Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Carolyn Bass – Investor Relations

Katy Murray – Chief Financial Officer

Mike Gregoire – Chairman and Chief Executive Officer

Analysts

Thomas Ernst – Deutsche Bank Securities

Brendan Barnicle – Pacific Crest Securities

Brad Reback – Oppenheimer & Co., Inc.

Nate Swanson – ThinkEquity Partners

Steve Koenig – KeyBanc Capital Markets, Inc.

Kash Rangan – Merrill Lynch & Co., Inc.

Bradley Mook – MKM Partners LLC.

Dan Cummins – Soleil

Taleo Corporation (TLEO) F2Q08 Earnings Call July 31, 2008 5:00 PM ET

Operator

Welcome to the Q2 2008 Taleo Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over Carolyn Bass.

Carolyn Bass

This is Caroline Bass, Investor Relations for Taleo, and with me today is Mike Gregoire, Chairman and Chief Executive Officer, and Katy Murray, Taleo's Chief Financial Officer, here to discuss our second quarter 2008 earnings financial results conference call. Mike and Katy will offer some prepared remarks lasting for approximately 20 minutes, and then we'll open up the call for your questions and answers. Please note that we will be limiting today's call to an hour in length.

Also note that our remarks today contain forward-looking statements. These statements include, but are not limited to, statements regarding Taleo's future financial performance, new product development, market growth, demand for Taleo solutions, the impact of Taleo's acquisition of Vurv, and general business conditions. These statements are based solely on information available to Taleo as of the date of this call. Our current expectations, forecasts and assumptions are subject to a number of risks and uncertainties that can cause actual results to differ materially from those anticipated by these forward-looking statements.

We refer you to our SEC filings, including Part 1 Item 1a of Taleo's annual report on Form 10-K, as filed with the SEC on March 14, 2008; Part 2 Item 1a of Taleo's quarterly report on Form 10-Q, as filed with the SEC on May 12, 2008; and in other reports filed by Taleo with the SEC.

These forward-looking statements should not be relied upon as representing Taleo's views at any subsequent date, and Taleo undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date they were made. In addition, during our discussion today, we will be using GAAP and non-GAAP numbers. Our GAAP numbers and their reconciliation to our non-GAAP numbers to the GAAP numbers are contained in our Q2 2008 earnings press release that is available on Taleo's website at www.Taleo.com and on the filing on Form 8-K.

In addition, please note that a webcast of today's call will be available on the Investor Relations site of Taleo's website.

And with that, I will turn the call over to Katy.

Katy Murray

As you have already seen in the press release across the wire, we have posted solid, organic results, and we are proud of our execution this past quarter. After I review Taleo's Q2 performance, I will discuss guidance, which will be on a combined basis considering the Vurv acquisition closed on July 1st.

As a reminder, I will be discussing our financial performance in both GAAP and non-GAAP measures. Please refer to this reconciliation, which can be found in today's press release.

Also, starting in Q3, we will be introducing a non-GAAP revenue measure which will add back the write down associated with Vurv's deferred revenue that was acquired on July 1st. We feel that this non-GAAP presentation will be a more transparent indicator of the combined entities growth and performance when compared to historical information. By introducing this metric, we will also be focusing on non-GAAP operating metrics and trends. Consistent with prior practice, we will continue to pro forma certain other expenses to arrive at a non-GAAP EPS, including amortization, restructuring and stock-based compensation.

For the second quarter, we reported GAAP net income of $1.1 million, or $0.04 per fully diluted share, and non-GAAP net income of $4.2 million, or $0.15 per fully diluted share. As we highlighted on our last call, we did expect to incur costs related to the acquisition this quarter that would be expense versus capitalized. Included in our Q2 results are approximately $200,000 of those expenses.

Total revenue for the second quarter was $38.8 million, representing a 25% year-over-year growth and a 4% sequential growth. Application revenue was $30.9 million, or 80% of total revenue, representing 21% growth over Q2 of '07, and we also recognize $7.9 million in services revenue, which represents 20% of total revenue.

We experienced strong new business activity this quarter with the addition of 25 new enterprise customers and 10 enterprise deals with a first-year ASP greater than $250,000. This is double what we did last quarter for both metrics and compares to 21 new enterprise deals in Q2 of last year and four enterprise deals over $250,000 in that same period.

We continue to see momentum in our SMB business, and in Q2, we reached a quarterly record of adding 207 new Taleo business addition customers, equating to a net 3 new customers a day.

We continue to be focused on realizing the growth potential of our international operation, and for the second quarter, we continue to see this momentum with international revenue contributing approximately 13% of total revenue, the highest in the Company's history and representing year-over-year growth of 83%.

On a blended basis, GAAP gross margin for the second quarter was 69%. Application margin remained consistent at 79%. And our consulting margin improved from 19% in Q1 to 30% this quarter. Some of the consulting margin improvement this quarter is directly related to the timing of revenue being recognized for milestone projects. However, we have been consistently focused on driving consulting margins to greater than 20%. On a blended basis, we expect to see pressure on non-GAAP gross margin in the near term and for it to be in the range of the mid- to high-60s as we continue to focus on driving efficiencies in our combined production environments and delivery organizations over the next 3 to 6 months.

