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(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 RNo £
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
definitions of “large accelerated filer,”“accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
Accelerated
filer R
Non-accelerated
filer £
Smaller
reporting company £
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
On July31, 2008, the registrant had 30,147,449 shares of Class A common stock and
462,118 shares of Class B common stock outstanding.
Accounts
receivable, less allowance for doubtful accounts of $362 and $369 at June30, 2008 and December 31, 2007, respectively
29,558
30,255
Prepaid
expenses and other current assets
6,152
5,912
Investment
credit receivable
5,985
4,734
Total
current assets
146,719
127,324
Property
and equipment, net
21,131
23,178
Restricted
cash
628
838
Other
assets
5,721
2,147
Goodwill
9,707
9,785
Other
intangibles, net
1,186
1,404
Total
assets
$
185,092
$
164,676
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current
liabilities:
Accounts
payable and accrued liabilities
$
24,558
$
20,623
Deferred
revenue and customer deposits
42,498
36,752
Capital
lease obligation, short-term
18
38
Total
current liabilities
67,074
57,413
Non-current
liabilities:
Customer
deposits and long-term deferred revenue
1,254
273
Other
liabilities
3,684
4,535
Capital
lease obligation, long-term
11
16
Commitments
and contingencies (Note 11)
Class B
Redeemable Common Stock, $0.00001 par value, 4,038,287 shares authorized;
462,118 and 655,652 shares outstanding at June 30, 2008 and
December 31, 2007
-
-
Total
liabilities
72,023
62,237
Exchangeable
share obligation
226
331
Stockholders’
equity:
Class A
Common Stock; par value, $0.00001 per share; 150,000,000 shares
authorized; 26,165,607 and 25,442,273 shares outstanding at June 30,2008 and December 31, 2007, respectively
Adjustments
to reconcile net income / (loss) to net cash provided by operating
activities:
Depreciation
and amortization
4,726
2,827
Amortization
of tenant inducements
(76
)
(93
)
Stock-based
compensation expense
5,232
2,965
Director
fees settled with stock
119
112
Bad
debt expense
100
310
Interest
earned on restricted cash
-
1
Changes
in working capital accounts:
Accounts
receivable
544
(5,986
)
Prepaid
expenses and other assets
(3,824
)
(1,272
)
Investment
credit receivable
(1,393
)
1,115
Accounts
payable and accrued liabilities
4,355
(218
)
Deferred
revenues and customer deposits
6,818
10,747
Net
cash provided by operating activities
19,276
9,663
Cash
flows from investing activities:
Acquisition
of property and equipment
(3,625
)
(4,082
)
Restricted
cash decrease
210
2,704
Acquisition
of business
-
(3,071
)
Net
cash used in investing activities
(3,415
)
(4,449
)
Cash
flows from financing activities:
Principal
payments on capital lease obligations
(24
)
(308
)
Proceeds
from stock options and warrants exercised
2,725
5,083
Net
cash provided by financing activities
2,701
4,775
Effect
of exchange rate changes on cash and cash equivalents
38
246
Increase
in cash and cash equivalents
18,600
10,235
Cash
and cash equivalents:
Beginning
of period
86,135
58,785
End
of period
$
104,735
$
69,020
Supplemental
cash flow disclosures:
Cash
paid for interest
$
1
$
7
Cash
paid for income taxes
$
44
$
124
Supplemental
disclosure of non-cash financing and investing activities:
Property
and equipment purchases included in accounts payable and accrued
liabilities
$
2,487
$
3,686
Class
B common stock exchanged for Class A common stock
$
96
$
393
*
Treasury
stock issued to employees under ESPP
$
701
$
450
Treasury
stock acquired to settle employee withholding liability
$
573
$
292
* The
amount previously reported in noncash activity disclosure of the condensed
consolidated statements of cash flows for the quarter ended June 30, 2007
was erroneously based on the fair value (rather than the book value) of
such shares exchanged of $16,101, and such error in disclosure has been
corrected to reflect the exchange at book value of
$393,000.
See
accompanying Notes to Condensed Consolidated Financial
Statements.
The
condensed consolidated balance sheet of Taleo Corporation and its Subsidiaries
(“the Company”) as of June 30, 2008, the condensed consolidated statements of
operations for the three and six months ended June 30, 2008 and 2007 and the
condensed consolidated statements of cash flows for the six months ended June30, 2008 and 2007 have been prepared by the Company without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 2007 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Annual Report on Form
10-K for the Company for the year ended December 31, 2007. The results of
operations for the three and six months ended June 30, 2008 are not necessarily
indicative of the operating results for the full year.
2.
Nature of Business and Basis of Presentation
Nature of
Business — The Company provides on-demand talent management solutions
that enable organizations of all sizes to assess, acquire, develop, and align
their workforces for improved business performance. The Company’s software
applications are offered to customers primarily on a subscription
basis.
The
Company was incorporated under the laws of the state of Delaware in May 1999 as
Recruitsoft, Inc. and changed its name to Taleo Corporation in March 2004. The
Company has principal offices in Dublin, California and conducts its business
worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands,
the United Kingdom, Singapore, and Australia. The subsidiary in Canada performs
the primary product development activities for the Company, and the other
foreign subsidiaries are generally engaged in providing sales, account
management and support activities.
Basis of
Presentation — The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and pursuant to the rules of the Securities and Exchange Commission. The
unaudited condensed consolidated financial statements include the accounts of
Taleo Corporation and its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated.
Recent Accounting
Pronouncements — In September 2006, the FASB issued Statement of
Financial Accounting Standard No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements. As
of June 30, 2008, the Company did not have any financial instruments subject to
SFAS 157 fair value measurements. However, the Company continues to evaluate the
impact of SFAS 157 on its non-financial instruments which are not affected by
the pronouncement until January 1, 2009.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) (“SFAS 141R”), Business Combinations. SFAS
141R requires an acquiring entity to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier adoption is
prohibited. Accordingly, the Company is required to record and disclose business
combinations following existing U.S. GAAP until January 1, 2009. The Company is
currently evaluating the requirements of SFAS 141R, and has not yet determined
the impact on its consolidated financial statements.
On May 5,2008, the Company entered into an Agreement and Plan of Reorganization (the
“Reorganization Agreement”) to purchase Vurv Technology, Inc. (“Vurv”), a
private company with headquarters in Florida. Vurv is a provider of on demand
talent management software. On July 1, 2008, the Company completed
the acquisition of Vurv. Accordingly, the assets, liabilities and
operating results of Vurv will be reflected in the Company’s consolidated
financial statements beginning in the third quarter of 2008. The
total consideration paid by the Company in connection with the acquisition was
approximately $34.4 million in cash and approximately 3.8 million shares of
Class A common stock, of which approximately $33.8 million in cash and
approximately 3.3 million shares of Class A common stock were paid on the
closing date. Approximately 0.5 million shares were 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 Reorganization Agreement or certain other
events. Additionally, approximately $0.3 million was placed into
escrow to pay for expenses incurred by the stockholder representative in
connection with its duties under the Reorganization Agreement, and approximately
$0.4 million was placed in escrow to compensate the Company in the event certain
expenses are incurred in connection with payments to certain Vurv
employees. In addition, the Company assumed obligations for
outstanding options to purchase shares of Vurv common stock, which converted
into options to purchase approximately 0.4 million shares of the Company’s
common stock. Taleo also repaid approximately $9.0 million of Vurv
debt on the closing date.
4.
Stock-Based Compensation
The
Company issues stock options to its employees and outside directors and provides
employees the right to purchase stock pursuant to stockholder approved stock
option and employee stock purchase programs.
Under the
provisions of SFAS 123(R) “Share-Based Payment”, the Company recognizes the
fair value of stock-based compensation in its financial statements over the
requisite service period of the individual grants, which generally equals a four
year vesting period. All of the Company’s stock awards are of an equity nature
and there have been no liability awards granted. The Company recognizes
compensation expense for the stock options, restricted stock awards, performance
share awards and Employee Stock Purchase Plan (“ESPP”) purchases granted
subsequent to December 31, 2005 on a straight-line basis over the requisite
service period. There was no stock-based compensation expense capitalized during
the six months ended June 30, 2008. Shares issued as a result of stock option
exercises, ESPP purchases, performance shares and restricted stock awards are
issued out of common stock reserved for future issuance under our stock plans.
SFAS 123(R) resulted in the Company recording compensation expense of $2.8
million for the three months ended June 30, 2008 and $5.2 million for the six
months ended June 30, 2008. The Company recorded compensation expense
of $1.6 million for the three months ended June 30, 2007 and $3.0 million for
the six months ended June 30, 2007. The amount recorded in the three and six
months ended June 30, 2008 and 2007 was recorded in the following expense
categories:
The
Company estimates the fair value of options granted using the Black-Scholes
option valuation model. The Company estimates the expected volatility of our
common stock at the date of grant based on a combination of our historical
volatility and the volatility of comparable companies, consistent with SFAS No.
123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107
(“SAB 107”). The Company estimates expected term consistent with the simplified
method identified in SAB 107 for share-based awards granted during the three
months ended June 30, 2008. The Company elected to use the simplified method due
to a lack of term length data as the Company had recently gone public in October
2005 and our options meet the criteria of the “plain-vanilla” option as defined
by SAB 107. 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 our
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, it amortizes the fair
value on a straight-line basis over the requisite service period of the options
that is generally 4 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.
Class A Common
Stock Option Plans
At June30, 2008, 464,196 shares were available for future grants under four of the
Company’s option plans, excluding the White Amber stock option plan described
below.
The
following table presents a summary of the Class A Common Stock option activity
for the six months ended June 30, 2008, and related information:
The
weighted average grant date fair value of options granted during the three and
six months ended June 30, 2008 was $9.43 and $9.51 per option,
respectively.
The total intrinsic value of options exercised during the three and six months
ended June 30, 2008 was $0.9 million and $1.5 million, respectively. As of June30, 2008, the Company had 3,213,777 options vested or expected to vest over four
years with an aggregate intrinsic value of $18.9 million and a weighted average
exercise price of $13.84.
The
aggregate intrinsic value for options outstanding and exercisable at June 30,2008 was $13.5 million with a weighted-average remaining contractual life of 6.7
years.
For
options, the Company recorded $2.1 million and $4.0 million of compensation
expense for the three and six months ended June 30, 2008, respectively and
recorded $1.1 million and $2.2 million of compensation expense for the three and
six months ended June 30, 2007, respectively. Unamortized
compensation cost was $12.1 million as of June 30, 2008. This cost is expected
to be recognized over a weighted-average period of 2.5 years.
During
the second quarter of 2008, two employees were terminated. Upon
termination, their stock options and restricted stock awards that were scheduled
to vest over the six months following their termination date, vested immediately
upon termination. As a result of this accelerated vesting of stock
options and restricted stock, the Company recorded shared-based compensation
expense of $0.3 million.
Pursuant
to the October 21, 2003 purchase of White Amber, Inc., the Company issued
206,487 options at $0.78 per share under a new option plan (“the White Amber
Stock Option Plan”). As of June 30, 2008, these options were fully vested. The
following table presents a summary of the White Amber Stock Option Plan activity
for the six months ended June 30, 2008 and related information:
For the
White Amber Stock Option Plan, the Company recorded no compensation expense for
the three and six months ended June 30, 2008 and June 30, 2007.
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 applicable reacquisition or vesting period using the
straight-line method. Upon vesting, restricted stock units will convert into an
equivalent number of shares of common stock. Unamortized compensation cost was
$6.9 million as of June 30, 2008. This cost is expected to be recognized over a
weighted-average period between 2.3 and 2.5 years.
The
following table presents a summary of the restricted stock awards and
performance share awards for the six months ended June 30, 2008 and related
information:
For
restricted stock and performance share agreements, the Company recorded $0.5
million and $0.9 million of compensation expense for the three and six months
ended June 30, 2008, respectively, and $0.3 million and $0.5 million for the
three and six months ended June 30, 2007, respectively.
Employee
Stock Purchase Plan
At June30, 2008, there were 214,022 shares reserved for future issuance under the
Company’s ESPP. For the ESPP, the Company recorded $0.2 million and $0.4 million
of compensation expense for the three and six months ended June 30, 2008,
respectively, and $0.2 million and $0.3 million for each of the three and six
months ended June 30, 2007. Unamortized compensation cost was $0.3 million as of
June 30, 2008. This cost is expected to be recognized over a four month
period.
