Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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  x    No  ¨

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  ¨    No  ¨

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		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		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  ¨    No  x

On July 30, 2010, the registrant had 40,013,911 shares of Class A common stock outstanding.

 

 

 

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TALEO CORPORATION

INDEX

 

PART I — FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited)		3
		Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009		3
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2010 and 2009		4
		Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June  30, 2010 and 2009		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3		Quantitative and Qualitative Disclosures About Market Risk		30
Item 4		Controls and Procedures		30
PART II — OTHER INFORMATION				31
Item 1		Legal Proceedings		31
Item 1A		Risk Factors		31
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3		Defaults Upon Senior Securities		45
Item 4		(Removed and Reserved)		45
Item 5		Other Information		45
Item 6		Exhibits		45
Signatures				46

 

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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)

 

		June 30, 2010				December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	244,943			$	244,229
Restricted cash			198				409
Accounts receivable, net of allowances of $563 at June 30, 2010 and $759 at December 31, 2009			41,993				43,928
Prepaid expenses and other current assets			11,990				10,126
Investment credits receivable			6,952				5,499
Total current assets			306,076				304,191
Property and equipment, net			25,909				23,510
Restricted cash			210				210
Goodwill			102,650				91,027
Intangible assets, net			29,093				30,544
Other assets			5,812				6,895
Total assets		$	469,750			$	456,377
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	23,705			$	23,592
Deferred revenue - application services and customer deposits			63,734				60,140
Deferred revenue - consulting services			17,116				17,523
Capital lease obligations, short-term			159				412
Total current liabilities			104,714				101,667
Long-term deferred revenue - application services and customer deposits			400				201
Long-term deferred revenue - consulting services			12,932				13,220
Other liabilities			3,264				3,973
Capital lease obligations, long-term			73				107
Commitments and contingencies (Note 9)
Total liabilities			121,383				119,168
Stockholders’ equity:
Class A Common Stock; par value, $0.00001 per share; 150,000,000 shares authorized; 39,894,093 and 39,507,837 shares outstanding at June 30, 2010 and December 31, 2009, respectively			1				1
Additional paid-in capital			425,357				414,106
Accumulated deficit			(77,621	)			(77,029	)
Treasury stock, at cost, 50,998 and 111,167 outstanding at June 30, 2010 and December 31, 2009, respectively			(1,627	)			(2,471	)
Accumulated other comprehensive income			2,257				2,602
Total stockholders’ equity			348,367				337,209
Total liabilities and stockholders’ equity		$	469,750			$	456,377

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Revenue:
Application		$	47,928			$	42,914			$	95,492			$	84,118
Consulting			8,348				6,179				15,830				13,058
Total revenue			56,276				49,093				111,322				97,176
Cost of revenue:
Application			12,213				10,617				23,526				20,302
Consulting			6,880				6,281				13,365				12,555
Total cost of revenue			19,093				16,898				36,891				32,857
Gross profit			37,183				32,195				74,431				64,319
Operating expenses:
Sales and marketing			18,133				17,147				35,193				33,055
Research and development			10,873				8,936				20,927				17,472
General and administrative			9,791				7,628				20,089				17,256
Total operating expenses			38,797				33,711				76,209				67,783
Operating loss			(1,614	)			(1,516	)			(1,778	)			(3,464	)
Other income / (expense):
Interest income			124				54				251				194
Interest expense			(30	)			(47	)			(64	)			(88	)
Other income (Note 10)			—				—				885				—
Total other income, net			94				7				1,072				106
Loss before benefit from income taxes			(1,520	)			(1,509	)			(706	)			(3,358	)
Benefit from income taxes			(110	)			(1,396	)			(114	)			(1,160	)
Net loss		$	(1,410	)		$	(113	)		$	(592	)		$	(2,198	)
Net loss per share attributable to Class A common stockholders — basic		$	(0.04	)		$	(0.00	)		$	(0.02	)		$	(0.07	)
Net loss per share attributable to Class A common stockholders — diluted		$	(0.04	)		$	(0.00	)		$	(0.02	)		$	(0.07	)
Weighted-average Class A common shares — basic			39,444				30,417				39,301				30,341
Weighted-average Class A common shares — diluted			39,444				30,417				39,301				30,341

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

		Six Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(592	)		$	(2,198	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			13,361				13,589
Loss on disposal of fixed assets			58				16
Amortization of tenant inducements			(88	)			(76	)
Tenant inducements from landlord			111				—
Stock-based compensation expense			6,847				5,102
Excess tax benefit from stock options			(16	)			—
Director fees settled with stock			111				126
Gain on remeasurement of previously held interest in Worldwide Compensation, Inc.			(885	)			—
Bad debt expense			7				528
Changes in working capital accounts, net of effect of acquisition:
Accounts receivable			2,249				2,994
Prepaid expenses and other assets			(2,270	)			(1,795	)
Investment credit receivable			(1,460	)			509
Accounts payable and accrued liabilities			1,612				(3,549	)
Deferred revenue and customer deposits			2,251				1,206
Net cash provided by operating activities			21,296				16,452
Cash flows from investing activities:
Purchases of property and equipment			(10,805	)			(5,340	)
Change in restricted cash			210				210
Acquisition of business, net of cash acquired			(13,381	)			—
Net cash used in investing activities			(23,976	)			(5,130	)
Cash flows from financing activities:
Principal payments on loan and capital lease obligations			(783	)			(630	)
Costs related to 2009 equity offering			(681	)			—
Excess tax benefit from stock options			16				—
Treasury stock acquired to settle employee withholding liability			(937	)			(339	)
Treasury stock issued to employees for ESPP			1,781				—
Proceeds from stock options exercised and ESPP shares			4,298				1,711
Net cash provided by financing activities			3,694				742
Effect of exchange rate changes on cash and cash equivalents			(300	)			443
Increase in cash and cash equivalents			714				12,507
Cash and cash equivalents:
Beginning of period			244,229				49,462
End of period		$	244,943			$	61,969
Supplemental cash flow disclosures:
Cash paid for interest		$	12			$	40
Cash paid for income taxes		$	1,230			$	271
Supplemental disclosure of non-cash financing and investing activities:
Property and equipment purchases included in accounts payable and accrued liabilities		$	995			$	3,467

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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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 primarily performs product development, production, and customer support activities for the Company, and the other foreign subsidiaries are generally engaged in providing sales, account management and support activities.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. For the six months ended June 30, 2010, the Company recorded adjustments that accumulated to $0.2 million that impacted revenue, net income and certain balance sheet accounts. Such amounts were not material to previously reported financial statements. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on March 11, 2010. In the opinion of management, all adjustments necessary for a fair statement have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

2. Business Combinations and Dispositions

On January 1, 2010, the Company completed the acquisition of Worldwide Compensation, Inc. (“WWC”) which expands the Company’s solution offerings for compensation management. Accordingly, the assets, liabilities and operating results of WWC are reflected in the Company’s consolidated financial statements from the date of acquisition. Previously, in the third quarter of 2008, the Company made an investment of $2.5 million for a 16% equity investment in and an option to purchase WWC at a later date. In connection with the acquisition, the Company negotiated more favorable terms than the purchase option and also terminated the purchase option. Accordingly, the total consideration paid by the Company for the issued and outstanding capital stock, options and warrants of WWC that the Company did not already own was approximately $14.1 million in cash, including approximately $0.3 million in transaction costs and $0.4 million in incentive compensation. Fifteen percent (15%) of the consideration was placed into escrow for one year following the closing to be held as security for losses incurred by the Company in the event of certain breaches of the representations and warranties contained in the merger agreement or certain other events. The Company has no contingent cash payments related to this transaction.

Allocation of Purchase Price

The Company took control of WWC when it purchased the remaining 84% equity interest from the former shareholders of WWC on January 1, 2010. Under the acquisition method of accounting, the total purchase price paid for the 100% equity interest has been allocated to the net identifiable assets based on their estimated fair value at the date of acquisition. As part of the process, the Company performed a valuation analysis to determine the fair values of certain identifiable intangible assets of WWC as of the valuation date. The determination of the value of these components required the Company to make various estimates and assumptions. Critical estimates in valuing certain of the intangible assets include but are not limited to the net present value of future expected cash flows from product sales and services. The fair value of deferred revenue was determined based on the estimated direct cost of fulfilling the obligation to the customer while the fair value for all other assets and liabilities acquired was determined based on estimated future benefits or legal obligations associated with the respective asset or liability. The excess of the purchase price over the net identifiable intangible assets, other identifiable assets and liabilities acquired has been recorded as goodwill. None of the goodwill recognized upon acquisition is deductible for tax purposes. The preliminary allocation of the purchase price was based upon preliminary valuations for certain deferred tax assets and will be completed by the third quarter of 2010. The following table summarizes the fair values of assets acquired and liabilities assumed as of January 1, 2010:

 

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TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Allocation of Purchase Price

 

Purchase Price		Amount
		(In thousands)
Cash		$	13,381
Fair Value of previously held 16% equity interest			2,300
Total purchase price		$	15,681
Allocation of purchase price		Amount
		(In thousands)
Accounts receivable, net		$	308
Other current assets			6
Property and equipment			166
Goodwill			11,623
Intangible assets			4,800
Current liabilities			(391	)
Deferred revenue			(831	)
Total purchase price		$	15,681

The Company did not record any in-process research and development charges in connection with the acquisition.

Remeasurement of Previously Held 16% Equity Interest in WWC

On January 1, 2010 when the Company closed the acquisition of the remaining 84% equity interest in WWC, it took control of the entity and remeasured the previously held 16% equity interest to its fair value. The difference between the $1.4 million book value and the $2.3 million fair value of the previously held 16% interest was recorded as a gain in the statement of operations as other income.

 

Remeasurement of previously held interest in WWC		Amount
		(In thousands)
Fair value of previously held 16% interest in WWC		$	2,300
Carrying value of previously held 16% equity investment in WWC			(1,415	)
Gain on remeasurement of previously held interest in WWC		$	885

For the three and six months ended June 30, 2010, $0.1 million and $0.1 million, respectively, in revenues related to WWC were included in the Company’s results of operations. It is impractical to determine results of operations for WWC on a standalone basis as the entity’s operations have been integrated into the Company’s operations.

Unaudited pro forma results of operations to reflect the acquisition as if it occurred on the first date of the three and six months ended June 30, 2009:

 

		Three Months Ended June 30, 2009				Six Months Ended June 30, 2009
		Condensed Consolidated Proforma
		(In thousands, except per share data)
Revenue		$	49,334			$	97,589
Net loss attributable to Class A common stockholders		$	(1,116	)		$	(4,231	)
Net loss attributable to Class A common stockholders - basic and diluted		$	(0.04	)		$	(0.14	)
Weighted average Class A common shares - basic and diluted			30,417				30,341

 

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TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Revenue Recognition

The Company derives its revenue from fixed subscription fees for access to and use of its on-demand application services and from consulting fees from services to support the implementation, configuration, education, and optimization of the applications. The Company presents revenue and deferred revenue from each of these sources separately in its consolidated financial statements.

In addition to fixed subscription fees arrangements, the Company has on limited occasions, entered into arrangements including perpetual licenses with hosting services to be provided over a fixed term. For hosted arrangements, revenues are recognized in accordance with the standards established by the FASB for hosting arrangements that includes a right of the customer to use the software on another entity’s hardware.

The Company’s application and consulting fee revenue is recognized when all of the following conditions have been satisfied:

 

•

persuasive evidence of an agreement exists;

 

•

delivery has occurred;

 

•

fees are fixed or determinable; and

 

•

the collection of fees is considered probable.

If collection is not considered probable, the Company recognizes revenues when the fees for the services performed are collected. Application agreements entered into during the three months and six months ended June 30, 2010 and 2009 are generally non-cancelable, or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause if we fail to perform our material obligations. However, if non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, the Company recognizes revenue upon the satisfaction of such criteria, as applicable.

Application Revenue

The majority of the Company’s application revenue is recognized monthly over the life of the application agreement, based on stated, fixed-dollar amount contracts with its customers and consists of:

 

•

fees paid for subscription services;

 

•

amortization of any related set-up fees; and

 

•

amortization of fees paid for hosting services and software maintenance services under certain software license arrangements.

Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of the application agreement or the expected lives of customer relationships, which generally range from three to seven years. The Company continues to evaluate the length of the amortization period of the set up fees as it gains more experience with customer contract renewals.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. The Company’s consulting engagements are typically billed on a time and materials basis. These services are generally performed within six months after the consummation of the arrangement. From time to time, certain of our consulting projects are subcontracted to third parties. Customers of the Company may also elect to use unrelated third parties for the types of consulting services that the Company offers. The Company’s typical consulting contract provides for payment within 30 to 60 days of receipt of invoice.

In October 2009, the FASB amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:

 

•

Provide updated guidance on how the deliverables of an arrangement should be separated, and how the consideration should be allocated;

 

•

Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

 

•

Require an entity to allocate revenue to an arrangement using the estimated selling prices (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.

Valuation terms are defined as set forth below:

 

•

VSOE — the price at which we sell the element in a separate stand-alone transaction

 

•

TPE — evidence from us or other companies of the value of a largely interchangeable element in a transaction

 

•

ESP — our best estimate of the selling price of an element in a transaction.

 

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TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The Company elected to early adopt this accounting guidance for our current fiscal year ending December 31, 2010 on a prospective basis. The implementation resulted in additional disclosures that are included below.

The Company follows accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. The Company’s consulting services have standalone value because those services are sold separately by other vendors, and the Company has VSOE for determining fair value for consulting services based on the consistency in pricing when sold separately. The Company’s application services have standalone value as such services are often sold separately. However, the Company uses ESP to determine fair value for its application services when sold in a multi-element arrangement as the Company does not have VSOE for these application services and TPE is not a practical alternative due to differences in features and functionality of other companies offerings and lack of access to the actual selling price of competitor standalone sales. If new application services products are acquired or developed that require significant consulting services in order to deliver the application service and the application and consulting services cannot support standalone value, then such application and consulting services will be evaluated as one unit of accounting. The Company determined its ESP of fair value for its application services based on the following:

 

•

The Company has defined processes and controls to ensure its pricing integrity. Such controls include oversight by a pricing committee which includes a cross functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions, and pricing history of similar services. Based on this information, management establishes or modifies pricing that is approved by the pricing committee.

 

•

The Company analyzed application services pricing history and stratified the population based on actual pricing trends within certain markets and established ESP for each market.

