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Executives

Don Volk - CFO

Rudy Karsan - Chairman and CEO

Troy Kanter - President and COO

Analysts

Andrey Glukhov - Brean Murray

Brad Reback - Oppenheimer & Co

Joe Delcaar (for Peter Goldmacher) - Cowen & Company

Richard Davis - Needham & Company

Sasha Jorbig - Goldman Sachs

Joe Wilson - RBC Capital Markets

Robert Breza - RBC Capital Markets

Laura Lederman - William Blair

Horacio for Ross Macmillan - Jefferies & Company.

Justin Bandy for Steven Koenig - Keybanc Capital Markets

Nate Swanson - Thinkequity

Greg Dunham for Thomas Ernst – Deutsche Bank

Michael Nemeroff – Wedbush

Brad Mook - MKM Partners

Kenexa Corporation (KNXA) Q2 2008 Earnings Call August 4, 2008 5:00 PM ET

Operator

Welcome to the Kenexa Corp second quarter 2008 earnings conference call. (Operator Instructions) Now I'd like to turn the conference over to Don Volk, Chief Financial Officer.

Donald Volk

With me 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 second quarter 2008 results and provide guidance for the third 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 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 to all of you for joining us on the call as we review our second quarter results. We’re pleased with the company’s execution and financial performance in the quarter, particularly considering the fact that the macro economic environment has been both challenging and tough over the first six months of the year.

Our second quarter revenue profitability were consistent with the guidance provided last quarter and were highlighted by a material sequential increase in our revenue run rate and another record quarterly operating profit.

At the same time we continue to generate strong cash flows from operations and used our cash wisely to return capital to shareholders by executing against our share buyback program. We believe Kenexa is one of the positioned human capital management vendors to continue to grow profit through this more difficult economic time period as a result of our critical mass, high levels of existing profitability, and our increasingly efficient global execution model.

From a critical mass perspective, the combination of solid sequential growth and the integration of Quorum international in the second quarter enabled Kenexa to become the first independent talent management vendor to pass the $200 million annualized revenue run rate level and as we have said in the past, we will remain focused on delivering profitable growth in any market environment. We consider this our responsibility on behalf of our shareholders.

In terms of the current environment, buyers have been more cautious over the first six months of the year and more scrutiny before they’re signed. Some of the quarters worth of data points under our belt in this uncertain environment were slightly just at our top line expectations this year, though we have increased our profitability expectations due the positive impact of our tax planning efforts.

Even after the adjustment, we continue to expect to generate solid revenue growth in 2008 that will result in market share gains. Don will share more on our financial outlook in a moment.

We believe that the space continues to be viewed as a strategic and high ROI purchase by a growing number of organizations.

Unemployment rate has been on the rise, which increases available talent pool to higher managers; however, the sum of unemployed workers are a small fraction as compared to the number of employees that naturally turn over each year. At the same time, retention and productivity of existing employees become all the more important in a difficult economic environment. It’s also important not to lose sight of the long-term given that we’re still in the early stages of market growth.

We believe the underlying drivers of market demand remain intact. The aging of the workforce, the climbing tenure of employees, increased globalization, fluidity of organizational structures and pressures on the HR department to minimize costs. Kenexa is ideally suited to help companies of all sizes and in particularly the largest 2,500 global organizations as they face these issues.

Kenexa’s go-to-market strategy combines industry-leading domain expertise with a combination of content, software, and services. This is what enables Kenexa to be a true business partner to our customers as opposed to just another software provider.

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 provider.

There are really five key areas that we are focused on that we believe will help Kenexa to thrive through the current economic environment. An execution in these areas should help Kenexa to gain market share and emerge an even stronger company when the economic environment improves as it inevitably will.

These five areas are 1) adding new preferred partner customers, 2) delivering value to our customers and expanding our relationships, 3) expanding our global presence, 4) continue to innovate, and 5) identifying and retaining talented employees to ensure that we continue to execute at the highest level.

I’d like to touch on progress made in each of these areas. First, during the second quarter, we are pleased to see a high level of interest in our solutions highlighted by over 15 new preferred partner customers joining Kenexa, which is the same record level as in the previous quarter and compares to 40 new preferred partner customers as in the prior year period.

