International Business Machines Corp (IBM) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Kenexa First Quarter 2006 Earnings Results Conference Call. (Operator Instructions.) I would now like to remind everyone that this conference is being recorded.

And I would now like to turn the conference over to Mr. Don Volk, Chief Financial Officer for Kenexa.

Please go ahead, sir.

Well, thank you, Cynthia.

Today we will review Kenexa's first quarter 2006 results, which were announced after the market closed this afternoon.

We will also provide guidance for the second quarter and full year 2006, after which we will open up the forum to 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 product.

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 express written consent of Kenexa.

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

I will later discuss the reconciliation of adjusted numbers to 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 our Chairman and Chief Executive Officer, Rudy Karsan.

Thanks, Don.

And thank you for joining us on the call as we review our first quarter results.

I am delighted to report that the momentum we had in 2005 not only continued into 2006, but it has gotten even better.

Our first quarter results were highlighted by better than expected revenue growth and profitability.

Another highlight to the first quarter was the completion of our follow-on offering in March, which added over 67 million in net proceeds to help fund our long-term growth strategy.

We were extremely gratified by the success of the offering and our focus on continuing to execute against our plan to drive future shareholder value.

The talent management market is looking for a clear market leader and we believe that Kenexa is making the right moves to be that vendor.

We have a proven and unique business model and are gaining market share on a quarterly basis.

As a result of our strong momentum, we're increasing the forecast we shared with you at the end of last quarter, which calls for strong top line momentum, market share gains, and continued profitability expansion.

Taking a look at the numbers, our first quarter total revenue came in at $23 million, an increase of 61% year-over-year.

The most important component to our business, subscription revenue, came in at 17.6 million, a 62% year-over-year increase.

The Webhire acquisition was fully integrated during the first quarter from a people, process, and system standpoint.

The momentum of our business can further be seen by the fact that our deferred revenue grew over 190% year-over-year and roughly 100% on an organic basis.

From a profitability perspective, we generated non-GAAP operating income of $4.1 million, or a margin of 17.8%.

This represented record quarterly operating profit and margin.

We remain focused on operational excellence and expanding the profitability of Kenexa as we scale the business.

This focus combined with the recurring revenue model provides us with a very attractive cash flow profile.

Excluding the excess tax benefit associated with the implementation of FAS-123R, we generated 1.3 million in cash from operations during the seasonally weak cash flow quarter for an increase of over 65% on a year-over-year basis.

The strength of our results is evidenced by the growing momentum in the talent management market and our growing position as a market leader.

In our experience, customers are increasingly realizing that they need to invest in state-of-the-art technology systems to help them find the most highly qualified employees faster and cheaper, and then make those employees as productive as possible.

The ROI for doing so can be extremely compelling and crystal clear to the buyer - reduced external recruiting costs, reduced training costs, faster time to productivity, greater productivity, and reduced turnover.

As new awareness of the talent management market increases and as the strategic importance of talent management purchase decisions rise, buyers are taking a closer look as to who they need for a partner to be able to realize the benefits.

Kenexa is the only company in the talent management market that has a full arsenal of on-demand software applications, proprietary content, professional services, and the option to fully outsource talent management business processes.

Not only do we have a wider range of solutions for customers, but we believe that our technology is also very easy to deploy and use.

From the time of our IPO, we have [expressed] that we are the true definition of a total solutions provider and have believed that our results and growing track record are evidence that this is the preferred model customers are increasingly looking for.

During the March quarter, we continued to see small and large customers turn to Kenexa as their talent manager solutions provider.

Across all of our solutions, we have added over 15 preferred partner customers during the quarter, bringing our total preferred partner customers to over 250.

On the talent acquisition side, we added customers such Guaranty Bank, Panasonic, Reliance Standard Life Insurance, and [indiscernible-accented] stores.

On the performance management side, we conducted business with customers such as Bank of America, Burger King, and Hormel.

During the quarter, approximately 60% of our new sales were attributable to talent acquisition, while 40% were attributable to performance management.

The slight difference from the 50/50 level we have seen in the past was the result of integrating Webhire into our operations.

[Indiscernible] to Kenexa's success over the years is that we have gone deep into the understanding of our customers' businesses, their employees, successful and unsuccessful strategies for both their business and similar businesses in the industry.

Much of this experience and knowledge is captured in our proprietary content over time.

And this is something that is both invaluable to our customers and a major barrier from a competitive perspective.

During the quarter, we added to our vertical knowledge in the healthcare sector with the addition of Webhire, and we also completed a small tuck-in acquisition of Knowledge Workers, which brings Kenexa over 20 years of domain expertise and HR process knowledge, and specific functionality for servicing government clients.

