10-K 1 d254366d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

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

For the fiscal year ended December 31, 2011

or

 

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

For the transition period from                     to                    

Commission File Number: 000-51299

 

 

TALEO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   52-2190418

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4140 Dublin Boulevard, Suite 400

Dublin, California 94568

(Address of principal executive offices, including zip code)

(925) 452-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  Name of Each Exchange on Which Registered
Class A Common Stock, $0.00001 par value   The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2011 was approximately $1,063 million (based on the closing sale price of such shares on the Nasdaq Global Market on June 30, 2011). This calculation excludes the shares of Class A common stock held by executive officers and directors at June 30, 2011. This calculation does not reflect a determination that such persons are affiliates for any other purposes.

On February 9, 2012, the registrant had 41,836,379 shares of Class A common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for the registrant’s 2012 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

 

 


Table of Contents

TALEO CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

PART I

  

ITEM 1    Business      3   
ITEM 1A    Risk Factors      12   
ITEM 1B    Unresolved Staff Comments      27   
ITEM 2    Properties      27   
ITEM 3    Legal Proceedings      27   
ITEM 4    Mine Safety Disclosures      27   

PART II

  

ITEM 5    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      28   
ITEM 6    Selected Financial Data      30   
ITEM 7    Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
ITEM 7A    Quantitative and Qualitative Disclosures About Market Risk      48   
ITEM 8    Financial Statements and Supplementary Data      50   
ITEM 9    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      83   
ITEM 9A    Controls and Procedures      83   
ITEM 9B    Other Information      83   

PART III

  

ITEM 10    Directors, Executive Officers and Corporate Governance      84   
ITEM 11    Executive Compensation      84   
ITEM 12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      84   
ITEM 13    Certain Relationships and Related Transactions, and Director Independence      84   
ITEM 14    Principal Accounting Fees and Services      84   

PART IV

  

ITEM 15    Exhibits and Financial Statements Schedules      84   

Signatures

     85   

 

 

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FORWARD-LOOKING INFORMATION

This Form 10-K, including Part I, Item 1 — Business and Part II, Item 7 — 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 pending acquisition by Oracle Corporation, our expectations regarding revenue and operating expenses, cost of revenue, tax and accounting estimates, cash, cash equivalents and cash provided by operating activities, the demand and expansion opportunities for our products, our customer base, our competitive position, and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “would,” “might,” “will,” “should,” “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 Part I, Item 1A — Risk Factors or included elsewhere in this Annual Report on Form 10-K. 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.

PART I

ITEM 1.     BUSINESS

Overview

Taleo Corporation and its subsidiaries (“we”, “us”, “our”) are leading global providers of on-demand talent management software solutions. We offer recruiting, performance management, compensation, succession planning, learning management, leadership development, and analytics software solutions that help our customers attract and retain high quality talent, more effectively match workers’ skills to business needs, reduce the time and costs associated with manual and inconsistent processes, ease the burden of regulatory compliance, and increase workforce productivity through better alignment of workers’ goals, skills and training, career plans and compensation with corporate objectives. In addition, our solutions are highly configurable which allows our customers to implement talent management processes that are tailored to accommodate different employment types (including salaried and hourly) in different geographies, business units and regulatory environments.

We deliver our solutions on demand as a 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 in comparison to traditional, on-premise software solutions, and generally offers a lower up-front and total cost of ownership when compared to 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.

We market our integrated suite of talent management products to two target audience segments. Taleo Enterprise™, for medium and large enterprises with more complex needs, is sold through our direct sales force and indirectly through our strategic partners. We sell Taleo Business Edition™ to smaller, more centralized organizations, primarily through our direct inside sales team with a focus on Internet marketing efforts. Our complete customer base ranges in size from large, global organizations, including 47 of the Fortune 100, to small, private companies with few employees.

Recent Developments

On February 8, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OC Acquisition LLC (“Parent”), a wholly owned subsidiary of Oracle Corporation (“Oracle”), Tiger Acquisition Corporation, a wholly owned subsidiary of Parent (“Merger Sub”), and Oracle, solely with respect to certain obligations set forth therein, pursuant to which, subject to the satisfaction or waiver of certain conditions therein, Merger Sub will merge with and into Taleo. As a result of the merger, Merger Sub will cease to exist, and Taleo will survive as an indirect wholly owned subsidiary of Oracle.

Upon the consummation of the merger, subject to the terms of the Merger Agreement, which has been unanimously approved by our Board of Directors, each share of Taleo common stock outstanding immediately prior to the effective time of the merger (the “Effective Time”), subject to certain exceptions, will be converted into the right to receive $46.00 in cash, without interest.

 

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The completion of the merger is subject to customary conditions, including without limitation, (i) approval of the merger by our stockholders; (ii) expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iii) receipt of other required foreign antitrust approvals, if any.

The Merger Agreement contains certain termination rights for both Taleo and Parent, and provides that, upon termination of the Merger Agreement under specified circumstances, including, but not limited to, if we accept a superior acquisition proposal, we may be required to pay Parent a termination fee of $66.0 million. We may also be required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses in connection with the transaction under certain circumstances.

A description of the Merger Agreement is contained in our Current Report on Form 8-K filed with the SEC on February 9, 2012, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.

The Talent Management Market

Talent management encompasses multiple complex processes that together play a vital role in helping organizations attract, develop, motivate, compensate, and retain human capital to more effectively achieve business objectives. Most organizations no longer view human capital as an expense to be minimized, but instead as an asset to be developed and optimized. Modern, innovative organizations now recognize that much of their value resides in human capital. This shift in thinking has mirrored the evolution of talent management from discrete, manual, paper-based processes to a technology-enabled, strategic initiative that integrates multiple processes. At the same time, demographic trends in certain working populations and the increasing rate of voluntary and involuntary job turnover have made the ability to manage talent wisely a pressing need in organizations today.

To increase their return on investment in human capital, organizations understand the need to systematically focus on measures such as quality of hire, time-to-productivity, internal employee mobility, employee retention, employee engagement, employee contribution, and pay for performance. Systematically pursuing these goals requires the comprehensive, unified view of talent management that our solution provides.

Software-as-a-Service Delivery Model

Our software-as-a-service, delivery model enables our proprietary software solutions to be implemented, accessed and used by our customers remotely through an Internet connection, a standard web browser and a variety of other access points such as smart phones, handheld devices, and productivity tools like Microsoft Outlook. Our solutions are hosted and maintained by us, thus eliminating the customer’s time, risk, headcount and costs associated with installing and maintaining applications within their own information technology infrastructures. As a result, we believe our solutions require less initial investment in third-party software, hardware and implementation services resulting in lower ongoing support costs than traditional enterprise software. The SaaS model also enables advanced information technology infrastructure management, security, disaster recovery, and other best practices to be leveraged by smaller customers that might not otherwise be able to implement such practices in their own information technology environments. Our SaaS delivery model also enables us to take advantage of operational efficiencies. Since updates and upgrades to our solutions are managed by us on behalf of our customers, we are able to implement improvements to our solutions in a more rapid and uniform way. As a result, we are required to support fewer old versions of our solutions. This allows our development resources to focus more effort on creating innovative new products.

We believe our SaaS delivery model, coupled with our subscription-based license model, effectively replaces the large, front-loaded cost, typical of most traditional licensed enterprise software deployments with a lower risk, pay-as-you-go model. We believe the SaaS model is well suited to the talent management market in which we operate.

Our Talent Management Suite

We market our full suite of talent management products to two markets, Small and Medium Businesses (“SMB”) and Enterprise. Taleo Enterprise is designed for larger organizations with more complex needs. It provides support for unified, end-to-end talent management processes ranging from sourcing, recruiting and onboarding to performance management, goals management, development planning, succession planning, compensation, and learning. Taleo Business Edition is marketed to smaller, more centralized organizations, stand-alone departments and divisions of larger organizations, and staffing companies. Taleo Business Edition supports recruiting, onboarding, performance management, compensation and learning. Our solutions are designed to address multiple types of candidates and employees, including professional and hourly, with support for multiple languages as well as differing geographic and cultural requirements.

Our solutions are accessed through intuitive role-specific user interfaces, which allows only the content and functionality relevant to a specific user — whether a candidate, current employee, corporate recruiter, agency, line manager or system administrator — to be easily accessed by that user. The candidate-facing portions of Taleo Enterprise solutions are available in 31 languages. Taleo Business Edition is currently available in four languages.

 

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Taleo Enterprise

Taleo Enterprise consists of the following modules from our talent management suite:

Taleo Recruiting ™ provides organizations with comprehensive tools to manage all types of recruiting including salaried employees, hourly workers, contingent labor, and to manage all types of programs and processes including campus recruiting, workforce mobility programs, and recruiting agencies. Taleo Recruiting offers broad and deep functionality for requisition management, sourcing, applicant tracking, screening, assessment, referral management, and offer management.

Taleo Onboarding ™ helps organizations accelerate time to productivity for new employees by streamlining new hire paperwork and the provisioning of equipment and other key resources.

Taleo Performance ™ provides tools to help transform traditional employee assessment from an annual event to an ongoing, business-driven, evaluation and process improvement tool.

Taleo Development ™ helps employees and managers create focused and dynamic career and development plans to improve individual performance and increase retention.

Taleo Goals ™ helps companies gain greater control over business outcomes by automating the creation, alignment and monitoring of organizational goals.

Taleo Succession ™ provides access to a complete view of internal and external talent and to put the right people in the right roles to deliver on business goals.

Taleo Compensation ™ enables organizations of any size, geographic distribution, or complexity to focus attention and compensation budget on the top performing employees that are most critical to success.

Taleo Learn TM helps organizations create, deliver, and track learning and training programs tied to compliance, regulatory, job role, and onboarding requirements. Organizations can tailor the mix of formal and social learning to include both structured curriculum and communities where experts share what they know.

Taleo Enterprise also includes several platform modules that may be used in conjunction with our talent management solutions. These modules help organizations gain strategic visibility across all of their talent management functions and integrate Taleo products to other internal and external systems.

Taleo Analytics ™ gives customers a tool to gain strategic insights into their talent management practices through a metrics configuration tool, standard analytics dashboards, and dashboard authoring tools.

Taleo Anywhere ™ provides access to Taleo solutions through many alternative platforms such as smartphones, common productivity tools like Microsoft Outlook, and through alternate Web 2.0 means such as RSS feeds.

Taleo Connect ™ gives customers the option for Taleo to manage their integrations or use self-service tools to build, monitor, and maintain their own integrations to corporate backend systems.

Taleo Passport ™ opens up the Taleo ecosystem with turnkey integration to a wide variety of certified solution partners for background checks, assessments, tax credit screening, video interviewing, and more.

Taleo Business Edition

Taleo Business Edition consists of the following modules from our talent management suite:

Taleo Recruit ™ facilitates an organization’s employee recruiting process. Taleo Recruit offers three service options that enable small businesses to acquire talent. The user interface allows users to create a customer specific talent management system with configurable objects, fields, layouts, views, workflow, reports, and integration.

Taleo Onboard ™ automates the new hire process by enabling every department involved in the onboarding process to receive task assignments and update progress as tasks are completed.

Taleo Perform ™ helps companies define and monitor the full employee review cycle. Managers can initiate the review process and support employee self-appraisals, manager assessments, and multi-rater reviews. Taleo Perform enables managers to establish quantitative and qualitative employee goals and align employee goals to broader company goals. A secure employee portal enables employees to submit self-assessments online and provides access to basic employee data, company messaging, assigned goals, performance reviews, and career planning.

 

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Taleo Comp ™ enables small enterprises to determine the total cost of a compensation cycle and apply maximum and minimum limits. Managers may use multiple performance reviews to allocate merit and bonus pay based on employee achievement over a period of time.

Taleo Learn™ helps organizations create, deliver, and track learning and training programs tied to compliance, regulatory, job role, and onboarding requirements. Organizations can tailor the mix of formal and social learning to include both structured curriculum and communities where experts share what they know.

As with Taleo Enterprise, Taleo Business Edition also includes the following platform modules that may be used in conjunction with our talent management solutions:

Taleo Insight™ provides customers with reporting and analysis to gain strategic insight into their talent management practices. Customers are able to optimize their talent processes through standard reports, custom reports, dashboards, and scheduling.

Taleo Connect™ for Business Edition provides organizations with data integration capabilities for synchronizing candidate and employee data with their systems of record.

Taleo Talent Grid

The Taleo Talent Grid™ provides a comprehensive online community for Taleo customers, partners, and job seekers to share best and next practices, select and deploy innovative solutions and interact to match jobs with the best talent. The Taleo Talent Grid includes: (1) Taleo Knowledge Exchange™, an online customer forum and social network for Taleo customers to share and discuss talent management topics, product ideas, and best practices in a quick, social manner; (2) Taleo Solution Exchange™, an online partner application and solution marketplace that enables customers to explore, evaluate, demo, and compare products and services from the Taleo partner ecosystem. This includes a wide variety of talent management categories including sourcing, assessments, tax credit screening, background checks, learning content, workforce planning, and more; and (3) Taleo Talent Exchange™, a crowd-sourced talent marketplace through which the Taleo community of customers can source active and passive candidates, share candidates, and enable job seekers to find the right positions and easily apply for open positions using their Taleo Universal Profile. Taleo Talent Grid is accessible through Taleo on demand talent management solutions for companies of all sizes.

Our Growth Strategy

Our objective is to become the leading global provider of unified talent management solutions. Key elements of our strategy include:

Expanding our target market opportunity. We intend to continue to expand and better serve our potential customer base by tailoring solutions, service offerings and marketing campaigns to address the needs of specific commercial and public sector vertical markets, geographies and organizational sizes.

Increasing cross selling and Talent Management Suite deals. Taleo offers one of the broadest sets of talent management capabilities of any SaaS vendor in our market, covering the core talent management offerings of recruiting, performance management, succession, compensation, and learning. We intend to continue our efforts to gain market share across all of these product categories by increasing the cross selling of additional talent management offerings to existing customers as well as selling new customers a complete talent management suite solution.

Extending our multinational customer base. We believe the increasing globalization of large organizations provides us with substantial opportunities to capitalize on our leadership in global deployments. With the acquisition of Jobpartners Limited in July 2011, we approximately doubled our enterprise customer base in Europe and became one of the largest SaaS-based talent management vendors in the region. We intend to continue expanding our efforts to deploy our solutions to more organizations that are based outside of North America. We also intend to continue to enhance our multinational functionality and to expand our investment in our international operations to support organizations of all sizes globally.

Expanding our solution offerings. We intend to continue our efforts to enhance and expand our industry-leading suite of talent management solutions to deliver additional new products as well as cross-product functionality that we can sell to our customer base and to new customers. We will continue this expansion through our internal development initiatives, such as our development of a compensation management solution for smaller, less complex organizations. We may also pursue strategic acquisitions like our acquisitions of Learn.com, Inc., through which we added solutions for learning management, and Worldwide Compensation, Inc., through which we added solutions for compensation management and incentive compensation for larger, more complex organizations. We intend also to further extend our solutions by offering talent intelligence and associated analytical functionality that leverages data from all of our core product offerings and enables our customers to gain strategic insight and assist in making decisions regarding their human capital resources.

 

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Extending our technology leadership. We believe we have established competitive advantages through our SaaS-based and service oriented architectures, and through our technology infrastructure platform that enables us to deliver cost effective and high availability SaaS solutions. Our advanced infrastructure platform and associated solutions enable us to both serve the very largest and complex customers as well as our SMB customers with cost effective solutions. We intend to continue to leverage our experience and internal development resources to continue to develop our technology platform, infrastructure and applications to leverage new technologies and methodologies, such as Web 2.0 design principles, social collaboration functionality, and mobile accessibility to further capitalize on the talent management market opportunity.

Enhancing our human capital resources. We believe we have a competent and competitive work force, which we will continue to enhance in both quantity and quality of. We provide a stimulating and interesting work environment with ample opportunities to learn and to prosper professionally. Having a competent and competitive workforce is of utmost importance, and we intend to reinforce our best practices to acquire and retain the best possible talent in the industry.

Technology

Our Software Applications

Our Taleo Enterprise solutions for recruiting and performance management reside on a common technology platform. Our component-based platform includes reporting and analytics capabilities, self-service integration and configuration tools, our proprietary method for contextualizing the user experience based upon a variety of organizational, location and job function attributes (which we refer to as our SmartOrg feature), the Talent Master Structured Data Platform (described in further detail below), and global language and currency capabilities. Because Taleo Recruiting and Taleo Performance share a common, native platform, we can provide clients superior interoperability between applications and a unified view of all talent management information. The self-service tools and SmartOrg make our solutions configurable for complex operations, giving companies enterprise-wide data and process consistency while being able to adapt the solution locally according to the organization, location, applicable laws, local staffing model, types of hires and internal mobility requirements.

The Talent Master Structured Data Platform maintains all employee, candidate, job and performance data elements required by our solutions. The data structure within the Talent Master Structured Data Platform includes information on skills, competencies, experience, behaviors and level of interest in a skill or competency that can be matched precisely to job requirements and business plans. The Talent Master Structured Data Platform enables organizations to inventory and search the skills of their external candidates and current employees in a common format to help managers and recruiters to decide between internal and external hires for new business initiatives, measure skills gaps in the existing workforce and prepare succession plans using both internal and external talent profiles.

Our Taleo Enterprise software applications for recruiting and performance management are written in Java and use Oracle as the relational database management system.

Our Taleo Business Edition solutions reside on a common technology platform that is separate from the Taleo Enterprise platform. The Taleo Business Edition platform enables us to deliver superior usability and functionality focused on small businesses, and allows for predictive modeling throughout the talent management lifecycle. Self-service tools within the platform provide standard and custom reporting and the ability to configure all Taleo Business Edition modules. The common platform also allows users to localize language and currency across the modules and within the configurable career websites and employee portals. It also exposes some data through a standard open web service for integration, allowing customers to integrate Taleo Business Edition with any third party software application that accepts such standard protocols. These self-service configuration and integration tools, together with pre-configured templates for specific industry verticals, enable our small and midsize customers to use Taleo Business Edition for both simple and complex talent management operations.

Our Taleo Business Edition software applications are written in Java and use Microsoft SQL Server® as the relational database management system.

Our Taleo Compensation software applications, which we added through our acquisition of Worldwide Compensation, Inc., and the Taleo Talent Grid are on a separate technology platform, are written in Java and use MySQL® as the relational database management system.