For transactions entered into prior to 2010 that include both application and consulting services, the related consulting revenues are recognized ratably over the remaining subscription term. For consulting services sold separately from application services, the Company recognizes consulting revenues as delivered. In some instances the Company sells consulting services on a fixed-fee basis and, in those cases, for consulting services sold separately from application services, the Company recognizes consulting revenues using a proportional performance model based on services performed. Expenses associated with delivering all consulting services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of consulting services are typically reimbursed by the customer and are accounted for as both revenue and expense in the period the cost is incurred.

For transactions entered into or materially modified in 2010, the Company allocates consideration in multi-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. As 2010 progresses, this change will significantly increase services revenue and services gross margins as the Company will continue to recognize previously deferred services revenue ratably for multi-element arrangements that occurred prior to fiscal year 2010, while consulting services revenue from new transactions in 2010 will generally be recognized as performed. Consulting services revenue recognized in the three months and six months ended June 30, 2010 related to multi-element arrangements entered into prior to 2010 was approximately $3.3 million and $6.9 million, respectively. For the three and six months ended June 30, 2010, the impact on the Company’s revenue under the new accounting guidance as compared to the previous methodology resulted in approximately $1.6 million and $2.0 million, respectively, in revenue recognized as performed that would have previously been deferred and recognized ratably.

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 Employee Stock Purchase Program (“ESPP”).

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 ESPP purchases on a straight-line basis over the requisite service period. There was no stock-based compensation expense capitalized during the three and six months ended June 30, 2010 and 2009. Shares issued as a result of stock option exercises, ESPP purchases, restricted stock awards and performance share awards are issued out of common stock reserved for future issuance under the Company’s stock plans.

 

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TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The Company recorded stock-based compensation expense in the following expense categories:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
		(In thousands)
Cost of revenue		$	658		$	475		$	1,196		$	819
Sales and marketing			999			819			1,883			1,332
Research and development			512			409			976			673
General and administrative			1,501			1,130			2,792			2,278
Total		$	3,670		$	2,833		$	6,847		$	5,102

Stock Options

The Company estimates the fair value of its stock options granted using the Black-Scholes option valuation model. The Company estimates the expected volatility of common stock at the date of grant based on a combination of the Company’s historical volatility and the volatility of comparable companies, consistent with the standards established by the FASB and the SEC. The Company estimates the expected term consistent with the simplified method identified by the SEC. The Company elected to use the simplified method due to a lack of term length data as the Company completed its initial public offering in October 2005 and its options meet the criteria of the “plain-vanilla” options as defined by the SEC. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of employee options. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, the Company amortizes the fair value on a straight-line basis over the requisite service period of the options which is generally four years.

Annualized estimated forfeiture rates based on the Company’s historical turnover rates have been used in calculating the cost of stock options. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

Common Equity Plans

At June 30, 2010, 3,749,220 shares were available for future grants under the Company’s 2009 Equity Incentive Plan.

The following table presents a summary of the stock option activity under all stock plans for the three and six months ended June 30, 2010 and related information:

 

		Outstanding Options
		Number of Shares			Weighted Average Exercise Price			Weigthed Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at January 1, 2010		2,735,597			$	15.22
Options granted		319,608			$	21.13
Options exercised		(173,530	)		$	13.29
Options forfeited /expired		(43,057	)		$	15.95
Outstanding at March 31, 2010		2,838,618			$	15.99
Options granted		58,000			$	25.95
Options exercised		(135,168	)		$	14.73
Options forfeited /expired		(42,483	)		$	18.76
Outstanding at June 30, 2010		2,718,967			$	16.22		6.26		$	22,384,813
Vested and expected to vest at June 30, 2010		2,635,816			$	16.11		6.22		$	21,982,819
Exercisable at June 30, 2010		1,787,794			$	14.79		5.70		$	17,234,981

The weighted average grant date fair value of options granted during the three and six months ended June 30, 2010 was $14.23 per option and $11.97 per option, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was $1.5 million and $3.6 million, respectively.

The Company recorded share-based compensation expense associated with Class A common stock options of $1.2 million and $2.5 million for the three and six months ended June 30, 2010, respectively, and $1.5 million and $2.8 million for the three and six months ended June 30, 2009, respectively. As of June 30, 2010, unamortized share-based compensation expense associated with Class A common stock options was $8.3 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock and Performance Shares

The fair value of restricted stock and performance shares is measured based upon the closing NASDAQ Global Market price of the underlying Company stock as of the date of grant. The Company uses historical data to estimate pre-vesting forfeitures and record share-based compensation expense only for those awards that are expected to vest. Restricted stock and performance share awards are amortized over the vesting period using the straight-line method. The only performance condition for unvested performance shares outstanding as of June 30, 2010 is continued service to the Company. Upon vesting, performance share awards convert into an equivalent number of shares of common stock.

The following table presents a summary of the restricted stock awards and performance share awards for the three and six months ended June 30, 2010 and related information:

 

		Performance Share Awards			Restricted Stock Awards			Weighted—Average Grant- Date Fair Value
Repurchasable/nonvested balance at January 1, 2010		467,455			466,812			$	17.01
Awarded		241,577			2,503			$	24.10
Released/vested		(4,999	)		(46,299	)		$	15.73
Forfeited/cancelled		(8,550	)		(11,376	)		$	15.79
Repurchasable/nonvested balance at March 31, 2010		695,483			411,640			$	17.08
Awarded		503,035			38,522			$	24.92
Released/vested		(5,001	)		(117,509	)		$	15.60
Forfeited/cancelled		(18,732	)		(22,260	)		$	18.81
Repurchasable/nonvested balance at June 30, 2010		1,174,785			310,393			$	18.49

The Company recorded share-based compensation expense for restricted stock and performance shares of $1.9 million and $3.5 million for the three and six months ended June 30, 2010, respectively and $1.2 million and $2.0 million for the three and six months ended June 30, 2009, respectively.

As of June 30, 2010, unamortized compensation cost associated with restricted stock and performance shares was $22.0 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period between 1.9 years and 3.5 years.

Employee Stock Purchase Plan (“ESPP”)

The Company recorded share-based compensation expense in connection with the ESPP of $0.6 million and $0.9 million for the three and six months ended June 30, 2010, respectively and $0.2 million and $0.3 million for the three and six months ended June 30, 2009, respectively. Unamortized compensation cost was $0.6 million as of June 30 2010. This cost is expected to be recognized over the next four months ending October 31, 2010. At June 30, 2010, there were 1,247,759 shares reserved for future issuance under the Company’s ESPP.

Reserved Shares of Common Stock

The Company has reserved the following number of shares of Class A common stock as of June 30, 2010 for the awarding of future stock options and restricted stock awards, release of outstanding performance share awards, exercise of outstanding stock options and purchases under the ESPP:

 

Stock Plans		8,005,230
Employee Stock Purchase Plan		1,247,759
Total		9,252,989

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Property and Equipment

Property and equipment consist of the following at June 30, 2010 and December 31, 2009:

 

		June 30, 2010				December 31, 2009
		(In thousands)
Computer hardware and software		$	66,661			$	59,699
Furniture and equipment			3,584				3,550
Leasehold improvements			4,058				4,036
			74,303				67,285
Less accumulated depreciation and amortization			(48,394	)			(43,775	)
Total		$	25,909			$	23,510

During the six months ended June 30, 2010, acquisitions of computer hardware and software increased significantly compared to the same period in the prior year primarily as a result of $8.6 million in equipment purchases for our new data center in the Chicago, Illinois area. The Company began depreciating these asset additions in the second quarter of 2010.

7. Intangible Assets and Goodwill

The Company acquired various identifiable intangible assets as a result of taking control of WWC on January 1, 2010. The fair value of these intangible assets was determined based on the present value of the expected future cash flows from the WWC compensation products acquired. The Company also capitalized goodwill, which represents the excess purchase price over the net identifiable assets acquired, in connection with the purchase of WWC. The Company acquired WWC primarily for the compensation product technology which is expected to complement its performance management product. The Company also expects long-term synergies and other benefits from integrating the acquired compensation products on to its unified platform. As of June 30, 2010, the Company had not completed its purchase price allocation related to the WWC acquisition as the Company is waiting for additional information to conclude on the fair values of the net assets acquired. All goodwill is reported in the application services operating segment. None of the goodwill recognized upon acquisition is deductible for tax purposes.

In the second quarter of 2010, the Company also recorded an impairment charge of $0.1 million related to certain identifiable intangible assets acquired in connection with the WWC acquisition.

The following schedule presents the gross carrying amount of intangible assets as of June 30, 2010:

 

		Beginning Balance January 1, 2010			Acquisition of WWC, net of impairment charges			Balance as of June 30, 2010
		(in thousands)
Existing technology		$	11,811		$	3,770		$	15,581
Customer relationships			41,297			867			42,164
Trade name and other			308			10			318
Non-compete agreements			410			20			430
Total intangible assets			53,826			4,667			58,493
Goodwill			91,027			11,623			102,650
		$	144,853		$	16,290		$	161,143

 

				June 30, 2010										December 31, 2009
(Dollars in thousands)		Estimated Useful Life		Gross Carrying Amount			Accumulated Amortization				Net			Gross Carrying Amount			Accumulated Amortization				Net
Existing technology		4		$	15,581		$	(9,036	)		$	6,545		$	11,811		$	(7,088	)		$	4,723
Customer relationships		6			42,164			(19,653	)			22,511			41,297			(15,668	)			25,629
Trade name and other		2			318			(291	)			27			308			(218	)			90
Non-compete agreements		2			430			(420	)			10			410			(308	)			102
				$	58,493		$	(29,400	)		$	29,093		$	53,826		$	(23,282	)		$	30,544

Amortization expense associated with intangible assets was $3.2 million and $6.3 million for the three and six months ended June 30, 2010, respectively, and $3.6 million and $7.1 million for the three and six months ended June 30, 2009, respectively.

The estimated amortization expense for intangible assets for the next five years and thereafter is as follows:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Estimated Amortization Expense		(In thousands)
Remainder of 2010		$	5,912
2011			7,286
2012			4,783
2013			4,519
2014			4,516
Thereafter			2,077
Total		$	29,093

8. Income Taxes

For the three and six months ended June 30, 2010, the Company recorded an income tax benefit of $110,000 and $114,000, respectively which is based on the Company’s projected annual effective tax rate for fiscal year 2010, adjusted for discrete tax items recorded in the period.

The effective tax rate for the three months ended June 30, 2010 was a benefit of 7.2% including minimal discrete tax benefits primarily related to the expiration of a foreign statue of limitation. Excluding discrete benefits, the Company’s effective tax rate for the quarter was a benefit of approximately 4.1%. The provision consists of foreign and U.S. state income tax expense offset by discrete tax benefits noted above. The difference between the statutory rate of 34% and the Company’s quarterly effective tax rate of 4.1%, excluding discrete adjustments, was due primarily to permanent differences related to non-deductible stock compensation expenses, state taxes, adjustments related to the Canadian research and development tax credits and the utilization of acquired and operating net operating losses not previously benefited.

The effective tax rate for the six months ended June 30, 2010 was 16.2% including minimal discrete tax benefits primarily related to the expiration of foreign statues of limitations. Excluding discrete benefits, the Company’s effective tax rate for the six month period was approximately 6.1%. The provision consists of foreign and U.S. state income tax expense offset by discrete tax benefits noted above. The difference between the statutory rate of 34% and the Company’s six month effective tax rate of 6.1 %, excluding discrete adjustments, was due primarily to permanent differences related to non-deductible stock compensation expenses, state taxes, adjustments related to the WWC acquisition, Canadian research and development tax credits and the utilization of acquired and operating net operating losses not previously benefited.

Effective January 1, 2007, the Company adopted the provisions of an accounting standard relating to the timing for recognition of an uncertain tax benefit in the financial statements. As of June 30, 2010, the Company had uncertain tax benefits of approximately $5.0 million which represents a decrease of $0.2 million from the balance at March 31, 2010. The change in balance relates to the expiration of statues of limitations in the United Kingdom and changes in foreign balances due to exchange rate fluctuations.

In December 2008, the Company was notified by the Canada Revenue Agency (“CRA”) of their intention to audit tax years 2003 through 2007. To date, CRA has issued proposed assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. These adjustments relate, principally, to the Company’s treatment of Canadian Development Technology Incentives (“CDTI”) tax credits and income and expense allocations recorded between the Company and its Canadian subsidiary. The Company disagrees with the CRA’s basis for its proposed adjustments and intends to appeal its decision through applicable administrative and judicial procedures.

There could be a significant impact to the Company’s uncertain tax positions over the next twelve months depending on the outcome of any audit. The Company has recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed both the Company’s uncertain tax benefits and its available deferred tax assets, the Company’s Canadian subsidiary may become a tax paying entity in 2010 or in a prior year and may be required to pay penalties and interest. Any such penalties and interest cannot be reasonably estimated at this time.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At June 30, 2010, accrued interest related to uncertain tax positions was less than $0.1 million. As the Company has net operating loss carryforwards for federal and state purposes, the statute of limitation remains open for all tax years to the extent the tax attributes are carried forward into future tax years. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for years before 2002.

The Company will seek U.S. tax treaty relief through the appropriate Competent Authority tribunals for all settlements entered into with the CRA. Although the Company believes it has reasonable basis for its tax positions, it is possible an adverse outcome could have a material effect upon its financial condition, operating results or cash flows in a particular quarter or annual period.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Commitments and Contingencies

The Company leases certain equipment, internet access services and office facilities under non-cancelable operating leases or long-term agreements. Commitments to settle contractual obligations in cash under operating leases and other purchase obligations have not changed significantly from the “Commitments and Contingencies” table included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except for the following agreement entered into during the current fiscal year 2010:

On March 31, 2010, the Company entered into a manual replacement statement of work (the “Agreement”) with Equinix Operating Co., Inc. (“Equinix”) according to which Equinix will provide co-location services to the Company. According to the terms of the Agreement, Equinix will provide space, electrical power and other colocation services at its web hosting facilities in Chicago, Illinois area for the Company’s hosting infrastructure. Under the terms of the Agreement, the Company will pay Equinix aggregate fees of approximately $9 million through December, 2014.