The
Company has recorded the following balances for acquired intangible assets and
goodwill at June 30, 2008 and December 31, 2007. Amortization of intangible
assets was $0.1 million and $0.2 million for the three and six months ended June30, 2008, respectively, and $0.1 million and $0.2 million for the three and six
months ended June 30, 2007, respectively. During the three months
ended June 30, 2008, the Company reduced goodwill by $42,000 due to capitalized
transaction costs associated with the Wetfeet acquisitions being more than
actual cost incurred. During the six months ended June 30, 2008,
goodwill was reduced by a total of $0.1 million due to capitalized transaction
costs associated with both JobFlash and Wetfeet acquisitions being more than
actual cost incurred.
Property
and equipment included capital leases totaling $1.1 million at June 30, 2008 and
December 31, 2007. All of the capital leases are included in computer hardware
and software classification above. Accumulated amortization relating to property
and equipment under capital leases totaled $1.0 million at June 30, 2008 and
December 31, 2007. Depreciation and amortization expense, including amortization
of assets under capital leases but excluding amortization of intangible assets,
was $2.3 million and $4.6 million for the three and six months ended June 30,2008, respectively, and $1.5 million and $2.7 million for the three and six
months ended June 30, 2007, respectively.
The
Company has reserved the following number of shares of Class A common stock as
of June 30, 2008 for the exchange of exchangeable shares, awarding of restricted
stock awards, release of performance share awards, exercise of stock options and
purchases under the employee stock purchase plan:
Exchange
of exchangeable shares and redemption of Class B common
stock
462,118
Class
A Common Stock Plans (excluding the White Amber Stock Option
Plan)
4,086,080
White
Amber Stock Option Plan
23,045
Employee
Stock Purchase Plan
214,022
Total
4,785,265
10.
Income Taxes
For the
three months ended June 30, 2008, the Company recorded an income tax benefit of
$0.4 million. The net benefit consists of U.S. state income taxes,
taxes generated by the Company’s international subsidiaries and a tax benefit of
approximately $0.3 million relating to Canadian investment tax
credits.
In July
2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods, disclosure
and transition. The Company adopted FIN 48 effective January 1, 2007. The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. At June 30, 2008, 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.
As of
June 30, 2008, the Company had unrecognized tax benefits of approximately $3.9
million which represents a decrease of $0.1 million of unrecognized tax benefits
as of March 31, 2008.
The
Company’s Canadian subsidiary is under examination by the Canada Revenue Agency
(“CRA”) with respect to tax years 2000 and 2001. The Company has settled certain
issues raised in the audit and is appealing the CRA’s treatment of Quebec
investment tax credits. Final resolution of the CRA’s examination will have
bearing on the Company’s tax treatment applied in subsequent periods not
currently under examination. The Company has recorded income tax reserves
believed to be sufficient to cover the estimated tax assessments for the open
tax periods.
There
could be a significant impact to the Company’s uncertain tax positions over the
next twelve months depending on the outcome of the on-going CRA audit. In the
event the CRA audit results in adjustments that exceed both our income tax
reserves and available deferred tax assets, the Company’s Canadian subsidiary
may become a tax paying entity in 2008 or in a prior year including potential
penalties and interest. Any such penalties cannot be reasonably estimated at
this time.
The
Company is seeking U.S. tax treaty relief through the appropriate Competent
Authority tribunals for the settlements entered into with CRA and will seek
treaty relief for all subsequent final settlements. 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.
Operating Leases
— The Company leases certain equipment, internet access services and
office facilities, under non-cancelable operating leases or long-term
agreements. Rental expense under these agreements for the three and six months
ended June 30, 2008 was $1.4 million and $2.7 million,
respectively. Rent expense for the three and six months ended June30, 2007 was approximately $1.8 million and $3.6 million,
respectively.
The
minimum non-cancelable scheduled payments under these agreements at June 30,2008 are as follows:
Litigation
— Kenexa Brassring, Inc., filed suit against the Company in the United
States District Court for the District of Delaware for patent infringement on
August 27, 2007. Kenexa asserts that the Company has infringed patent numbers
5999939 and 6996561, and seeks monetary damages and an injunction enjoining the
Company from further infringement. Management has reviewed this matter and
believes that its software products do not infringe any valid and enforceable
claim of these patents. On May 9, 2008, Kenexa also filed suit in
United States District Court for the District of Delaware against Vurv
Technology, Inc., alleging infringement of patent numbers 5999939 and 6996561,
and seeking monetary damages and an injunction enjoining the Vurv from further
infringement. Vurv answered the Kenexa complaint on May 29,2008. Management has reviewed this matter and believes that Vurv’s
software products do not infringe any valid and enforceable claim of these
patents. The Company has engaged in settlement discussions with
Kenexa Brassring, Inc. but as of yet no settlement agreement has been reached.
Litigation is on-going with respect to these 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 former employees and competitors. The Company
has accrued for estimated losses in the accompanying unaudited condensed
consolidated financial statements for matters where the Company believes the
likelihood of an adverse outcome is probable and the amount of the loss is
reasonably estimable. The adverse resolution of any one or more of those matters
or the matter described above, over and above the amount, if any, that has been
estimated and accrued in its unaudited condensed consolidated financial
statements could have a material adverse effect on the Company’s business,
financial condition, results of operations and/or cash flows.
In
addition to pending litigation, the Company has received the following notices
of potential claims. In February 2005, the holder of patent number 6701313B1
verbally asserted that he believes the Company’s software products infringe upon
this patent. Management reviewed this matter and believes that the Company’s
software products do not infringe any valid and enforceable claim of this
patent. Also, in September 2006, the holder of patent numbers 5537590 and
5701400 wrote the Company to inform the Company of its contention that the
Company’s product offerings may infringe these patents. To date, the Company is
not aware of any legal claim that has been filed against the Company regarding
these matters, but the Company can give no assurance that claims will not be
filed.
Income Taxes
— The Company and its subsidiaries’ income tax returns are periodically
examined by various tax authorities. In connection with such examinations, tax
authorities raise issues and propose tax adjustments and the Company reviews and
contests certain of the proposed tax adjustments. While the timing and ultimate
resolution of these matters is uncertain, the Company anticipates that certain
of these matters could be resolved during 2008.
For the
three and six months ended June 30, 2008, the Company had net income of $1.1
million and $2.7 million, respectively. During the three and six
months ended June 30, 2007, the Company had net loss of $(1.8) million and
$(0.8) million, respectively. Diluted net income per share is calculated based
on outstanding Class A common stock, stock options, ESPP shares and exchangeable
shares. Exchangeable shares are represented by Class B common stock. Each
exchangeable share can be converted to one Class A common stock; therefore,
exchangeable shares are included in the calculation of fully diluted earnings
per share during periods in which the Company had net income.
Antidilutive
securities, which consist of exchangeable shares and stock options that are not
included in the diluted net income per share calculation, aggregated on a
weighted average share basis to 3,363,000 and 3,456,000 for the three and six
months ended June 30, 2008 and 4,331,000 and 3,021,000 for the three and six
months ended June 30, 2007.
summary
of the earnings or loss applicable to each class of common shares is as
follows:
Class
B common stock is non-participating in periods of net income or net losses
and as a result have no attribution of earnings or losses for the purposes
of calculating earnings per
share.
The
Company follows the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and
Related Information,” which establishes standards for reporting
information about operating segments and requires selected information about
operating segments in interim financial reports issued to stockholders. The
Company is organized geographically and by line of business. The Company has two
operating segments: application and consulting services. The application 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:
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.
Revenue
attributed to a country or region includes sales to multinational organizations
and is based on the country of location of the legal entity that is the
contracting party for the Company. The Company’s U.S. entity is the contracting
party for all sales agreements in the United States and the Company’s Canadian
entity is the contracting party for all Taleo Enterprise Edition sales
agreements in Canada. Prior to January 1, 2005, certain of the Company’s
subsidiaries outside of North America were the contracting parties for sales
transactions within their regions. After January 1, 2005, the Company’s U.S.
entity has been the contracting party for all new sales agreements and renewals
of existing sales agreements entered into with customers outside of North
America. Revenues as a percentage of total revenues are as follows:
During
the three and six months ended June 30, 2008 and 2007, there were no customers
that individually represented greater than 10% of the Company’s total revenue or
accounts receivable.
During
the second quarter of 2008, as a result of the then pending Vurv acquisition
that closed on July 1, 2008, the Company initiated a restructuring plan (the
“Plan”) to reorganize the Company. The Plan will result in the
termination of approximately 25 persons throughout the organization and the
closure of certain U.S. and international facilities. Total estimated
cost of the plan is $2.0 million consisting of $1.0 million in severance and
$1.0 million in facility closure cost. During the quarter ended June30, 2008, the Company incurred severance expense of $0.3 million in connection
with the termination of two employees. These costs were recorded as
restructuring expenses in the Company’s financial statements. The
expected completion date of the Plan is within the next twelve
months.
Exit
Costs –San Francisco Lease
During
July 2006, the Company moved its corporate offices from San Francisco,
California to Dublin, California. As a result of this relocation, the Company
has recorded a provision for the exit from the San Francisco facility in
accordance with SFAS 146 “Accounting for Costs Associated
with Exit or Disposal
Activities.” As a part of this provision, the Company has taken into
account that on October 19, 2006 it entered into an agreement to sublease its
San Francisco facility, consisting of approximately 12,000 square feet. As of
June 30, 2008, pursuant to the lease for the Company’s San Francisco facility,
cash payments totaling $0.4 million remain to be made through July 2009 and the
associated remaining unpaid lease costs, net of sublease rental income $0.3
million, as of June 30, 2008 is approximately $0.1 million. The total estimated
cost associated with the exit from the San Francisco facility is $0.4
million.
Lease
payments
Sublease
rental income
Net
liability
Liability
for the Remaining Net Lease Payments for the San Francisco
Facility
Transition
of Time and Expense Services Processing
As a
result of the Company’s decision to discontinue the time and expense processing
services related to its Taleo Contingent solution, there were a total of
approximately 38 full time positions that may be terminated as part of this
transition, which is targeted to be completed in August 2008. As of June 30,2008, 30 positions were terminated and 4 were reassigned to other departments.
If an employee is terminated and remains employed through the transition date,
the terminated employee would be entitled to an exit package. The total
estimated liability for exit packages is expected to be $0.6 million, of which
$0.5 million has been paid through June 30, 2008. Total costs for the three and
six months June 30, 2008 was $10,000 and $0.1 million, respectively while total
expense for three and six months ended June 30, 2007 was $0.2 million and $0.3
million, respectively. These costs were recorded as an operating
expense.
16.
Employee Benefit Plans
The
Company maintains a 401(k) profit-sharing plan (the “401(k) Plan”) covering
substantially all U.S. employees. Pursuant to the 401(k) Plan, the Company may
elect to match employee contributions to the 401(k) Plan, not to exceed 6% of an
employee’s compensation. Effective January 1, 2008, the Company has instituted a
401(k) matching program with the following specifics: (i) for employee
contributions to the 401(k) Plan of up to 4% of the each employee’s base salary,
the Company will match such employee contributions at a rate of $0.50 for every
$1.00 contributed by the employee; and (ii) the Company 401(k) matching program
has a three year vesting period. The Company recorded $0.2 million and $0.3
million in employee related costs during the three and six months ended June 30,2008 as a result of the adoption of this program.
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
discontinuation of our time and expense processing services related to our Taleo
Contingent solution, the opening of additional data centers, the demand and
expansion opportunities for our products, our customer base and our competitive
position. In some cases, forward-looking statements can be identified by the
use of words such as “may,”“could,”“would,”“might,”“will,”“should,”“expect,”“forecast,”“predict,”“potential,”“continue,”“anticipates,”“expects,”“intends,”“plans,”“believes,”“seeks,”“estimates,”“is scheduled for,”“targeted,” and variations of such words and similar
expressions. Such forward-looking statements are based on current
expectations, estimates, and projections about our industry, management’s beliefs,
and assumptions made by management. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and assumptions
that are difficult to predict; therefore, actual results and outcomes may
differ materially from what is expressed or forecasted in any such
forward-looking statements. Such risks and uncertainties include those set forth herein under
“Risk Factors” or included elsewhere in this Quarterly Report on Form 10-Q,
and in our Annual Report on Form 10-K for the year ended December 31, 2007.
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
deliver on-demand talent management solutions that enable organizations to
assess, acquire, develop, and align their workforces for improved business
performance. We were incorporated under the laws of Delaware in May
1999.
We are a
leading global provider of talent management software solutions. Our goal is to
help our customers improve business results through better talent management. We
offer recruiting, performance management, internal mobility and other 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 and career plans with corporate objectives. In addition, our
solutions are highly configurable, which allows our customers to implement
talent management processes that are tailored to accommodate different employee
types, locations, business units and regulatory environments.
We
deliver our solutions on-demand as a hosted service that is accessed through an
Internet connection and a standard web browser. Our solution delivery model,
also called software-as-a-service or SaaS, eliminates the need for our customers
to install and maintain hardware and software in order to use our solutions. We
believe our SaaS model significantly reduces the time, cost and complexity
associated with deployment of traditional, on-premise software solutions, and
offers a lower upfront and total cost of ownership than traditional software
solutions. We offer our solutions as a subscription-based service for which our
customers pay a recurring annual or quarterly fee during the subscription
term.
On May 5,2008, Taleo entered into an Agreement and Plan of Reorganization (the
“Reorganization Agreement”) to purchase Vurv Technology, Inc. (“Vurv”), a
private company with headquarters in Florida. Vurv is a provider of on demand
talent management software. On July 1, 2008, Taleo completed the
acquisition of Vurv. Accordingly, the assets, liabilities and
operating results of Vurv will be
reflected in the Company’s consolidated financial statements beginning in the
third quarter of 2008. The total consideration paid by Taleo in
connection with the acquisition was approximately $34.4 million in cash and
approximately 3.8 million shares of Class A common stock, of which approximately
$33.8 million in cash and approximately 3.3 million shares of Class A common
stock were paid on the closing date. Approximately 0.5 million shares
were placed into escrow for one year following the closing to be held as
security for losses incurred by Taleo in the event of certain breaches of the
representations and warranties contained in the Reorganization Agreement or
certain other events. Additionally, approximately $0.3 million was
placed into escrow to pay for expenses incurred by the stockholder
representative in connection with its duties under the Reorganization Agreement,
and approximately $0.4 million was placed in escrow to compensate Taleo in the
event certain expenses are incurred in connection with payments to certain Vurv
employees. In addition, Taleo assumed obligations for outstanding
options to purchase shares of Vurv common stock, which converted into options to
purchase approximately 0.4 million shares of Taleo common
stock. Taleo also repaid approximately $9.0 million of Vurv debt on
the closing date.
During
the second quarter of 2008, as a result of the then pending Vurv acquisition
that closed on July 1, 2008, we initiated a restructuring plan (“Plan”) to
reorganize the Company. The reorganization plan will result in the
termination of approximately 25 persons throughout the organization and the
closure of certain U.S. and international facilities. Total estimated
cost of the plan is $2.0 million consisting of $1.0 million in severance and
$1.0 million in facility closure cost. During the quarter ended June30, 2008, we incurred severance expense of $0.3 million in connection with the
termination of two employees. These costs were recorded as
restructuring expenses in the Company’s financial statements. The
expected completion date of the Plan is within the next twelve
months.
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. For example, during 2008 we have
observed a lengthening in the completion of procurement cycles with our
customers and potential customers which we believe may be related to the general
economic outlook of our customers. While sales results in the second
quarter of 2008 were strong, as we look ahead, these same factors may result in
longer and less predicable sales cycles for our solutions. 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 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.
We derive
our revenue from two sources: application revenue and consulting
revenue.
Application
Revenue
Application
revenue is generally comprised of subscription fees from customers accessing our
applications, which includes the use of the application, application and data
hosting and maintenance of the application. The majority of our application
subscription revenue is recognized monthly over the life of the application
agreement, based on a stated, fixed-dollar amount. Revenue associated with our
Taleo Contingent solution is recognized based on a fixed contract percentage of
the dollar amount invoiced for contingent labor through use of the application.
Effective March 2007, we ceased entering into agreements to provide time and
expense processing as a component of our Taleo Contingent
solution. As a result, Taleo Contingent processing activity declined
in 2007 and has ended as of June 30, 2008.
The term
of our application agreements for Taleo Enterprise Edition signed with new
customers in the second quarter of 2008 and 2007 was typically three or more
years. The term of application agreements for Taleo Business Edition is
typically one year. Our customer renewals on a dollar basis have historically
been greater than 95%.
Application
agreements entered into during the first six months of 2008 and 2007 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 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, although we may sell consulting services under milestone or
fixed fee contracts, and in such cases, recognize consulting revenues on a lower
of the milestone or percentage-of-completion basis. From time to time, certain
of our consulting projects are subcontracted to third parties. Our customers may
also elect to use unrelated third parties for the types of consulting services
that we offer. Our typical consulting contract provides for payment within 30 to
60 days of invoice.
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 and
depreciation expense associated with computer equipment. We allocate overhead
such as rent and occupancy charges, 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 two primary data centers that host the
applications for all of our customers, though we plan to open one or more
additional data centers during the remainder of 2008.
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. To the extent that our
customer base grows, we intend to continue to invest additional resources in our
consulting services. The timing of these additional expenses could affect our
cost of revenue, both in dollar amount and as a percentage of revenue, in a
particular quarterly or annual period.
Sales
and Marketing
Sales and
marketing expenses consist primarily of salaries and related expenses for our
sales and marketing staff, including commissions, marketing programs, and
allocated overhead. 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 and
allocated overhead, and third-party consulting fees. Our expenses are net of the
tax credits we receive from the Government 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, and allocated overhead.
Employee
Benefits
Effective
January 1, 2008, we instituted a 401(k) matching program with the following
specifics: (i) for employee contributions to our 401(k) plan of up to 4% of the
each employee’s base salary, we will match such employee contributions at a rate
of $0.50 for every $1.00 contributed by the employee; and (ii) our 401(k)
matching program has a three year vesting period with one third of the employer
contribution match vesting each year over the three year period. We
recorded $0.2 million and $0.3 million in employee related costs during the
three and six months ended June 30, 2008 as a result of the adoption of this
program.
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. We believe that the accounting policies
discussed below are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving
management’s judgments and estimates. Our management has reviewed these critical
accounting policies, our use of estimates and the related disclosures with our
audit committee.
Revenue
Recognition
We derive
revenue primarily from fixed subscription fees for access to and use of our
on-demand solutions, which fees are collectively reflected as application
revenue, and secondarily from professional services, which are reflected as
consulting revenue.
In
addition to fixed subscription fees arrangements, on limited occasions, we have
entered into arrangements including a perpetual license with hosting services to
be provided over a fixed term. For hosted arrangements, revenues are recognized
under the provisions of Emerging Issues Task Force or EITF No. 00-3, Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware.
Our
application 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.
We
utilize the provisions of EITF No. 00-21, “Revenue Arrangements with
Multiple Deliverables”
to determine whether our arrangements containing multiple deliverables
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. Typically, we measure and allocate the total arrangement fee among each
of the elements based on their fair value.
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;
•
amortization
of fees paid for hosting services and software maintenance services under
certain software license arrangements;
and
•
amortization
of related consulting fees in certain multiple element subscription
arrangements where fair value does not exist for an undelivered
element.
Our
revenue associated with the time and expense processing functionality of our
Taleo Contingent solution is recognized based on a fixed, contracted percentage
of the dollar amount invoiced for contingent labor through use of the
application, and is recorded on a net basis under the provisions of EITF No.
99-19, “Reporting Revenue
Gross as a Principal versus Net as an Agent” as we are not the primary
obligor under the arrangements, the percentage earned by us is typically fixed,
and we do not take credit risk.
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 and
recognized on a time-and-materials basis, although in some instances we sell
consulting services under milestone or fixed-fee contracts and, in those cases,
we recognize consulting revenues on the lower of the milestone or a percentage
of completion basis.
In
arrangements that include both subscription and consulting services we recognize
consulting services as they are performed if the consulting services qualify as
a separate unit of accounting in the multiple element arrangement. Consulting
services qualify as a separate unit of accounting when they have stand alone
value and when fair value has been established. If the consulting services do
not qualify as a separate unit of accounting, the related consulting revenues
are combined with the subscription revenues and recognized ratably over the
subscription term.
We
account for software development costs under the provisions of Statement of
Financial Accounting Standards, or SFAS No. 86 “Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed.” Accordingly, we capitalize certain
software development costs after technological feasibility of the product has
been established. Such costs have been immaterial to date, and accordingly, no
costs were capitalized during the three and six months ended June 30, 2008 and
2007.
Stock
Based Compensation
We
adopted SFAS 123(R) “Share-Based Payment”
effective January 1, 2006. Under the provisions of SFAS 123(R), we
recognize the fair value of stock-based compensation in financial statements
over the requisite service period of the individual grants, which generally
equals a four year vesting period. We have elected the modified prospective
transition method for adopting SFAS 123(R), under which the provisions of SFAS
123(R) apply to all awards granted or modified after the date of adoption. The
unrecognized expense of awards not yet vested at the date of adoption is
recognized in our financial statements in the periods after the date of adoption
using the same value determined under the original provisions of SFAS 123, “
Accounting for Stock-Based
Compensation,” as disclosed in previous filings. We recognize
compensation expense for the stock option awards granted subsequent to December31, 2005 on a straight-line basis over the requisite service period. Estimates
are used in determining the fair value of such awards. Changes in these
estimates could result in changes to our compensation charges.
Goodwill,
Other Intangible Assets and Long-Lived Assets
In
accordance with SFAS 142, “Goodwill and Other Intangible
Assets,” we conduct a test for the impairment of goodwill on at least an
annual basis. We adopted October 1 as the date of the annual impairment
test. The impairment test compares the fair value of reporting units
to their carrying amount, including goodwill, to assess whether impairment is
present. Based on our most recent assessment test, we do not have impairment as
of October 1, 2007. We will assess the impairment of goodwill annually on
October 1, or sooner if indicators of impairment arise.
SFAS 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets,” requires the review
of the carrying value of long-lived assets when impairment indicators arise. The
review of these long-lived assets is based on factors including estimates of the
future operating cash flows of our business. These future estimates are based on
historical results, adjusted to reflect our best estimates of future market and
operating conditions, and are continuously reviewed. Actual results may vary
materially from our estimates, and accordingly may cause a full impairment of
our long-lived assets.
Income
Taxes
We are
subject to income taxes in both the United States and foreign jurisdictions and
we use estimates in determining our provision for income taxes. Deferred tax
assets, related valuation allowances and deferred tax liabilities are determined
separately by tax jurisdiction. This process involves estimating actual current
tax liabilities together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are recorded on the balance
sheet. Our deferred tax assets consist primarily of net operating loss carry
forwards and stock based compensation deductions. We assess the likelihood that
deferred tax assets will be recovered from future taxable income and a valuation
allowance is recognized if it is more likely than not that some or all of the
deferred tax assets will not be recognized. In the quarter ended March 31, 2008,
we reduced approximately $262,000 of our U.S. valuation allowance on the
deferred tax asset relating to the federal minimum tax credits, since it was
determined to be more likely than not that these assets would be realized. We
continue to maintain a full valuation allowance on our remaining U.S. deferred
tax assets. A portion of the remaining valuation allowance pertains to deferred
tax assets established in connection with prior acquisitions, and to the extent
that this portion of the valuation allowance is reversed in 2008, goodwill will
likely be adjusted. Although we believe that our tax estimates are reasonable,
the ultimate tax determination involves significant judgment that could become
subject to audit by tax authorities in the ordinary course of
business.
Compliance
with income tax regulations requires us to make decisions relating to the
transfer pricing of revenue and expenses between each of our legal entities that
are located in several countries. Our determinations include many decisions
based on our knowledge of the underlying assets of the business, the legal
ownership of these assets, and the ultimate transactions conducted with
customers and other third-parties. The calculations of our tax liabilities
involve dealing with uncertainties in the application of complex tax regulations
in multiple tax jurisdictions. We are periodically reviewed by domestic and
foreign tax authorities regarding the amount of taxes due. These reviews include
questions regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposure associated
with various filing positions, we record estimated reserves based on the
recognition and measurement criteria governed under the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 48. Based on our evaluation
of current tax positions, we believe we have appropriately accounted for these
uncertainties.
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.
The
increase in application revenue was attributable to sales of our applications,
including sales to new customers and additional sales to our current
customers. We also experienced an increase in our small business
application revenue. The increase in consulting revenue was
attributable to higher demand for services from new and existing customers. The
prices of our solutions and services were relatively consistent on a
period-to-period comparative basis.
During
the six months ended June 30, 2008, application revenue increased due to
sales to new customers and additional sales to our existing customers. We
continued to experience a high renewal rate with our existing
customers. Additionally, we continue to see growth in our small
business application revenue. The increase in consulting revenue was
attributable to higher revenue from implementation and education services as
compared to the same period last year as we continue to see increases in demand
for our consulting services.
Prior to
January 1, 2005, certain of our subsidiaries outside of North America were the
contracting parties for sales transactions within their regions. After January1, 2005, our U.S. company has been the contracting party for all new sales
agreements and renewals of existing sales agreements entered into with customers
outside of North America. As our customers renew their agreements with us over
time, the percentage of total revenue identified to our subsidiaries outside of
North America should decline. Accordingly, the geographic mix of total revenue,
based on the country of location of the Taleo contracting entity, for each of
the three and six months ended June 30, 2008 was 94%, 6% and 0% in the United
States, Canada and the rest of the world, respectively, as compared to 90%, 7%
and 3%, respectively, for the three and six months ended June 30,2007. We also track the geographic mix of our revenue on the basis of
the location of the contracting entity for our customers. The geographic mix of
total revenue, based on the country of location of the customer contracting
entity, for the three months ended June 30, 2008 was 87% from North America and
13% from the rest of the world, as compared to 91% from North America and 9%
from the rest of the world for the three months ended June 30,2007. For the six months ended June 30, 2008, the geographic mix of
total revenue, based on the country of location of the customer contracting
entity, was 88% from North America and 12% from the rest of the world, as
compared to 91% from North America and 9% from the rest of the world for the six
months ended June 30, 2007.
Cost of
application revenue increased primarily as a result of a $1.0 million increase
in hosting facilities cost, a $0.2 million increase in employee related cost
(including $0.1 million in stock based compensation expense), and a $0.1 million
net increase in other operating expenses partially offset by a $0.1 million
decrease in telecommunication expenses, a $0.1 million decrease in overhead
allocations, and a $0.1 million decrease in depreciation and
amortization. Hosting facilities cost increased primarily due to
additional third-party software fees resulting from continued enhancements to
our small business hosting infrastructure. Employee related cost increased due
to severance for time and expense processing service employees and new hires in
2008. At the end of the second quarter, five time and expense
processing service employees terminated resulting in a decrease in
headcount. Overhead allocation costs decreased primarily from a
decrease in headcount. Depreciation and amortization expense
decreased due to equipment lease returns. As a result of our recent
acquisition of Vurv, we expect the cost of application revenue in dollar terms
will increase in the near term as revenue increases and we expect cost of
application revenue to increase as a percentage of application revenue until
certain synergies are realized.
Cost of
consulting revenue increased primarily as a result of a $0.9 million increase in
employee-related costs (including $0.1 million in stock based compensation
expense), and a $0.1 million increase in overhead allocation costs, partially
offset by a $0.1 million net decrease in other operating
expenses. The increase in employee related cost and overhead
allocation costs resulted from an increase in headcount by seven persons in the
second quarter of 2008 compared to the same period in prior year. Headcount
increased to meet customer demand for our consulting services. Additionally,
professional services expenses increased as a result of subcontracting portions
of consulting services to third parties. We expect the cost of consulting
revenue to increase in dollar terms over the remainder of the year as consulting
revenue increases, and to increase as a percentage of consulting revenue, as we
integrate consultants from our recent acquisition of Vurv.
Cost of
application revenue increased primarily as a result of a $1.8 million increase
in hosting facilities cost, a $0.5 million increase in employee related cost
(including $0.1 million in stock based compensation expense) and a $0.1 million
net increase in other operating expenses, partially offset by and a $0.1 million
decrease in telecommunication expenses, and a $0.1 million depreciation and
amortization. Hosting facilities cost increased primarily due to
additional third-party software fees and amortization expenses resulting from
enhancements to our hosting infrastructure. Employee related cost increased as a
result of higher salaries for headcount added over the past 12 months and
severance cost related to time and expense process service
employees. As a result of our recent acquisition of Vurv, we expect
the cost of application revenue in dollar terms will increase in the near term
as revenue increases and we expect cost of application revenue to increase as a
percentage of application revenue.
Cost of
consulting revenue increased primarily as a result of a $2.0 million increase in
employee-related costs (including $0.2 million in stock based compensation
expense), a $0.3 million increase in travel expenses, a $0.2 million increase in
overhead allocation costs and a $0.3 million increase in professional
services. The increase in employee related cost and overhead
allocation costs resulted from an increase in headcount by seven persons in the
second quarter of 2008 compared to the same period in prior year. Headcount
increased to meet customer demand for our consulting services. Travel
expenses increased due to our annual services kick-off meeting during the first
quarter of 2008. Additionally, professional services expenses
increased as a result of subcontracting portions of consulting services to third
parties. We expect the cost of consulting revenue to increase in
dollar terms over the remainder of the year as consulting revenue increases, and
to increase as a percentage of consulting revenue, as we integrate consultants
from our recent acquisition of Vurv.
Gross
profit on application of $24.5 million represents an increase of $4.3 million or
21% over the same quarter in the prior year. Application revenue grew by 21%
over the same period. The higher gross profit on application revenue was driven
by increased efficiencies in the use of our production infrastructure and
revenue growth was faster than expense growth.
Gross
profit on consulting increased significantly when compared to the same period in
2007. Gross profit percentage on consulting was positively impacted
by the recognition of previously deferred revenue related to certain engagements
where a portion of the corresponding expense had been recorded in a prior
period.
As a
result of our recent acquisition of Vurv, we expect gross margins on revenue to
decrease until certain synergies are achieved.
Gross
profit on application of $48.4 million represents an increase of $9.6 million or
25% over the same period in the prior year. Application revenue grew by 24% over
the same period. The higher gross profit on application revenue was driven by
increased efficiencies in the use of our production infrastructure and revenue
growth was faster than expense growth.
Gross
profit on consulting increased when compared to the same period in
2007. Gross profit percentage on consulting was positively impacted
by the recognition of revenue deferred from prior periods for which expenses
were recorded in the prior period. Conversely, gross profit
percentage on consulting was negatively impacted by the deferral of revenue
related to certain milestone engagements where revenue is deferred to future
periods but expenses are reflected in the current
period. Additionally, in the first quarter of 2008 gross profit
percentage on consulting was negatively impacted by our annual services kick-off
meeting which took billable resources out of the field for one week and
increased non-billable travel expense. The net impact of these
factors was an increase in gross profit on consulting during the six months
ended June 30, 2008 compared to the same period in the prior year.
Sales and
marketing expenses for the second quarter of 2008 increased by 40% over the same
quarter in the prior year as a result of a $2.6 million increase in employee
related cost (including $0.5 million in stock based compensation expense), a
$0.3 million increase in marketing expenses, a $0.3 million increase in travel
expenses, a $0.1 million increase in professional services expenses, and a $0.1
million increase in overhead allocation costs. To support our business growth,
our headcount increased by 21 persons compared to the same quarter in the prior
year resulting in additional employee related cost and travel expenses. Employee
related cost also increased as a result of higher commissions associated with
our revenue. Our increase in marketing expenses resulted primarily
from promotional cost related to our small business application. Additionally,
our overhead allocation costs increased due in part to an increase in employee
benefits. We expect sales and marketing expense over the near term will increase
in dollar terms as we continue to grow our business; however, we expect it to
remain consistent as a percentage of revenue.
Research
and development expenses for the second quarter of 2008 increased by 34% over
the same quarter in the prior year as a result of a $1.1 million increase in
employee related cost, a $0.5 million increase in product development and
maintenance cost, a $0.1 million increase in travel expenses, a $0.1 million
increase in depreciation expense, and a $0.1 million increase in overhead
allocation costs. Product development cost continued to increase primarily due
to an increase in professional services outside the U.S. Employee
related cost increased primarily due to 32 additional persons in the second
quarter of 2008 compared to the same period in the prior year.
Depreciation
expense increased due to an increase in depreciation allocations resulting from
additional headcount. We expect our research and development expenses
will increase in terms of dollars and remain constant as a percentage of revenue
in the near term.
General
and administrative expenses for the second quarter of 2008 increased by 11% over
the same quarter in the prior year as a result of a $1.3 million increase in
employee related cost (including $0.6 million in stock based compensation
expense), a $0.2 million increase in telecommunications expenses, a $0.1 million
increase in travel expenses, a $0.1 million increase in software maintenance
expenses and a $0.1 million increase in temporary help expenses. Such
expense increases were offset by a $0.5 million decrease in legal expenses, a
$0.2 million increase in the allocation of general and administrative costs to
cost of revenue, sales and marketing and research and development expense line
items, a $0.2 million increase in foreign exchange gains, a $0.1 decrease in
equipment leases and a $0.1 million decrease in building and maintenance
expenses. Employee related costs increased primarily due to 12
additional persons in the second quarter of 2008 compared to same period in the
prior year and the expense increase related to equity granted in
2008. Legal costs decreased as a result of costs related to a
secondary offering of the company’s stock in the prior year not occurring in
second quarter of 2008. Overhead allocations increased primarily due
to increased benefit cost and the allocation of general and administrative
expenses not previously allocated. Additionally, other operating cost
reductions resulted from facility closures and our cost containment
efforts. We expect general and administrative expenses to increase in
terms of dollars and increase slightly as a percentage of revenue over the near
term due to the acquisition of Vurv.
Restructuring
expenses were incurred during the second quarter of 2008 as we initiated a
restructuring plan to reorganize the company. The reorganization plan
resulted in the termination of two employees during the quarter ended June 30,2008. Severance cost associated with these terminations totaled $0.3
million. We expect future severance and facility cost to be incurred
within the next twelve months.
Sales and
marketing expenses for the first six months of 2008 increased by 32% over the
same period in the prior year as a result of a $3.9 million increase
in employee related cost (including $0.8 million in stock based compensation
expense), a $0.5 million increase in marketing expenses, a $0.4
million increase in travel expenses, a $0.3 million increase in professional
services and other expenses, a $0.1 million increase in depreciation and
amortization and a $0.3 million increase in overhead allocation costs. To
support our business growth, our headcount increased by 21 persons compared to
the same period in the prior year resulting in additional employee related cost
and travel expenses. Employee related cost also increased as a result
of higher commissions associated with our revenue growth. Our
increase in marketing expenses resulted primarily from promotional cost related
to our small business application. Additionally, depreciation and amortization
increased due to the acquisition of JobFlash and Wetfeet and our overhead
allocation costs increased due in part to an increase in employee benefits. We
expect sales and marketing expense over the near term will increase in dollar
terms as we continue to grow our business; however we expect it to remain
consistent as a percentage of revenue.
Research
and development expenses for the first six months of 2008 increased by 32% over
the same period in the prior year as a result of a $1.8 million increase in
employee related cost (including $0.1 million in stock based compensation
expense), a $1.1 million increase in product development and maintenance cost, a
$0.2 million increase in depreciation expense, a $0.1 million increase in travel
expenses and a $0.3 million increase in overhead allocation costs. Product
development costs increased primarily due to an increase in professional
services outside the U.S. Employee related costs increased primarily
due to 32 additional persons in the first six months of 2008 compared to the
same period in the prior year and an increase in employee
benefits. Depreciation expense increased due to an increase
in depreciation allocations resulting from additional headcount. We
expect our research and development expenses will increase in terms of dollars
and remain constant as a percentage of revenue in the near term.