Moving to specific GAAP operating expense metrics for Q2, our sales and marketing costs were $11.8 million, or 30% of total revenue, consistent with prior quarters. In the near term, we do expect to see a reduction in the overall expense percentage as a total of non-GAAP revenue. R&D expenses were $7.4 million, which is in line with expectations and consistent with prior quarters. We expect R&D expenses, as a percentage of non-GAAP revenue to remain relatively consistent in the near term, but we will see improvements in this percentage as we continue to scale our business.

Finally, G&A expenses were $7.2 million, or 19% of total revenue, reflecting an increase from last quarter. This increase is the result of incurring legal expenses relating to ongoing litigation as well as the expensing of costs related to the transaction mentioned earlier. As a percentage of non-GAAP revenue, we expect to see G&A decrease in the near term.

Lastly, on operating expenses, we incurred $281,000 of restructuring cost relating to severance payments made to terminated employees. We will have additional restructuring charges in Q3 as we continue to rationalize the combined organization.

At June 30, total cash, excluding restricted cash, was $104.7 million. This represents an increase of over $13 million from last quarter.

Subsequent to June 30th, we completed the acquisition of Vurv, which was partially funded with approximately $44 million in cash relating to the proceeds and repayment of $9 million in debt. In addition, we are estimating an additional $6 million of payments relating to severance costs that will be paid over the next two quarters.

Cash flow from operations for the first half of 2008 was $19.3 million, or $12 million specifically related to Q2. Our strong cash flow is the result of our continued focus on collections, which in Q2 we had our strongest quarter ever.

Deferred revenue and customer deposits totaled $43.8 million, representing an increase of approximately $2.4 million over Q1 and $13.8 million over Q2 of last year. The increase in our deferred revenue was primarily the result of strong sales execution, but as a reminder, deferred revenue is impacted also by the timing of our invoicing and the mix of annual and quarterly billings.

DSOs for Q2 adjusted for the increase in deferred was 64 days, down from 73 in Q1 and 92 days this time last year.

Turning to other operating metrics, at June 30th, we had 678 employees, a net decrease of 8 employees from March 31st. We expect ending headcount at September 30th to be approximately 900 employees.

Now, turning to guidance. As a reminder going forward, our guidance represents the full impact of the Vurv acquisition. Ongoing, we will only be reporting combined guidance, and we will not be providing organic versus inorganic growth metrics. As our Q2 results showed, Taleo has been on a strong growth trajectory, and we expect the acquisition of Vurv to compliment our growth opportunities.

As I mentioned at the start of the call, starting in Q3, we will be introducing non-GAAP revenue as a measure which will add back the write down associated with the deferred revenue that has been acquired with the acquisition. For Q3 2008, we expect total non-GAAP revenue to be in the range of $49.2 to $50.0 million and non-GAAP EPS of $0.15 based on fully weighted shares outstanding of $34 million.

In regards to cash flow from operation, we are expecting depreciation expense of $3 million and stock compensation of $2.8 million. Amortization expense, which has been $100,000 per quarter historically, will increase and is estimated to be in the range of $2.5 to $3 per quarter. This is an estimate only and will be finalized in conjunction with the purchase price allocation work that is in process. Overall, cash flow from operations will be under some pressure in the near term as we finalize the restructuring activities that are in process.

For the fiscal year 2008, we are maintaining non-GAAP revenue of $175 to $177 million and non-GAAP EPS of $0.62 based on the average fully weighted outstanding shares of $31 to $32 million for the year.

For Q3, we are anticipating a minimal tax benefit in the quarter. However, we are also anticipating the settlement of an ongoing Canadian investment tax credit audit in the near term, which we believe will be favorably resolved and may add further tax benefit if settled in this quarter.

For fiscal year 2009, we are maintaining our prior guidance of non-GAAP fully diluted EPS of $0.87 to $0.89, assuming fully diluted shares outstanding of $35 million for the full year 2009.

In conclusion, I am very pleased with our solid Q2 results and about the combination with Vurv, which has created a strong operational foundation that will continue to scale to support our growth and our combined customer base.

With that, I would like to turn the call over to Mike.

Mike Gregoire

Our second quarter of 2008 was the strongest quarter in the history of our company. Our performance in Q2 was both broad and deep in that every business unit posted record results. Talent management remains a critical initiative with corporations around the world, and as the market leader, Taleo is well positioned to capture the lion's share of this opportunity.

In the second quarter of 2008, Taleo posted record revenues, agreed to our largest acquisition to date and achieved this during an increasingly tough economy. This performance highlights both the need for talent management in any economic environment and Taleo's ability to innovate and execute across a number of fronts.

Let us review some of our business success during the quarter. The enterprise recruiting market is large, resilient and continues to provide a substantial amount of our growth. In the U.S. alone, there are about 900 companies with more than 10,000 employees. Currently, less than 20% are Taleo customers, and we continue to gain market share with replacement business and new customers. We are the market leader in this segment, and we continue to focus on extending our lead.