Our On-Demand Infrastructure

Our infrastructure is designed to achieve high levels of security, scalability, performance and availability. We use commercially available hardware in our data centers. Our software architecture runs on the Linux operating system. Our solutions use some proprietary and commercially available software as well as open-source software components for enhanced reliability, scalability and a secure computing environment, which can scale to accommodate transaction load increases. Our secure Internet facing infrastructure includes load balancing and secure socket layer encrypting devices, anti-virus appliances and security technology that allows us to

 

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detect and prevent unauthorized access to our infrastructure. Our tiered and virtualized application architecture deploys specialized systems and application functions on distinct server clusters for web, application, database management, search, reporting, utility, and storage services. Each server cluster is implemented with redundancy which allows us to scale systems and application capacity and provide high on demand availability of our solutions. All of our equipment and systems are remotely operated, monitored and managed by our personnel working on a 24/7 schedule. Key technology specialists and managers are also on call at all times on a rotating basis. Our monitoring technology uses industry leading system monitoring and performance monitoring tools and we have also developed our own customized monitoring tools for added insight into the performance and availability of our systems.

We provide a highly secure computing environment as well as high application availability. Each customer is provided with its own secure virtual application instance, which we refer to as a Zone. Each customer Zone includes the customer’s own standard encrypted database schema, text translation management, configuration settings, reporting tools, and data integration tools. Customers share hardware infrastructure at all tiers. The scalable design of the software and hardware infrastructure allows us to deploy customer Zones and balance transaction load across any number of servers to ensure consistent high performance of applications.

Our business continuity measures include a comprehensive data backup program consisting of daily incremental database backups to disk and full weekly backups to disk which we store in an encrypted format. In the fourth quarter of 2011, we opened a new datacenter which operates as the disaster recovery site of our primary U.S. data center. The data of Taleo Enterprise customers that is hosted in our primary U.S. data center is mirrored several times per day to this separate, geographically distinct disaster recovery data center, and the data of Taleo Enterprise customers that is hosted in our primary data center in the European Union (“EU”), is fully backed up and copied at least once weekly to a separate geographically distinct data center.

DataCenters

We currently deliver our Taleo Enterprise solutions from secure co-location datacenters operated by third parties in which we have purchased cage space, electrical power and cooling. Redundant Internet connectivity and bandwidth is provided by an alternate third party. We currently deliver our secure Taleo Business Edition and Taleo Talent Grid solutions via third party managed services arrangements.

Taleo Services

Professional Services supports both the Taleo Enterprise and Taleo Business Edition needs of our customers. Our professional services organization leverages our consultants’ and educators’ domain expertise and our proprietary tools, best practices, and methodologies to provide implementation services, solution optimization, expansion services, technical services and education services that help our customers maximize their return on investment. We also subcontract or refer consulting engagements or portions of consulting engagements to our third-party implementation partners from time to time.

Taleo Services Methodologies

We have developed methodologies that enable us to accelerate the deployment of our solutions across a variety of industries and talent management environments:

Taleo Implementation Methodology — Working with Fortune 500 companies as well as smaller sized organizations, we have developed methods to optimize critical business processes, while maintaining the integrity of our customers’ business drivers. The Taleo Implementation Methodology addresses specific processes for Talent Management key initiatives such as recruiting, onboarding, performance reviews, goals management, career management, development planning, succession planning, learning and compensation. Our Taleo consultants work with our customers to implement our solutions utilizing solution workflows, best practices, and business requirements.

Talent Practices Knowledge Base — Our talent practices knowledge base (which we call “Green Pages”) enables us to understand an organization’s overall talent management environment, including internal and external business drivers, evaluate talent management processes and to recommend best practices to optimize these processes. Green Pages is a searchable database of descriptions of the complex talent management challenges faced within different industries and geographies. Green Pages also provides specific details of the solutions our consultants implemented to address these challenges and the results obtained. This knowledge base reflects years of talent management experience across a wide variety of industries. Our consultants use the collective data from our knowledge base to help our new customers solve their complex talent management challenges and to help our existing customers hone their talent management practices and processes.

Implementation Services

Our Taleo implementation services typically begin with an evaluation of a customer’s current talent management practices. Services include process definition, configuration of the solutions, and integrations with existing applications to fit each organization’s dynamic business requirements. We have a dedicated project management office that equips our consultants with a library of toolkits, forms, training documentation and workshop templates. The project management office also audits active customer engagements quarterly to help ensure consistent quality.

 

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Taleo customers can also leverage standard implementation packages that are focused on rapid implementation to achieve value quickly from our solutions.

Solution Optimization and Expansion

We provide ongoing solution optimization and expansion services to help our customers achieve desired results in quality improvement, increased productivity, cost savings and operational effectiveness after the initial deployment of our solution. We work with our customers to optimize their talent management processes and we modify, as well as expand configuration of our solutions to increase their effectiveness, where necessary. In collaboration with customer project leaders, we establish an ongoing process for solution optimization. Using this process, our customers can promote best practice usage and end user adoption after our solutions have been deployed.

Technical Services

We offer comprehensive technical services to help our customers integrate our solutions with other third-party solutions within our customers’ system portfolios. Many of our clients leverage our technical expertise to assist with technical engagements such as data conversion, ongoing data interfaces, single sign-on for internal users, third-party integration and technical readiness assessments. We also provide services to identify and develop reports and dashboards using our advanced reporting technology. We work with our clients in various ways, from knowledge transfer to help them better use our self-service technology, to full-service, on-site implementation projects.

Training

Through Taleo University, we offer a full range of educational services to foster customer self-sufficiency. These services include: program and adoption planning, pre-deployment classroom training, train-the-trainer programs, system administrator training, post-deployment specialty training, upgrade training and a full catalogue of interactive, self-study eLearning/web-based training courses. We also offer a variety of training tools to drive user adoption, including training manuals, process user guides, feature training exercises, a self-service website for training scheduling and registration, post-training assessment and certification, and both synchronous and asynchronous web-based training options for remote users. Customers may license Taleo University courseware and trainer kits for in-house use or license the Taleo Proficiency learning content development tools to build their own custom elearning programs. Our solutions are designed to meet the requirements of customers of various sizes, and we measure all training engagements for quality and customer satisfaction.

Customer Support

Our global customer support organization for Taleo Enterprise provides both proactive and customer-initiated support for all Taleo products. We deliver customer assistance appropriately aligned to the market needs for each product via universal toll-free telephone access, internet “‘click-to-chat’” technology, and our web-based incident management system to our customers’ designated points-of-contacts. Our customer support organization tracks all customer support requests in our incident management system and displays the status of these requests to the user through our Customer Support Portal, enabling users to know the status of their support requests, the person responsible for resolving them, and the targeted timing and process for resolution. Our Customer Support Portal, directly accessible through our Taleo solutions, gives customers easy access to: our incident management system; our knowledge database, which enables easy search of documentation and solutions; our reporting system which allows customers to see real-time support metrics for their issues; and our production portal, which provides real-time views and reports on the health, performance, and activity of a customer’s Zone.

Customer support is provided from support centers in seven locations operating globally in a follow-the-sun model. In North America, customer support operates from Quebec City, Canada, Jacksonville, Florida, Sunrise, Florida, and our corporate headquarters in Dublin, California. Internationally, customer support operates from the Greater London area, Edinburgh, Scotland, and Sydney, Australia. We utilize our corporate Voice over IP, or VoIP, telephone system coupled with web-based tools and systems to deliver seamless service to our customers, irrespective of the point of delivery. Our customer support management team utilizes real-time analytic dashboards to monitor performance and make rapid adjustments to ensure consistency in our service levels. Our senior customer support executives receive automated alerts for escalated issues, review the analytic dashboards, customer satisfaction reports, and take appropriate action to ensure that we maintain customer satisfaction.

Customers

We market our Taleo Enterprise solutions to medium and large organizations with more complex needs, typically with more than 5,000 employees. We market our Taleo Business Edition solutions to smaller, more centralized organizations, typically with fewer than 5,000 employees. Our customers include organizations in the business services, consumer goods, energy, financial services, healthcare, manufacturing, technology, transportation, government and retail sectors, and range in size from smaller, private companies to large, global corporations with more than 300,000 employees. No single customer has accounted for more than ten percent of our revenue or accounts receivable in any of the last three years.

 

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Sales and Marketing

We sell subscriptions to our Taleo Enterprise solutions through our global direct sales force and through our strategic partners. Our direct sales organization has field sales professionals in metropolitan areas throughout the United States, Canada, Europe and Australia. Our Taleo Enterprise direct sales force consists of regional sales managers, solution consultants, and business development representatives that sell our solutions to new customers. We also maintain a separate team of account executives that focuses on renewing and selling new solutions and services to existing Taleo Enterprise customers. In addition, we have developed partnerships and direct sales relationships with business process outsourcing (BPO), human resources outsourcing (HRO), and recruitment process outsourcing (RPO), providers. Our BPO, HRO, and RPO partners use our solutions to manage talent management for their customers as part of their broader human resource solution offerings. Taleo Business Edition offerings are sold primarily through an inside sales team.

Our marketing programs are designed to increase awareness of our solutions with prospects and customers and enhance our brand positioning as the talent management leader. Our marketing initiatives include industry research, product and strategy updates with industry analysts, public relations activities, web and social media marketing, direct mail and relationship marketing programs, seminars, industry specific trade shows, speaking engagements and cooperative marketing with customers and partners. Our marketing team generates qualified leads and provides programs for prospects and customers that build awareness and generate demand for our existing solutions as well as new products and services. Our marketing department also produces materials that include brochures, datasheets, white papers, product presentations, demonstrations, and other marketing tools posted on our corporate website. We also generate awareness through digital and print advertising in business and trade magazines, websites, search engines, seminars, and direct customer and partner events.

Research and Development

Our research and development organization consists of product management, development and quality assurance employees. Our research and development organization is primarily located in Quebec City, Canada and Jacksonville, Florida. We also have development staff in Dublin, California and other locations. We use independent development firms or contractors for portions of our development related work, with current research and development efforts occurring in Budapest, Hungary, Kiev, Ukraine, and Krakow, Poland. Our development methodology allows us to implement flexible development cycles that result in more timely and efficient delivery of new solutions and enhancements to existing solutions. We focus our research and development efforts on improving and enhancing our existing solution offerings as well as developing new solutions. The responsibilities of our research and development organization include product management, product development, and software maintenance. We allocate a portion of our research and development budget to the development of our technology platform, including our Talent Master Structured Data Platform (discussed above) and the platform underlying the configuration capabilities of our solutions (what we refer to as Configurable Staffing Process Platform). Our research and development expenditures, net of provincial qualified wage credits we receive from the province of Quebec for qualifying research and development expenditures, are expensed as incurred.

Competition

The market for talent management solutions is highly competitive and rapidly evolving. We believe that the principal competitive factors in this market include:

 

   

product performance and functionality;

 

   

breadth and depth of functionality;

 

   

multinational capabilities;

 

   

ease of implementation and use;

 

   

security and data privacy;

 

   

ability to integrate with third-party solutions;

 

   

scalability and reliability;

 

   

sales and marketing efforts;

 

   

company reputation and brand name recognition;

 

   

financial stability; and

 

   

price.

 

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We believe that we generally compete favorably with respect to these factors. Our solutions compete with enterprise resource planning software from vendors such as Oracle and SAP and also with products and services from vendors such as ADP, Cezanne, Cornerstone OnDemand, Halogen Software, Healthcare Source, HRSmart, iCIMs, Jobvite, Kenexa Corporation, Kronos, Lumesse, PeopleFluent, Saba Software, SilkRoad Technology, SuccessFactors, SumTotal Systems, and Workday.

Our current and potential competitors include large, multinational, well-capitalized companies who have a larger install base of users, longer operating histories, greater name recognition, and substantially greater technical, marketing, and financial resources. In addition, we compete with smaller companies who may adapt better to changing conditions in the market. Our competitors may develop products or services that will be superior to our products, or that will achieve greater market acceptance.

Intellectual Property

We rely on a combination of trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology, services methodology and brand. We have registered trademarks for certain of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. Taleo is a registered trademark in the United States, European Union, Australia, Canada and Singapore and in various other jurisdictions. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.

Business Combinations

Over the past three years, we expanded our market share, acquired new technology or supplemented our technology by purchasing businesses and assets focused in the talent management market. During this time period, we acquired the following businesses:

 

   

JobPartners Limited (“Jobpartners”) on July 1, 2011. This acquisition increased our customer base in Europe and gives us an increased presence in the SaaS-based talent management industry in Europe.

 

   

Cytiva Software Inc. (“Cytiva”) on April 1, 2011. The acquisition of Cytiva improved our position in talent management for small and medium-sized businesses and expands our customer base.

 

   

Learn.com, Inc. (“Learn.com”) on October 1, 2010, which enabled us to provide learning and development solutions to complement our existing talent management products.

 

   

Worldwide Compensation, Inc. (“WWC”) on January 1, 2010. This acquisition allowed us to directly offer a compensation management solution to larger, more complex organizations.

Employees

As of December 31, 2011, we had 1,414 employees, including 88 employees from our acquisition of Jobpartners and 22 employees from our acquisition of Cytiva. None of our employees are represented by a collective bargaining agreement and we have never experienced a strike or similar work stoppage. We consider our relationship with our employees to be good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports furnished or filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on the “Investor Relations” section of our website (www.taleo.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Information available on, or that can be accessed through, our website is not part of this report. The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website (www.sec.gov) that contains reports, proxy and information statements and other information regarding us that we file electronically with the SEC.

 

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ITEM 1A.     RISK FACTORS

Because of the following factors, as well as other variables affecting our operating results and financial condition, past performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occurs, our business, financial condition or results of operation could be materially and adversely affected. In that case, the trading price of our stock could decline, and you may lose some or all of your investment.

The pendency of our agreement to be acquired by Oracle could have an adverse effect on our business.

On February 8, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OC Acquisition LLC (“Parent”), a wholly owned subsidiary of Oracle Corporation (“Oracle”), Tiger Acquisition Corporation, a wholly owned subsidiary of Parent (“Merger Sub”), and Oracle, pursuant to which, subject to the satisfaction or waiver of certain conditions therein, Merger Sub will merge with and into Taleo. As a result of the merger, Merger Sub will cease to exist, and Taleo will survive as an indirect wholly owned subsidiary of Oracle. Upon the consummation of the merger, subject to certain exceptions, each share of our common stock issued and outstanding immediately prior to the merger will be converted into the right to receive $46.00 in cash, without interest.

The announcement and pendency of the acquisition by Oracle could cause disruption in the business, including experiencing (i) the potential loss or disruption of customer, vendor or other commercial relationships prior to the completion of the merger, including, but not limited to, as a result of the merger or their potential unwillingness to do business with Oracle, or (ii) a potential negative effect on our ability to retain management, technical, sales and other key personnel as a result of the announcement of the merger. Such disruptions may continue to occur through the closing of the merger.

The Merger Agreement generally requires us to operate our business in the ordinary course of business pending consummation of the merger, but includes certain contractual restrictions on the conduct of our business. In addition, the pendency of the acquisition by Oracle and the completion of the conditions to closing could divert the time and attention of our management.

All of the matters described above, alone or in combination, could materially and adversely affect our business, financial condition, results of operations and stock price.

The failure to complete the merger with Oracle could adversely affect our business.

We cannot provide assurance that our pending acquisition by Oracle will be completed. If the pending merger is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. On February 8, 2012, the day before the announcement of the pending merger, our stock’s closing price was $38.94. On February 9, 2010, following the announcement of the pending merger, our stock’s closing price was $45.64.

In addition, on February 14, 2012, a purported class action lawsuit on behalf of our stockholders was filed in the Delaware Court of Chancery, captioned Coyne v. Taleo Corporation, et al, Case No. 7245. On February 24, 2012, a second purported class action lawsuit was filed in the Delaware Court of Chancery, captioned Elliott v. Taleo Corporation, et al, Case No. 7279. The complaints name as primary defendants the Company and the members of our board of directors and generally allege that the defendants violated the fiduciary duties owed to stockholders by approving the Company’s agreement to be acquired by Oracle. The complaints allege that the defendants engaged in an unfair process, agreed to unfair deal terms, and agreed to a price that allegedly fails to maximize value for stockholders. The complaints also allege that Oracle (and its wholly-owned subsidiaries created to effect the merger) aided and abetted the board members’ alleged breach of fiduciary duty. The complaints seek, among other things, declaratory and injunctive relief, including an injunction halting the merger.

Also, under certain circumstances specified in the Merger Agreement, we may be required to pay Oracle a termination fee of approximately $66.0 million and reimbursement of out-of-pocket expenses of up to $5.0 million. A failed transaction may also result in negative publicity and a negative impression of us in the investment community. Further, any disruptions to our business resulting from the announcement and pendency of our acquisition by Oracle and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, partners, vendors and employees, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the acquisition or merger, if the acquisition or merger is not consummated.

 

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We have a history of losses, and we cannot be certain that we will sustain profitability.

With the exception of the years ended December 31, 2007, 2009 and 2010, we have incurred annual net losses in every year since our inception. As of December 31, 2011, our accumulated deficit was $94.0 million, comprised of aggregate net losses of $80.2 million and $13.8 million of dividends and issuance costs for preferred stock. In the year ended December 31, 2011, we reported a net loss of $17.4 million. We cannot be certain that we will be able to sustain profitability on a quarterly or annual basis in the future. As we continue to incur costs associated with initiatives to grow our business, which may include, among other things, acquisitions, international expansion, significant hiring, and new product development, any failure to increase revenue or manage our cost structure could prevent us from achieving or sustaining profitability. For instance, in the years ended December 31, 2010 and December 31, 2011, our results were negatively impacted by amortization expense for intangible assets associated with acquisitions. In the near term, we expect to continue to incur significant amortization expense for intangible assets associated with our past acquisitions. In addition, we may incur losses as a result of revenue shortfalls or increased expenses associated with our business. As a result, our business could be harmed and our stock price could decline.

Unfavorable economic conditions could limit our ability to grow our business or result in less favorable commercial terms in our customer agreements.

