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Executives

Don Volk - CFO

Rudy Karsan - Chairman and CEO

Troy Kanter - President and COO

Analysts

Brendan Barnicle - Pacific Crest Sec

Brad Reback - Oppenheimer & Co

Ajaykumar Kasargod - Piper Jaffray

Joel Fishbein - Lazard Capital Markets

Peter Goldmacher - Cowen and Company

Brian McGrath - Credit Suisse

Richard Davis - Needham & Company

Robert Breza - RBC Capital Markets

Andrey Glukhov - Brean Murray

David Hilal - FBR

Laura Lederman - William Blair & Company

Ross Macmillan - Jefferies & Company.

Steven Koenig - Keybanc Capital Markets

Shasa Jorbig - Goldman Sachs

Kenexa Corp. (KNXA) Q1 2008 Earnings Call May 12, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen and welcome to today’s Kenexa Corp first quarter 2008 earnings conference call. (Operator Instructions) Now I'd like to turn the conference over to Mr. Don Volk, Chief Financial Officer; please go ahead, sir.

Donald Volk

Thank you Keith. With me on the call today is Rudy Karsan our Chairman and Chief Executive Officer and Troy Kanter our President and Chief Operating Officer. Today we will review Kenexa's first quarter 2008 results and provide guidance for the second quarter and full year 2008. Then we will open up the call for questions.

Before we begin, let me remind you that this presentation may contain forward-looking statements that are subject to risks and uncertainties associated with the Company's business. These statements may concern among other things, guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property and the development of products. Additional information that may affect the Company's business and financial prospects as well as factors that would cause Kenexa's actual performance to vary from our current expectations is available in the Company's filings with the Securities and Exchange Commission.

Also I would like to remind you that today's call may not be reproduced in any form without the expressed written consent of Kenexa. We may refer to certain non-GAAP financial measures on this call. I will discuss the reconciliation of the adjusted numbers to the GAAP numbers and a reconciliation schedule showing the GAAP versus non-GAAP financial measures is currently available on our company website with the press release issued earlier today. Our website is located at www.kenexa.com.

I will now turn the call over to Rudy Karsan.

Rudy Karsan

Thanks Don, and thanks to all of you for joining us on the call. As we review our first quarter results which were highlighted by subscription revenue and non-GAAP EPS that was either inline or above our guidance.

We continue to see new customers moving forward with purchase decisions in the phase of a more challenging macroeconomic environment We believe this is a result of the growing awareness of the talent management market and the increasing power of Kenexa’s brand on a global basis. We are recognizing the benefit from our investments and building out our international operations and we will continue to invest in our business and focus on a combination of organic growth and strategic acquisitions.

We have consistently stated that we believe the talent management industry would continue to consolidate and we believe the lower the macroeconomic plan that remain challenging, the more likely the consolidation will occur. Based on the strength of our current market position we believe that Kenexa is well positioned to be one of the market consolidators. Taking a look at the numbers for the first quarters, our total revenue and profitability came in inline with our guidance and Don will elaborate on this further.

As we stated in our last call if the macro-economy were to worsen materially during the year we would do all that is reasonable and possible to continue driving Company’s profitability. We believe we are and we will continue to be one of the best divisioned in human capital management vendors to do so based on our critical mass, profitability and increasing global execution models. With that said, we continue to see a high degree of interest in our solutions and solid flow of new customers moving forward with purchases. The fact is that workers continue to retire as otherwise turnover, new respective of the net new job growth as an individual company may experience.

At the same time the performance management market is focused on retention and productivity of existing employees. From a longer term perspective our experiences indicated that the underlying drivers of market demand remains the same, the ageing of the workforce, declining tenure of employees, increased globalization, fluidity of organizational structure and pressures on the HR department to minimize costs. This creates long-term market demand and we release an exogenous position to meet the needs of customers based on our unique value proposition of content services and software.

We believe the talent management is increasing viewed as a strategic priority by the world’s largest origination and is ideally suited to our go-to-market approach that is focused on levering the domain expertise of Kenexa. This is very different than peer software companies and is something that we believe creates a comparative advantage, significant value for our customers and long-term relationships. With the strong competitive position and value prop, we are highly focused on expending the power of Kenexa's brand on a global scale and have been investing aggressively to do so.

Since 2005, we’ve expanded the number of countries we operate in from three to 18. Our flagship Kenexa Recruiter BrassRing Solutions supports 29 candidate languages and 11 recruiter languages, we now have approximately 40% of our employee base located outside of the United States and in the fourth quarter of 2007, we completed construction of our own building in India that has a capacity of 700 employees to support our future growth plans. I will share more on this development activity later in my remark.

We recently added to our global presence and domain expertise the acquisition of London-based Quorum international, a leader in providing EPO services to multinational corporations throughout Europe, the Middle East and Africa for nearly a decade. There were several strategic reasons we acquired Quorum: first, it expands our global deliverability capabilities in the AMEA region; second, it enhances Kenexa's domain expertise and the technology vertical and third, it further expands the breath and dept of our EPO solution.

