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Taleo Corp – ‘10-Q’ for 9/30/11

On:  Wednesday, 11/9/11, at 4:06pm ET   ·   For:  9/30/11   ·   Accession #:  1193125-11-304522   ·   File #:  0-51299

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2011

For the transition period from             to

Commission File Number: 000-51299

TALEO CORPORATION

(Exact name of registrant as specified in its charter)

4140 Dublin Boulevard, Suite 400

Dublin, California 94568

(Address of principal executive offices, including zip code)

(925) 452-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On November 2, 2011, the registrant had 41,496,136 shares of Class A common stock outstanding.

Table of Contents

TALEO CORPORATION

INDEX

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PART I FINANCIAL INFORMATION

TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and per share data)

See Accompanying Notes to Condensed Consolidated Financial Statements

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TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

See Accompanying Notes to Condensed Consolidated Financial Statements

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TALEO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See Accompanying Notes to Condensed Consolidated Financial Statements

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TALEO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Business and Basis of Presentation

Nature of Business — Taleo Corporation and its subsidiaries (“we”, “us”, “our”, “the Company”) provide on-demand talent management solutions that enable organizations of all sizes to assess, acquire, develop, compensate and align their workforces for improved business performance. Our software applications are offered to customers primarily on a subscription basis.

Taleo Corporation 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. Our principal offices are in Dublin, California and we conduct our business worldwide, with wholly owned subsidiaries in Canada, France, the Netherlands, the United Kingdom, Germany, Spain, Poland, Singapore, and Australia. Our subsidiary in Canada primarily performs product development, production, and customer support activities, and the other foreign subsidiaries are generally engaged in providing sales, account management, support activities, production, and product development.

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments necessary for a fair statement have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year.

The condensed consolidated balance sheet as of December 31, 2010 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. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 28, 2011. For the nine months ended September 30, 2011, we recorded adjustments that accumulated to $0.3 million related to prior years that impacted the benefit from income taxes, net loss and certain balance sheet accounts. For the nine months ended September 30, 2010, we recorded adjustments that accumulated to $0.2 million that impacted revenue, net loss and certain balance sheet accounts. Such adjustments were assessed under the guidance in the SEC’s Staff Accounting Bulletin 108 and deemed immaterial to previously reported financial statements and to the expected results for the year ended December 31, 2011.

Beginning in the first quarter of 2011, we changed the terminology used to report our revenues, from “Application” to “Subscription and Support” and from “Consulting” to “Professional Services”. This change in terminology did not result in any changes to our previously reported financial statements.

Recent Accounting Pronouncements — In September 2011, the Financial Accounting Standards Board (the “FASB”) issued amended guidance on the goodwill impairment tests. The amendments allow both public and nonpublic entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance also includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current U.S. GAAP that is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance will be effective for reporting periods beginning after December 15, 2011 and will be applied retrospectively. We do not expect that this guidance will have an impact on our financial position, results of operations or cash flows.

In May 2011, the FASB issued an update to existing guidance to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The updated guidance amends the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. It does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRS. This updated guidance is effective for interim and annual periods beginning after December 15, 2011, which is beginning January 1, 2012 for the Company. Early adoption is not permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.

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Note 2. Business Combinations

In July 2011, we completed the acquisition of JobPartners Limited (“Jobpartners”). In April 2011, we completed the acquisition of Cytiva Software Inc. (“Cytiva”). In 2010, we completed the acquisitions of Learn.com, Inc. (“Learn.com”) and Worldwide Compensation, Inc. (“WWC”). The acquisitions were accounted for in accordance with Accounting Standards Codification 805. The goodwill recognized is not expected to be deductible for income tax purposes. Transaction costs associated with the business combinations are expensed as incurred, and are included in general and administrative expenses in the condensed consolidated statement of operations. Such transaction costs were $3.5 million and $7.0 million for the three and nine months ended September 30, 2011, respectively, and $2.1 million and $3.1 million for the three and nine months ended September 30, 2010, respectively.

