
Various
other expense
|
(462 | ) | 218 | |||||
$ | (944 | ) | $ | 2,595 |
28
During
the three months ended September 30, 2009, the net decrease in general and
administrative expenses resulted from cost management initiatives implemented
during the quarter which offset year over year increases in employee-related
costs from additional headcount added in 2009. In the nine months
ended September 30, 2009, the net increase in general and
administrative expense was primarily driven by a net headcount increase of 6
persons as compared to the same quarter in the prior year, partially offset by a
reduction in share-based compensation due to the vesting of options granted to
senior management. The outside consulting and temporary help expense
decreased during the three months ended September 30, 2009 as we reduced
outsourced services during the period. These costs increased during
the nine months ended September 30, 2009 resulting from the evaluation of our
historical revenue practices associated with the restatement reflected in our
annual report on Form 10-K for the period ended December 31, 2008 filed on April
30, 2009. Audit fees decreased during the three and nine months ended
September 30, 2009 primarily due to a change in the methodology for recording
fees associated with the annual audit. In prior years, we recognized
annual audit fees ratably over the year but we now record the expense in the
quarter in which the work is performed. Additionally annual audit fees decreased
for 2009. These decreases were partially offset by audit fees related to the
evaluation of our historical revenue practices associated with the restatement
reflected in our annual report on Form 10-K for the period ended December 31,
2008 filed April 30, 2009. For the nine months ended September 30,
2009, bad debt expense increased primarily from at-risk receivables associated
with legacy Vurv customers. Various other expenses decreased
primarily from cost management during the quarter. These savings were
offset during the nine months ended September 30, 2009 due to new headcount and
expansion of our operations including the acquisition of Vurv on July 1,
2008. We expect general and administrative cost to increase in
absolute dollars for the remainder of the year.
Contribution
Margin – Operating Segments
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Contribution
Margin (1)
|
||||||||||||||||||||||||||||||||
Contribution
margin — application
|
$ | 25,605 | $ | 19,159 | $ | 6,446 | 34 | % | $ | 71,949 | $ | 52,893 | $ | 19,056 | 36 | % | ||||||||||||||||
Contribution
margin — consulting
|
(337 | ) | 1,932 | (2,269 | ) | -117 | % | 166 | 3,408 | (3,242 | ) | -95 | % | |||||||||||||||||||
Contribution
margin — total
|
$ | 25,268 | $ | 21,091 | $ | 4,177 | 20 | % | $ | 72,115 | $ | 56,301 | $ | 15,814 | 28 | % |
(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
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Interest
income
|
$ | 52 | $ | 261 | $ | (209 | ) | -80 | % | $ | 246 | $ | 1,556 | $ | (1,310 | ) | -84 | % | ||||||||||||||
Interest
expense
|
(42 | ) | (58 | ) | 16 | -28 | % | (130 | ) | (144 | ) | 14 | -10 | % | ||||||||||||||||||
Investment
purchase option write-off
|
(1,084 | ) | - | (1,084 | ) | * | (1,084 | ) | - | (1,084 | ) | * | ||||||||||||||||||||
Total
other income, net
|
$ | (1,074 | ) | $ | 203 | $ | (1,277 | ) | -629 | % | $ | (968 | ) | $ | 1,412 | $ | (2,380 | ) | -169 | % |
Interest
income and interest expense
Interest income — The
decrease in interest income is primarily attributable to a reduction in the
overall cash balance resulting from the acquisition of Vurv in July 2008 and a
lower average interest rate during 2009 compared to the same prior
year.
Interest expense
— There was no significant change in interest expense during the three
and nine months ended September 30, 2009 compared to the same period in the
prior year.
Investment purchase option write-off
- On September 14, 2009, we entered into the Merger Agreement to acquire
the outstanding capital stock, options and warrants of WWC that we do not
already own. The Merger Agreement contains certain termination rights
for both us and WWC. Previously, in the third quarter of 2008, we
made an initial 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
execution of the Merger Agreement, we negotiated more favorable terms than the
purchase option and also terminated the purchase
option. Accordingly, we wrote-off the $1.1 million carrying value of
the purchase option in the third quarter of 2009.