Litigation

Kenexa Litigations — Kenexa BrassRing, Inc., (“Kenexa”) filed suit against the Company in the United States District Court for the District of Delaware on August 27, 2007. Kenexa alleges that we infringed Patent Nos. 5,999,939 and 6,996,561, and seeks monetary damages and an order enjoining the Company from further infringement. The Company answered Kenexa’s complaint on January 28, 2008. On May 9, 2008, Kenexa filed a similar lawsuit against Vurv Technology, Inc. (now known as Vurv Technology LLC) (“Vurv”) in the United States District Court for the District of Delaware, alleging that Vurv has infringed Patent Nos. 5,999,939 and 6,996,561, and seeking monetary damages and an order enjoining further infringement. Vurv answered Kenexa’s complaint on May 29, 2008. The Company acquired Vurv on July 1, 2008. The Company has reviewed these matters and believe that neither its nor Vurv’s software products infringe any valid and enforceable claim of the asserted patents. The Company has engaged in settlement discussions with Kenexa, but no settlement agreement has been reached. Litigation is ongoing with respect to these matters.

On June 30, 2008, the Company filed a reexamination request with the United States Patent and Trademark Office (“USPTO”), seeking reconsideration of the validity of Patent No. 6,996,561 based on prior art that we presented with our reexamination request. Finding that our reexamination request raised a “substantial new question of patentability,” the USPTO ordered reexamination of Patent No. 6,996,561 on September 5, 2008. On November 13, 2008, the USPTO issued an office action rejecting all of the claims of Patent No. 6,996,561 because they are either anticipated by or unpatentable over the prior art. After comments by both parties to the reexamination, on June 4, 2009 the USPTO issued a subsequent action standing by its determination that certain claims of Patent No. 6,996,561 are unpatentable, but indicating patentability of other claims. Both parties have since provided additional comments on this subsequent action and both parties have since filed appeals to elements of the reexamination to the USPTO’s Board of Patent Appeals and Interferences. Accordingly, the USPTO’s reexamination of Patent No. 6,996,561 is ongoing.

In a separate action filed on June 25, 2008 in the United States District Court for the District of Delaware, Kenexa’s parent, Kenexa Technology, Inc. (“Kenexa Technology”), asserted claims against us for tortious interference with contract, unfair competition, unfair trade practices, and unjust enrichment arising from our refusal to allow Kenexa Technology employees to access and use the Company’s proprietary applications to provide outsourcing services to a customer of the Company. Kenexa Technology seeks monetary damages and injunctive relief. The Company answered Kenexa Technology’s complaint on July 23, 2008. On October 16, 2008, the Company amended its answer and filed counterclaims against Kenexa Technology, alleging copyright infringement, misappropriation of trade secrets, interference with contractual relations, and unfair competition arising from Kenexa Technology’s unauthorized access and use of the Company’s products in the course of providing outsourcing services to its customers. The Company sought declaratory judgment, monetary damages, and injunctive relief. The Company filed a motion to dismiss Kenexa Technology’s claims on July 21, 2009 and a motion for preliminary injunction to enjoin Kenexa Technology employees from accessing its solutions deployed at joint customers of both companies on July 22, 2009. These motions are pending before the Court. In addition, Kenexa has joined the litigation, and claims similar to those discussed above have been asserted against and by Kenexa. This matter is ongoing.

On November 7, 2008, Vurv sued Kenexa, Kenexa Technology, and two of Vurv’s former employees (who now work for Kenexa and/or Kenexa Technology) in the United States District Court for the Northern District of Georgia. In this action, Vurv asserts claims for breach of contract, computer theft, misappropriation of trade secrets, tortious interference, computer fraud and abuse, and civil conspiracy. The defendants answered Vurv’s complaint on December 12, 2008 without asserting any counterclaims. This matter is ongoing.

        On July 17, 2009, Kenexa and Kenexa Recruiter (together, the “Kenexa Plaintiffs”) filed suit against the Company, a current employee of the Company and a former employee of the Company in Massachusetts Superior Court (Middlesex County). The Kenexa Plaintiffs amended the complaint on August 27, 2009 and added Vurv Technology LLC, two former employees of the Company and two current employees of the Company. The Kenexa Plaintiffs assert claims for breach of contract and the implied covenant of good faith and fair dealing, unfair trade practices, computer theft, misappropriation of trade secrets, tortious interference, unfair competition, unjust enrichment, computer fraud and abuse. Vurv removed the complaint to the United States District Court for the District of Massachusetts and the Company and Vurv, along with two other defendants, answered the complaint on October 5, 2009. Additionally, four other defendants (current and former employees of the Company) moved to dismiss for lack of jurisdiction on October 5 and October 26, 2009. The Court dismissed the case for lack of personal jurisdiction as to two individual defendants. It denied the motion with respect to the two other individual defendants. The matter is ongoing.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Matters — In addition to the matters described above, the Company is subject to various claims and legal proceedings that arise in the ordinary course of its business from time to time, including claims and legal proceedings that have been asserted against the Company by customers, former employees and advisors and competitors. The Company is also subject to legal proceedings or discussions that may result in litigation in the future. For instance, the Company is currently responding to subpoenas from the Department of Homeland Security’s inspector general’s office relating to the Company’s commercial pricing for the Transportation Safety Administration contract, a government entity that accessed the Company’s services through a third party private contractor, and the Company was recently notified that an intellectual property licensing firm has inquired as to whether a usability feature of the Taleo software was subject to patents held by the intellectual property licensing firm.

The Company accrues for estimated losses in the accompanying consolidated financial statements for matters with respect to which it believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. Based on currently available information, the Company does not believe that the ultimate outcome of these unresolved matters, individually or in the aggregate, is likely to have a material adverse effect on its financial position, results of operations or cash flows. However litigation is subject to inherent uncertainties and its view on these matters may change in the future. Were an unfavorable outcome to occur in any one or more of those matters or the matters described above, over and above the amount, if any, that has been estimated and accrued in the Company’s condensed consolidated financial statements, it could have a material adverse effect on our business, financial condition, results of operations and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

10. Other Income

On January 1, 2010, the Company completed its acquisition of WWC. In accordance with the acquisition method of accounting for a business combination, the Company’s previously owned 16% equity investment was remeasured to its $2.3 million fair value on the acquisition date and the $0.9 million difference between the fair value of equity investment and the $1.4 million carrying value was recorded as a gain in the first quarter of 2010. See Note 2 “Business Combinations and Dispositions for additional information about the acquisition.”

11. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying the Company’s outstanding dilutive stock options, restricted stock and performance shares had been issued. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. The following table sets forth the computation of basic and diluted net income (loss) per share:

 

		Three months ended								Six months ended
(in thousands, except per share data)		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
Numerator:
Net loss		$	(1,410	)		$	(113	)		$	(592	)		$	(2,198	)
Denominator:
Weighted-average shares outstanding (1)			39,444				30,417				39,301				30,341
Effect of dilutive options, restricted shares and performance shares			—				—				—				—
Denominator for dilutive net loss per share			39,444				30,417				39,301				30,341
Net loss per share — basic		$	(0.04	)		$	(0.00	)		$	(0.02	)		$	(0.07	)
Net loss per share — diluted		$	(0.04	)		$	(0.00	)		$	(0.02	)		$	(0.07	)
Potentially dilutive securities (2)			874				2,194				690				974

 

(1)	Outstanding shares do not include unvested restricted stock or unvested performance shares

(2)	The potentially dilutive securities are excluded from the computation of diluted net loss per share for the above periods because their effect would have been anti-dilutive.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Effective for interim and annual periods beginning after December 15, 2008, and applied retrospectively, the FASB issued an accounting standard that requires use of the two-class method to calculate earnings per share when non-vested restricted stock awards are eligible to receive dividends (i.e., participating securities), even if the Company does not intend to declare dividends. Although the Company’s unvested restricted stock awards are eligible to receive dividends, they are not significant as compared with total weighted average diluted shares outstanding and there is no impact on the Company’s earnings per share calculation in applying the two-class method.

12. Segment and Geographic Information

The Company is organized geographically and by line of business. The Company has two operating segments: application and consulting services. The application services segment is engaged in the development, marketing, hosting and support of the Company’s software applications. The consulting services segment offers implementation, business process reengineering, change management, and education and training services. The Company does not allocate or evaluate assets or capital expenditures by operating segments. Consequently, it is not practical to show assets, capital expenditures, depreciation or amortization by operating segment.

The following table presents a summary of operating segments:

 

		Application			Consulting				Total
		(In thousands)
Three Months Ended June 30, 2010:
Revenue		$	47,928		$	8,348			$	56,276
Contribution margin(1)		$	24,842		$	1,468			$	26,310
Three Months Ended June 30, 2009:
Revenue		$	42,914		$	6,179			$	49,093
Contribution margin(1)		$	23,361		$	(102	)		$	23,259
		Application			Consulting				Total
		(In thousands)
Six Months Ended June 30, 2010:
Revenue		$	95,492		$	15,830			$	111,322
Contribution margin(1)		$	51,039		$	2,465			$	53,504
Six Months Ended June 30, 2009:
Revenue		$	84,118		$	13,058			$	97,176
Contribution margin(1)		$	46,344		$	503			$	46,847

 

(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 June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In thousands)
Contribution margin for operating segments		$	26,310			$	23,259			$	53,504			$	46,847
Sales and marketing			(18,133	)			(17,147	)			(35,193	)			(33,055	)
General and administrative			(9,791	)			(7,628	)			(20,089	)			(17,256	)
Interest and other income, net			94				7				1,072				106
Loss before benefit from income taxes		$	(1,520	)		$	(1,509	)		$	(706	)		$	(3,358	)

During the three and six months ended June 30, 2010 and 2009, there were no customers that individually represented greater than 10% of the Company’s total revenue. There were no customers that individually represented greater than 10% of the Company’s total accounts receivable at June 30, 2010 or December 31, 2009.

 

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(Unaudited)

 

13. Comprehensive Income (Loss)

Comprehensive income (loss), net of income taxes, comprises of foreign currency translation gains/losses.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In thousands)
Net loss		$	(1,410	)		$	(113	)		$	(592	)		$	(2,198	)
Net foreign currency translation adjustments			(669	)			1,016				(345	)			691
Comprehensive income (loss)		$	(2,079	)		$	903			$	(937	)		$	(1,507	)

14. Subsequent Events – Departure of Executive Officer

On July 12, 2010, Katy Murray, the Company’s Executive Vice President and Chief Financial Officer, announced her intention to resign from the Company effective on approximately October 1, 2010. Ms. Murray will remain the Company’s Chief Financial Officer through the earlier of October 1, 2010 or until a successor is appointed.

 

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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, and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “expect,” “forecast,” “predict,” “potential,” “continue,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “is scheduled for,” “targeted,” and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under “Risk Factors” or included elsewhere in this Quarterly Report on Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a leading global provider of on-demand talent management software solutions. Our goal is to help our customers improve business results through better talent intelligence. We offer recruiting, performance management, compensation, succession planning, leadership development and analytics software solutions that help our customers attract and retain high quality talent, more effectively match workers’ skills to business needs, reduce the time and costs associated with manual and inconsistent processes, ease the burden of regulatory compliance, and increase workforce productivity through better alignment of workers’ goals, career plans and compensation with corporate objectives. In addition, our solutions are highly configurable which allows our customers to implement talent intelligence processes that are tailored to accommodate different employee types (including professional and hourly), in different locations, business units and regulatory environments.

We offer two suites of talent management solutions: Taleo Enterprise and Taleo Business Edition. Taleo Enterprise is designed for medium and large enterprises with more complex needs. Taleo Business Edition is designed for smaller, more centralized organizations, stand-alone departments and divisions of larger organizations, and staffing companies. Our revenue is primarily earned through subscription fees charged for accessing and using these solutions. Our customers generally are billed in advance for their use of our solutions, and we use these cash receipts to fund our operations. Our customers generally pay us on a quarterly or annual basis.

We focus our evaluation of our operating results and financial condition on certain key metrics, as well as certain non-financial aspects of our business. Included in our evaluation of our financial condition are our revenue composition and growth, net income, and our overall liquidity that is primarily comprised of our cash and accounts receivable balances. Non-financial data is also evaluated, including purchasing trends for software applications across industries and geographies, input from current and prospective customers relating to product functionality and general economic data. We use the financial and non-financial data described above to assess our historic performance, and also to plan our future strategy. We continue to believe that our strategy and our ability to execute that strategy may enable us to improve our relative competitive position in a difficult economic environment and may provide long-term growth opportunities given the cost saving benefits of our solutions and the business requirements our solutions address. However, if general economic conditions do not continue to improve, we may experience increased delays in our sales cycles, increased pressure from prospective customers to offer discounts higher than our historical practices, and increased pressure from existing customers to renew expiring software subscriptions agreements at lower rates.

On January 1, 2010, we took control of Worldwide Compensation, Inc. (“WWC”), a private company with headquarters in California that provides compensation management solutions, when we purchased the remaining 84% equity interest from the former shareholders of WWC. Accordingly, the assets, liabilities and operating results of WWC have been reflected in our consolidated financial statements from the date of acquisition. The total consideration paid by us for the portion of WWC that we did not already own was approximately $14.1 million in cash, including approximately $0.3 million in transaction costs and $0.4 million in incentive compensation. No contingent cash payments remain for this transaction. Additionally, we re-measured the previously held 16% equity interest to its fair value resulting in a $0.9 million gain being recorded in the statement of operations for the three months ending March 31, 2010. We expect the WWC compensation management solutions to complement our existing performance management products.

 

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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 for the right to access and use our applications, which includes the data hosting and maintenance of the application. The majority of our application subscription revenue is recognized ratably on a monthly basis over the life of the application agreement, based on a stated, fixed-dollar amount. The majority of our application revenue in any quarter comes from transactions entered into in previous quarters.

The term of our application agreements signed with new customers purchasing Taleo Enterprise in the first half of 2010 and 2009 was typically three or more years. The term of application agreements for new customers purchasing Taleo Business Edition in the first half of 2010 and 2009 was typically one year.

Application agreements entered into during the three months and six months ended June 30, 2010 and 2009 are generally non-cancelable, or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause if we fail to perform our material obligations.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application process definition, configuration, integration, change management, optimization, expansion and education and training services. From time to time, certain of our consulting projects are subcontracted to third parties. Our customers may also elect to use unrelated third parties for the types of consulting services that we offer. Our typical consulting contract provides for payment within 30 to 60 days of receipt of the invoice.