In April 2011, we received $0.4 million cash from the settlement of the WWC escrow account for losses incurred by us as a result of certain breaches of the representations and warranties contained in the WWC acquisition agreement. The cash we received was recorded as ‘Other income’ in our condensed consolidated statements of operations during the three months ended June 30, 2011. All escrow accounts related to the WWC acquisition were settled in the second quarter of 2011.

Acquisition of Jobpartners

On July 1, 2011, we completed our acquisition of Jobpartners, a European provider of talent management solutions. We expect this acquisition to increase our customer base in Europe and give us an increased presence in the SaaS-based talent management industry in the region. Total consideration for the purchase was $39.3 million dollars in cash. Approximately fifteen percent (15%) of the consideration has been placed into escrow to be held as security for losses incurred by us in the event of certain breaches of the representations and warranties by Jobpartners. The escrow will be released in two tiers on the 12 and 18 month anniversaries of the closing of the acquisition. There are no contingent cash payments related to this transaction. The assets, liabilities and operating results of Jobpartners have been reflected in our condensed consolidated financial statements from the date of acquisition.

Allocation of Purchase Price

Under the acquisition method of accounting, the total purchase price paid for the equity interest has been allocated to the net identifiable assets based on their estimated fair value at the date of acquisition. As part of the process, we performed a valuation analysis to determine the fair values of certain identifiable intangible assets of Jobpartners as of the acquisition date. The determination of the value of these components required us to make various estimates and assumptions. Critical estimates in valuing certain of the intangible assets include but are not limited to the net present value of future expected cash flows from product sales and services. The fair value of deferred revenue was determined based on the estimated direct cost of fulfilling the obligation to the customer while the fair value for all other assets and liabilities acquired was determined based on estimated future benefits or legal obligations associated with the respective asset or liability. The excess of the purchase price over the net identifiable intangible assets, other identifiable assets and liabilities acquired has been recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and the liabilities assumed at the acquisition date. These preliminary estimates are subject to change during the measurement period (up to one year from the acquisition date) as we finalize the valuation of certain assets acquired and liabilities assumed in connection with the acquisition.

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We did not record any in-process research and development in connection with the acquisition.

Acquisition of Cytiva

On April 1, 2011, we completed our acquisition of Cytiva, a Canadian based mid-market provider of on-demand recruiting software solutions. We expect the acquisition of Cytiva to improve our position in talent management for small and medium-sized businesses and expand our customer base. The total consideration paid by us to acquire all of the outstanding capital stock and vested options of Cytiva was $12.3 million. There were no contingent cash payments related to this transaction. The assets, liabilities and operating results of Cytiva have been reflected in our condensed consolidated financial statements from the date of acquisition.

Allocation of Purchase Price

Under the acquisition method of accounting, the total purchase price paid for the equity interest has been allocated to the net identifiable assets based on their estimated fair value at the date of acquisition. As part of the process, we performed a valuation analysis to determine the fair values of certain identifiable intangible assets of Cytiva as of the acquisition date. The determination of the value of these components required us to make various estimates and assumptions. Critical estimates in valuing certain of the intangible assets include but are not limited to the net present value of future expected cash flows from product sales and services. The fair value of deferred revenue was determined based on the estimated direct cost of fulfilling the obligation to the customer while the fair value for all other assets and liabilities acquired was determined based on estimated future benefits or legal obligations associated with the respective asset or liability. The excess of the purchase price over the net identifiable intangible assets, other identifiable assets and liabilities acquired has been recorded as goodwill.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. These preliminary estimates are subject to change during the measurement period (up to one year from the acquisition date) as we finalize the valuation of certain assets acquired and liabilities assumed in connection with the acquisition.

We did not record any in-process research and development in connection with the acquisition.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations of Taleo, Learn.com, Cytiva, and Jobpartners to reflect the acquisitions as if they occurred on the first date of the earliest period presented. The pro forma financial information, as presented below, is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions of Learn.com, Cytiva, and Jobpartners had taken place as of the beginning of the earliest period presented.

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Our results of operations for the three months ended September 30, 2011 include $1.6 million, $0.5 million and $0.3 million in revenues related to Jobpartners, Cytiva, and Learn.com acquired deferred revenues, respectively. Our results of operations for the nine months ended September 30, 2011 include $1.6 million, $1.2 million and $3.0 million in revenues related to Jobpartners, Cytiva, and Learn.com acquired deferred revenues, respectively. It is impractical to determine the results of operations for Jobpartners, Cytiva, and Learn.com on a standalone basis as each entity’s operations have been integrated into our operations.

