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Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kenexa second-quarter 2006 earnings results conference call. Today's conference is being recorded. (Operator Instructions). I would now like to turn the conference over to Don Volk, Chief Financial Officer. Please go ahead, sir.
Don Volk - CFO
Today, we will review Kenexa's second-quarter 2006 results, which were announced after the market closed this afternoon. We'll also provide guidance for the third 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 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.
A further note. Six miles away, we have a blackout in progress and we've been notified from PECO that there is rolling blackouts in the area. If we happen to have a blackout, please standby as our backup generator will kick in and we will be back on the line in less than five minutes. I'll now turn the call over to our Chairman and Chief Executive Officer, Rudy Karsan.
Rudy Karsan - Chairman, CEO
Thanks, Don, and thank you for joining us on the call as we review our second-quarter results, which were highlighted by better-than-expected revenue growth and profitability. Market awareness for talent management solutions continues to grow, and Kenexa's unique business model and value proposition are driving our significant market share gain. We are proud of the trust our customers have placed with us. The combination of strong organic growth and well-executed strategic acquisitions has helped Kenexa grow profitably. This is significant as the market consolidates, and customers and potential acquisition candidates are trying to determine which vendor is best positioned for the long-term. The strength of our business gives us confidence to again raise our top line and our non-GAAP income from operations forecast for 2006.
Taking a look at the numbers, our second-quarter total revenue came in at $24.7 million, an increase of 54% year-over-year. The most important component of our business, subscription revenue came in at $19.9 million, a 64% year-over-year increase and a very strong 13% increase on a sequential basis. The strength of our subscription revenue is being driven by strong bookings across both of our major product categories in addition to the success of bringing our recently-acquired solutions to the marketplace.
From a profitability perspective, we generated non-GAAP operating income of $4.8 million or a margin of 19.4%. This represented another record quarterly operating profit and margin, and it was 14% ahead of the high end of our previously-issued guidance. Our cash flow from operations excluding the tax benefit associated with FAS 123R was $1.8 million during the quarter. However, this does not take into consideration that we collected approximately $3 million a few days following the end of the second quarter. As Don will touch on later, we continue to expect very strong cash flow growth for the year based on our growing profitability margins and strong execution of our on-demand business model.
We believe that this is truly an exciting time in the development of the talent management market. Companies of all size are increasingly realizing the significant benefits associated with implementing state-of-the-art systems to improve their talent acquisition and employee performance management business processes. Talent management solutions, such as those that Kenexa is providing, reduce external recruiting costs, training costs and turnover, while leading to faster-times productivity and a greater productivity. As attractive as the business benefits are, it's important to understand that companies of all sizes are increasingly feeling the pressure to invest in talent management solutions to effectively deal with industry drivers, such as the aging of the workforce, declining tenure of employees, increased globalization, immobility of organization structures and the pressures in the HR department to minimize costs. We believe these drivers will continue to fuel market demand for the remainder of this year and beyond.
It is increasingly becoming a question of not whether to move forward with a talent management implementation but which vendor to move forward with. The market remains highly fragmented, but consolidation activity continues in the market and the majority of vendors are falling back in the race. We believe that Kenexa is very well-positioned to continue gaining share and to extend our market leadership position based on the fact that we're 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. From the time of our IPO, we have stressed that we're the true definition of a total solutions provider. And we believe that our results and growing track record are evidence that this is the preferred model customers are increasingly looking for.
During the June quarter, we continued to see small and large customers turn to Kenexa as their talent management solutions provider. Across all of our solutions, we added over 20 preferred partner customers during the quarter, which was a record and an increase from the over 15 level we cited in the prior quarter and the over 10 level we cited in previous quarters.
On the talent acquisition side, we added customers such as Beckman Coulter, BlueLinx, Pacific Dental, Legacy Health, Health Quest Systems and Providence Healthcare. On the performance management side, we conducted business with customers such as FirstEnergy, WW Grainger and ADP. During the quarter, approximately 60% of our new sales were attributable to talent acquisition, while 40% were attributable to performance management consistent with prior quarters.
In addition to success with Kenexa's core applications in both talent acquisition and employee performance management, it is particularly encouraging to see the initial success we've had with bringing recently-acquired applications to market. Indeed at the time we announced the Webhire acquisition, we stated that one of the attractive aspects of the move was that they brought extra domain expertise in the healthcare vertical.
If you take a step back and look at the new customer names I just mentioned in the talent acquisition space, you notice that we had a very good quarter in the healthcare vertical. In addition to having success selling to new customers, we are very pleased to see that our renewal rates involving customers that Webhire brought over are just as good as the best-in-class levels that Kenexa has historically experienced.
In addition, last quarter, we announced the relatively small acquisition of Knowledge Workers, a talent management vendor with significant domain expertise in the government sector. During the June quarter, we were successful in winning a multiyear EPO deal with the US Department of Agriculture that was slightly greater than the price we paid for Knowledge Workers. We believe that there is a very attractive long-term opportunity in the government sector. And we believe that the domain expertise we brought on board via this acquisition positions us well to capitalize as demand grows.
A cornerstone to Kenexa's success over the years is that we've 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. Being successful in the talent management market goes far beyond simply the software, which is why our domain expertise and proprietary content are such major differentiators from a competitive perspective and the reason we are able to deliver such a high level of value for our customers. For example, one of the largest consumer companies in the world -- we not only implemented a talent management technology solution but we also helped a customer from services and a content perspective as well. Specifically, we helped this customer create the surveys and performance indicators for which they would evaluate which candidates were the best fit for their organization. The higher the candidates scored in our performance evaluation criteria, the greater the likelihood that they would become a successful employee. The customer hires thousands of employees per year, and it is estimated that the benefit of improving the hiring process led to over $2000 in productivity gains per new hire.
To put the level of domain expertise required into perspective, in this customer situation, we put together a questionnaire of 38 items to assess general work experience and then 33 items that were specific to this customer's industry. The assessment included categories, such as initiative, stress tolerance, self-control, adaptability, concern for others, persistence, energy, dependability, detail orientation and integrity. As I mentioned, it is by going deep with our customers that we're able to create long-lasting relationships, become a trusted partner and adviser in the area of talent management.
Our domain expertise in the talent management market was the reason that we were selected by Beckman Coulter in the second quarter. They are a leading biomedical testing manufacturer, and they will be implementing our applicant tracking system in addition to Kenexa Selector for behavioral profiling assessment and Kenexa Prove It! for skills assessment. No other vendor could match Kenexa's end-to-end capabilities in this evaluation. And as the talent management market becomes increasingly strategic, we believe our unique value proposition will become an even greater differentiator.
In summary, our second-quarter results were very strong and we continue to be optimistic about our outlook. Market awareness is growing, demand is strong and Kenexa is gaining significant share and extending our leadership position. With that, let me turn it over to Don, and he will review the financials in more detail. Don?
Don Volk - CFO
Thanks, Rudy. I would reiterate your beginning comment that we are pleased with the Company's performance in the second quarter, which was highlighted by record revenue and profitability. Let me start with the details on our second-quarter results, and then I will finish with guidance for the third quarter and the full year 2006, beginning with the P&L.
Total revenue for the second quarter was $24.7 million, an increase of 54% over last year. Subscription revenue is the majority of our revenue, and it is the strategic component of our business that encompasses our on-demand technology solutions. During the second quarter, our subscription revenue was $19.9 million, representing 81% of our total revenue and growth of 64% on a year-over-year basis and 13% sequentially. The remaining 4.8 of total revenue in the June quarter came from other and professional services, which increased 23% over last year but decreased 11% on a sequential basis.
Last quarter, you may recall that we pointed out $400,000 to $500,000 in success fees that were over and above our expectations and non-recurring in nature. The majority of the revenue from this line item typically comes from discrete professional services, though we occasionally have a perpetual license that will go into this line item. For the third quarter in a row, we did not sign a perpetual deal.
On a geographic basis, our revenue continues to be heavily skewed toward the US at over 90% of total revenue. Of note, in the second quarter, we did increase the level of resources dedicated to growing our international presence with the opening of an office in Taiwan. However, it will take time for these and other investments to lead to results, particularly considering our ratable revenue recognition model. Our clients typically purchase subscriptions, and the average length of those subscription deals remains at approximately two years.
Looking at customer concentration, again, 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. Our revenue continues to be highly visible as a result of the diversity of our revenue across many customer relationships, long-term contracts with renewal rates that continue to be in the 90%-plus range and the growing number of new customers that we are adding to our overall customer base. During the quarter, we added over 20 preferred partners, some of which Rudy discussed earlier. Our average annual revenue from our top 80 customers -- what we refer to as P3 -- was over $700,000, an increase from the $600,000 level in the prior quarter and a significant increase from the $550,000 level at the end of 2005. We continue to expand the scope of our customer relationships as a result of expanding the adoption of initial solutions that were purchased and by cross-selling our broad solution suite over time.
Turning to costs and profitability, we will be providing non-GAAP measures of each second-quarter 2006 expense category, which excludes the stock-based compensation charges associated with the implementation of FAS 123R and amortization of intangibles associated with previous transactions 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 73.7% in the quarter, an increase from the 73% in the prior quarter and 71.3% a year ago. For the second quarter in a row, gross margins remained above the run rate that we had experienced since mid-2004. This was due to the increased mix of our total revenue coming from subscription revenue, which typically carries a higher margin than professional services and other revenue. We would not be surprised to see our gross margins move back toward the mid part of our long-term target of 70 to 74% for gross margins.
On the operating expense side, non-GAAP sales and marketing came in at 5.6 million or 22.7% of revenue, a reduction from 24% in the prior quarter and 24.6% in the year ago quarter. We continue to invest in sales and marketing to pursue new clients and expand relationships with existing ones. We're focused on continuing to optimize the productivity of our sales organization. We ended the quarter with 98 people in sales and marketing. This is even with the end of the first quarter. But keep in mind that our sales organization was expanded by 26% sequentially in the first quarter as a result of internal hiring and the acquisition of Webhire. Similar to prior quarters, approximately 75% of our sales organization carries a quota.
Non-GAAP G&A expenses were approximately $5.4 million or 22% of revenues, slightly below the prior quarter and slightly higher than a year ago. Non-GAAP R&D expense came in at $1.8 million or 7.3% of revenue, an increase when compared with both the prior quarter and year ago period. We continue to invest in broadening and deepening our solution 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.
The combination of better-than-expected revenue, increased mix of subscription revenue and a focus on operational excellence led to record non-GAAP income from operations of $4.8 million for the second quarter. This represented an increase of 85% on a year-over-year basis and an all-time high margin of 19.4%.
Our non-GAAP net income, which excludes non-cash-based charges such as stock-based compensation expense and amortization of intangibles, was $4.2 million. Based on 21.1 million shares outstanding for the quarter, we generated non-GAAP diluted EPS of $0.20, which was in line with our previous guidance. Of note, on last quarter's call, we had pointed out that our non-GAAP tax rate would most likely increase from the 6% level at some point in 2006. But we did not know the timing as to when or what level.
As you can see from our press release, during the second quarter, our non-GAAP tax rate for reporting purposes was 22%. This is the new level we believe analysts should use for the remainder of 2006. It is impressive that our non-GAAP EPS was still in line with our guidance, even though our guidance was based on a tax rate of 6%.
Turning to our results on a GAAP basis, which include the allocation of stock-based compensation to the various expense line items and the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP -- cost of goods sold, $6.7 million; sales and marketing, $5.7 million; R&D, $1.8 million; G&A, $5.9 million. For the second quarter, our GAAP income from operations was $3.8 million or a margin of 16%. For the June quarter, the GAAP net income applicable to common shareholders was 3.3 million, resulting in GAAP diluted EPS of $0.16. A reconciliation of GAAP to non-GAAP expenses and income from operations can be found in our press release, in current report on Form 8-K filed with the SEC.
We ended the quarter with a strong balance sheet. Cash and investments were $76.9 million at June 30, 2006, a decrease from $79.5 million at the end of the prior quarter. The decrease in cash was a result of paying $2.6 million for the acquisition of Knowledge Workers, $1.2 million in prepaid expenses related to investments in our infrastructure and $1.2 million in other CapEx, offset by our positive cash flow from operations.
Excluding the approximately $400,000 excess tax benefit associated with the implementation of FAS 123R, we generated $1.8 million in cash from operations, an increase of 50% -- of over 50% sequentially. As Rudy mentioned, our second-quarter cash from operations did not benefit from the collection of roughly $3 million of accounts receivable in the first week of the third quarter. We have said many times that quarterly cash flow is skewed by the timing of payments and collections. And as a result, we would expect to see a level of catch-up in the third quarter and second half as a result of the collections that have already come in combined with our continued expectations for strong and growing probability. In fact, our expectations for full year cash from operations excluding the impact of FAS 123R continues to be at least in the mid $20 million range for the full year, which is consistent with our thoughts coming into the year.
Accounts receivable ended the quarter at $18 million. This was an increase from the $13 million level at the end of the prior quarter. In addition to roughly $3 million in collections moving from the last week of the second quarter to the first week of the third quarter, our ending accounts receivable balance also reflects the transition of our collection function to India during the middle of the quarter. This transition is now complete, and we believe we have not only upgraded our long-term execution capabilities by bringing on broad, significant and experienced talent that would be very hard to find domestically but we have also lowered the cost of this administrative aspect of our business.
Our deferred revenue at the end of the quarter was $17.1 million, an increase of 6% sequentially and 98% on a year-over-year basis. The strong momentum of our business gives us the confidence to again raise our top-line forecast for the year. Specifically, we are raising our top-line forecast for 2006 from $98 million to $100 million to $100 million to $102 million as a result of continuing strong bookings and pipeline growth. Within total revenue, we expect subscription revenue of $78 million to $80 million, an increase from $77 million to $79 million. As it relates to profitability, we are raising our estimate for non-GAAP operating income from $17.3 million to $18.2 million to $19.6 million to $20.1 million.
As I indicated earlier, our analysis during the second quarter of '06 along with our independent consultants determined that our reported effective non-GAAP tax rate should be 22% for the remainder of 2006 and effectively 19% for the full year of 2006. As a result, we expect non-GAAP EPS of $0.91 to $0.93 for the full year, using 20.4 million shares outstanding. We're pleased that our non-GAAP EPS has remained the same at the upper end of the range, despite a material increase in our tax rate compared to the last time we upgraded guidance.
I would like now to turn to our outlook for the third quarter of 2006. We expect the following -- revenue to be $25.5 million to $26 million; subscription revenue to be $20.3 to $20.7 million; non-GAAP income from operations to be $4.9 to $5.2 million. Assuming a 22% tax rate for reporting purposes and 21.2 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.21 to $0.22. We will provide our preliminary 2007 top line and profitability forecast on next quarter's conference call. But for the time being, we expect our tax rate to be 25% in 2007.
In summary, we are very pleased with our second-quarter results. We continue to build on our track record of delivering strong operating results. And we have again increased our top line and operating income forecast based on our quarterly results, strong bookings and growing sales pipeline. We are excited about the outlook for the remainder of the year. I will now turn it over to the operator to begin the Q&A session. Operator?
Operator
(Operator Instructions). Jason Maynard, Credit Suisse.
Jason Maynard - Analyst
Can I get -- just a couple questions on bookings that you saw during the quarter. Can you maybe talk a little bit about linearity of your product bookings, what you saw from customers in terms of spending if there were anything abnormal that was popping up in the June quarter? And then maybe also break it down a little bit by some of the strength across the product lines and maybe talk a little bit more in detail what you saw in terms of specific numbers around recruiting and performance management.
Rudy Karsan - Chairman, CEO
As far as linearity goes, again, it's kind of the same as we've seen in the past, which is pretty consistent through the quarter. There's been no aberrations either at the beginning or at the end or at the middle. The distribution between performance management and talent acquisition remained at 60/40 in favor of talent acquisition, which was similar to what we had in Q1. We're expecting those trend lines to continue for the balance of the year with a 60/40 split.
As far as the kinds of customers, we've seen an increase in the healthcare as we noticed in our prepared comments. But other than that, in terms of new verticals, we haven't seen any significant increase in any of our other verticals. This -- I'm trying to think; I think that answers all your questions, right?
Jason Maynard - Analyst
That covers it. Maybe one follow-up just on -- I think you talked about the average deal size bumped up. I mean there's obviously I think some confusion around that metric mid quarter. Can you maybe talk a little bit about what you are seeing from customers around increased commitments and maybe give us an update on where you think that number can trend over the next year or so?
Rudy Karsan - Chairman, CEO
Those are our top 80 customers that we referred to as P3 customers. At the end of '05, we were at 550,000 and we tracked that on a -- actually, we track it on a monthly basis and report on a quarterly basis. As we go through the year because you know added seats or expanding of solutions or adding more solutions, generally the number grows through the calendar year. So we started the year -- we ended last year at 550. And to put it in perspective, we started that year at the end of Q1 at around 400. This year, at the end of first quarter, we're at 600. At the end of the second quarter, we are substantially over 700.
And the number that we gave the Street at the end of Q4 '05 was that we had 30 P3 customers with multiple solutions. That number is now north of 40. So we have 10 of our P3 customers through this year -- more than 10 of our P3 customers halfway through this year have now purchased multiple solutions for an average north of 2.5 solutions per customer that purchases multiple solutions. So all those metrics are very exciting for us because it shows that customers are buying more from us.
Operator
Peter Goldmacher, SG Cowen.
Peter Goldmacher - Analyst
Can you give us a little more insight on to how well you guys are doing selling incremental products and applications into your installed base? And also a question around invoice duration -- are you still doing on average for less than -- are your average invoice duration less than a quarter?
Rudy Karsan - Chairman, CEO
I'll answer the first half; Don, you answer the second half. Just the first half of the question -- as we are incrementally increasing the number of applications per customer, which is now north of 2.5, and we have over 40 P3 customers, what we're seeing is that the pipeline -- I'm sorry the timeline or the time to close is shrinking for that group. So we didn't have the number at the end of Q1. But as we analyzed it through the year, we're seeing that that sales cycle is shrinking. I would say that as we continue through this year, I would expect to see that number well north of 750 by the time we finish the year, probably nudging 800. And I would see that the number of customers with multiple solutions kind of approaching the mid-40s mark. Don, you want to address the second?
Don Volk - CFO
On the invoicing, we've been running three months in advance for invoicing and we've moved that up to about 3.1 at this point. It's very difficult to get it to move past that.
Peter Goldmacher - Analyst
Can you help me understand the deferred revenue line again? I would have thought there might have been a bigger increase. I understand the invoicing duration has something to do with that, but it sounds like even if you are extending it a little bit, why wouldn't it have been bigger?
Don Volk - CFO
In fact, we had a record booking quarter this quarter. It was simply very strong. But because we are on quarterly payment terms, if we close a deal early in the quarter and we bill it early in the quarter, we will only have one month left in deferred. In addition, we closed a bunch of deals at the end of the quarter and we don't bill until we get out into implementation. And implementations were delayed into the third quarter, so we didn't get the bill. Nevertheless, we still did reach a record level. Deferred revenue was up 98% year-over-year and nearly double the growth rate of our revenue.
Operator
Jon Maietta, Needham & Company.
Jon Maietta - Analyst
Just a couple of questions. The first one, Rudy, I was wondering if you could comment -- since you have acquired Webhire, do you feel like that business is gaining greater traction now that it's part of a larger company in Kenexa?
Rudy Karsan - Chairman, CEO
I would say that getting greater traction, we do see that the inbound calls are north of 60% in terms of our total sales. We have integrated Webhire to the point where we can't differentiate between Webhire and Kenexa leads anymore. Our Kenexa Recruiter is with the old Webhire application, and our Recruiter Enterprise is the old Kenexa application. Once we get the requests, we can move it and decide on what would be the best solution that we wish to push forward to the customer.
I guess net-net what I'm saying is if you look at overall growth rates of Kenexa and compare it to the old Webhire model, then the entire entity has grown by roughly organically around 40%. So we knew that Webhire wasn't growing last year at this point in time. So the answer would be -- yes, it's kind of caught up with Kenexa's organic growth rates. So the answer is we're pretty happy with it.
Jon Maietta - Analyst
Then just the other question I had was -- Don, I was wondering if you had the number of full-time equivalents handy.
Don Volk - CFO
It's 850.
Operator
Brendan Barnicle, Pacific Crest Securities.
Brendan Barnicle - Analyst
Don, just following up on that deferred revenue question. Can you give us any sense of an off-balance sheet sort of contract uncollected number that you might be tracking now?
Don Volk - CFO
We do track off-balance sheet contracts. The number is significantly up. We do not disclose that number.
Brendan Barnicle - Analyst
Is it up within the range of what we've been seeing in the last couple of quarters? Can you give us a little more color around that?
Don Volk - CFO
I'd rather not give that color and rather not put the pressure on ourselves to sign deals before the end of the quarter to hold us accountable for that number.
Brendan Barnicle - Analyst
Rudy, can you give us just a status update on where we're at with Kmart?
Rudy Karsan - Chairman, CEO
Kmart has five applicant tracking systems. One of which is Kenexa's. There's one with ADP. One is a home-grown system. One is Unicru, and one is I think BrassRing. I can't remember who the fifth player is. They've put it out for bid. I know our contract is due at the end of this year, sometime in October or November. We have been told that another vendor has been selected. The total revenues from Kmart are not in the top 15 or 20 of our P3 customers. So they are not in kind of the top tier. But we have other performance management solutions in the works with Kmart to the point where we expect total '07 revenues from Kmart to be at or above '06 revenues from Kmart.
Operator
Laura Lederman, William Blair.
Laura Lederman - Analyst
Nice quarter, a few questions. One is cash tax rate. I know you talked about the tax rate on the P&L for the year, but is that the same thing as the cash tax rate? And if not, what is the difference? What is the cash tax rate?
Don Volk - CFO
For tax cash rate, we pay taxes on our deferred revenue that is collected. And we have -- we have NOLs from Webhire that we'll be able to use against that. So essentially, the rates are pretty much the same.
Laura Lederman - Analyst
That's very helpful. Also, and I hate to ask this question, but there was a rumor going around last week -- you probably know it -- that sent the stock down that you guys lost a major customer. Besides Kmart, are you aware of any such loss? Because I would love for you guys to refute that on this call.
Rudy Karsan - Chairman, CEO
Thanks for the opportunity to refute that. Generally, our policy is we don't respond to rumors because the problem with responding is when you respond, then people accept your answer. But when you don't, then they assume it's true. Having said that and given that we are on an open call, the answer is we're very, very, very confident of the guidance we've given. We're not aware of any major losses. We have bumped up top line and bottom line significantly. We wouldn't be doing that with impending loss of a major customer. We just wouldn't.
Laura Lederman - Analyst
Sorry to bring that up.
Rudy Karsan - Chairman, CEO
No worries at all.
Laura Lederman - Analyst
Separately on the economy, a number of technology companies have missed their results. Can you just comment on the general economic environment? I realize how you can save companies money, so maybe you would still do well in an economic environment that's weakening. But what are you hearing from your large customers because a lot of them might have a better feel for the economy than we would?
Rudy Karsan - Chairman, CEO
I guess we're distributed enough through the different verticals that we're seeing kind of strengthening in the healthcare vertical, either because of the Webhire acquisition or because we've just made more inroads. Generally, from our customers what we're hearing is we're really not hearing any major concerns at this point in time. If we did, we wouldn't -- again, I'll go back to if we did, we wouldn't be increasing our guidance both for the top line and bottom line. So, there is a sense of nervousness about the general economic environment. The part I think -- I'm not an economist by any stretch of the imagination -- but the part I think where Wall Street analysts as you're looking at unemployment rates you might not be building into consideration is that the number of retirees of people leaving the workforce has now started to climb dramatically to a point of I think it's north of 150,000 terminations per month exiting from the workforce.
So in order to maintain our unemployment rate, I think the numbers before had to be approximately 180 to 200,000 new jobs created. For 2006 and beyond, that number is now about 150,000 new jobs created. So this economy does appear to be slowing down a bit. The baby boomers are reaching age 60. They are starting to retire. The net impact is that for solutions such as ours and unemployment rates to be where they are at, you would expect that the delta would start to reduce because of the exits from the workforce. That is about the best way I think I could explain it.
Laura Lederman - Analyst
Final question which is -- there is also rumors going around -- sorry to mention another rumor -- about pricing and the recruiting space. Can you talk a little bit about what you're seeing? Are there vendors that are being aggressive? Just generally, what are you seeing in that piece of business?
Rudy Karsan - Chairman, CEO
Let's see -- kind of the best way -- let me answer that question using numbers. Being inaccurate is the easiest way -- 73.7% gross margin, which is about 2.7% higher than we've been in the last seven, eight quarters; operating margins of 19.4%, which is about 6% higher than we've been in the last 6 to 8 quarters. If there are those pressures, I think they are more -- I'd suspect they are more off a salesperson's view of the world than looking at it from a kind of a high level -- a high corporate level. We haven't seen it dramatically. If we had, you would have seen a shrinking of our margins, which you haven't.
Operator
Brad Mook, Boenning & Scattergood.
Brad Mook - Analyst
Can you guys talk about the average annual revenue increasing past 700? And you gave some metrics around increasing adoption of multiple applications. Can you qualitatively or quantitatively discuss the effect on that number of increasing penetration within the actual customers, maybe additional divisions or expanded deployments of single applications?
Rudy Karsan - Chairman, CEO
What we're seeing is -- one of the things we experimented with was to do kind of a bulk kind of a sale. So we would put in two of our solutions and see if we could do it better from a marketing standpoint or wrap one or two solutions at the time of initial sale. And we're seeing some of those methods of marketing gain traction. So you are seeing that in the overall number climbing from 30 at the end of last year to north of 40 in terms of multiple solutions this year.
So as those solutions start to get implemented through the year, you will then see that the average number, which you said is over 700,000 -- as we approach the end of the year, you should start to see that number climb as well. So that 40% growth rate that we've had historically over the last three to four years in terms of P3 growth. We, at this point in time, I would say are fairly confident that we will meet or beat that CAGR of 40%.
Brad Mook - Analyst
If you look at your EPO practice, how does the headcount break out within that group domestically versus internationally? I know you had a lot of developments done internationally. Are you doing some recruiting practices over there as well?
Rudy Karsan - Chairman, CEO
Yes, we are doing -- you see the way we are breaking up our EPO practice is we have democratized information. So as we are breaking out the linearity of the information that goes to the customer, whether it is on the search component side or the screening side or the consulting side as they are trying to wrap their arms around the recruiting challenges that they face, where there is a people count we will move some of those jobs to either India or Malaysia, mostly India. So some of that sourcing and some of that expertise that existed in the US is moving across the Pacific to India.
Brad Mook - Analyst
Can you give me a sense as to the distribution?
Rudy Karsan - Chairman, CEO
We're not commenting in terms of -- we haven't commented in terms of how many jobs are in EPO and how many are in non EPO. I don't think we've ever done that, right, Don?
Don Volk - CFO
Right. Again, go back to the gross margins; that should give you the answer.
Brad Mook - Analyst
You mentioned trying to get more productivity out of the sales organization -- a big jump in Q1 in terms of personnel and now leveling off a bit. Can you just give a qualitative assessment as to how much productivity you expect to squeeze out of the existing force and what your plans might be later in the year in terms of expansion?
Rudy Karsan - Chairman, CEO
We expect to kind of grow our sales force at 50 to 60% of the rate of growth of our revenue. This year to date, we have grown our revenue 54% and we have grown our sales force 26%. So based on our guidance for our expectations I should say for next quarter, we are expecting to see growth rates in the 55 to 60% range. I would say any increase in the sales force this quarter would be minuscule as we maintain that relationship of about 50 to 60%, so maybe net addition of 2 or 3 or one way or the other up or down.
Brad Mook - Analyst
Then, I guess just finally in terms of your positioning, you guys have a nice blend of solutions and services. Certainly, that's a competitive advantage or at least it would seem to be in talking to your customers being able to offer both the services and the technology. Are you seeing any encroachment from either the professional services organizations or the technology organizations who are seeing your success and now trying to move in that direction?
Rudy Karsan - Chairman, CEO
We've seen some -- a couple of the private firms that I have mentioned that they are expanding their range of solutions. Obviously, we're seeing Kronos by Unicru and kinds of things coming into the space from that way. In terms of the other big EPO providers -- I'm sorry HRO providers or the larger -- the technology providers we haven't really seen a lot of encroachment from that perspective yet.
Brad Mook - Analyst
Nice quarter.
Operator
(Operator Instructions). Andrey Glukhov, Brean Murray.
Andrey Glukhov - Analyst
Congrats on a good quarter. First of all, could you update us on the launch of your new technology platform?
Rudy Karsan - Chairman, CEO
The new technology platform will -- we're looking at data. If you remember, we were talking about it at the end of last year, early this year to be around Q1 of '07. After we did the Webhire transaction, we said that we wanted to take a closer look at the commonalities of the two platforms and make sure that our product roadmap would incorporate a solution that would be suitable for a larger number of customers in a larger number of verticals.
We have completed that evaluation, and I would say we're looking at a beta now. We should be late Q1, early Q2 with kind of moving customers in a big way let's say 12 to 15 months from now. We don't have specific dates on that. But by the time of the next call, I will be able to share on this call exactly kind of what the rollout dates are that we are expecting to meet or beat.
In terms of just design, we're very, very excited about it. As I mentioned I think on the last call, there's a lot of features and functionality that will give us a competitive disruptive advantage to our competition. We're really focusing on ease-of-use, the ability to transition easily by hiring managers -- from hiring managers to recruiters, just scrolling features in the software, ability to populate folders much easier -- just a lot of really, really cool things. I am just very grateful to Alan Cooper's team for helping us think through some of these issues like he did with Apple.
Andrey Glukhov - Analyst
That helps. Don, as far as the deferred revenue, did you guys have any onetime items in deferred?
Don Volk - CFO
No onetime items.
Andrey Glukhov - Analyst
And of the $5 million in deferred that came in last quarter as a result of Webhire acquisition, can you talk or give some color how much of that have you drawn down this quarter?
Don Volk - CFO
Approximately $500,000.
Andrey Glukhov - Analyst
What else -- lastly, Rudy, any more color to kind of future inorganic growth plans?
Rudy Karsan - Chairman, CEO
Future inorganic growth plans, which means are we buying more companies, right?
Andrey Glukhov - Analyst
Pretty much.
Rudy Karsan - Chairman, CEO
We can't comment on names as you know. But we are aggressive. We are acquisitive. We are looking at organizations that meet our criteria of either more solutions, geographical distribution or solution or content expansion, either one of those capabilities. And we also look at them being accretive out of the gate. So if we can find organizations that meet this criteria with the same kinds of demands we faced on Knowledge Workers, Webhire and Scottworks over the last say three quarters or four quarters, we would be very interested.
Operator
David Rudow, Piper Jaffray.
David Rudow - Analyst
Just a question on the guidance. Did you give guidance on other income for Q3 in the full year?
Don Volk - CFO
We did. You have to subtract to get it, right? So we gave guidance on total income and subscription and then the difference is other.
David Rudow - Analyst
I was talking below the line, like interest income?
Don Volk - CFO
No, we do not give that for -- we're giving non-GAAP EPS.
David Rudow - Analyst
We can back into it that way. What is your blended rate on your tax from an interest perspective?
Don Volk - CFO
Our blended rate on our tax from an interest -- well, our interest is tax free.
David Rudow - Analyst
I'm sorry; I'll rephrase that. What is your interest rate that you're getting on your cash on the books, the blended rate?
Don Volk - CFO
About 4%.
David Rudow - Analyst
About 4%? Okay, thank you very much.
Operator
Michael Nemeroff, Wedbush Morgan.
Michael Nemeroff - Analyst
So I just want to talk about the renewal pricing. I've been hearing a lot of chatter out in the industry about renewal rates or renewal pricing being more competitive recently than in the past. Is there any validity to that chatter?
Rudy Karsan - Chairman, CEO
If it was, our gross margins would be shrinking, not expanding.
Michael Nemeroff - Analyst
Then what percent of your customers renew at a higher rate? Or do they buy more products to get to for a higher rate? Is that how it works with you guys?
Rudy Karsan - Chairman, CEO
So what we do is, if they do purchase new modules, we treat that as new business and it's not part of our renewals. So the renewals only look at like to like. If there's any additional seats or expansion on the part of the customer, that is also treated as new business.
Michael Nemeroff - Analyst
Then, I don't know if I missed this, but were there any success fees during the quarter?
Don Volk - CFO
Just our typical quarter in success fees. We average about $100,000 in success fees every quarter.
Michael Nemeroff - Analyst
Then just for the P3 customers, I guess part of the confusion over the last couple months is what would happen if a P3 customer did not renew and if the revenue just kind of fell off in the model, would it just not be there to pick up for a couple of quarters until you sign a customer with revenues of same or more size?
Rudy Karsan - Chairman, CEO
Let me try and just kind of quickly answer; Don, just jump in. So if you assumed that there is 65% of our business comes from P3 roughly, right? So 65% of roughly round numbers, that's $25 million. So you get P3 revenues around $15 million a quarter. Divided by 80, it's about $200,000 per quarter. So if we do lose a P3 customer, we have to sell an extra $200,000 quarterly or $800,000 annualized to make up that difference.
Michael Nemeroff - Analyst
But on the subscription side because it takes a couple of quarters to get them on, you would need to try and make that up two quarters in advance of losing that revenue, correct?
Rudy Karsan - Chairman, CEO
Correct. And given that we've upped our guidance for both subscription as well as total gives you an idea that we're probably not in significant danger with any large customers between now and the end of the year for those who would've done that.
Michael Nemeroff - Analyst
Then, Don, just to verify, you said mid-20s operating cash flow. And could you just give us an update on the CapEx expectation for the remainder of the year?
Don Volk - CFO
Yes, the CapEx has not changed from --
Michael Nemeroff - Analyst
$7 million?
Don Volk - CFO
Yes.
Operator
There are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.
Rudy Karsan - Chairman, CEO
Once again, thanks a lot for joining us for our Q2 conference call. As we said at the end of the first -- as we have said over the last three conference calls, we're just really excited about the market. It is growing, continues to grow and our numbers continue to show that. So thanks for your time and until next quarter. Goodnight.
Operator
Thank you, everyone. That does conclude today's conference. You may now disconnect.