On talent acquisition side, we closed business with customers such as Naval Medical Center, Mobile Telecommunications Group, Convergys, A-Max, PMI Group, and Telephone Data Systems. As it relates to our employee retention solutions, we closed business with customers such as Alain, Fosters Group, Alyna Health Care, Gemini, Imperial World, and the Racer Benchmark Group. Continuing to add a healthy number of new customers on a quarterly basis provide Kenexa with a growing opportunity to go back to its clients to sell additional modules of a broad and expanding suite of solutions. This is our second major focus.

Our ability to deliver value to our customers is evident in part by consistent and solid growth in our PQ metric. This metric increased to over $1.4 million dollars at the end of the second quarter, which is up from last quarter, and up from the $1.2 million dollars level at the beginning of the year.

Our third key strategic priority is growing our global presence. At the beginning of the second quarter, the acquisition of London-based Quorum international expanded our global delivery capabilities into region and in recent weeks, we acquired a 49% stake in a talent management company based in China, which will provide Kenexa with local talent management, domain expertise, and get our foot in the door in what could be a large geographic market opportunity over the long term. This is similar to our previous acquisition of HRC in Germany.

Over the past six to twelve months, we have begun to realize the payback on the increased resources and attention we have dedicated to these global markets. An important factor in our growing global successful fact of the acquisition of our Kenexa Recruiter BrassRing Solutions a little over 18 months ago. This provided Kenexa with key multilingual capabilities and the talent acquisition market segment that we previously did not have.

With strong technology and global execution capabilities from a domain expertise perspective, we believe we’re well positioned to continue scaling our global operations.

Our fourth strategic priority is continuing to invest in R&D to drive innovation. While our domain expertise and proprietary content are important differentiators, that we believe are more difficult to replicate by a competitor, the strength of Kenexa’s technology solutions also continues to be recognized by customer and industry analysts. For example, during the quarter, Kenexa was recognized by one of the market leaders in the area of recruitment software by the Gartner Group. Interestingly, in the same report that was issued in June 2008, Gartner Group estimated the market grew by 12% in 2006 and by approximately a similar amount of gain during 2007. This represents an data source that illustrates connective market share gain.

During the second quarter, we continue to introduce new solutions to the marketplace, such as the latest Kenexa Recruiter BrassRing. We expanded our talent acquisition capabilities to include additional global support, increase multilingual and global sourcing capabilities, and job family expertise.

We also released Kenexa’s cultural fit and compatibility fit, which are web-based assessment tools designed to increase retention, decrease turnover, and increase organizational and job commitment. Kenexa’s performance indicators OKPI was launch as a web-based suite of free employment assessment tools designed to identify perspective employees who have an intent to be engaged, to work well in a team, and to demonstrate excellent customer service orientation.

Finally, we launched SJT customer service, our new online relation platform designed to assess customer service aptitude. We will continue to invest in R&D enhancing our current solutions and introducing additional modules that enable our customers to implement world class talent management business processes. This is a tangible positive business impact during both robust and weak economic environments.

The final area that we’re focused on is ensuring we have the right team in place to execute our plans as we take the company to the next level.

In order to help Kenexa scale from the $200 million annualized revenue run rate to the half a billion range and beyond, we continue to add to our senior executive leadership team. For example, we recently announced that Tim Beaumont joined Kenexa as VP of Sales for our talent management offerings. Tim has had over 20 years of sales experience in talent management space, including leading the sales efforts at Vurv during their high growth years.

We also recently welcomed Ron Hanscamp to lead our product strategy across our entire suite of products and solutions. Ron has a rich background including Oracle, where he was VP of ATM applications marketing and oversaw all pre-Oracle ATM product lines.

In summary, our second quarter results were in line with our expectations. The market environment remains challenging and our current expectation is that it will be so for the remainder of the year.

We will continue to focus on gaining market share, servicing our customers, driving innovation, and delivering strong profitability for our shareholders.

I will now to Mr. Volk to review the financials in more detail.

Donald Volk

I will now review our results for the second quarter of 2008.

Let me start with the P&L. Total revenue for the second quarter was $56.4 million, consistent with our guidance and an increase of 25% over the last year and 17% on a sequential basis. The strong sequential growth was driven primarily by increased business activity during the prior two quarters, which started to come online during the second quarter and secondarily by the integration of Quorum International’s operations during the quarter.