29
Provision
/ benefit for income taxes
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|||||||||||||||||||||||||||
|
September 30,
|
September 30,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||||||||||||||
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||||||||||
Provision
/ (benefit) for income taxes
|
$ | 329 | $ | 561 | $ | (232 | ) | -41 | % | $ | (831 | ) | $ | 89 | $ | (920 | ) | -1034 | % |
The
increase in income tax benefit for the nine month period ended September 30,
2009 is due principally to the 2000 and 2001 Canadian income tax audit
settlement which resulted in a tax benefit of approximately $1.3
million. The difference between the statutory rate of 34% and the
Company’s quarterly effective tax rate ended September 30, 2009 of 42.5% on a
loss before income taxes was due primarily to permanent differences related to
non-deductible stock compensation expenses, state taxes and the utilization of
acquired and operating net operating losses not previously
benefited.
At
September 30, 2009, we continue to maintain a valuation allowance against our
remaining U.S. deferred tax assets since it was determined to be more
likely than not these assets would not be realized. If, based on the operating
results of 2009 and a review of the realizability of our deferred tax assets, we
were to conclude that some or all of our deferred tax asset valuation allowance
was not required, this would likely have a material impact on our financial
results in the form of a benefit to the income tax rate. However,
there can be no assurance that any reduction of our valuation allowance will
actually occur until all requirements are achieved.
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
September 30, 2009, our principal source of liquidity was a net working capital
balance of $46.7 million, including cash and cash equivalents totaling $76.5
million.
|
Nine Months Ended
|
|
|
|||||||||||||
|
September 30,
|
|
|
|||||||||||||
|
2009
|
2008
|
$ change
|
% change
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Cash
provided by operating activities
|
$ | 30,051 | $ | 13,684 | $ | 16,367 | 120 | % | ||||||||
Cash
used in investing activities
|
(7,510 | ) | (57,787 | ) | 50,277 | -87 | % | |||||||||
Cash
provided by financing activities
|
3,786 | 7,086 | (3,300 | ) | -47 | % |
Net cash
provided by operating activities was $30.1 million for the nine months ended
September 30, 2009 compared to $13.7 million for the nine months ended September
30, 2008. Consistent with prior periods, cash provided by operating activities
has historically been affected by revenues, changes in working capital accounts,
particularly changes in deferred revenue, customer deposits and 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 nine months ended September 30, 2009 was $8.2 million versus
$8.5 million during the nine months ended September 30, 2008. This decrease
resulted from fully vested, fully amortized stock options, which are no longer
expensed in 2009 offset by incremental expense in 2009 related to new
grants. Additionally, depreciation and amortization expense increased
by $10.0 million in the first nine months of 2009 compared to the same period in
the previous year, primarily due to the addition of intangible assets associated
with the acquisition of Vurv in July 2008. The change in accounts
receivable increased due to an increase in billings compared to the same period
in 2008, however we continue to emphasize cash collections. 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 decreased 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 $7.5 million for the nine months ended
September 30, 2009 compared to net cash used in investing activities of $57.8
million for the nine months ended September 30, 2008. This decrease between
periods was due to the acquisition of Vurv on July 1, 2008. This
decrease was partially offset by the significant acquisition of property plant
and equipment during the nine months ended September 30, 2009 as we took
advantage of favorable equipment pricing extended by our vendors.
30
Net cash
provided by financing activities was $3.8 million for the nine months ended
September 30, 2009, compared to net cash provided by financing activities of
$7.1 million for the nine months ended September 30, 2008. This decrease was
primarily due to an increase of cash used for payments of capital lease
obligations of $1.0 million as compared to the previous year as a result of
capital assumed with the acquisition of Vurv and capital expenditures during the
first nine months of 2009. This decrease was partially offset by an
increase in stock option exercises resulting primarily from the increase in our
stock price over the nine months ended September 30, 2009.
We
believe our existing cash and cash equivalents and cash provided by operating
activities, together with anticipated net proceeds of our proposed public
offering of 6.5 million shares of our Class A common stock will be sufficient to
meet our working capital and capital expenditure needs for at least the next
twelve months. There can be no assurances we will be able to complete
the proposed public offering and receive any net proceeds. 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. For example, we entered into the
Merger Agreement to acquire WWC in September 2009, a privately held company that
provides compensation management solutions, in September 2009. The
impact of this acquisition on our cash and cash equivalents balance will be
significant. 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 as amended for fiscal year ended
December 31, 2008 except for the following agreements entered into during
the first nine months of 2009:
On March
12, 2009, we extended the lease of the Quebec, Canada facility to December 31,
2012. Payments related to this operating lease total $1.1 million
over the term of the lease.