We continue to be on the lookout for solution providers to expand our product footprint and/or vertical expertise.

And we believe Kenexa's strong financial profile and track record makes us the most attractive partner in the talent management market.

Our combination of content, experience, and best in class technology enables Kenexa to deliver unmatched value to our customers.

For example, our employee engagement research identified business results for our customer, which drives alignment, action planning, and decision making.

We have an internal CPG customer that was able to improve productivity by 8% per hour by using Kenexa solutions, a 20% reduction in absenteeism, a 22% reduction in waste costs, and $11 million in total savings.

As I mentioned earlier, the ROI for hiring the best employees quicker and cheaper is extremely compelling.

By using our performance management technology to survey employees, comparing their position to management, and the overall company plan, a telecommunications company was able to increase customer service rating by 30% and it became 50% more likely that they would reach their net income target for the year.

Simply put, there is no talent management vendor that has as long a history in the marketplace, and this is a huge factor for customers looking for a long-term partner that can help them improve their businesses.

As we continue to invest in our people, which is another component to our domain expertise competitive advantage, [EP] has been an excellent overall contributor to our business.

It plays a factor in a good number of our larger deals, and it is a significant competitive differentiator compared to all of the technology-only talent management vendors.

During the first quarter, we announced PAREXEL amongst others as an [EPO] customer.

They are a leading life sciences organization with over 5,300 employees operating at 51 locations through 39 countries.

The combination of our technology, process expertise, and content led to our selection.

In summary, the first quarter was very strong across all key metrics, highlighted by top and bottom line results that were materially ahead of our expectations.

We continue to gain market share and we have again raised our financial outlook for Kenexa.

Our overall financial profile continues to strengthen, which we believe is a long-term competitive advantage.

Don will now review the financials in more detail.

Thanks, Rudy.

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

Let me start with the details on our first quarter results, and then I'll finish with guidance for the second quarter and full year 2006 beginning with the P&L.

Total revenue for the first quarter was $23 million, an increase of 61% over last year.

Subscription revenue is the majority of our revenue and is the strategic component of our business that encompasses our on-demand technology solutions.

During the first quarter, our subscription revenue was $17.6 million, representing 77% of our total revenue and growth of 62% on a year-over-year basis and 21% sequentially.

The remaining 5.4 million of total revenue in the March quarter came from other and professional services, representing an increase of 56% over last year and sequentially.

The majority of the revenue from this line item typically comes from discreet professional services, though we occasionally have a perpetual license that will go into this line item.

For the second quarter in a row, there were no perpetual deals.

However, it is worth pointing out that there was approximately $400,000 to $500,000 of success fees in the quarter that produced positive, albeit non-recurring, revenue.

These fees relate to meeting certain client-specific objectives and each may be based on a one-off basis.

We have success fees on a quarterly basis, but this quarter was certainly beyond the run rate we would typically expect.

Our goal from a forecasting perspective is to leave these as pure upside and that is what we saw this quarter.

On a geographic basis, our revenue continues to be heavily skewed toward the U.S. at over 90% of total revenue.

We continue to make investments in the international markets.

However, it will take time for these investments to lead to results, particularly considering our ratable revenue recognition model.

Our clients typically purchase multi-year subscriptions and the average length of those subscription deals remains approximately two years.

Looking at customer concentration, no customer accounted for more than 10% of our quarterly revenue.

And our top five customers represented less than 25% of our first quarter revenue.

During the quarter, we added over 15 preferred partners, some of whom Rudy discussed earlier.

Our average annual revenue from our top 80 customers, what we refer to as P3, was over $600,000, an increase from the $550,000 level in the prior quarter and a significant increase from the $392,000 level at the end of 2004.

The increase compared to the prior quarter is due in part to several of our larger customers also being joint Webhire customers.

But the overall trend is a result of the growing adoption of our solutions within our customer base.

Turning to costs and profitability, we will be providing non-GAAP measures of each first quarter 2006 expense category, which excludes the stock-based compensation charges associated with the implementation of FAS-123R and amortization of intangibles associated with the Webhire transaction in order to provide comparisons to prior periods which do not include such charges.

All comparisons will be using the non-GAAP current period results.

Non-GAAP gross margin was 73% in the quarter, an increase from the 71% level in both the prior quarter and full year.

The increase in the gross margin was due in part to the greater than expected success fees we saw in the other revenue line item.

On a steady state, our gross margins would have been consistent with the past year and a half.