Within total revenue, subscription revenue was the most strategic revenue source and it was $43.7 million, representing growth of 18% on a year-over-year basis and 12% sequentially. Subscription revenue was also consistent with our guidance and at approximately 77% of total revenue, it was within our targeted mix of the high 70 to 80% range. As a reminder, our clients typically purchase multi-year subscriptions with an average length of approximately two years and our diverse customer base continues to renew in the 90%-plus range. The remaining $12.7 million dollars of total revenue in the second quarter came from other and professional services, which increased 57% over the last year and 41% over the prior quarter. The significant sequential increase was driven primarily by the integration of Quorum International results in the quarter as a majority of their revenue contribution falls into our other revenue category.

Turning to profitability, we will be providing our non-GAAP measures for each second 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 70% in the quarter. This is down from 73% in the prior quarter and 72% in the prior year and inline with our gross margin expectations following the acquisition of Quorum.

Looking at operating expenses, non-GAAP sales and marketing came in at $10.7 million or `9% of revenue, a increase of slightly over $1 million dollars in absolute dollars on the sequential basis but slightly lower as a percentage of revenue from both the prior quarter and year ago periods.

Non-GAAP R&D expense came in at $4.2 million, down roughly $300,000 sequentially and representing 7% of revenue. This is down from 9% of revenue in both the prior quarter and year ago period and is within our long-term targeted R&D spend of 6 to 9% of revenue.

Non-GAAP G&A expenses were approximately $11.9 million; an increase of $1.1 million on a sequential basis and representing 21% of the revenue. During the quarter, G&A expense including approximately $300,000 in charges related to our Indian office move to buyback.

As we discussed last quarter, these onetime moving charges are being recognized throughout the year of 2008 as opposed to all in the first quarter as we originally anticipated. We do not expect this charge to recur in 2009.

Our non-GAAP income from operations was record $10.9 million for the second quarter, which was consistent with our guidance.

During the second quarter our non-GAAP tax rate for reporting purposes was 20% resulting in non-GAAP net income of $9 million and non-GAAP diluted EPS of $0.39 based on $22.8 million shares outstanding. Our tax rate was lower than expected during the quarter due to the positive impact of tax planning efforts on a global basis and this contributed $0.05 cents to our bottom line in the quarter.

Turning to our results on a GAAP basis which include $1.5 million related to the allocation of stock-based compensation and $1.6 million dollars related to the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP. Cost of revenue $17.2 million, sales and marketing $11 million, R&D $4.3 million and G&A $12.8 million.

For the second quarter, our GAAP income from operations was $7.9 million dollars. Net income applicable to common shareholders was $46 million resulting in a GAAP diluted EPS of $0.26. A reconciliation of GAAP to non-GAAP expenses and income from operations can be found in our press release and current report on Form 8K filed with the SEC.

Kenexa had cash, cash equivalents, and short and long-term investments of $49.3 million at June 30th, 2008; a decrease from $68.1 million at the end of the prior quarter. The decrease in cash was the result of approximately $20 million dollars related to the acquisition of Quorum and approximately $5 million dollars in cash used to repurchase the companies common shares during the quarter.

During the second quarter, we repurchased almost 300,000 shares associated with our second repurchase program, which was announced in February.

The cash out flow relative to the acquisition and repurchase plan was partially offset by $12.9 million in positive cash flows from operations in the quarter.

Accounts receivable DSOs were 65 days at the end of the quarter compared to 62 days at the end of the prior quarter and 66 days at the end of the year ago quarter. Our deferred revenue at the end of quarter was $38.7 million up from of $37.5 million in the prior quarter and over 20% compared to the end of the previous year’s quarter.

I’d now like to turn to guidance for the full-year in the third quarter of 2008. For the third quarter of 2008, we expect the following. Revenue to be $57 to $59 million. We expect subscription revenue to continue running in the upper 70% range as a percentage of our total revenue.

Non-GAAP income from operations to be $11.4 million to $11.8 million, assuming a 25% tax rate for reporting purposes and $22.8 million shares outstanding. We expect our diluted non-GAAP earnings per share to be $0.38 to $0.39.

For the full-year 2008, we expect total revenue of $225 million to $230 million. We expect subscription revenue to continuing running in the upper 70% range as a percentage of our total revenue and non-GAAP operating income of $45.2 million to $46.2 million, assuming a 25% tax rate for reporting purposes and 23 million shares outstanding. We expect our diluted non-GAAP EPS to be $1.52 to $1.55. 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 will incur throughout the year.