In Q2, Taleo closed 25 new Taleo enterprise deals, including 10 deals over $250,000 per year. This includes the largest deal in Taleo's history, AT&T, which purchased Taleo Recruiting for worldwide recruiting. Other new Taleo Recruiting customers in North America include Adobe, Allergen, Avinad, BlueCross, BlueShield of Michigan, CSX Transportation, Cymer, Enterprise Products, Harris Teeter, Herbalife, Manpower, Nielsen Company, Plantronics and U.S. Food Service.

International continues its rapid growth as its revenues grew 83% over last year and now comprises 13% of total revenues, up from 9% a year ago. New customers from international include Air France, Baloise, Cargotec, Effiage, Manpower, Veolia, and VicRoads.

Taleo Performance continues to gain momentum in the marketplace. Just one quarter after becoming generally available, Taleo Performance has established itself as the most compelling product in the industry. Large companies are seeing that Taleo Performance represents the next generation of talent management solutions, and our pipeline continues to build with Taleo Recruiting customers looking for a unified solution and new customers who want an easy-to-use, enterprise-caliber performance management solution. New Taleo Performance deals in Q2 include International Hotels Group, Children's Healthcare of Atlanta and North Shore Long Island Jewish Health System.

Taleo Business Edition also had an outstanding quarter and closed 207 new customers, their highest total ever. Revenues for the quarter were 70% higher than a year ago, and during the quarter TB deployed its largest new release ever, Taleo Business Edition 8.0. This release includes enhanced social networking capability with LinkedIn and increased automation for high-volume hiring, such as voice response, candidate screening and interview scheduling automation.

We continue to see strong growth in the SMB segment, which contains over 625,000 companies between 20 and 2,500 employees in the U.S. alone. Taleo Business Edition currently has less than 1% market share but continues to build on its base of over 1,500 customers. New TB customers include Eclipse Aviation, Rand Worldwide, Right Now Technologies, Pearl Izumi, Massimo Corporation, Verified Person, Conklin Cars, Yelp Incorporated, First Guaranteed Bank, Taco Johns, Wolfgang Puck Express, Red Bull Australia, SAB Miller, the makers of Miller Coors, and the Abu Dhabi Audit Authority.

In Q2, our HRO channel had a strong quarter. Taleo has secured a seven-year HRO deal with IBM to support a global pharmaceutical company. We also had added Hertz as a customer through their HRO agreement with CDI.

On the innovation front, in Q2, Taleo announced Taleo Edge, a tailored offering of Taleo Enterprise for the midmarket. In the U.S., there are over 2,600 companies with between 2,500 and 10,000 employees, and from our market research, one of the key issues to them adopting a robust talent management application is the cost of implementation. The Taleo Edge offering removes that barrier to adoption by streamlining the implementation of Taleo for these midmarket customers with pre-configuration templates and workflows. I am happy to announce that during Q2 Taleo closed its first ever Taleo Edge customer, NetJets.

In Q2, Gartner Group released its 2008 Magic Quadrant for eRecruiting and Taleo were positioned as the clear leader in the market. Gartner Group's analysis of the Company's ability to execute and its completeness of vision put Taleo clearly and singularly ahead of all other competitors on both metrics.

As you can see, Q2 was a great quarter across the entire organization, and I am particularly proud that we were able to execute and achieve these outstanding results in the midst of a very large potential distraction. During the quarter, Taleo agreed to acquire Vurv, completed due diligence and prepared for Company integration, and we closed the acquisition on July 1, 2008. The numbers we are reporting today do not include the Vurv acquisition, and as you can see, our organic growth was strong before the acquisition.

It also showed that from a position of strength, we are able to get stronger with the Vurv acquisition by solidifying our leadership and talent management. Taleo now has over 3,600 customers, 2.5 million users around the world, including over 650 enterprise customers, 47 of them of the Fortune 100, and over 150 of the Fortune 500.

Our integration efforts with Vurv have gone extremely well. As of July 1st, all internal organizations, processes and systems have been rationalized. The synergies between Taleo and Vurv were strong, and we were able to cut a significant amount of cost out of the combined organization. Taleo emerges from the acquisition as a much leaner and stronger organization, with key leaders in all functions from both companies.

Also, Taleo has met with, directly, almost all major Vurv customers and has had communication with the remainder. The feedback from Vurv's largest customers on Taleo's transition plan has been extremely positive. They are excited to be working with the leader in talent management who has the resources to meet their needs today and the vision to meet their talent needs in the future.

I am also proud that we were able to achieve these results in the face of some very strong economic headwinds. As our results demonstrate, Taleo presents a compelling business need for talent management that our customers believe will help them drive their business through this economic storm.

In a strong economy, as well as in the down economy, finding, retaining and motivating talent is a critical business initiative that no business can ignore. In fact, during Q2, our operational hiring metrics showed no signs of slow down.

Number of hires, number of candidates, the number of transactions, each reached all-time highs. Some of this growth is due to Taleo adding more new customers last quarter, but even on a per customer basis, our operational metrics reached all-time highs in Q2. Taleo is becoming an increasingly essential application for companies large and small.