A good example of Quorum’s capabilities involved a leading supplier of networking technologies with over 40,000 employees operating across 32 countries. In the first six months of its engagement Quorum delivers over 300 hires, which is ahead of plan and made service improvements in all of the objective areas, 30% improvement in candidate quality, reduced full times by 30 days and cost were higher by -- were reduced by a third. After those successful six months the contract was extended for another year and time to hire was apart from contract interception and cost reduction was sustained through the achievement of 90% non-agency hire rate.

From an overall perspective development in our EPO business continues to be more positive. First, we accelerated our global delivery capabilities with the acquisition of Quorum; second, we signed and our implementing the new EPO customer in the technology sectors that we have announced last quarter and finally, I’m pleased to share with you that we recently engaged two additional EPO customers; one in the life sciences vertical and another being a European based technology vendor.

To summarize, we are encouraged by the recent progress of the EPO segment of our business, which is an area that provides Kenexa’s domain expertise that no other on demand Software Company can match. It also provides us with a unique opportunity to build close relationships with customers where we can sell our broad suite of capabilities over time. With the acquisition of Quorum, we have now diversified and expanded our EPO customer base and this portion of our business now represents in the mid 20% range of our revenue.

I would now like to discuss the driver to the majority of our revenue which is our technology solution. During the quarter we are pleased to see continued solid demand for our solution highlighted by over 50 new preferred partner customers joining Kenexa, which compares to 40 new preferred partner customers in the prior year period. We continue to be pleased with the market reception that we are seeing relative to our Kenexa Recruiter BrassRing solution which is at high end offering in the talent acquisition space.

From an overall perspective we find customers such as with which general Hong Kong Jockey Club, Bakery Brand, FTC services are reaching out to $0.99 stores and coming among others for our talent acquisition solution. As it relates to our employee retention solutions, we closed business with customers such as Ingersoll-Rand, Liz Claiborne, Scotiabank, Select Comfort, Ocean Spray, [Inaudible] Europe, DAFF and Harry and David. High quality customers such as these provide ample opportunity for Kenexa to expand our presence over time. As we demonstrate a unique value which is evidenced by consistent and solid group in our PQ Metric. This metric increased to over the $1.3 million level in the first quarter.

We’re highly focused on continuing to get our foot into all of these companies with the large 2500 organizations in the world being the primary target of our effort. We believe the best of our value propositions is unique in the industry and provides us with a significant long-term opportunity to expand our presence with these companies overtime. In addition to having a broad suite of solutions we believe the strength of our technology continues to position Kenexa, as a market leader in HCM market place.

During the first quarter, we had several major new releases including Kenexa CareerTracker 4.8, Kenexa Recruiter 18 and Kenexa Recruiter BrassRing 11, which was the third major release of Kenexa Recruiter BrassRing since the acquisition and included more than 70 functional, operates more than any release in the history of our product.

A final quarterly milestone I wanted to highlight was a successful opening of our newest Global Kenexa’s in Vizag India. This campus will become a key part of Kenexa software global research and development organization and will be run by Tom Wanuga, our VP of Development for India and Malaysia. Tom holds Post Graduate degrees from MIT, and a past employee of IBM's, Thomas J. Watson Research Center and he will be overseeing Kenexa's offshore R&D efforts.

In summary, our first quarter results were solid and I believe our growth is posed to increase beginning in the second quarter, based on business that’s disclosed in the past two quarters, a high-level of renewal rates and a solid pipeline of opportunities that we continue to execute again. We believe our investments expand our global presence of paying out and the acquisition of Quorum further solidifies our improving EPO business and as the global delivery capabilities that were a strategic priority for the Company.

We continue to watch the macroeconomic environment carefully, and are highly focused on delivering revenue growth, strong operating margins and cash flows for our shareholders. I will now, turn it over to Don Volk, to review the financials in more detail.

Donald Volk

Thanks Rudy. I will now review our results for the first quarter of 2008. Let me start with the P&L. Total revenue for the first quarter was $48.2 million, inline with our guidance and an increase of 14% over the last year and 1% on a sequential basis. Within total revenue subscription revenue is the most strategic revenue resource and it was $39.2 million representing growth of 13% on a year-over-year basis and 1% sequentially.

Subscription revenue was inline with our guidance for the quarter and an 81% of total revenue was slightly above the high end of our targeted mix in the high 70% to 80% range. The remaining $9 million of total revenue in the first quarter came from other and professional services which increased 20% over the last year and it was roughly inline with the prior quarter. The majority of the revenue from this line comes from discrete professional services.

As a reminder our clients typically purchased multi-year subscriptions with an average length of approximately two years and our diverse customer base continues to renew in the 90% plus range. During the quarter we added over 50 preferred partners, which compares to over 40 preferred partner customers added in the year ago period. As Rudy pointed out our 2Q metrics was over $1.3 million at the end of the quarter, which was up from over $1.2 million at the end of 2007.