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

Unfavorable economic conditions may also cause increased delays in our sales cycles and increased pressure from prospective customers to offer higher discounts or less favorable payment, billing or other commercial terms than our historical practices, and may also cause increased pressure from existing customers to renew expiring software subscriptions agreements at lower rates, delay or cancel consulting or education services engagements, purchase fewer products upon renewal, or demand other less favorable commercial terms. In addition, certain of our customers may attempt to negotiate lower software subscription fees for existing arrangements because of downturns in their businesses. If we accept certain requests for higher discounts, lower fees or less favorable commercial terms, our business may be adversely affected and our revenues may decline.

Additionally, certain of our customers have become or may become bankrupt or insolvent as a result of an economic downturn, and we may lose all future revenue from such customers and payment of receivables may be lower or delayed as a result of bankruptcy proceedings.

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

We have made, continue to make and routinely evaluate acquisitions or investments in companies, products, services, and technologies to expand our product offerings, customer base and business. For example, in January 2010 we completed our acquisition of WWC, in October 2010 we completed our acquisition of Learn.com, in April 2011 we completed our acquisition of Cytiva and in July 2011 we completed our acquisition of Jobpartners. 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;

 

   

difficulty integrating the accounting systems, operations, and personnel of the acquired business;

 

   

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;

 

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difficulties and additional expenses associated with integrating or incorporating the acquired technologies or products into our existing code base and hosting infrastructure;

 

   

difficulties and additional expenses associated with supporting the legacy products and hosting infrastructure of the acquired business;

 

   

problems arising from differences in applicable accounting standards or practices of the acquired business (for instance, non-U.S. businesses may not prepare their financial statements in accordance with GAAP) or difficultly identifying and correcting deficiencies in the internal control over financial reporting of the acquired business;

 

   

problems arising from differences in the revenue, licensing (for instance, an acquired business may offer perpetual licenses), support (for instance, an acquired business may offer customer specific customizations of product code to certain customers) or consulting 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;

 

   

difficulty in integrating the acquired technologies and other acquired intangible assets into an efficient integrated supply chain structure;

 

   

difficulty in integrating acquired legal entities into a cost effective legal entity holding structure, including potential incremental accounting, tax, regulatory and other compliance costs;

 

   

difficulty converting the customers of the acquired business onto Taleo’s technology platform and contract terms; and

 

   

problems or liabilities associated with product quality, data privacy, data security, regulatory compliance, technology and legal contingencies.

The consideration paid in connection with an investment or acquisition also affects our financial results. If we should proceed with one or more significant acquisitions in which the consideration includes cash, we could be required to use a substantial portion of our available cash to consummate any such acquisition. To the extent that we issue shares of stock or other rights to purchase stock, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in our incurring debt, material one-time write-offs, or purchase accounting adjustments and restructuring charges. They may also result in recording goodwill and other intangible assets in our financial statements which may be subject to future impairment charges or ongoing amortization costs, thereby reducing future earnings. In addition, from time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as incurring expenses that may impact operating results.

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

We generally recognize revenue from software subscription agreements ratably over the terms of these agreements, which are typically three or more years for our Taleo Enterprise customers and one year for our Taleo Business Edition customers. As a result, a substantial majority of our software subscription revenue in each quarter is generated from software subscription agreements entered into during prior periods. Consequently, a decline in new software subscription agreements in any one quarter may not affect our results of operations in that quarter, but could reduce our revenue in future quarters. Additionally, the timing of renewals or non-renewals of a software subscription agreement during any one quarter may affect our financial performance in that particular quarter or may not affect our financial performance until the next quarter. For example, because we recognize subscription and support 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 customer 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.

 

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

During 2009 and prior years, when we sold software subscriptions and professional services in a single arrangement (sometimes referred to as a multi-element arrangement), we recognized revenue from professional services ratably over the term of the software subscription agreement, which is typically three or more years, rather than as the professional services were delivered, which is typically during the first six to twelve months of a software subscription agreement. Accordingly, a significant portion of the revenue for professional services performed in any quarterly reporting period prior to 2010 was deferred to future periods. However, under accounting guidance which we adopted on January 1, 2010, substantially all of our revenue from professional service arrangements entered into on or after January 1, 2010 is recognized as the consulting services are delivered. In addition, if we materially modify a multi-element arrangement entered into prior to 2010, the revenue associated with consulting services delivered in prior periods that would have been recognized ratably under our pre-2010 policy, will be recognized in the period of the material modification. The application of these revenue recognition methodologies will result in our professional services revenue for the foreseeable future including a mix of revenue from professional services delivered during the reporting period and professional services delivered in previous reporting periods, which may make our results more difficult to understand and less indicative of our current operational trends. Further, since we recognize expenses related to our consulting services in the period in which the expenses are incurred, the consulting margins we report in any quarterly reporting period may not be indicative of the actual gross margin on consulting services delivered during the reporting period.

If our existing customers do not renew their software subscriptions and buy additional solutions from us, or if our customers renew at lower fee levels, 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;

 

   

the stability, performance and security of our hosting infrastructure and hosting services; and

 

   

the business environment of our customers and, in particular, headcount reductions by our customers.

Most of our Taleo Enterprise customers enter into software subscription agreements with duration of three years or more from the initial contract date. Most of our Taleo Business Edition customers enter into annual software subscription agreements. Our customers have no obligation to renew their subscriptions for our solutions after the expiration of the initial term of their agreements. In addition, our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these customers. Factors that are not within our control may contribute to such fee reductions. For instance, many companies reduced their total employee populations during the recent economic downturn. As our software subscriptions are often based on the total number of employees for which our software applications may be used by a customer, a significant employee count reduction by a customer during the term of an agreement may result in a renewal that is based on a lower maximum employee limit for the use of our products and thus a lower renewal fee. 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 at lower fee levels, or fail to buy new products and services from us, our revenue may decline or our future revenue may be constrained.

If our efforts to attract new customers are not successful or we do not compete effectively with other companies offering talent management solutions, our revenue may not grow and could decline.

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 and our ability to compete with other talent management solution providers. Many of our prospective customers have traditionally used other products and services for their talent management requirements or have developed internal solutions to address certain talent management requirements. If our sales and marketing efforts are not successful, our prospective customers may not be familiar with us or our solutions or may not consider our solutions to be of sufficiently high value and quality and, as a result, we may not be considered in such prospective customers’ sale cycles.

 

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Additionally, in the past we have experienced, and expect to continue to experience, intense competition from a number of companies. Our solutions compete with enterprise resource planning software from vendors such as Oracle and SAP and also with products and services from vendors such as ADP, Cezanne, Cornerstone OnDemand, Halogen Software, Healthcare Source, HRSmart, iCIMs, Jobvite, Kenexa Corporation, Kronos, Lumesse, PeopleFluent, Saba Software, SilkRoad Technology, SuccessFactors, SumTotal Systems, and Workday. Our competitors may announce new products, services or enhancements that better meet changing industry standards or the price or performance needs of customers. Increased competition may cause pricing pressure and loss of market share, either of which could have a material adverse effect on our business, results of operations and financial condition.

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

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

There has been vendor consolidation in the industry in which we operate and we believe such consolidation is likely to continue, which could weaken our competitive position. For example, in December 2011, SAP announced an agreement to acquire SuccessFactors. After the closing of this acquisition, SuccessFactors will benefit, when competing with us, from SAP’s greater financial, technical, development, marketing, sales, services, installed base of customers, and brand recognition. There may also be consolidation by one or more vendors with respect to the product sets currently offered by distinct talent management and human resource software vendors. Additional consolidation within our industry would continue to intensify the competitive landscape in ways that would adversely affect our ability to compete effectively.

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

We have had to restate our historical financial statements and have identified internal control weaknesses.

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

In addition, in March 2009, we announced that we had completed a review of our revenue recognition practices and, as a result of this review, we restated certain financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. The restatement resulted in the deferral to future periods of $18.0 million of professional services revenue and approximately $0.2 million in subscription and support revenue previously recognized through June 30, 2008. Amounts in our previously issued

 

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consolidated financial statements for the years ended December 31, 2003 through 2007, and the interim condensed consolidated financial statements for each of the periods ended March 31, 2008 and June 30, 2008, have been corrected for the timing of revenue recognition for professional services revenue during these periods, as well as to correct an error relating to the timing of revenue recognition for set-up fees, an element of our subscription and support services revenue. In connection with such review we identified certain control deficiencies relating to the application of applicable accounting literature related to revenue recognition. These deficiencies constituted a material weakness in internal control over financial reporting as of September 30, 2008, which led to items requiring correction in our historical financial statements and our conclusion to restate such financial statements to correct those items. Specifically, the control deficiencies related to our failure to correctly interpret the multi-element accounting guidance in determining the proper accounting treatment when subscription and support and professional services are sold together.

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

As part of our ongoing processes, we continue to focus on improvements in our internal control over financial reporting. We have discussed deficiencies in our financial reporting and our remediation of such deficiencies with the audit committee of our board of directors and will continue to do so as required. However, we cannot be certain that we will be able to detect, prevent or remediate all deficiencies which may exist now or in the future, including deficiencies which may constitute a material weakness in our internal control over financial reporting. Any such current or future deficiencies could materially and adversely affect our ability to provide timely and accurate financial information.

Our financial performance may be difficult to forecast as a result of our historical focus on large customers and the long sales cycle associated with our solutions.

The majority of our revenue is currently derived from organizations with complex talent management requirements. Accordingly, in a particular quarter the majority of our bookings from new customers on an aggregate contract value basis are from large sales made to a relatively small number of customers. As such, our failure to close a sale in a particular quarter will impede desired revenue growth unless and until the sale closes. In addition, sales cycles for our Taleo Enterprise clients are generally between three months and one year, and in some cases can be longer. As a result, substantial time and cost may be spent attempting to secure a sale that may not be successful. The period between our first sales call on a prospective customer and a contract signing is relatively long due to several factors such as:

 

   

the complex nature of our solutions;

 

   

the need to educate potential customers about the uses and benefits of our solutions;

 

   

the relatively long duration of our contracts;

 

   

the discretionary nature of our customers’ purchases;

 

   

the timing of our customers’ budget cycles;

 

   

the competitive evaluation of our solutions;

 

   

fluctuations in the staffing management requirements of our prospective customers;

 

   

announcements or planned introductions of new products by us or our competitors; and

 

   

the lengthy purchasing approval processes of our prospective customers.

If our sales cycles unexpectedly lengthen, our ability to forecast accurately the timing of sales in any given period will be adversely affected and we may not meet our forecasts for that period.

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

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve customer acceptance, we must enhance and improve existing products and continue to introduce new products and services. Any new products we develop or acquire may not be introduced in a timely manner, may not achieve the broad customer acceptance necessary to generate significant revenue, and may generate additional development or integration expenses and resulting losses. If we are unable to develop or acquire new products that appeal to our target customer base or enhance our existing products or if we fail to price our products to meet customer 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. Additionally, our efforts to expand our solutions beyond our current offerings or beyond the talent management industry may divert management resources from existing operations and require us to commit significant financial resources to an unprofitable business, which may harm our existing business.

 

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

Our solutions involve the storage and transmission of customers’ proprietary information and users’ personal information, including the personal information of our customers’ job candidates. As part of our solution, we may also offer third-party proprietary solutions which require us to transmit our customers’ proprietary data and the personal information of job candidates to such third parties. Security breaches could expose us to loss of this information, and we could be required to undertake an investigation, notify affected data subjects and appropriate legal authorities and regulatory agencies, and conduct remediation efforts, which could include modifications to our current security practices and ongoing monitoring for users whose data might have been subject to unauthorized access. Accordingly, security breaches may result in investigation, remediation and notification expenses, litigation, liability, and financial penalties.

While we have administrative, technical, and physical security measures in place, and we contractually require third parties to whom we transfer data to have appropriate security measures, if any of these security measures are breached as a result of third-party action, employee error, criminal acts by an employee, malfeasance, or otherwise, and, as a result, someone obtains unauthorized access to customer data or personal information, our reputation will be damaged, our business may suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we and our partners to whom we transfer data may be unable to anticipate these techniques or to implement adequate preventative measures. Applicable law may require that a security breach involving certain types of data be disclosed to each data subject or publicly disclosed. If an actual or perceived breach of our security occurs, the 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 customer acceptance and sales of our products;

 

   

loss of customers;

 

   

product liability and breach of warranty claims against us;

 

   

diversion of development and support resources;

 

   

injury to our reputation;

 

   

increased billing disputes and customer claims for fee credits; and

 

   

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

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

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

Our hosting infrastructure is a critical part of our business operations. Our customers access our solutions through a standard web browser via the internet and depend on us to enable fast and reliable access to our applications. We have experienced, and may in the future experience, disruptions within our hosting infrastructure, some of which have been significant, which have prevented customers from using our solutions from time to time. Factors that may cause such disruptions include:

 

   

software errors or defects;

 

   

equipment failures or defects;

 

   

human error;

 

   

physical or electronic security breaches;

 

   

telecommunications outages from third-party providers;

 

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computer viruses or other malicious code;

 

   

acts of terrorism or sabotage;

 

   

fire, earthquake, flood and other natural disasters; and

 

   

power loss.

Although we back up customer data stored on our systems at least daily, the hosting infrastructure for all our product lines does not currently include real-time, or near real-time, mirroring of data storage and production capacity in more than one geographically distinct location. Thus, in the event of a physical disaster, or certain other failures of our computing infrastructure, customer data from recent transactions may be permanently lost.

We have also 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. 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.

We currently deliver our Taleo Enterprise solutions from secure co-location datacenters operated by third parties in which we have purchased cage space, electrical power and cooling. Redundant Internet connectivity and bandwidth is provided by an alternate third party. We currently deliver our Taleo Business Edition and Taleo Talent Grid solutions via third party managed services arrangements. We do not control the operation of any of the datacenter facilities mentioned above and must rely on our 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. Although we believe we would be able to enter into a similar relationship with another third party should one of these relationships fail or terminate for any reason, we believe our reliance on any third-party vendor exposes us to risks outside of our control. If these third-party vendors encounter financial difficulty such as bankruptcy or other events beyond our control that cause them to fail to secure adequately and maintain their hosting facilities or provide the required data communications capacity, our customers may experience interruptions in our service or the loss or theft of important customer data.

We may in the future consolidate certain of our datacenters with our other existing datacenters, or move certain datacenter operations to new facilities. For example, in 2010, we consolidated our U.S. production datacenter operations for our Taleo Enterprise solution into a new facility in the Chicago, Illinois area, and in 2011 we consolidated data centers for our Vurv and WWC solution customers into the same Chicago facility. When we consolidated these datacenter operations, we relocated existing hardware, purchased new hardware, and transferred all of our Taleo Enterprise customers’ proprietary information and their users’ personal information. Although we take reasonable precautions designed to mitigate the risks of such a move, such transitions create increased risk of service disruptions, outages and the theft or loss of important customer and user data that could harm our reputation, subject us to financial liability, and adversely affect our revenue and earnings. We may also 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 Europe and doing so may pose additional risk to us.

If, as a result of our datacenter operations, 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, and on our ability to attract and hire qualified senior management and executives. 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.

 

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Additionally, our continued success depends, in part, on our ability to attract and retain qualified personnel in the software design and development, sales, and other functions of the business. In certain of the jurisdictions in which we operate the talent pool for such qualified personnel may be limited and we may find it difficult to attract and retain qualified personnel. For instance, a significant portion of our software development function is conducted in Quebec City, a relatively limited labor market. Additionally, we may find it difficult or more costly to attract and retain qualified personnel in alternative jurisdictions in which the talent pool is less limited, or the personnel we hire in such jurisdictions may be less effective than we expect. It may also be particularly challenging to retain employees as we integrate newly acquired entities due to uncertainty among employees regarding their career options and cultural differences between us and the newly acquired entities.

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

A portion of our revenue is generated by sales to government entities, which is subject to a number of challenges and risks, including risks associated with failure to comply with government contracting regulations.

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

Our contracts with governmental customers may also be subject to various procurement regulations and other contract provisions, and governments routinely audit and investigate government contractors to confirm compliance with such regulations and provisions. We have been, and may in the future be, subject to such audits and investigations. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Qui tam actions are sealed by the court at the time of filing. The only parties privy to the information in the complaint are the complainant, the U.S. government and the court. Therefore, it is possible that qui tam actions have been filed against us and that we are not aware of such actions or have been ordered by the court not to discuss them until the seal is lifted. Thus, it is possible that we are subject to liability exposure for qui tam actions. As a result of an audit, investigation or qui tam action, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture or refund of profits or certain fees collected, suspension of payments, fines, and suspension or prohibition from doing business with the government entity. For example, in August 2011, we settled claims asserted by the U.S. government in a qui tam action for approximately $6.5 million. In addition, we could suffer serious reputational harm if allegations of impropriety are made against us, and any interruption or termination of our government contractor status could reduce our profits and revenues significantly.

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

The intensely competitive industry 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.

 

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

During the year ended December 31, 2011, revenue generated outside of the United States was 19% of total revenue, based on the location of the legal entity of the customer with which we contracted. Of the revenue generated outside the United States, 10% was generated in Europe and 5% was generated in Canada. We conduct research and development in Quebec, Canada and Poland as well as other international locations. We currently have international offices outside of North America in Australia, France, the Netherlands, Germany, Spain and the United Kingdom, which focus primarily on selling and implementing our solutions in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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;

 

   

competition from more internationally established companies;

 

   

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;

 

   

differing pricing expectations;

 

   

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 and the Euro, and may in the future have sales denominated in the currencies of additional countries. We also incur a substantial portion of our operating expenses in British pound sterling, Canadian dollar and the Euro. Any fluctuation in the exchange rate of these foreign currencies may positively or negatively affect our business, financial condition and operating results. For instance, in 2011, the impact of changes in foreign currency exchange rates compared to the average rates in effect during 2010 was a $0.6 million loss. In 2012, the volatility in exchange rates for foreign currencies may continue and, as a result, we may continue to see fluctuations in our revenue and expenses, which may impact our operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.

 

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

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

We are sometimes subject to legal proceedings and claims that arise in the course of business. We are currently a defendant or potential defendant in a number of matters described in more detail in Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K. Litigation may result in substantial costs, including lengthened or discontinued sales cycles due to concerns of existing or prospective customers with respect to litigation, and may divert management’s attention and resources, which may seriously harm our business, overall financial condition, and operating results. In addition, legal claims that have not yet been asserted against us may be asserted in the future. See Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K, 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 as we become more well-known to non-practicing entities, sometimes referred to as patent trolls, that acquire and assert patents against other entities. For example, Kenexa, a competitor, filed suit against us for patent infringement in August 2007. That lawsuit was settled in June 2011 for a net payment of $3.0 million by Taleo to Kenexa. We are currently involved in patent infringement litigation and other claims, assertions or threats involving patent infringement as are specifically described in Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K. We expect such claims will continue to be threatened, asserted or filed in the future. Our competitors or other third parties may also challenge the validity or scope of our intellectual property rights. A claim may also be made relating to technology that we acquire or license from third parties.

If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:

 

   

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

 

   

require significant management time;

 

   

cause us to enter into unfavorable royalty or license agreements;

 

   

require us to discontinue the sale of our products;

 

   

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

 

   

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

 

   

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

The application of GAAP to our operations may also require significant judgment and interpretation as to the appropriate treatment of a specific issue. These judgments and interpretations are complicated by the relative newness of the on-demand, vendor-hosted software business model, also called software-as-a-service, or SaaS, and the relative lack of interpretive guidance with respect to the application of GAAP to the SaaS model. We cannot ensure that our interpretations and judgments with respect to the application of GAAP will be correct in the future and any incorrect interpretations and judgments could adversely affect our business.

Additionally, the FASB is currently working together with the International Accounting Standards Board (IASB) to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP and those who are required to follow International Financial Reporting Standards (IFRS). These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, but not limited to, revenue recognition, lease accounting, and financial statement presentation. We expect the SEC to make a determination in the near future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS may have a material impact on our financial statements and may retroactively, adversely affect previously reported transactions.

If benefits currently available under the tax laws of Canada, the province of Quebec and other jurisdictions 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 domestic or foreign taxing authorities, our business could suffer.

A significant portion of our research and development activities are conducted through Taleo (Canada) Inc., our Canadian subsidiary. From 1999 through 2011 we recorded the benefit from qualified wage credits administered through provincial government programs in Quebec, Canada. The qualified wage credits were based upon salaries for persons performing functions on identified projects. As of the filing date of this Form 10-K, the Quebec Provincial taxing authority has not finalized its assessment relating to the 2009 year but has communicated with Taleo that it intends to disallow the 2009 qualified wage credit based on the alleged failure to file an election to claim the credit in a timely manner. We have recorded an allowance of $3.5 million for the qualified wage credits receivable related to 2009 in our annual results for the year ended December 31, 2011. The denial was based on facts which were unique to 2009 and which do not affect the 2010 and 2011 qualified wage credits. Currently, the qualified wage credit for 2010 is under review by the Provincial incentive authority (Investment Quebec) and our financial statements reflect the benefit of the 2010 qualified wage credit. In addition our financial statements reflect an estimate for the 2011 qualified wage credit. We expect future year qualified wage credits to be reviewed by both Investment Quebec and Revenue Quebec. If these qualified wage credits are reduced or disallowed by these agencies, our financial condition and operating results may be adversely affected.

In addition to the provincial qualified wage credits described above, our Canadian subsidiary is participating in a scientific research and experimental development, or SR&ED program, administered by the Canadian federal government that provides income tax credits based upon qualifying research and development expenditures. For tax years 2010 and 2011, we recorded SR&ED credits of approximately $0.9 million and $0.9 million, respectively. Our Canadian subsidiary is eligible to remain in the SR&ED program for future tax years as long as its development projects continue to qualify. These Canadian federal SR&ED tax credits can only be applied to offset Canadian federal taxes payable and are reported as a credit to our tax provision to the extent they reduce taxes payable to zero with any residual benefits recorded as a net deferred tax asset.

In 2008, the Canada Revenue Agency (“CRA”) issued assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. In December 2010 we received a proposal letter from CRA for 2004 detailing their initial proposal of increasing taxable income of CAD $7.2 million. In October 2011, we received a letter from CRA detailing their initial proposal of increasing 2005, 2006, and 2007 taxable income by CAD $5.7 million, CAD $3.8 million, and CAD $4.1 million, respectively. These adjustments relate principally to the income and expense allocations recorded between Taleo Corporation and our Canadian subsidiary of Quebec qualified wage credits. We disagree with the CRA’s basis for these adjustments and have appealed their decision through applicable administrative income tax treaty-based procedures.

There could be significant changes to unrecognized tax benefits over the next twelve months depending on the outcome of any audit. We have recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed our recorded tax reserves, we may have to accrue additional tax expense. To the extent the CRA audit results in adjustments that exceed both our tax reserves and our available deferred tax assets, we may be required to accrue and pay additional tax, penalties and interest, the amount of which cannot be reasonably estimated at this time as proceedings to determine the applicability of penalties and interest has not yet reached a conclusion.

 

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We have sought U.S. tax treaty relief through the Competent Authority for the 2002 and 2003 CRA assessments and have indicated our intent to do so for 2004 through 2007 when CRA issues their final assessment. Although we believe we have reasonable bases for our tax positions, it is possible an adverse outcome could have a material effect upon our financial condition, operating results or cash flows in a particular quarter or annual period.

As we continue to expand domestically and internationally, we are increasingly subject to reviews by various U.S. and foreign taxing authorities the outcomes of which could negatively impact our financial results. While we have reserved for these uncertainties and do not expect the outcomes of these reviews to be material to our operations, our current assessment as to the potential financial impact of these reviews could prove incorrect and we may incur additional income tax expense in the period the uncertainty is resolved.

In addition, we are currently under review by the province of Quebec regarding the application of the contribution to the Fonds des services de santé (“FSS”), pursuant to the Act respecting the “Régie de l’assurance maladie du Québec” with respect to the stock option benefits derived by Taleo Canada employees participating in the Taleo Corporation stock option plan. We disagree with the conclusion that we are subject to the contribution requirements. We have received final assessments for tax years 2006 through 2008 that we continue to discuss and reconcile with representatives of the Quebec government. We have formally objected to these assessments and plan to object to any future final assessments. Our objections for 2006 through 2008 assessments have been formally rejected by Revenue Quebec. In December 2010 we filed a motion with the Canadian courts to request a hearing. Based upon a recent court ruling in Quebec that was adverse to a taxpayer in a fact scenario similar to ours, we have recorded a reserve for a potential contribution liability. We are monitoring this case as its appeal is scheduled to be heard within the next twelve months. We believe our reserve recorded is sufficient to cover any potential final assessments for the open years. In the event the audit results in adjustments that exceed our recorded reserve, we may have to accrue additional liabilities which could have a material adverse impact on our operating results.

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

Changes in applicable tax laws and regulations, and the related rulings, interpretations, and developments can affect our overall effective income tax rate. For instance, we have historically applied existing and available net operating loss carryforwards to reduce our income tax liabilities in various tax jurisdictions. In 2008 and 2009, the State of California suspended the ability of corporations to deduct net operating loss carryforwards to reduce taxable income in these years. In October 2010, the State of California suspended the ability of corporations to deduct net operating loss carryforwards for California income tax purposes for 2010 and 2011. In addition, Illinois has suspended the use of net operating losses for tax years ending December 31, 2011 through December 31, 2014 and Michigan eliminated the use of net operating losses as it converted from the Michigan Business Tax system to the Michigan Corporate Income Tax system, effective January, 2012. Other states, such as Colorado, Indiana, New Jersey, Maine, and New Hampshire have also restricted the use of net operating losses. If additional states suspend or restrict the use of net operating losses, our tax expense may increase. Furthermore, as we expand our international operations, complete acquisitions, develop new products and new distribution models, implement changes to our operating structure or undertake intercompany transactions, changes in tax laws may result in an increase to our tax expense.

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

We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and, in the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain.

Although we believe our tax estimates are reasonable, the estimation process and interpretations of applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. The tax laws’ treatment of software and internet-based transactions is particularly uncertain and in some cases currently applicable tax laws are ill-suited to address these kinds of transactions. For instance, the application of U.S. state and local sales/use tax laws to our business model is not uniform across all state taxing jurisdictions with some jurisdictions addressing the taxability of our revenue streams through statutes, regulations and public rulings, other jurisdictions taking positions through unpublished private rulings, while still others are silent. We believe we have appropriately reserved for any potential uncollected sales/use taxes; however, our interpretations are not binding on tax authorities and the outcome of any future audit is uncertain and could have a material impact on our operations.

In the ordinary course of a global business, there are many intercompany transactions where the ultimate tax determination on transfer pricing and withholding tax issues is uncertain. Although we believe we are in compliance with transfer pricing laws and regulations in all jurisdictions in which we conduct business, there is no assurance that the final determination of any tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. Non-compliance with administrative procedures for withholding taxes could result in a temporary adverse impact to our cash flows. For example, we

 

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have been notified by the German tax authority of the need to follow certain administrative procedures that will require us to advance approximately $0.9 million in withholding taxes. We expect to recover the withholding taxes after complying with the administrative procedures. Until those are complete as determined by the German tax authority, we will have an adverse impact to cash flows from operating activities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations.

Evolving regulation of the Internet or changes in the infrastructure underlying the Internet may adversely affect our financial condition by increasing our expenditures and causing customer dissatisfaction.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies may become more likely. We are particularly sensitive to these risks because the Internet is a critical component of our business model. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for solutions accessed via the Internet and restricting our ability to store, process and share data with our customers via the Internet. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Legislation has been proposed, from time to time, that may impact the way that internet service providers treat Internet traffic. The outcome of such proposals is uncertain but certain outcomes may negatively impact our business or increase our operating costs. Any regulation imposing greater fees for internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of internet-based services, which could harm our business.

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

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

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

 

   

our operating performance and the performance of other similar companies;

 

   

overall performance of the equity markets;

 

   

developments with respect to intellectual property rights;

 

   

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

 

   

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

 

   

speculation in the press or investment community;

 

   

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

 

   

terrorist acts; and

 

   

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

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

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

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

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

 

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

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

Our board of directors also has the ability to issue preferred stock that could significantly dilute the ownership of a hostile acquirer. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% or greater stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.     PROPERTIES

We currently lease approximately 202,000 square feet of office space worldwide.

Our executive offices and principal office for domestic marketing, sales, professional services and development occupy approximately 62,000 square feet in Dublin, California. In September 2011, we entered into an amendment to expand our existing premises located in Dublin, California, to approximately 108,500 square feet, and we will occupy the additional space under this amendment in the first half of 2012. The lease for the entire Dublin office will expire in April 2022. This office space will continue to serve as our principal executive offices.

In addition, we lease approximately 45,000 square feet of space in Quebec City, Canada where we primarily perform product development, production, and customer support activities. We lease additional offices for sales, account management and support activities in the United States, including offices in Jacksonville and Sunrise, Florida; Chicago, Illinois; and Petaluma and Redwood City, California. We also lease offices for our sales and services personnel in London, United Kingdom; Melbourne and Sydney, Australia; Paris, France; and Vancouver, Canada.

In connection with our acquisition of Jobpartners in 2011, we assumed leases of approximately 17,000 square feet for office space in London and Edinburgh, United Kingdom; Paris, France; Krakow, Poland; Utrecht, Netherlands; and Frankfurt and Heidelberg, Germany. The office in Krakow, Poland, is used for research and development. The other offices are used for sales, professional services, and general operations.

We also operate data centers in the U.S. and the European Union pursuant to various lease agreements and co-location arrangements.

We believe that our existing facilities and offices are adequate to meet our current requirements. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms.

ITEM 3.     LEGAL PROCEEDINGS

Information required by this Item is included in Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K and is incorporated by reference herein.

ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TLEO”. The following table sets forth the range of high and low closing prices on the Nasdaq Global Select Market of the Class A common stock for the periods indicated.

 

     High      Low  

For the year ended December 31, 2011

     

Fourth quarter

   $ 42.24       $ 24.30   

Third quarter

     36.96         22.03   

Second quarter

     37.94         33.40   

First quarter

     36.07         28.50   

For the year ended December 31, 2010

     

Fourth quarter

   $ 32.66       $ 27.28   

Third quarter

     30.43         23.05   

Second quarter

     27.93         21.97   

First quarter

     27.22         19.17   

As of February 9, 2012, there were approximately 109 holders of record of our Class A common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholder, we are unable to estimate the total number of stockholders represented by these record holders.

Issuer Purchases of Equity Securities (1)

 

Period

   Total
Number of
Shares
Purchased
     Price Paid
per Share
    Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
     Maximum
Dollar Value
of
Shares that
May Yet
be Purchased
under the
Plans or
Program
 

October 1, 2011 through October 31, 2011

     39,460       $ 24.30        —         $ —     

November 1, 2011 through November 30, 2011

     —           —          —           —     

December 1, 2011 through December 31, 2011

     —           —          —           —     
  

 

 

      

 

 

    

 

 

 
     39,460       $ 24.30 (2)      —         $ —     
  

 

 

      

 

 

    

 

 

 

 

(1) Consists of shares repurchased to satisfy tax withholding obligations that arose on vesting of shares of restricted stock units and/or restricted stock.
(2) Represents the price per share purchased during the three months ended December 31, 2011.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

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Stock Performance Graph

The following graph shows a comparison from December 31, 2006 through December 31, 2011 of cumulative total return for Taleo’s Class A common stock, the Nasdaq Composite Index and the Nasdaq Computer and Data Processing Index. The graph assumes that $100 was invested on December 31, 2006 in Taleo’s Class A common stock and each of the indices as noted below, including reinvestment of dividends. No dividends have been paid or declared on Taleo’s Class A common stock. Note that historic stock price performance is not necessarily indicative of future stock price performance.

 

LOGO

Information used in the graph was obtained from Research Data Group Inc, a third party investment research firm, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

The stock performance graph shall not be deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Taleo under the Securities Act of 1933, as amended, or the Exchange Act.

 

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ITEM 6.     SELECTED FINANCIAL DATA

The information below is derived from our consolidated financial statements and should be read in conjunction with Item 8 — Financial Statements and Supplementary Data and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Consolidated Statements of Operations data for each of the years ended December 31, 2008 and 2007 and the Consolidated Balance Sheets data as of December 31, 2009, 2008 and 2007 are derived from our consolidated financial statements which are not included in this report. Our historical results are not necessarily indicative of results for any future period.

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data (1):

          

Revenues:

          

Subscription and support

   $ 256,526      $ 199,302      $ 173,495      $ 138,628      $ 105,032   

Professional services

     58,869        37,973        24,917        29,791        23,038   

TSA settlement — subscription and support (Note 9)

     (6,500     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     308,895        237,275        198,412        168,419        128,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

          

Subscription and support

     58,380        48,765        41,478        32,376        22,642   

Professional services

     44,992        29,671        24,614        25,269        18,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     103,372        78,436        66,092        57,645        40,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     205,523        158,839        132,320        110,774        87,330   

Operating expenses:

          

Sales and marketing

     112,083        77,721        65,731        53,827        37,172   

Research and development

     58,127        43,431        34,847        30,994        23,197   

General and administrative (2)

     55,529        42,761        32,240        31,419        23,742   

Restructuring and severance expense

     —          —          —          1,914        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     225,739        163,913        132,818        118,154        84,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) (2)

     (20,216     (5,074     (498     (7,380     3,219   

Interest and other income (expense), net:

          

Interest income

     348        482        329        1,717        3,045   

Interest expense

     (364     (106     (166     (199     (137

Gain on WWC escrow settlement

     350        —          —          —          —     

Gain on re-measurement of previously held interest in WWC

     —          885        —          —          —     

WWC purchase option write-off

     —          —          (1,084     —          —     

Gain on Vurv escrow settlement

     —          —          2,471        —          —     

Other income (expense), net (2)

     581        (1,073     (912     (963     (539
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and other income (expense), net (2)

     915        188        638        555        2,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     (19,301     (4,886     140        (6,825     5,588   

Provision for (benefit from) income taxes

     (1,870     (5,306     (1,153     1,303        3,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (17,431   $ 420      $ 1,293      $ (8,128   $ 2,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Class A common stockholders — basic

   $ (0.42   $ 0.01      $ 0.04      $ (0.29   $ 0.10   

Net income (loss) per share attributable to Class A common stockholders — diluted

   $ (0.42   $ 0.01      $ 0.04      $ (0.29   $ 0.09   

Weighted-average Class A common shares — basic

     41,043        39,685        31,507        27,569        24,116   

Weighted-average Class A common shares — diluted

     41,043        40,915        32,406        27,569        28,777   

 

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     December 31,  
     2011      2010      2009      2008      2007  
     (In thousands, except per share data)  

Consolidated Balance Sheets Data:

              

Cash and cash equivalents

   $ 115,974       $ 141,588       $ 244,229       $ 49,462       $ 86,135   

Working capital

     56,236         87,929         202,524         19,594         60,515   

Total assets

     574,722         523,836         456,377         283,189         164,821   

Long-term debt (3)

     7         46         107         519         16   

Total preferred stock and exchangeable share obligation (4)

     —           —           —           —           331   

Total stockholders’ equity

     379,227         368,515         337,209         172,421         85,668   

 

(1) We acquired Jobpartners in July 2011, Cytiva in April 2011, Learn.com in October 2010, WWC in January 2010, Vurv in July 2008, certain assets of Wetfeet, Inc. in July 2007, and certain assets of JobFlash, Inc. in March 2007. Our Consolidated Statements of Operations and Consolidated Balance Sheets data include the results of these acquired businesses only for periods subsequent to their respective acquisition dates. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 “Business Combinations” of the Notes to Consolidated Financial Statements for additional information regarding these acquisitions.
(2) In the fourth quarter of 2011, we began classifying realized and unrealized gains and losses from foreign currency transactions in our Consolidated Statements of Operations within Other income (expense), net. These amounts were previously included in the line item general and administrative expense in our Consolidated Statements of Operations. The Consolidated Statements of Operations for all periods presented have been reclassified to conform to the current presentation.
(3) Includes capital leases related to production equipment and internal use software. See Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.
(4) Includes exchangeable shares and redeemable convertible preferred stock that were converted to Class A common stock as of December 31, 2008.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled of this Annual Report on Form 10-K “Risk Factors”. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.

Overview

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

We deliver our solutions on demand as a 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. Our revenue is primarily earned through subscription fees charged for accessing and using these solutions. Our customers generally are billed in advance for their use of our solutions, and we use these cash receipts to fund our operations.

We market our integrated suite of talent management products to two target audience segments. Taleo Enterprise™, for medium and large enterprises with more complex needs, is sold through our direct sales force and indirectly through our strategic partners. We sell Taleo Business Edition™ to smaller, more centralized organizations, primarily through our direct inside sales team with a focus on Internet marketing efforts. Our complete customer base ranges in size from large, global organizations, including 47 of the Fortune 100, to small, private companies with few employees.

