International Business Machines Corp (IBM) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Kenexa Fourth Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS) And now I'd like to turn the conference over to Mr.

Don Volk, Kenexa's Chief Financial Officer.

Please go ahead, sir.

Thank you, Tom.

With me today on the call is Rudy Karsan, our Chairman and CEO and Troy Kanter our President and COO.

Today we will review Kenexa's Fourth Quarter 2007 results which were announced after the market close this afternoon.

We will also provide guidance for the first quarter and full year 2008 outlook.

We will then open up the forum for questions.

Before we begin, let me remind you that this presentation may contain forward looking statements that are subject to risks and uncertainties associated with the Company's business.

These statements may contain, among other things, guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property, and the development of products.

Additional information that may affect the Company's business and financial prospects, as well as factors that would cause Kenexa's actual performance to vary from our current expectations is available in the Company's filings with the Securities and Exchange Commission.

Also, I would like to remind you that today's call may not be reproduced in any form without the express written consent of Kenexa.

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

I will discuss the reconciliation of adjusted numbers to 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 Office, Rudy Karsan.

Thanks, Don, and thanks to all the people joining us on the call as we review our fourth quarter results which were highlighted by strong cash flow and revenue and non-GAAP earnings per share that were in line or above our guidance.

Our momentum with new customers continues to be strong with interest in our Kenexa Recruiter BrassRing offering helping to drive a record number of new preferred partner customers in the fourth quarter.

Kenexa is among the largest talent management vendors and we believe we continue to grow faster than the industry growth rates.

As we enter 2008 and beyond, we believe that Kenexa's industry-leading technology domain expertise, proprietary content and a large and growing customer base positions us well competitively.

We are highly focused on continuing to leverage this position to drive profitability and cash flow for our shareholders.

Taking a look at the numbers for the fourth quarter, October revenue came in at $47.7 million, an increase of 31% year-over-year.

Subscription revenue, which is the most strategic component of our business, came in at $38.7 million, an increase of 30% year-over-year and above the high-end of our guidance for the quarter.

The year-over-year growth in subscription revenues was driven primarily by solid bookings across our key product categories and continued strength in our renewal base.

From a profitability perspective, we generated record non-GAAP operating income of $10.3 million which was within our guidance range and represented a quarterly non-GAAP operating margin of 21.6%.

Non-GAAP EPS was $0.32 in the quarter, above our guidance.

Of note, we incurred over $2,000 or about $0.01 per share in professional expenses and other fees related to the evaluation of a potential M&A opportunity that we did not move forward with.

This expense was not anticipated at the time we provided our guidance for the quarter.

Looking at cash flow, we generated $15.6 million in cash from operations during the fourth quarter bringing our full year total to $38.6 million which is up over 100% compared to 2006.

We believe that Kenexa is unique from the perspective that we're generating year-over-year revenue growth that is above the industry average while also delivering best in class profitability margins with strong cash flow.

We expect each one of these characteristics to continue in 2008.

Since our last earnings call and the analyst day that we hosted in early December, the market sentiment regarding the health of the economy has continued to deteriorate including recently published job reports.

As a result, investors have been understandably concerned regarding what this might mean for software vendors in general and talent management vendors in particular.

If the hiring environment and the state of the economy continues to worsen over the course of 2008, our experience tells us that it is more likely than not that it eventually becomes a more difficult selling environment for all vendors.

If such a situation were to occur, we have said it before and we will reiterate it again, we will do whatever is reasonable and possible to protect the earnings of Kenexa and we believe we are one of the best positioned vendors to do so based on our relative critical mass, existing high levels of profitability and our global execution model.

One can continue to speculate on the economy but all we can speak to with certainty is what we currently see occurring in our business and the talent management market.

On that basis, we just signed a record number of new customers in the fourth quarter, our pipeline remains robust and our customers and prospects have not, at this time, changed their buying behavior.

A characteristic of the hiring market that is positive for talent management vendors is the fact that the strong majority of hiring every year relates to replacing workers that turnover as opposed to net new job growth.

At the same time, the performance manager market is more focused on retention and productivity of existing employees.