For transactions entered into prior to 2010 that include both application and consulting services, the related consulting revenues are recognized ratably over the remaining subscription term. For engagements sold separately from application services, we recognize consulting revenues as delivered. In some instances, we sell consulting services on a fixed-fee basis and, in those cases, for engagements sold separately from application services, the Company recognizes consulting revenues using a proportional performance model based on services performed. Expenses associated with delivering all consulting services are recognized as incurred when the services are performed. Associated out-of-pocket travel and expenses related to the delivery of consulting services is typically reimbursed by the customer. This is accounted for as both revenue and expense in the period the cost is incurred.

For transactions entered into or materially modified in 2010, we allocate consideration in multi-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. As 2010 progresses, this change will significantly increase services revenue and services gross margins as we will continue to recognize previously deferred services revenue ratably for multi-element arrangements entered into prior to 2010, while consulting services revenue from new arrangements entered into in 2010 will generally be recognized as performed.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of application revenue primarily consists of expenses related to hosting our application and providing support, including employee-related costs, depreciation expense associated with computer equipment and amortization of intangibles from acquisitions. We allocate overhead such as rent and occupancy charges, information system cost, employee benefit costs and depreciation expense to all departments based on employee count. As such, overhead expenses are reflected in each cost of revenue and operating expense category. We currently deliver our solutions from eight data centers that host the applications for all of our customers and two data centers that host Talent Exchange, our online community for candidates. In the first quarter of 2010, we added two data center facilities in San Jose and Los Angeles, California in connection with our acquisition of WWC and opened our new facility in the Chicago, Illinois area. In the second quarter of 2010, we closed data center facilities in New York City, New York and Atlanta, Georgia, as part of our plan to consolidate our U.S. production data center operations for our Taleo Enterprise Solution into our new single facility in Chicago, Illinois.

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.

 

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Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions, marketing programs, allocated overhead and amortization of intangibles from acquisitions. Marketing programs include advertising, events, corporate communications, and other brand building and product marketing expenses. As our business grows, we plan to continue to increase our investment in sales and marketing by adding personnel, building our relationships with partners, expanding our domestic and international selling and marketing activities, building brand awareness, and sponsoring additional marketing events.

Research and Development

Research and development expenses consist primarily of salaries and related expenses, allocated overhead, and third-party consulting fees. Our expenses are net of the provincial investment credits we receive from the province of Quebec. We focus our research and development efforts on increasing the functionality and enhancing the ease of use and quality of our applications, as well as developing new products and enhancing our infrastructure.

General and Administrative

General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resource, legal, operations and management information systems personnel, professional fees, board compensation and expenses, expenses related to potential mergers and acquisitions, other corporate expenses.

In our “Results of Operations” below, we have included two types of tables: period over period changes in income statement line items, and summaries of the key changes in expenses by natural category for each expense line item.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

We derive revenue from fixed subscription fees for access to and use of its on-demand application services and from consulting fees from services to support the implementation, configuration, education, and optimization of the applications. We present revenue and deferred revenue from each of these sources separately in its consolidated financial statements.

In addition to fixed subscription fees arrangements, we have on limited occasions, entered into arrangements including perpetual licenses with hosting services to be provided over a fixed term. For hosted arrangements, revenues are recognized in accordance with the standards established by the FASB for hosting arrangements that includes a right of the customer to use the software on another entity’s hardware.

Our application and consulting fee revenue is recognized when all of the following conditions have been satisfied:

 

•

persuasive evidence of an agreement exists;

 

•

delivery has occurred;

 

•

fees are fixed or determinable; and

 

•

the collection of fees is considered probable.

 

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If collection is not considered probable, we recognize revenues when the fees for the services performed are collected. Application agreements entered into are generally non-cancelable, or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause if we fail to perform our material obligations. However, if non-standard acceptance periods or non-standard performance criteria, cancellation or right of refund terms are required, we recognize revenue upon the satisfaction of such criteria, as applicable.

Application Revenue

The majority of our application revenue is recognized monthly over the life of the application agreement, based on stated, fixed-dollar amount contracts with our customers and consists of:

 

•

fees paid for subscription services;

 

•

amortization of any related set-up fees; and

 

•

amortization of fees paid for hosting services and software maintenance services under certain software license arrangements

Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of the application agreement or the expected lives of customer relationships, which generally range from three to seven years. We continue to evaluate the length of the amortization period of the set up fees as it gains more experience with customer contract renewals.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. Our consulting engagements are typically billed on a time and materials basis. These services are generally performed within six months after the consummation of the arrangement. From time to time, certain of our consulting projects are subcontracted to third parties. Customers may also elect to use unrelated third parties for the types of consulting services that it offers. Our typical consulting contract provides for payment within 30 to 60 days of invoice.

In October 2009, the FASB amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:

 

•

Provide updated guidance on how the deliverables of an arrangement should be separated, and how the consideration should be allocated:

 

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Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

 

•

Require an entity to allocate revenue to an arrangement using the estimated selling prices (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.

Valuation terms are defined as set forth below:

 

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VSOE — the price at which we sell the element in a separate stand-alone transaction

 

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TPE — evidence from us or other companies of the value of a largely interchangeable element in a transaction

 

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ESP — our best estimate of the selling price of an element in a transaction.

We elected to early adopt this accounting guidance for our current fiscal year ending December 31, 2010 on a prospective basis. The implementation resulted in additional disclosures that are included below.

We follow accounting guidance for revenue recognition of multiple-element arrangements to determine whether such arrangements contain more than one unit of accounting. Multiple-element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. Our consulting services have standalone value because those services are sold separately by other vendors, and we have VSOE for determining fair value for consulting services based on the consistency in pricing when sold separately. Our application services have standalone value as such services are often sold separately. However, we use ESP to determine fair value for application services when sold in a multi-element arrangement as we do not have VSOE for these application services and TPE is not a practical alternative due to differences in features and functionality of other companies offerings. If new application services products are acquired or developed that require significant consulting services in order to deliver the application service, and the application and consulting services cannot support standalone value, then such application and consulting services will be evaluated as one unit of accounting. We determined our ESP of fair value for our application services based on the following:

 

•

We have defined processes and controls to ensure its pricing integrity. Such controls include oversight by a pricing committee which includes a cross functional team and members of executive management. Significant factors considered when establishing pricing include market conditions, underlying costs, promotions, and pricing history of similar services. Based on this information, management establishes or modifies pricing that is approved by the pricing committee.

 

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•

We analyzed application services pricing history and stratified the population based on actual pricing trends within certain markets and established ESP for each market.

For transactions entered into prior to 2010 that include both application and consulting services, the related consulting revenues are recognized ratably over the remaining subscription term. For engagements sold separately from application services, we recognize consulting revenues as delivered. In some instances, we sell consulting services on a fixed-fee basis and, in those cases, for engagements sold separately from application services, we recognize consulting revenues using a proportional performance model based on services performed. Expenses associated with delivering all consulting services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of consulting services are typically reimbursed by the customer. This is accounted for as both revenue and expense in the period the cost is incurred.

For transactions entered into or materially modified in 2010, we allocate consideration in multi-element arrangements based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. As 2010 progresses, this change will significantly increase services revenue and services gross margins as we will continue to recognize previously deferred services revenue ratably for multi-element arrangements that occurred prior to fiscal year 2010, while consulting services revenue from new transactions in 2010 will generally be recognized as performed. Consulting services revenue recognized in the three months and six months ended June 30, 2010 related to multi-element arrangements entered into prior to 2010 was approximately $3.3 million and $6.9 million, respectively. For the three months and six months ended June 30, 2010, the impact on our revenue under the new accounting guidance as compared to our previous methodology resulted in approximately $1.6 million and $2.0 million, respectively of revenue recognized as performed that would have previously been deferred and recognized ratably.

 

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Results of Operations

The following tables set forth certain unaudited condensed consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated. Period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
Condensed Consolidated Statement of Operations Data:
Revenue:
Application		85	%		87	%		86	%		87	%
Consulting		15	%		13	%		14	%		13	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue (as a percent of related revenue):
Application		25	%		25	%		25	%		24	%
Consulting		82	%		102	%		84	%		96	%
Total cost of revenue		34	%		34	%		33	%		34	%
Gross profit		66	%		66	%		67	%		66	%
Operating expenses:
Sales and marketing		32	%		35	%		32	%		34	%
Research and development		19	%		18	%		19	%		18	%
General and administrative		17	%		16	%		18	%		18	%
Total operating expenses		69	%		69	%		69	%		70	%
Operating loss		(3	%)		(3	%)		(2	%)		(4	%)
Other income (expense):
Interest income		0	%		0	%		0	%		0	%
Interest expense		0	%		0	%		0	%		0	%
Other income		0	%		0	%		1	%		0	%
Total other income, net		0	%		0	%		1	%		0	%
Loss before benefit from income taxes		(3	%)		(3	%)		(1	%)		(3	%)
Benefit from income taxes		(0	%)		(3	%)		(0	%)		(1	%)
Net loss		(3	%)		(0	%)		(1	%)		(2	%)

Comparison of the Three and Six Months Ended June 30, 2010 and 2009

Revenue

 

		Three Months Ended June 30,												Six Months Ended June 30,
		2010			2009			$ Change			%			2010			2009			$ Change			%
		(In thousands)												(In thousands)
Application revenue		$	47,928		$	42,914		$	5,014		12	%		$	95,492		$	84,118		$	11,374		14	%
Consulting revenue			8,348			6,179			2,169		35	%			15,830			13,058			2,772		21	%
Total revenue		$	56,276		$	49,093		$	7,183		15	%		$	111,322		$	97,176		$	14,146		15	%

 

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Application revenue increased due to successful renewals of existing customers, sales to new customers, sales of additional applications and broader roll out of our applications by existing customers. Application revenue from our products for medium and larger, more complex organizations increased by $4.7 million and $10.9 million for the three and six months ended June 30, 2010, respectively. Application revenue from our small business product lines increased by $0.3 million and $0.5 million for the three and six months ended June 30, 2010, respectively. Our list prices for application services have remained relatively consistent on a year-over-year basis, and renewals of application services for medium and larger more complex organization, on a dollar-for-dollar basis, remained strong at approximately 93%. For the remainder of 2010, we expect to see renewals in the same percentage range, but unexpected events, such as significant staff reductions within our customer base, may negatively impact our renewal trends. We expect total application revenue to increase over the remainder of the year as we continue to increase our sales of new and existing applications into our installed customer base as well as to new customers.

Our consulting revenue comes from two kinds of engagements: standalone consulting engagements which are not associated with new product implementations and consulting engagements which are associated with new product implementations. Standalone consulting engagement revenue is generally recognized when the services are performed. Consulting revenue for engagements which are associated with new product implementation entered into prior to 2010 is generally recognized ratably over the term of the associated application services term with a significant portion of revenue deferred to periods beyond the period in which services were performed. Consulting revenue for engagements which are associated with new product implementation entered into during 2010 is generally recognized when the services are performed.

For the three and six months ended June 30, 2010, consulting revenue increased as a result of an increase in revenue recognized from consulting services associated with new product implementations that were delivered in past periods and are recognized ratably. Also, consulting revenue recognized as services are performed increased when compared to the same period in 2009 as a result of transactions entered into during 2010. We expect total consulting revenue to increase over the remainder of the year as we continue to recognize previously deferred revenue from prior year multi-element arrangements and recognize revenue as consulting services are performed for transactions entered into during 2010.

Cost of Revenue

 

		Three Months Ended June 30,												Six Months Ended June 30,
		2010			2009			$ Change			%			2010			2009			$ Change			%
		(In thousands)												(In thousands)
Cost of revenue - application		$	12,213		$	10,617		$	1,596		15	%		$	23,526		$	20,302		$	3,224		16	%
Cost of revenue - consulting			6,880			6,281			599		10	%			13,365			12,555			810		6	%
Cost of revenue - total		$	19,093		$	16,898		$	2,195		13	%		$	36,891		$	32,857		$	4,034		12	%

Cost of revenue – application - summary of changes

 

		Change from 2009 to 2010
		Three Months Ended June 30,				Six Months Ended June 30,
Employee-related costs		$	288			$	638
Hosting facility costs			1,071				1,814
Software support			373				810
Amortization			130				316
Other professional services			(186	)			(180	)
Various other expense			(80	)			(174	)
		$	1,596			$	3,224

During the three and six months ended June 30, 2010, the increase in cost of application revenue was primarily driven by an increase in hosting facility expenses. Hosting facility expenses increased primarily due to additional third-party software costs, internet bandwidth costs, depreciation and other costs resulting from hosting infrastructure investments made in 2009 and infrastructure investments and support cost associated with our new U.S. production data center operations which went into service during the three months ended June 30, 2010 in the Chicago, Illinois area. Employee-related cost increased due to an increase in compensation costs for international employees due to unfavorable foreign exchange rates, merit pay raises, and an increase in incentive compensation as compared to the prior year. Our amortization expense increased due to the amortization of intangible assets obtained in connection with the January 1, 2010 acquisition of WWC. Other professional services decreased due to a reduction in outsourced support. We expect cost of application revenue to decrease in terms of absolute dollars for the remainder of the year as a result of completion of implementation of our data center consolidation efforts.

 

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Cost of revenue – consulting - summary of changes

 

		Change from 2009 to 2010
		Three Months Ended June 30,				Six Months Ended June 30,
Employee-related costs		$	621			$	978
Professional services			(224	)			(492	)
Stock-based compensation			109				249
Various other expense			93				75
		$	599			$	810

Expenses associated with delivering consulting services are generally recognized as incurred when the services are performed. For the three and six months ended June 30, 2010, cost of consulting revenue increased as a result of an increase in employee-related costs as compared to the same period in 2009. Employee-related cost increased as a result of the hiring of additional employees in connection with the acquisition of WWC on January 1, 2010, an increase in compensation cost for international employees due to unfavorable foreign exchange rates, merit pay raises and an increase in incentive compensation as compared to the same prior in the year. Additionally stock-based compensation costs increased as a result of incremental grants in 2010 combined with an overall higher stock price per share in 2010 compared to 2009. These increases were partially offset by a reduction in outsourced consulting services cost as we have converted a substantial portion of legacy Vurv customers to Taleo products in 2009 and therefore reduced the demand for outsourced consulting services for the three and six months ended June 30, 2010. We expect cost of consulting revenue to remain relatively flat in terms of absolute dollars for the remainder of the year.