In summary, we remain focused on maintaining our high level of execution and extending our market leadership position in what is currently a challenging economic environment. We continue to expect solid growth and strong profitability during 2008 and we believe we are well positioned to both thrive through this time period as well emerge an even stronger company when the economy improves.

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

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Andrey Glukhov with Brean Murray.

Andrey Glukhov - Brean Murray

Don, if I can get a couple of metrics on the business. Historically you provided us the revenue contribution from EPO. Maybe you can provide a comparable metric this quarter.

Don Volk

Our EPO revenue is approximately25 to 30% of our total.

Andrey Glukhov - Brean Murray

Given the fact that you tweaked the guidance. I mean is that assumption consistent going forward?

Don Volk

Yes.

Andrey Glukhov - Brean Murray

Basically, if I look at your guidance, you guys are assuming a slightly faster sequential ramp in Q4 versus what you’re assuming in Q3. Give us some color whether that you’re seeing would help facilitate that.

Don Volk

Once again, looking our pipeline and our backlog and knowing where the customer is going to come inline. It was kind of the same question we were asked at end of Q1, which is how can your sequential growth be so much faster in Q2 and the answer was because we could see our pipeline. From what we’re seeing right now, Q4 looks like it’s going to grow a little faster than Q3 over Q2.

Operator

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

Brian McGrath - Credit Suisse

In the past you talked about your visibility metric and I just wanted to review that and see what you’re seeing as far as visibility right now given your guidance.

Don Volk

As you know, if you remember every year at the beginning of the year we give out visibility number that’s calculated by contracted revenues plus renewals at 90% and at the beginning of the year, it comes to 70 to 71% of our total guidance for the year and then as we proceed through the year, the percentage becomes more and more and as Rudy said, we based our guidance in Q4, in Q3, based on that visibility and based on that improved visibility throughout the year. So that number is getting better, but we only give that number on January 1st each year.

Brian McGrath - Credit Suisse

A model subscription revenue, maybe you can give us what kind of growth rate we should be thinking about as far as modeling the other, service revenue in other.

Don Volk

Well as we’ve always said, other revenue is lumpy and it’s harder to model and with Quorum coming in as the majority of their revenue being other revenue, it’s a bigger problem for you, but that being said, the number that we’ve said is in the upper 70% range of our total revenue is expected to be other revenue.

Brian McGrath - Credit Suisse

Can you give us an update on sales rep hiring?

Don Volk

We’re on target in terms of the hiring. We’re going through a little bit of a growth. We hired Tim Beaumont. We hired about three or four ex-Vurv sales people. So I would say our numbers probably closer to about 180, about 75% carry a quota and we will continue to be very vigilant on those costs as we move forward through the balance of the year.

Operator

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

Joe Delcaar for Peter Goldmacher - Cowen and Company

This is Joe for Peter Goldmacher. So now that Taleo acquired Vurv, how do you see the competitive landscape shaping up? Are you going to see a tailwind in the near future?

Troy Kanter

We see as an opportunity any time there’s consolidation in the market. It takes out some of the sloppiness that you’ll see on some of the pricing. It sorts of narrows the field for us. So we’re optimistic on converting some of that business. It’s at the early stages though. A number of those clients had long-term contracts. So as those come up for renewal, you know, based on some of the comments from the Taleo management team without converting them to their platforms, I’m sure they’ll shop. So we’re optimistic about trying to win our share of them.

Operator

We will go next to Brad Reback with Oppenheimer.

Brad Reback – Oppenheimer & Co

Just a quick housekeeping note, Don. On the CapEx, we expect it to remain in sort of this $5.5 to $6 million dollar range for the remainder of the year?

Don Folk

Brad, we don’t expect it to be that high going through the rest of the year. We’ve been capitalizing some R&D expenses for new products and we expect that to continue in the $2 million dollar range, but we did pay off the majority of the building and we’ve got about $500,000 left of that. We did accomplish an office move in our Dallas facility, into Frisco, we did accomplish a couple of other office moves. We set up our data center in Virginia, moved that from internally. We set up additional disaster recovery. So we expect that number to tail off into the last half of the year.

Rudy Karsan

The only major expenses, putting up a Europe hosting center in the second half of the year over and above that.

Brad Reback – Oppenheimer & Co

With most of your metrics going in the right direction, what happened in the last 90 days that caused you to take down the revenue guidance?