On
May 31, 2009, we entered into an amendment to our software license and
maintenance agreement for database software to be used in the production
environment. This amendment requires total payments of approximately
$5.4 million over the next two years. Of the $5.4 million total
payments, $2.0 million has been capitalized in property plant and equipment and
will be amortized over the next five years.
On
September 14, 2009, we entered into an Amended and Restated Agreement and Plan
of Merger (the “Merger Agreement”) to acquire Worldwide Compensation, Inc.
(“WWC”). In accordance with the terms of the Merger Agreement, we
will pay up to $16 million in cash, subject to adjustment for any outstanding
debt, third-party expenses and certain other specified items, in exchange for
all of the issued and outstanding capital stock, options and warrants of WWC
that we do not already own. Fifteen percent (15%) of the consideration will be
placed into escrow for one year following the closing to be held as security for
losses incurred by us in the event of certain breaches of the representations
and warranties contained in the Merger Agreement or certain other
events. The acquisition has been approved by both companies’ boards
of directors and is subject to customary closing conditions. The
Merger Agreement provides that the closing of the acquisition shall not occur
before January 1, 2010. The Merger Agreement contains certain
termination rights for both us and WWC. Previously, in the third
quarter of 2008, we made an initial 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 execution of the Merger Agreement, we negotiated more
favorable terms than the purchase option and also terminated the purchase
option. Accordingly, we wrote-off the $1.1 million carrying value of
the purchase option in the third quarter of 2009.
On
September 16, 2009, the Company entered into a lease for office space in the
United Kingdom. The lease has a term of five years, with an option to
renew in September 2014 at the then-market rate. Monthly payments
related to this operating lease range from $10,000 to $19,000, with a total
payment of $1.0 million for the five year term of the lease.
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 8
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.
31
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
and nine months ended September 30, 2009, 4% and 11% of our revenue was
denominated in Canadian dollars and currencies other than the U.S. or
Canadian dollar, 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 and nine months ended September 30, 2009, the
Canadian dollar weakened by approximately 7% and 14%, respectively, 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 $0.4 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 $76.5 million at September 30, 2009. This compares
to $49.5 million at December 31, 2008. 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.
ITEM
4. CONTROLS AND PROCEDURES
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 September 30, 2009. 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.
In
connection with the restatement described in Note 2 of the Notes to Unaudited
Condensed Consolidated Financial Statements “Restatement of Condensed
Consolidated Financial Statements” in Part I, Item 1 of this Form 10-Q, our
Chief Executive Officer and Chief Financial Officer evaluated our disclosure
controls and procedures and determined that there was a material weakness in our
internal control over financial reporting as of 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 September 30, 2009. Based on this evaluation and because
of the material weakness described above, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective as of September 30, 2009.
Changes
in Internal Control over Financial Reporting
Remediation
of Material Weakness – Stock-Based Compensation Expense
32
Subsequent
to the identification of the material weakness related to our accounting for
stock-based compensation expense, we have initiated remediation
measures relating to the calculation of stock-based compensation
expense and the application of the forfeiture rate, which include: (1) adding
a control procedure to test the calculation of the third-party stock-based
compensation software reports upon our upgrades to new versions of the software;
(2) adding a control procedure to test the calculation of the third-party
stock-based compensation software reports upon grants of new stock options and
awards with new features; and (3) on a quarterly basis, adding a control
procedure to sample grants to verify that cumulative stock-based
compensation expense is accurate and complete.
For the
three months ended September 30, 2009 these remediation measures ensured we
properly recorded stock-based compensation expense for the
period. Although the expense was properly recorded during this
period, because we had not performed these measures consistently and tested
their effectiveness, we could not conclude such controls and procedures were
effective at September 30, 2009. During the three months ending
December 31, 2009 we expect such measures will be performed consistently and
tested.