Gross Profit and Gross Profit Percentage

 

		Three Months Ended June 30,													Six Months Ended June 30,
		2010			2009				$ Change			%			2010			2009			$ Change			%
		(In thousands)													(In thousands)
Gross profit - application		$	35,715		$	32,297			$	3,418		11	%		$	71,966		$	63,816		$	8,150		13	%
Gross profit - consulting		$	1,468		$	(102	)			1,570		*			$	2,465		$	503			1,962		390	%
Gross profit - total		$	37,183		$	32,195			$	4,988		15	%		$	74,431		$	64,319		$	10,112		16	%

 

*	not meaningful

Gross Profit percentage

 

		Three Months Ended June 30,									Six Months Ended June 30,
		2010			2009			% Change			2010			2009			$ Change
Gross profit - application		75	%		75	%		0	%		75	%		76	%		(1	%)
Gross profit - consulting		18	%		(2	%)		20	%		16	%		4	%		12	%
Gross profit - total		66	%		66	%		0	%		67	%		66	%		1	%

Gross profit – application

The gross profit percentage on application revenue during the three months ended June 30, 2010 remained unchanged from the same period in 2009 due to an overall increase in application revenue being offset by an increase in hosting costs which escalated during the second quarter of 2010 when the new data center in Chicago, Illinois went live. Gross profit percentage on application revenue during the six months ended June 30, 2010 decreased one percentage point from the same period in 2009 primarily as a result of increased hosting costs associated with the new data center. We expect gross profit on application revenue to return to its historical range as a percentage of application revenue for the remainder of the year.

Gross profit – consulting

Historically, a significant percentage of consulting revenue is recognized ratably over the term of the subscription agreement while expenses associated with delivering these services are recognized as incurred when the services are performed. The difference of the timing of revenue recognition compared to the timing of recognizing expenses as performed can cause fluctuations in gross profit for consulting services.

        The higher gross profit percentage on consulting revenue in the three and six months ended June 30, 2010 compared to the same period in 2009 resulted from the combined impact of the increase in revenue from consulting services associated with new product implementations delivered in prior periods that are being recognized ratably and an increase in standalone consulting revenue recognized related to services performed during these periods. During the three and six months ended June 30, 2010, we benefited from recognizing revenue for which the related expense was recorded in the prior period. In 2010, gross margins on consulting will be positively affected by the recognition of previously deferred revenue with no related expense for engagements entered into prior to 2010, and the change in accounting guidance in 2010 whereby consulting revenue for new engagements will be generally recognized when the services are performed.

 

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Operating expenses

 

		Three Months Ended June 30,												Six Months Ended June 30,
		2010			2009			$ Change			%			2010			2009			$ Change			%
		(In thousands)												(In thousands)
Sales and marketing		$	18,133		$	17,147		$	986		6	%		$	35,193		$	33,055		$	2,138		6	%
Research and development			10,873			8,936			1,937		22	%			20,927			17,472			3,455		20	%
General and administrative			9,791			7,628			2,163		28	%			20,089			17,256			2,833		16	%
Total operating expenses		$	38,797		$	33,711		$	5,086		15	%		$	76,209		$	67,783		$	8,426		12	%

Sales and marketing – summary of changes

 

		Change from 2009 to 2010
		Three Months Ended June 30,				Six Months Ended June 30,
Employee-related costs		$	947			$	2,103
Professional services			214				606
Stock-based compensation			181				551
Amortization			(559	)			(1,259	)
Various other expenses			203				137
		$	986			$	2,138

The increase in sales and marketing expense during the three and six months ended June 30, 2010 was primarily driven by an increase in employee-related expenses. Employee-related costs increased due to merit pay raises, an increase in compensation cost for international employees due to unfavorable foreign exchange rates, an increase in incentive compensation due an increase in sales, and severance and relocation costs. These increases were partially offset by a decrease in amortization expense related to intangible asset acquired in connection with the Vurv acquisition. We amortize the Vurv intangible assets in proportion to our conversion of Vurv customers to Taleo products. There are fewer customers to convert in 2010 than 2009 resulting in a reduction in amortization expense for three and six months ended June 30, 2010 compared to the same periods in the prior year. Professional services increased due to additional marketing programs. Stock-based compensation costs increased as a result of incremental grants in 2010 combined with an overall higher stock price per share in 2010 compared to 2009. We expect sales and marketing costs to increase in terms of dollars for the remainder of the year.

Research and development – summary of changes

 

		Change from 2009 to 2010
		Three Months Ended June 30,				Six Months Ended June 30,
Employee-related costs		$	1,369			$	2,459
Professional services			539				689
Stock-based compensation			104				304
Various other expenses			(75	)			3
		$	1,937			$	3,455

The increase in research and development expense during the three and six months ended June 30, 2010 was primarily driven by an increase in employee-related costs. Employee-related costs increased primarily due to an increase in headcount by 13 persons, merit pay raises, an increase in compensation cost for international employees due to unfavorable foreign exchange rates and an increase in incentive compensation costs when compared to same period in the prior year. Also, during the three and six months ended June 30, 2010, other research and development operating expenses were adversely affected by the negative impact of foreign currency movements against the U.S. dollar. We expect research and development costs to remain relatively flat in absolute dollars for the remainder of the year.

 

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General and administrative – summary of changes

 

		Change from 2009 to 2010
		Three Months Ended June 30,				Six Months Ended June 30,
Employee-related costs		$	627			$	1,239
Legal			558				1,287
Audit and tax related			247				34
Professional services, other			191				(400	)
Bad debt reserve			(28	)			(521	)
Stock-based compensation			371				515
Various other expenses			197				679
		$	2,163			$	2,833

General and administrative expenses for the three and six months ended June 30, 2010 increased as compared to the same periods in 2009 primarily due to increased employee-related costs associated with increase in incentive compensation costs in 2010 as compared to 2009, increased legal cost associated with on-going litigation, and transaction costs associated with acquisition of WWC on January 1, 2010 and other corporate development activities, offset by a decrease in non-recurring 2009 consulting and audit fees associated with an evaluation of our historical revenue practices during the first quarter of 2009, and lower bad debt expense in 2010. We expect general and administrative costs to remain relatively flat in absolute dollars for the remainder of the year.

Contribution Margin – Operating Segments

 

		Three Months Ended June 30,													Six Months Ended June 30,
Contribution Margin (1)		2010			2009				$ Change			%			2010			2009			$ Change			%
		(In thousands)													(In thousands)
Contribution margin - application		$	24,842		$	23,361			$	1,481		6	%		$	51,039		$	46,344		$	4,695		10	%
Contribution margin - consulting			1,468			(102	)			1,570		*				2,465		$	503			1,962		390	%
Contribution margin - total		$	26,310		$	23,259			$	3,051		13	%		$	53,504		$	46,847		$	6,657		14	%

 

*	not meaningful

(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 June 30,														Six Months Ended June 30,
		2010				2009				$ Change			%			2010				2009				$ Change			%
		(In thousands)														(In thousands)
Interest income		$	124			$	54			$	70		130	%		$	251			$	194			$	57		29	%
Interest expense			(30	)			(47	)			17		(36	%)			(64	)			(88	)			24		(27	%)
Other income			—				—				—		*				885				—				885		*
Total other income, net		$	94			$	7			$	87		*			$	1,072			$	106			$	966		*

 

*	not meaningful

Interest income — The increase in interest income during the three and six months ended June 30, 2010 is attributable to a higher cash balance during 2010 compared to the same period in the prior year. Our stock offering in November 2009 resulted in our cash balance during 2010 to be significantly higher than the prior year balance. Interest rates remained unchanged between the two periods.

 

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Interest expense — There was no significant change in interest expense during the three and six months ended June 30, 2010 compared to the same period in the prior year.

Other income — On January 1, 2010, we completed our acquisition of WWC. In accordance with the acquisition method of accounting for a business combination, our 16% previously owned equity investment was re-measured to its $2.3 million fair value on the acquisition date and the $0.9 million difference between the fair value of equity investment and the $1.4 million carrying value was recorded as gain in the first quarter of 2010.

Benefit from income taxes

 

		Three Months Ended June 30,														Six Months Ended June 30,
		2010				2009				$ Change			%			2010				2009				$ Change			%
		(In thousands)														(In thousands)
Benefit from income taxes		$	(110	)		$	(1,396	)		$	1,286		(92	%)		$	(114	)		$	(1,160	)		$	1,046		(90	%)

The tax benefit reported for the three and six months ended June 30, 2010 is $110,000 and $114,000, respectively. The decrease in income tax benefit for the three month ending June 30, 2010 as compared to June 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 recorded in the quarter ended June 30, 2009

We provide for income taxes on interim periods based on the estimated annual effective tax rate for the full year and we record cumulative adjustments in the period a change in the estimated annual effective rate is determined. The effective tax rate calculation does not include the effects of discrete events that may occur during the year. If such events occur, they are recorded in the provision in the period recognized.

The effective tax rate for the three months ended June 30, 2010 was a benefit of 7.2% including minimal discrete tax benefits primarily related to the expiration of a foreign statue of limitation. Excluding discrete benefits, our effective tax rate for the quarter was a benefit of approximately 4.1%. The provision consists of foreign and U.S. state income tax expense offset by discrete tax benefits noted above. The difference between the statutory rate of 34% and our quarterly effective tax rate of 4.1 %, excluding discrete adjustments, was due primarily to permanent differences related to non-deductible stock compensation expenses, state taxes, adjustments related to the Canadian research and development tax credits and the utilization of acquired and operating net operating losses not previously benefited

The effective tax rate for the six months ended June 30, 2010 was 16.2% includes minimal discrete tax benefits primarily related to the expiration of foreign statues of limitations. Excluding discrete benefits, our effective tax rate for the six month period was approximately 6.1%. The provision consists of foreign and U.S. state income tax expense offset by discrete tax benefits noted above. The difference between the statutory rate of 34% and our six month effective tax rate of 6.1 %, excluding discrete adjustments, was due primarily to permanent differences related to non-deductible stock compensation expenses, state taxes, adjustments related to the WWC acquisition, Canadian research and development tax credits and the utilization of acquired and operating net operating losses not previously benefited.

We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized.

At June 30, 2010, we maintained a valuation allowance against our U.S. deferred tax assets, excluding U.S. federal alternative minimum tax credits, as we determined it was more likely than not these assets would not be realized. If we are to conclude the U.S. deferred tax assets will more likely than not be realized in the future, we will reverse the valuation allowance, which would likely have a material impact on our financial results in the form of reduced tax expense or increased tax benefits in the period the reversal occurs. There can be no assurances we will reverse the valuation allowance in 2010.

Liquidity and Capital Resources

At June 30, 2010, our principal source of liquidity was a working capital balance of $201.4 million, including cash and cash equivalents totaling $244.9 million.

 

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		Six Months Ended June 30,
		2010				2009				$ Change				%
		(In thousands)
Cash provided by operating activities		$	21,296			$	16,452			$	4,844			29	%
Cash used in investing activities			(23,976	)			(5,130	)			(18,846	)		367	%
Cash provided by financing activities			3,694				742				2,952			398	%

Net cash provided by operating activities was $21.3 million for the six months ended June 30, 2010 compared to $16.4 million for the six months ended June 30, 2009. Consistent with prior periods, cash provided by operating activities has historically been affected by changes in working capital accounts, and net income (loss) adjusted for add-backs of non-cash expense items such as depreciation and amortization, and the expense associated with stock-based awards. Specifically, stock-based compensation expense for the six months ended June 30, 2010 was $6.8 million versus $5.1 million during the six months ended June 30, 2009. This increase resulted new grants to employees partially offset by reductions from fully vested, fully amortized stock options, which no longer impact expenses in 2010. Additionally, depreciation and amortization expense decreased by $0.2 million in the first six months of 2010 compared to the same period in the previous year, primarily due to intangible assets associated with the acquisition of Vurv becoming fully amortized. The change in accounts receivable decreased due to the timing of billings and collections compared to the same period in 2009. The change in deferred revenue increased during the six month period due to fluctuations resulting from the mix of annual and quarterly application billings combined with the timing of billings and the timing of the application revenue recognized associated with those contracts. The change in accounts payable and accrued liabilities increased in the six month 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 $24.0 million for the six months ended June 30, 2010 compared to net cash used in investing activities of $5.1 million for the six months ended June 30, 2009. The increase resulted from a $13.4 million cash outlay to complete the acquisition of WWC on January 1, 2010. Additionally, we increased capital expenditures in connection with our new production data center in the Chicago, Illinois area resulting in an increase in payments for property and equipment.

Net cash provided by financing activities was $3.7 million for the six months ended June 30, 2010, compared to $0.7 million for the six months ended June 30, 2009. This increase was primarily due to a $6.1 million in proceeds from stock option exercises and proceeds from the employee stock purchase on May 31, 2010. This was partially offset by $0.7 million in payments for accrued costs associated with our November 2009 public offering and increases in treasury stock tax withholdings and capital lease payments.

We believe our existing cash and cash equivalents and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new applications and enhancements to existing applications, the continuing market acceptance of our applications and the extent to which we acquire or invest in complimentary business products or technologies. To the extent that existing cash and cash equivalents, and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We will likely enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations

Our principal commitments consist of capital leases, obligations under leases for office space, operating leases for computer equipment and for third-party facilities that host our applications. Our commitments to settle contractual obligations in cash under operating leases and other purchase obligations has not changed significantly from the “Contractual Obligations” table included in our Annual Report on Form 10-K for fiscal year ended December 31, 2009 except for the following agreement entered into during the first six months of 2010:

On March 31, 2010, we entered into a manual replacement statement of work (the “Agreement”) with Equinix Operating Co., Inc. (“Equinix”) according to which Equinix will provide co-location services to us. According to the terms of the Agreement, Equinix will provide space, electrical power and other colocation services at its web hosting facilities in the Chicago, Illinois area for our hosting infrastructure. Under the terms of the Agreement, we will pay Equinix aggregate fees of approximately $9.0 million over the next five years.

 

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Legal expenditures could also affect our liquidity. We are regularly subject to legal proceedings and claims that arise in the ordinary course of business. See Note 9 of the Notes to 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/or cash flows.