Turning to profitability we will be providing our non-GAAP measures for each first quarter 2008 expense category, which excludes stock-based compensation charges associated with the implementation of FAS 123R and amortization of intangibles associated with previous transactions. All comparisons will be using the non-GAAP current period results. Non-GAAP gross margin was 73% in the quarter. This was roughly inline with the prior quarter and prior year. Following the acquisition of Quorum, we expect our longer term non-GAAP gross margins to fluctuate in the 70% range plus or minus depending on the mix of business in any quarter.

Looking at operating expenses, non-GAAP sales and marketing came in at $9.6 million or 20% of revenue, a slight increase in absolute dollars on the sequential basis and slightly higher as a percentage of revenue from both the prior quarter and year ago periods. Non-GAAP R&D expense came in at $4.4 million, down roughly $100,000 in dollars sequentially and representing 9% of revenue. This is at the high-end of our long-term targeted R&D spent of 69% of revenue.

Non-GAAP G&A expenses were approximately $10.7 million; an increase of $1 million is on a sequential basis and representing 22% of the revenue. We typically experienced a seasonal sequential increase in G&A expense during the first calendar quarter of the New Year.

In addition, we have previously expected a onetime $2.3 million expense associated with the move to our new campus in Vizag, India. However, after detailed research on accounting for relocation expenses we determine that we should record 300,000 in the current quarter and we recognized $2 million balance over the reminder of the year. Similar to our past expectations, we do not expect this charge to recur in 2009.

Our non-GAAP income from operations was $9.1 million for the first quarter. This was above our guidance due to the fact that we did not incur the full relocation charge in the quarter. However, on a normalized basis compared to our guidance we were inline with our expectations. During the first quarter our non-GAAP tax rate for reporting purposes was 25% resulting in non-GAAP net income of $7.3 million and non-GAAP diluted EPS of $0.31 based on $23.6 million shares outstanding. Had we taken the full relocation charge in the quarter as we previously expected when we provided our first quarter guidance, our non-GAAP EPS would have been $0.25.

Turning to our results on a GAAP basis which include $1.7 million related to the allocation of stock-based compensation and 800,000 related to the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP. Cost of goods sold $13.1 million, sales and marketing $9.9 million, R&D $4.5 million and G&A $12 million.

For the first quarter our GAAP income from operations was 6.5 million. Net income applicable to common shareholders was $4.8 million resulting in a GAAP diluted EPS of $0.20. The reconciliation of GAAP to non-GAAP expenses and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.

Kenexa had cash, cash equivalents and short and long-term investments of $68.1 million at March 31, 2008; a decrease from $96.5 million at the end of the prior quarter. The decrease in cash was primarily the result of $24.6 million in cash used to repurchase the companies common shares during the quarter.

During the first quarter, we completed the reminder of the first repurchase program that was announced in the fourth quarter of 2007. In addition, in February we announced that our Board of Directors had authorized the Company to repurchase up to 3 million additional shares of our common stock. During the first quarter we repurchased approximately 760,000 shares associated with the second repurchase program.

The cash out flow relative to the repurchase plan was partially offset by $3.6 million in positive cash from operations in the quarter. You will note that we have reclassified $21.3 million of our auction rate securities which are all AAA credit rated; from short-term to long-term assets due to the current liquidity of the auction market. In addition, we recognize the related temporary impairment charge of approximately $1 million to our stockholders equity balance at the end the quarter. We remain comfortable with the Company’s overall liquidity based on our cash and short-term investments balance of approximately $47 million and our strong cash flow capabilities generated from our high level of profitability.

The accounts receivable adjusted DSO were 62 day at the end of the quarter compared to 60 days at the end of the prior quarter and 62 days at the end of the year ago quarter. Our deferred revenue at the end of quarter was $37.5 million, an increase of $2.4 million or 7% sequentially. From a seasonality perspective, we typically expect deferred revenue to be flat to down sequentially in the first quarter of the year.

I now like to turn to guidance for the full-year in the second quarter of 2008, which includes the impact of the Quorum acquisition, which closed on April 2. For the second quarter of 2008, we expect the following: revenue to be $56 million to $57 million, subscription revenue to be $43.7 million to $44.2 million. Non-GAAP income from operations to be $10.9 million to $11.2 million, assuming a 30% tax rate for reporting purposes and $22.9 million shares outstanding we expect our diluted non-GAAP earnings per share to be $0.34 to $0.35.

For the full-year 2008, we expect total revenue of $230 million to $235 million, subscription revenue to be $179 million to $185 million, non-GAAP operating income to be $47.2 million to $48.2 million, assuming a 30% tax rate for reporting purposes and 23 million shares outstanding we expect our diluted non-GAAP EPS to be $1.47 to $1.50. As a reminder our full-year 2008 guidance includes the $2.3 million one-time charge related to the opening of our new office space in India, which we incurred in the first quarter.

There are two additional factors I would like to point out relative to our guidance. First, we have reduced our interest rate assumption from 3.5% to 3% as a result of the decline in interest rates which impacts our interest income projection for the full year 2008 by approximately 300,000 or $0.01 a share. Second, by the way of background Quorum's revenue in 2007 was approximately $15 million and their operating and profitability margins were in the mid to high teens. As evidence by the increase in our EPS guidance we expect the acquisition of Quorum to be accretive to our non-GAAP EPS, consistent with our stated acquisition parameters.