Other
than described above, there was no change in our internal control over financial
reporting during the third quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II-OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
information set forth in Note 8 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.
ITEM
1A. RISK FACTORS
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 year ended December 31, 2007, we have incurred annual losses in
every year since our inception. As of September 30, 2009 we had incurred
aggregate net losses of $81.6 million, which consists of our accumulated deficit
of $67.8 million and $13.8 million of dividends and issuance costs on preferred
stock. In the three and nine months ended September 30, 2009, we incurred a net
loss of $1.1 million and $3.3 million, respectively. 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 regulatory compliance and implement 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.
As a result, our business could be harmed and our stock price could decline. In
the nine months ended September 30, 2009, we incurred losses largely as a result
of amortization expense associated with our acquisition of Vurv Technology, Inc.
(“Vurv”) on July 1, 2008. In the near term, we expect to continue to
incur losses as a result of the increased amortization expense associated with
the acquisition of Vurv.
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, the current downturn
in global economic conditions has weakened and may continue to weaken demand for
our software and services. For example, we believe that customer budget cuts and
the lack of available credit for small- and medium-sized organizations have
negatively impacted sales of our Taleo Business Edition solutions, and we
believe that sales of our Taleo Enterprise solutions have been negatively
affected as well. 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
33
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.
We
will likely experience longer sales cycles and increased pricing pressure as a
result of unfavorable economic conditions.
If
general economic conditions worsen or fail to improve, we will likely continue
to experience the conditions that began in the first quarter of 2008 of
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. Additionally,
certain of our customers have become or may become bankrupt or insolvent as a
result of the current 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 Technology, Inc, our largest
acquisition to date. We have limited experience in integrating an
acquired company, 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
will incur additional expense to maintain and support the Vurv product
lines for up to three years while customers are migrated to the Taleo
platform;
|
·
|
we
may find it difficult to integrate Vurv’s hosting infrastructure and
operations with our own hosting operations;
and
|
·
|
Jacksonville,
Florida may be more expensive or less productive than we anticipate as a
software development and support
location.
|
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 revenue over the term of the agreement for our software
subscriptions and for a significant portion of our consulting service
agreements, a significant downturn in our business may not be reflected
immediately in our operating results, or our 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.
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 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
34
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.
Additionally,
when we sell software subscriptions and consulting services in a single
arrangement, we recognize 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 are 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 will be 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 addition, In September 2009 the
Financial Accounting Standards Board (“FASB”) approved new accounting guidance
for revenue arrangements that contain multiple components to be delivered to a
customer (“deliverable”). This standard provides guidance for
establishing fair value for a deliverable. When vendor-specific objective
evidence or third-party evidence 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. This guidance is
effective as of the beginning of an entity’s fiscal year that begins after June
15, 2010; however, early adoption is permitted. We expect that for
arrangements that we enter into after we adopt the new guidance, the new
guidance will require us to recognize significant portions of our consulting
revenue as a separate unit of accounting as the consulting services are
delivered. We are currently evaluating when we will adopt the new
guidance.
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:
·
|
the
price, performance and functionality of our
solutions;
|
·
|
the
availability, price, performance and functionality of competing products
and services;
|
·
|
the
effectiveness of our maintenance and support
services;
|
·
|
our
ability to develop complementary products and services;
and
|
·
|
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, or may request that
we license our software to them on a perpetual basis, which may, after we have
ratably recognized the revenue for the perpetual license over the relevant term
in accordance with our revenue recognition policies, reduce recurring 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.
In
addition, Vurv has historically offered perpetual licenses and customer
on-premise hosting for certain of its products, while we have historically
maintained a single version of each release of our software applications that is
configurable to meet the needs of our customers without customer-specific code
customizations. If we are unable to convert such Vurv customers to
our Taleo-hosted, subscription model, our future revenues may be adversely
impacted.
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
35
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.
Some
prospective customers may request that we license our software to them on a
perpetual basis, which may, after we have ratably recognized the revenue for the
perpetual license over the relevant term in accordance with our revenue
recognition policies, reduce recurring revenue from these customers. To date, we
have completed a limited number of agreements with such terms.