 

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 six months ended June 30, 2010, 5%, 5% and 6% of our revenue was denominated in Canadian dollars, euros and other remaining currencies, respectively. Our expenses are generally denominated in the currencies in which our operations are located. Our expenses are incurred primarily in the United States and Canada, including the expenses associated with our largest research and development operations that are maintained in Canada. Additionally a portion of expenses are incurred outside of North America where our other international sales offices are located and third party development is performed. Our results of operations and cash flows are therefore subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian dollar, and to a lesser extent, to the Australian dollar, British pound sterling, Euro, Singapore dollar and New Zealand dollar, in which certain of our customer contracts are denominated. For the six months ended June 30, 2010, the Canadian dollar strengthened by approximately 16% against the U.S. dollar on an average basis compared to the same period in the prior year. Assuming a constant currency rate as the same period last year, the negative impact on our operating results is $1.5 million. 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 $0.2 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 $244.9 million at June 30, 2010. This compares to $244.2 million at December 31, 2009. These amounts were held primarily in cash or money market funds. Cash and cash equivalents are held for working capital purposes, and restricted cash amounts are held as security against various lease obligations. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

 

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 June 30, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2010, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

The information set forth in Note 9 of the Notes to 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 years ended December 31, 2007 and 2009, we have incurred annual losses in every year since our inception. As of June 30, 2010, our accumulated deficit was $77.6 million, comprised of aggregate net losses of $63.8 million and $13.8 million of dividends and issuance costs for preferred stock. In the three and six months ended June 30, 2010, we reported net losses of $1.4 million and $0.6 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 initiatives to grow our business, which may include, among other things, acquisitions, international expansion, significant hiring, and new product development, any failure to increase revenue or manage our cost structure could prevent us from achieving or sustaining profitability. For instance, in the six months ended June 30, 2010, our profitability was negatively impacted by amortization expense associated with acquisitions. In the near term, we expect to continue to incur significant amortization expense associated with both the July 1, 2008 acquisition of Vurv Technology, Inc. (“Vurv”) and the January 1, 2010 acquisition of Worldwide Compensation, Inc. (“WWC”). In addition, we may incur losses as a result of revenue shortfalls or increased expenses associated with our business. As a result, our business could be harmed and our stock price could decline.

Unfavorable economic conditions and reductions in information technology spending could limit our ability to grow our business.

Our operating results may vary based on the impact of changes in economic conditions globally and within the industries in which our customers operate. The revenue growth and profitability of our business depends on the overall demand for enterprise application software and services. Our revenue is derived from organizations whose businesses may fluctuate with global economic and business conditions. Historically, economic downturns have resulted in overall reductions in corporate information technology spending. Accordingly, any downturn in global economic conditions may weaken demand for our software and services. In addition, an economic decline impacting a particular industry may negatively impact demand for our software and services in the affected industry. Many of the industries we serve, including financial services, manufacturing (including automobile manufacturing), technology and retail, have recently suffered a downturn in economic and business conditions and may continue to do so. A softening of demand for enterprise application software and services, and in particular enterprise talent management solutions, caused by a weakening global economy or economic downturn in a particular sector would adversely affect our business and likely cause a decline in our revenue.

If economic conditions do not continue to improve, we may experience longer sales cycles, increased pricing pressure, and decreased demand for certain of our products and services.

If general economic conditions do not continue to improve, we may experience increased delays in our sales cycles and increased pressure from prospective customers to offer discounts higher than our historical practices, and increased pressure from existing customers to renew expiring software subscriptions agreements at lower rates. In addition, certain of our customers may attempt to negotiate lower software subscription fees for existing arrangements because of downturns in their businesses. If we accept certain requests for higher discounts or lower fees, our business may be adversely affected and our revenues may decline. Also, in a difficult economic environment, our existing customers may elect not to purchase additional software solutions or education and consulting services from us. Additionally, certain of our customers have become or may become bankrupt or insolvent as a result of the recent economic downturn, and we may lose all future revenue from such customers and payment of receivables may be lower or delayed as a result of bankruptcy proceedings.

 

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We may not achieve the anticipated benefits of our acquisition of Vurv, which could adversely affect our operating results and cause the price of our common stock to decline.

On July 1, 2008, we completed our acquisition of Vurv, our largest acquisition to date. We have limited experience in integrating an acquired company of Vurv’s size, and our acquisition of Vurv subjects us to a number of risks, including the following:

 

•

we may have difficulty renewing former Vurv customers at the expiration of their current agreements;

 

•

we may be unable to convert certain Vurv customers — including in particular those that previously entered into perpetual licenses and customer on-premise hosting arrangements — to the Taleo platform and our vendor-hosted subscription model;

 

•

we may find it difficult to support or migrate Vurv customers that are using specific customized versions of the Vurv software to our solutions, as we historically have maintained a single version of each release of our software applications without customer-specific code customization. Additionally, certain customized versions of the legacy Vurv software may not have been subject to the same level of data security review that Taleo has historically required;

 

•

we may incur more expense than expected to maintain and support the legacy Vurv product lines while customers are migrated to the Taleo platform; and

 

•

we may find it difficult to integrate Vurv’s hosting infrastructure with our own hosting operations.

There can be no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with our acquisition of Vurv. To the extent that we are unable to successfully manage these risks, our business, operating results, or financial condition could be adversely affected, and the price of our common stock could decline.

Because we recognize software subscription revenue over the term of the agreements for our software subscriptions, a significant downturn in our business may not be reflected immediately in our operating results, which increases the difficulty of evaluating our future financial position.

We generally recognize revenue from software subscription agreements ratably over the terms of these agreements, which are typically three or more years for our Taleo Enterprise customers and one year for our Taleo Business Edition customers. As a result, a substantial majority of our software subscription revenue in each quarter is generated from software subscription agreements entered into during prior periods. Consequently, a decline in new software subscription agreements in any one quarter may not affect our results of operations in that quarter, but will reduce our revenue in future quarters. Additionally, the timing of renewals or non-renewals of a software subscription agreement during any one quarter may affect our financial performance in that particular quarter or may not affect our financial performance until the next quarter. For example, because we recognize application revenue ratably, the non-renewal of a software subscription agreement late in a quarter will have very little impact on revenue for that quarter, but will reduce our revenue in future quarters. Accordingly, the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations, which would make these reported results less indicative of our future financial results. By contrast, a non-renewal occurring early in a quarter may have a significant negative impact on revenue for that quarter and we may not be able to offset a decline in revenue due to such non-renewals with revenue from new software subscription agreements entered into in the same quarter. In addition, we may be unable to adjust our costs in response to reduced revenue.

Because of the way we are required to recognize our consulting revenue under applicable accounting guidance, consulting revenue reported for a particular period may not be indicative of trends in our consulting business, which increases the difficulty of evaluating our future financial position.

During 2009 and prior years, when we sold software subscriptions and consulting services in a single arrangement, we recognized revenue from consulting services ratably over the term of the software subscription agreement, which is typically three or more years, rather than as the consulting services were delivered, which is typically during the first six to nine months of a software subscription agreement. Accordingly, a significant portion of the revenue for consulting services performed in any quarterly reporting period prior to 2010 was deferred to future periods. As a result, our consulting revenue for any quarterly reporting period may not be reflective of the consulting services delivered during the reporting period or of the business trends with respect to our consulting services business. Further, since we recognize expenses related to our consulting services in the period in which the expenses are incurred, the consulting margins we report in any quarterly reporting period may not be indicative of the actual gross margin on consulting services delivered during the reporting period.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for revenue arrangements that contain multiple components to be delivered to a customer which we adopted on January 1, 2010. Under the new standard each revenue component is considered a separate deliverable and the standard provides guidance for establishing fair value for each deliverable. When vendor-specific objective evidence or third-party evidence of selling price for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price of each separate deliverable and allocate consideration for the arrangement using the relative selling price method.

 

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In the context of our typical arrangements in which software subscriptions and consulting services are sold together, the new guidance will result in the consulting services revenue in such arrangements being recognized as delivered. Substantially all of our revenue from consulting service arrangements entered into on or after January 1, 2010 will be recognized as the consulting services are delivered, while consulting revenue from combined software subscription and consulting services arrangements entered into prior to 2010 will continue to be recognized ratably over the term of the software subscription agreement. The application of these two revenue recognition methodologies will result in our consulting revenue for the foreseeable future including a mix of revenue from consulting services delivered during the reporting period and consulting services delivered in previous reporting periods.

If our existing customers do not renew their software subscriptions and buy additional solutions from us, our business will suffer.

We expect to continue to derive a significant portion of our revenue from renewal of software subscriptions and, to a lesser extent, service fees from our existing customers. As a result, maintaining the renewal rate of our software subscriptions is critical to our future success. Factors that may affect the renewal rate for our solutions include:

 

•

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. Under certain circumstances, our customers may cancel their subscriptions for our solutions prior to the expiration of the term. Our future success also depends, in part, on our ability to sell new products and services to our existing customers. If our customers terminate their agreements, fail to renew their agreements, renew their agreements upon less favorable terms, or fail to buy new products and services from us, our revenue may decline or our future revenue may be constrained.

If our efforts to attract new customers are not successful, our revenue growth will be adversely affected.

In order to grow our business, we must continually add new customers. Our ability to attract new customers will depend in large part on the success of our sales and marketing efforts. However, our prospective customers may not be familiar with our solutions, or may have traditionally used other products and services for their talent management requirements. In addition, our prospective customers may develop their own solutions to address their talent management requirements, purchase competitive product offerings, or engage third-party providers of outsourced talent management services that do not use our solution to provide their services. If our prospective customers do not perceive our products and services to be of sufficiently high value and quality, we may not be able to attract new customers. In addition, certain of our prospective customers may delay the purchasing of, or choose not to purchase, our products as a result of the current negative general economic conditions or downturns in their businesses.

If we do not compete effectively with companies offering talent management solutions, our revenue may not grow and could decline.

We have experienced, and expect to continue to experience, intense competition from a number of companies. Our solutions compete 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, Bullhorn, Ceridian, Cezanne, Cornerstone OnDemand, Halogen Software, HRSmart, iCIMS, Jobpartners, Kenexa, Kronos, Monster, Peopleclick Authoria, Pilat, Plateau, Saba, Salary.com, SilkRoad Technology, Softscape, StepStone Solutions, SuccessFactors, SumTotal Systems, Technomedia, Ultimate Software, Workday, and Workstream. Our competitors may announce new products, services or enhancements that better meet changing industry standards or the price or performance needs of customers. Increased competition may cause pricing pressure and loss of market share, either of which could have a material adverse effect on our business, results of operations and financial condition.

        Certain of our competitors and potential competitors have significantly greater financial, technical, development, marketing, sales, service and other resources than we have. Some of these companies also have a larger installed base of customers, longer operating histories and greater brand recognition than we have. Certain of our competitors provide products that incorporate capabilities which are not available in our current suite of solutions, such as automated payroll and benefits, or services that we do not currently offer, such as recruitment process outsourcing services. Products with such additional functionalities may be appealing to some customers because they can reduce the number of different types of software or applications used to run their business and such additional services may be viewed by some customers as enhancing the effectiveness of a competitor’s solutions. In addition, our competitors’ products may be more effective than our products at performing particular talent management functions or may be more customized for particular customer needs in a given market. Further, our competitors may be able to respond more quickly than we can to changes in customer requirements.

 

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Our customers often require our products to be integrated with software provided by our existing or potential competitors. These competitors could alter their products in ways that inhibit integration with our products, or they could deny or delay access by us to advance software releases, which would restrict our ability to adapt our products to facilitate integration with these new releases and could result in lost sales opportunities. In addition, many organizations have developed or may develop internal solutions to address talent management requirements that may be competitive with our solutions.

We have had to restate our historical financial statements.

In October 2009, we announced that, after upgrading to a new version of the equity program administration software that we license from a third-party provider, we identified differences in the stock-based compensation expense of prior periods and, after reviewing such differences, identified an error in our accounting for stock-based compensation expense. As a result of identifying the error, in October 2009, we concluded that accounting adjustments were necessary to correct certain previously issued financial statements. Accordingly, we restated those financial statements and recorded total cumulative additional stock-based compensation expense of approximately $2.6 million for the fiscal years ended December 31, 2008, 2007 and 2006 and the quarters ended June 30, 2009 and March 31, 2009. Specifically, we recorded increases in stock-based compensation expense of approximately $1.3 million in fiscal 2007, $1.2 million in fiscal 2006 and $0.3 million in the quarter ended June 30, 2009, and recorded reductions in stock-based compensation expense of approximately $0.1 million in fiscal 2008 and $0.1 million in the quarter ended March 31, 2009. In connection with this restatement, we determined that there was a material weakness in our internal control over financial reporting as of December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009. Specifically, our controls to calculate stock-based compensation expense related to the application of the forfeiture rate were not designed effectively, and a material weakness existed in the design of the controls over the calculation of stock-based compensation expense related to the application of the forfeiture rate as of those periods.

In addition, in March 2009, we announced that we had completed a review of our revenue recognition practices and, as a result of this review, we restated certain financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. The restatement resulted in the deferral to future periods of $18 million of consulting services revenue and approximately $0.2 million in application revenue previously recognized through June 30, 2008. Amounts in our previously issued consolidated financial statements for the years ended December 31, 2003 through 2007, and the interim consolidated financial statements for each of the periods ended March 31, 2008 and June 30, 2008, have been corrected for the timing of revenue recognition for consulting services revenue during these periods, as well as to correct an error relating to the timing of revenue recognition for set-up fees, an element of our application services revenue. In connection with such review we identified certain control deficiencies relating to the application of applicable accounting literature related to revenue recognition. These deficiencies constituted a material weakness in internal control over financial reporting as of September 30, 2008, which led to items requiring correction in our historical financial statements and our conclusion to restate such financial statements to correct those items. Specifically, the control deficiencies related to our failure to correctly interpret the multi-element accounting guidance in determining the proper accounting treatment when application and consulting services are sold together.

We cannot be certain that the measures we have taken since these restatements will ensure that restatements will not occur in the future. Execution of restatements like the ones described above could create a significant strain on our internal resources and cause delays in our filing of quarterly or annual financial results, increase our costs and cause management distraction.

Failure to implement and maintain the appropriate internal controls over financial reporting could negatively affect our ability to provide accurate and timely financial information.

Prior to the filing of our financial results for the period ended March 31, 2007, we identified a material weakness in connection with the evaluation of the effectiveness of our internal controls as of March 31, 2007 related to the identification of a material required adjustment, which affected cash, accounts receivable and cash flow from operations. Additionally in the third quarter of 2008, we identified certain control deficiencies relating to the application of applicable accounting literature related to revenue recognition. These deficiencies constituted a material weakness in internal control over financial reporting as of September 30, 2008. In October 2009, we determined that there was a material weakness in our internal control over financial reporting as of December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009. Specifically, our controls to calculate stock-based compensation expense related to the application of the forfeiture rate were not designed effectively, and a material weakness existed in the design of the controls over the calculation of stock-based compensation expense related to the application of the forfeiture rate as of those periods.