On the operating expense side, non-GAAP sales and marketing came in at 5.5 million, or 23.9% of revenue, a reduction from 24.3% in the prior quarter, and 25.2% in the year-ago quarter.

We continue to invest in sales and marketing to pursue new clients and expand relationships within the existing clients.

However, we gained efficiency following the acquisition of Webhire and we are gaining increasing economies of scale as we become a larger company from an overall perspective.

We currently have 98 people in sales and marketing, an increase from 78 people at the end of the prior quarter due to continued hiring by Kenexa combined with the increased staff that joined Kenexa from Webhire.

Of that total, approximately 75% carry a quota consistent with prior quarters.

Non-GAAP G&A expenses were approximately $5.1 million, or 22.2% of revenue, slightly below the prior quarter and year.

The increase in absolute dollars in G&A was due to the absorption of Webhire combined with increasing--increased beginning of the year costs associated with employee fringe benefits.

Non-GAAP research and development came in at $1.5 million, or 6.5% of revenue, in line with the prior quarter and below the 8% level in the prior year's quarter.

The $500,000 quarterly run rate increase in R&D was due in part to the Webhire acquisition.

However, we also continued to invest in broadening and deepening our solutions suite from an overall perspective.

We believe that Kenexa has a highly efficient R&D organization that is a result of our significant offshore presence.

And we believe the efficiency of our ISO-certified and high quality R&D processes is a key competitive advantage.

Turning to profitability, we generated non-GAAP income from operations of $4.1 million for the quarter, a 124% improvement on a year-over-year basis.

Non-GAAP operating margins reached an all-time high of 17.8%, which was ahead of our expectations as a result of generally better than expected efficiency, combined with the success fees that were above and beyond our expectations.

Our non-GAAP net income, which excludes non-cash-based charges, such as stock-based compensation expense and amortization of intangibles, was 4.0 million.

Based on 19 million shares outstanding for the quarter, we generated non-GAAP diluted EPS of $0.21, well ahead of our guidance of $0.15 to $0.16.

The following were expense levels determined in accordance with GAAP - cost of goods sold, $6.4 million; sales and marketing, $5.7 million;

R&D, $1.5 million; and G&A, $5.3 million.

For the first quarter, our GAAP income from operations was $3.4 million, or a margin of 15%.

For the March quarter, the GAAP net income applicable to common shareholders was $3.3 million, resulting in GAAP diluted EPS of $0.17.

Our 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.

Turning to the balance sheet, cash and investments were $79.5 million at March 31, 2006, an increase from 43.5 million at the end of the prior quarter.

The increasing cash was a result of positive cash from operations and approximately $67.3 million in net proceeds from the follow-on equity transaction completed during the quarter, reduced by the Webhire acquisition of approximately $32 million.

Prior to the implementation of FAS-123R, we generated $1.3 million in cash from operations, an increase of over 65% year-over-year in what is typically a seasonally weak quarter due to the payout of prior year employee bonuses.

You can see on our cash flow statement that there is between $300,000 and $400,000 use of cash to the tax impact of implementing FAS-123R.

Accounts receivable ended the quarter at $12.2 million.

This was an increase from the $10.3 million level at the end of the prior quarter due to strong bookings in the quarter, but even more so, due to the inclusion of Webhire's results.

You can see a related impact on our deferred revenue, which was $16.2 million at the end of the March quarter, an increase from 12.6 million at the end of the prior quarter.

The increase in deferred revenue was a multiple of the increase in accounts receivable and it represented growth of over 190% on a year-over-year basis and approximately 100% on an organic basis.

Now let me turn to our financial forecast.

We are raising our top line forecast for 2006 from $95 to $98 million to $98 to $100 million as a result of continuing strong bookings and pipeline growth.

Within total revenue, we expect subscription revenue of $77 to $79 million, an increase from $76 to $78 million.

As it relates to profitability, we are raising our estimate for non-GAAP operating income from $16.2 to $17.4, to $17.3 to $18.2 million.

We stated last quarter that we were continuing to review the use of our NOLs after picking up over $20 million in NOLs from Webhire.

Our analysis along with assistance from our independent consultants on this matter is ongoing.

There is a chance that at some point this year our reported effective non-GAAP tax rate may change.

But at this time, we simply don't know for sure, so we are continuing to use the 6% for now.

At this time, we believe 25% is a reasonable effective non-GAAP tax rate for 2007.

Assuming a 6% tax rate for this year, we would expect non-GAAP EPS of $0.88 to $0.93.

I would like now to turn to our outlook for the second quarter of 2006.