General
and administrative expenses for the first six months of 2008 grew by 16% over
the same period in the prior year as a result of a $2.5 million increase in
employee related cost (including $1.2 million in stock based compensation
expense), a $0.4 million increase in telecommunications expenses, a $0.3 million
increase in legal expenses, a $0.2 million increase in software maintenance, a
$0.2 million increase in travel expenses, and a $0.1 million net increase in
other operating expenses, partially offset by a $0.9 million increase
in the allocation of general and administrative costs to cost of revenue, sales
and marketing and research and development expense line items, a $0.6 million
increase in foreign exchange gains, a $0.2 million decrease in building
maintenance expenses, and a $0.1 million decrease in equipment
leases. Employee related cost increased primarily due to increased
headcount of 12 additional persons in the first six months of 2008 compared to
same period in the prior year and equity compensation granted in 2008. Legal
cost increased as a result of a settlement accrual recorded during the first
quarter of 2008. This increase in legal cost was offset by savings
resulting from secondary offering cost incurred in the second quarter of 2007
not occurring in 2008. Overhead cost allocations increased primarily due to
increased benefit cost and the allocation of general and administrative expenses
not previously allocated. Other operating cost decreased due to
facility closures and our efforts to contain cost. We expect general
and administrative expenses to increase in terms of dollars and increase
slightly as a percentage of revenue over the near term due to the acquisition of
Vurv.
Restructuring
expenses were incurred during the second quarter of 2008 as we initiated a
restructuring plan to reorganize the company. The reorganization plan
resulted in the termination of two employees during the quarter ended June 30,2008. Severance cost associated with these terminations totaled $0.3
million. We expect future severance and facility cost to be
incurred within the next twelve months.
Application
contribution margin increased quarter over quarter as a result of an application
revenue increase of 21% while cost of application revenue only increased by 19%.
Additionally, the application revenue increase adequately covered the 34%
increase in research and development expenses and increases in hosting expenses.
Further, as mentioned in our explanation of gross profit on consulting, we
attribute the increase in consulting contribution margin to timing of revenue
recognition.
Application
contribution margin increased for the first six months of 2008 compared to the
same period in the prior year as a result of an application revenue increase of
24% while cost of application revenue only increased by 21%. Additionally, the
application revenue increase adequately covered the 32% increase in research and
development expenses and increases in hosting expenses. Further, as mentioned in
our explanation of gross profit on consulting, we attribute the increase in
consulting contribution margin to timing of revenue recognition.
Interest income — The
decrease in interest income is primarily attributable to a lower average
interest rate during the second quarter of 2008 compared to the same period in
the prior year even though the average daily cash balances was higher than the
prior year. As a result of our recent cash outlay for the acquisition
of Vurv on July 1, 2008, we expect interest income to be significantly lower in
the second half of 2008.
Interest expense — The
increase in interest expense is attributable to higher debt balances related to
capitalized software contracts during the second quarter of 2008 compared to the
same quarter in the prior year.
Interest income — The
decrease in interest income is primarily attributable to a lower average
interest rate during the first six months of 2008 compared to the same period in
the prior year even though the average daily cash balances was higher than the
prior year. As a result of our recent cash outlay for the acquisition
of Vurv on July 1, 2008, we expect interest income to be significantly lower in
the second half of 2008.
Interest expense — The
increase in interest expense is attributable to higher debt balances related to
capitalized software contracts during the first six months of 2008 compared to
the same period in the prior year.
The
decrease in income tax expense for the three and six months ended
June 30, 2008 was due principally to a $2.9 million increase to our
non-cash income tax reserve associated with our ongoing Canadian income tax
audit recorded in the quarter ended June 30, 2007.
At June30, 2008, a valuation allowance remained only against our U.S. deferred tax
assets, excluding federal minimum tax credits, since it was determined to be
more likely than not these assets would not be realized. If, based on the
operating results of 2008 and a review of the realizability of our deferred tax
assets, we were to conclude that some or all of our deferred tax asset valuation
allowance was not required, this would likely have a material impact on our
financial results in the form of reduced tax expense. However, there can be no
assurances that any reduction of our valuation allowance will actually
occur.
We
provide for income taxes on interim periods based on the estimated effective tax
rate for the full year. We record cumulative adjustments to tax provisions in
the interim period in which a change in the estimated annual effective rate is
determined. The effective tax rate calculation does not include the effect of
discrete events that may occur during the year. The effect of these events, if
any, is reflected in the tax provision for the quarter in which the event occurs
and is not considered in the calculation of our annual effective tax
rate.
Liquidity
and Capital Resources
At June30, 2008, our principal source of liquidity was a net working capital balance of
$79.6 million, including cash and cash equivalents totaling $104.7
million.
Net cash
provided by operating activities was $19.3 million for the six months ended June30, 2008 compared to net cash provided by operating activities of $9.7 million
for the six months ended June 30, 2007. Consistent with prior periods, cash
provided by operating activities has historically been affected by revenues,
changes in working capital accounts, particularly increases in deferred revenue,
customer
deposits and add-backs of non-cash expense items such as depreciation and
amortization, and the expense associated with stock-based awards. Specifically,
stock-based compensation expense for the six months ended June 30, 2008 was $5.2
million versus $3.0 million during the six months ended June 30, 2007. This
increase was the result of stock options and restricted stock granted in
2008. Additionally, depreciation and amortization expense increased
by $1.9 million in the first half of 2008 compared to the same period last year
primarily due to the acquisition of software for use in our production
environment in 2007 and the first quarter of 2008. Also, our cash
collections improved significantly during the first half of 2008 compared to the
same period in the prior year as a result of increased efforts by our collection
team and an increase in billings to collect. Deferred revenue
increased due to a significant increase in deals closing during the six months
ended June 30, 2008 compared to the same period in the prior year. These
increases were partially offset by decreases resulting from the capitalization
of $2.9 million in Vurv acquisition cost incurred in the three months ended June30, 2008 and the timing of certain investment credit cash receipts. We received
a $2.7 million payment from the Canadian government related to research
development credits during the first six months of 2007 compared to no payments
in the first six months of 2008.
Net cash
used in investing activities was $3.4 million for the six months ended June 30,2008 compared to net cash used in investing activities of $4.4 million for the
six months ended June 30, 2007. This decrease between periods was primarily due
to the JobFlash acquisition for $3.1 million and the elimination of restrictions
on $2.7 million in cash in 2007 versus only $0.2 million in
2008. Similar activity did not occur in
2008. Additionally, computer and software purchases during the first
six months of 2008 decreased by $0.5 million when compared to the same period in
2007.
Net cash
provided by financing activities was $2.7 million for the six months ended June30, 2008, compared to net cash provided by financing activities of $4.8 million
for the six months ended June 30, 2007. This decrease was primarily due to a
$2.4 million decline in proceeds received from stock option and warrant
exercises during the six months ended June 30, 2008 versus the same period in
2007. The decrease in stock exercise coincides with a decline in the average
stock price during the six months ended June 30, 2008.
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. On July 1,2007, we acquired Vurv Technology Inc. Accordingly, the assets,
liabilities and operating results of Vurv will be reflected in the Company’s
consolidated financial statements beginning in the third quarter of
2008. We believe the cash provided by operating activities from the
combined entity will be sufficient to meet its 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, and the continuing market acceptance of our applications.
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 may 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.
Our
principal commitments consist of 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 is detailed in Note 11
Commitments and Contingencies of our Unaudited Condensed Consolidated Financial
Statements.
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
11 Commitments and Contingencies of our Unaudited Condensed Consolidated
Financial Statements. Litigation may result in substantial costs and may divert
management’s attention and resources, which may seriously harm our business,
financial condition, operating results and cash flows.
Income
Taxes
Our
income tax returns are periodically examined by various tax authorities. In
connection with such examinations, tax authorities raise issues and propose tax
adjustments and we review and contest certain of the proposed tax adjustments.
While the timing and ultimate resolution of these matters is uncertain, we
anticipate that certain of these matters could be resolved during
2008.
Our
revenue is generally denominated in the local currency of the contracting party.
The majority of our revenue is denominated in U.S. dollars. In the three months
ended June 30, 2008, 6% and 11% of our revenue was denominated in Canadian
dollars and currencies other than the U.S. or Canadian dollar, respectively. In
the six months ended June 30, 2008, 6% and 10% of our revenue was denominated in
Canadian dollars and currencies other than the U.S. or Canadian dollar,
respectively. Our expenses are generally denominated in the
currencies in which our operations are located. Our expenses are incurred
primarily in the United States and Canada, including the expenses associated
with our research and development operations that are maintained in Canada, with
a small portion of expenses incurred outside of North America where our other
international sales offices are located. However, as a result of our recent
acquisition of Vurv, and the expansion of our operations outside the United
States, we expect hosting expenses denominated in currencies other than the U.S
dollar to increase. We maintained minimal debt denominated in
Canadian dollars as of June 30, 2008. Our results of operations and cash flows
are therefore subject to fluctuations due to changes in foreign currency
exchange rates, particularly changes in the Canadian dollar, and to a lesser
extent, to the Australian dollar, British pound sterling, Euro, Singapore dollar
and New Zealand dollar, in which certain of our customer contracts are
denominated. For the three and six months ended June 30, 2008, the Canadian
dollar increased in value by 10% and 14%, respectively, over the U.S. dollar on
an average basis compared to the same period in the prior year. This change in
value had a minimal impact on our earnings for the first six months of 2008. If
the U.S. dollar continues to weaken compared to the Canadian dollar, our
operating results may be negatively impacted. 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 $104.7 million at June 30, 2008. This compared to
$86.1 million at December 31, 2007. 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 of
our debt 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.
Our
management evaluated, with the participation of our Chief Executive Officer and
our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 (i) is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and (ii) is accumulated and
communicated to the Company’s management, including our Chief Executive Officer
and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our
disclosure controls and procedures are designed to provide reasonable assurance
that such information is accumulated and communicated to our management. Our
disclosure controls and procedures include components of our internal control
over financial reporting. Management’s assessment of the effectiveness of our
internal control over financial reporting is expressed at the level of
reasonable assurance because a control system, no matter how well designed and
operated, can provide only reasonable, but not absolute, assurance that the
control system’s objectives will be met.
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 and that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Litigation
— Kenexa Brassring, Inc., filed suit against the us in the United States
District Court for the District of Delaware for patent infringement on August27, 2007. Kenexa asserts we have infringed patent numbers 5999939 and
6996561, and seeks monetary damages and an injunction enjoining us from further
infringement. Management has reviewed this matter and believes that its software
products do not infringe any valid and enforceable claim of these
patents. On May 9, 2008, Kenexa also filed suit in United States
District Court for the District of Delaware against Vurv Technology, Inc.,
alleging infringement of patent numbers 5999939 and 6996561, and seeking
monetary damages and an injunction enjoining Vurv from further
infringement. Vurv answered the Kenexa complaint on May 29,2008. Management has reviewed this matter and believes that Vurv’s
software products do not infringe any valid and enforceable claim of these
patents. We have engaged in settlement discussions with Kenexa
Brassring, Inc. but as of yet no settlement agreement has been reached.
Litigation is on-going with respect to these matters.
In
addition to the matters described above, we are subject to various claims and
legal proceedings that arise in the ordinary course of our business from time to
time, including claims and legal proceedings that have been asserted against us
by former employees and competitors. We have accrued for estimated losses in the
accompanying unaudited condensed consolidated financial statements for matters
where we believe the likelihood of an adverse outcome is probable and the amount
of the loss is reasonably estimable. The adverse resolution of any one or more
of those matters or the matter described above, over and above the amount, if
any, that has been estimated and accrued in its unaudited condensed consolidated
financial statements could have a material adverse effect on our business,
financial condition, results of operations and/or cash flows.
In
addition to pending litigation, we have received the following notices of
potential claims. In February 2005, the holder of patent number 6701313B1
verbally asserted that he believes our software products infringe upon this
patent. Management reviewed this matter and believes that its software products
do not infringe any valid and enforceable claim of this patent. Also, in
September 2006, the holder of patent numbers 5537590 and 5701400 wrote us to
inform us of its contention that our product offerings may infringe these
patents. To date, we are not aware of any legal claim that has been filed
against us regarding these matters, but we can give no assurance that claims
will not be filed.
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.
We have a history
of losses, and we cannot be certain that we will sustain profitability.
Prior to
the year ended December 31, 2007, we incurred annual losses since our inception.
As of June 30, 2008 we had incurred aggregate net losses of $34.9 million, which
is our accumulated deficit of $48.7 million less $13.8 million of dividends and
issuance costs on preferred stock. We cannot be certain that we will be able to
sustain profitability on a quarterly or annual basis. As we implement
initiatives to grow our business, which include, among other things,
acquisitions, international expansion and new product development, any failure
to increase revenue or manage our cost structure could prevent us from
completing these initiatives and sustaining profitability. For
example, in the near term, we expect to incur losses as a result of expenses and
charges associated with our recent acquisition of Vurv Technology,
Inc. In the future we may incur losses as a result of other expenses
associated with the continued development and expansion of our
business. As a result, our business could be harmed and our stock
price could decline.