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 has
been highly volatile. As a result, the market price of our Class A common stock
is likely to be similarly volatile, and investors in our Class A common stock
may experience a decrease in the value of their stock, including decreases
unrelated to our operating performance or prospects. The price of our Class A
common 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.
|
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, Authoria, Cezanne,
Cornerstone OnDemand, Halogen Software, HRSmart, Jobpartners, Kenexa, Kronos,
Peopleclick, Pilat, Plateau, Saba, Salary.com, Stepstone, SuccessFactors,
SumTotal Systems, Technomedia, TEDS, Workday, and Workstream. Our Taleo Business
Edition solution competes primarily with Bullhorn, Halogen Software, HireDesk
from Talent Technology Corporation, iCIMs, KMS Software Company, Monster.com
from Monster, OpenHire from SilkRoad Technology, SuccessFactors and Virtual Edge
from ADP. 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
36
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.
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, Kronos
acquired Unicru in 2006 and acquired Deploy Solutions in 2007. Kronos itself was
acquired in 2007 by the private equity firm Hellman & Friedman. Kenexa
acquired Brassring in 2006 and ADP acquired VirtualEdge in 2006. In
2008, we acquired Vurv Technology and Authoria was acquired by the private
equity firm Bedford Funding. These transactions or 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.
The
results of our review of our revenue recognition practices and resulting
restatement may continue to have adverse effects on our financial
results.
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. Our review of our revenue recognition practices and the resulting
restatement of our historical financial statements have required us to expend
significant management time and incur significant accounting, legal, and other
expenses. The accounting, legal and other expenses associated with the
restatement have had a material adverse effect on our results of operations. As
a result of our revenue recognition review and the resulting restatement,
revenue from consulting services totaling approximately $18 million reported in
our previously issued consolidated financial statements for the years ended
December 31, 2003 through 2007, and our interim consolidated financial
statements for each of the periods ended March 31, 2008 and June 30, 2008, will
be deferred to periods after June 30, 2008. Additionally, the
correction relating to the timing of revenue recognition for set-up fees, an
element of application services revenue, resulted in the deferral of
approximately $0.2 million in application revenue recognized as of June 30, 2008
to periods after June 30, 2008. In addition, litigation has been filed against
us and certain of our current and former officers relating to a failure to apply
GAAP in the reporting of quarterly and annual financial statements and
securities prospectuses from the time of our initial public offering to our most
recent filing with the SEC. See Note 8 of the Notes to Unaudited Condensed
Consolidated Financial Statements “Commitments and Contingencies” in Part I,
Item 1 of this Form 10-Q for a more detailed description of these proceedings.
We may become the subject of additional private or government actions regarding
these matters in the future. These proceedings are in the preliminary stages,
and their ultimate outcome could have a material adverse effect on our business,
financial condition, results of operations, cash flows and the trading price for
our securities. Litigation may be time-consuming, expensive and disruptive to
normal business operations, and the outcome of litigation is difficult to
predict. The defense of this litigation will result in significant expenditures
and the continued diversion of our management’s time and attention from the
operation of our business, which could impede our business. While we maintain
standard directors and officers insurance, all or a portion of any amount we may
be required to pay to satisfy a judgment or settlement of any or all of these
claims may not be covered by insurance.
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
37
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 EITF 00-21 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.
During
2006 we completed a review and redesign of our internal controls over financial
reporting related to our closing procedures and processes, our calculations of
our reported numbers, including depreciation expense and fixed assets, and the
need to strengthen our technical accounting expertise. Despite these efforts, we
identified a material weakness in connection with the evaluation of the
effectiveness of our internal controls as of March 31, 2007, prior to the filing
of our financial results for the period ended 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.
We
have previously not been in compliance with SEC reporting requirements and
NASDAQ listing requirements. If we again fail to remain in compliance with SEC
reporting requirements and NASDAQ listing requirements, there may be a material
adverse effect on our business and our stockholders.