Over the last year, Taleo has been diligently working with our customers around the world to define the future of talent management. We invite you to preview the future of talent management with us at Taleo World in Boston, September 15th to 17th. We have scheduled a specific track for analysts and investors on Tuesday September 16th, and I would like to extend an invitation to all of you to attend.

Now, I would like to open up the line to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thomas Ernst - Deutsche Bank.

Thomas Ernst - Deutsche Bank Securities

So my question is about the momentum of the business in the quarter. I think if we look at the growth in application revenue sequentially, it is around 2%, but when I look at the key metrics that drive that business, number of enterprise customers grew sequentially 8%. The number of users grew 8%. And the number of new hires processed was up actually 16% sequentially. What is the difference between the numbers? Timing? Or are there other factors at play?

Katy Murray

I think one of the things we have seen in looking at specific quarters, some of the metrics that come through, with the nature of the business, do not necessarily line up with what we are seeing from some of the other metrics. Some of it is timing in the quarter. Some of it is also, especially around the momentum of the deals, you could say we had one off the strongest quarters last quarter with the number of deals that we are closing. There was an increase in the number of transactions and candidates but remember on the candidate side and some of how we also price, it is not necessarily priced on candidates and certain transactions and volumes that we are seeing in the business. We are still pricing on headcount, so while those metrics are showing that there is an increased use of the system, I think you are seeing that metric really relay into how strong the business momentum was coming through from the quarter.

On the actual revenue growth, when you are looking at it sequentially, or if you are looking at it year-over-year, I think it goes back to trying to look at the quarter on a stand-alone basis. I think on this business model, especially given the nature of the recurring revenue, the fact that we are not backend loaded on a quarter, we do not feel the pressure of doing that, you really have to look at the business on an annualized or a 12-month rolling. We saw that with some of the metrics that we had in Q1. They looked a little off. If you look at them now, they are back in line. And I think it is the same thing even on the application revenue. Some of these are just sensitive to the timing of when deals close and then also to the prior quarter, as you know, in this business.

Thomas Ernst - Deutsche Bank Securities

Perhaps as a follow-up on a couple things specifically how was pricing trended for you, and how are renewals for you?

Mike Gregoire

Renewals are very strong; we have seen no difference there. We have not seen any difference in pricing. From a competitive front, we basically saw the same competitors. Of the 25 deals we won, oddly enough, we faced Vurv in 10 of those 25 deals. So I think that the competitive nature will probably start changing towards the back half of this year.

Operator

Your next question comes from Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I just wanted to make sure I had it right, the cash impact from the transactions so that we can figure that into where cash may be at the end of next quarter. I have my notes right here and it is about $59 million in outlays in cash that will be related to the transaction.

Katy Murray

Brendan, that is actually probably a little on the high side. If you look at it, we spent about $44 million which was just proceeds and then also paying off the debt of $9 million. Then we also estimated that there is another about $6 million going to restructuring and exit activities. Now, that will actually be over the next 3 to 6 months, so really what you are looking at is over the next 6 months, it is probably more along the lines of a $50 million outlay.

Brendan Barnicle - Pacific Crest Securities

So $50 million over 6 months. Any idea how much you expect, I mean, is that straight-line $25 million in Q3, the model?

Katy Murray

Oh, no. The majority of it is in Q3. The $44 million is gone, right? Then we paid out the deal on July 1. We paid the debt. The majority of the severance is taking place. I would actually say that probably even out of the $6 million of severance over the next two quarters, probably 60% of that is going to be Q3.

Operator

Your next question comes from Brad Reback - Oppenheimer.

Brad Reback – Oppenheimer & Co., Inc.

Obviously last quarter, some of your commentary around lengthening sales cycles got people concerned. Have things changed at all out there? Have they improved, stayed the same, any commentary on that?

Mike Gregoire

Well, we get selected, our selection has gone up, but the amount of time it takes to negotiate a deal has gotten a little bit longer. But once we have been selected, we have not fallen out of a transaction. And with 25 enterprise transactions getting done in the quarter that volume is the biggest volume we have ever had, and the pipeline once again is really strong. And if I take a look at the deals in the pipeline of where we have been selected, I am anticipating a similar amount of negotiating to go on that we saw in the previous quarter.

So if I was to wrap it up, deals are still getting done. Pipeline is growing. But the amount of calories you have to put into getting a contract signed was more significant in Q1 than it was in Q2, and it was more significant in Q1 than it was in Q4. So if you take a look at the last four quarters, Q1 was probably the most difficult quarter in order to transact, where we have seen a little bit of that lighten up in Q2, and I really do not have a clear crystal ball on how Q3 will work out. But once again, from a competitive point of view, we have been selected more often and earlier than we have before in the history of the Company.

Brad Reback – Oppenheimer & Co., Inc.

And of the 25 deals that you did in the quarter, I am assuming some of those benefited or slipped out of one queue, and you were able to close them up.

Mike Gregoire

Yes, that is true. There was a couple that we thought we would get done in Q1. Once again, a little bit of a delay, but some of that delay, we caused ourselves. One of the things and everyone has probably figured out about Taleo, we are pretty disciplined, and we know what it costs to do a transaction. We know what it costs to serve our customer the way that they want to be served. And we are more willing to have a transaction hang out there and cross over a quarter to get the right economics rather than settle it early and have to struggle with a three-year deal that did not have the right economics. So sometimes it takes a little bit of convincing, and we have had the discipline in the past to be able to do that.

Brad Reback – Oppenheimer & Co., Inc.

And finally, given that Vurv closed in the first day of the third quarter. They were out there on their own in the second quarter. Were they able to book a nice, strong quarter? Did they do anything irrational over that period of time?

Katy Murray

We signed the definitive in early May. It was filed, I mean, the transactions that Vurv engaged in and the business that they closed had some oversight, and there were certain things that if they were going to try to negotiate or things that they were going to do, we actually had oversight and some authority on that, so to answer your question, no.

Operator

Your next question comes from Nate Swanson - ThinkEquity.

Nate Swanson – ThinkEquity Partners

My question for you, it sounds like you had a chance to get out and meet with a lot of the Vurv large customers. I am wondering, the feedback that you are getting, or the conversations that you are having, do those focus more around the migration path and visibility on how to get from one platform to the other? Or is a broader conversation around talent management and providing a unified set of applications that all run on a single code?

Mike Gregoire

It is more of the latter. At the end of the day, a lot of these big customers like the concept of getting involved with a customer. It has a got a very broad global footprint, that can scale to thousands of people, has a very big R&D organization that can deliver net new releases that have very deep functionality and also the opportunity for performance management. Performance management is a relatively unpenetrated marketplace, and if they are going to be making a change, getting a recruiting and performance management system at the same time, or at least having the option to get that, is something that they find attractive.

Nate Swanson – ThinkEquity Partners

And any idea what the timing of migrations might look like over the next three year window that you have laid out, or based upon your past experience?

Mike Gregoire

Well, it is early days on that. We have got a full dedicated team, and that is their job all day everyday is to engage with that Vurv customer base, understand what it is they have, understand what it is their needs are, make sure they understand how the Taleo system works and the benefits. We have got a pretty detailed document. I think it is over 80 pages long, on feature/function differences that we provide the potential client with, so they understand how to get from where they are to where they have been.

And the other thing is we have got experience in this. We were fortunate enough over the last couple of years to win a number of customers from Vurv, and we have got experience in putting them onto the Taleo platform. So we are augmenting those scripts and processes and procedures to try to make them a little bit more battle hardened and make them extremely predictable so that the cost of getting that migration is reduced as much as possible.

There are a few customers, the way you asked your question, it led me to some of the discussions we have had with some of the more forward thinking organizations, and they are really thinking through how to make their HR organization more strategic. How do they get better qualified people into the Company, and what do they do once they get great people in the Company? And how do they drive towards a more results-based performance management model that ties to compensation rather than just a competency-based model which you see in most of the large corporations. So there is a lot of interesting thinking going on in the talent management space right now, and while we feel like we are providing a lot of value there, we are listening to a lot of companies as well. There is a lot of interesting work going on.

Nate Swanson – ThinkEquity Partners

Does that help you on the partner side as well?

Mike Gregoire

It definitely helps us on the partner side. I think Vurv was the only other true competitor that could handle a 40,000 or 50,000-employee Company on a multinational basis, and now I think in that category, the upper end, that is pretty much something you are bound to see at Taleo. Now, if you take a look at the HRO business, in order for their economics to work, big is better for those folks. The more complicated, the more countries, the larger, the more HRO vendors are interested in those deals.

Coupled with that, our alliances organization has had a flood of calls from assessment partners, background screening partners, and tax partners. When you have 3,600 customers and 47 of the Fortune 100, that makes people be attracted to your platform, and we are probably going to have to make some headcount adjustments in the alliances function because the flow of people trying to get onto our platform has exceeded our expectations, and we want to be able to serve those folks because a lot of customers want choice, and if we can charge people to go through the platform and give them the kind of choice that they want, we think that that is a big advantage for us.

Nate Swanson – ThinkEquity Partners

I know it is still early days in terms of the Performance Management Suite, but as you look at your pipeline there, do you see any trends in terms of how those deals will come in, or average sales cycles for what the Performance Suite looks like?

Mike Gregoire

Well, I am very happy with the pipeline growth. There is a lot to be said about our performance management strategy, and our performance management products. When it comes to running on demand for enterprise, I do not think that it is a comparable, and we intimately understand how to do that. The three or four deals that we have right now have all been for large-scale enterprises. Our pipeline is chucked full of large-scale enterprises that are really looking for a system that has gotten proven scalability. They like the interoperability to move seamlessly between recruiting and performance. So I feel that it will come with time, but it is going to be a similar sales cycle to the enterprise recruiting market.

Now, the other thing that I think is a big competitive weapon for our Company is we go beta with our SMB performance management product that will fit on the TV platform, and that will be GA in November, and we are signing 3 customers a day, 207 customers over the quarter in SMB, and if we take a look at most of the competition out there, most of their wins are in that SMB sector, not in the large-scale enterprise. I feel that we will be very competitive in both the large-scale enterprise with the reputation we have for getting things done and getting them done right at the enterprise and then having a great product in that SMB, where it is more of a high-volume transaction model.

Nate Swanson – ThinkEquity Partners

Will we see the SMB product at Taleo World?

Mike Gregoire

Absolutely. We are going to be demoing it, and we are going to show it to both the analyst track and to the general audience.

Nate Swanson – ThinkEquity Partners

I know you talked about the write down of deferred at Vurv. I didn't hear it. Is there kind of a best guess as to what percentage of their revenues will need to be written down? Or how should we think about that?

Katy Murray

Yes, Nate. I did not talk about that specifically because we are still working through that. For anyone who's done it, it is not a straight-cut calculation. The other piece to that is also the timing of the billing, which is good for us because they were predominantly quarterly billers, and so basically when new billing takes place, you are not writing that deferred down. So we are still working through that. That is why I talked today in gross, non-GAAP revenue terms, and then once we get through this quarter and have better visibility to where we are, we will be able to project out how much more write down there could be over the near term. And again, we do not expect this to be a long-term issue, again, given that they have quarterly billings, but really be able to wrap this up in the next 6 to 9 months.

Operator

Your next question comes from Steve Koenig - KeyBanc Capital Markets.

Steve Koenig – KeyBanc Capital Markets, Inc.

I wanted to drill down a little bit in Vurv. Business looks like it is doing real well organically, and the metrics came back. So focusing on Vurv, which will be a big item on your plate in the next couple of quarters, and maybe longer. The first question is a question on the cost side and a question on the revenue side. On the cost side, I am wondering, Katy, are you planning, at all, to separate out for us the cost of the Vurv customer migration?

Katy Murray

We are working through that. We talked about that at Analyst Day, that I think it could be an important metric for the community to understand on the analyst side. I mean, we have got two really distinct costs there. We do have the people that internally are focused specifically on… all they do every day is talking to the customer base about conversions and timing and migration.

From an ongoing perspective of how we are actually going to service the customers on that, we do not typically break out how we are pricing migration type of things, or implementations and that. It is very early on that still, Steve. We are still working through that. But I think we have shown in the past that if we feel like it is something that is important to break out and to be transparent on, we definitely do it. And I would say this about this measure as well, but we are just not at a point right now where we can really talk to and be accurate on what that is going to be. But it is something that we will be separating out internally for our own analysis, to understand how that is moving and how that is tracking. Actually, a lot of people are paying attention to that number. And again, if we feel like it is something we need to break out, we definitely will.

Steve Koenig – KeyBanc Capital Markets, Inc.

Okay. So you're working through how you treat that.

Katy Murray

Absolutely.

Steve Koenig – KeyBanc Capital Markets, Inc.

Then I am curious to know, what does your guidance assume? Are those costs in your guidance? Or are they not in your guidance?

Katy Murray

Yes the guidance is an all-in guidance. It is on total non-GAAP revenue, as I mentioned. So I am not trying to give you the pro forma write down now, so the revenue is total gross revenue, and then the EPS is the total non-GAAP revenue, which only excludes on the expense side the amortization, the restructuring and the stock comp expense.

Steve Koenig – KeyBanc Capital Markets, Inc.

So that guidance does not exclude the cost of migrating Vurv customers.

Katy Murray

For Q3 and for the year, it does not.

Steve Koenig – KeyBanc Capital Markets, Inc.

Okay, three and Q3. Okay. And then, on the revenue side, a question either for Katy or Mike, what percentage of the Vurv revenue is from customers that are on the earlier version with the customization versus customers on the configurable version?

Katy Murray

So, Steve, we talked a little bit about this before too. The amounts that I think you are talking to; there were some old legacy applications that were the more highly accustomed to what you are talking about, some of the old licensed products. I think that is what you are referring to?

Steve Koenig – KeyBanc Capital Markets, Inc.

Yes,

Katy Murray

That is a small, a very, very small portion of the overall revenue stream. I would tell you it is probably less than five% after you strip out the services piece when you are looking at the overall revenue stream, and the majority of the customers. Vurv had already been working, prior to us engaging with them, on actually converting legacy customers over to the pure, on-demand hosted version. So that was really well underway, really, internally with Vurv prior to us even getting there, and that is something that we will continue to focus on as well.

Steve Koenig – KeyBanc Capital Markets, Inc.

Okay then, Katy, and then, just to make sure that I am on the same page with you, we had heard numbers, like out of 300 customers, maybe 120 to 130 were on the version would have your customization. Is that the same bucket that you are talking about when you say 5% of revenue? Or is that different?

Katy Murray

That is not. I think what's hard about that number is if you look back at the customer mix of Vurv, while they did have some enterprise customers, they also had a very large number of customers at the enterprise level that we would actually tell you were more midmarket and smaller on that area. So when you are looking at the customer count, it is a bit misleading. It may appear to be and I am not confirming that it is 100 to 130. That actually seems high, but from the percentage of revenue, that is really the way to look at it because some of these customers that would have been on earlier versions or custom code, in the grand scheme of the overall revenue mix are actually smaller customers when you are looking at the total annual contribution from a single customer. Does that make sense?