As part of our ongoing processes, we continue to focus on improvements in our internal control 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.

 

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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.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency end-customers have accounted for a small portion of our revenue, and we may in the future increase sales to government entities. Sales into government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully sell our products and services to such governmental entity. Government entities may require contract terms that differ from our standard arrangements. In addition, government demand and payment for our products may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products. Most of our sales to government entities have been made indirectly through third-party prime contractors that resell our solutions. Government entities may have contractual or other legal rights to terminate contracts with our resellers for convenience or due to a default, and any such termination may adversely impact our future results of operations.

Governments routinely audit and investigate government contractors, and we may be subject to such audits and investigations. For example, we have been subject to government contract audits in the past and we have received and are currently responding to a subpoenas from the Department of Homeland Security’s inspector general’s office relating to our commercial pricing for the Transportation Security Administration contract, a government entity that accessed our services through a third party prime contractor. As a result of an audit or investigation, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the government entity. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

If we fail to develop or acquire new products or enhance our existing products to meet the needs of our existing and future customers, our sales will decline.

        To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve market acceptance, we must enhance and improve existing products and continue to introduce new products and services. For instance, the Taleo Talent Grid, a foundation for sharing industry knowledge, technology and candidates, became generally available to our customers in September 2009, and Taleo 10, the newest version of our talent management solutions, became generally available to our customers in February 2010. Additionally, on January 1, 2010, we completed our acquisition of WWC, which allows us to offer a compensation management solution directly to our customers. Any new products we develop or acquire may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenue and may generate losses. If we are unable to develop or acquire new products that appeal to our target customer base or enhance our existing products or if we fail to price our products to meet market demand or if the products we develop or acquire do not meet performance expectations or have a higher than expected cost structure to host and maintain, our business and operating results will be adversely affected. Our efforts to expand our solutions beyond our current offerings or beyond the talent management market may divert management resources from existing operations and require us to commit significant financial resources to an unprofitable business, which may harm our existing business.

 

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We expect to incur additional expense to develop software products and to integrate acquired software products into existing platforms to maintain our competitive position. For example, our acquisition of WWC will require significant effort to integrate existing WWC products into our platform and hosting infrastructure over time. In addition, we have invested in software development locations other than the locations where we traditionally developed our software. For example, we have invested in development locations in Eastern Europe and Ukraine and we may invest in other locations outside of North America in the future. In addition, we plan to continue to invest in Jacksonville, Florida, as a software development location. We may engage independent contractors for all or portions of this work. These efforts may not result in commercially viable solutions, may be more expensive or less productive than we anticipate, or may be difficult to manage and result in distraction to our management team. If we do not manage these remote development centers effectively or receive significant revenue from our product development investments, our business will be adversely affected.

Additionally, we intend to maintain a single version of each release of our software applications that is configurable to meet the needs of our customers. Customers may require customized solutions or features and functions that we do not yet offer and do not intend to offer in future releases, which may disrupt our ability to maintain a single version of our software releases or cause our customers to choose a competing solution.

Acquisitions and investments present many risks, and we may not realize the anticipated financial and strategic goals for any such transactions, which would harm our business, operating results and overall financial condition.

We have made, continue to make and are actively evaluating acquisitions or investments in companies, products, services, and technologies to expand our product offerings, customer base and business. For example, in 2008, we completed our acquisition of Vurv, which is our largest acquisition to date. In January 2010, we completed our acquisition of WWC. We have limited experience in executing acquisitions and investments. Acquisitions and investments involve a number of risks, including the following:

 

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being unable to achieve the anticipated benefits from our acquisitions;

 

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discovering that we may have difficulty integrating the accounting systems, operations, and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

 

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our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;

 

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difficulty incorporating the acquired technologies or products into our existing code base;

 

•

problems arising from differences in applicable accounting standards of the acquired business (for instance, non-U.S. businesses may not prepare their financial statements in accordance with GAAP);

 

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problems arising from differences in the revenue, licensing, support or consulting model of the acquired business;

 

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customer confusion regarding the positioning of acquired technologies or products;

 

•

difficulty maintaining uniform standards, controls, procedures and policies across locations;

 

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difficulty retaining the acquired business’ customers; and

 

•

problems or liabilities associated with product quality, data privacy, data security, regulatory compliance, 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.

 

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If our security measures are breached and unauthorized access is obtained to customer data or personal information, customers may curtail or stop their use of our solutions, which would harm our reputation, operating results, and financial condition.

Our solutions involve the storage and transmission of customers’ proprietary information and users’ personal information, including the personal information of our customers’ job candidates. As part of our solution, we may also offer third-party proprietary solutions which require us to transmit our customers’ proprietary data and the personal information of job candidates to such third parties. Security breaches could expose us to loss of this information, and we could be required to undertake an investigation, notify affected data subjects and appropriate legal authorities and regulatory agencies, and conduct remediation efforts, which could include modifications to our current security practices and ongoing monitoring for users whose data might have been subject to unauthorized access. Accordingly, security breaches may result in investigation, remediation and notification expenses, litigation, liability, and financial penalties. For example, in May 2009, a legacy Vurv customer using a customized version of the Vurv software informed us that email addresses contained in its candidate database, which we host, were used by an unauthorized third party to solicit additional personal information from job candidates. While it has not been determined that this incident resulted from a breach of our security measures, our customer has been sued with respect to this incident and we cannot be certain that a claim will not be asserted against us or that we will not incur liability or additional expense with respect to this matter.

While we have administrative, technical, and physical security measures in place, and we contractually require third parties to whom we transfer data to have appropriate security measures, if any of these security measures are breached as a result of third-party action, employee error, criminal acts by an employee, malfeasance, or otherwise, and, as a result, someone obtains unauthorized access to customer data or personal information, our reputation will be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we and our partners to whom we transfer data may be unable to anticipate these techniques or to implement adequate preventative measures. We do not encrypt all data we store for our customers while such data is at rest in the database. Applicable law may require that a security breach involving certain types of data be disclosed to each data subject or publicly disclosed. If an actual or perceived breach of our security occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Our insurance policies may not adequately compensate us for any losses that may occur due to failures in our security measures.

We may lose sales opportunities if we do not successfully develop and maintain strategic relationships to sell and deliver our solutions.

We have partnered with a number of business process outsourcing, or BPO, and human resource outsourcing, or HRO, providers that resell our solutions as a component of their outsourced human resource services and we intend to partner with more BPOs and HROs in the future. If customers or potential customers begin to outsource their talent management functions to BPOs or HROs that do not resell our solutions, or to BPOs or HROs that choose to develop their own solutions, our business will be harmed. In addition, we have relationships with third-party consulting firms, system integrators and software and service vendors who provide us with customer referrals, integrate their complementary products with ours, cooperate with us in marketing our products and provide our customers with system implementation or other consulting services. If we fail to establish new strategic relationships or expand our existing relationships, or should any of these partners fail to work effectively with us or go out of business, our ability to sell our products into new markets and to increase our penetration into existing markets may be impaired.

If we are required to reduce our prices to compete successfully, our margins and operating results could be adversely affected.

The intensely competitive market in which we do business may require us to reduce our prices. If our competitors offer discounts on certain products or services, we may be required to lower prices or offer our solutions on less favorable terms to compete successfully. Some of our larger competitors have significantly greater resources than we have and are better able to absorb short-term losses. Any such changes would likely reduce our margins and could adversely affect our operating results. Some of our competitors may provide bundled product offerings that compete with ours for promotional purposes or as a long-term pricing strategy. These practices could, over time, limit the prices that we can charge for our products or services. If we cannot offset price reductions with a corresponding increase in the quantity of applications sold, our margins and operating results would be adversely affected.

Defects or errors in our products could affect our reputation, result in significant costs to us and impair our ability to sell our products, which would harm our business.

Our products may contain defects or errors, which could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. The costs incurred in correcting any product defects or errors may be substantial and could adversely affect our operating results. While we test our products for defects or errors prior to product release, defects or errors have been identified from time to time by our customers and may continue to be identified in the future.

Any defects that cause interruptions in the availability or functionality of our solutions could result in:

 

•

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;

 

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injury to our reputation;

 

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increased billing disputes and customer claims for fee credits; and

 

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failure to meet our contractual service level commitments and associated contractual liabilities.

While our software subscription agreements typically contain limitations and disclaimers that should limit our liability for damages related to defects in our software, such limitations and disclaimers may not be upheld by a court or other tribunal or otherwise protect us from such claims.

If we fail to manage our hosting infrastructure capacity satisfactorily, our existing customers may experience service outages and data loss, and our new customers may experience delays in the deployment of our solution.

We have experienced significant growth in the number of users, transactions, and data that our hosting infrastructure supports. Failure to address the increasing demands on our hosting infrastructure satisfactorily may result in service outages, delays or disruptions. For example, we have experienced downtimes within our hosting infrastructure, some of which have been significant, which have prevented customers from using our solutions from time to time. We seek to maintain sufficient excess capacity in our hosting infrastructure to meet the needs of all of our customers. We also maintain excess capacity to facilitate the rapid provisioning of new customer deployments and expansion of existing customer deployments. The development of new hosting infrastructure to keep pace with expanding storage and processing requirements could be a significant cost to us that we are not able to predict accurately and for which we are not able to budget significantly in advance. Such outlays could raise our cost of goods sold and be detrimental to our financial results. At the same time, the development of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities and the loss of customers. If our hosting infrastructure capacity fails to keep pace with sales, customers may experience delays as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.

In addition, we may in the future consolidate certain of our data centers with our other existing data centers, or move certain data center operations to new facilities. For example, we are in the process of consolidating our U.S. production data center operations for our Taleo Enterprise solution into a new facility in the Chicago, Illinois area. When we consolidate these data center operations, we relocate existing hardware, purchase new hardware, and migrate all of our Taleo Enterprise customers’ proprietary information and their users’ personal information. Although we take reasonable precautions designed to mitigate the risks of such a move, such transitions create increased risk of service disruptions, outages and the theft or loss of important customer and user data that could harm our reputation, subject us to financial liability, and adversely affect our revenue and earnings.

Any significant disruption in our computing and communications infrastructure could harm our reputation, result in a loss of customers and adversely affect our business.

Our computing and communications infrastructure is a critical part of our business operations. Our customers access our solutions through a standard web browser. Our customers depend on us for fast and reliable access to our applications. Much of our software is proprietary, and we rely on the expertise of members of our engineering and software development teams for the continued performance of our applications. We have experienced, and may in the future experience, serious disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:

 

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human error;

 

•

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 customer data stored on our systems at least daily to disks in our data centers, and weekly to automated tape which is stored offsite, our infrastructure does not currently include real-time, or near real-time, mirroring of data storage and production capacity in more than one geographically distinct location. Thus, in the event of a physical disaster, or certain other failures of our computing infrastructure, customer data from recent transactions may be permanently lost.

        We currently deliver our solutions from eight data centers that host the applications for all of our customers and two data centers that host Talent Exchange, our online community for candidates. The Taleo Enterprise platform is hosted from three facilities: U.S. facilities leased from Equinix, Inc. in the Chicago, Illinois area and San Jose, California; and a European data center facility also leased from Equinix in Amsterdam, the Netherlands. 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 from two U.S. facilities located in San Jose, California and Ashburn, Virginia, both operated via a managed services arrangement. Opsource, Inc. provides hardware, internet bandwidth, and access in the San Jose, California and Ashburn Virginia hosting facilities through the managed services arrangement.

 

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The Vurv legacy enterprise recruiting product is hosted through three facilities located in Jacksonville, Florida, San Jose, California, and Amsterdam, the Netherlands. Internet bandwidth and access for the Vurv legacy enterprise recruiting product is provided by Peak 10 in the Florida facility, by Equinix in San Jose and Amsterdam.

The Taleo Compensation solution is currently hosted from two facilities leased from Internap in San Jose, California, and Los Angeles, California. Internap also provides the Internet bandwidth and access services for both of these locations.

Talent Exchange is hosted at two facilities at undisclosed locations, both operated by Amazon.com. 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 locations that are managed service locations, we also rely upon the third-party vendor for hardware associated with our hosting infrastructure. Although we believe we would be able to enter into a similar relationship with another third party should one of these relationships fail or terminate for any reason, we believe our reliance on any third-party vendor exposes us to risks outside of our control. If these third-party vendors encounter financial difficulty such as bankruptcy or other events beyond our control that cause them to fail to secure adequately and maintain their hosting facilities or provide the required data communications capacity, our customers may experience interruptions in our service or the loss or theft of important customer data. We plan to consolidate our U.S. production data center operations for our Taleo Enterprise Solution into a new single facility in the Chicago, Illinois area in 2010. We may elect to open computing and communications hardware operations at additional third-party facilities located in the United States, Europe or other regions. We are not experienced at operating such facilities in jurisdictions outside the United States and doing so may pose additional risk to us.

We have experienced system failures in the past. If our customers experience service interruptions or the loss or theft of their data caused by us, we may be required to issue credits pursuant to the terms of our contracts and may also be subject to financial liability or customer losses. Such credits could reduce our revenues below the levels that we have indicated we expect to achieve and adversely affect our margins and operating results.

Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

The consolidation or acquisition of our competitors or other similar strategic alliances could weaken our competitive position or reduce our revenue.

There has been vendor consolidation in the market in which we operate. For example, in August 2010, StepStone Solutions announced the signing of an agreement to acquire MrTed and StepStone Solutions was itself acquired by private equity firm HgCapital in May 2010. In January 2010, Peopleclick was acquired by Bedford Funding, a private equity firm that also acquired Authoria in 2008. Additional consolidation within our industry may change the competitive landscape in ways that adversely affect our ability to compete effectively.

Our competitors may also establish or strengthen cooperative relationships with our current or future BPO partners, HRO partners, systems integrators, third-party consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our products and limiting the number of consultants available to implement our solutions. Disruptions in our business caused by these events could reduce our revenue.

We must hire and retain key employees and recruit qualified personnel or our future success and business could be harmed.

Our success depends on the continued employment of our senior management and other key employees, such as our chief executive officer and our chief financial officer, and on our ability to attract and hire qualified senior management and executives. On July 12, 2010, Katy Murray, our executive vice president and chief financial officer, announced her intention to resign, and we are conducting a search for her replacement. Ms. Murray will remain our chief financial officer through the earlier of October 1, 2010 or until a successor is appointed. 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.

