Translating Taleo’s Accounting Issues
For those that have been watching, November is quickly becoming a month Taleo would like to forget. It first started with the announcement that Taleo is re-evaluating the timing of revenue recognition based on concerns from their auditor, Deliotte (a Taleo customer). The accounting issues are based on 1) whether delivery of TLEO’s application software has successfully occurred when access is provided to a customer; and, 2) whether consulting services (time and materials) delivered in tandem with a software subscription have stand-alone value and can therefore continue to be recognized when completed rather than ratably over the corresponding software subscription term. The resulting affect has been delayed quarterly reporting, a NASDAQ delisting notification, and, as of today, a total of 11 pending class action lawsuits or investigations of insider trading.
What is interesting out of this entire situation is that Taleo has had their revenue recognition policy in place for over 7 years, including the last 3 as a publicly traded company, and Deliotte has signed off on their financial statements every year. Why are they just now raising the timing issue? Additionally, this is not case of fraud but seems to be more of a philosophical debate of when the money is put in the pocket…upon client configuration or upon actual user access and “go live”. More broadly, many investors are concerned this is not just a Taleo issue but a SaaS accounting issue (as most SaaS vendors have similar accounting policies) with other SaaS vendors potentially at risk.
Nonetheless, this news, in conjunction with unique market conditions, have erased nearly $800 million in company value this year (its current market capitalization of approximately $190 million is off from a high of nearly $1 billion). 
So what does all of this mean for customers? If nothing else, it creates a distraction in what is becoming one of the most difficult enterprise software selling periods. The result for Taleo could potentially be even further delayed and scrutinized contract that could even impact how they discount their products.
Distractions aside, Taleo remains one of the most viable vendors in the HCM space. It is important to note that Taleo still has some of the best products in the market, with a long, recognized customer base, good service, and capital at hand (~$60 million) to continue investment in the product and company. I recommend any clients or prospects keep apprised of the situation but the news, so far, should not have any material impact on buying decisions.
Lastly, one of the questions I have gotten over the past two weeks is if Taleo is now a prospective takeover candidate with such low valuation. “Why doesn’t SAP or Oracle acquire them” seems to be a opportune question. Any acquisition at this point is highly unlikely due to the ongoing litigation and a presumable poison pill in place that would force any acquisition to become hostile.
Even with all of these issues, Taleo remains a well-positioned vendor in a market destined for significant shifts over the next 12 months.
Technorati Tags: Taleo, TLEO, lawsuit, revenue recognition, NASDAQ
13 Comments Add your own
1. TechSphinx | November 25th, 2008 at 4:16 pm
Great post Jason. Taleo had a similar downturn in its stock surrounding the departure of their former CFO back in 2006. Gregoire seems to be a pretty steady hand, so if anything, Taleo may be undervalued, even in this wretched market. And, if you are going to buy a recruiting package, who is a better option? Certainly not Kenexa nor Authoria.
I just hope, and expect, that the most that could occur there is a minor revenue recognition adjustment.
2. Jason Averbook | November 25th, 2008 at 7:40 pm
Jason
Great post. Taleo has one of the best management teams in the software space today. I am very confident that they will make it through this and remain a leader in the space for a long time to come.
All software vendors will be facing amazing pressure during the last part of 08 and most of 09; but I do believe like you that Taleo will continue to be a leader in the space.
3. Dexter Donahue | November 25th, 2008 at 8:43 pm
Good article.
Agree, Taleo has a great management team. I have known some of them since the PSFT days, very solid. This whole situation they are in is very confusing since it is the same firm that has signed the books for the last 7 years.
Taleo has great products to go with their management team and a very innovative SMB group. As we watch vendors circle the drain in the next few quarters, Taleo will still be on top.
4. Bill Kutik | November 26th, 2008 at 4:34 am
Well done, JC.
At the risk of appearing ridiculous (or worse, old), I have known Taleo since it was three people called Recruitsoft 10 years ago, including Supply Chain veteran and founder Louis Tetu.
While I had lots of problems with Louis’ willingness to trust the world outside his company, I never doubted that he laid a solid ERP-like development foundation for the company. From the start, continuing to this day, the company has produced industrial strength, bullet-proof software.
During the same time that dearly-loved and mourned Vurv had development running on Jolt Cola and customers doing Quality Assurance on new upgrades.
There is so much I don’t want to know about accounting. But there is so much that I *do* want to know about why Deloitte, after seven years, decided to raise this ruckus now. When the dust settles, I suspect it will be seen as just a distraction for the company and some kind of CYA move by Deloitte that has nothing to do with Taleo.
Why haven’t the auditors at every other public SaaS vendor raised the same questions?
Long-term (if we’re still capable of looking beyond today’s stock market results?), Taleo will emerge just as solid as ever from this, perhaps with some revenue pushed around chronologically. But they’ll still have the same amount of money and financial position they enjoy today.
And, I trust, a new auditor.
5. Jason Corsello | November 26th, 2008 at 6:08 am
“Why haven’t the auditors at every other public SaaS vendor raised the same questions?” you ask? A couple of reasons. 1. It is my understanding none of the other major, publicly traded SaaS vendors use Deliotte as their auditor. 2. Auditors tend to make up their own rules in determining revenue recognition. 3. Their is no hard and fast rule as to revenue recognition for SaaS solutions.
Keep in mind, in all of this philosophical debate, hardware vendors like Sun and software companies like Microsoft recognize revenue once the product either leaves the dock or store room shelve irregardless if the product is actually ever turned on or used.
6. Max | November 26th, 2008 at 9:09 am
Jason, are saying this is a Deliotte issue for not catching it? Or the other vendors in the space don’t get the same level of scrutiny because they don’t use Deliotte? PWC and KPMG are pretty good auditors. So I wouldn’t take shots at the other vendors because they don’t use Deliotte.
Also, I don’t remember seeing the other publicly traded vendors in the space having issues with revenue recognition. ADP (Virtual Edge) is publicly traded and I haven’t seen any issues there. Kenexa, which has been publicly traded for a few years hasn’t had any issues. I haven’t seen any press releases about SuccessFactors either.
I always look to this site for “objective” options. I thought that you and Bill are independent industry experts. However, any time I read your articles or posts they also seem to be extremely pro-Taleo.
I’m currently leading an evaluation of applicant tracking systems for my company but I cannot use any of the information you or Bill provide because I’m not sure of your stance with Taleo. I’ve never, no matter how bad seen either of you write anything negative about Taleo.
Even in this case to completely absolve Taleo is laughable. Both of you praise their Exec Team, how good can they be if they missed this? They’ve all been Exec’s at other publicly held SaaS vendors in the past. They should at least know the basic accounting rules or they shouldn’t be holding those positions.
7. Jason Corsello | November 26th, 2008 at 12:39 pm
“Max”- This is not an issue of Deliotte “not catching it” nor is it about “basic accounting issues” as you suggest. Deliotte seemed to have decided that after 7 years they need to re-access how SaaS software revenue is accrued. Taleo’s issues are not a cause of fraud whereas the auditor is concerned about revenue deception but more of when the timing of revenue should be accounted. If I was a SaaS vendor, I would be watching this situation intently. I am not “completely absolving” Taleo but what I am saying is, as it currently stands, these issues should not affect buying decisions. Even with these issues, Taleo stands on a much more solid foundation than most of the other vendors in the market.
For those that know Bill and myself know we are some of the most objective observers in our market. Sorry if you think this blog is pro-Taleo. Most readers come to this blog to get fair and balanced facts combined with well-informed opinions. I wish you luck with your evaluation.
Jason
8. TechSphinx | November 26th, 2008 at 1:14 pm
Max, I am more than happy to accuse anybody of unfair bias, or any number of other things, but not all companies are the same. You can’t accuse someone of lack of objectivity just because they have a qualitative opinion of something, even an ATS provider. What’s wrong with Jason or Bill Kutik saying they think Taleo is a better company than others? They didn’t say that, but even if they did, that doesn’t make their opinion non-objective. It simply means the HAVE an opinion. It’s like saying “Roger Federer is better than Andre Agassi.” You can disagree, but that doesn’t mean they are biased.
If you want to argue that someone is wrong about Taleo, bring the facts. If you think Jason is wrong, make a counter-argument stating why you think he is wrong. If you think he is covertly being paid by Taleo, then accuse him…but you might want to bring some damn good evidence with you.
By the way, do you really want your analysts and columnists to not have informed opinions about their subject matter? Perhaps you prefer them to be middle-of-the-road say nothings? Aren’t there enough of that type for you already?
9. Lisa | November 27th, 2008 at 5:49 am
The timing of this is unfortunate and also wonder why after 7 years Deloitte has made this inquiry when virtually every other SaaS firm recognizes revenue similarly. I don’t think it shows a pro-Taleo stance to question this timing and I think Max is out of line. What are you proposing the Taleo exec team did wrong if their auditors have signed off on the books for the last 7 years?
10. Vurv Vet | November 28th, 2008 at 8:34 am
I worked for Vurv for many years and stayed on with Taleo briefly, leaving for better opportunities due to some leadership issues following the transition.
For some insight, at Vurv we would recognize revenue for new contracts immediately upon the delivery of a new production site/application/instance, prior to any customer configuration, UAT, training, or go-live taking place.
Also, Deloitte was our auditor for years, however we were using KPMG up until the acquisition.
11. Jason Corsello | November 28th, 2008 at 7:27 pm
“Vurv Vet” - You bring up an excellent point. Taleo’s revenue recognition issues may be related to Vurv’s revenue and accounting procedures. If this is the case, one would have to argue Taleo did a poor job accessing and integrating Vurv from a pure accounting perspective…irregardless of the customer challenges ongoing.
12. Dave | December 2nd, 2008 at 8:28 am
Jason, I am not so sure on your last response to Vurv Vet. I think you were right the first time in that it is a problem more common to the SAAS business model as a whole.
We are Vurv customer considering transitioning to Taleo (but only after their 8.0 product is available).
I know of a fellow customer (large defense contractor) who rolled out separate divisions onto Vurv over an extended period of time. Did Vurv have to wait until the last division is live to book the extended services and the basic services and software related to the first division? The majority of Vurv and Taleo’s basic services for a new implementation are completed prior to handing over the keys to the staging/future production site in the form of data conversion and initial configuration. At that point, the customer steps in and finishes configuration prior to go live. Turning on the site is a relatively simple matter. I think the SAAS vendors have a good argument to booking it at that point and extended services when the clients are billed.
13. Samantha | November 11th, 2009 at 9:22 pm
I would not touch Taleo, it has brough much pain and anger to me and many of my friends. Applying for jobs is hard enough but using Taleo makes life so much harder especially once you spend a lot of time and effort filling out your personal details, attching CV, cover letter etc only to be told there is techinical difficulties and therefore all the time you have spent applying is wasted. There are plenty if stoties on the web of people using Taleo, having issues and finally being contacted by the company once the job listing has closed.
Another issue is their job matching is all computer based, no people input therefore many of the jobs are not suited to the individual.
No happy Taleo!
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