Note 3. Revenue Recognition

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

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

Revenue from subscription and support and professional services is recognized when all of the following conditions have been satisfied:

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

Subscription and support revenue

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

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

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Professional services revenue

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

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

Valuation terms are defined as set forth below:

We elected to early adopt this accounting guidance in 2010 on a prospective basis.

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

For multi-element arrangements entered into or materially modified in 2010 and 2011, we allocate consideration based on the relative selling prices. Revenue is then recognized as appropriate for each separate element based on its fair value. The professional services revenue associated with the professional services element of such multi-element arrangements is generally recognized as the professional services are performed, or using a proportional performance model based on services performed for fixed fee professional service engagements.

For multi-element arrangements entered into prior to 2010, the related professional services revenues are recognized ratably over the remaining subscription term, unless the transaction is materially modified. In the event of a material modification to such multi-element arrangements, the transaction is evaluated in accordance with the new accounting guidance which will most likely result in any deferred professional services revenue being recognized at the time of the material modification.

Professional services revenue recognized in the three and nine months ended September 30, 2011 relating to multi-element arrangements entered into prior to 2010 was approximately $2.3 million and $7.6 million, respectively. Professional services revenue recognized in the three and nine months ended September 30, 2010 relating to multi-element arrangements entered into prior to 2010 was approximately $3.2 million and $10.1 million, respectively. During the three months ended September 30, 2011, there was no additional revenue deferred for services performed related to multi-element arrangements entered into prior to 2010. During the nine months ended September 30, 2011, we deferred revenue of $0.6 million for services performed related to multi-element arrangements entered into prior to 2010.

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For professional services sold separately from subscription and support services, we recognize professional services revenues as these services are performed for hourly engagements, or using a proportional performance model based on services performed for fixed fee engagements.

Expenses associated with delivering all professional services are recognized as incurred when the services are performed. Associated out-of-pocket travel costs and expenses related to the delivery of professional services are typically reimbursed by the customer. This is accounted for as both revenue and expense in the period the cost is incurred.

Note 4. Concentration of Credit and Market Risk and Significant Customers and Suppliers

Financial instruments that potentially subject us to credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain substantially all of our cash and cash equivalents in financial institutions that we believe to have good credit ratings and represent minimal risk of loss of principal. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Certain operating cash accounts exceed the FDIC insurance limits.

Our allowance for doubtful accounts is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with problem accounts. We do not require our customers to provide collateral. Credit risk arising from accounts receivable is mitigated due to the large number of customers comprising our customer base and their dispersion across various industries. During the three and nine months ended September 30, 2011 and 2010, there were no customers that individually represented greater than 10% of total revenue, respectively. There were no customers that individually represented greater than 10% of total accounts receivable at September 30, 2011 or December 31, 2010.

A portion of our revenues and expenses are generated in Canadian dollars as well as other foreign currencies and, as a result, we are exposed to market risks from changes in foreign currency exchange rates.

Note 5. Fair Value of Financial Instruments

The carrying amounts of our financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values due to their nature, duration and short maturities.

Note 6. Stock-Based Plans

We issue stock options, restricted stock units and restricted stock to our employees and outside directors and provide employees the right to purchase stock pursuant to our stockholder approved Employee Stock Purchase Plan (“ESPP”).

Stock-based compensation expense

We recognize the fair value of stock-based compensation in our condensed consolidated financial statements over the requisite service period of the individual grants, which generally is a four year vesting period. We recognize compensation expense for the stock options, restricted stock awards, restricted stock units, and ESPP purchases on a straight-line basis over the requisite service period. There was no stock-based compensation expense capitalized during the three and nine months ended September 30, 2011 and 2010. Shares issued as a result of stock option exercises, ESPP purchases, restricted stock awards and restricted stock units are issued out of common stock reserved for future issuance under our stock plans.