As a
consequence of our review of our revenue recognition practices and resulting
restatement of our historical financial statements, we were delayed until April
30, 2009 in filing our Annual Report on Form 10-K for the year ended December
31, 2008 and our Quarterly Report on Form 10-Q for the period ended September
30, 2008 with the SEC. During the period of such delay, we faced the
possibility of delisting of our stock from the NASDAQ Global Market. We cannot
be certain that we will be able to comply with SEC reporting requirements and
NASDAQ listing requirements in the future. If we are delisted from the NASDAQ as
a result of noncompliance with NASDAQ listing requirements, the price of our
stock and the ability of our stockholders to trade in our stock would be
adversely affected. In addition, we would be subject to a number of restrictions
regarding the registration of our stock under federal securities laws, and we
would not be able to allow our employees to exercise their outstanding options,
which could adversely affect our business and results of
operations. Furthermore, if we are delisted in the future from the
NASDAQ Global Market, there may be other negative implications, including the
potential loss of confidence by customers, suppliers and employees and the loss
of institutional investor interest in our company.
As a
result of the delayed filing of our Annual Report on Form 10-K for the year
ended December 31, 2008 as well as our Quarterly Report on Form 10-Q for the
period ended September 30, 2008, we will be ineligible to register our
securities on Form S-3 for sale by us or resale by others until March 16, 2010,
which is one year from the original due date of the last untimely filed report.
We are currently using Form S-1 for our proposed public offering of our Class A
common stock and may use Form S-1 to
38
raise
capital or complete acquisitions in the future, but doing so may increase
transaction costs and adversely impact our ability to raise capital or complete
acquisitions of other companies in a timely manner.
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:
·
|
the
complex nature of our solutions;
|
·
|
the
need to educate potential customers about the uses and benefits of our
solutions;
|
·
|
the
relatively long duration of our
contracts;
|
·
|
the
discretionary nature of our customers’
purchases;
|
·
|
the
timing of our customers’ budget
cycles;
|
·
|
the
competitive evaluation of our
solutions;
|
·
|
fluctuations
in the staffing management requirements of our prospective
customers;
|
·
|
announcements
or planned introductions of new products by us or our competitors;
and
|
·
|
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.
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 we continue to develop Taleo 10, the newest
version of our talent management solutions. Additionally, in
September 2009, we entered into an amended merger agreement to acquire Worldwide
Compensation, Inc. (“WWC”). Previously, we offered compensation
management solutions through our alliance with WWC, and, if the acquisition
closes, we will be able 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 Vurv will require significant effort
to maintain existing Vurv products in addition to ours and to integrate the
hosting of products of both companies 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, Ukraine and Asia, 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, the former headquarters site of
Vurv, 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
39
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. Vurv has historically allowed customer
specific customizations of its software and we may find it difficult to support
or migrate such customizations.
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. In addition, we
have limited experience in acquiring and integrating other
companies.
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. Also
in 2008, we invested $2.5 million for a 16% equity investment in and an option
to purchase the remaining shares of WWC. In September 2009, we
entered into an amended merger agreement to acquire WWC. The merger
agreement with WWC provides that the closing of the acquisition shall not occur
before January 1, 2010, and there can be no assurances that the acquisition will
close at all. We have limited experience in executing acquisitions and
investments. Acquisitions and investments involve a number of risks, including
the following:
·
|
being
unable to achieve the anticipated benefits from our
acquisitions;
|
·
|
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;
|
·
|
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;
|
·
|
difficulty
incorporating the acquired technologies or products into our existing code
base;
|
·
|
problems
arising from differences in the revenue, licensing or support model of the
acquired business;
|
·
|
customer
confusion regarding the positioning of acquired technologies or
products;
|
·
|
difficulty
maintaining uniform standards, controls, procedures and policies across
locations;
|
·
|
difficulty
retaining the acquired business’ customers;
and
|
·
|
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.
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
40
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.
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, including for example WWC’s compensation
management products, 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, 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. Unless our customers
elect to purchase encryption, we do not encrypt 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 unencrypted 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.
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:
·
|
lost
or delayed market acceptance and sales of our
products;
|
·
|
loss
of customers;
|
·
|
product
liability and breach of warranty suits against
us;
|
·
|
diversion
of development and support
resources;
|
41
·
|
injury
to our reputation; and
|
·
|
increased
maintenance and warranty costs.
|
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 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. 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. Such a transition creates increased risk of
service disruptions or outages that could harm our reputation and adversely
affect our revenue and earnings. 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. Integrating the hosting
infrastructure of Vurv and other acquired entities may increase these
challenges.