In summary, our first quarter results were solid. As we look ahead we are encouraged by the progress of our EPO business, continued high levels of customer renewals and our ongoing business momentum. In light of the current macroeconomic environment we believe Kenexa presents an attractive combination of revenue growth, operating profitability and cash flow.

We would now like to turn over to the operator to begin the Q-and-A session. Keith?

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thank you, guys. I was interested in EPO business, you mentioned your two new wins. Rudy, I thought you had said maybe for the full-year, originally you would expected for the four and I just wanted to get sort of an update on where we are now versus what you'd expected and then also are you seeing any change in that business as the economy slowed as people potentially look to outsource more and more work of outsource including the recruiting.

Rudy Karsan

Well, we said at the beginning of the year is we had three renewals coming through and that we would expect to kind of win one or two, lose one or two and finish the year at net plus one. So far if the two renewals we have won one and lost one. So, that’s -- and now we have signed on three, so we are plus net two, which is above the plus one that we said we would be. However, part of the win -- one of the wins was in Europe, which was a combination between us and core. So, at this point in time generally on the EPO front, we have moved from being kind of neutral to mildly positive to being somewhat positive in this business and the EPO business also takes a while for the revenue to start hitting our income statement, so the loss that we didn’t bring you in Q1 was reflected in our numbers in Q1 because it was terminated there. The new sign-on will was start coming in towards the later half of this quarter in Q2 and into Q3; we won’t to a huge growth from it in Q2. In general the EPO business has been going well, we continue to get advanced at it and at this point in time its -- I think if you remember on the analyst day, we said it was on critical watch, we are now basically saying its off the critical watch, its become part of the normal business and kind of in the second half of this year we don’t expect it to be a drive on overall growth like it has been over the last six quarters.

Brendan Barnicle - Pacific Crest Securities

Terrific and Don you mentioned the big improvement in deferred revenues sequentially which is not typical seasonally, what was it specifically drove at; some of these new EPO deals?

Don Volk

No that was part of it, Brendan, but typically we got a budget flush at the end of Q4 and we get A spike in Q4 where we didn’t get that budget flush this year, so we didn’t have that spike and I believe that it just carried over into Q1 and we had a typical strong increase in deferred in Q1.

Operator

We will go next Ajay Kasargod with Piper Jaffray.

Ajaykumar Kasargod - Piper Jaffray

Thanks. First question is Don, just can you just review again -- I tend to get some complicated accounting, but why you didn’t recognize all the Vizag costs in Q1 and also, I think you recognized 13% of that cost of $300,000 or $2.3 million in Q1. You said the quarter we have been $0.25 when you were looking for a $0.10 charge, so can you reconcile that again for us?

Donald Volk

Sure, we didn’t recognize the entire $2.3 million because relocation accounting tells us to recognize the expense when incurred and it defines when incurred as when it’s paid out. So although we have committed to the employees for the reallocation expenses, we have not paid it out any more than $300,000 in the first quarter, okay. So, then if you go and say, okay we paid out 300 and we recognized that in Q1, we didn’t recognize $2 million, so if you tax effect $2 million at 70%, you get 1.4 and you divide 1.4 by the shares outstanding you get $0.06. We had $0.31 take $0.06, we would have been at $0.25.

Ajaykumar Kasargod - Piper Jaffray

Okay great and then Don my follow up would be, if I look at cash real quick on the balance sheet and this also -- and knowing that its the first quarter, looks like cash is down about $28.4 million from last quarter that includes the long-term investment and I know the buyback was 24.6, so it has -- does that mean -- is my math right, I is that a typical loss, cash lost quarter or can you just kind of I reconcile why cash was down above the buyback?

Rudy Karsan

Cash was down -- operating cash was up $3.6 million and if that typically Q1 is the slow flow cash quarter for us from an operating cash flow prospective, but $3.6 million positive was encouraging to us. The only other reason cash was down was because of the buyback.

Ajaykumar Kasargod - Piper Jaffray

Okay and then it looks like your CapEx was about 3 point -- what is it about $5 million in the quarter; a little bit higher than traditional; just can you tell us why and I’ll get back in the queue, thanks.

Rudy Karsan

Sure, it was a little bit higher as the final payments on the building in Vizag and some equipment purchases.

Operator

We will go next to Brad Reback with Oppenheimer.

Brad Reback – Oppenheimer & Co

Hey Rudy, when you look at over the business longer terms, how large do you see the EPO business getting as a percent of revenue?

Rudy Karsan

It’s hard to judge it, but I think it will be in the 20% to 25% range Brad, which is a number we were at in ’05 and ’06 and then in ’07 we lost a bunch of business and we dropped into that 15% to 20% range. Now with the purchase of Quorum we are in the mid 20s. It continues to grow at that same level, then it should remain in the mid 20s, expect -- the solutions business has been growing faster than the EPO over the last couple of years. We are not strategically trying to get more of that business; we find that the partnerships are allowing us to get more and more into that business, so I guess long-term we’ve haven’t put a cap on it and said, we want to more than 30% of our business will be EPO and no more than 25% will be EPO, but if I look at historical number that would say it will be in the 22% to quarter 27% range, so 23% to 25%

Brad Reback – Oppenheimer & Co

Okay and what is the logics you have given in the past and if I missed it in this call, I apologize; it’s sort of the amount of inbound activity you have seen from your customer base, could you give us any sense were that stands in relation to where it was last quarter or maybe a year ago.

Donald Volk

It was in the low 40s in Q1 which is slightly higher than the same period last year and up sequentially by about 10% from Q4.

Operator

We’re going to next Joel Fishbein with Lazard.

Joel Fishbein - Lazard Capital Markets.

Hi, Don just a real quick; can you just -- if you can give us a little bit of guidance on how Quorum’s revenue’s going to flow through the year?

Donald Volk

Okay. We are not going to break out Quorum on a quarterly basis moving forward, because they are now fully integrated into our overall EPO business. We are running a single global EPO business, not two different companies. So, we did share that Quorum generated revenue of approximately $15 million last year, so a quarterly contribution will be approximately $3.75 million and Quorum will be included in our results for only three quarters of 2008.

Operator

We will go next to Peter Goldmacher with Cowen and Company.

Peter Goldmacher - Cowen and Company

Can you give us a little bit of your thoughts on the recent tie-up between Taleo and Bourbon and how you see that changing; the landscape for you guys probably in the next three to six months and then over the next year or so.

Rudy Karsan

I guess, all along we have said that this space is you going to be consolidating and we are one of the consolidators, we expected Taleo to be one of the consolidators, so this is something that for a while we couldn’t have predicted the exact quarter and exact transaction; it is something that we felt that’s going to happen over the long-term, so really what happened now is customers will have choose between Taleo and Kenexa’s as far as ATS goes, it only kind of leaves people click and step stone at the other two, so we are now -- its become a four horse race now from 15 that was call it 2 years to 3 years ago. Expect it to be in a sense more competitive, because some of the three or four players are going to be tighter against one another as we are jockeying for positions and it’s going to be less competitive from a standpoint to us. You don’t have as many smaller companies kind of mudding the waters and effecting your pricing. Three out of the four companies are publicly held, so they got to protect their margin so we expect the pricing will be somewhat same. Troy do you want to add anything further to that?

Troy Kanter

No.

Rudy Karsan

Is that’s what you were looking forward and do you have anything specific.

Operator

We will go next to Brain McCart excuse me, Brian McGrath with Credit Suisse

Brian McGrath - Credit Suisse

Just a couple of quick ones here; I think you exited ‘07 with 150 sales reps and you have talked about adding relative to 20 in ’08 in 2008. So, when are you going to give us an update on that and Quorum has that kind of -- how you had it schedule there?

Rudy Karsan

Yeah Brian at the end of Q1 we had a $170 plus sales reps at 75% again carrying a quota and that does not include Quorum and then we will update you with Quorum sales reps as we go through the quarter.

Brian McGrath - Credit Suisse

Okay and then real quick on CapEx. Appreciate the color on what happen in Q1; it was a little bit higher than either one -- what should we be modeling for the years; is there any change there?

Rudy Karsan

No we said that the CapEx is going to between 8 and 12 for the year and that’s where we expected today. We expect it will slow down a little bit from Q1 as we go through the years with finished paying with debt for that building.

Operator

We will go next to Richard Davis with Needham & Company

Richard Davis - Needham & Company

Hey thanks, two questions one with regard to kind of what Peter talked about, as best you can tell obviously we can’t -- typically in too much, but are you guys still in the market for acquisitions? The answer would probably be yes and then two, we have not heard this, but sometimes we hear this from investors who get stressed out, they talk about platform integration and things like that, has that at all been a hurdle, have you seen that been a hurdle to your selling cycles at all?

Rudy Karsan

Richard for the first question I think you answered correct, right?

Richard Davis - Needham & Company

Yes, I just wanted to make sure, but I -- you are going to ask anyway.

Rudy Karsan

Confirm yes, we are acquisitive; we did do one transaction this year. We did do I think three last year and five the year before, so that answer is that. Platform integration, I guess the best way I can answer that is from Kenexa’s perspective and I can’t answer from any of our competitors perspective, if from Kenexa's perspective, we are looking not of the assets that are out there right now. They each have the road map who will continue to enhance and will continue to sell it and as long as these value for the customer and profitability for Kenexa and growth opportunities that are available we are going to continue to do that and as we evolve the products over a period of time needless to say that we will get the best of everything into all our products we will use common services in our architecture, we will become more efficient from a pricing and a cost infrastructure and then from an R&D perspective and then the customers will really decide at the end of the day when and if we tend to -- because at this point in time there is no plan for it in the future. Does that answer your question?

Operator

We will go next to Robert Breza with RBC Capital.