 

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We currently derive a significant portion of our revenue from international operations and expect to expand our international operations. However, we do not have substantial experience in international markets, and may not achieve the expected results.

During the three months ended June 30, 2010, application revenue generated outside of the United States was 16% of total revenue, based on the location of the legal entity of the customer with which we contracted, of which 5% was revenue generated in Canada. We conduct research and development in Quebec, Canada as well as other international locations. We currently have international offices outside of North America in Australia, France, the Netherlands, and the United Kingdom, which focus primarily on selling and implementing our solutions in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:

 

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Potentially degrading general economic conditions and credit environments in Europe and elsewhere;

 

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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;

 

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differing regulations in Quebec, Canada with regard to maintaining operations, products and public information in both French and English;

 

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differing labor regulations, especially in the European Union and Quebec, Canada where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

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more stringent regulations relating to data privacy and the unauthorized use of, or access to, commercial and personal information, particularly in Europe and Canada;

 

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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;

 

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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;

 

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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;

 

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limited or unfavorable intellectual property protection; and

 

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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 and the euro and may in the future have sales denominated in the currencies of additional countries. In addition, we incur a substantial portion of our operating expenses in Canadian dollars and, to a much lesser extent, other foreign currencies. Any fluctuation in the exchange rate of these foreign currencies may positively or negatively affect our business, financial condition and operating results. For instance, in 2009, the impact of changes in foreign currency exchange rates compared to the average rates in effect during 2008 was a $2.1 million increase in income before income taxes. In 2010, the volatility in exchange rates for foreign currencies has continued and may continue and, as a result, we may continue to see fluctuations in our revenue and expenses, which may impact our operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

If we fail to defend our proprietary rights aggressively, our competitive advantage could be impaired and we may lose valuable assets, experience reduced revenue, and incur costly litigation fees to protect our rights.

        Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our proprietary rights in our products and services. We do not have any issued patents. We do not rely on patent protection. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed products may be unenforceable under the laws of certain jurisdictions and foreign countries in which we operate. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase. We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from developing technologies independently that are substantially equivalent or superior to our products. Initiating legal action has been and may continue to be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

 

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Current and future litigation against us could be costly and time consuming to defend.

We are sometimes subject to legal proceedings and claims that arise in the course of business. For example, we are currently defendant in a suit alleging patent infringement and were defendants in a recently-dismissed suit alleging securities fraud, both of which are described in more detail in Note 9 of the Notes to Condensed Consolidated Financial Statements. Litigation may result in substantial costs, including lengthened or discontinued sales cycles due to concerns of existing or prospective customers with respect to litigation, and may divert management’s attention and resources, which may seriously harm our business, overall financial condition, and operating results. In addition, legal claims that have not yet been asserted against us may be asserted in the future. See Note 9 of the Notes to Condensed Consolidated Financial Statements, for further information regarding pending and threatened litigation and potential claims.

Our results of operations may be adversely affected if we are subject to a protracted infringement claim or a claim that results in a significant award for damages.

Software product developers such as us may continue to receive infringement claims as the number of products and competitors in our space grows and the functionality of products in different industry segments overlaps. For example, Kenexa, a competitor, filed suit against us for patent infringement in August 2007. Additionally, in the first quarter 2010, two of our customers notified us that an intellectual property licensing firm has inquired as to whether a usability feature of the Taleo software was subject to patents held by the intellectual property licensing firm. Other infringement claims have been threatened against us. We can give no assurance that such claims will not be filed in the future. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:

 

•

require costly litigation to resolve and the payment of substantial damages;

 

•

require significant management time;

 

•

cause us to enter into unfavorable royalty or license agreements;

 

•

require us to discontinue the sale of our products;

 

•

damage our relationship with existing or prospective customers and disrupt our sales cycles;

 

•

require us to indemnify our customers or third-party service providers; or

 

•

require us to expend additional development resources to redesign our products.

We entered into standard indemnification agreements in the ordinary course of business and may be required to indemnify our customers for our own products and third-party products that are incorporated into our products and that infringe the intellectual property rights of others. Although many of the third parties from which we purchase are obligated to indemnify us if their products infringe the rights of others, this indemnification may not be adequate.

Our insurance policies will not compensate us for any losses or liabilities resulting from patent infringement claims.

We use open source software in our products, which could subject us to litigation or other actions.

We use open source software in our products and may use more open source software in the future. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of our products or take other remedial actions.

 

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We employ technology licensed from third parties for use in or with our solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

Our hosted solutions incorporate certain technology obtained under licenses from other companies, such as Oracle for database software. We anticipate that we will continue to license technology and development tools from third parties in the future. Although we believe that there are commercially reasonable software alternatives to the third-party software we currently license, this may not always be the case, or we may license third-party software that is more difficult or costly to replace than the third party software we currently license. In addition, integration of our products with new third-party software may require significant work and require substantial allocation of our time and resources. Also, to the extent that our products depend upon the successful operation of third-party products in conjunction with our products, any undetected errors in these third-party products could prevent the implementation or impair the functionality of our products, delay new product introductions and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which could result in higher costs.

Difficulties that we may encounter in managing changes in the size of our business could affect our operating results adversely.

In order to manage our business effectively, we must continually manage headcount in an efficient manner. In the past, we have undergone facilities consolidations and headcount reductions in certain locations and departments. As a result, we have incurred, and may incur, charges for employee severance. We may experience additional facilities consolidations and headcount reductions in the future. As many employees are located in jurisdictions outside of the United States, we are required to pay the severance amounts legally required in such jurisdictions, which may exceed those of the United States. Further, we believe reductions in our workforce and facility consolidation create anxiety and uncertainty, and may adversely affect employee morale.

These measures could adversely affect our employees that we wish to retain and may also adversely affect our ability to hire new personnel. They may also negatively affect customers.

Failure to manage our customer deployments effectively could increase our expenses and cause customer dissatisfaction.

Enterprise deployments of our products require a substantial understanding of our customers’ businesses, and the resulting configuration of our solutions to their business processes and integration with their existing systems. We may encounter difficulties in managing the timeliness of these deployments and the allocation of personnel and resources by us or our customers. In certain situations, we also work with third-party service providers in the implementation or software integration-related services of our solutions, and we may experience difficulties in managing such third parties. Failure to manage customer implementation or software integration-related services successfully by us or our third-party service providers could harm our reputation and cause us to lose existing customers, face potential customer disputes or limit the rate at which new customers purchase our solutions.

Our ability to conclude that a control deficiency is not a material weakness or that an accounting error does not require a restatement can be affected by a number of factors, including our level of pre-tax income.

Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative factors, and depending upon that analysis we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness.

One element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a significant deficiency or material weakness.

Because our pre-tax income is relatively small, if management or our independent registered public accounting firm identify an error in our interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or may meet the quantitative threshold established under Staff Accounting Bulletin No. 99, “Materiality”, that could, depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.

Our reported financial results may be adversely affected by changes in generally accepted accounting principles or changes in our operating history that impact the application of generally accepted accounting principles.

Accounting principles generally accepted in the United States, or GAAP, are subject to interpretation by the FASB, the SEC, the American Institute of Certified Public Accountants, or AICPA, the Public Company Accounting Oversight Board and various other organizations formed to promulgate and interpret accounting principles. A change in these principles or interpretations could have a significant effect on our historical or future financial results.

        The application of GAAP to our operations may also require significant judgment and interpretation as to the appropriate treatment of a specific issue. These judgments and interpretations are complicated by the relative newness of the on-demand, vendor-hosted software business model, also called software-as-a-service, or SaaS, and the relative lack of interpretive guidance with respect to the application of GAAP to the SaaS model. For example in October 2009, the FASB issued accounting guidance related to the recognition of multiple element arrangements, which superseded the guidance used during 2009. The new guidance, which we adopted as of January 1, 2010, will generally require us to recognize the majority of consulting services revenue from multiple element arrangements as the consulting services are delivered for arrangements we have entered into after January 1, 2010. We cannot ensure that our interpretations and judgments with respect to the application of GAAP will be correct in the future and any incorrect interpretations and judgments could adversely affect our business.

 

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If benefits currently available under the tax laws of Canada, the province of Quebec and other jurisdictions are reduced or appealed, or if we have taken an incorrect position with respect to tax matters under discussion with the Canadian Revenue Agency or other domestic or foreign taxing authorities, our business could suffer.

The majority of our research and development activities are conducted through our Canadian subsidiary, Taleo (Canada) Inc. We participate in a provincial government program in Quebec that provides refundable investment credits based upon qualifying research and development expenditures. These expenditures primarily consist of the salaries for the persons conducting research and development activities. We have participated in the program since 1999, and expect that we will continue to receive these refundable investment tax credits through December 2010. In 2009, we recorded a $2.4 million reduction in our research and development expenses as a result of this program. We anticipate the continued reduction of our research and development expenses through application of these credits through December 2010. If these investment tax benefits are reduced or eliminated, our financial condition and operating results may be adversely affected. We are currently evaluating alternative provincial investment programs that will replace the expiring December 2010 Quebec program.

In addition to the provincial research and development refundable investment credit program described above, our Canadian subsidiary is participating in a scientific research and experimental development, or SRED, program administered by the Canadian federal government that provides income tax credits based upon qualifying research and development expenditures. For tax year 2009, we recorded an estimated SRED credit claim of approximately $1.0 million. Our Canadian subsidiary is eligible to remain in the SRED program for future tax years as long as its development projects continue to qualify. These Canadian federal SRED tax credits can only be applied to offset Canadian federal taxes payable and are reported as a credit to our tax provision to the extent they reduce taxes payable to zero with any residual benefits recorded as a net deferred tax asset. We believe that our Canadian subsidiary is in compliance with these government programs and that all amounts recorded will be fully realized. If these SRED investment credits are reduced or disallowed by the federal Canada Revenue Agency (“CRA”), our financial condition and operating results may be adversely affected.

In December 2008, we were notified by the CRA of their intention to audit tax years 2002 through 2007. To date, CRA has issued proposed assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. These adjustments relate, principally, to our treatment of Canadian Development Technology Incentives (“CDTI”) tax credits and income and expense allocations recorded between our parent company and our Canadian subsidiary. We disagree with the CRA’s basis for these adjustments and intend to appeal their decision through applicable administrative and judicial procedures.

There could be significant unrecognized tax benefits over the next twelve months depending on the outcome of any audit. We have recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed both our unrecognized tax benefits and available deferred tax assets, we may become a tax paying entity in 2010 or in a prior year and may be required to pay penalties and interest. Any such penalties and interest cannot be reasonably estimated at this time.

We will seek U.S. tax treaty relief through the appropriate Competent Authority tribunals for all settlements entered into with the CRA. Although we believe we have reasonable basis for our tax positions, it is possible an adverse outcome could have a material effect upon our financial condition, operating results or cash flows in a particular quarter or annual period.

As we continue to expand domestically and internationally, we are increasingly subject to reviews by various U.S. and foreign taxing authorities which could negatively impact our financial results. While we have 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.

Our reported financial results may be adversely affected by changes in tax laws or changes in the application of tax laws.

Changes in applicable tax laws and regulations, and the related rulings, interpretations, and developments can affect our overall effective income tax rate. For instance, we have historically applied existing and available net operating loss carryforwards to reduce our income tax liabilities in various taxing jurisdictions. In 2008 and 2009, the State of California suspended the right of companies to apply net operating losses to reduce taxable income in these years. If the State of California, or any other taxing jurisdiction, were to take similar action with respect to the 2010 tax year, our overall effective tax rate would increase as a result of additional income tax expense. Furthermore, as we expand our international operations, complete acquisitions, develop new products and new distribution models, implement changes to our operating structure or undertake intercompany transactions, changes in tax laws may result in an increase to our tax expense.

An adverse determination with respect to our application of tax laws may negatively impact our tax rates and financial results.

We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and, in the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the estimation process and interpretations of applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. The tax laws’ treatment of software and internet-based transactions is particularly uncertain and in some cases currently applicable tax laws are ill-suited to address these kinds of transactions. In the ordinary course of a global business, there are many intercompany transactions where the ultimate tax determination is uncertain. Although we believe we are in compliance with transfer pricing laws and regulations in all jurisdictions in which we conduct business, there is no assurance that the final determination of any tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations.

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.

 

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The rapid and continual growth of traffic on the Internet has resulted at times in slow connection and download speeds among Internet users. Our business expansion may be harmed if the Internet infrastructure cannot handle our customers’ demands or if hosting capacity becomes insufficient. If our customers become frustrated with the speed at which they can utilize our software over the Internet, our customers may discontinue use of our products and choose not to renew their contract with us.

Our stock price is likely to be volatile and could decline.

The stock market in general and the market for technology-related stocks in particular have been highly volatile. As a result, the market price of our stock is likely to be similarly volatile, and investors in our stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section and others such as:

 

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our operating performance and the performance of other similar companies;

 

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overall performance of the equity markets;

 

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developments with respect to intellectual property rights;

 

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publication of unfavorable research reports about us or our industry or withdrawal of research;

 

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coverage by securities analysts or lack of coverage by securities analysts;

 

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speculation in the press or investment community;

 

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general economic conditions and data and the impact of such conditions and data on the equity markets;

 

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terrorist acts; and

 

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announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments.

We may need to raise additional capital, which may not be available, thereby adversely affecting our ability to operate our business.

If we need to raise additional funds due to unforeseen circumstances, we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and any additional financings could result in additional dilution to our stockholders. If we need additional capital and cannot raise it on acceptable terms, we may not be able to meet our business objectives, our stock price may fall and you may lose some or all of your investment.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Provisions in our charter documents and Delaware law may delay or prevent a third party from acquiring us.

Our certificate of incorporation and bylaws contain provisions that could increase the difficulty for a third party to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. The acquirer would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and will not be able to cumulate votes at a meeting, which will require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.

 

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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
April 1, 2010 through April 30, 2010		18,273		$	25.35					—		—
May 1, 2010 through May 31, 2010		—			—					—		—
June 1, 2010 through June 30, 2010		—			—					—		—
		18,273		$	25.35		(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 June 30, 2010.

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.

(REMOVED AND RESERVED)

 

ITEM 5.

OTHER INFORMATION

None.

 

ITEM 6.

EXHIBITS

 

Exhibit Number		Description
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.

 

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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.

 

Date: August 6, 2010

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Exhibit Index

 

Exhibit Number		Description
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.