In
addition, we recently brought to market a performance management product for
which we may not be able to accurately predict the number of users, transactions
and infrastructure demands. Such a failure could result in system outages for
our customers and higher than expected costs to support and maintain our
performance management solution, which could negatively affect our reputation
and our financial results.
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:
·
|
human
error;
|
·
|
physical
or electronic security breaches;
|
·
|
telecommunications
outages from third-party providers;
|
·
|
computer
viruses;
|
·
|
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 weekly, 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
42
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 ten data centers that host the applications
for all of our customers. The Taleo Enterprise platform is hosted from three
facilities: a U.S. facility leased from Equinix, Inc. in San Jose, California, a
U.S. facility leased from Internap Network Services Corporation in New York
City, New York and a Netherlands data center facility also leased from Equinix
in Amsterdam. Internet bandwidth and access is provided by Internap in the two
U.S. facilities and by Equinix in the Netherlands. The Taleo Business Edition is
hosted through two U.S. facilities located in San Jose, California and Ashburn,
Virginia, and operated via a managed services arrangement. A third facility is
located in San Francisco, California 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 a managed services arrangement.
Services
at the San Francisco facility are provided by Coloserve, Inc. The
Vurv legacy enterprise recruiting product is hosted through four facilities: a
U.S. facility located in Jacksonville, Florida, a U.S. facility located in
Atlanta, Georgia, a facility located in London, England and a facility located
in Sydney, Australia. Internet bandwidth and access for the Vurv legacy
enterprise recruiting product is provided by Peak 10 in the Florida facility,
Adapt PLC in the England facility, and Conexim Australia Pty Ltd in the
Australia facility. 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. In the future, 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.
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 and nine months ended September 30, 2009, application revenue
generated outside of the United States was 17% 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,
Singapore 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:
·
|
unexpected
changes in regulatory requirements, taxes, trade laws, tariffs, export
quotas, custom duties or other trade
restrictions;
|
·
|
differing
regulations in Quebec with regard to maintaining operations, products and
public information in both French and
English;
|
43
·
|
differing
labor regulations, especially in the European Union and Quebec, 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 negatively affect our business,
financial condition and operating results. For instance, in 2008, the impact of
changes in foreign currency exchange rates compared to the average rates in
effect during 2007 was a $0.8 million decrease in earnings. In 2009, 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 and only
one pending patent. 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
44
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 defendants in a suit alleging patent
infringement and a suit alleging securities fraud, both of which are described
in more detail in Note 8 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, 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 8 of
the Notes to Unaudited Condensed Consolidated Financial Statements “Commitments
and Contingencies” in Part I, Item 1 of this Form 10-Q 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 and
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.
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.
Our
insurance policies will not compensate us for any losses or liabilities
resulting from patent infringement claims.
45
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
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 American Institute of Certified Public
Accountants, or AICPA, the Public Company Accounting Oversight Board, the SEC
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.
Pursuant
to the application of GAAP we recognize the majority of our application revenue
monthly over the life of the application agreement. In certain instances, the
straight-line revenue recognized on a monthly basis may exceed the amounts
invoiced for the same period. If our history of collecting all fees reflected in
our application agreements negatively changes, the application of GAAP may
mandate that we not recognize revenue in excess of the fees invoiced over the
corresponding period for new agreements. The application of GAAP also requires
that we accomplish delivery of our solutions to our customers in order to
recognize revenue associated with such solutions. In the context of our model,
delivery generally requires the creation of an instance of the solution that may
be accessed by the customer via the Internet. We may experience difficulty in
making new products available to our customers in this manner. In the event we
are not able to make our solutions available to our customer via the Internet in
a timely manner, due to resource constraints, implementation difficulties or
other reasons, our ability to recognize revenue from the sales of our solutions
may be delayed and our financial results may be negatively
impacted.