We expect the following - revenue to be $23.5 to $24 million; subscription revenue to be $18.7 to $19 million; our non-GAAP income from operations to be $4 million to $4.2 million.

Assuming our 6% tax rate and 21.2 million shares outstanding, we expect our non-diluted--we expect our diluted non-GAAP earning per share to be $0.20 to $0.21.

In summary, we were very pleased with our first quarter results, which was a great start to the new year.

We are excited about the outlook for the remainder of the year and remain focused on continuing to build a track record for continued--for delivering strong financial results.

Cynthia, please begin the Q&A session.

Thank you. (Operator Instructions.) And our first question will come from Laura Lederman with William Blair.

Great quarter, guys.

Just a few quick questions.

One, can you talk about the competitive environment, particularly recruiting - who you're seeing more of, who you're seeing less of - and also pricing?

And then, maybe also talk a little bit about performance management skills assessment and surveying.

And then, secondly, can you give us the Webhire contribution actually in the quarter?

Thank you.

Don, do you want to go with the Webhire and I'll handle the other?

Well, with the Webhire, Laura, we've totally integrated Webhire into our operations, so we are--we don't look at any separation between Kenexa and Webhire.

And we've given our guidance as Kenexa as a whole.

So we're not going to break out Webhire separately.

And as far as the competitors, it's about the same as it was last quarter, Laura.

We're seeing of the [floor-up] companies in our space, no one has really kind of taken charge, if you will.

And that landscape has not materially changed since the end of 2005.

One final question.

Can you talk a little bit about one-stop shopping?

And are customers buying more of the sweet instead of discreet components?

What are you seeing in terms of trends in that area?

We are seeing more of the sweet purchases.

And the number that Don mentioned that has gone up from 550 to over 600--over the last two years or three years that number has grown 40% on a CAGR basis.

And we are optimistic that we can continue maintaining that rate through the balance of 2006.

All right.

Thank--.

--So I think that indicates that it's still fairly buoyant for us.

Right.

I'll pass on the time to the next person.

Thank you.

Thanks, Laura.

We'll hear from Jason Maynard with Credit Suisse.

Hey, guys.

Good quarter.

Thanks, Jason.

A couple of questions just in terms of penetration within the talent acquisition management and performance management suite.

Can you maybe just talk about where you think we're at in terms of maybe Global 2000 actually implementing solutions from third-party providers like yourself?

If you think about the talent management space in four separate buckets--if you think about the applicant tracking system space, third-party vendors, anecdotally, we believe it's got about a 40 to 50% penetration in that space.

In the testing space, we think the number is between 10 and 15.

Performance management we think is under 10, and surveys is about 15.

Okay.

And then, would that number match if you looked at international or is that--or is it obviously skewed much more towards North America?

These numbers are very North American-based.

I would say if you look at it from a MSC perspective or a Global 2000 perspective in the first two components--the first and the fourth component, namely, applicant tracking systems and surveys, the numbers would be similar to that in the U.S.

In the other two components, I would say probably half.

Okay.

And maybe on that vein then, can you just talk a little about what you are seeing in the international market and how we should sort of think about your investments over the next year or so as you start to grow that international piece?

We're going to be taking the go-slow approach.

We just announced the opening of our Taiwan operation.

Our view is that the Pacific Asia is going to be a little slower in developing because solutions there takes a little bit longer.

And especially given that we are gong to be using a subscription model.

So in terms of modeling for the balance of Kenexa--for the balance of '06, we have all our expenses for international expansion baked into our numbers.

We have no revenue increases over that 10% number that Don referred to.

We don't expect it to materially climb in 2007.

We expect it to be in low double-digits, probably in the 12 to 14 range, as we approach 20 two to three years from now.

We're not going to do anything foolish on that front.

We're going to take territory by territory in a very conservative deliberate manner to ensure that we can protect our financial statements.

That's great.

And then maybe one last question, Don.

Just on in terms of the guidance going forward, I assume you're baking in no perpetual license contribution.

Is that a fair assessment?

That's consistent with the past.

Yes.

Okay, great.

Thank you very much.

Good quarter.

Thanks, Jason.

And Peter Goldmacher with Cowen has our next question.

Hi, guys.

I want to ask you two quick questions.

On these success fees, that's a great number.

How many--how many customers is that spread over?

What's the average success fee from any given customer?

Generally, I don't--just generally, the success fees are fairly small amounts.

This quarter--and we bake in like very, very low amounts.

Whereas, this quarter we just had a lot of buoyancy with a lot of our customers, so we got a bluebird in a couple of situations - in two customers, to be specific.

We don't expect it to happen again.

And if it--well, if it does, it will be a nice upside.

Okay.

And in the past, you've talked about your average revenue from your top clients.

I think last quarter you said it was almost up to $500,000.

Has that number changed?

That number has gone--it was--at the end of last year it was 550.

In Q1 of this year it was 600 or north of 600.

And we are expecting that number will continue to grow to the 40% mark CAGR.

And has any of the M&A had any kind of an impact on that number?

Slight.

We had about single digit joint clients like Tyco and AmGen.

But other than that, they were--are--I think we had a total of eight clients, Don, or 10 clients that were exactly the same?

Eight.

Eight.

Any--have any of your existing clients--[lifted] the feedback on the M&A from your current installed base?

It seems somewhat meaningless to the current installed base, because we are looking at kind of seeing if we can now start pushing the on-boarding solution that we acquired from Webhire.

So we haven't really begun marketing on that front.

Kind of the only comments we have heard from existing customers are I hope we don't get forgotten in your growth, which obviously, they won't be because they are very valuable to us.

And from the Webhire--the old Webhire customers, here's an interesting statistic.

On the first day, 25 calls were made by one of the individuals that's an executive there.

And in all 25 of those calls - we got 2 responses - were really happy that it's Kenexa because of our discipline and our approach towards extreme service.

And the second comment we heard was, we can't wait to hear what else do you have to offer us.

And so you will see that continued upward momentum in terms of our top 80 clients growing at 40% a year or more.

So that will feed into that.

Okay.

Great.

Thanks, guys.

Thanks, Peter.

Next is Jon Maietta with Needham and Company.

Hi.

Thanks very much.

The first question I had, Rudy, at the beginning you talked about taking share.

Do you see that predominantly amongst some of the smaller competitors that are out there or is it pretty much across the board?

Jon, I'd like to say that there are certain competitors who we are more successfully against.

But given the fragmented level of the space that there is, we've got a fair share of wins and losses against most of our competitors.

So I wouldn't say, yes, we are being highly successful against A, B, or C. In general, I would say that when you get to that sort of a larger company and you get into the RFP mode and you get down--narrow it down to the top two, three, four, or five, you tend to run into the same suspects.

The smaller competitors tend to have the inroads of the executive suites and a lot of that stuff is not RFP'd.

Okay.

And then, just to close, the last question I had with respect to sales headcount.

Do you expect to add folks in that area as the year progresses, as you potentially see upsides to the top line?

Yes.

We will continue to [telegraph] to the market our growth rate, which will--our growth rate in our sales force, which will be about half the total growth rate that we're expecting in the forward 12 months.

So in this case, you've seen about an addition of - whatever it is - 20, 22% with the Webhire transaction growth rate.

So that's--I mean, our numbers in Q1 clearly show that that's what we're expecting this year.

Okay, great.

Thank you.

Moving on to Brad Reback with CIBC.

Hey, guys.

How are you?

Good, Brad.

Yourself?

Good, good.

Hey, in the past you talked about the sales model really getting some leverage in--I think it was 60% of a lot of your leads are now inbound calls as opposed to actively solicited outbound calls.

Can you give us any update on that front?

Yes.

I think--I was just looking at some of the statistics from Q1 earlier this morning.

And that number that we were saying around 60 is now comfortably north of 60.

So even though we are growing, that number is still growing faster.

It hasn't hit the 70 or two-thirds mark yet.

So we're somewhere between that 60 and 66%.

Okay.

And is 70 your ultimate goal there or--?

--That's a tough question because what happens is in some of our strategic sales, the relationship that exists will get us to the point where there are no RFPs going the other way.

So I would say we don't have--we're not zeroing in towards a goal.

But in order to continue to manage the business model so that our present marketing costs continue to drop with time as a percentage of total, but increasing in absolute terms, we would expect that number to climb.

But is 70 the right number?

Is it 67?

Is it 75?

We haven't broken it down to that level of scientific detail yet.

Great.

Thanks a lot.

Thanks, Brad.

Next, we'll hear from Brendan Barnicle with Pacific Crest Securities.

Thanks, guys.

Just two quick questions.

Any information on Knowledge Workers' contribution?

And then, can you give us a little more detail on as you go into these international markets, what's required in terms of localization and investment to kind of bring the product up to kind of local jurisdiction needs?

Thanks a lot.

Brendan, Knowledge Workers was a very small tuck-in.

They in fact had less than 10 employees.

They didn't have any contribution into Q1 as we purchased them right at the end or the beginning of April.

And as far as the localization in the different countries, what we are doing currently, I think we kind of mentioned this in last--in the last call, is we were negotiating with the government of Malaysia to add some incubation space in [Subang Jaya], which is in the outskirts of Kuala Lumpur.

And we're hoping to make that announcement in the next couple of months that that office is up and running.

The localization kind of comes--if you look at a mapping and tracking system, there's three levels to it.

There's a career center level, there's a search level, and there's an administration level.

We believe that from a career center level we're going to have to meet a lot of the local laws.

We are not expecting significant issues there in Pacific Asia or in India.

There will be minor differences.

And we are pretty confident of the partners that we have there, as well as the people that we have on the ground there, that will have the knowledge to carry us there.

In Europe, our expectations are given that we've started operating there and given that we are in a few languages in Europe, that whatever toes we were going to stub into or wherever we stubbed our toes, we did that in kind of the '03, '04 timeframe.

Go--looking forward, we are still debating the financial viability of adding localization at the search level as well as at the back-end level.

So that question hasn't been completely resolved within Kenexa.

Great.

Thank you very much.

Moving on to Patrick Walravens with JMP.

Thank you.

Hey, Rudy, to start, would you mind giving us an example of where you would earn a success fee?

So what exactly are you doing for the client and how do you overachieve and get a fee?

Generally, these are restricted to--or they are primarily related--not restricted, but they are primarily related to EPO-type clients.

So basically, what happens is if we--if we are successful in meeting the statement of work situation we tend to--we tend to win out.

We tend to get that.

Other than that, I'd rather not comment because they are kind of client specific details, the parts of contracts, and it [indiscernible] confidentiality agreements.

Okay.

But, I mean, would it be fair if you're supposed to help bring on board 500 employees in a year and you bring on board 600, is that the sort of thing we're talking about?

Yes, that's the general idea, or with some timeline or we've reduced cost.

So--.

--Sometimes it might say we needed--we were expecting to get X cost for hire and retainment at X minus 10% and we get a kicker for it.

Okay, great.

And then, on the--Don, this is for you I think.

So I understand that you're operating as one business and you don't want to constantly have to give out where Webhire is.

But given that this is your first quarter, right, can you give us some sense of what the organic growth of Kenexa was?

I mean, 20, 25, 30, 35--just a ballpark?

Well, we fully integrated Webhire, as you heard.

Yes, I heard that part.

Yes.

And we had previously provided our expectations for the contribution of Webhire and what they would make to Kenexa on the last call.

And on a combined integrated basis we were able to exceed those expectations.

And going forward--.

--Let me ask it differently.

Did Webhire meet your expectations for the quarter?

Okay, let's put it this way.

Don, let me jump in and--.

--[Indiscernible.]

I'll give him the answer I gave on the road show.

We take our communication with the street very seriously.

We are very responsible.

It's almost like a--covenant that we have.

And for an organization that takes it that seriously, we raised guidance on December 24.

We re-raised guidance on February 7 and the only material thing that happened in that six weeks was the closing of Webhire.

Take your queue from that.

All right.

Rudy, big picture for you.

So right now we're operating in a fantastic hiring environment from a jobs point of view, right?

So how long--I mean, you've been doing this a long time.

How long do you see that continuing?

And then, inevitably, it will change, right?

How do you need to operate your business differently when the hiring environment is not as strong?

Okay.

So inevitably it will change, so I'll disagree with you--I'll agree with that comment.

So how--I guess--I've been through two downturns - in the 90s and then in the early 2000s.

And generally, what happens is you--then you clamp down on it, you start putting hiring freezes in your organization, you watch out on the cost front, you make sure that your sales dollars are appropriately expensed, you continue to educate your clients in terms of the value of your solutions.

Hopefully, you are integrated to the point where they can't afford to shut you down because if they did, they can't hire anybody.

It's an all or nothing thing.

So all in all, I would say that would be the basic method of--the basic MO, which incidentally is not implemented as today, which is you look at your pipeline, you make sure that you're meeting your financial projections, and you kind of manage everything to the top and bottom line.

Okay.

And last question, there's a lot of talk about sort of talent management recruiting, learning, compensation performance management, all coming together.

Do you ascribe to that theory?

Do you see things like learning and compensation as spaces that you need to move into at some point?

Yes.

We've said that there are three ways we're going to move strategically or in terms of expanding it for an M&A would be through either solution expansion--and the specific example we've given is compensation.

We haven't seen anything yet that caught our attention in terms of having not only a solution that makes sense, but also a financial model that's viable for us.

So do I subscribe to ultimately compensation will be part of performance management?

I think so, yes.

I don't know if it will happen in '06 or '07 or '08.

But it's going to fit in.

Do we believe that ultimately learning will become a part of the whole solution provided?

Yes.

But is it going to be at the back-end of this decade or at the--or is it going to be sooner?

Don't know.

Great.

Thanks very much, guys.

Good quarter.

Thanks, Pat.

Moving on to Brad Mook with Boenning and Scattergood.

Thank you.

Rudy, you've talked about the importance of the end-to-end solution as a competitive advantage.

Can you give us an update on the adoption of multiple products?

I think a couple of quarters ago, 30 of your top 80 were using multiple products.

It's--we're at about the same number as we have been expanded with the Webhire thing.

I haven't seen the most recent numbers, Don, have you?

It's about the same.

It's about the same.

Okay.

And if you expand the group to about 250--to the top 250 preferred partners that you talk about, what kind of [inaudible]?

--I think the number there, if I remember correctly is in the low teens.

By that, I mean about 13%, 14%.

Don, can you add any more color to that?

That's correct.

Yes.

It's right in the 13 to 14% mark, Brad.

Okay.

Given that the number hasn't really changed in the past couple of quarters, how are your cross-selling efforts going?

How important is that to the existing customer base?

I just haven't seen the numbers.

I think at the end of Q3, I--just going back--at the end of Q3 we had 27.

Right, Don?

Yes.

Then it moved from 27 to 30, so we did add three last quarters.

I just haven't looked at the numbers for this quarter.

In terms of how the cross-selling efforts are going, they are going pretty well.

I would say that our clients are fairly receptive in terms of having Kenexa--or [indiscernible] I should say, visit with them.

We are--we are in front and center in a lot of the discussions.

And in a lot of cases we do find out things in such a fashion that we avoiding the RFP.

Is that right?

Yes.

Okay.

And can you talk a little bit about your investments in R&D?

You mentioned in addition to picking up products through acquisition, also applying money into R&D for product development.

Right.

We talked about the Malaysian--the Malaysian opening will probably happen around May or June, July.

It depends on when the space is going to be ready.

I guess we're already in May.

So it will probably be June or July.

Over and above that, we were given or granted land in the state of [indiscernible] in Q3 of last year.

And we are in the process of drawing up the architectural plans to start building our building there.

So there will be some capital expenditure associated with that.

Other than that, we are expecting to be--our model calls for 6 to 9% and I expect that we will be in that range.

Don, do you want to add anything to that?

I'll just reiterate that 6 to 9% is the range we'll be in.

Any specific product areas you're working on?

Well, we've--we talked at the end of last year about a new 5.0 on our applicant tracking systems that will come out at the end of this year that we're hoping will be disruptive.

And we're--I'm pretty excited about that one.

We've got a [indiscernible] with [indiscernible] Cooper.

He's the guy who developed [indiscernible] for Mac about 7 or 8 years ago and it had--it was fairly disruptive in the PC space.

We've hired his firm to help look at beginning to end exactly how people are utilizing the systems using this notion called persona.

And we're hoping to surprise the market with the new solution coming in at the end of this year.

Making it more competitive?

[Indiscernible] fairly disruptive.

More competitive on the ATS side?

That means more competitive not only on the ATS side, but also, it will really build in the testing and some of our content stuff will come in even better integrated than it sits right now.

It will be completely invisible to the user and it will have a lot of--it won't have the standard features and functionality [indiscernible] obviously that exist.

But it will be really configurable and you'll be able to--you'll be able to do things that really get a--I don't want to talk too much about that just from a purely competitive standpoint.

So as excited as I about it, I'm going to keep my mouth shut because I'll--I'd better not get lynched internally.

But be that as it may, we are very, very excited about it.

Okay.

And then, just last some housekeeping for Don.

Can you just detail your stock-based comp CapEx and amortization expectations for the year?

Yes.

Our stock-based compensation expectations for the year are approximately $2.8 million.

Our CapEx expectations for the year are approximately $7 million.

Okay.

Amortization.

Do you have a figure there?

On amortization, the number is approximately $1 million.

Okay.

All right.

Thanks, guys.

Thanks, Brad.

Moving on to Matthew Weiss with Maxim Group.

Hey, guys.

Hi, Matt.

Most of my questions have been answered.

I was just wondering if you could give us some kind of sense as to the contribution by vertical.

I know you normally don't break that out, but if you could talk about where you saw strength and possibly weakness?

And then, also, as follow-on, the strides you are making in terms of the public education market.

I know that you had talked about that in the past.

On our revenue by vertical, it really hasn't changed since the last time we spoke.

The manufacturing is our top vertical running at about 18%.

Pharma--pharmaceutical is next, around 16.

And then--.

--I think technology is next--.

--Technology, 14.

And what was the second part of the question?

I forgot.

It was about your strides in terms of the public education market?

We had a couple of victories.

We are--we are believing that in the summer when a lot of these decisions are made that hopefully we will be able to decide whether or not we made the right call on that front.

Okay, great.

And then, I was--sorry if I missed it.

But did you give a total headcount number?

No, you didn't.

And it's a little under 800.

A little under 800?

796 at the end of March.

Okay, great.

Thanks.

Congrats on the quarter.

Hey, thanks a lot, Matt.

Moving on to Michael Nemeroff with Wedbush Morgan.

Thanks, guys.

Good quarter.

Did I hear you correct, Don, and you said that CapEx for the year is going to be 7 million?

Yes.

So that's going to be--so where--in terms of linearity going forward, where do you think most of that's going to fall?

Is it going to be spread evenly among the next three quarters?

Yes.

More toward third and fourth quarter as we get into this building in [indiscernible].

Okay.

And did you mention--I didn't hear it--the new versus existing customer revenue split?

It was 60% talent acquisition, 40% performance management.

And in terms of new versus existing customers, do you have a revenue split on that?

No, we don't.

Is it something that could be easily--?

The overall magnitude is unchanged because if you look at the rate of which our revenues in the P3 declined, we're still in the kind of 50/50 mode.

Okay.

And just kind of going back to the organic growth rate of the company.

I understand that you don't want to break out the Webhire acquisition.

Was the growth rate in the first quarter organically, excluding Webhire, was it greater than the growth rate was in the first quarter of last year?

It's another way of asking the same question.

The one you didn't want to answer, Don.

You know, I'm not being able to--.

[Inaudible.]

I'm not being able to break out the Webhire revenues because everything is fully integrated at this point.

Why don't I answer the question a little differently?

When we purchased Webhire, I think we filed all the forms.

And in Q1 of last year, they had a run rate, if I remember correctly, it was their annualized run rate was about 10 million.

So they had about 20--2.5 million of subscription revenue.

And if you saw that number through the year, it didn't materially change.

So I mean, you can figure out the math.

If they hadn't joined us, [indiscernible] number would that be, and subtract it, and you should be able to see our organic rate that way.

So about--so subtract about 2.5 million from the 17.6 on the subscription revenues and that should be approximately where the organic growth was for the company for the quarter?

I'll let you answer that one.

You could do it that way.

Okay.

Okay, guys.

Thank you.

But that's just subscriptions.

The other--don't forget the other part as well.

Right.

Thank you.

Got you.

Later.

(Operator Instructions.) And we'll move on to Andrey Glukhov.

Yes.

Thank you.

Congratulations on a good quarter.

Thanks, Andrey.

Hi, Andrey.

Yes.

Hi.

As far as Webhire is concerned, one of the things that penalized them prior to you guys acquiring them is that they had some customer departures to--from the smaller competitors because there were some concerns on their viability.

Can you maybe directionally talk about how [their and] your rates improved after you have acquired them?

I guess--well, let me answer this question this quarter.

Right, Don?

Because it's the first quarter since integration.

We lost zero customers.

So your rates have so far--100% renewal rate?

Correct.

Okay, excellent.

And also, as far as you updating your guidance, when you look at the guidance, are you maintaining roughly the same coverage of backlog to subscription revenue as you did when you provided the original guidance?

He's good on this.

I'm fine.

If I can't give that number [indiscernible].

Go ahead.

Well, you know we had 70% coverage when we gave the number .

And we don't give the--we don't update the number--we don't update the number quarterly.

But we have updated our annual guidance and we have updated our second quarter guidance as a result of continued strong bookings and a strong pipeline.

Okay.

And then, lastly, Don, did I hear correctly?

So basically, it's worked out to defer on an organic base declining about $1.5 million?

Is that correct?

On deferred, yes.

Okay.

Thank you.

Thanks.

There are no further questions in the queue.

Mr. Karsan, I'd like to turn the conference back over to you for any closing remarks, sir.

Thanks, Cynthia.

I guess the text and the subtext of this call is one of optimism.

I'd just like to clearly say that we really appreciate the support of the street.

And I want to take this opportunity to say thank you very much.

And we'll talk to you, hopefully, in another quarter.

Good night.

That does conclude today's conference.

Thank you for your participation.