Steve Koenig – KeyBanc Capital Markets, Inc.

It does. It does. And so am I right in concluding that the vast majority of Vurv revenues come from customers that are on a standard or configured version where tools are more amenable to converting those customers?

Katy Murray

Absolutely.

Operator

Your next question comes from Kash Rangan - Merrill Lynch.

Kash Rangan – Merrill Lynch & Co., Inc.

Looking at the sequential growth rate, it seems to be a bit of a contrast with otherwise a very strong quarter. I look at the number of e-customers. It looks like almost it is a one-year high for the Company, and also some of the other metrics you have talked about, the ASPs and other deals greater than $250,000. Yet, I do not seem to be able to reconcile that with the slow sequential growth rate. Could it have been other things, maybe a backend-loaded quarter where these contracts came in really late to really materially impact the revenues? That is one question, and then I have a follow-up question.

Katy Murray

It is. I mentioned this earlier when Tom asked the same question. I think what is hard to look at in one single quarter is a metric. Obviously we would have loved to have sequential revenue growth higher in the quarter, but when you are looking at where it is, and you are thinking about what Mike had talked about in Q1 and some of the slowness even in getting contracts finalized so it is not a question of closing the deals; it is really more of a timing. Some of that happens, and last year, we really did see some benefit in certain quarters where deals were closing much sooner in a quarter. And last quarter, like Mike just talked about, we did see some come into Q2. So I think what you are really seeing again is a one-quarter metric that if you try to strip it out and make decisions around it, it is really not giving you the accurate picture of the business when you look overall at an annualized rate. Or when you are looking at the specific metrics this quarter you look around deferred revenue growth. You look around all the different pieces that really give you more forward visibility into what the business is going to be forward or doing into the next few months.

Kash Rangan – Merrill Lynch & Co., Inc.

Got it. So conversely, this should help you build up your sequential growth in Q3 because you had, it looks like, a lot of these deals that came in towards the end of the quarter that did not help you in Q2 but should help you in Q3.

Katy Murray

That's right.

Mike Gregoire

Not only that, Kash. That AT&T deal was a huge deal, and when you just take a look at a deal greater than $250,000, that deal is like 10 deals, so it is a big contract for us and that is going to have a big impact.

Kash Rangan – Merrill Lynch & Co., Inc.

And also the expense side, Katy, I am looking at sales and marketing, research and development seem to be at least a little bit higher than what we had modeled. Is there any seasonality to these expenses? Any one-time things that, on sales and marketing and research and development also G&A, that could help us?

Katy Murray

Nothing really one time. On the G&A, I called it out. We had some costs coming through this quarter relating to things that I would not call normal operating activities around legal expenses and some deal costs that we expensed. I think what you are seeing on the operating side, though, Kash, your same point on the sequential revenue growth; it does not take a lot to really influence the percentage of total revenue on any one operating line. And I think when I was giving color around where we saw these lines; all of these lines are improving as a percentage of total non-GAAP revenue going forward, which everyone would expect. But part of that is just us managing the business and getting the leverage in each of these lines that we have anticipated, and that includes with the acquisition of Vurv. The intention of that was to add to the operating leverage of the Company, not to burden it.

Operator

Your next question comes from Brad Mook - MKM Partners.

Bradley Mook – MKM Partners LLC.

On the AT&T deal, given how big it is, is there a longer time to rely on that?

Mike Gregoire

No, the beauty of that deal is we had been working with BellSouth, so BellSouth was already a Taleo customer. So they have already got their processes in place, and the way that they have decided to do that is to adopt that process. It is just an expansion. So of course we will have to buy more servers, etc, but they have already got the process in place. They have already got the client webpage. They have already got the workflow in place. So this is going to be pretty efficient for AT&T to get value relatively quickly.

Bradley Mook – MKM Partners LLC.

That is good for them, and it is good for you.

Mike Gregoire

It works out the best for everybody when it happens that way. But they are a great customer, a great brand, and the team that AT&T has put on this is pretty smart folks, and they have got some deep thoughts on HR and some deep thoughts on how talent management should work. So we are extremely honored to have them as a customer.

Bradley Mook – MKM Partners LLC.

On the performance management product, did you say that you have gone beta with SMB, or you are soon to go beta?

Mike Gregoire

No, the beta will happen in September, and it will be live in November.

Bradley Mook – MKM Partners LLC.

And then, my understanding was that you were targeting principally your existing base on the recruiting side, and I heard you slip in the comments that you are seeing some stand-alone pipeline as well. Is that true?

Mike Gregoire

Absolutely.

Bradley Mook – MKM Partners LLC.

Are you devoting much in terms of resources to that?

Mike Gregoire

You have to. I would not say it was a surprise to us. We just thought it would happen later on, but we are getting quite a few calls from stand-alone customers that want to see the performance management application. If you go to our website, you can see a demo of it. It is pretty attractive, and I think that that is what's driving the lead gen because our inbound lead generation programs have been targeted at the customer base.

Bradley Mook – MKM Partners LLC.

And then, on the Vurv customer base, I guess, it sounds like you are pretty confident about the… between your integration/migration plan and the enthusiasm you are getting from the conversations with the Vurv customers, it sounds like you are pretty confident in your ability to lock those customers down and keep them within the fold?

Mike Gregoire

Yes, we feel pretty good about that, but you never want to be…you want to have the right level of humility. They picked Vurv for a reason, and I think our approach to go in there is to understand why and to understand what specifically that they need and really be a good listener, understand what it is and what business problem that they want to solve so that we talk to them in their language. I think it would be wrong for us to go there, be arrogant and say, "This is the platform. You need to move to it." We have been very patient, working with the customers to understand what it is they want to get out of this application, what their views on talent management are and how best we can make that happen.

Bradley Mook – MKM Partners LLC.

Okay, and in some of our conversations with their customers, one of the things that has come up is, not uniformly, but in some cases issues around your user interface for the recruiting product, and so can you just talk a little bit about your plans in terms of next generation recruiting, ATS.

Mike Gregoire

Absolutely. Well, that is another reason for you to come to Boston. We will be demoing what we call - Code Name Monarch. And if you take a look at the performance management application, the recruiting application will have a similar web presence and a similar look and feel, and the performance management user interface is the future user interface for all of Taleo products.

Bradley Mook – MKM Partners LLC.

When do you expect Monarch to hit the market?

Mike Gregoire

Monarch will be in the market in the first of the second quarter.

Bradley Mook – MKM Partners LLC.

Explain that. First of the second quarter?

Mike Gregoire

Yes, it will be the beginning of the second quarter.

Bradley Mook – MKM Partners LLC.

Okay, in the beginning of the second quarter.

Mike Gregoire

In the year 2009. Sorry.

Bradley Mook – MKM Partners LLC.

No. No worries. And just in terms of Vurv employees, obviously you have been making your headcount adjustments both with Taleo and Vurv. Have you had any issues with losses of Vurv employees either ahead of the transaction or ones that you had lined up to keep that may have left?

Mike Gregoire

We have been pretty good at selecting the ones that we think are the best fit for our company. There are a lot of very talented people at Vurv that are still in the company. There are a lot of talented people in Vurv that we did not have room for. It is a case of, I wish we could have accommodated all of the employees that Vurv had, but as you know you have got to make those tough decisions. I think that the integration team did a remarkable job of coming up with the most objective criteria possible for figuring out who was going to be the best fit for our company. And part of it is not just the skill set. We are a different company. We have aspirations for being a very big, public software company, and some people just do not want to be in a big public software company. It takes a different skill set. So we had an eye to it not only where we are but where we are going when we were selecting the kinds of people that we think can make a difference for us, and for the most part, I think the people that wanted to be here were able to find a spot and the people that did not think this was a good fit on our part or on their part, all of the conversations that I saw were handled extremely professionally. It is a small industry, and I think we might see some people want to come back to Taleo, and we would try to welcome them.

Operator

Your final question comes from Dan Cummins - Soleil.

Dan Cummins – Soleil Securities

Of the 25 wins that you referenced, I am curious how many of those were non-U.S. Please, perhaps, more color on what is happening in your non-U.S. business and how fast you can deploy resources to take advantage of the demand there, and I had one follow-up.

Mike Gregoire

Yes, take a look at it right now. It looks like we had 5 of the 25 happened outside of the U.S. I am sorry. Seven happened outside of the U.S. So there was 18 in North America and 7 outside the U.S.

Dan Cummins – Soleil Securities

How about distribution and sales hiring over there? How is that going?

Mike Gregoire

We are at full capacity for what we have budgeted right now, and I think we have got a full team that is fully qualified to sell, and I feel pretty good about that team. That is a great story too. The person that is running international is a Vurv employee, a very accomplished executive, and we have big expectations from international. We have big expectations from Darren Jaffries, who is running that business.

Dan Cummins - Soleil

And then, just my last question was the Vurv compensation product, I am just curious if you have done a detailed assessment there. Is it robust enough to take and run with it, or is that going to need some work into next year to get another leg of the product portfolio going?

Mike Gregoire

I think it is going to need more work. We are still working through that. Compensation is extremely complex, as you well know, so you have to first decide how big of a problem do you want to solve. If you want to solve global compensation, that is a big problem to solve. If you want to take a subset of that, you could take a look at the Vurv application and use that as a starting point to solve that. But right now, we did not feel that that particular application was strong enough to put into some of our larger clients. And so, between us and the SMB organization, we are trying to figure out where that fits and then what is our overall arching structure and overarching strategy for getting the kind of compensation that JPMorgan, Citigroup, Intel, Pitney Bowes, those class of clients would need in order to run their business.

Operator

There are no further questions at this time.

Mike Gregoire

Well, in summary, I want to thank everyone for taking time out of their afternoon to listen to our conference call. I could not be happier with the Company and where we have come from. I am extremely excited about the Vurv acquisition and what we are going to be able to do with that. And despite what you are reading in the newspapers, it is tough economic times, but it seems that Taleo's been able to figure out how to weather through these economic storms and we look forward to talking to you out in the field. All the best.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Taleo Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts