International Business Machines Corp (IBM) 2005 Q2 法說會逐字稿

Please stand by, we are about to begin.

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Kenexa second quarter results conference call.

[Operator Instructions].

I would now like to turn the conference over to Mr. Rudy Karsan, Kenexa Chairman and CEO.

Please go ahead, sir

Thank you, Arin.

Before we start I will ask Don to read the safe harbor statement.

Thanks Rudy.

Today we will first review the Company's second quarter of 2005 results, which were released this afternoon.

We will then provide guidance for the next quarter and the full year.

Finally, we will open up the forum to audience 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 and available with the company's filings with the SEC.

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 also refer certain non-GAAP financial measures on this call.

I will later discuss the reconciliation of adjusted numbers to GAAP numbers in a reconciliation schedule showing in the GAAP versus non-GAAP measures which is currently available on our Company's Website with the press release issued earlier today.

Our website is located at www.kenexa.com.

Rudy?

Thanks Don.

Let me start off by saying I'd like to thank all of you for joining us today on our first conference call as a public company.

We were pleased to complete our IPO and look forward to communicating with you on a regular basis moving forward.

I am especially pleased to share with you our second quarter results in which Kenexa generated record revenue and profits that were better than expectations.

The talent management market continues to gain momentum, and Kenexa is emerging as one of the clear market leaders.

As Don will discuss later, the combination of our strong quarter results and positive outlook has caused us to raise our expectations for the second half and the full year.

Let me take a step back and review with you the highlights of our second quarter results.

Total revenue came in at $16 million for the quarter, representing 40% organic growth on a year-over-year basis.

The largest and most strategic component to our revenue is subscription revenue, which at 12.1 million grew 36% year-over-year, and 12% sequentially.

Of note, both of these growth rates accelerated compared to what we delivered in the first quarter, and a sequential growth in the subscription revenue was the highest growth rate in over a year.

From a profitability perspective, we generated incomes from operations of $2.5 million or a margin of 15%.

Our operating income grew well over 100% on a year over year basis, and our 15% margin was an all-time record.

As I mentioned on the IPO roadshow, Kenexa is very focused on operational excellence, and it is our intention to continue driving profitability as we scale the business.

To that point, we believe our profitability level is greater than any other vender focused in our sector, even as we grow at a rapid rate and gain market share.

A core reason for Kenexa's success in the second quarter and over the long term, is a metric driven culture that we have ingrained from the top to the bottom of our organization.

Evidence of this focus and Kenexa's ability to execute, is a fact that the second quarter represented our eleventh consecutive quarter of sequential subscription revenue growth and income from operations.

This combination of rapid growth and growing profitability places Kenexa in a special class of solution vendors given that most have experienced a more challenging environment over the past 12 months and few have posted organic growth in the 40% range.

We believe our success is being driven by 3 primary factors.

One, talent management is becoming an established marketplace with drawing demand and awareness.

Two, Kenexa has emerged as a market leader from a solution and critical mass perspective.

And three, we have an unique and attractive business model based on providing end-to-end solutions in an on-demand model.

I'd like to drill down into these areas so you have a good understanding of what is driving our business momentum.

Then I will provide more details from the second quarter that reinforces our long-term opportunity and competitive position.

The start, Kenexa is one of the early pioneers in the talent management market, and we provide solutions that enable organizations to optimize the recruiting and retention of their employees.

The amount of money US corporations spent on employees alone in 2004, was approximately $6.8 trillion, or roughly 56% of the total US GDP.

Not only the investment in human capital massive, but the process of sourcing, hiring and retaining employees, is becoming increasingly difficult due to the aging of the work force, declining tenure of the average employee, increased globalization, and mobilization of the work force, as well as increased cost management pressures on human resource departments.

These fundamental business drivers create a significant problem for the vast majority of large corporations, because they have not implemented best practices in the talent management areas, and most still have paper-based or rudimentary internally developed applications as their infrastructure support.

This leads to weak hires, poor retention, poor productivity, and increased training and HR costs.

The talent management market is crossing the chasm, and our solutions are in high demand because they enable our clients to increase the size of the talent pool they draw from, hire the most qualified candidates more quickly, improve the productivity of their organization, maximize employee retention, and lower the overall cost of putting together the best possible employee team.

Examples of this business value in action are Omaha Children's Hospital, a 142-bed facility with 1,400 employees that's used our survey products for 8 years.

In this time, they have improved their employee engagement scores by 78%, which has led to a 3% vacancy rate, compared to an industry average vacancy rate of 16%.

Another development that has us excited is the signing of the NFL, as we mentioned in our press release.

The significant impact our solutions can have on a customer's success, profitability and long-term competitiveness, is the reason firms such as IDC expect the market for talent management solutions to grow to the billion dollar plus dollar level by 2008.

We had emerged as an early market leader as a result of A, our domain expertise;

B, the broadest and deepest suite of talent management application;

C, a unique end-to-end combination of software, content, services and process outsourcing; and D, proven execution history across many industries and blue-chip customers.

The strategic nature of talent management forces customers to look for safe choice, which makes that growing critical mass, and profitability an important competitive advantage.

Indeed, during the second quarter, our business momentum continues to increase across both, major product suites and new and existing customers.

Looking at our solutions on the talent management side, we won new deals with Autodesk, Engenium (ph), Avnet.

On the performance management side, we added GE, Del Monte, Tyco, Campbell Soup and DHL.

The cross-section of verticals that resulted during the quarter included, industrial manufacturing, CPG, software, technology manufacturing, aerospace, home construction, semiconductors, and distribution.

Quarter after quarter, for over 15 years we have improved our knowledge base of recruiting and retention best practices across companies in many industries.

This is a significant competitive advantage that continues to grow over time.

In addition, the diversity of the verticals that we sell to, speaks to the horizontal nature of the problem we are addressing.

We are clearly focused on growing our market share with new customer wins, during the early stage of this large market opportunity.

However, our growing presence within our existing customer base is both proof that our solutions are delivering significant business value, and that we have a tremendous long-term follow-on revenue opportunity.

To that point during the second quarter we sold additional solutions to, and increase that quarterly revenue run-rate by over 35% with both the global technology hardware manufacturer, and one of the world's largest software vendors.

Although it was off, a smaller base we also more than doubled our revenue run-rate with a healthcare provider.

In these 3 cases alone, we increased our recurring annual base of revenue by over $1 million.

In all of these cases and in the vast majority of our customer base, there remains a significant opportunity to continue expanding our account presence.

In summary, we are feeling very good about our market opportunity and business momentum.

Our revenue growth was above 40%, and organically, I might add, for the second consecutive quarter and we posted a record operating margin.

The talent management market is one of the most attractive early stage market opportunities in the software industry, and Kenexa is emerging as one of the clear market leaders.

I will now turn it over to Don Volk to review our second quarter results in more detail.

Thanks Rudy.

I would reiterate your beginning comment that we are very pleased with the company's performance in the second quarter, which was highlighted by rapid growth and record revenue and profitability.

Before turning it over to Q&A, I would like to provide more details on our second quarter results and financial guidance for the third quarter and for '05.

Beginning with the P&L.

Total revenue for the second quarter of '05 was $16 million, an increase of 40% over last year and 12% sequentially.

On a year-to-year basis our total revenue has grown 41%, an acceleration from the 34% growth we experienced in the comparable year ago period.

As Rudy mentioned, our business momentum has been increasing as a result of the growing awareness and demand for talent management solutions, and our differentiated value proposition that has helped us emerge as one of the early market leaders.

Subscription revenue is the majority of our revenue, and it is the strategic component of our business that has delivered via an on-demand model.

During the second quarter our subscription revenue was 12.1 million, representing over 75% of our total revenue, and growth of 36% on a year-over-year basis and 12% sequentially.

These organic growth rates compared at 33% and 10% in the first quarter of '05 respectively.

The remaining 3.9 million of total revenue came from other and professional services, representing an increase of 56% over last year, and 12% sequentially.

The majority of the revenue from this line item comes from discreet professional services.

In addition, while the majority of our product revenue is driven by subscription fees, we do occasionally close a perpetual deal and this is the line where this shows.

It is worth pointing out the perpetual deals are an exception, and is only a consideration if;

One, we are penetrating a new vertical.

Two, it is a long-term existing subscription-based client that is making a separate purchase of a product.

And three, we must be able to charge what we view as a premium, or an attractive price for that product.

We have accumulated less than 10 perpetual customers in the past 18 months, with 2 of them coming during the second quarter for a combined value of roughly $500,000.

In one circumstance, we were able to penetrate the K through 12 education vertical, at Boston Public Schools for the first time, while in the other case it was a sale to a long-term invest -- a long-term existing customer.

We will continue to focus on our subscription, and on-demand business model.

But we don't want to lose otherwise, lose market share, because of refusing to accommodate how certain customers may wish to do business, if we can do so in a way that is advantageous for Kenexa and advantageous for the customer.

On a geographic basis, our revenue continues to be dominated by the US at over 90% of total revenue.

However, we are stepping up our investments in EMEA, and we recently acquired a company in Canada to jump-start our efforts north of the border.

This acquisition should add 100 to $150,000 to our quarterly total revenue run-rate.

And this acquisition has a high-profile customer in Sears Canada.

Our client typically purchases multi-year subscriptions, which provide us with a predictable recurring revenue stream.

From a retention perspective, our focus on customer satisfaction, and delivering business results continues to drive renewal rates which continue to be in excess of 90%.

Looking at customer concentration, no customers accounted for more than 10% of our quarterly revenue, and our top 5 customers represented less than 25% of our second quarter revenue.

During the quarter we added over 10 customers of which Rudy highlighted several by name earlier.

Excluding the 2 perpetual deals, our average annual revenue from our top 80 customers increased to 548,000 from 392,000 at the end of 2004.

And the average length of our subscription deals in the quarter was approximately 2 years in line with our prior experience.

Turning to costs and profitability.

Gross margin was 71.3% compared to 71.7% last quarter.

The slight down tick in gross margin was due to the increase in services and other revenue within our revenue mix.

However, we were in line with our expectations in the low 70s on a quarterly basis

On the operating expense side sales and marketing came in at 3.9 million or 24.5% of revenue, compared to 25.2% in the prior quarter, and 29.7% in the year ago quarter.

We will continue to invest in sales and marketing to pursue new clients and expand relationships with existing ones.

However, we are gaining economies of scale due to the recurring nature of our on-demand business and revenue model.

G&A expenses were approximately $3.6 million, or 22.3% of revenue compared to 23.1% in the prior quarter, and 21.7% in the year ago quarter.

The year-over-year increase in G&A was a result of increase public company costs, bonuses due to our over-performance relative to internal targets and increases in headcount.

We expect G&A will increase modestly in absolute dollars during the second half of '05 due to ongoing costs associated with being a public company, as well as incremental increases in rent in the second half of this year, as we expand into more office space to support the organic growth of our business.

Research and development came in at $1 million or 6% of revenue, compared to 7.8% in the prior quarter and 10.5% in the prior year's quarter.

We did increase our R&D headcount, and we continue to invest in broadening and deepening our applications suite.

However, we have a highly efficient R&D organization, as a result of our significant offshore presence and on-demand business model.

Our offshore presence provides us with a cost advantage for our software developers while our on-demand model single code base enables us to focus all of our resources on enhancements, while perpetual companies spend over 50% of their monies on testing, porting and supporting multiple versions of their products across numerous operating systems and hardware environments.

We believe the efficiency of our certified high quality R&D processes is the key competitive advantage.

Turning to profitability.

We generated income from operations of 2.5 million for the second quarter which represented 135% improvement on a year-over-year basis.

And we also achieved an all time high of operating margin of 15%.

Our Pro forma income from operations which excludes stock-base compensation expense was 2.6 million.

Giving effect to the sale of our common stock and the redemption and conversion of our preferred and redeemable common stock, and certain warrants from our June 29, 2005 initial public offering, pro forma diluted EPS is $0.15 and $0.06 for the quarters ended June 30th '05 and '04 respectively.

Our reconciliation of GAAP to non-GAAP Performa income from operations can be found in our press release and 8K documents.

As of June 30th, we have 16.7 million shares outstanding, and we will have $17.5 million outstanding in Q3 after the exercise of the shoe.

Turning to the balance sheet, cash and investments were $24.8 million at June 30th 2005.

The increase from 9.2 million at the end of the prior quarter includes approximately 14.4 million in net proceeds from the IPO.

Net accounts receivable were $10.9 million, at the end of Q2, up from 7.9 million at the end of Q1, leading to DSOs of 63 versus 52 at the end of Q1.

The increase in the accounts receivable balance was due to 2 factors.

Number 1, strong bookings in the second quarter; and number 2, over $2 million was collected in the first couple of days of July.

We would expect the DSOs to return to the 50s range during the September quarter as a result.

Deferred revenue at the end of the second quarter increased sequentially to 8.7 million from 5.6 million in Q1.

Finally looking at our cash flow.

We generated $2.2 million in cash from operations during in the quarter, and we had $1.1 million net property, plant and equipment investment.

Cash flow obviously varies quarter to quarter based on the timing of numerous payments and collection events.

As I just mentioned, the timing of several large collections skewed that number at the end of the quarter.

There are 2 other timing events worth pointing out.

First of all, prepaids went up $500,000 sequentially as we took the opportunity on advantageous terms, presented to us from several suppliers.

Secondly, on the PP&E side we received a land grant from India, earlier than we had expected.

And this represented more than half of the increase in property, plants and equipment.

We are excited by this development as it means that we can continue to scale our India R&D operations, which I mentioned is a key competitor advantage for Kenexa.

We had previously thought that it would take another 6 to 9 months before we would receive and pay for the land grant.

I would like to now turn to our outlook for the third quarter, and the remainder of the year.