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 connection with our recent review of our revenue recognition practices, we
submitted a pre-clearance submission to the Office of the Chief Accountant of
the SEC, or OCA,
46
requesting
its view of our historical application of accounting guidance related to the
recognition of multiple element arrangements. Following consultation
with the OCA, we changed our application of the guidance to recognize revenue
from consulting services ratably over the term of the software subscription
agreement when we sell software subscriptions and consulting services in a
single arrangement, rather than as the consulting services are delivered, as we
had done in the past. In addition, in September 2009, the FASB ratified
accounting guidance related to the recognition of multiple element arrangements,
which will supersede existing guidance. We expect that for
arrangements that we enter into after we adopt the new guidance will require us
to recognize significant portions of our consulting revenue as a separate unit
of accounting as the consulting services are delivered. We are
currently evaluating when we will adopt the new guidance. 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 and the province of
Quebec are reduced or repealed, or if we have taken an incorrect position with
respect to tax matters under discussion with the Canadian Revenue Agency or
other 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 government program
in Quebec that provides 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 investment tax credits through December 2010. In 2008, we recorded
a CAD $2.7 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 research and development 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 2008, we recorded an estimated SRED
credit claim of approximately CAD $1.2 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 federal SRED tax credits can
only be applied to offset 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 investment credits are reduced
or disallowed by the Canada Revenue Agency (“CRA”), our financial condition and
operating results may be adversely affected.
Our
Canadian subsidiary is being audited by the CRA with respect to tax years 2002
through 2007. In June 2009, we were issued a notice of assessment by the CRA to
increase taxable income by approximately CAD $3.8 million in respect to our 2002
tax year. These adjustments relate, principally, to our treatment of
CDTI tax credits and income and expense allocations recorded between the Company
and our Canadian subsidiary. We disagree with CRA’s basis for their
proposed 2002 adjustments and intend to appeal their decision through applicable
administrative and judicial procedures. In December 2008, Taleo was
notified by the CRA of their intention to audit tax years 2003 through
2007. No proposed assessment notices have been issued with respect to
these open tax years.
Final
resolution of the CRA’s examination will have bearing on the tax treatment
applied in subsequent periods not currently under examination. We have recorded
income tax reserves believed to be sufficient to cover the estimated tax
assessments for the open tax periods.
There
could be a significant impact to our uncertain tax position over the next twelve
months depending on the outcome of any audit. In the event the CRA audit results
in adjustments that exceed both our income tax reserves and available deferred
tax assets, our Canadian subsidiary may become a tax paying entity in 2009 or in
a prior year including potential penalties and interest. Any such penalties
cannot be reasonably estimated at this time.
We are
seeking United States tax treaty relief through the appropriate Competent
Authority tribunals for all settlements entered into with the
CRA. Although we believe we have a 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 period
or annual period.
As we
continue to expand domestically and internationally, we may become subject to
review by various U.S. and foreign taxing authorities which could negatively
impact our financial results. While we have reserved 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.
47
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 but increasing 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 have received a
subpoena from the Department of Homeland Security’s inspector general’s
office relating to our commercial pricing for the Transportation Security
Administration, a government entity that accessed our services through a 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.
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.
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.
48
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.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
|
||||||||||||||||
July
1, 2009 through July 31, 2009
|
17,347 | $ | 18.57 | - | - | |||||||||||||||
August
1, 2009 through August 31, 2009
|
- | - | - | |||||||||||||||||
September
1, 2009 through September 30, 2009
|
- | - | - | |||||||||||||||||
17,347 | $ | 18.57 | (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 September 30,
2009.
|
Item
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
49
None.
ITEM
5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit
Number
|
Description
|
|
21
|
Amended
and Restated Agreement and Plan of Merger dated September 14, 2009, by and
among Taleo Corporation, Wyoming Acquisition Corporation, Worldwide
Compensation, Inc. and with respect to Articles VII, VIII and IX only,
Dennis M. Rohan as Stockholder Representative and U.S. Bank National
(incorporated herein by
reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, filed on September 17,
2009).
|
|
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.
|
|
50
SIGNATURES
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:
November 2, 2009
51
Exhibit
Index
Exhibit
Number
|
Description
|
|
2.1
|
Amended
and Restated Agreement and Plan of Merger dated September 14, 2009, by and
among Taleo Corporation, Wyoming Acquisition Corporation, Worldwide
Compensation, Inc. and with respect to Articles VII, VIII and IX only,
Dennis M. Rohan as Stockholder Representative and U.S. Bank National
(incorporated herein by
reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K, filed on September 17,
2009).
|
|
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.
|
||