 

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We focus our evaluation of our operating results and financial condition on certain key metrics, as well as certain non-financial aspects of our business. Included in our evaluation of our financial condition are our revenue composition and growth, net income, and our overall liquidity that is primarily comprised of our cash and accounts receivable balances. Non-financial data is also evaluated, including purchasing trends for software applications across industries and geographies, input from current and prospective customers relating to product functionality and general economic data. We use the financial and non-financial data described above to assess our historic performance, and also to plan our future strategy.

We made the following investments in 2011:

 

   

On July 1, 2011, we completed our acquisition of Jobpartners, a European provider of talent management solutions, for $39.3 million in cash. 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.

 

   

On April 1, 2011, we completed our acquisition of Cytiva, a provider of on-demand recruiting software solutions. The total consideration paid by us to acquire all of the outstanding capital stock and vested options of Cytiva was approximately $12.3 million in cash. We expect the acquisition of Cytiva to improve our position in talent management for small and medium-sized businesses and expand our customer base.

 

   

We also made investments in our infrastructure to ensure scalability and reliability for customers as well as in our sales capacity.

Recent Developments

On February 8, 2012, we entered into a definitive agreement under which Oracle will acquire all of our common stock, through a merger, for $46.00 per share in cash and we will become a wholly owned subsidiary of Oracle. The completion of the acquisition is subject to customary conditions, including without limitation, (i) the approval of the acquisition by Taleo’s stockholders; (ii) expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iii) receipt of other required foreign antitrust approvals, if any. The definitive agreement provides that under specified circumstances, including our acceptance of a superior acquisition proposal, we may be required to pay Oracle a termination fee of $66.0 million. We may also be required to reimburse Oracle for up to $5.0 million of its out-of-pocket expenses in connection with the transaction under certain circumstances.

Sources of Revenue

We derive our revenue from two sources: subscription and support revenue and professional services revenue.

Subscription and Support Revenue

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

The term of our subscription and support agreements signed with new customers purchasing Taleo Enterprise is typically three or more years. The term of subscription and support agreements for new customers purchasing Taleo Business Edition is typically one year.

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. We generally invoice our customers in advance, in annual or quarterly installments, and typical payment terms provide that our customers pay us within 30 to 60 days of receipt of invoice.

Professional Services Revenue

Professional services revenue consists primarily of fees associated with application process definition, configuration, integration, change management, optimization, expansion and education and training services associated with our applications. 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. Our 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 receipt of the invoice.

 

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Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of subscription and support revenue primarily consists of expenses related to hosting our application and providing support, including employee-related costs, depreciation expense associated with computer equipment, third party royalty expense, and amortization of intangibles from acquisitions. We allocate overhead such as rent and occupancy charges, information system cost, employee benefit costs and depreciation expense to all departments based on employee count. As such, overhead expenses are reflected in each cost of revenue and operating expense category.

Cost of professional services revenue consists primarily of employee-related costs associated with these services and allocated overhead. The cost associated with providing professional services is significantly higher as a percentage of revenue than for our subscription and support revenue, primarily due to labor costs. We also subcontract to third parties for a portion of our consulting business.

Our cost of subscription and support revenue and cost of professional services revenue is net of the qualified wage credits we receive from the Province of Quebec.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions, marketing programs, allocated overhead and amortization of intangibles from acquisitions. Commissions are expensed over the twelve-month period following the initiation of a new customer contract. 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 research and development expenses are net of the qualified wage credits we receive from the Province of Quebec. We focus our research and development efforts on increasing the functionality and enhancing the ease of use and quality of our applications, as well as developing new products and enhancing our infrastructure.

General and Administrative

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

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the current tax liability and assessing valuation allowance requirements on deferred tax assets resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 1 “Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. Our management has reviewed these critical accounting policies, our use of estimates, and the related disclosures with our audit committee.

 

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Revenue Recognition

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

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

 

  persuasive evidence of an agreement exists;

 

  delivery has occurred;

 

  fees are fixed or determinable; and

 

  the collection of fees is considered probable.

If collection is not considered probable, we recognize revenues when the fees for the services performed are collected. 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 monthly over the life of the application agreement, based on stated, fixed-dollar amount contracts with our customers.

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 typically 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 consulting services that we offer. Our typical professional services contract provides for payment within 30 to 60 days of invoice.

On January 1, 2010, we adopted Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”) on a prospective basis. ASU 2009-13 amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:

 

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

 

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

 

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

Valuation terms are defined as set forth below:

 

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

 

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

 

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

We 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 us and similar services are sold by other vendors. 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 company’s 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 will be evaluated as one unit of accounting. We determined ESP for our subscription and support services based on the following:

 

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

 

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

For multi-element arrangements entered into or materially modified in 2010 and thereafter, we allocate consideration proportionately based on the relative selling prices, and then recognize the allocated revenue over the respective delivery periods for each element.

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 2011 and 2010 relating to multi-element arrangements entered into prior to 2010 was approximately $10.0 million and $13.4 million, respectively. During 2011 and 2010, we deferred additional revenue of $0.6 million and $8.3 million, respectively, for services performed related to multi-element arrangements entered into prior to 2010.

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. They are accounted for as both revenue and expense in the period the cost is incurred.

Stock-based Compensation

We measure all share-based payments to employees, including purchase rights under our Employee Stock Purchase Plan (“ESPP”), based on the grant date fair value of the awards and recognize these amounts in our Consolidated Statements of Operations on a straight-line basis over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award). We calculate the fair value of restricted stock units and restricted stock awards based on our stock price on the date of grant. We use the Black-Scholes pricing model to estimate the fair value of a stock option as well as for purchase rights under our Employee Stock Purchase Plan. This model requires the input of highly subjective assumptions such as expected term and expected volatility. Changes in the subjective input assumptions can materially affect the estimate of fair value of options granted and our results of operations could be impacted.

Expected Term: We estimate the expected term using the simplified method. We elected to use the simplified method due to a lack of term length data and our options meet the criteria of the “plain-vanilla” options. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. An increase in the expected term by 1 year for options granted in 2011would increase the total stock-based compensation by approximately $0.6 million.

Expected Volatility: We estimate the expected volatility of our common stock at the date of grant based on our historical volatility and considering the volatility of comparable companies. An increase of 10% in our computation of expected volatility would increase the total stock-based compensation expense for options granted in 2011 by approximately $0.9 million.

In addition, our estimates of the forfeiture rate, which is the number of stock-based payment awards that we expect to vest, also has a significant impact on the recorded stock-based compensation expense. We consider many factors when estimating forfeitures, including employee class and historical experience and record share-based compensation expense only for those awards that are expected to vest.

We expect to continue to issue share-based awards to our employees in future periods, which will increase the stock-based compensation amortization in such future periods. We recognize as an operating expense the payroll and social tax costs, as applicable by jurisdiction, when stock options are exercised. The requirement to expense stock-based awards will continue to materially reduce our reported results of operations. As of December 31, 2011, we had an aggregate of $57.4 million of stock-based compensation, net of assumed forfeitures, remaining to be amortized to expense over the remaining requisite service period of the underlying awards. The impact of stock-based expense in the future is dependent upon, among other things, the timing of when we hire additional employees, the effect of long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock awards granted, the fair value of the stock awards at the time of grant, changes in estimated forfeiture assumption rates and the tax benefit that we may or may not receive from stock-based compensation.

 

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Impairment of Goodwill and Other Intangible Assets

We perform a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that impairment may have occurred. Such events or circumstances may include significant adverse changes in the general business climate, among other things. The impairment test is performed by determining the fair value of the reporting unit based on estimated discounted future cash flows and also considering the market price of our common stock. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We did not record any charges related to goodwill impairment during 2011 as our assessment indicated that the estimated fair value of our reporting units was substantially in excess of their carrying values.

Identified intangible assets primarily consist of acquisition-related developed technology, customer relationships, patents and trade names which are generally amortized over the periods of benefit, ranging from one to seven years. We perform a review of identified intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than it had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There were no impairment charges related to identified intangible assets in 2011.

Income Taxes

We are subject to income taxes in the United States and foreign jurisdictions based upon actual and estimated amounts. We record deferred tax assets and liabilities on the Consolidated Balance Sheets as temporary differences arise. Our temporary differences arise because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses. A difference between the tax basis of an asset or a liability and its reported amount in the statement of financial position will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. Deferred tax assets, related valuation allowances, and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating current tax expense (benefit) together with assessing temporary differences. Our deferred tax assets consist primarily of net operating loss carryforwards, research credits, and temporary differences related to deferred revenue and stock based compensation. Our deferred tax liabilities consist primarily of acquired intangible assets that are amortizable for financial reporting purposes only.

We assess the likelihood that our deferred tax assets will be deductible in some future year(s) and a valuation allowance is recorded if it is deemed more likely than not that such benefit will not be realized. As of December 31, 2011, we continue to maintain a valuation allowance against our U.S. deferred tax assets. In addition, we expect to provide a valuation allowance on future U.S. tax benefits until significant positive evidence arises that demonstrates that these assets are more likely than not to be deductible in some future year(s). We recorded a valuation allowance against deferred tax assets that were acquired with the acquisition of Jobpartners during the second quarter. Evaluating and quantifying these amounts involves significant judgment. We consider all available evidence, both positive and negative, to determine whether a valuation allowance is needed. Cumulative losses weigh heavily in our overall assessment. In determining the amount of valuation allowance we did not include the taxable temporary differences related to (i) certain transaction costs and (ii) tax-deductible goodwill acquired from certain acquisitions. These differences create deferred tax liabilities which are not expected to reverse in the future (i.e. are considered to have indefinite lives).

We are periodically examined by domestic and foreign tax authorities. These examinations include questions regarding the timing and amount of income and deductions and the allocation among various tax jurisdictions. Our estimate of the potential outcome for any uncertain tax position is highly judgmental. We account for uncertain tax positions by recognizing and measuring tax benefits taken or expected to be taken on a tax return. The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Although we believe we have adequately recognized and measured our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust the recognition and measurement of our uncertain tax positions based upon changing facts and circumstances, such as the closing of a tax audit, judicial rulings, or realization of revenues or expenses that differ from our estimates. We do not adjust our recognition or measurement based upon a reassessment of existing facts. The effective settlement with a taxing authority of an unrecognized tax benefit balance will generally result in the recognition of a tax benefit in the settlement period.

 

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Historically, we have considered undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. taxes have been provided thereon. We intend to continue to indefinitely reinvest the undistributed earnings of our foreign subsidiaries outside of the United States.

Results of Operations

The following table sets forth certain 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.

 

     Year ended December 31,  
     2011     2010     2009  

Consolidated Statement of Operations Data:

      

Revenues:

      

Subscription and support

     83     84     87

Professional services

     19     16     13

TSA settlement — subscription and support (Note 9)

     (2 %)      0     0
  

 

 

   

 

 

   

 

 

 

Net revenues

     100     100     100
  

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Subscription and support

     23     24     24

Professional services

     76     78     99

Total cost of revenues

     33     33     33
  

 

 

   

 

 

   

 

 

 

Gross profit

     67     67     67
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Sales and marketing

     36     33     33

Research and development

     19     18     18

General and administrative

     18     18     16
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     73     69     67
  

 

 

   

 

 

   

 

 

 

Operating loss

     (6 %)      (2 %)      (0 %) 
  

 

 

   

 

 

   

 

 

 

Interest and other income (expense), net:

      

Interest income

     0     0     0

Interest expense

     0     0     0

Other income (expense), net

     0     (0 %)      0
  

 

 

   

 

 

   

 

 

 

Total interest and other income (expense), net

     0     (0 %)      0
  

 

 

   

 

 

   

 

 

 

Income (loss) before benefit from income taxes

     (6 %)      (2 %)      0

Benefit from income taxes

     (0 %)      (2 %)      (1 %) 
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     (6 %)      (0 %)      1
  

 

 

   

 

 

   

 

 

 

Comparison of the Years ended December 31, 2011 and 2010

Revenues

 

     2011     2010      $ Change     % Change  
     (In thousands)        

Subscription and support

   $ 256,526      $ 199,302       $ 57,224        29

Professional services

     58,869        37,973         20,896        55

TSA settlement — subscription and support

     (6,500     —           (6,500     *   
  

 

 

   

 

 

    

 

 

   

Net revenues

   $ 308,895      $ 237,275       $ 71,620        30
  

 

 

   

 

 

    

 

 

   

 

 

* not meaningful

Subscription and support revenue increased due to sales to new customers, successful renewals of existing customers, sales of additional applications and broader roll out of our applications by existing customers and the addition of customers through our acquisition of Jobpartners on July 1, 2011, Cytiva on April 1, 2011, and Learn.com on October 1, 2010. Subscription and support revenue from our products for medium and larger, more complex organizations increased by $36.9 million for 2011 as compared to 2010. Subscription and support revenue from our small business product lines increased by $20.3 million for 2011 as compared to 2010. We expect total subscription and support revenue to increase for 2012 as we continue to increase our sales of new and existing applications into our installed customer base, to new customers and to additional customers added through the acquisition of Jobpartners on July 1, 2011 and Cytiva on April 1, 2011. However, unexpected events, such as significant staff reductions within our customer base, may negatively impact our renewal trends.

 

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The change in subscription and support revenues for 2011 also included a $6.5 million reduction in revenue related to a settlement agreement with the federal government (See Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K).

Our professional services revenue comes primarily from two kinds of engagements: standalone professional services engagements which are not associated with new product implementations and professional services engagements which are associated with new product implementations. Standalone professional services engagement revenue is generally recognized when the services are performed. Professional services revenue for engagements which are associated with new product implementation entered into prior to 2010 is generally recognized ratably over the term of the associated subscription and support services term with a significant portion of revenue deferred to periods beyond the period in which services are performed. Professional services revenue for engagements which are associated with new product implementations entered into since the beginning of 2010 has been generally recognized when the services are performed.

Professional services revenue that is recognized as services are performed increased in 2011 when compared to 2010 resulting from the higher demand for services from an increased number of customers. However, the increase was offset in part by a decrease in professional services revenue recognized for professional services that were delivered prior to 2010 but recognized in later periods. Professional services revenue recognized in 2011 and 2010 relating to multi-element arrangements entered into prior to 2010 were approximately $10.0 million and $13.4 million, respectively.

Revenues by region

We track the geographic mix of our revenue on the basis of the location of the contracting entity of our customers. The geographic mix of revenue based on the region of location of the customer contracting in the year ended December 31, 2011 was 81% from the United States, 5% from Canada, 10% from Europe, and 4% from the rest of the world. The geographic mix of revenue based on the region of location of the customer contracting in the year ended December 31, 2010 was 83% from the United States, 4% from Canada, 9% from Europe, and 4% from the rest of the world.

Cost of Revenues

 

     2011      2010      $ Change      % Change  
     (In thousands)         

Cost of revenue — Subscription and support

   $ 58,380       $ 48,765       $ 9,615         20

Cost of revenue — Professional services

     44,992         29,671         15,321         52
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 103,372       $ 78,436       $ 24,936         32
  

 

 

    

 

 

    

 

 

    

Cost of revenue — subscription and support — summary of changes

 

     Change from 2010 to 2011  

Employee-related costs

   $ 2,876   

Hosting facility costs and software support

     3,012   

Third party royalty expense

     1,812   

Stock-based compensation

     424   

Depreciation and amortization

     418   

Various other expenses

     1,073   
  

 

 

 
   $ 9,615   
  

 

 

 

Employee-related costs increased as a result of the hiring of additional employees primarily in connection with our acquisitions of Learn.com in October 2010, Cytiva in April 2011, and Jobpartners in July 2011, as well as an increase in compensation costs due to merit pay raises. These increases were offset in part by a credit related to the qualified wage credit program for qualifying personnel expenditures.

We participated in a provincial government program in Quebec, Canada through 2010 and received qualified wage credits based upon qualifying research and development expenditures (“prior Quebec program”). This particular qualified wage credit program in Quebec expired in December 2010. In 2011, we were initially accepted in a new provincial qualified wage credit program (“current Quebec program”) that replaced the prior Quebec program. Since the current Quebec program is retroactive to 2009 and provides for a broader

 

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base of qualifying salaries than under the prior Quebec program, we were able to increase our projected refund over the amounts previously recorded as expense reductions in 2009 and 2010. We initially recorded $1.6 million in qualified wage credits under the current Quebec program to cost of subscription and support revenue in 2011, of which $1.1 million related to the projected refund amounts for 2009 and 2010. There were no qualified wage credits recorded related to cost of subscription and support revenue in 2010. Please refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K for the detail on the Revenue Quebec audit of the 2009 qualified wage credits.

Hosting facility costs increased due to increased costs resulting from infrastructure investments as well as increased hosting costs as a result of the Learn.com, Cytiva and Jobpartners acquisitions. Third party royalty expense increased primarily due to the royalty contracts that we acquired from the acquisition of Learn.com. Depreciation and amortization expense increased due to amortization of intangible assets obtained in connection with the acquisitions of Learn.com, Cytiva and Jobpartners, offset by the decrease in amortization expense related to intangible assets acquired in connection with the Vurv acquisition. Stock-based compensation costs increased as a result of incremental grants in 2010 and 2011 combined with an overall increasing trend in our stock price in 2010 and 2011. The increase in other expenses was primarily as a result of allocated overhead costs due to the increase in headcount.

We expect cost of subscription and support revenue to continue to increase in absolute dollars for 2012 in support of increased revenues.

Cost of revenue — professional services — summary of changes

 

     Change from 2010 to 2011  

Employee-related costs

   $ 9,255   

Professional services

     2,209   

Business development and travel

     1,134   

Stock-based compensation

     977   

Various other expenses

     1,746   
  

 

 

 
   $ 15,321   
  

 

 

 

Employee-related costs increased as a result of increase in headcount due to the hiring of additional employees in order to meet the current and anticipated demand for our consulting and training services as well as the addition of employees in connection with the acquisitions of Learn.com in October 2010, Cytiva in April 2011 and Jobpartners in July 2011. These increases were offset in part by qualified wage credits related to the current Quebec program for qualifying personnel expenditures. We initially recorded a $1.2 million credit to cost of professional services revenue in 2011, of which $0.9 million related to the projected refund amounts for 2009 and 2010. There was no credit recorded related to cost of professional services revenue in 2010. Please refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K for the detail on the Revenue Quebec audit of the 2009 qualified wage credits.

Professional services costs increased due to additional outsourced services corresponding with the increase in professional services revenue. Business development and travel expense increased due to increased headcount and professional service activities. Stock-based compensation costs increased as a result of incremental grants in 2010 and 2011 combined with an overall increasing trend in our stock price in 2010 and 2011.

We expect cost of professional services revenue to increase in absolute dollars for 2012 to meet higher anticipated demand for our professional services.

Gross Profit and Gross Profit Percentage

 

     2011      2010      $ Change      % Change  
     (In thousands)         

Gross profit — subscription and support

   $ 191,646       $ 150,537       $ 41,109         27

Gross profit — professional services

     13,877         8,302         5,575         67
  

 

 

    

 

 

    

 

 

    

Gross profit — total

   $ 205,523       $ 158,839       $ 46,684         29
  

 

 

    

 

 

    

 

 

    

 

     2011     2010     Change  

Gross profit — subscription and support

     77     76     1

Gross profit — professional services

     24     22     2

Gross profit — total

     67     67     0

Gross profit — subscription and support

The gross profit percentage on subscription and support revenue for 2011 remained comparable to 2010. We expect gross profit on subscription and support revenue to increase in absolute dollars for 2012 as we continue to support additional customers.

 

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Gross profit — professional services

The higher gross profit percentage on professional services revenue in 2011 compared to 2010 resulted primarily from professional services revenue associated with new product implementations delivered before 2010 that are being recognized ratably. During 2011 and 2010, we benefited from recognizing revenue, net of additional deferrals, of $9.4 million and $5.1 million, respectively, for which the related expense was recorded in the prior years. Additionally, as described above, we initially recorded $1.2 million in qualified wage credits under the current Quebec program to the cost of professional services revenue in 2011, of which $0.9 million related to the projected refund amounts for 2009 and 2010. Please refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K for the detail on the Revenue Quebec audit of the 2009 qualified wage credits.

Operating Expenses

 

     2011      2010      $ Change      % Change  
     (In thousands)                

Sales and marketing

   $ 112,083       $ 77,721       $ 34,362         44

Research and development

     58,127         43,431         14,696         34

General and administrative

     55,529         42,761         12,768         30
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 225,739       $ 163,913       $ 61,826         38
  

 

 

    

 

 

    

 

 

    

Sales and marketing — summary of changes

 

     Change from 2010 to 2011  

Employee-related costs

   $ 16,561   

Depreciation and amortization

     5,405   

Marketing programs

     4,996   

Business development and travel

     2,234   

Stock-based compensation

     2,159   

Telecommunications expense

     1,004   

Third party royalties

     396   

Various other expenses

     1,607   
  

 

 

 
   $ 34,362   
  

 

 

 

Employee-related costs increased due to an increase in headcount primarily from our acquisition of Learn.com and Jobpartners, as well as additional sales and marketing personnel hired to focus on adding new customers and increasing penetration within our existing customer base, merit pay raises, an increase in incentive compensation due to an increase in sales and an increase in severance costs. Depreciation and amortization expense increased due to the amortization of intangible assets obtained in connection with the acquisitions of Learn.com, Cytiva and Jobpartners offset in part by the decrease in amortization expense related to intangible assets acquired in connection with the Vurv acquisition. We amortize the Vurv intangible assets in proportion to our conversion of Vurv customers to Taleo products. There were fewer customers to convert in 2011 than 2010 resulting in a reduction in amortization expense. Marketing program costs increased due to increased marketing activities for all products and business development and travel costs increased due to the increase in headcount. Stock-based compensation costs increased as a result of incremental grants in 2010 and 2011 combined with an overall increasing trend in our stock price in this period. The increase in other expenses was primarily as a result of higher allocated overhead costs due to the increase in headcount. We expect sales and marketing costs to increase in absolute dollars for 2012 as we continue our efforts to grow our business.

Research and development — summary of changes

 

     Change from 2010 to 2011  

Employee-related costs

   $ 7,544   

Business development and travel

     907   

Stock-based compensation

     2,062   

Allowance for 2009 qualified wage credits receivable

     3,536   

Various other expenses

     647   
  

 

 

 
   $ 14,696   
  

 

 

 

 

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Employee-related costs increased primarily due to an increase in headcount resulting from the acquisition of Learn.com in October 2010 and Jobpartners in July 2011, as well as hiring of additional employees, and an increase in compensation costs due to merit pay raises. Business development and travel costs increased as a result of the increase in headcount. The increase in other expenses was primarily as a result of higher allocated overhead costs due to the increase in headcount. Stock-based compensation costs increased as a result of incremental grants in 2011 and 2010 combined with an overall increasing trend in our stock price in this period. These increases were offset in part by qualified wage credits related to the current Quebec program for qualifying personnel expenditures. We recorded $2.8 million reduction in our research and development expenses in 2010 under the prior Quebec program. We recorded $3.0 million reduction in our research and development expenses in 2011 under the current Quebec program . Additionally, research and development costs in 2011 were also adversely affected by the negative impact of foreign currency movements, particularly the Canadian dollar.

On February 23, 2012, prior to the issuance of our financial statements, we received a notification from Revenue Quebec that our 2009 qualified wage credit claim was denied. Although we intend to pursue this matter with an appeal to the Minister of Finance in Quebec, we have recorded an allowance of $3.5 million related to this receivable in our annual results for the year ended December 31, 2011. The denial for the 2009 qualified wage credits was based on an alleged failure to file an election to claim the credit in a timely manner. The denial does not affect the 2010 and 2011 qualified wage credits. We have attributed this allowance to Research and Development.

We expect our research and development expenses to increase in absolute dollars for 2012 as we continue to integrate the operations of Jobpartners and also continue our efforts to expand our development activities.

General and administrative — summary of changes

 

     Change from 2010 to 2011  

Employee-related costs

   $ 9,038   

Legal

     4,381   

Audit and tax related

     1,430   

Stock-based compensation

     1,334   

Bad debt reserve

     504   

Professional services, other

     (1,662

Various other expenses

     (2,257
  

 

 

 
   $ 12,768   
  

 

 

 

Employee-related costs increased due to an increase in headcount primarily from the acquisitions of Learn.com, Cytiva and Jobpartners, merit pay raises, an increase in incentive compensation costs when compared to same periods in the prior year, and an increase in severance costs. The increase in legal costs for 2011 compared to 2010 was primarily due to the settlement resolving all outstanding litigation between us and Kenexa, settlement of the Trunqate patent litigation, the payment for the attorney’s fees of the qui tam relator in connection with our settlement with the federal government, as well as accruals for ongoing litigation costs (See Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K). Audit and tax expense increased primarily due to an increase in acquisition-related professional services. Stock-based compensation cost increased as a result of incremental grants in 2010 and 2011 combined with an overall increasing trend in our stock price in this period. Professional services expense decreased in 2011 as compared to the prior year due to higher acquisition-related transaction costs incurred in 2010 relating to our acquisition of Learn.com in October 2010. We expect our general and administrative expenses to increase in absolute dollars for 2012 as we continue to integrate the operations of Cytiva and Jobpartners.

Interest and Other Income (Expense), Net

 

     2011     2010     $ Change     % Change  
     (In thousands)              

Interest income

   $ 348      $ 482      $ (134     (28 %) 

Interest expense

     (364     (106     (258     243

Other income (expense), net

     931        (188     1,119        (595 %) 
  

 

 

   

 

 

   

 

 

   

Total interest and other income (expense), net

   $ 915      $ 188      $ 727        387
  

 

 

   

 

 

   

 

 

   

Interest income — The decrease in interest income in 2011 is primarily attributable to a lower average cash balance during 2011 compared to the prior year due to the acquisitions of Cytiva in April 2011 and Jobpartners in July 2011.

Interest expense — The increase in interest expense during 2011 compared to the prior year is primarily due to the amortization of debt issuance costs associated with our Credit Agreement (See Note 8 “Credit Agreement” of the Notes to Consolidated Financial Statements in this Form 10-K).

Other income (expense), net — In the fourth quarter of 2011, we began classifying realized and unrealized gains and losses from foreign currency transactions in our Consolidated Statements of Operations within Other income (expense), net. These amounts were previously included in the line item general and administrative expense in our Consolidated Statements of Operations. The Consolidated Statements of Operations for all periods presented have been reclassified to conform to the current presentation.

 

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Other income (expense), net for 2011 includes $0.5 million of realized and unrealized foreign currency transaction gains and $0.4 million of gain recorded upon the settlement of the WWC escrow account in 2011. Foreign currency transaction gains in 2011 include $1.0 million of realized gains from the settlement of an intercompany loan.

Other income (expense), net for 2010 includes $1.1 million of realized and unrealized foreign currency transaction losses and $0.9 million of gain recorded upon the completion of the acquisition of WWC on January 1, 2010. In accordance with the acquisition method of accounting for a business combination, our 16% previously owned equity investment in WWC was re-measured to its $2.3 million fair value on the acquisition date and the difference between the fair value of equity investment and the $1.4 million carrying value was recorded as gain.

Benefit From Income Taxes

 

     2011     2010     $ Change      % Change  
     (In thousands)               

Benefit from income taxes

   $ (1,870   $ (5,306   $ 3,436         (65 %) 

We recorded an income tax benefit of approximately $1.9 million in 2011 compared to an income tax benefit of $5.3 million in 2010. The change is primarily attributable to valuation allowance on U.S. and foreign deferred tax assets and differences between statutory rate and foreign effective tax rates, offset primarily by state tax research credits and change in apportionment method. The difference between the statutory rate of 34% and our effective tax rate benefit of 10% was due primarily to valuation allowance, permanent differences related to non-deductible stock compensation expenses, non-deductible transaction costs, state taxes, and Canadian research and development tax credits. At December 31, 2011, we maintained a valuation allowance against our U.S. and certain foreign deferred tax assets as we determined it was more likely than not that these assets will not be realized.

Comparison of the Years ended December 31, 2010 and 2009

Revenues

 

     2010      2009      $ Change      % Change  
     (In thousands)                

Subscription and support

   $ 199,302       $ 173,495       $ 25,807         15

Professional services

     37,973         24,917         13,056         52
  

 

 

    

 

 

    

 

 

    

Net revenues

   $ 237,275       $ 198,412       $ 38,863         20
  

 

 

    

 

 

    

 

 

    

Subscription and support revenue increased due to sales to new customers, successful renewals of existing customers, sales of additional applications and broader roll out of our applications by existing customers and the addition of customers through our acquisition of WWC on January 1, 2010 and Learn.com on October 1, 2010. Subscription and support revenue from our products for medium and larger, more complex organizations increased by $21.0 million in 2010 as compared to 2009 and subscription and support revenue from our small business product lines increased by $4.8 million for 2010 as compared to 2009. Our list prices for subscription and support services have remained relatively consistent on a year-over-year basis, and renewals of subscription and support services for medium and larger more complex organization, on a dollar-for-dollar basis, remained strong at approximately 97%. The increase in subscription and support revenues was due primarily to new customers, upgrades and additional subscriptions from existing customers and improvement in renewal rates over the past twelve months, and incremental revenue resulting from the acquisition of Learn.com in October 2010.

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

For 2010, professional services revenue increased as a result of an increase in revenue recognized from professional services associated with new product implementations that were delivered in past periods and are recognized ratably. Also, professional services revenue recognized as services are performed increased in 2010 when compared to 2009 resulting from higher demand for services from an increased number of customers. The utilization rate for our consultants is the percentage of time billable out of a 2,080 hour year and we experienced a slight increase in 2010 from 65% in 2009 to 67% in 2010. The prices of our professional services were relatively consistent on a period-to-period comparative basis.

 

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Revenues by region

We track the geographic mix of our revenue on the basis of the location of the contracting entity of our customers. The geographic mix of revenue based on the region of location of the customer contracting in the year ended December 31, 2010 was 83% from the United States, 4% from Canada, 9% from Europe, and 4% from the rest of the world. The geographic mix of revenue based on the region of location of the customer contracting legal entity in the year ended December 31, 2009 was 81% from the United States, 4% from Canada, 11% from Europe, and 4% from the rest of the world.

Cost of Revenues

 

     2010      2009      $ Change      % Change  
     (In thousands)         

Cost of revenue — Subscription and support

   $ 48,765       $ 41,478       $ 7,287         18

Cost of revenue — Professional services

     29,671         24,614         5,057         21
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 78,436       $ 66,092       $ 12,344         19
  

 

 

    

 

 

    

 

 

    

Cost of revenue — subscription and support — summary of changes

 

     Change from 2009 to 2010  

Employee-related costs

   $ 1,881   

Hosting facility costs

     2,582   

Software support

     1,472   

Depreciation and amortization

     1,098   

Other professional services

     (33

Various other expenses

     287   
  

 

 

 
   $ 7,287   
  

 

 

 

The increase in cost of subscription and support revenue in 2010 was primarily driven by an increase in hosting facility costs, employee-related costs, software support costs and depreciation and amortization expense. Hosting facility expenses increased due to increased capacity, and costs resulting from infrastructure investments and support cost associated with our new U.S. production data center which went into service in the second quarter of 2010 in the Chicago, Illinois area. Employee-related costs increased as a result of the hiring of additional employees primarily in connection with the acquisition of Learn.com, an increase in compensation cost due to merit pay raises, and an increase in incentive compensation as compared to the prior year. Software support costs increased due to additional third-party software purchases used to support our product offerings. Depreciation and amortization expense increased due to the amortization of intangible assets obtained in connection with the acquisitions of Learn.com and WWC. Other professional services decreased slightly in 2010 compared to 2009 due to a reduction in outsourced support.

Cost of revenue — professional services — summary of changes

 

     Change from 2009 to 2010  

Employee-related costs

   $ 2,999   

Professional services

     1,030   

Stock-based compensation

     507   

Various other expenses

     521   
  

 

 

 
   $ 5,057   
  

 

 

 

Expenses associated with delivering professional services are generally recognized as incurred when the services are performed. For 2010, cost of professional services revenue increased as a result of an increase in employee-related costs as well as professional services cost as compared to 2009. Employee-related costs increased as a result of increase in headcount as we hired additional employees in order to meet the current and anticipated demand for our consulting and training services as well as the hiring of additional employees in connection with the acquisition of Learn.com, an increase in compensation cost due to merit pay raises, and an increase in incentive compensation as compared to the same period in the prior year. We increased the professional services headcount. Professional services cost increased due to additional outsourced services consulting costs corresponding with the increase in professional services revenue. Additionally, stock-based compensation costs increased as a result of incremental grants in 2010 combined with an overall higher stock price per share in 2010 compared to 2009.

 

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Gross Profit and Gross Profit Percentage

 

     2010      2009      $ Change      % Change  
     (In thousands)         

Gross profit — subscription and support

   $ 150,537       $ 132,017       $ 18,520         14

Gross profit — professional services

     8,302         303         7,999         2640
  

 

 

    

 

 

    

 

 

    

Gross profit — total

   $ 158,839       $ 132,320       $ 26,519         20
  

 

 

    

 

 

    

 

 

    

 

     2010     2009     Change  

Gross profit — subscription and support

     76     76     0

Gross profit — professional services

     22     1     21

Gross profit — total

     67     67     0

Gross profit — subscription and support

The gross profit percentage on subscription and support revenue for 2010 remained unchanged from 2009 due to an overall increase in subscription and support revenue being offset by an increase in hosting costs which escalated during the second quarter of 2010 when the new data center in Chicago, Illinois went live.

Gross profit — professional services

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

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

Operating Expenses

 

     2010      2009      $ Change      % Change  
     (In thousands)         

Sales and marketing

   $ 77,721       $ 65,731       $ 11,990         18

Research and development

     43,431         34,847         8,584         25

General and administrative

     42,761         32,240         10,521         33
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 163,913       $ 132,818       $ 31,095         23
  

 

 

    

 

 

    

 

 

    

Sales and marketing — summary of changes

 

     Change from 2009 to 2010  

Employee-related costs

   $ 7,885   

Professional services

     612   

Stock-based compensation

     1,054   

Depreciation and amortization

     (945

Marketing programs

     1,384   

Business development and travel

     1,105   

Various other expenses

     895   
  

 

 

 
   $ 11,990   
  

 

 

 

 

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The increase in sales and marketing expense for 2010 was primarily driven by an increase in employee-related costs, costs related to marketing programs and business development and travel costs, offset in part by a decline in depreciation and amortization expense. Employee-related costs increased due to an increase in headcount primarily from our acquisition of Learn.com as well additional sales personnel hired to focus on adding new customers and increasing penetration within our existing customer base, merit pay raises, an increase in incentive compensation due an increase in sales, and severance and relocation costs. Additionally, stock-based compensation costs increased as a result of incremental grants in 2010 combined with a higher average stock price per share in 2010 compared to 2009. The decline in depreciation and amortization expense was as a result of a decrease in amortization expense related to intangible assets acquired in connection with the Vurv acquisition. We amortize the Vurv intangible assets in proportion to our conversion of Vurv customers to Taleo products. There were fewer customers to convert in 2010 than 2009 resulting in a reduction in amortization expense for 2010 compared to 2009. This decline was offset in part by the increase in amortization expense related to the acquisition of Learn.com.

Research and development — summary of changes

 

     Change from 2009 to 2010  

Employee-related costs

   $ 5,805   

Professional services

     1,364   

Stock-based compensation

     1,127   

Various other expenses

     288   
  

 

 

 
   $ 8,584   
  

 

 

 

The increase in research and development expense during 2010 was primarily driven by an increase in employee-related costs and professional services costs. Employee-related costs increased primarily due to an increase in headcount from the acquisitions of WWC and Learn.com in 2010, merit pay raises, and an increase in incentive compensation costs when compared to 2009. Stock-based compensation costs increased as a result of incremental grants in 2010 combined with a higher average stock price per share in 2010 compared to 2009. Also, during 2010, research and development operating expenses were adversely affected by the negative impact of foreign currency movements against the U.S. dollar.

General and administrative — summary of changes

 

     Change from 2009 to 2010  

Employee-related costs

   $ 3,784   

Legal

     2,410   

Professional services, other

     2,968   

Stock-based compensation

     939   

Audit and tax related

     490   

Bad debt reserve

     (924

Various other expenses

     854   
  

 

 

 
   $ 10,521   
  

 

 

 

General and administrative expenses increased in 2010 as compared to 2009 primarily due to an increase in employee-related costs, professional services costs, which included transaction costs associated with acquisition of Learn.com, an increase in legal costs associated with on-going litigation, and an increase in audit and tax-related costs and other corporate development activities, offset in part by lower bad debt expense in 2010. Employee-related costs increased due to an increase in headcount primarily from our acquisition of Learn.com, merit pay raises, an increase in incentive compensation, and severance and relocation costs. Stock-based compensation costs increased as a result of incremental grants in 2010 combined with a higher average stock price per share in 2010 compared to 2009.

Interest and Other Income (Expense), Net

 

     2010     2009     $ Change     % Change  
     (In thousands)              

Interest income

   $ 482      $ 329      $ 153        47

Interest expense

     (106     (166     60        (36 %) 

Other income (expense), net

     (188     475        (663     (140 %) 
  

 

 

   

 

 

   

 

 

   

Total interest and other income (expense), net

   $ 188      $ 638      $ (450     (71 %) 
  

 

 

   

 

 

   

 

 

   

 

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Interest income — The increase in interest income in 2010 is attributable to a higher average cash balance during 2010 compared to 2009. Our stock offering in November 2009 resulted in our cash balance during 2010 being significantly higher than the prior year balance. Interest rates remained unchanged between the two periods.

Interest expense — There was no significant change in interest expense during 2010 as compared to 2009.

Other income (expense,) net — Other income (expense), net for 2010 consists of $1.1 million of realized and unrealized foreign currency transaction losses and $0.9 million of gain recorded upon the completion of the acquisition of WWC on January 1, 2010. In accordance with the acquisition method of accounting for a business combination, our 16% previously owned equity investment in WWC was re-measured to its $2.3 million fair value on the acquisition date and the difference between the fair value of equity investment and the $1.4 million carrying value was recorded as gain.

Other income (expense), net in 2009 consists of $0.9 million of realized and unrealized foreign currency transaction losses and $2.5 million settlement of the Vurv escrow account offset by the $1.1 million write-off of the WWC purchase option. We received 111,167 shares of our Class A common stock valued at $2.5 million from the Vurv escrow account as a result of a settlement with the former shareholders of Vurv. In the third quarter of 2009, we recorded an impairment of the WWC purchase option obtained in September 2008 as the terms of the September 19, 2009 merger agreement were more favorable than the terms of the purchase option.

Benefit From Income Taxes

 

     2010     2009     $ Change     % Change  
     (In thousands)              

Benefit from income taxes

   $ (5,306   $ (1,153   $ (4,153     360

We recorded an income tax benefit of approximately $5.3 million in 2010 compared to an income tax benefit of $1.2 million in 2009. The change is primarily attributable to (i) the release of our valuation allowance associated with the recording of significant deferred tax liabilities related to the purchase accounting of our Learn.com acquisition which increased our tax benefit in 2010 (ii) a foreign tax benefit generated from a favorable income tax audit settlement with the Canadian government covering tax years 2000 and 2001 which increased our tax benefit in 2009 and (iii) the changing mix of permanent book versus tax differences relative to taxable income and the utilization of acquired and operating net operating losses not previously benefited. The difference between the statutory rate of 34% and our effective tax rate benefit of 109% was due primarily to the release of our valuation allowance associated with the recording of significant deferred tax liabilities related to the purchase accounting of our Learn.com acquisition which increased our tax benefit in 2010, permanent differences related to non-deductible stock compensation expenses, non-deductible transaction costs, state taxes, adjustments related to the WWC acquisition, Canadian research and development tax credits and the utilization of acquired and operating net operating losses not previously benefited. At December 31, 2010, we maintained a valuation allowance against our U.S. deferred tax assets as we determined it was more likely than not that these assets will not be realized.

Liquidity and Capital Resources

We have funded our operations primarily through cash flow from operations, the 2005 initial public offering of our common stock as well as the 2009 offering of our common stock. As of December 31, 2011, we had cash and cash equivalents totaling $116.0 million.

 

     2011     2010     $ Change     % Change  
     (In thousands)              

Cash provided by operating activities

   $ 31,403      $ 35,792      $ (4,389     (12 %) 

Cash used in investing activities

     (63,407     (151,620     88,213        (58 %) 

Cash provided by financing activities

     7,721        12,613        (4,892     (39 %) 
     2010     2009     $ Change     % Change  
     (In thousands)              

Cash provided by operating activities

   $ 35,792      $ 50,672      $ (14,880     (29 %) 

Cash used in investing activities

     (151,620     (8,722     (142,898     1638

Cash provided by financing activities

     12,613        151,728        (139,115     (92 %) 

 

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Net Cash Provided by Operating Activities

Net cash provided by operating activities was $31.4 million and $35.8 million for 2011 and 2010, respectively. Consistent with prior years, cash provided by operating activities has historically been affected by net income (loss) adjusted for the add-back of non- cash expense items such as depreciation and amortization and the expense associated with stock-based awards as well as changes in operating assets and liabilities. Non-cash items included in net income (loss) for 2011 and 2010 were $56.9 million and $36.0 million, respectively. Specifically, stock-based compensation expense increased by $7.0 million in 2011 as compared to 2010. This increase was resulted from the new grants to employees and the increased market price per share of our stock, offset in part by reductions from fully vested, fully amortized stock options, which no longer impacted expense in 2011. Additionally, depreciation and amortization expense increased by $6.4 million in 2011 compared to 2010, primarily due to the amortization of intangible assets associated with the acquisitions of Learn.com in October 2010, Cytiva in April 2011, and Jobpartners in July 2011, offset in part by the decrease in amortization of the intangible assets associated with the acquisition of Vurv as these become fully amortized.

Changes in operating assets and liabilities resulted in a net decrease of $8.0 million to operating cash flows in 2011. Our net accounts receivable balance fluctuates from period to period, depending on the amount and timing of sales and billing activity, cash collections, and changes to our allowance for doubtful accounts. The change in deferred revenues was due to the addition of new customers and fluctuations resulting from the mix of annual and quarterly subscription and support billings combined with the timing of billings and the timing of the subscription and support revenue recognized associated with those contracts. The change in accounts payable and accrued liabilities was due to the timing of additional liabilities and payments in general, and does not reflect any significant change in the nature of accrued liabilities. The change in qualified wage credits receivable was related to a new qualified wage credit program in Quebec, Canada.

Net Cash Used in Investing Activities

Net cash used in investing activities was $63.4 million and $151.6 million for 2011 and 2010, respectively. Cash used in investing activities in 2011 resulted primarily from the $12.1 million and $34.5 million net cash outlays to complete the acquisition of Cytiva on April 1, 2011 and the acquisition of Jobpartners on July 1, 2011, respectively, as well as $15.9 million in capital expenditures as a result of investment in our datacenters and purchase of other hardware and software.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $7.7 million and $12.6 million for 2011 and 2010, respectively. Cash provided by financing activities in 2011 consisted primarily of the proceeds from stock option exercises and employee stock purchases in May and October 2011, offset by treasury stock tax withholdings related to vesting restricted stock and restricted stock units.

Our primary source of liquidity has been cash generated from operations as well as our stock offering in November 2009. In April 2011, we entered into a Credit Agreement which provides for an unsecured revolving credit facility in an amount of up to $150.0 million. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new applications and enhancements to existing applications, the continuing customer acceptance of our applications, the timing of general and administrative expenses as we grow our administrative infrastructure and the extent to which we acquire or invest in complimentary business products or technologies. In addition, we will likely enter into agreements with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future. These investments could impact our liquidity and in particular our operating cash flows. Although we currently anticipate that cash flows from operations, together with our available funds, will continue to be sufficient to meet our cash needs for the foreseeable future, we may require or choose to obtain additional financing. Our ability to obtain additional financing will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing.

Off Balance Sheet Arrangements

We have historically not participated in transactions that involve unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Excluding operating leases for office space, computer equipment, software, and third party facilities that host our applications, which are described below, and our indemnification agreements, we do not engage in off-balance sheet financing arrangements.

 

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Contractual Obligations

The following table summarizes our commitments to settle contractual obligations in cash under operating leases and other purchase obligations, as of December 31, 2011:

 

     Less Than
1 Year
     2—3
Years
     4—5
Years
     More than
5 Years
     Total Future
Payments
 
     (In thousands)  

Operating lease obligations:

              

Facilities

   $ 3,041       $ 8,252       $ 8,722       $ 19,451       $ 39,466   

Third party hosting facilities

     6,274         8,434         2,966         —           17,674   

Capital lease obligations, including interest

     41         7         —           —           48   

Other contractual obligations

     3,927         2,548         —           —           6,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 13,283       $ 19,241       $ 11,688       $ 19,451       $ 63,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The contractual obligations in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Our commitments under operating leases are primarily for office spaces and third-party facilities that host our applications. Our commitments under capital leases are for certain computer hardware and software. Other contractual obligations include obligations for software license and maintenance agreements.

We have excluded $8.9 million in liabilities for unrecognized tax benefits from the contractual obligations table because we cannot make a reasonable reliable estimate of the periodic cash settlements with the respective taxing authorities. See Note 7 “Income Taxes” of the Notes to Consolidated Financial Statements in this Form 10-K for a discussion of income taxes.

Legal expenditures could also affect our liquidity. We are regularly subject to legal proceedings and claims that arise in the ordinary course of business, see Note 9 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in this Form 10-K. 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.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

An increasing proportion of our operations are conducted outside the U.S. Our foreign currency exposure continues to grow as we grow internationally. In our view, our primary foreign currency exposures are economic, transaction, and translation.

Economic Exposure

We conduct business globally in numerous currencies. The direct effect of foreign currency fluctuations on sales has not been material because our sales are primarily denominated in U.S. dollars. For 2011, 5%, 6%, and 6% of our revenue was denominated in Canadian dollars, Euros, and other foreign currencies, respectively. However, if the U.S. dollar strengthens relative to other currencies, such strengthening could have an indirect effect on our sales to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker U.S. dollar could have the opposite effect. However, the precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations.

Our expenses are generally denominated in the currencies in which our operations are located. Our operating expenses are incurred primarily in the United States and Canada, including the expenses associated with our significant research and development operations that are maintained in Canada, with a portion of expenses incurred outside of North America where our other international sales offices and operations are located. 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, in the Euro and the British pound sterling. For 2011, approximately 78% of our operating expenses were U.S.-dollar denominated, and 11%, 5%, and 6% of our expenses revenue were denominated in Canadian dollars, Euros, and other foreign currencies, respectively. Assuming a constant currency rate as last year, the negative impact on our operating results was approximately $0.6 million. If the currencies noted above uniformly fluctuated by plus or minus 500 basis points from our estimated rates, we would expect our net results for 2012 to change by approximately minus or plus $0.6 million. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial instruments for trading or speculative purposes. In the future, we may consider entering into hedging transactions to help mitigate our foreign currency exchange risk.

 

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Transaction Exposure

We have various assets and liabilities, primarily receivables and accounts payable (including inter-company transactions) that are denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, cash flows and results of operations. Transaction gains and losses on these foreign exchange denominated assets and liabilities are recognized each period in our Consolidated Statements of Operations. During the year ended December 31, 2011, we recognized gains related to these foreign exchange assets and liabilities of approximately $0.5 million.

Translation Exposure

As our international operations grow, fluctuations in foreign currencies create volatility in our reported results of operations

because we are required to consolidate the results of operations of our non-U.S. dollar denominated subsidiaries. Foreign exchange rate fluctuations may adversely impact our financial position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our Consolidated Balance Sheets. The cumulative effect of foreign exchange rate fluctuations on our consolidated financial position at the end of December 31, 2011, was a net translation gain of approximately $0.5 million. This gain is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive income.

Interest Rate Risk

We had cash and cash equivalents of $116.0 million at December 31, 2011. These amounts were held primarily in cash or money market accounts. At December 31, 2011, our cash equivalents were generally invested in money market funds, which are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. Declines in interest rates, however, will reduce future interest income.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Taleo Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations, stockholders’ equity and comprehensive income (loss) and cash flows present fairly, in all material respects, the financial position of Taleo Corporation and its subsidiaries (the “Company”) at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for multiple element revenue arrangements in 2010.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Jobpartners Limited (Jobpartners) and Cytiva Software Inc. (Cytiva) from its assessment of internal control over financial reporting as of December 31, 2011 because Jobpartners and Cytiva were acquired by the Company in business combinations during 2011. We have also excluded Jobpartners and Cytiva from our audit of internal control over financial reporting. The total assets and net revenues of these two acquisitions on a combined basis represent approximately 10.1% and 2.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.

 

/s/ Pricewaterhouse Coopers LLP
San Jose, California
February 29, 2011

 

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TALEO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per share data)

 

     December 31,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 115,974      $ 141,588   

Accounts receivable, net of allowances of $639 at December 31, 2011 and $354 at December 31, 2010

     85,810        58,120   

Prepaid expenses and other current assets

     22,689        18,065   

Qualified wage credits receivable

     7,947        6,034   
  

 

 

   

 

 

 

Total current assets

     232,420        223,807   
  

 

 

   

 

 

 

Property and equipment, net

     28,391        26,552   

Restricted cash

     13        218   

Goodwill

     243,304        206,418   

Intangible assets, net

     59,233        59,478   

Other assets

     11,361        7,363   
  

 

 

   

 

 

 

Total assets

   $ 574,722      $ 523,836   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 47,907      $ 36,377   

Deferred revenue - subscription and support and customer deposits

     111,707        79,704   

Deferred revenue - professional services

     16,530        19,692   

Capital lease obligations, short-term

     40        105   
  

 

 

   

 

 

 

Total current liabilities

     176,184        135,878   
  

 

 

   

 

 

 

Long-term deferred revenue - subscription and support and customer deposits

     1,233        150   

Long-term deferred revenue - professional services

     4,595        10,006   

Other liabilities

     13,476        9,241   

Capital lease obligations, long-term

     7        46   
  

 

 

   

 

 

 

Total liabilities

     195,495        155,321   
  

 

 

   

 

 

 

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Class A Common Stock; par value, $0.00001 per share; 150,000,000 shares authorized; 41,679,443 and 40,672,092 shares outstanding at December 31, 2011 and December 31, 2010, respectively

     1        1   

Additional paid-in capital

     473,596        442,514   

Accumulated deficit

     (94,040     (76,609

Treasury stock, at cost, 26,269 and 34,738 shares outstanding at December 31, 2011 and December 31, 2010, respectively

     (801     (776

Accumulated other comprehensive income

     471        3,385   
  

 

 

   

 

 

 

Total stockholders’ equity

     379,227        368,515   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 574,722      $ 523,836   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements

 

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TALEO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Year Ended December 31,  
     2011     2010     2009  

Revenues:

      

Subscription and support

   $ 256,526      $ 199,302      $ 173,495   

Professional services

     58,869        37,973        24,917   

TSA settlement - subscription and support (Note 9)

     (6,500     —          —     
  

 

 

   

 

 

   

 

 

 

Net revenues

     308,895        237,275        198,412   
  

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Subscription and support

     58,380        48,765        41,478   

Professional services

     44,992        29,671        24,614   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     103,372        78,436        66,092   
  

 

 

   

 

 

   

 

 

 

Gross profit

     205,523        158,839        132,320   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Sales and marketing

     112,083        77,721        65,731   

Research and development

     58,127        43,431        34,847   

General and administrative

     55,529        42,761        32,240   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     225,739        163,913        132,818   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (20,216     (5,074     (498
  

 

 

   

 

 

   

 

 

 

Interest and other income (expense), net:

      

Interest income

     348        482        329   

Interest expense

     (364     (106     (166

Other income (expense), net

     931        (188     475   
  

 

 

   

 

 

   

 

 

 

Total interest and other income (expense), net

     915        188        638   
  

 

 

   

 

 

   

 

 

 

Income (loss) before benefit from income taxes

     (19,301     (4,886     140   

Benefit from income taxes

     (1,870     (5,306     (1,153
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (17,431   $ 420      $ 1,293   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Class A common stockholders — basic

   $ (0.42   $ 0.01      $ 0.04   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Class A common stockholders — diluted

   $ (0.42   $ 0.01      $ 0.04   
  

 

 

   

 

 

   

 

 

 

Weighted-average Class A common shares — basic

     41,043        39,685        31,507   
  

 

 

   

 

 

   

 

 

 

Weighted-average Class A common shares — diluted

     41,043        40,915        32,406   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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TALEO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2011, 2010, and 2009

(In thousands)

 

                Additional
Paid-In-
Capital
    Accumulated
Deficit
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
    Comprehensive
Income (Loss)
 
    Common Stock              
    Shares     Amount              

Balances, December 31, 2008

    31,120,614      $ —        $ 250,168      $ (78,322   $ —        $ 575      $ 172,421      $ (9,559
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Employee stock options exercised

    616,806        —          7,438        —          —          —          7,438     

Issuance of restricted shares

    300,592        —          247        —          —          —          247     

Issuance of ESPP shares

    182,608        —          1,137        —          1,066        —          2,203     

Stock offering

    7,475,000        1        151,370        —          —          —          151,371     

Stock offering transaction cost

    —          —          (7,584     —          —          —          (7,584  

Shares received from Vurv escrow settlement

    (111,167     —          —          —          (2,471     —          (2,471  

Shares acquired for payroll tax payments

    (67,865     —          —          —          (1,066     —          (1,066  

Restricted shares reacquired or forfeited

    (8,751     —          —          —          —          —          —       

Stock-based compensation

    —          —          11,029        —          —          —          11,029     

Excess tax benefit associated with stock-based compensation

    —          —          301        —          —          —          301     

Net income

    —          —          —          1,293        —          —          1,293      $ 1,293   

Foreign currency translation adjustments

    —          —          —          —          —          2,027        2,027        2,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, December 31, 2009

    39,507,837      $ 1      $ 414,106      $ (77,029   $ (2,471   $ 2,602      $ 337,209      $ 3,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Employee stock options exercised

    970,329        —          13,678        —          —          —          13,678     

Issuance of restricted shares

    45,807        —          240        —          —          —          240     

Issuance of ESPP shares

    186,786        —          (742     —          4,519        —          3,777     

Vested restricted stock units converted to shares

    140,139        —          —          —          —          —          —       

Shares acquired for payroll tax payments

    (110,357     —          —          —          (2,824     —          (2,824  

Restricted shares reacquired or forfeited

    (68,449     —          —          —          —          —          —       

Stock-based compensation

    —          —          14,939        —          —          —          14,939     

Excess tax benefit associated with stock-based compensation

    —          —          293        —          —          —          293     

Net income

    —          —          —          420        —          —          420      $ 420   

Foreign currency translation adjustments

    —          —          —          —          —          783        783        783   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, December 31, 2010

    40,672,092      $ 1      $ 442,514      $ (76,609   $ (776   $ 3,385      $ 368,515      $ 1,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Employee stock options exercised

    611,550        —          9,815        —          —          —          9,815     

Issuance of restricted shares

    43,311        —          269        —          —          —          269     

Issuance of ESPP shares

    181,707        —          (765     —          5,510        —          4,745     

Vested restricted stock units converted to shares

    349,772        —          —          —          —          —          —       

Shares acquired for payroll tax payments

    (173,238     —          —          —          (5,535     —          (5,535  

Restricted shares reacquired or forfeited

    (5,751     —          —          —          —          —          —       

Stock-based compensation

    —          —          21,896        —          —          —          21,896     

Excess tax benefit associated with stock-based compensation

    —          —          (133     —          —          —          (133  

Net loss

    —          —          —          (17,431     —          —          (17,431   $ (17,431

Foreign currency translation adjustments

    —          —          —          —          —          (2,914     (2,914     (2,914
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, December 31, 2011

    41,679,443      $ 1      $ 473,596      $ (94,040   $ (801   $ 471      $ 379,227      $ (20,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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TALEO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended December 31,  
     2011     2010     2009  

Cash flows from operating activities:

      

Net income (loss)

   $ (17,431   $ 420      $ 1,293   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization

     35,160        28,720        27,437   

Loss on disposal of fixed assets

     49        98        17   

Amortization of debt issuance costs

     109        —          —     

Amortization of tenant inducements

     (226     (176     (152

Tenant inducements from landlord

     —          —          114   

Stock-based compensation expense

     21,896        14,939        11,029   

Excess tax benefits on the exercise of stock options

     133        (293     (301

Tax benefit recorded upon business acquisitions

     (1,053     (6,546     —     

Director fees paid with stock in lieu of cash

     269        240        247   

Gain on remeasurement of previously held interest in Worldwide Compensation, Inc.

     —          (885     —     

Bad debt provision (recovery)

     528        (83     840   

Worldwide Compensation purchase option write-off

     —          —          1,084   

Settlement of Vurv escrow account

     —          —          (2,471

Changes in assets and liabilities, net of effect of acquisitions:

      

Accounts receivable

     (25,977     (11,046     4,440   

Prepaid expenses and other assets

     (3,848     (8,436     (1,576

Qualified wage credits receivable

     (2,283     (275     1,471   

Accounts payable and accrued liabilities

     4,125        8,371        (2,249

Deferred revenues and customer deposits

     19,952        10,744        9,449   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     31,403        35,792        50,672   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property and equipment, net

     (15,871     (14,517     (9,140

Change in restricted cash

     204        401        418   

Acquisitions, net of cash acquired

     (46,590     (137,504     —     

Purchase of intangible assets

     (1,150     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (63,407     (151,620     (8,722
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Principal payments on capital lease obligations

     (355     (1,652     (1,591

Payments for costs associated with 2009 equity offering

     —          (659     —     

Payments for debt issuance costs

     (816     —          —     

Excess tax benefits on the exercise of stock options

     (133     293        301   

Treasury stock acquired to settle employees withholding liability

     (5,535     (2,824     (1,066

Net proceeds from stock offering

     —          —          144,444   

Proceeds from stock options exercised and ESPP shares

     14,560        17,455        9,640   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     7,721        12,613        151,728   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (1,331     574        1,089   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (25,614     (102,641     194,767   

Cash and cash equivalents:

      

Beginning of period

     141,588        244,229        49,462   
  

 

 

   

 

 

   

 

 

 

End of period

   $ 115,974      $ 141,588      $ 244,229   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow disclosures:

      

Cash paid for interest

   $ 7      $ 18      $ 64   

Cash paid (refunded) for income taxes, net

   $ (505   $ 2,469      $ 275   

Supplemental disclosure of non-cash investing and financiang activities:

      

Property and equipment purchases included in accounts payable and accrued liabilities

   $ 3,116      $ 2,771      $ 2,636   

Property and equipment acquired under capital lease

   $ —        $ 104      $ —     

Accrued offering expenses

   $ —        $ —        $ 659   

See Accompanying Notes to Consolidated Financial Statements.

 

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TALEO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Summary of Significant Accounting Policies

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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Taleo Corporation and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. For the year ended December 31, 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 year ended December 31, 2010, we recorded adjustments that accumulated to $0.1 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 were deemed immaterial to previously reported financial statements and to the results for the current period.

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.

Reclassifications — In the fourth quarter of 2011, we began classifying realized and unrealized foreign currency transaction gains and losses in our Consolidated Statements of Operations within Other income (expense), net. These amounts were previously included in the line item general and administrative expense in our Consolidated Statements of Operations. Accordingly, the Consolidated Statements of Operations for the prior years have been reclassified to conform to the current presentation. The reclassification did not impact net income as previously reported (See Note 12).

In addition, certain reclassifications have been made to the prior years’ Consolidated Statements of Cash Flows to conform to the current year presentation.

Allocation of Overhead Costs — 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.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires our management to make estimates and assumptions that affect the amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management include the determination of the provision for income taxes, the fair value of stock-based awards issued, and the determination of the fair value of assets acquired and liabilities assumed for business acquisitions. Actual results could differ from those estimates.

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

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

 

   

persuasive evidence of an agreement exists;

 

   

delivery has occurred;

 

   

fees are fixed or determinable; and

 

   

the collection of fees is considered probable.

 

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If collection is not considered probable, we recognize revenues when the fees for the services performed are collected. 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 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; and

 

   

amortization of any related set-up fees.

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 typically 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 consulting services that it offers. Our typical professional services contract provides for payment within 30 to 60 days of invoice.

On January 1, 2010, we adopted Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”) on a prospective basis. ASU 2009-13 amended the accounting standards for revenue recognition for multiple deliverable revenue arrangements to:

 

   

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

 

   

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

 

   

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

Valuation terms are defined as set forth below:

 

   

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

 

   

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

 

   

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

We 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 us and similar services are sold by other vendors. 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 company’s 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 will be evaluated as one unit of accounting. We determined ESP for our subscription and support services based on the following:

 

   

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

 

   

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

 

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For multi-element arrangements entered into or materially modified in 2010 and thereafter, we allocated consideration proportionately based on the relative selling prices, then recognized the allocated revenue over the respective delivery periods for each element.

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 2011 and 2010 relating to multi-element arrangements entered into prior to 2010 was approximately $10.0 million and $13.4 million, respectively. During 2011 and 2010, we deferred additional revenue of $0.6 million and $8.3 million, respectively, for services performed related to multi-element arrangements entered into prior to 2010.

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. They are accounted for as both revenue and expense in the period the cost is incurred.

Deferred Revenue and Customer Deposits — Deferred revenue and customer deposits primarily consists of billings or payments received in advance of revenue recognition from our solutions described above and are recognized as the revenue recognition criteria are met. We generally invoice our customers for application agreements in quarterly or annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of all, multi-year, noncancelable subscription agreements in effect. The portion of deferred revenue that we anticipate will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue.

Commission Expense — Commissions are the incremental costs that are directly associated with revenue contracts. In the case of commissions for subscription and support contracts, the commissions are calculated based upon a percentage of the revenue for the first contract year. Commissions are expensed over the twelve-month period following the initiation of a new customer contract. Commission expense is included in Sales and marketing expense in the accompanying Consolidated Statement of Operations.

Business Combinations — We recognize separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. 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 is 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 is determined based on estimated future benefits or legal obligations associated with the respective asset or liability.

While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations. In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated fair values as of the date of acquisition. Subsequent to the measurement period or our final determination of the tax allowance’s estimated value, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in the our consolidated statement of operations. The goodwill recognized from these acquisitions 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 consolidated statement of operations. Such transaction costs were $8.2 million and $6.8 million for the years ended December 31, 2011 and 2010, respectively. There were no transaction costs for the year ended December 31, 2009.

Goodwill and Other Intangible Assets —We perform a goodwill impairment test annually during the fourth quarter of our fiscal year and more frequently if events or circumstances indicate that an impairment may have occurred. October 1 has been adopted as the date of the annual impairment test. The impairment test compares the fair value of our reporting units to their carrying amount, including goodwill, to assess whether impairment is present. We estimate the fair value of our reporting units using two methods: quoted market price and a discounted cash flow valuation model. The discounted cash flow method requires estimates of our future

 

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revenues, profits, capital expenditures, working capital, and other relevant factors from a market participants’ perspective. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Based on the most recent impairment test conducted on October 1, 2011, we concluded that there was no impairment of goodwill as of that date. We will continue to assess the impairment of goodwill annually on October 1 or sooner, if other indicators of impairment arise.

Identified intangible assets primarily consist of acquisition-related developed technology, customer relationships, trade names and trademarks which are generally amortized over the periods of benefit, ranging from one to seven years. We perform a review of identified intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than it had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There were no impairment charges related to identified intangible assets in 2011.

Impairment of Long-Lived Assets — We assess potential impairment to long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows that are expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes — We are subject to income taxes in both the United States and foreign jurisdictions based upon actual and estimated amounts. We account for income taxes using the asset/liability method. We record deferred tax assets and liabilities on the Consolidated Balance Sheets as temporary differences arise. Our temporary differences arise because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses. A difference between the tax basis of an asset or a liability and its reported amount in the statement of financial position will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. A full valuation allowance against our U.S. deferred tax assets is maintained based upon evidence that demonstrates that our net deferred tax assets are not more likely than not to be deductible in some future year(s). Deferred tax assets, related valuation allowances, and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating current tax expense (benefit) together with assessing temporary differences. Our deferred tax assets consist primarily of net operating loss carryforward balances, research tax credits, and temporary differences related to deferred revenue and stock-based compensation. Our deferred tax liabilities consist primarily of acquired intangible assets that are amortizable for financial reporting purposes only.

Through December 31, 2011 we maintained a valuation allowance against our U.S. and certain foreign deferred tax assets as we determined that it was more likely than not that these assets would not be realized. If we are to conclude that these deferred tax assets will more likely than not be realized in the future, we will reverse the valuation allowance. Reversing the valuation allowance would likely have a material impact on our financial results in the form of reduced tax expense or increased tax benefit in the period the reversal occurs.

We account for uncertain tax positions by recognizing and measuring tax benefits taken or expected to be taken on a tax return. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If the recognition threshold is met, only the portion of the tax benefit that is greater than 50 percent likely to be realized upon settlement with a taxing authority (that has full knowledge of all relevant information) is recorded. The tax benefit that is not recorded is considered an unrecognized tax benefit and disclosed. We recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 7 “Income Taxes” of the Notes to Consolidated Financial Statements in this Form 10-K for a discussion of income taxes.

To date, the Canada Revenue Agency (“CRA”) has issued assessment notices for tax years 2002 and 2003 seeking increases to taxable income of CAD $3.8 million and CAD $6.9 million, respectively. In December of 2010, we received a proposal letter from CRA for 2004, detailing their initial proposal of increasing taxable income of CAD $7.2 million. In October 2011, we received a letter from CRA detailing their initial proposal of increasing 2005, 2006, and 2007 taxable income by CAD $5.7 million, CAD $3.8 million, and CAD $4.1 million, respectively. We disagree with the CRA’s basis for these adjustments and have appealed their decision through applicable administrative procedures. We have sought U.S. tax treaty relief through Competent Authority for the 2002 and 2003 assessments received by the CRA and have indicated our intent to do so for 2004 - 2007 when CRA issues their final assessment.

 

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There could be a significant impact to our uncertain tax positions over the next twelve months depending on the outcome of any audit. We have recorded income tax reserves believed to be sufficient to cover any potential tax assessments for the open tax years. In the event the CRA audit results in adjustments that exceed both our tax reserves and our available deferred tax assets, our Canadian subsidiary may be subject to penalties and interest. Any such penalties and interest cannot be reasonably estimated at this time as proceedings to determine the applicability of penalties and interest has not yet reached a conclusion.

Allowance for Doubtful Accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. 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. The following is a summary of the activity in the allowance for doubtful accounts for the three years ended December 31:

 

     2011     2010     2009  
     (In thousands )  

Balance at beginning of period

   $ 354      $ 759      $ 884   

Additions (deductions)

     528        (83     840   

Provision related to Vurv acquisition

     —          —          (241

Write-offs charged against allowance

     (243     (322     (724
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 639      $ 354      $ 759   
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents — We define cash and cash equivalents as cash and highly liquid investments with maturity of three months or less when purchased and are mainly comprised of bank deposits.

Restricted Cash — Our restricted cash balance of $0.2 million at December 31, 2010 was maintained in a money market account and reserved for a letter of credit issued to our landlord as a security deposit. At December 31, 2011, we were no longer required to maintain the letter of credit and accordingly, the restricted cash balance was released.

Concentration of Credit and Market Risk and Significant Customers — 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. At December 31, 2011, cash and cash equivalents held by our foreign subsidiaries totaled approximately $9.3 million. If these assets were distributed to the U.S., we may be subject to additional U.S. taxes in certain circumstances.

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 2011, 2010 and 2009, 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 December 31, 2011 or December 31, 2010.

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

Foreign Currency Translation — The U.S. dollar is the reporting currency for all periods presented. The financial information for entities outside the United States is measured using their local currency as the functional currency. Assets and liabilities for foreign entities are translated into U.S. dollars at the exchange rate in effect on the respective balance sheet dates, and revenues and expenses are translated into U.S. dollars based on the average rate of exchange for the corresponding periods. Exchange rate differences resulting from translation adjustments are accounted for as a component of accumulated other comprehensive income. Realized and unrealized gains and losses from foreign currency transactions are reflected in the Consolidated Statements of Operations within the line item Other income (expense), net, and were $0.5 million, ($1.1) million, and ($0.9) million in 2011, 2010, and 2009, respectively.

Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to operations. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets or, for leasehold improvements, the shorter of lease term or useful life of the asset. The following table presents the estimated useful lives of our property and equipment:

 

Computer hardware and software

   3 to 5 years

Furniture and equipment

   5 years

Leasehold improvements

   Shorter of lease term or useful life of asset

 

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Qualified Wage Credits — We participated in a provincial government program in Quebec, Canada through 2010 and received qualified wage credits based upon qualifying research and development expenditures (“prior Quebec program”). This particular qualified wage credit program in Quebec expired in December 2010. In 2011, we were accepted in a new provincial qualified wage credit program (“current Quebec program”) that replaced the prior Quebec program. Since the current Quebec program is retroactive to 2009 and provides for a broader base of qualifying salaries than under the prior Quebec program, we were able to increase our projected refund over the amounts previously recorded as expense reductions in 2009 and 2010. The credits earned are reported as a reduction of related cost of revenues and research and development expense in the year incurred. During 2011, we recorded $5.8 million in qualified wage credits under the current Quebec program as a reduction of cost of revenues and research and development expenses, of which $1.8 million related to the projected refund amounts for 2009 and 2010. During 2010 and 2009, we recorded $2.8 million and $2.4 million, respectively, in qualified wage credits under the prior Quebec program as a reduction of research and development expenses.

On February 23, 2012, prior to the issuance of our financial statements, we received a notification from Revenue Quebec that our 2009 qualified wage credit claim was denied. Although we intend to pursue this matter with an appeal to the Minister of Finance in Quebec, we have recorded an allowance of $3.5 million related to this receivable in our annual results for the year ended December 31, 2011. The denial for the 2009 qualified wage credits was based on an alleged failure to file an election to claim the credit in a timely manner. The denial does not affect the 2010 and 2011 qualified wage credits. The income tax effect of this adjustment is a benefit of $0.6 million.

In addition to the current Quebec program described above, our Canadian subsidiary participates in a scientific research and experimental development, or SR&ED, program administered by the Canadian federal government that provides income tax credits based upon qualifying research and development expenditures. For tax years 2011 and 2010, we recorded estimated SR&ED credit claims of approximately $0.9 million and $0.9 million, respectively, and we are eligible to remain in the SR&ED program for future tax years as long as our development projects continue to qualify. These Canadian federal SR&ED tax credits can only be applied to offset Canadian federal taxes payable and are reported as a credit to our tax provision to the extent they reduce taxes payable to zero with any residual benefits recorded as a net deferred tax asset.

Advertising Expenses — The cost of advertising is expensed as incurred as a component of sales and marketing expense on the consolidated statement of operations. Advertising costs were approximately $3.9 million, $1.0 million, and $0.7 million for the years ended December 31, 2011, 2010, and 2009, respectively.

Internal-Use Software Development Costs — We capitalize costs to develop internal-use software during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software is included in property and equipment and is depreciated over three to five years when placed in service. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

During 2011, we capitalized $1.1 million of such costs. Amortization of these capitalized costs has not started as of December 31, 2011. There were no internal-use software development costs capitalized in 2010 and 2009.

Warranties and Indemnification — Our application suite is generally warranted to perform substantially in accordance with our standard documentation. Additionally, our customer agreements generally include provisions for indemnifying customers against liabilities if our services infringe a third party’s intellectual property rights or in the event of certain other damages caused by us. Our customer agreements generally include defined service level commitments for system availability and other measures. Failure to meet these service levels could result in an obligation for us to issue service credits or, for certain material failures, give rise to a right for the customer to terminate the agreement. To date, we have not accrued any material liabilities related to these agreements in the accompanying consolidated financial statements.

We also have entered into customary indemnification agreements with each of our officers and directors.

Stock-Based Compensation — We amortize stock-based compensation expense based upon the fair value of stock-based awards on a straight-line basis over the requisite vesting period as defined in the applicable plan documents. Corporate income tax benefits realized upon exercise or vesting of an award in excess of that previously recognized in earnings, referred to as an excess tax benefit, are presented in the Consolidated Statements of Cash Flows as a financing activity. Realized excess tax benefits are credited to additional paid-in capital in the Consolidated Balance Sheets. Realized shortfall tax benefits, amounts which are less than that previously recognized in earnings, are first offset against the cumulative balance of excess tax benefits, if any, and then charged directly to income tax expense.

Comprehensive Income (Loss) — Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments related to the net assets (liabilities) of the operations of our foreign subsidiaries an