From a high level and long-term perspective, the key underlying drivers of market demand remain the same - aging of the workforce, the declining tenure of employees, increased globalization, fluidity of organizational structures and pressures on the HR department to minimize costs.

Irrespective of whether IT budgets come under increased scrutiny in 2008, we're confident that these factors will persist for the foreseeable future and we believe that creates a positive long-term demand environment and market opportunity for Kenexa.

In any market environment, we believe that Kenexa's unique value proposition of software, content and services positions the Company well to continue gaining market share.

If you look at the types of people employed at Kenexa, the types of sales reps Kenexa uses and the top leadership we have brought on board by several acquisitions, all are very different than what you might see from a typical software company and we think this clearly distinguishes us in the talent management market.

Unlike most software companies, our beginning focus is how to solve business problems for the HR department and business executives as a whole.

Then we go about doing so by using the best combination of technology, content and services.

We believe that talent management is increasingly viewed as a strategic priority by the world's largest 2,500 organizations and these are the situations where Kenexa competes and performs the best as a result of our unique approach.

A significant event during 2007 that enabled Kenexa to better lead the talent acquisition needs of the high-end of the market was the integration of our acquisition of BrassRing.

BrassRing brought Kenexa a very strong, functionally rich, on demand solution that has multi-language capabilities.

This was previously a hole in Kenexa's broad suite of solutions.

We are very pleased with the market reception that we've been seeing relative to our high-end offering.

During the fourth quarter we closed business related to our Kenexa Recruiter BrassRing solution with customers such as Baxter International, Sony, Vortech Pharmaceuticals, Home Depot of Canada, [McCain] Foods and Air Products among others.

To put our momentum with the Recruiter BrassRing solution more in perspective, we added several times the number of new customers in the fourth quarter alone compared to what BrassRing added on a stand-alone basis for the entire full year of 2006.

At the time we announced the BrassRing acquisition, we stated that we were confident we would be able to increase the growth of their business as a result of combining the strength of their technology offering with Kenexa's much larger brand distribution and long-term financial viability.

We believe our progress, after doing the first full year following the acquisition, provides evidence that we are being successful in doing what we set out to accomplish.

In addition to winning new customers, we continue to enjoy renewal rates of over 90% related to the Kenexa Recruiter BrassRing solution.

It is also encouraging to hear the positive commentaries from customers and prospects as it relates to the continued execution of our R&D plan, numerous releases and advancements that we are making to what was already a leading technology solution in the marketplace.

During the fourth quarter we also won new customers such as McDonald's where we are designing an assessment system for the recruitment of their hourly paid staff at over 1,200 restaurants spanning the UK and Northern Ireland.

As it relates to our employee retention solutions, we closed business with customers such as Siemens, Molson Coors, US Bank, [CVS], AMC, Chipotle, Expedia.Com, Alkem Labs and AstenJohnson.

High quality customers such as these provide ample opportunity for Kenexa to expand our presence over time as we demonstrate a unique value which is evidenced by consistent and solid growth in our P3 metrics.

This metric increased to over the 1.2 million level in the fourth quarter reaching the upper end of our 30% to 50% growth target in this metrics year-over-year.

Taking a look at our overall customer base at the end of 2007, we have more than 4,000 customers including over 500 preferred partner customers.

Those are customers that spend more than $50,000 annually with us; 131 of those preferred partners are in the Fortune 500 and we have just under 200 of the Fortune 500 companies as customers in total.

We're highly focused on continuing to get our foot in the door at these companies with the largest 2,500 organizations in the world being the primary target of our efforts.

We believe the breadth of our value proposition is unique in the industry and it provides us with a significant long-term opportunity to expand our presence with these companies over time.

The EPO segment of our business which we discussed at length at our last earnings conference call is an area that provides Kenexa with a unique opportunity to build close relationships with customers.

We have a dozen or so EPO customers and it's a majority of our business -- minority of our business at 15% to 20% of our revenue but it provides us with domain expertise that no other on demand software company has.

Our perspective on this segment of our business has not largely changed since our last earning call.

Our expectations take into consideration the elongated sales cycles faced during the third quarter combined with the fact that it will not be until the second half of the year that we are in a position to better leverage our global infrastructure capabilities.

On the margin, developments in our EPO business have been more positive than not over the past couple of months.

In particular, we have previously shared that our expectation was for the Company's EPO customer base to be net even at the halfway point of 2008 and that we were targeting to be up one EPO customer on a net basis by the end of the year.

Furthermore, we shared with you that we had three renewals in the year.

We do not plan on providing a detailed progress report on a quarterly basis; however, in the short-term we will provide greater perspective in order for investors to increasingly understand what is driving this portion of our business.

With respect to renewals, we were successful in renewing a deal with a biopharmaceutical company while we were not going to continue our relationship with a company in the manufacturing industry.

In terms of new business activity, while we've not completed all the details to a new EPO relationship with a large technology vendor, we have already begun the initial stages of implementation work during the first quarter.

If we are to move ahead in this regard, we would be net even which is consistent with our expectations and we continue to believe that we will finish the year with at least one net new customer.

And based on opportunities we are currently pursuing, we may get to this level somewhat sooner than we originally expected.

In summary, our fourth quarter results were solid and close out a year in which Kenexa had many important achievements.

We significantly grew our customer base, successfully integrated the BrassRing acquisition, expanded our global presence, grew our brand recognition as a leader in the talent management market.

This all contributed to our revenue growth and market share gains in 2007.

But we are even more proud of our strong profitability and cash flow.

We faced some challenges during the third quarter however we took quick actions to improve our performance in these areas and are optimistic about our overall growth and profitability outlook for 2008.

As I have said many times before, we believe that there will be very few large companies to ultimately emerge from the talent management market in the next few years.

We continue to believe Kenexa is well positioned to be one of those winners due to our broad suite of technology solutions across both the higher end and retention side of the market of proprietary content and domain expertise.

I will now turn it over to Don Volk to review the financials in greater detail.

Don?

Thanks, Rudy.

I will now review our results for the fourth quarter of 2007.

Let me start with the P&L.

Total revenue for the fourth quarter was $47.7 million, an increase of 31% over last year and 2% on a sequential basis.

Total revenue was in line with our guidance range.

Within total revenue, subscription revenue was $38.7 million representing growth of 30% on a year-over-year basis and 1% sequentially.

Subscription revenue was above the high end of our guidance for the quarter.

At 81% of total revenue, subscription revenue was slightly above the high end of our targeted mix of the high 70% to 80% range.

The remaining $9 million of total revenue in the fourth quarter came from other and professional services which increased 36% over last year and 5% compared to the prior quarter.

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

Our clients typically purchase multi-year subscriptions with an average length of approximately two years and our diverse customer base continues to renew in the 90% plus range.

During the quarter we added over 50 preferred partners and average annual revenue out of our top A&E customers, what we refer to as P3, increased to over $1.2 million.

This was at the high end of our target for the year and is up from the $800,000 level at the end of 2006.

Turning to profitability, we will be providing non-GAAP measures for each fourth quarter 2007 expense category which excludes stock-based compensation charges associated with the implementation of FAS 123R and amortization of intangibles associated with previous transactions.

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

Non-GAAP gross margin was 73% in the quarter.

This was up approximately 2% points from the prior quarter due to the higher mix of subscription revenue combined with the wind down of the EPO engagement that we discussed last quarter.

We continue to expect non-GAAP gross margins to fluctuate within our long-term target of the low 70% range depending on the mix of business at any given quarter.

Looking at operating expenses, non-GAAP sales and marketing came in at $9 million or 19% of revenue, a slight increase in absolute dollars on a sequential basis but down 1% as a percentage of revenue from a year ago.

Non-GAAP R&D expense came in at $4.5 million, consistent with the prior level and representing 9% of revenue.

This is at the high end of our long-term targeted R&D spend of 6% to 9% of revenue.

Non-GAAP G&A expenses were approximately $9.6 million, an increase of approximately $700,00 on a sequential basis and representing 20% of revenue.

The increase in G&A expenses was related to the over $200,000 expense incurred related to professional fees tied to the acquisition opportunity we evaluated but did not move forward with.

In addition, the fourth quarter included increased expenses associated with our expansion into Europe.

Our non-GAAP income from operations was a record $10.3 million for the fourth quarter.

This represented an increase of 29% on a year-over-year basis and a non-GAAP operating margin of 21.6% in line with the prior quarter and our guidance range.

During the fourth quarter, our non-GAAP effective tax rate for reporting purposes was 29% resulting in non-GAAP net income of $7.9 million and non-GAAP net income per diluted share of $0.32 based on 25.2 million shares.

This was above the high end of our guidance.

Non-GAAP net income per diluted share was $0.31 in the year ago period, however, it was based on a lower effective tax rate of 19% and 21.2 million shares outstanding.

The year-over-year increase in shares outstanding is the result of the secondary offering completed in early 2007, offset to some degree by the execution of our share repurchase program in the fourth quarter of 2007.

Turning to our results on a GAAP basis which include approximately $800,000 related to the allocation of stock-based compensation and approximately $1.2 million related to the amortization of intangibles associated with previous acquisitions.

The following were expense levels determined in accordance with GAAP - cost to goods sold $13.2 million, sales and marketing $9.2 million, R&D $4.4 million and G&A $10.3 million.

For the fourth quarter, our GAAP income from operations was $8.3 million or a margin of 17%.

Also, for the December quarter the GAAP net income applicable to common share holders was $5.9 million resulting in GAAP diluted EPS of $0.24.

The reconciliation of GAAP to non-GAAP expenses, and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.

Kenexa had cash and cash equivalents and short-term investments of $96.5 million at December 31, 2007, a decrease from $113.8 million at the end of the prior quarter.

The decrease in cash was primarily the result of $25.5 million in cash used to repurchase the Company's common shares during the quarter.

In November, we announced that the Board had authorized the Company to repurchase up to 2 million shares of our common stock.

We have completed our share buyback during the first quarter of 2008 consistent with the terms of the plan.

The cash out-flow relative to the repurchase plan was partially offset by $15.6 million in positive cash from operations in the quarter.

It is not unusual for cash from operations to be flat-ish or even down in the fourth quarter compared to the third quarter.

However, it was up 44% sequentially.

For the full year 2007, Kenexa generated $38.6 million in cash from operations, an increase of over 100% compared to $18.6 million in 2006.

The significant increase in cash flow on a year-over-year basis has been driven by our strong profitability, incremental improvement in the efficiency of our operations as we proceeded with the integration of BrassRing acquisition and the momentum of our business.

Accounts receivable DSO's were 60 days compared to 60 days at the end of the prior quarter and 60 days at the end of the year-ago quarter and 68 days at the end of the year-ago quarter.

And our deferred revenue at the end of the quarter was $35.1 million.

And now for a quick summary of our full year 2007 results.

Total revenue was $181.9 million representing an increase of 62% compared to the full year 2006.

Subscription revenue was $148.7 million, an increase of 64% compared to the full year 2006 while professional services and other revenue was $33.3 million, an increase of 54% over the same period of 2006.

Non-GAAP income from operations which excludes stock-based compensation expense, amortization of intangibles associated with recent acquisitions and one-time consulting fees and tax benefits related to research and development credit carry-backs was $37.6 million for the full year 2007.

This represented a 68% increase compared to the full year 2006.

Non-GAAP net income per diluted share was $1.16 for the full year 2007, an increase compared to $0.96 for the full year 2006.

On a GAAP basis and for the full year 2007, income from operations was $31 million, net income was $23.5 million or $0.93 per diluted share.

This compares to GAAP net income of $15.9 million and $0.78 per diluted share for the full year 2006.

I'd now like to turn to guidance for the full year and the first quarter of 2008.

For the full year 2008, we are reiterating the revenue and EPS guidance provided following our analyst day in mid-December.

We expect total revenue of $221 million to $227 million, subscription revenue to be $177 million to $182 million, non-GAAP operating income of $44.6 million to $45.4 million.

Assuming a 30% effective tax rate for reporting purposes and 24 million shares outstanding, we expect our diluted non-GAAP EPS to be $1.38 to $1.42.

For the first quarter of 2008, we are also reiterating the revenue and EPS guidance provided following our analyst day.

We expect the following - revenue to be $48.2 million to $49.2 million, subscription revenue to be $38.6 million to $39.4 million, non-GAAP income from operations to be $6.9 million to $7.3 million.

Assuming a 30% effective tax rate for reporting purposes and 24 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.22 to $0.23.

Our first quarter and full year 2008 guidance assumes a $2.3 million one-time charge related to the opening of our new development office in India.

This represents a net impact of $0.10 per diluted share.

We currently expect our sequential growth to increase in the second quarter due to a combination of the strong increase in BrassRing related business in the second half of 2007 and the fourth quarter in particular.

The ramping of the new EPO customer that Rudy referred to in his remarks combined with a solid pipeline of business that we continue to pursue.

As always, we will provide more specific 2Q guidance when we host our 1Q earnings call sometime in May.

In summary, our fourth quarter results were in line or above our guidance and we completed a year in which Kenexa delivered solid revenue growth, a non-GAAP operating margin north of 20% and strong cash flow.

As we look to 2008 we believe that Kenexa's differentiated business model and value proposition will help us to gain market share and we will remain highly focused on delivering growth, profitability and cash flow.

We'd now like to turn the call back to the operator to begin the Q&A session.

Tom?

Thank you.

(OPERATOR INSTRUCTIONS) Steve Koenig, KeyBanc Capital Markets.

This is Justin [Bandy] filling in for Steve.

A quick question, I was wondering our linearity was in Q4 and also what closer rates were like.

And does your 2008 guidance anticipate similar close rates to those that you saw in 2007?

Linearity was pretty stable through the quarter and the answer to your second question is yes.

Thanks.

Brendan Barnicle, Pacific Crest Securities.

I was wondering if you could give us any sense on what you think P3 might grow at in '08 and also a little more color on why subscription revenue will be down sequentially in Q1.

That's not the typical pattern.

You answer the second question, Don.

I'll answer the first question.

Okay.

Go ahead with the first.

P3 we are -- what we're thinking about is that we're going to be reevaluating the whole P3 program for our customers for 2008 and it's not a street reporting number.

It's actually the way we operate the business.

I think we will complete most of this, Brendan, by the end of -- I want to say February, maybe early March.

And it's a strategic priority for us and so it's a big growth driver.

I expect it to be a strong number but we'll share more specifics next quarter.

On the guidance, Brendan, what we do on our guidance is we take our total revenue in the range and then we just multiply it times 80% to project subscriptions.

If you go back and look at history you'll see that that's been our pattern.

Ajay Kasargod, Piper Jaffray.

Don, as a follow-up to the prior question asked, in the past you're kind of Q4 to Q1 revenue growth was much more substantial than the current year.

Maybe it's a law of larger numbers but this year is a little bit more muted.

Can you just kind of talk about that relative to your guidance and is it just the law of large numbers or is it less customer signings?

I want to start with that question first.

Well, don't forget last year between Q4 and Q1 in Q4 we had half of a quarter for BrassRing which was $4.5 million and then we jumped up in Q1 to a $9 million run rate.

So you have a one time benefit of $4.5 million last year Q1 versus Q4.

Okay.

And then also when you guys are -- like in the current economic even, Rudy, you addressed this in your opening remarks, where would you consider to be the most challenged in your outlook?

Would it be with your P3 customers or would it be with your other customer base?

Could you give us a little bit of a better handle on that?

Yes.

If you think about it in terms of growth, the current environment is very tight for anything related to housing, obviously, and financial companies.

If we look at our current P3 customer base it is extremely varied by vertical.

So it's really hard for me to give you a global answer by P3 versus new prospects.

We tend to think of the market more in terms of verticals.

What we are really seeing is our growth is driven by total job changes, not necessarily by net new job growth so as the environment gets tougher, and if it does get tougher, you will see that there might be some movement in the total number of employee growth where it will be affected.

But as of now, we haven't seen any signs.

And if you remember on the analyst day, the analysts asked the questions off the customers directly to see if their budgets had shrunk.

And the answer, I think uniformly, we got was, "no, they haven't." And that's really what we're seeing.

Great.

And then just let me add a little bit more to the Q1 number.

Bear in mind that the big customer, the big EPO customer that we lost in Q3/Q4, had a very large amount of revenue in Q1 of 2007.

So if you're comparing Q1 '07 versus Q1 '08 you almost have to treat that as a divestiture.

Could you give us a basis of how much that was last year just so we can have a better apples-to-apples comparison?

It was about $1.5 million a quarter.

I think the number we used at the end of the earnings call for Q3 was $1.5 million.

Don, do I remember correctly?

That's correct.

And then just one final question.

Can you just talk in a little bit more detail about the one-time expenditure and in the end terms of the new facility and I just want to make sure that's clear.

Your current guidance of $1.38 to $1.42 now includes that expense.

Did you -- was that expense factored when you gave preliminary guidance at the analyst day?

Thanks.

Yes.

It was.

Peter Goldmacher, Cowen and Company.

I'm sorry, I just want to follow-up on that $0.10 from India.

So when you give guidance of $0.22 to $0.23 in Q1 are we backing out that dime and then so you're actually raising your full-year guidance by keeping it the same or are you taking down 1Q guidance?

We're including the $2.3 million in our expenses for Q1 and our expenses for the full year.

So without that $2.3 million we would have been -- we would be $0.10 a share higher.

So you're leaving 1Q the same and taking up the full year earnings?

No.

Let me try answering this, Peter.

So if I just assume that it's going to be $1.40 which is between $1.38 and $1.42, the $1.40 stays at $1.40.

We had it built in.

So Q1 is going to come in in the low 20's and the balance of the year will be in the $1.15 to $1.20 range.

So Q1 consensus was $0.30.

Right?

And consensus for the full year is -- so Q1 consensus is $0.30.

Q1 for the full year is $1.40?

Yes.

So let's say Q1 is still $1.40.

No.

What you do is you're going to take - I'm just using round numbers here - Q1 is $0.20 and then Q2 will be $0.40, Q3 will be $0.40, Q4 will be $0.40.

Got it.

Sounds great.

It's round numbers, this isn't guidance.

That's fine.

I understand that.

One of the statistics you guys have talked about in the past is your visibility into numbers heading into the new year.

I think you've said historically it's been about 70% visibility into the income statement heading into the new year just with stuff rolling off on the balance sheet and contracts.

Has that number changed at all?

The number is consistent.

It's 69 to 71 depending on whether you look at the top end or the bottom end of our range.

So smack in the middle of 70.

And on the competitive environment, have you started to see any pricing becoming more of a factor from some of your other competitors?

Hi Peter.

This is Troy.

No, pricing has been pretty consistent.

Great.

Thanks, guys.

Nate Swanson, ThinkEquity Partners.

I was wondering if you could talk about your R&D initiatives for 2008 and what new products or features we should be looking for this year.

2008 as we explained during the analyst day, Nate, was that it's going to be really focused in on bringing unified services on our platform of ATS's, rolling out that in kind of the second half of next year.

You will see a new -- not a new ATS but in that evolution of the ATS of our legacy ATS, which we haven't named yet so we've got the core platform coming up which is going to be the services model for the entire group of both performance management as well as AST as well as testing solutions.

And we are looking for consolidation and robustness in 2008.

We will see some significant features and functionality improvements in the second half and we're beginning -- we've already signed on, I think, five [Beta] customers on that and we're thinking of doing a full demo sometime in Q1.

Will that be available for us to play with?

Yes.

We want to -- we're trying to figure out what the best way to handle that would be.

Then just a quick follow-up, in terms of your partner strategy relative to your competitors, it seems like you've spent little time developing your partners' relationships or network.

What is your thought there?

We continue trying to expand that but we haven't been able to execute very well on that front.

We've got a minimal amount of revenue coming in from partnerships.

I would say less than 3% of our revenues from partners, maybe 4%.

We developed a stronger partnership on the federal government side with CGI and that being a source of new business for us.

Partners with the HR consulting firms like Mercer and Towers Perrin have been a source for us but we don't -- we haven't got to the 20%, 30% number where a lot of our competitors are at.

We are under five on that.

And we're going to continue to hammer away at it.

I guess we've been kidding around internally, in 2006 that number was 1%.

Somebody said (inaudible).

Andrey Glukhov, Brean Murray, Carret & Company.

I guess first of all, Rudy, you guys basically announced that you completed the buyback and you bought back the stock at higher levels than where it's now.

What are your thoughts on the future use of cash in that regard?

So we didn't say what we bought it back for and I don't really know what the average price was and I don't know what now is either so I won't comment on that because I just don't know.

Future uses of cash, we haven't really made a decision on that.

We are still inquisitive.

Real property prices have not come down.

Don't know what the future is going to bring.

We have a Board meeting next week and it's an item on our agenda and we'll continue to think and talk about it and when we've made a decision then we'll be letting the street know immediately as to what that decision is.

And then, Don, on the metrics front can you update us how many sales guys you had and maybe the sales force hiring plans for in the next year?

I'll let Troy do that.

We were a little over 150 and the way we planned for this year is we'll probably look at new hires or expansion in that 15 to 20 range.

Thank you.

Robert Breza, RBC Capital Markets.

This is Joe Wilson on for Rob.

Thanks for taking my question.

Just a quick question on CapEx expectations for the year, maybe if you could just give some color around that and then also just kind of following up on the sales force headcount which geographies, I guess, do you kind of expect to grow the headcount there?

Do you want to do the geographies, Troy?

And then I'll do the CapEx?

We are, let's see, from a geography perspective we're a little more heavily weighted on North America.

We are experiencing more expansion in Europe, so as a percentage that will grow and also we'll be adding a smaller number but in Asia as well.

So a rough breakdown would be US 60% of that 50 to 20 number and then the balance between Asia and Europe.

On the CapEx, Joe, we expect somewhere between $6 million and $12 million.

It's hard to give specifics because of the timing of certain decisions related to some international development.

Brad Mook, Boenning & Scattergood Inc.

I want to make sure I understand what's going on in the EPO business.

I think you said you had three renewals this year and so far you've gotten one and lost one?

Correct.

And when you said -- I think in addition to the renewals you had said at the analyst day you had two customers kind of late in the pipeline.

Correct.

We signed one and we've still got two customers late in the pipeline.

And the renewal that you lost?

What was your thinking on that when you gave your initial guidance of a net one out for the year?

Did you think you were going to lose it or were you hoping to get it?

What we were hoping to do, Brad, was to be net even at the end of six months so we knew we had three events, two customers in the pipeline and one renewal, and we were hoping for one out of those three events to occur.

Out of the three events, two have already taken place where we're still at net one.

The other one that was still in the pipeline is still in the pipeline and we've added one.

And that's why we said on the margin we're now positive.

That makes sense.

And then looking at, Don, your comment about the Q1 subscription guidance.

A little surprised at the way you approached delivering that guidance just taking 80% of the total revenue number and I'm curious, when you look at (technical difficulties) sequentially does that take you by surprise or is there something in there that makes it logical?

No.

We do not expect subscriptions to be down sequentially.

If you look at the mid-point and the high-end, it's up sequentially.

So we don't expect that subscription to be down at all.

Fair enough.

I hadn't done the math.

I was looking at somebody else's.

Thank you.

Laura Lederman, William Blair & Company.

The deal that you lost, the renewal on the EPS side, can you talk a little bit about (technical difficulties) and why you won the other one and then, separately, can you talk a little bit about why you walked from that particular acquisition.

Was the prize not a fit and also along the lines of acquisitions are you looking at small ones and large ones?

So it's two questions with a sub-part, so really four.

Thanks.

Sure.

Let's see, start with the acquisition.

Price and fit relative to where we expected our numbers to be versus where we saw it when we got into due diligence.

So, again, there's a lot of properties that we're interested in but we just aren't willing to sort of come forward at some of the valuations that people are asking for now.

Laura, as it relates to our EPO wins, I think the big one was, again, being able to integrate all the pieces that we bring to bear to have a technology solution, a measurement, an analytic solution and assessment solution combined with our global expansion that we've worked on to be able to fulfill these large complex global deals.

I think that was a big differentiator for us in that win.

On the one that we did not get renewed, there were some client-specific issues that we had been working on and I just don't think that we were able to get those resolved in a way that was going to work for both us and for the customer.

So in general our renewal rates have been fairly significant but on these large complex deals there are always exceptions.

And acquisitions, are you looking at large ones and small ones just to get a sense of the size and potential intent on the business going forward?

We're looking at a little bit of everything.

It's a rapidly consolidating market.

There are a lot of companies in the space that, again range on in size from small to large.

Thanks so much.

David Heinz, Needham & Company.

This is Richard Davis.

David dialed in for me because I don't know how to use phones I guess but in any case I remember at the analyst day you guys were talking about taking the EPO business and kind of disaggregating it or unbundling it in the service offering such as discovery generation, screening, etc.

Did you do that in the December quarter or is that something that should be anticipated in '08 and is that a positive selling or what kind of response have you gotten from customers with regard to that?

It's a work in progress.

So we've begun to operationalize that and package that up and communicate that up with customers and prospects.

So we don't expect to see any revenue impact for that until late '08 but, again, the reception that we've received from the marketplace has been favorable.

And then the follow-up question would be, I think you talked about the pipeline -- at the analyst day you were talking about kind of 36 to 37 inbound inquiries a week over the preceding month at the time and then you had observed that if you kind of got over 35 inbound inquiries that would be a firm record and those kind of things.

How has that trended, if you're willing to talk about it.

And if you don't, I understand.

But I figured I would ask.

We're seeing consistent growth in that inbound activity.

Our 13-week moving average month-over-month is moved up by at least one.

Great.

Thank you very much.

Bryan McGrath, Credit Suisse.

Seems like all my good questions have already been asked and answered.

So what are you going to do?

So you're already telling us it's going to be a bad question?

Well, some of those have been asked too but -- going back to that divisibility metric, that was one of my good questions, could you just briefly review kind of how you define it because I remember you have a very specific definition of how you define divisibility.

Yes.

It's contracted revenue for the next 12 months, plus renewals are 90%.

And real quick, you haven't talked at all about your backlog or your booked, the unbilled balance.

I know you don't normally ever talk about it quantitatively but can you give us some sense of what we're looking at there or maybe relative to what you're showing in deferred revenue or just some idea of how that's looking?

Well, because we've been growing fairly rapidly, like over 20%, you'd expect that number to be a record at the end of every quarter and it continues to be a record.

Thank you very much.

Chris Rowen, Soleil Securities.

My questions have been answered.

Thanks.

Brendan Barnicle, Pacific Crest Securities.

Don, as we go back to look out next year at sort of the expense lines, you haven't given much guidance around that.

Where would you expect to see sort of the greatest leverage as a percentage of revenue and where might we see things increase as a percentage of revenue?

When you say next year, are you meaning '09 or '08?

'08.

So Brendan, we said that -- and we've said this since that analyst day, is that we do not expect an increase in our operating margin as a percentage in '08.

So we are looking at this year as a -- an example is the $2.3 million we're spending on that move in India is that we're looking at this as a 20% plus year but not significant expansion in those margins.

Any more color within sales and marketing, R&D and G&A how they may move around?

I expect that $2.3 million to be distributed between G&A and R&D.

And then I expect to continue to leverage G&A going into the future provided that we also are investing in sales and marketing on our marketing expenses and we're investing in our expansion in Europe which will run through G&A.

And there are no further questions in the queue at this time.

I'd like to turn the call back over to Mr.

Karsan for any closing remarks.

Thank you very much.

We really appreciate the support of our customers, our employees and our owners.

Have a terrific evening.

Goodnight.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.