We recorded stock-based compensation expense in the following expense categories:

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Stock Options

We estimate the fair value of our stock options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the option’s expected term and the price volatility of the underlying stock. We elected to use the simplified method to determine the expected term of options due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. We estimate the volatility of our common stock by analyzing our historical volatility and considering volatility data of our peer group. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. 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.

For options granted, we amortize the fair value on a straight-line basis over the requisite service period of the options which is generally four years.

Common Equity Plans

At September 30, 2011, 1,408,553 shares were available for future grants under our 2009 Equity Incentive Plan.

The following table presents a summary of the stock option activity under all stock plans for the three and nine months ended September 30, 2011 and related information:

The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2011 was $14.35 per option and $17.22 per option, respectively. The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2010 was $13.08 per option and $12.23 per option, respectively.

The total intrinsic value of options exercised during the three and nine months ended September 30, 2011 was $0.4 million and $7.3 million, respectively. The total intrinsic value of options exercised during the three and nine months ended September 30, 2010 was $5.6 million and $9.2 million, respectively.

As of September 30, 2011, unamortized stock-based compensation cost associated with stock options was $11.6 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock and Restricted Stock Units

The fair value of restricted stock and restricted stock units is measured based upon the closing NASDAQ Global Market price of our underlying stock as of the date of grant. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Restricted stock and restricted stock units are amortized over the vesting period using the straight-line method. Upon vesting, restricted stock units convert into an equivalent number of shares of common stock.

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The following table presents a summary of the restricted stock awards and restricted stock units for the three and nine months ended September 30, 2011 and related information:

As of September 30, 2011, unamortized compensation cost associated with restricted stock and restricted stock units was $45.7 million, net of assumed forfeitures. This cost is expected to be recognized over a weighted-average period of 3.1 years.

Employee Stock Purchase Plan (“ESPP”)

There were no shares and 92,859 shares issued under the ESPP during the three and nine months ended September 30, 2011, respectively. Unamortized compensation cost associated with ESPP was $0.1 million as of September 30, 2011. This cost will be recognized over the next one month ending October 31, 2011.

Reserved Shares of Common Stock

We have reserved the following number of shares of Class A common stock as of September 30, 2011 for the award of future stock options and restricted stock awards, release of outstanding restricted stock units, exercise of outstanding stock options and purchases under the ESPP:

Note 7. Property and Equipment

Property and equipment consist of the following at September 30, 2011 and December 31, 2010:

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Computer hardware and software included capital leases totaling $2.7 million and $2.7 million at September 30, 2011 and December 31, 2010, respectively. Accumulated amortization relating to these capital leases totaled $2.6 million and $2.5 million at September 30, 2011 and December 31, 2010, respectively. Depreciation and amortization expense of property and equipment was $3.7 million and $11.0 million for the three and nine months ended September 30, 2011, respectively.

Note 8. Intangible Assets and Goodwill

In the nine months ended September 30, 2011, we acquired identifiable intangible assets as a result of our acquisition of Jobpartners on July 1, 2011, and our acquisition of Cytiva on April 1, 2011. The fair value of these intangible assets was determined based on the present value of the expected future cash flows from the acquired intangibles. We also recorded $30.9 million and $8.2 million of goodwill in connection with the acquisition of Jobpartners and Cytiva, respectively. All goodwill is reported in the subscription and support operating segment. None of the goodwill recorded upon the acquisition is deductible for tax purposes.

The allocation of the purchase price for the acquisitions of Jobpartners and Cytiva was based upon a preliminary valuation. Changes to amounts recorded as assets or liabilities, such as tax assets and liabilities, may result in corresponding adjustments to goodwill during the measurement period (up to one year from the acquisition date). We expect the allocation of the purchase price for Jobpartners to be finalized in the third quarter of 2012 and we expect the allocation of the purchase price for Cytiva to be finalized in the second quarter of 2012. The allocation of the purchase price for Learn.com was completed in the second quarter of 2011.

The following schedule presents the changes in the carrying amount of goodwill during the nine months ended September 30, 2011:

“Adjustments to goodwill” includes foreign currency translation and purchase accounting adjustments during the measurement period (up to one year from the acquisition date).

The following schedule presents the details of intangible assets as of September 30, 2011 and December 31, 2010: