Taleo A Takeover Target?

According to market research firm Bersin & Associates, the talent management market, currently worth about $3 billion, is expected to grow by 12-15 percent or more this year. SuccessFactors (NASDAQ:SFSF) and Taleo (NASDAQ:TLEO), the leading players in the market have over the past two to three years, have made many acquisitions and seen tremendous growth. Let’s take a closer look.

Taleo’s Financials

Taleo, with annual revenue of $237.3 million, recently reported third quarter revenue of $83 million, up 41% y-o-y. Net loss was $3.3 million or $0.08 per share compared to net loss of $1.6 million or $0.04 per share last year. Non-GAAP net income was $0.30 per share compared to non-GAAP net income of $0.20 per share last year. Analysts expected earnings of $0.27 per share on revenue of $83.6 million.

Subscription revenue for the third quarter was $67 million, an increase of 38% y-o-y. Professional services revenue for the third quarter was $16 million, an increase of 59% y-o-y. Current deferred revenue was up 41% to $111 million. Billings, which is the company’s change in short-term deferred subscription revenue, rose 50% y-o-y to $71 million.

Taleo signed 270 new customers in the quarter and closed seven new large enterprise deals with first-year contract values in excess of $250,000. Cash generated from operations for the third quarter was $6 million compared to $15 million in the third quarter of 2010. The company ended the quarter with total cash of $111 million, a decrease of $31 million from the prior year mainly because of the acquisitions of Cytiva, a mid-market provider of on-demand recruiting software solutions and European vendor Jobpartners.

For the fourth quarter, Taleo expects non-GAAP revenue in the range of $86 million to $87 million compared to analysts estimate of $86.33 million. For the full year, the company expects non-GAAP revenue of $324 million to $325 million, up from the prior $320 million to $323 million. Full-year earnings per share is expected in a range of $1.02 to $1.03, up from the prior $0.98 to $1.01 per share. Analysts expected full-year non-GAAP earnings of $1.01 per share on revenue of $317 million.

Taleo is trading around $34.37 with market cap of about $1.43 billion. Its 52-week range is $21.44 to $38.28.

SuccessFactors’ Financials

Competitor SuccessFactors with annual revenue of $209.4 million recently reported third quarter revenue of $91.2 million, up 77% y-o-y and 25% q-o-q. GAAP net loss was $25 million or $0.30 per share compared with $2.8 million or $0.04 per share last year. Non-GAAP net income per share was $0.07. Analysts expected earnings of $0.01 on revenue of $88.5 million.

SuccessFactors generated $4 million from operating activities, down from $9.6 million last year. Deferred revenue was $243.9 million, up 18% y-o-y.

For the fourth quarter, SuccessFactors expects to break even on non-GAAP revenues of $95 million to $97 million. For the full year, the company expects to break even on non-GAAP revenue of $331 million to $333 million, up 59% y-o-y. Last quarter, it forecast full-year revenues of $310 million to $315 million. SuccessFactors is trading around $27.63 with market cap of about $2.33 billion. Its 52-week range is $19.46 to $40.44.

Over the past two years, both Taleo and SuccessFactors have made numerous acquisitions that have consolidated their positions as end-to-end talent management solution providers. Taleo recently acquired Jobpartners, which makes it one of the largest SaaS-based talent management vendors in Europe. SuccessFactors recently acquired Plateau, a learning management software (LMS) company, for $290 million. Earlier, Taleo had acquired Learn.com, an LMS vendor.

Abe Raymond on MSN Money reports of rumors of Taleo being a takeover target. He does not specify the interested companies, but it is most likely that the recent $1.5 billion acquisition of RightNow by Oracle has triggered these rumors. A couple of years ago I suggested that Taleo could be an acquisition target for Oracle. That was when Taleo’s revenue was just $128 million and its market cap was $354 million. With a current market cap of about $1.4 billion, would it still be a good buy for Oracle?

Michael Fauscette on Seeking Alpha discusses the shift in Oracle’s acquisition strategy and says:

“The Oracle HCM and Talent Management offerings are already available in the cloud, so presumably there would be no reason to look there.”

Oracle is sure to make many more acquisitions in the SaaS sector. RightNow is just its first step. The fact that it already has talent management offerings in the cloud should not deter it from considering this sector.  The point of the RightNow acquisition was also more about gaining market share against Salesforce.com than filling portfolio gaps. So, the Talent Management sector is a definite possibility and though couple of years ago Taleo would have been much cheaper, it would still be a good buy for Oracle.