We may not
successfully integrate Vurv’s business operations with our own. As a result, we
may not achieve the anticipated benefits of our acquisition, which could
adversely affect our operating results and cause the price of our common stock
to decline.
On July1, 2008, we completed our acquisition of Vurv Technology, Inc, our largest
acquisition to date. We have limited experience in integrating an
acquired company, and successful integration of Vurv’s business operations will
place an additional burden on our management and infrastructure. 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 have difficulty securing consent to the assignment of certain Vurv
contracts to us, or we may be required to enter into new agreements with
less advantageous terms;
•
we
may be unable to convert certain Vurv customers that previously entered
into perpetual licenses and customer on-premise hosting arrangements to
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;
•
we
may have difficultly identifying and correcting deficiencies in Vurv’s
internal controls over financial
reporting;
•
we
terminated a significant number of Vurv employees in connection with the
acquisition, and may have difficulty retaining key Vurv employees over
time;
•
we
will incur additional expense to maintain and support the Vurv product
lines for up to three years while customers are migrated to the Taleo
platform;
•
we
may find it difficult to integrate Vurv’s hosting infrastructure and
operations with our own hosting
operations;
•
we
have redundant offices in certain locations, and we may find it difficult
to consolidate these office
locations;
•
Jacksonville,
Florida may be more expensive or less productive than we anticipate as a
software development and support location;
and
•
we
may not have sufficient cash balances to fund other investments that
become available to us over time as a result of our decreased cash balance
due to the cash consideration paid in connection with the acquisition, or
we may be required to seek additional sources of funding in order to make
new investments.
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.
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 Edition customers enter into software subscription
agreements with a duration of three years or more from the initial contract
date. Most of our Taleo Business Edition customers enter into annual software
subscription agreements. Our customers have no obligation to renew their
subscriptions for our solutions after the expiration of the initial term of
their agreements. In addition, our customers may negotiate terms less
advantageous to us upon renewal, which may reduce our revenue from these
customers, or may request that we license our software to them on a perpetual
basis, which may, after we have ratably recognized the revenue for the perpetual
license over the relevant term in accordance with our revenue recognition
policies, reduce recurring revenue from these customers. Under certain
circumstances, our customers may cancel their subscriptions for our solutions
prior to the expiration of the term. Our future success also depends, in part,
on our ability to sell new products and services to our existing customers. If
our customers terminate their agreements, fail to renew their agreements, renew
their agreements upon less favorable terms, or fail to buy new products and
services from us, our revenue may decline or our future revenue may be
constrained.
In
addition, Vurv has historically offered perpetual licenses and customer
on-premise hosting for certain of its products, while we have historically
maintained a single version of each release of our software applications that is
configurable to meet the needs of our customers without customer-specific code
customizations. If we are unable to convert such Vurv customers to
our Taleo hosted, subscription model, our future revenues may be adversely
impacted.
Because we
recognize revenue from software subscriptions over the term of the agreement, 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 Edition 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 also affect our financial performance in
that particular quarter. For example, because we recognize revenue ratably, the
non-renewal of a software subscription agreement late in a quarter will have
very little impact on revenue for that quarter, but will reduce our revenue in
future quarters. Accordingly, the effect of significant declines in sales and
market acceptance of our solutions may not be reflected in our short-term
results of operations, which would make these reported results 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.
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.
Additionally,
some new customers may request that we license our software to them on a
perpetual basis, which may, after we have ratably recognized the revenue for the
perpetual license over the relevant term in accordance with our revenue
recognition policies, reduce recurring revenue from these customers. To date, we
have completed a limited number of agreements with such terms.
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. Most of our revenue is currently
derived from large organizations whose businesses may fluctuate with global
economic and business conditions. Historically, economic downturns have resulted
in overall reductions in corporate information technology spending by large
organizations. Accordingly, the current 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,
especially financial services and technology, 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 effect our business and
likely cause a decline in our revenue.
If we do not
compete effectively with companies offering talent management solutions, our
revenue may not grow and could decline.
We have
experienced, and expect to continue to experience, intense competition from a
number of companies. Our Taleo Enterprise Edition solution competes with vendors
of enterprise resource planning software such as Oracle Corporation and SAP AG,
and also with vendors such as ADP, Authoria, Cezane, Cornerstone OnDemand,
Halogen Software, HRSmart, Jobpartners, Kenexa, Kronos, NeoGov, Peopleclick,
Pilat, Plateau, Salary.com, Stepstone, SuccessFactors, Technomedia, TEDS,
Workday, and Workstream, that offer products and services that compete with one
or more modules in our Taleo Enterprise Edition suite of solutions. Our Taleo
Business Edition solution competes primarily with Bullhorn, Hiredesk, iCIMs,
Monster.com, Silkroad, Virtual Edge from ADP, and certain of the vendors listed
in the previous sentence. 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 may incorporate
capabilities which are not available in our current suite of solutions, such as
automated payroll and benefits, or services that we do not currently offer, such
as recruitment process outsourcing services. Products with such additional
functionalities may be appealing to some customers because they can reduce the
number of different types of software or applications used to run their business
and such additional services may be viewed by some customers as enhancing the
effectiveness of a competitor’s solutions. In addition, our competitors’
products may be more effective than our products at performing particular talent
management functions or may be more customized for particular customer needs in
a given market. Further, our competitors may be able to respond more quickly
than we can to changes in customer requirements.
Our
customers often require our products to be integrated with software provided by
our existing or potential competitors. These competitors could alter their
products in ways that inhibit integration with our products, or they could deny
or delay access by us to advance software releases, which would restrict our
ability to adapt our products to facilitate integration with these new releases
and could result in lost sales opportunities. In addition, many organizations
have developed or may develop internal solutions to address talent management
requirements that may be competitive with our solutions.
The mergers of or
potential mergers of our competitors or other similar strategic
alliances could weaken our competitive position or reduce our revenue.
The
market in which we operate appears to be in the midst of a period of vendor
consolidation. If one or more of our competitors were to merge or partner with
another of our competitors, the change in the competitive landscape could
adversely affect our ability to compete effectively. For example, Kronos
acquired Unicru in 2006 and recently acquired Deploy Solutions. Kronos itself
was acquired in 2007 by the private equity firm Hellman & Friedman.
Additionally, Kenexa acquired Brassring in 2006 and ADP acquired VirtualEdge in
2006. Unicru, Brassring, VirtualEdge and Deploy Solutions have been direct
competitors of ours in the past and it is unclear what impact these acquisitions
will have on our market and our long term ability to compete against the
combined companies.
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.
In connection
with the December 31, 2005 year-end audit we identified deficiencies in
our internal control over financial reporting that led us to restate our
unaudited condensed consolidated financial statements and we cannot be certain
restatements will not occur again.
In
connection with the December 31, 2005 year-end audit of our financial
statements, management and our independent registered public accounting firm
identified deficiencies in our internal control over financial reporting. These
were matters that in our judgment could have adversely affected our ability to
record, process, summarize and report financial data consistent with the
assertions of management in our financial statements and were deemed to be
material weaknesses. In particular, we discovered errors in respect to
depreciation of fixed assets, and accrual of dividends on preferred stock which
required adjustment. As a result, we restated our consolidated financial
statements. We also identified a failure to appropriately apply GAAP to certain
aspects of our financial reporting resulting from the lack of a properly
designed financial reporting processes and a lack of sufficient technical
accounting expertise. Certain of such deficiencies were also deemed to be
material weaknesses. We have remediated all known material weaknesses that were
identified as part of the December 31, 2005 year end audit; however, we cannot
be certain that the measures we have taken will ensure that those or similar
deficiencies and a resulting restatement will not occur in the future. Execution
of restatements like the one described above could create a significant strain
on our internal resources, cause delays in our filing of quarterly financial
results, increase our costs and cause management distraction.
Failure to
implement and maintain the appropriate internal controls over financial
reporting could negatively affect our ability to provide accurate and
timely
financial information.
During
2006 we completed a review and redesign of our internal controls over financial
reporting related to our closing procedures and processes, our calculations of
our reported numbers, including depreciation expense and fixed assets, and the
need to strengthen our technical accounting expertise. Despite these efforts, we
identified a material weakness in connection with the evaluation of the
effectiveness of our internal controls as of March 31, 2007 prior to the filing
of our financial results for the period ended March 31, 2007, related to the
identification of a material adjustment required, which affected cash, accounts
receivable and cash flow from operations. As part of our ongoing processes we
will continue to focus on improvements in our controls over financial reporting
and will continue to do so in 2008. We have discussed deficiencies in our
financial reporting and 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. In
addition, deficiencies may exist in their internal controls of the acquired
operations of Vurv which may be difficult to identify and
correct.
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 Edition 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
discretionary nature of our customers’ purchase and budget
cycles;
•
the
competitive evaluation of our
solutions;
•
fluctuations
in the staffing management requirements of our prospective
customers;
•
announcements
or planned introductions of new products by us or our competitors;
and
•
the
lengthy purchasing approval processes of our prospective
customers.
If our
sales cycles unexpectedly lengthen, our ability to forecast accurately the
timing of sales in any given period will be adversely affected and we may not
meet our forecasts for that period.
If we fail to
develop or acquire new products or enhance our existing products to meet the needs
of our existing and future customers, our sales will
decline.
To keep
pace with technological developments, satisfy increasingly sophisticated
customer requirements, and achieve market acceptance, we must enhance and
improve existing products and continue to introduce new products and services.
For instance, in February 2008 our performance management software product
became generally available in the market. 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. 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 may divert management
resources from existing operations and require us to commit significant
financial resources to an unproven business, which may harm our existing
business.
We expect
to incur additional expense to develop software products and to integrate
acquired software products into existing platforms to maintain our competitive
position. For example, our acquisition of Vurv will require significant effort
to maintain existing Vurv products in addition to ours and to integrate the
products of both companies over time.
In
addition, we have invested in software development locations other than the
locations where we traditionally developed our software. For example,
we have invested in development locations in Eastern Europe, Ukraine and Asia,
and we may invest in other locations outside of North America in the future. In
addition, we plan to continue to invest in Jacksonville, Florida, the former
headquarters site of Vurv, as a software development location. We may
engage independent contractors for all or portions of this work. These efforts
may not result in commercially viable solutions, may be more expensive or less
productive than we anticipate, or may be 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 out
ability to maintain a single version of our software releases or cause our
customers to choose a competing solution. Vurv has historically allowed customer
specific customizations of its software and we may find it difficult to support
or migrate such customizations.
Acquisitions and
investments present many risks, and we may not realize the anticipated
financial and strategic goals for any such transactions, which would harm our
business, operating results and overall financial condition. In addition, we have
limited experience in acquiring and integrating other companies.
We have
made, and may continue to make, acquisitions or investments in companies,
products, services, and technologies to expand our product offerings, customer
base and business. For example, we recently completed our acquisition of Vurv,
which is our largest acquisition to date. We have limited experience in
executing acquisitions and investments. Acquisitions and investments involve a
number of risks, including the following:
•
being
unable to achieve the anticipated benefits from our
acquisitions;
•
discovering
that we may have difficulty integrating the accounting systems,
operations, and personnel of the acquired business, and may have
difficulty retaining the key personnel of the acquired
business;
•
our
ongoing business and management’s attention may be disrupted or diverted
by transition or integration issues and the complexity of managing
geographically and culturally diverse
locations;
•
difficulty
incorporating the acquired technologies or products into our existing code
base;
•
problems
arising from differences in the revenue, licensing or support model of the
acquired business;
•
customer
confusion regarding the positioning of acquired technologies or
products;
•
difficulty
maintaining uniform standards, controls, procedures and policies across
locations;
•
difficulty
retaining the acquired business’ customers;
and
•
problems
or liabilities associated with product quality, 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. For example, in connection with our acquisition of Vurv, we paid
approximately $34.4 million in cash, approximately 3.8 million shares of Class A
common stock, and repaid approximately $9.0 million of Vurv’s debt. We also
assumed obligations for options to purchase shares of Vurv common stock, which
were converted into options to purchase approximately 0.4 million of our Class A
common stock. Accordingly, the assets, liabilities and operating
results of Vurv will be reflected in the Company’s consolidated financial
statements beginning in the third quarter of 2008. In addition,
acquisitions may result in the incurrence of debt, material one-time write-offs,
or purchase accounting adjustments and restructuring charges. They may also
result in recording goodwill and other intangible assets in our financial
statements which may be subject to future impairment charges or ongoing
amortization costs, thereby reducing future earnings. In addition, from time to
time, we may enter into negotiations for acquisitions or investments that are
not ultimately consummated. Such negotiations could result in significant
diversion of management time, as well as incurring expenses that may impact
operating results.
We
have discontinued the time and expense processing services of our
Taleo Contingent
solution. We may have difficulty replacing the revenue from these
customers.
Effective
March 2007, we ceased entering into agreements to provide time and expense
processing services for temporary workers. Fees for time and expense processing
through our Taleo Contingent product declined throughout 2007; however, on an
annualized basis such fees were still significant in 2007. Revenue from time and
expense processing effectively ended on June 30, 2008.
We may
find it difficult to replace the revenue we once received from the processing of
temporary worker time and expense transactions and our results may be negatively
impacted.
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 staffing solutions as a
component of their outsourced human resource services and we intended to partner
with more 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.
If our security
measures are breached and unauthorized access is obtained to customer data,
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 security breaches could expose us to loss of this information,
litigation and possible liability. While we have security measures in place, if
our 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, 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 may be unable to anticipate these techniques or to
implement adequate preventative measures. Unless our customers elect to purchase
encryption, we do not encrypt data we store for our customers while such data is
at rest in the database. Applicable law may require that a security breach
involving certain types of unencrypted data be publicly disclosed. If an actual
or perceived breach of our security occurs, the market perception of our
security measures could be harmed and we could lose sales and
customers. Our insurance policies may not adequately compensate us
for any losses that may occur due to failures in our security
measures.
Defects or errors
in our products could affect our reputation, result in significant costs
to us and impair our ability to sell our products, which would harm our
business.
Our
products may contain defects or errors, which could materially and adversely
affect our reputation, result in significant costs to us and impair our ability
to sell our products in the future. The costs incurred in correcting any product
defects or errors may be substantial
and could adversely affect our operating results. While we test our products for
defects or errors prior to product release, defects or errors have been
identified from time to time by our customers and may continue to be identified
in the future.
Any
defects that cause interruptions in the availability or functionality of our
solutions could result in:
•
lost
or delayed market acceptance and sales of our
products;
•
loss
of customers;
•
product
liability suits against us;
•
diversion
of development and support
resources;
•
injury
to our reputation; and
•
Increased
maintenance and warranty costs.
While our
software subscription agreements typically contain limitations and disclaimers
that should limit our liability for damages related to defects in our software,
such limitations and disclaimers may not be upheld by a court or other tribunal
or otherwise protect us from such claims.
We participate in
a relatively new and evolving market for talent management software and
services, which increases the difficulty of evaluating the effectiveness of
our current business strategy and future prospects.
Our
current business model and prospects for increases in revenue should be
considered in light of the risks and difficulties we encounter in the evolving
talent management market. Because this market is relatively new in comparison to
other enterprise software markets, we cannot predict with assurance the future
growth rate and size of this market, which, in comparison with the market for
all enterprise software applications, is relatively small. The rapidly evolving
nature of the markets in which we sell our products and services, as well as
other factors that are beyond our control, reduce our ability to accurately
evaluate our future prospects and to forecast with a high degree of certainty
our projected quarterly or annual performance.
If acceptance of
the vendor hosted, or on-demand, delivery model does not continue to
develop, or develops more slowly than we expect, our business may be
harmed.
The
market for on-demand, vendor hosted enterprise software, also called
software-as-a-service or SaaS, is still relatively new in comparison to the
market for client-server based software. Our customers access and use our
software as a web-based solution that is hosted by us. If the preferences of our
customers change and our customers require that they host our software
themselves, either upon the initiation of a new agreement or upon the renewal of
an existing agreement, we would experience a decrease in revenue from hosting
fees, and potentially higher costs and greater complexity in providing
maintenance and support for our software. Additionally, a very limited number of
our customers have the contractual right to elect to host our software
themselves prior to the expiration of their subscription agreements with us. If
the number of customers purchasing hosting services from us decreases, we might
not be able to decrease our expenses related to hosting infrastructure in the
short term. Potential customers may be reluctant or unwilling to allow a vendor
to host software or internal data on their behalf for a number of reasons,
including security and data privacy concerns. If such organizations do not
recognize the benefits of the on-demand delivery model, then the market for our
solutions may not develop further, or may develop more slowly than we
expect.
If we fail to
manage our hosting infrastructure capacity satisfactorily, our existing
customers may experience service outages and our new customers may experience delays
in the deployment of our solution.
We have
experienced significant growth in the number of users, transactions, and data
that our hosting infrastructure supports. Failure to address the increasing
demands on our hosting infrastructure satisfactorily may result in service
outages, delays or disruptions. For example, we have experienced downtimes
within our hosting infrastructure, some of which have been significant, which
have prevented customers from using our solutions from time to time. We seek to
maintain sufficient excess capacity in our hosting infrastructure to meet the
needs of all of our customers. We also maintain excess capacity to facilitate
the rapid provisioning of new customer
deployments and expansion of existing customer deployments. The development of
new hosting infrastructure to keep pace with expanding storage and processing
requirements could be a significant cost to us that we are not able to predict
accurately and for which we are not able to budget significantly in advance.
Such outlays could raise our cost of goods sold and be detrimental to our
financial results. At the same time, the development of new hosting
infrastructure requires significant lead time. If we do not accurately predict
our infrastructure capacity requirements, our existing customers may experience
service outages that may subject us to financial penalties, financial
liabilities and the loss of customers. If our hosting infrastructure capacity
fails to keep pace with sales, customers may experience delays as we seek to
obtain additional capacity, which could harm our reputation and adversely affect
our revenue growth. Integrating the hosting infrastructure of Vurv and other
acquired entities may increase these challenges.
In
addition, we are in the process of bringing to market a performance management
product for which we may not be able to accurately predict the number of users,
transactions and infrastructure demands. Such a failure could result in system
outages for our customers and higher than expected costs to support and maintain
our performance management solution, which could negatively affect our
reputation and our financial results.
Any significant
disruption in our computing and communications infrastructure could harm our
reputation, result in a loss of customers and adversely affect our
business.
Our
computing and communications infrastructure is a critical part of our business
operations. Our customers access our solutions through a standard web browser.
Our customers depend on us for fast and reliable access to our applications.
Much of our software is proprietary, and we rely on the expertise of members of
our engineering and software development teams for the continued performance of
our applications. We have experienced, and may in the future experience, serious
disruptions in our computing and communications infrastructure. Factors that may
cause such disruptions include:
•
human
error;
•
physical
or electronic security breaches;
•
telecommunications
outages from third-party providers;
•
computer
viruses;
•
acts
of terrorism or sabotage;
•
fire,
earthquake, flood and other natural disasters;
and
•
power
loss.
Although
we back up data stored on our systems at least weekly, our infrastructure does
not currently include real-time, or near real-time, mirroring of data storage
and production capacity in more than one geographically distinct location. Thus,
in the event of a physical disaster, or certain other failures of our computing
infrastructure, customer data from recent transactions may be permanently
lost.
For the
Taleo Enterpise Edition product, we have computing and communications hardware
operations located at third-party facilities in the United States with Internap
on the east coast and with Equinix on the west coast, and we recently entered
into a co-location agreement with Equinix for an additional hosting facility in
the Netherlands. In addition, we have an agreement with Opsource, Inc. for the
hosting of our Taleo Business Edition service. With respect to the
legacy Vurv applications we maintain computing and communications hardware
operations located at third-party facilities in the United States with Peak10 in
Florida, Data Return in Texas and Coloserve in
California. Additionally, third-party hosting facilities for
legacy Vurv applications outside of the United States include Adapt in the
United Kingdom and Conexim in Austrailia. We do not control the
operation of these facilities and must rely on these vendors to provide the
physical security, facilities management and communications infrastructure
services to ensure the reliable and consistent delivery of our solutions to our
customers. In the case of Opsource and Vurv locations that are managed service
locations, we also rely upon the third party vendor for hardware associated with
our hosting infrastructure. Although we believe we would be able to enter into a
similar relationship with another third party should one of these relationships
fail or terminate for any reason, we believe our reliance on any third-party
vendor exposes us to risks outside of our control. If these third-party vendors
encounter financial difficulty
such as bankruptcy or other event beyond our control that cause them to fail to
secure adequately and maintain their hosting facilities or provide the required
data communications capacity, our customers may experience interruptions in our
service or the loss or theft of important customer data. In the future, we may
elect to open computing and communications hardware operations at additional
third-party facilities located in the United States, Europe or other regions. We
are not experienced at operating such facilities in jurisdictions outside the
United States and doing so may pose additional risk to us.
We have
experienced system failures in the past. If our customers experience service
interruptions or the loss or theft of their data caused by us, we may be
required to issue credits pursuant to the terms of our contracts and may also be
subject to financial liability or customer losses. Such credits could reduce our
revenues below the levels that we have indicated we expect to achieve and
adversely affect our margins and operating results.
Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems.
We must hire and
retain key employees and recruit qualified personnel or our future success
and business could be harmed
Our
success depends on the continued employment of our senior management and other
key employees, such as our chief executive officer and our chief financial
officer. If we lose the services of one or more of our senior management or key
employees, or if one or more of them decides to join a competitor or otherwise
to compete with us, our business could be harmed. We do not maintain key person
life insurance on any of our executive officers. Additionally, our continued
success depends, in part, on our ability to attract and retain qualified
technical, sales and other personnel. It may be particularly challenging to
retain employees as we integrate new acquisitions, like our recent acquisition
of Vurv, due to uncertainty among employees regarding their career options and
cultural differences between us and Vurv.
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, 2008, revenue generated outside of North America
was 13% of total revenue, based on the location of the legal entity of the
customer with which we contracted, and revenue generated in Canada was 6% of
total revenue. We currently have international offices outside of North America
in Australia, France, the Netherlands, Singapore and the United Kingdom, which
focus primarily on selling and implementing our solutions in those regions.
However, we currently maintain data centers only in the United States. In 2008,
we plan to continue our research and development operations in Quebec, Canada
and expand our international operations, including opening product development
locations and data centers outside of North America. We may also expand our
international sales and services locations. These initiatives will involve a
variety of risks, including:
•
unexpected
changes in regulatory requirements, taxes, trade laws, tariffs, export
quotas, custom duties or other trade
restrictions;
•
differing
regulations in Quebec with regard to maintaining operations, products and
public information in both French and
English;
•
differing
labor regulations, especially in the European Union and Quebec, where
labor laws are generally more advantageous to employees as compared to the
United States, including deemed hourly wage and overtime regulations in
these locations;
•
more
stringent regulations relating to data privacy and the unauthorized use
of, or access to, commercial and personal information, particularly in
Europe and Canada;
•
reluctance
to allow personally identifiable data related to non-U.S. citizens to be
stored in databases within the United States, due to concerns over the
United States government’s right to access personally identifiable data of
non-U.S. citizens stored in databases within the United States or other
concerns;
•
greater
difficulty in supporting and localizing our
products;
•
greater
difficulty in localizing our marketing materials and legal agreements,
including translations of these materials into local
language;
•
changes
in a specific country’s or region’s political or economic
conditions;
•
challenges
inherent in efficiently managing an increased number of employees or
independent contractors over large geographic distances, including the
need to implement appropriate systems, policies, benefits and compliance
programs;
•
limited
or unfavorable intellectual property protection;
and
•
restrictions
on repatriation of earnings.
If we
invest substantial time and resources to expand our international operations and
are unable to do so successfully and in a timely manner, our business and
operating results will suffer.
