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Tech stocks - Thursday, June 19, 2008

Giving The Pink Slip To Taleo

In uncertain economic times, two areas that often feel the brunt of layoffs are marketing (this includes public relations) and human resources. That shouldn't be a major revelation to anyone who reads this column but why would anyone invest in a company that offers "on demand talent solutions"(aka hr software).

This brings us to Taleo (TLEO:Nasdaq), a Dublin-based company that is trying to be the leader in E-recruitment software.

Immediately the company is placed under a certain amount of scrutiny as CEO Michael Gregoire and two other senior VPs are PeopleSoft alumni. We at tech:stocker feel that everyone at PeopleSoft should still be sending Larry Ellison holiday cards as without him and Oracle, they were doomed to an existence of mediocrity and underperformance.

Even though we can't find any whitepapers on Taleo's site stating the cost savings of their software once implemented, at the very least it saves company employees from having to read the farewell emails from disgruntled hr employees when they are shown the door. So why bet against Taleo?

First, the company referred its first quarter 2008 diluted earnings of $0.06 as "strong". While the number may have excited the IR people who wrote the release, we didn't see any reason for such enthusiasm. Taleo's P/E ratio for the last 4 quarters is a whopping 132.88. Regardless of the industry, this shouldn't be a "green light" for even the riskiest investors.

But what truly has us questioning Taleo is their touting of being positioned in the "Leaders' Quadrant" of Gartner's Magic Quadrant. Taleo proudly features this on the top of their Web site. While third party validation is always reassuring to potential investors, Gartner has a reputation of being pay-to-play so it wouldn't surprise us if Taleo is a loyal customer. We also know quite a few people who have pulled the wool over Gartner's supposedly discerning eyes.

Talking to our people on the street, we hear that investors are starting to short Taleo. The recent acquisition of Vurv doesn't make a lot of sense considering they were not profitable and seemed to have overlapping offerings. While the acquisition will boost the Taleo's gross sales, Vurv's debt might hurt the company's earnings over the next few quarters.

If we were forced to pick a winner in this industry, we would choose SuccessFactors (SFSF:Nasdaq) even though they didn't have a spot on Gartner's Magic Quadrant.