The third quarter of '05, we expect the following.

Revenue to be, 16.2 to 16.7 million, subscription revenue to be 12.5 to 12.7 million, and income from operations to be 2.1 to 2.3 million.

Assuming our 6% tax rate and 17.7 million shares outstanding, we expect our diluted earnings per share to be $0.11 to $0.12.

For the year ended 2005, we expect total revenue to be 63.3 to 64 million, subscription revenue to be 48.6 to 48.9 million, and operating income to be 8.3 to 8.7 million.

In summary, we were pleased with our second quarter results.

We finished the quarter in very solid shape, and we have increased our expectations for the remainder of the year based on the momentum we see in talent management market and in our business in particular.

Operator, we would now like to take questions, please begin the Q&A session.

[Operator Instructions].

We will first go to Richard Davis with Needham and Company.

Hi, thanks very much.

It's actually this is John Mayata (ph) for Richard.

Rudy, I was wondering if you could comment on what new modules we may see in the future out of your R&D effort?

Thanks for the question, John.

Basically what we are looking at is trying to add, added feature and functionality of our ATS around increased mobility.

We are looking to add more content on our testing modules.

And using additional dynamic testing as well.

The other couple of modules, we'll probably let you know about in our next quarter's call once we've solidified on it.

Okay.

And Don if you can have it, can you just give us a sense as to what the headcount was at the end of the quarter?

Headcount at the end of the quarter was approximately 570.

Okay, thank you.

[Operator Instructions].

We'll take Patrick Walravens from JMP Securities.

Thank you.

I know there is a lot of background.

So I'll just lay out my question and then use the phone.

So first of all, Don, if you could repeat why the gross margins were perhaps a little lower than you expected, that will be great.

Rudy, if you could give us an example of one of your big clients, and the types of employees they are using your software to recruit and retain.

And then lastly Don, if you have a cash flow estimate for us for 2005.

Thank you very much.

Okay, gross margins, we expect gross margins to be in the low 70s.

When we have a -- when we have a perpetual deal that we break into a new vertical, our gross margins always come down a little bit, because they carry some more costs.

So, basically our gross margins are a function of what makes up our revenue line in those costs.

And they are in line in the low 70s and we expect them to continue.

And I'll go with the types of employees that use our applications.

On the talent management -- I'm sorry, on the talent acquisition side path, the types of employees that use it are the recruiters incorporations, as well as hiring managers.

If you are looking at our EPO Services, it's used throughout the organization.

And if you look at our testing, it is primarily used by the recruiting department of most organizations.

On the performance management side, the employee performance management or CareerTracker is used by all the employees in an organization.

The survey tools from a participation perspective is used by all employees.

From an analysis perspective, it's generally used by the senior level executives.

On our cash flow, we expect that our cash flow, it's reasonable to expect that our cash flow will catch up in Q3 to where we expected.

We collected several million dollars in the beginning of July.

So we are off to a good start.

And in addition, our business model should deliver cash flow greater than net income over the long term.

Our DSOs should drop.

You can tell what our net income expectations are based on guidance.

So, over the course of the year we should continue to have a material increase in cash flow.

That being said, it's often difficult to find and to predict when customers are going to make payments on a certain day and when payments are going to be required by us.

So in summary, we expect to catch up.

And we expect our -- we expect a material increase in cash flow run-rate over the course of the year.

Great, thanks very much.

We will now go to Peter Goldmacher with SG Cowen.

Hi guys.

A couple of quick questions.

Did you -- can you give us any additional information on the average duration for the invoices in the quarter?

I can't really, Peter.

You can see what happened to our -- you can see what happened to our deferred revenue line.

It went up by 55%, compared to the prior.

We were expecting -- we got 8.7 million in deferred revenue.

We were expecting 7.6.

And we expect that number to continue to climb but not to that particular rate.

Okay, you had mentioned a deal that you did in Canada.

Was that in the current quarter?

It's in Q3.

We closed it in Q3, but our numbers, our guidance numbers include those revenues.

Okay.

And last question.

You mentioned efforts in Europe.

Are you adding headcount, sales headcount in Europe?

Yes, we are adding sales headcount in Europe.

And we are continued to be fairly acquisitive in nature as well.

How many sales heads are you going to add in Europe, did you say?

I didn't give a number, Peter.

I would expect us to add about 3 within the next 12 months.

Okay, great, thank you.

[Operator's Instructions].

And gentlemen, there are no other questions at this time.

I will turn the conference back to you for any closing or additional remarks.

Well I like to thank everybody once again for joining our first earnings call.

And we look forward to communicating with you in more detail in the months and quarters to come.

Thank you all.

Once again, that does conclude today's conference.

We thank you for your participation.

You may now disconnect.