Fluctuations in
the exchange rate of foreign currencies could result in currency
transaction losses, which could harm our operating results and financial
condition
We
currently have foreign sales denominated in foreign currencies, including the
Australian dollar, British pound sterling, Canadian dollar, the euro, New
Zealand dollar, Singapore dollar and Swiss franc and may in the future have
sales denominated in the currencies of additional countries in which we
establish or have established sales offices. In addition, we incur a substantial
portion of our operating expenses in Canadian dollars and, to a much lesser
extent, other foreign currencies. Any fluctuation in the exchange rate of these
foreign currencies may negatively affect our business, financial condition and
operating results. For instance, in 2007, the impact of changes in foreign
currency exchange rates compared to the average rates in effect during 2006 was
a $1.2 million decrease in earnings. In 2008, we expect that the volatility in
exchange rates for foreign currencies may continue and we could incur additional
losses from the impact of such fluctuations. 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 or pending
patents and 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
may be necessary in the future to enforce our intellectual property rights and
to protect our trade secrets. Litigation, whether successful or unsuccessful,
could result in substantial costs and diversion of management resources, either
of which could seriously harm our business.
Current and
future litigation against us could be costly and time consuming to defend.
We are
sometimes subject to legal proceedings and claims that arise in the ordinary
course of business. Litigation may result in substantial costs 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 11 —
Commitments and Contingencies in our notes to unaudited 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 and
other infringement claims have been threatened against us. We can give no
assurance that such claims will not be filed in the future. Our competitors or
other third parties may also challenge the validity or scope of our intellectual
property rights. A claim may also be made relating to technology that we acquire
or license from third parties. If we were subject to a claim of infringement,
regardless of the merit of the claim or our defenses, the claim
could:
•
require
costly litigation to resolve and the payment of substantial
damages;
•
require
significant management time;
•
cause
us to enter into unfavorable royalty or license
agreements;
•
require
us to discontinue the sale of our
products;
•
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.
In
addition, 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. We use open source software in our products and may use
more open source software in the future. 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.
Our
insurance policies will not compensate us for any losses or liabilities
resulting from patent infringement claims.
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.
We
include in the distribution of our solutions certain technology obtained under
licenses from other companies, such as Oracle for database software, and
Business Objects for reporting 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. For
example, in connection with our recent acquisition of Vurv, we announced plans
to reduce the headcount of the combined entities by approximately
160. A majority of such headcount reductions take place on of July 1,2008, but reductions will continue throughout 2008 and 2009. We may
experience additional facilities consolidations and headcount reductions in the
future. As a result, we have incurred, and may incur, charges for
employee severance. As many employees are located in jurisdictions outside of
the United States, we are required to pay the severance amounts legally required
in such jurisdictions, which may exceed those of the United States. Further, we
believe reductions in our workforce and facility consolidation create anxiety
and uncertainty, and may adversely affect employee morale. These measures could
adversely affect our employees that we wish to retain and may also adversely
affect our ability to hire new personnel. They may also negatively affect
customers.
Failure to manage
our customer deployments effectively could increase our expenses and
cause customer dissatisfaction.
Enterprise
deployments of our products require a substantial understanding of our
customers’ businesses, and the resulting configuration of our solutions to their
business processes and integration with their existing systems. We may encounter
difficulties in managing the timeliness of these deployments and the allocation
of personnel and resources by us or our customers. In certain situations, we
also work with third-party service providers in the implementation or software
integration-related services of our solutions, and we may experience
difficulties in managing such third parties. Failure to manage customer
implementation or software integration-related services successfully by us or
our third-party service providers could harm our reputation and cause us to lose
existing customers, face potential customer disputes or limit the rate at which
new customers purchase our solutions.
Our reported
financial results may be adversely affected by changes in generally
accepted accounting principles or changes in our operating history that impact the
application of generally accepted accounting principles.
Accounting
principles generally accepted in the United States, or GAAP, are subject to
interpretation by the Financial Accounting Standards Board, or FASB, the
American Institute of Certified Public Accountants, or AICPA, the SEC and
various other organizations formed to promulgate and interpret accounting
principles. A change in these principles or interpretations could have a
significant effect on our projected financial results.
Pursuant
to the application of GAAP we recognize the majority of our application revenue
monthly over the life of the application agreement. In certain instances, the
straight-line revenue recognized on a monthly basis may exceed the amounts
invoiced for the same period. If our history of collecting all fees reflected in
our application agreements negatively changes, the application of GAAP may
mandate that we not recognize revenue in excess of the fees invoiced over the
corresponding period for new agreements. The application of GAAP also requires
that we accomplish delivery of our solutions to our customers in order to
recognize revenue associated with such solutions. In the context of our model,
delivery generally requires the creation of an instance of the solution that may
be accessed by the customer via the Internet. We may experience difficulty in
making new products available to our customers in this manner. In the event we
are not able to make our solutions available to our customer via the Internet in
a timely manner, due to resource constraints, implementation difficulties or
other reasons, our ability to recognize revenue from the sales of our solutions
may be delayed and our financial results may be negatively
impacted.
If tax benefits
currently available under the tax laws of Canada and the province of
Quebec are reduced or repealed, or if we have taken an incorrect position with
respect to tax matters under discussion with the Canadian Revenue Agency or other
taxing authorities, our business could suffer.
The
majority of our research and development activities are conducted through our
Canadian subsidiary, Taleo (Canada) Inc. We participate in a government program
in Quebec that provides investment credits based upon qualifying research and
development expenditures. These expenditures primarily consist of the salaries
for the persons conducting research and development activities. We have
participated in the program since 1999, and expect that we will continue to
receive these investment tax credits through December 2010. In 2007, we recorded
a CAD $2.6 million reduction in our research and development expenses as a
result of this program. We anticipate the continued reduction of our research
and development expenses through application of these credits through 2010. If
these investment tax benefits are reduced or eliminated, our financial condition
and operating results may be adversely affected.
In
addition to the research and development investment credit program described
above, our Canadian subsidiary has applied to participate 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, including capital equipment
purchases. In June 2007, we filed our initial SRED credit claims with respect to
our 2005 and 2006 tax years and recorded combined credits of CAD $2.1 million
and CAD $1.1 million in 2007. Our Canadian subsidiary is eligible to remain in
the SRED program for future tax years as long as its development projects
continue to qualify. These federal SRED tax credits can only be applied to
offset federal taxes payable and are reported as a credit to tax provision to
the extent they reduce taxes payable to zero with any residual benefits recorded
as a net deferred tax asset. We believe that our Canadian subsidiary is in
compliance with these government programs and that all amounts recorded will be
fully realized. If these investment credits are reduced or disallowed by the
Canada Revenue Agency (“CRA”), our financial condition and operating results may
be adversely affected.
Our
Canadian subsidiary is under examination by the Canada Revenue Agency (“CRA”)
with respect to tax years 2000 and 2001. We have settled certain issues raised
in the audit and are appealing the CRA’s treatment of Quebec investment tax
credits. Final resolution of the CRA’s examination will have bearing on the tax
treatment applied in subsequent periods not currently under examination. We have
recorded income tax reserves believed to be sufficient to cover the estimated
tax assessments for the open tax periods.
There
could be a significant impact to our uncertain tax position over the next twelve
months depending on the outcome of the on-going CRA audit. In the event the CRA
audit results in adjustments that exceed both our income tax reserves and
available deferred tax assets, our Canadian subsidiary may become a tax paying
entity in 2008 or in a prior year including potential penalties and interest.
Any such penalties cannot be reasonably estimated at this time.
We are
seeking United States tax treaty relief through the appropriate Competent
Authority tribunals for the settlements entered into with CRA and will seek
treaty relief for all subsequent final settlements. 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 internationally, we may become subject to review by various
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 income tax liability in excess of our current reserves.
Evolving
regulation of the Internet may increase our expenditures related to compliance
efforts, which may adversely affect our financial condition.
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. 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.
If we fail to
develop our brand cost-effectively, our customers may not recognize our
brand and we may incur significant expenses, which would harm our business and
financial condition.
We
believe that developing and maintaining awareness of our brand in a
cost-effective manner is critical to achieving widespread acceptance of our
existing and future solutions and is an important element in attracting new
customers. Furthermore, we believe that the importance of brand recognition will
increase as competition in our market intensifies. Successful promotion of our
brand will depend largely upon the effectiveness of our marketing efforts and on
our ability to provide reliable and useful solutions at competitive prices. In
the past, our efforts to build our brand have involved significant expense, and
we expect to increase that expense in connection with our branding and marketing
processes. Brand promotion activities may not yield increased revenue, and even
if they do, any increased revenue
may not offset the expenses we incur in building our brand. If we fail to
promote successfully and maintain our brand, we may fail to attract enough new
customers or retain our existing customers to the extent necessary to realize a
sufficient return on our brand-building efforts, and our business could
suffer.
Our stock price
is likely to be volatile and could decline.
The stock
market in general and the market for technology-related stocks in particular has
been highly volatile. As a result, the market price of our Class A common stock
is likely to be similarly volatile, and investors in our Class A common stock
may experience a decrease in the value of their stock, including decreases
unrelated to our operating performance or prospects. The price of our Class A
common stock could be subject to wide fluctuations in response to a number of
factors, including those listed in this “Risk Factors” section and others such
as:
•
Our
operating performance and the performance of other similar
companies;
•
The
overall performance of the equity
markets;
•
developments
with respect to intellectual property
rights;
•
publication
of unfavorable research reports about us or our industry or withdrawal of
research;
•
coverage
by securities analysts or lack of coverage by securities
analysts;
•
speculation
in the press or investment
community;
•
general
economic conditions and data and the impact of such conditions and data on
the equity markets;
•
terrorist
acts; and
•
announcements
by us or our competitors of significant contracts, new technologies,
acquisitions, commercial relationships, joint ventures, or capital
commitments.
We may need to
raise additional capital, which may not be available, thereby adversely
affecting our ability to operate our business.
If we
need to raise additional funds due to unforeseen circumstances, we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all, and any additional financings could result in additional dilution to
our existing 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.
Provisions in our
charter documents and Delaware law may delay or prevent a third party from
acquiring us.
Our
certificate of incorporation and bylaws contain provisions that could increase
the difficulty for a third party to acquire us without the consent of our board
of directors. For example, if a potential acquirer were to make a hostile bid
for us, the acquirer would not be able to call a special meeting of stockholders
to remove our board of directors or act by written consent without a meeting. In
addition, our board of directors has staggered terms, which means that replacing
a majority of our directors would require at least two annual meetings. The
acquirer would also be required to provide advance notice of its proposal to
replace directors at any annual meeting, and will not be able to cumulate votes
at a meeting, which will require the acquirer to hold more shares to gain
representation on the board of directors than if cumulative voting were
permitted.
Our board
of directors also has the ability to issue preferred stock that could
significantly dilute the ownership of a hostile acquirer. In addition, Section
203 of the Delaware General Corporation Law limits business combination
transactions with 15% or greater stockholders that have not been approved by the
board of directors. These provisions and other similar provisions make it more
difficult for a third party to acquire us without negotiation. These provisions
may apply even if the offer may be considered beneficial by some
stockholders.
(1) In connection with
our restricted stock and performance share agreements approved by the
Board of Directors on May31, 2006, we repurchase common stock from
employees as consideration for the payment of required withholding
taxes.
(2) Represents the
weighted average price per share purchased during the six months ended
June 30, 2008.
The first
proposal involved the election of directors. The following matters
were submitted to the stockholders in our annual meeting of stockholders held on
May 21, 2008. Each of the matters was approved by the requisite
vote.
(a)
The
following individuals were re-elected to the Board of Director for
three-year terms as Class III
Directors:
Name
Votes
For
Votes
Withheld
Patrick
Gross
20,888,394
196,141
Jeffrey
Schwartz
20,989,856
94,679
Our Board
of Directors is currently comprised of eight members that are divided into
three classes with overlapping three-year terms. The term of our Class I
directors, Gary Bloom, Howard Gwin and Greg Santora will expire at the Annual
Meeting of Stockholders in 2009. The term of our Class II directors,
Michael Gregoire, Eric Herr and Michael Tierney will expire at the Annual
Meeting of Stockholders in 2010.
(b)
The
second proposal involved ratification of the appointment of Deloitte &
Touche LLP as our independent registered public accounting firm for the
year ending December 31, 2008:
Master
service agreement dated June 27, 2008, by and among Taleo (Europe) B.V., a
wholly-owned subsidiary of Taleo Corporation and Equinix Netherlands
B.V..
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.
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.
Master
service agreement dated June 27, 2008, by and among Taleo (Europe) B.V., a
wholly-owned subsidiary of Taleo Corporation and Equinix Netherlands
B.V..
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.
Dates Referenced Herein and Documents Incorporated by Reference