Rudy Karsan

Our pipeline, in a word.

Brad Reback – Oppenheimer & Co

Now when you say your pipeline, Rudy, does that mean that people either canceled existing projects or pushed out implementation dates?

Rudy Karsan

A little bit of both, that is being cancellation of some our projects that we know that sits in the other and there’s delays in implementation, and the sales cycles have gotten longer. Troy, you want to add anything to that?

Troy Kanter

It’s a tougher selling environment, although we are experiencing success and we believe we’re having good reasonable growth considering the market conditions, but we want to be cautious and responsible as we see some of these buying decisions pushed out a little bit.

Brad Reback – Oppenheimer & Co

Are there any scenes across the projects that are getting delayed or cancelled?

Troy Kanter

I guess what we’re seeing and we shared last quarter, we’re seeing the larger more strategic deals where it’s a multi element deal. Those are tending to move through the sales cycle, where it’s on the radar screen of the operating committee. Now having said that, when you have multi element deals, that takes a little bit longer to get to the income statement. We’re seeing the category level stuff start to elongate on the sales cycle.

Operator

We will go next to Richard Davis with Needham & Company

Richard Davis - Needham & Company

Two questions. Did you say what your percentage of your revenue for this quarter from existing customers versus new?

Don Folk

We are running about 64 between existing and brand new.

Richard Davis - Needham & Company

With regard to the China talent management, did you say it was at 49% that you owned and how big is this company or do you have an extra color on the Chinese talent management company on an investment end?

Don Folk

We’re not at liberty to disclose the name, because we don’t have official notification from the authorities in China with the Olympics and everything, it got delayed. The total revenue that will come into our financial statement in Q3 will be less than six figures.

Richard Davis - Needham & Company

What percentage did you say you own of it?

Don Folk

49%.

Operator

We'll go next to Sasha Jorbig with Goldman Sachs.

Sasha Jorbig - Goldman Sachs

First question would be with the lower tax rate that you had just had in your guiding. Should we now expect for this to be kind of more of a permanent type with tax planning you have done?

Don Volk

Yes, Sasha.

Sasha Jorbig - Goldman Sachs

And what is really kind of behind that? If you could explain a bit more?

Don Volk

It’s sales globally. It’s reallocation of revenues into the lower tax rates. We’re going to the IRS for an advanced pricing agreement and it’s moving revenues operations, creating that data center in a low tax rate facility in Europe, things of that nature.

Sasha Jorbig - Goldman Sachs

Going back to the question regarding the specifics about the environment that you’ve been noting, the three things specifically pointed out. You did not mention competitive issues. Does that not occur anymore or would those be also added?

Troy Kanter

I’d say that the competitive landscape has not changed that dramatically. It’s fairly consistent where it has been the last few quarters. From a competitive perspective, we see our close rate much higher when they’re multi element deals, when they’re a much more strategic purchase, and then we see a little more competition at the individual product or category level. Again, having said that, we still signed on record number of customers this quarter, record in our PQ metric, so a lot of the leading indicators of the business, again, we’re quite pleased with how we’re competing, on the new customers as well as with our current customer base with the expansion there.

Operator

We will go next to Robert Breza with RBC Capital.

Robert Breza - RBC Capital Markets

Rudy, as you look at making the changes on the head of sales here and obviously the more challenging environment we’re in, do you think you’re likely to make a change to the sales force, the model, how you sell, and what are you exploring at these early days?

Rudy Karsan

Rob, that’s a question that is always work in progress at Kenexa. So you kind of think through the model we have. In Q2, our sequential growth was the fastest it’s been in about four or five quarters. So some of the changes that took place end of last year, we’re starting to reap rewards on that. So as we look in the past, we were broken down pretty heavily by category level and we were broken down from kind of strategic selling. Now we’re moving more towards geographical distribution of sales force, sales people. So that will be work in progress and it will probably stretch into 2009.

Troy Kanter

The sales and distribution of the continual work in progress and we continue to evaluate it. We’ve seen major changes in how customers are purchasing, whereas four or five years ago almost everything was bought at the individual category or product level. Now we’re seeing over half we’re in are much more strategic level as opposed to an individual product level, a multi element deal. So market conditions and buyers expectations and needs and the globalization of this industry and the decisions being made at a global level as opposed to a regional level continue to evolve, we’ll continue to evolve the distribution system to try to get ourselves in the best position to take advantage of that and to serve our customers.

Robert Breza - RBC Capital Markets

As you look at the acquisition of Quorum and large customers like Microsoft, what are you seeing from an international opportunistic perspective? Is Quorum kind of dragging you into deal more with them? Are you becoming more strategic with large companies such as Microsoft? And then one note for Don. Don, G&A was a little higher than what I had expected, despite the 300K Indian offices. Is there anything else going on in G&A and how should we think of modeling that going forward?

Rudy Karsan

Don, I’ll take the global piece. When we opened our 19th country here recently, we believe have the largest global footprint of anyone in this space and we see that as a significant differentiator and you see that play through in our funnel too with the size and the quality of the deals that we’re winning and we will continue to expand that footprint as it makes sense financially as well as continue to serve our customers and put us in a better position to win deals.

Don Volk

Rob, our G&A is something where we think we can leverage going into the future and it’s a little bit higher than what we want it to be and we’re going to be working on that as a leverage point in our P&L.

Operator

We will go next to Laura Lederman - William Blair & Company

Laura Lederman – William Blair

In following up on the earlier call on Vurv being bought by Taleo, are you seeing the combined company more, less, I mean just a sense of how it’s in more detail impacting the competitive environment? Also, on the subject of the economy, where are you seeing most of the weakness? In other words, is it in skills, in assessment, or are you also seeing it in BrassRing, are you kind of seeing it everywhere, or just in specific places? Also, can you give us a sense of internal growth if you take out Quorum?

Rudy Karsan

On the market conditions with a combination of that latest acquisition. You know, Laura, we’re really not seeing any difference again on the large global enterprise deals. If it’s a North American headquartered organization, we were typically seeing Taleo. If it was a European headquartered organization, we would see [S.D] occasionally for an FAP. On the large global enterprise deals hereof lately, we hadn’t been seeing Vurv as much anyway, because we’re not as aggressive in the mid-market opportunities.

Don Volk

Let me dissect the question in two components here, Laura. First let me remind you, it’s a record growth quarter. The best sequential growth I think in over five quarters.

Laura Lederman – William Blair

Oh fair enough. I meant taking down guidance in economy.

Don Volk

Okay, we’ve grown our business what we believe is significant and we are still calling for market share gains. Now, where are we seeing the softness? In the usual suspects. Finance, retail, technology remains somewhat strong. Global has remained strong.

Laura Lederman – William Blair

Can you talk a little bit, help us understand where maybe sales cycles are getting longer and deals are being delayed and implementations are being delayed. Is it impacting which products more than others?

Rudy Karsan

Not as much products. I guess it’s more of region. We’re seeing a little more delay in North American than we are in Europe, if that helps out a little bit of color, and then we’re seeing category stuff get delayed a little bit more than we’re seeing the bigger strategic deals getting delayed.

Laura Lederman – William Blair

Internal growth, if you take out Quorum in the quarter?

Rudy Karsan

We said it was like $11 million the balance of the year, so that’s $3.75 million for quarter, divided by three.

Operator

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

Horacio for Ross Macmillan - Jefferies & Company.

All my questions have been answered. Thank you.

Operator

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

Justin Bandy for Steven Koenig - Keybanc Capital Markets

Hi, this is Justin Bandy for Steve. I was wondering if you could give us a breakout of your revenues international versus US?

Don Volk

Revenue outside the US is 24% in the quarter Q2 out the US was 26%.

Justin Bandy for Steven Koenig - Keybanc Capital Markets

I was wondering if you could give us a little more detail around how your different lines of businesses are doing? The assessments business, contract recruiting, applicant tracking, and if you could tell us where the strengths are and which of those businesses are having the weakness related to the macro situation?

Rudy Karsan

The overall composition of our business has remained more or less the same with EP making up 25 to 30% or RPM making up 25 to 30% of our business. Off the balance, hiring solutions are running at around 70%, and retention solutions are running around 30%.

Justin Bandy for Steven Koenig - Keybanc Capital Markets

Is there any way you can give us color around maybe where the deals are getting elongated? Assessments or applicant tracking? Is there a noticeable difference between the product lines?

Rudy Karsan

As we study the funnel, the time it’s taking us to get decisions made, get deals live, you know, we’ve seen again a slight delay. We’ve spent a lot of time on this call answering calls about that, but again we feel really good about new customer acquisitions. We feel really good about expansion of the current customers. So just across the board, we’ve just seen slight delays in purchasing decisions.

Operator

And we will go next to Nate Swanson with Thinkequity.

Nate Swanson - Thinkequity

I jumped on a little late, so excuse me if you covered this, but I’m wondering if you talked about any significant deals on the BrassRing side that you closed this quarter in terms of net new customers?

Don Volk

We just gave a list of the new customer that we had on the hiring side. We didn’t break it down.

Nate Swanson - Thinkequity

Is it possible to break out what the growth rate of your recruiting businesses?

Don Volk

We’ve already given you the numbers. It’s about 25 to 30% of EPO. Of the balance, hiring solutions at 70% and retention solutions at 30, which is the same as it was before. So everything is going about the same rate.

Operator

And we will go next with Thomas Ernst with Deutsche Bank.

Greg Dunham for Thomas Ernst – Deutsche Bank

This is Greg Dunham on behalf of Tom. Most of my questions have been answered. I do have one more question on how should we think about gross margins going forward? This is the first quarter it dipped below that 70% level and with EPO moving 25 to 30% of the business, what should be model looking out?

Don Volk

If you remember last quarter, we said that the gross margin was going to be down be down because of the service component in the Quorum deal and we said it was going to be 60% and actually we came in around 70% and we expect in the 70% range for the remainder of the year.

Greg Dunham for Thomas Ernst – Deutsche Bank

Okay, so you’re predicting stable 70% range long-term. I guess on the R&D front, would you expect to be closer to that 6% or that 9% as you scale with the business?

Don Volk

We expect to be a little bit up from the 6%. The Quorum transaction helps on a percentage of revenue basis being that it’s EPO, but we do expect it to be in the 7 to 8% range.

Operator

And we will take our final question from Michael Nemeroff with Wedbush.

Michael Nemeroff – Wedbush

Could you give us what the currency impact was on both the top and bottom line, Don?

Don Volk

It was minimal, Mike, not enough to comment on.

Michael Nemeroff – Wedbush

Okay. Rudy, I understand that you don’t want to talk about the name of the company that you acquired, the 49% stake in China. Could you tell us what that business was? Was it an EPO company?

Rudy Karsan

It’s more of an HR consulting/training company and we’re looking at it as a distribution source for our products.

Operator

We do have another question from Brad Mook with MKM Partners.

Brad Mook - MKM Partners

Just wondering on the EPO business or I guess you’re calling it RPM now. Can you give an update in terms of your customer account or customer expectation in terms of what your existing customers are doing and then also what’s going on in terms of new customers?

Don Volk

We had a decent quarter, not in terms of new signings. I don’t remember exactly the number we’re now at, but after the Quorum transaction I know it’s in the high teens, low 20’s. We didn’t have any customer losses, so I’d say the business is now mimicking the overall business.

Brad Mook - MKM Partners

What about exclusives of new ads? What are you seeing from your existing customers in terms of their activity levels?

Don Volk

Q2, about a third of our customers come in above expectations. Third below and a third right in line.

Rudy Karsan

I guess as we think about the future of that business with our current customer base, what we are seeing in the pipeline, again, these are long sales cycles, but in some of these customers we’re running year up in Asia but not North America or vice versa, we’re running North America and not Europe and Asia, and with the integration of Quorum now, it does provide a global platform for our current customers. We as we move forward and continue the integration there, we’re optimistic long-term about the growth in the current customer base in that business line.

Brad Mook - MKM Partners

Okay, then how about shorter term? What would you expect second half in that third split?

Don Volk

I would say as a larger customer, we’re seeing a certain amount of stability. Bear in mind, I still think that if you can step back and look at the US, the number of jobs, the number employed is still going to remain steady, even though the unemployment rate is climbing. We’re still at about $154 million in change, number of employees. I think the number of unemployed is declined. So the turnover, which makes it 93, 94, 95% of our revenue on a lot of this stuff remains unchanged. I would say that the balance of the year unless it is sort of a massive jolt would be about the same as the first half of the year.

Operator

There no more questions at this time.

Donald Volk

I’d like to summarize the call by saying thank you very much. I appreciate you showing up on a beautiful summer afternoon. We appreciate the support on the street and we’ll talk to you in about a quarter. Thanks a lot and good day.

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