Robert Breza - RBC Capital Markets

Thanks. Don maybe just a quick follow-up to Joel’s prior question about Quorum and thinking about the growth rate there, the quarterly breakout was helpful; was there any write offs that’s here or write down of revenues, that you had to take from an accounting perspective that we should think about as we think longer term about 2009 and maybe Rudy if you could just talk about what’s your expected outlook for Global EPO Business; could it grow in 2009 or a broad range of these two are helpful? Thanks.

Don Volk

So, on any deferred revenue the Quorums deferred revenue was minimal, so there was no particular write off of deferred revenue that you have to think about and the second part Rudy.

Rudy Karsan

It was $15 million last year. As we think about the business we integrate it; we don’t break it out separately thinking -- and I think this is consistent with what we have done in the past Rob. Just from optimism perspective is that North America is much more fragmented than Europe is. One of the greatest demands within our Sandbox is that global 2500. As we look at that, those large global buyers are looking for a global solution and we believe we are uniquely positioned now with the Quorum acquisition to be able to provide the most holistic global solutions so from a forward couple of year perspective on it we’re quite optimistic about the solution that we can bring today in the marketplace now with the combined entities.

Don Volk

In terms of data, let me just add a couple of points; we’re now operating in 18 countries. On the EPO front I think we’re now covering 21 languages Troy.

Troy Kanter

Yeah, it’s now yeah.

Don Volk

And we now had four service centers; one in Poland, one in India and two in the US and we were looking to extent into Ireland as well, so it’s a pretty solid footprint and our clients appreciate it.

Operator

We’ll going next to Andrey Glukhov with Brean Murray.

Andrey Glukhov - Brean Murray

Yes thanks. Rudy, to follow up on the questions about Quorum, so essentially exiting Q1 you guys where at 13 EPO customers or something like that. Post Quorum acquisition I mean does that metric -- does that acquisition diversify you significantly in term of the concentration in the EPO business?

Rudy Karsan

Yes and no. So if you go back to last year’s number, we did about what 180 something and we said 15% to 20% of our business was EPO, so call it $35 million to $40 million, nice round numbers. We said that Quorum was 15. So you go 15 over 37, so we got about 40% more appliance. So I would say yes it diversifies us but I won’t use the word significantly.

Andrey Glukhov - Brean Murray

So the revenue per customer on the EPO side was comparable to Kenexa?

Rudy Karsan

Yes, it was consistent in terms of both, in term of spread as well as in terms of size. It means we are about to the same Andrey.

Andrey Glukhov - Brean Murray

Okay and then Don, the revenue from Quorum does it all flow thought the non recurring component of the P&L or did they have any recurring engagements.

Don Volk

They have some recurring engagements less than what we had. It’s in the 40% range

Operator

We will go next to David Hilal with FBR.

David Hilal – FBR

Great thank you. Two questions; first, it looks like your guidance for ’08 is going up less than Quorum brings to the table and beings to the table, I wanted to I guess confirm that and understand the new launch there?

Don Volk

Okay our process for formulating our guidance is the same this quarter as it’s been every quarter. We take a look at the business environment, our business backlog, our renewals our pipeline and what we believe will close and how that will translate to revenue. We did that process this quarter and we share with you our best estimate of what the Company can deliver this year. We believe the guidance is solid with growth of over 20% adding in strategic acquisitions on top and operating margins of 20% plus with strong cash flow. We continue to see a high level of interest in our solutions, we just equaled our record number of new preferred partners and we are making progress, significant progress in our EPO business, so we feel pretty good about things.

David Hilal – FBR

Okay and than if I could just ask Rudy, I know you don’t like to break out specifically performance management versus talent acquisition, but if you could talk about those two areas qualitatively in terms of maybe, if one sell more strength in quarter than the other and if in this environment, where there is some IT spending slowdown, does one tend to do better than the other? Thanks.

Rudy Karsan

Yes, so we have said historically in the past that our service solutions tend to get slowdown and deferred unit slowdown. We did see this happened this in Q1, we did see deferrals and slowdowns in that. If I was looking at our business in general, we were about 70:30 in ’07 between kind of acquisition versus retention or hiring versus retention solutions. I would say Q1 -- I don’t have the exact numbers at my finger tips, but there would be probably slightly about 70 of the hiring side and slightly below 30 on the retention side. Troy you want to add anything to that. Thanks.

Troy Kanter

There was not much I can add.

Operator

We will go next to Laura Lederman with William Blair.

Laura Lederman - William Blair & Company

Yes, thank you for taking my question. Can you talk a little bit about acquisitions maybe large, medium, small all of the above and I just heard the one that you made was relatively small and perhaps being refused, but if you could give us a sense of sort of bigger than a breadbox and smaller than an SUV?

Rudy Karsan

I'm sorry, I didn’t understand the question. Are you saying what's in our pipeline?

Laura Lederman - William Blair & Company

No, would the acquisitions be of small companies and big companies? That’s what I'm trying to get and would there be like small form or potentially large like…?

Rudy Karsan

What do you mean future acquisitions?

Laura Lederman - William Blair & Company

That is correct.

Rudy Karsan

Small, micro small and medium.

Laura Lederman - William Blair & Company

Okay. And…

Rudy Karsan

And if we're going to do a big one we wouldn’t say it before we were going to do it anywhere Laura, so.

Laura Lederman - William Blair & Company

Sure. I'm just trying to get a sense of if there is just a lot of small ones or a few medium ones, I'm just trying to get a sense of the balance there.

Rudy Karsan

So, you're saying the Quorum was small or medium?

Laura Lederman - William Blair & Company

Quorum was a small.

Don Volk

Okay. So, it will be micro small and like I said we won’t really talk about large and then we continue to have sort of our three areas to focus on acquisition or its for; number one, geographical expansion, the second would be either expansion of our content solutions or expansion of the technology work, better expansion of our industry verticals and it has to be accretive.

Laura Lederman - William Blair & Company

Following-up on the accretive comment any guidance at all as to how much or how accretive Quorum is going to be for ’08; is that a penny, $0.02 or just give us a rough feel for the amount of accretion?

Don Volk

We are not sending a specific level of accretion to the Quorum deal, but that’s one of the factors we took in to consideration in giving our guidance. The reason our EPS guidance was more than the raise, that will be called for by lowering our share account due the share buy back and then that raise was likely -- the addition way was largely driven by the accretion of the Quorum deal.

Laura Lederman - William Blair & Company

Okay that’s helpful and following-up on an earlier question in the economy beside surveying slowing down was there any other piece of the business that felt like it was impacted by the economy?

Rudy Karsan

No. In general Laura, we are not seeing that. I think what we are seeing if I see any differences in our funnel, I’m seeing the large complex strategic deals, those are all moving forward at the same rate, if we look at some of the more category type purchases that’s were we will be seeing a slight slowdown. Those are the only minor trends beyond Rudy’s comment of our content business on the performance management that we would see.

Operator

We will go next to Ross Macmillan with Jefferies & Company.

Ross Macmillan - Jefferies & Company

Thanks, just to; firstly Don, with the entire consideration for Quorum in the quarter I can see that on the cash flow is that the entire amount?

Donald Volk

There is a -- no the Quorum deal was done in on April 2, so that’s besides the Quorum.

Ross Macmillan - Jefferies & Company

Okay, that’s fine and then just one point of clarification on -- I just noticed the slight sequential up tick on the un-built receivables; any driver to that, any reason why we see that in Q1 maybe seasonality or something?

Don Volk

Yes seasonality; that is particularly driven by end of the quarter, consulting revenue, which is built in arrears.

Operator

We will go next to Steve Koenig with Keybanc Capital Markets.

Steven Koenig - Keybanc Capital Markets

Alright thanks. One question and one quick follow-up; the first question just would be the guidance for subscription revenues looks like a strong sequential increase almost $5 million or so and even with -- if you assume maybe you said 40% of Quorum is recurring, its still a pretty strong increase, what's driving now?

Don Volk

We talked about the back end of our year from Q1, Q2, Q3, Q4 and what's driving that -- the increases in our guidance towards the back end are the deals that we gave at the end, the later part of 2007, because of our subscription model we don’t get our revenues into revenue -- we don’t get our revenue into recognized revenue as we signed the deal fort there, it’s the way into our implementations, so that’s what’s driving that subscribing revenue and its also driving the sequential increases in our revenue guidance.

Steven Koenig - Keybanc Capital Markets

Okay, great thanks that helps and then just a quick follow-up on BrassRing in particular. There seems to be some confusion out there among industry analysts and others in terms of how many customers you’re adding on BrassRing, either in ’07 or in the quarter and wondering if you do want to comment on that and also regarding BrassRing any plans yet for how you provide them an upgrade path to the new architecture or the core architecture?

Rudy Karsan

That’s a lot of questions there, so let’s go with BrassRing. No we did not provide solution-by-solution sales or category sales. So we have a total of something like 11 products out there. The sense we had given I think in Q4 was that it was a fairly strong quarter, we wrote more business than on BrassRing. I think in the industry analysts meeting we said we wrote 14 -- if I remember correctly, was that the right number in Q4 ’07, Q1 ’08 was also a pretty strong quarter for us. We are deliberately not giving out those deals because a lot of times we add assessment on to it, in some cases we don’t, in some cases we have on boarding attach to it, in some cases we don’t, in some cases we have carrier tracker attached to it, in some cases we have don’t, so that’s why we avoid giving singular per product data points because it gets really confusing as you dig down deeper into the various numbers. Now, as far as on the product side on BrassRing we are continuing aggressive R&D investment there. Since we have owned the product we had three major releases, we do a slip stream every three weeks, the last release which was this quarter I think we had -- I think it was the most robust release in the history of the product, added four additional languages including Japanese, Hebrew, Arabic. It really advanced the reporting functionality, added really sophisticated analytics to the reporting, we've already had some of the most advanced contact management functionality, we even upgraded that, so the ongoing R&D is around a common services platform, where we are continuing to lift out the very best of all of our applications and build them on a common services platform, which our customers will just receive continually through their slip stream upgrades, as well as though these major releases that we've done.

Operator

We'll go next to [Shasa Jorbig] with Goldman Sachs.

Shasa Jorbig - Goldman Sachs

Thank you. My first question would be regarding the international break down of your revenue if you could provide that please?

Don Volk

Sure. In Q1 '08 the US was 82%, so we continue to grow that outside of US portion

Shasa Jorbig - Goldman Sachs

And then secondly as a follow-up really, more about regarding sort of the competition and if you have seen really any changes in terms of win rates or maybe more broadly who you are seeing in the deals throughout the quarter of kind of what the -- at this point the situation has changed any from a quarter ago?

Rudy Karsan

Given that most of our focus is in that global 2500, we typically see to layout if it’s a European headquartered company, we will typically see step stone, that’s on the hiring side, lets see when we are selling a more specific category level performance, that’s still a fairly fragmented market where we will see a handful of privately held -- there is a new public company that will see there, we will even see some of the ERP stuff there, on the content side again very fragmented markets depending on what part of the world that your in you will see different competitors. When we’re selling a more integrated wrap together solution the playing field really changes in terms of who we’re competing against typically, what we will see there and our people that are trying to collar together partnerships, so I know that’s sort of a broad answer but it really does depend on what part of the world we are in and if we’re competing at an individual category level, or what we’re starting to see more and more and the funnels is where we are wrapping a lot of this stuff together for a much more strategic offering.

Shasa Jorbig - Goldman Sachs

But I -- am I right in thinking that it had been really changed from a quarter ago or it didn’t change?

Rudy Karsan

I would say it’s fairly consistent.

Operator

At this time we have time for one last question in the queue. We will go next to Ajay Kasargod with Piper Jaffray.

Ajaykumar Kasargod - Piper Jaffray & Co.

Thanks and Rudy there’s a couple of quick follow-ups, could you just give us your customer count of number of new additions in the quarter?

Rudy Karsan

Yeah, certainly we have over 50 new preferred partners compared to 40 same time last year.

Ajaykumar Kasargod - Piper Jaffray & Co.

Okay and then, how about your total client count?

Rudy Karsan

Total client count would still be in that 4000 range.

Ajaykumar Kasargod - Piper Jaffray & Co.

Okay and the reason as if I just use some back of the envelope and again this is a little back of the envelope without all the hard data, but if your top 80, which is again -- which grew sequentially to $1.3 million in the PQ metric, what does that really imply for the growth outside of top 80. I mean at least in my numbers maybe it’s a little flattish or maybe moderate growth, can you give us any comments around that?

Rudy Karsan

Yeah that’s consistent with what we have said. I think we said that on the analyst day and about consistent we said that our Sandbox is the largest and most strategic and most sophisticated employers globally, so we are really focusing on employers that have over 5000 or – depending on the part of the world you are looking at; anywhere from 5000 to over 25000 employees. If I look at this top 25,000 employers in the world I mean top 2,500 employers in the world, they mean that about 50,000 employees a piece, that’s really our Sandbox and that’s where PQ continues to do. So, if you look at the balance, very small customers that’s our web traffic; we don’t really sell the market hardware. It’s when it comes in, it’s comes in. There is very little human activity that buys the tests over the web, a lot of times using their credit card. I would say 3000 plus customers were never even spoken to.

Ajaykumar Kasargod - Piper Jaffray & Co.

Okay and then lastly just on Quorum, this we talked about little bit, just one follow up there, was the Quorum deal driven at all by maybe a customer or two looking for a better -- a larger coverage or better coverage and is a big multinational or is it just serving on a strategic requirement?

Rudy Karsan

I think if I look at the way we do transactions as Troy mentioned earlier, the basic three reasons are added geography, added offerings or added vertical. Now, as we look at our acquisition pipeline, if there is commonality of customer or customer demand for a particular solution, it might speed up an acquisition or it might slow it down depending on where in our pipeline it sits and sometimes if there are customer needs, we may speed up an acquisition. In Quorum’s case there really wasn’t, but there were existing customers that set to us that if we had a larger and more global footprint they would share more business with us and I think on the analyst day, we also said that we were knocked out of a couple of RFP’s because we didn’t have European and Middle East exposure and so we are hoping that in the second half of this year we don’t ever say that we were knocked out of an RFP because we didn’t have a European foot print.

Operator

We have no questions in the queue. I would like turn the conference back to the speakers for any additional or closing remarks.

Donald Volk

Alright, I’d like to summarize like I normally do. Thank the streets for the time and the patience they have had with us, the continued support and as we look into to the future we see a fairly buoyant ’08 coming up, sequential growths looks pretty strong for this quarter and we are hoping to continue this path for the balance of the year. Thank you all for your time and good evening.

Operator

Ladies and gentlemen this does concludes today's conference. We appreciate your participation. You may disconnect at this time.

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Source: Kenexa Corporation, Q1 2008 Earnings Call Transcript
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