International Business Machines Corp (IBM) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome today's Kenexa's Corp.

first quarter 2008 earnings conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue for questions.

Would like to remind everyone that this conference is being recorded.

I'd like to turn the conference over to Mr.

Don Volk, Chief Financial Officer.

Please go ahead, sir.

Thank you Keith.

With me on the call today is Rudy Karsan, our Chairman and Chief Executive Officer, and Troy Kanter, our President and Chief Operating Officer.

Today we will review Kenexa's first quarter 2008 results and provide guidance for the second quarter and full year 2008.

Then we will open up the call for questions.

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

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

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

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

We may refer to certain nonGAAP financial measures on this call.

I will discuss the reconciliation of adjusted numbers to GAAP numbers and a reconciliation schedule showing the GAAP versus nonGAAP financial measures is currently available on our Company website with the press release issued earlier today.

Our website is located at www.kenexa.com.

I will now turn the call over to Rudy Karsan.

Thanks Don and thanks to all of you for joining us on the call as we review our first quarter results which were highlighted by subscription revenues and nonGAAP EPS that was either in line or above our guidance.

We continue to see new customers moving forward with purchase decisions in the face of a more challenge macroeconomic environment.

We believe this is a result of the growing awareness of the talent management market and the increasing power of Kenexa's brand on a global basis.

We are recognizing the benefits from our investments in building out our international operations and we will continue to invest in our business and focus on a combination of organic growth and strategic acquisition.

We have consistently stated that we believe the talent management industry would continue to consolidate and we believe the longer the macroeconomic climate remains challenging the more likely the consolidation will occur.

Based on the strength of our current market position we believe that Kenexa is well positioned to be one of the market consolidators.

Taking a look at the numbers for the first quarter, our total revenue and profitability came in in line with our guidance, as Don will elaborate on this further.

As we stated on our last call if the macroeconomic -- macroeconomy were to worsen materially during the year we would do all that is reasonable and possible to continue driving the Company's profitability.

We believe we are and will continue to be one of the best positioned human capital management vendors to do so based on our critical mass, profitability and increasing global execution model.

That said we continue to see a high degree of interest in our solutions and solid flow of new customers moving forward with purchases.

The fact that our work has continued to retire or otherwise turnover irrespective of the net new job growth as an individual Company may experience.

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

From a longer term perspective our experience has indicated that the underlying drivers of market demand remain the same.

The aging of the work force, declining tenure of employees, increased globalization, fluidity of organizational structures and pressures under each of our departments to minimize cost.

This creates long-term market demand and (inaudible) Kenexa's uniquely positioned to meet the needs of customers based on our unique value proposition of content, services and software.

We believe that talent management is increasingly viewed as a strategic priority by the world's largest organizations and is ideally suited to our go-to-market approach that is focused on leveraging the domain activities of Kenexa.

This is very different than pure software companies and is something that we believe create a competitive advantage, significant value for our customers and long-term relationships.

With a strong competitive position and value prop we are highly focused on expanding the power of Kenexa's brand on a global scale and have been investing aggressively to do so.

Since 2005 we expanded a number of countries we operate in from three to 18, our flagship connector recruiter BrassRing solution supports 29 candidate languages and 11 recruiter languages.

We now have approximately 40% of our employee base located outside of the United States.

And in the fourth quarter of 2007 we completed construction of our own building in India that has the capacity of 700 employees to support our future growth plans.

I will share more on this development activity later in my remarks.

We recently led to our global presence and domain expertise with the acquisition of London based Quorum International a leader in providing EPO services to multinational corporations throughout Europe, the Middle East and Africa for nearly a decade.

There were several strategic reasons we acquired Quorum.

First it expands our global delivery capabilities in the EMEA region.

Second it enhances Kenexa's domain expertise in the technology vertical.

And third it further expands the breadth and depth of our EPO solution.

A good example of Quorum's capabilities involve the leading supplier of networking technologies with over 40,000 employees operating across 32 countries.

In the first six months of its engagement Quorum delivered over $300 which is ahead of plan and made service improvements in all the objective areas, 30% improvement in candidate quality, reduce (inaudible) times by 30 days and cost were higher but were reduced by a third.

After the successful six months the contract was extended for another year and turned to higher with (inaudible) from contract inception and cost reduction was obtained through the achievement of 90% nonagency hiring.

From an overall perspective, development in our EPO business continue to be more positive.

First we accelerated our global delivery capabilities with the acquisition of Quorum.

Second we signed and are implementing the new EPO customer in the technology sector that we announced last quarter.

And finally I'm pleased to share with you that we recently engaged two additional EPO customers, one in the life sciences vertical and the another being a European based technology vendor.

To summarize we're encouraged by the recent progress of the EPO segment of our business which is an area that provides Kenexa's domain expertise as no other on demand software company can match.

It also provides us with a unique opportunity to build close relationships with customers where we can sell our broad suite of capabilities over time.

With the acquisition of Quorum we have now diversified and expanded our EPO customer base and this portion of our business now represents in the mid 20% range of our revenue.

I would now like to discuss the driver to the majority of our revenue which is our technology solution.

During the quarter we were pleased to see continued solid demand for our solutions highlighted by over 50 new preferred partner customers joining Kenexa which compares to 40 new preferred partner customers in the prior year period.

We continue to be pleased with the market reception that we're seeing relative to our Kenexa recruit of BrassRing solution which is our high end offering in the talent acquisition space.

From an overall perspective we signed customers such as [Regeneron], Hong Kong Jockey Club, [Zachary] Brand, FCC Services, [Aregants] $0.99 Stores and coming among others for our talent acquisitions solutions.

As it relates to our employee retention solution we closed business with customer such as Ingersoll-Rand, Liz Claiborne, [Kosha Bank], Select Comfort, Ocean Spray, [Sereanna Motor], [Europe], EAFF and Harry and Davis.

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 $1.3 million level in the first quarter.

We're highly focused on continuing to get our foot on the door of these companies with the largest 2500 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 provide us with a significant long-term opportunity to expand our presence with these companies over time.

In addition to having a broad suite of solutions we believe the strength of our technology continues to position Kenexa as a market leader in the (inaudible) marketplace.

During the first quarter we had several major new releases, including Kenexa CareerTracker 4.8, Kenexa Recruiter 18 and Kenexa Recruiter BrassRing 11, which was a third major release of Kenexa Recruiter BrassRing since the acquisition and included more than 70 functional upgrades, more than any release in the history of the product.

A final quarterly milestone I wanted to highlight was the successful opening of our newest global campus in Vizag, India.

This campus will become a key part of Kenexa's software global research and development organization and will be run by Tom Wanuga, our VP of Development for India and Malaysia.

Tom holds post-graduate degrees from MIT and a past employee of IBM, Tom J.

Watson research center and he will be overseeing Kenexa's offshore R&D efforts.

In summary our first quarter results were solid and we believe our growth is poised to increase beginning in the second quarter based on business that I disclosed in the past two quarters, our high level of renewal rates and a solid pipeline of opportunities that we continue to execute against.

We believe our investments expand our global presence at (inaudible) and the acquisition of Quorum further fully (inaudible) our improving EPO business and has a global delivery capabilities that were a strategic priority for the Company.

We continue to watch the macroeconomic environment carefully and are highly focused on delivering revenue growth, strong operating margins and cash flows for our shareholders.

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

Thanks Rudy.

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

Let me start with the P&L.

Total revenue for the first quarter was $48.2 million in line with our guidance and an increase of 14% over last year and 1% on a sequential basis.

Within total revenue subscription revenue is the most strategic revenue source and it was $39.2 million representing growth of 13% on a year-over-year basis and 1% sequentially.

Subscription revenue was in line with our guidance for the quarter and at 81% of total revenue it was slightly above the high end of our targeted mix in the high 70% to 80% range.

The remaining $9 million of total revenue in the first quarter came from other and professional services which increased 20% over last year and was roughly in line with the prior quarter.

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

As a reminder, our clients typically purchased 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 which compares to over 40 preferred partners customers added in the year ago period.

As Rudy pointed out our P3 metric was over $1.3 million at the end of the quarter which was up from over $1.2 million at the end of 2007.

Turning to profitability, we will be providing our nonGAAP measures for each first quarter 2008 expense category which excludes stock-based compensation charges associated with the implementation of FAS 123R and amortization of intangibles associated with previous transactions.

All comparisons will be using the nonGAAP current period results.

NonGAAP gross margin was 73% in the quarter.

This was roughly in line with the prior quarter and prior year.

Following the acquisition of Quorum, we expect our longer-term nonGAAP gross margins to fluctuate in the 70% range plus or minus depending on the mix of business in any quarter.

Looking at operating expenses, nonGAAP sales and marketing came in at $9.6 million or 20% of revenue, a slight increase in absolute dollars on a sequential basis and slightly higher as a percentage of revenue from both the prior quarter and year ago periods.

NonGAAP R&D expense came in at $4.4 million, down roughly $100,000 in dollars sequentially and representing 9% of revenue.

This is at the high-end of our long-term targeted R&D spend of 69% of revenue.

NonGAAP G&A expenses were approximately $10.7 million an increase of $1 million on a sequential basis and representing 22% of the revenue.

We typically experience a seasonal sequential increase in G&A expenses during the first calendar quarter of the new year.

In addition we had previously expected a one-time $2.3 million expense associated with the move to our new campus in Vizag, India.

However, after detailed research on accounting for relocation expenses we determined that we should record $300,000 in the current quarter and will recognize $2 million balance over the remainder of the year.

Similar to our past expectations we do not expect this charge to reoccur in 2009.

Our nonGAAP income from operations was $9.1 million for the first quarter.

This was above our guidance due to the fact that we did not incur the full relocation charge in the quarter.

However on a normalized basis compared to our guidance we were in line with our expectations.

During the first quarter our nonGAAP tax rate for reporting purposes was 25% resulting in nonGAAP net income of $7.3 million and nonGAAP diluted EPS of $0.31 based on 23.6 million shares outstanding.

Had we taken the full relocation charge in the quarter, as we previously expected when we provided our first quarter guidance, our nonGAAP EPS would have been $0.25.

Turning to our results on a GAAP basis which include $1.7 million related to the allocation of stock-based compensation and $800,000 related to the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP.

Cost of good sold $13.1 million, sales and marketing $9.9 million, R&D $4.5 million and G&A $12 million.

For the first quarter our GAAP income from operations was $6.5 million.

Net income applicable to common shareholders was $4.8 million resulting in a GAAP diluted EPS of $0.20.

The reconciliation of GAAP to nonGAAP 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, cash equivalents and short and long-term investments of $68.1 million at March 31st, 2008 a decrease from $96.5 million at the end of the prior quarter.

The decrease in cash was primarily the result of $24.6 million in cash used to repurchase the Company's common shares during the quarter.

During the first quarter we completed the remainder of the first repurchase program that was announced in the fourth quarter of 2007.

In addition, in February we announced that our Board of Directors had authorized the Company to repurchase up to 3 million additional shares of our common stock.

During the first quarter we repurchased approximately 760,000 shares associated with this second repurchase program.

The cash flow out-- the cash outflow relative to the repurchase plan was partially offset by $3.6 million in positive cash from operations in the quarter.

You will note that we have reclassified $21.3 million of our auction rate securities which are all AAA credit rated from short-term to long-term assets due to the current liquidity of the auction market.

In addition, we recognized the related temporary impairment charge of approximately $1 million to our stockholders equity balance at the end of the quarter.

We remain comfortable with the Company's overall liquidity based on our cash and short-term investments balance of approximately $47 million and our strong cash flow capabilities generated from our high level of profitability.

Accounts receivable adjusted DSO were 62 days at the end of the quarter compared to 60 days at the end of the prior quarter and 62 days at the end of the year ago quarter.

Our deferred revenue at the end of the quarter was $37.5 million an increase of $2.4 million or 7% sequentially.

From a seasonality perspective, we typically expect deferred revenues to be flat to down sequentially in the first quarter of the year.

And now I'd like to turn to guidance for the full year and the second quarter of 2008 which includes the impact of the Quorum acquisition which closed on April 2nd.

For the second quarter of 2008, we expect the following: Revenue to be $56 million to $57 million.

Subscription revenue to be $43.7 million to $44.2 million.

NonGAAP income from operations to be $10.9 million to $11.2 million.

Assuming a 30% tax rate for reporting purposes and 22.9 million shares outstanding, we expect our diluted nonGAAP earnings per share to be $0.34 to $0.35.

For the full year 2008, we expect total revenue of $230 million to $235 million.

Subscription revenue to be $179 million to $185 million.

NonGAAP operating income to be $47.2 million to $48.2 million.

Assuming a 30% tax rate for reporting purposes and 23 million shares outstanding we expect our diluted nonGAAP EPS to be $1.47 to $1.50.

As a reminder, our full year 2008 guidance includes the $2.3 million one-time charge related to the opening of our new office space in India which we incurred in the first quarter.

There are two additional factors I would like to point out relative to our guidance.

First we have reduced our interest rate assumption from 3.5% to 3% as a result of the decline in interest rate which impacts our interest income projection for the full year 2008 by approximately $300,000 or $0.01 a share.

Second by way of background, Quorum's revenue in 2007 was approximately $15 million and they are operating at profitability margins that were in the mid-to-high teens.

As evidenced by the increase in our EPS guidance we expect the acquisition of Quorum to be accretive to our nonGAAP EPS consistent with our stated acquisition parameters.

In summary, our first quarter results were solid.

As we look ahead we are encouraged by the progress of our EPO business, continued high levels of customer renewals and our ongoing business momentum.

In light of the current macroeconomic environment we believe Kenexa presents an attractive combination of revenue growth, operating profitability and cash flow.

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

Keith?

(OPERATOR INSTRUCTIONS).

We'll go first to Brendan Barnicle with Pacific Crest Securities.

Thanks guys.

I was interested in EPO business you mentioned you had two new wins.

Rudy, I thought you had said maybe for the full year originally you'd expected was it 4?

And so I wanted to get sort of an update on where we are now versus what you had expected?

And then also are you seeing any change in that business as the economy slows as people potentially look to outsource more work of all sorts including the recruiting?

So what we said at the beginning of the year is we were -- we had three renewals coming through, and that we would expect to kind of win one or two, lose one or two and finish the year at net plus one, okay.

So far in the two renewals we have one, one and lost one so that's-- and now we've signed on three.

So we are plus net two, which is above the plus one that we said we would be.

However, part of the win -- one of the wins was in Europe, which was a combination between us and Quorum.

So at this point in time generally on the EPO front we are-- we've moved from being kind of neutral to mildly positive to being somewhat positive in this business.

Then the EPO business also takes a while for the revenue to start hitting our income statement, so the loss that we didn't renew in Q1 was reflected in our numbers in Q1 because it was terminated then.

The new sign ons will start coming in towards the later half of this quarter in Q2 and into Q3.

We won't see a huge growth from it in Q2.

In general the EPO business has been going well.

We continue to get (inaudible) and at this point in time it's-- I think if you remember on the analyst day we said it was on critical watch.

We're now basically saying it's off the critical watch.

It's become part of the normal business and kind of in the second half of this year we don't expect it to be a drag on overall growth like it has been over the last six quarters.

Terrific.

And Don you mentioned the big improvement in deferred revenue sequentially which is not typical seasonally.

What was it specifically that drove that?

Some of these new EPO deals?

That was part of it, Brendan.

But typically we got a budget flush at the end of Q4 and we'd get a spike in Q4.

Well we didn't get that budget flush this year so we didn't have that spike and I believe it just carried over into Q.

And we had a typical strong increase in deferred in Q1.

Terrific.

Thank you.

We'll go next to Ajay Kasargod with Piper Jaffray.

Thanks.

My first question is Don, just can you review again, it sounds like you had some complicated accounting but why you didn't recognize all the Vizag cost in Q1?

And also I think you recognized 13% of that cost so $300,000 of $2.3 million in Q1 that you said the-- you said the quarter would have been $0.25 when you were looking for a $0.10 charge, so just can you reconcile for that again for us?

Sure.

We didn't recognize the entire $2.3 million because relocation accounting tells us to recognize the expense when incurred and it defines when incurred as when it's paid out.

So although we've committed to the employees for the relocation expenses we have not paid it out any more than $300,000 in the first quarter.

Okay?

So then if you go and say okay, we paid out $300,000 and we recognize that in Q1, we didn't recognize $2 million.

So if you tax effect $2 million at 70%, you get $1.4 million and you divide $1.4 million by -- $1.4 million by shares outstanding you get $0.06.

We had $0.31, take $0.06 off we would have been at $0.25.

Okay, great.

And then, Don, just my follow-up would be if I look at cash real quick on the balance sheet, and this also-- I know that in the first quarter it looks like cash is down about $28.4 million from last quarter.

That includes the long-term investment and I know the buyback was $24.6 million.

So is this-- is that-- I mean is my math right, is it a typical loss, cash loss for the last quarter?

Or can you just reconcile why cash was down above the buyback?

Well cash was down-- well cash-- operating cash was up $3.6 million, and if you -- you know that typically Q1 is a slow cash flow quarter for us from an operating cash flow perspective, but $3.6 million positive was encouraging to us.

The only other reason cash was down was because of the buyback.

Okay.

And then it looks like your CapEx was about 3.-- was about $5 million in the quarter a little bit higher than traditional.

Just can you tell us why and I'll get back in the queue?

Thanks.

Sure.

It was a little bit higher as the final payments on the building in Vizag and some equipment purchases.

We'll go next to Brad Reback with Oppenheimer.

Hey guys, how are you?

Good.

Yourself Brad?

Excellent, excellent.

Hey, Rudy, when you look out at over the business longer term, how large do you see the EPO business getting as a percent of revenue?

It's hard to judge it but I think it'll be in the 20% to 25% range, Brad, which is a number we were at in '05 and '06.

And then in '07 we lost a bunch of business and we dropped into that 15% to 20% range.

Now with the purchase of Quorum we're in the mid-20s.

I-- if it continues to grow at that same level, then it should remain in the mid-20s.

I expect that the solutions business has been growing faster than the EPO the last couple of years.

We're not strategically trying to get more of that business.

We find that the partnerships are allowing us to get more and more into that business.

So I guess long-term we haven't put a cap on it and said we won't do more than 30% of our business will be EPO or no more than 25% would be EPO.

But if I look at historical numbers I would say it'll be in the 20% to call it 27% range, so 23% to 25%.

Okay.

And one of the metrics you've given in the past and if I missed it this call, I apologize is sort of the amount of inbound activity you've seen from your customer base.

Could you give us any sense where that stands in relation to where it was last quarter, maybe a year ago?

It was in the low 40s in Q1, which is slightly higher than same period last year and up sequentially by about 10% from Q4.

Excellent.

Thank you very much.

We'll go next to Joel Fishbein with Lazard.

Hi, Don.

Just real quick, can you just, if you can, give us a little bit of guidance on how Quorum is going to -- revenue is going to flow through the year?

Okay.

We're not going to break out Quorum on a quarterly basis moving forward because they're now fully integrated into our overall EPO business.

We're running a single global EPO business not two different companies.

So we did share that Quorum generated revenue of approximately $15 million last year.

So a quarterly contribution would be approximately $3.75 million, and Quorum will be included in our results for only three quarters of 2008.

Okay.

Great.

Thanks a lot.

We'll go next to Peter Goldmacher with Cowen and Company.

Hi guys.

Can you give us a little bit of your thoughts on the recent clash between [Toleis] and [Bourbon], how you see that changing the landscape for you guys probably in the next three to six months and then over the next year or so?

Well I guess all along we have said that the space is going to be consolidating and we're one of the consolidators.

We expect [Toleis] to be one of the consolidators.

So this is something that while we couldn't have predicted the exact quarter and the exact transaction, it is something that we felt that's going to happen over the long-term.

So really what happens now is customers will have a choice between [Toleis] and (inaudible) as far as ATS goes.

It only kind of leaves (inaudible) and [Touchstone] as the other two.

So we're now-- it's become a four horse race now from 15 that was call it two to three years ago.

Expect it to be in a sense more competitive because kind of the three or four players are going to be tighter against one another as we're jockeying for position and it's going to be less competitive from a standpoint of you don't have as many smaller companies kind of mudding the waters and effecting your pricing.

Three out of the four companies are publicly held so they've got the protected margin so we expect the pricing will be somewhat the same.

Troy, do you want to add anything further to that?

No.

Is that what you were looking for or do you have anything specific?

No, that's helpful.

Thanks a lot guys.

We'll go next to Bryan McCarth-- excuse me, Bryan McGrath with Credit Suisse.

Hi guys.

Hi, Bryan.

Just a couple of quick ones here.

I think you've exited a lot-- exited '07 with 150 sales reps and you've talked about adding around 50 in '08-- in 2008.

So maybe you give us an update on that and Quorum has kind of got you ahead of schedule there?

Yes, Bryan.

At the end of Q1, we had 170 plus sales reps at 75% again carrying a quota and that does not include Quorum.

And then we'll update you with Quorum sales reps as we go through the quarter.

Okay and then real quick on CapEx, I appreciate that Quorum would happened in Q1, it was a little bit higher than I (inaudible).

But what should we be modeling for the year?

Is there any change there?

No.

We've said that CapEx is going to be between 8 and 12 for the year and that's where we expect it to be.

We expect it will slow down a little bit from Q1 as we go through the year, as we finish paying with that-- for that building.

Great.

Thank you very much.

We'll go next to Richard Davis with Needham & Company.

Thanks.

Two questions.

One, with regard to, kind of what Petter talked about as best you can tell, obviously you can't tip in too much, but are you guys still in the market for acquisitions?

That answer would probably be yes.

And then two, we have not heard this but sometimes we hear from investors who get stressed out, they talk about platform integration and things like that.

Has that at all been a hurdle, have you seen that been a hurdle to your selling cycles at all?

Okay so for the first question, I think you answered it for us, right?

Yes.

Just wanted to make sure, but I had to ask anyway.

Confirm it, yes, we are acquisitive.

We did do one transaction this year.

We did do I think three last year and five the year before, so that answers that.

Platform integration I guess the best way I can answer is from Kenexa's perspective, and I can't answer from any of our competitors perspective, but from Kenexa's perspective we're really not looking to sunset any of the assets that are out there right now.

They each have their road map.

We're continuing to enhancing, we're continuing to sell it.

And as long as there's value for the customer and profitability for Kenexa and growth opportunities that are available, we're going to continue to do that.

And as we evolve the products over a period of time needless to say that we will get the best of everything into all our products.

We will use common services in our architecture we'll become more efficient from a pricing and a costing perspective and from an R&D perspective.

And then the customers will really decide at the end of the day, when and if we sunset.

Which at this point in time there is no plan for it in the future.

Does that answer your question?

Yes, no that's perfect.

Thanks.

We'll go next to Robert Breza with RBC Capital.

Thanks.

Don maybe just a quick follow-up to Joel's prior question about Quorum and thinking about the growth rate there, the quarterly breakout was helpful.

Was there any write-off that you-- or write-down of revenues that you had to take from an accounting perspective that we should think about as we think longer term about 2009?

And then maybe Rudy if you could just talk about what your perspective outlook for the global EPO business could grow into 2009 or a broad range would be helpful?

Thanks.

So on any deferred revenue, their deferred-- Quorum's deferred revenue was minimal so there was no particular write-off of deferred revenue that you have to think about.

And the second part Rudy?

It was $15 million last year.

As we think about the business, we integrated, we don't break it out separately our thinking.

And I think this is consistent with what we've done in the past, Rob.

It's from an optimism perspective, what we're seeing is that North America is much more fragmented than Europe is.

One of the greatest demand, again our stand box is that global 2500.

As we look at that, those large global buyers are looking for a global solution.

We believe we are uniquely positioned now with the Quorum acquisition to be able to provide the most holistic global solution.

So from a forward couple year perspective on it, we're quite optimistic about the solution that we can bring to bare in the marketplace now with the combined entities.

Great.

Thank you.

In terms of data, let me just add a couple of points.

We're now operating in 18 countries on the EPO front, I think we are now covering 21 languages, Troy?

Yes.

And we are -- we now have four service centers, one in Poland, one in India and two in the U.S.

And we're looking to expand into Ireland as well.

So it's a pretty solid footprint and our clients appreciate it.

We'll go next to Andrey Glukhov with Brean Murray.

Yes, thanks.

Rudy to follow-up on the questions about Quorum, so essentially exiting Q1 you guys were at 13 EPO customers or something like that.

Post-Quorum acquisition, I mean does that metric -- does that acquisition diversify you significantly in terms of the concentration in EPO business?

Yes and no.

So if you go back to last year's numbers, it was at about what 180 something and we said 15% to 20% of our business was EPO, so call it $35 million to $40 million, nice round numbers.

We said that Quorum was 15, so you go 15 over 37, so we've got about 40% more clients.

So I'd say, yes it diversifies us, but I won't use the word significantly.

So the revenue per customer was on the EPO side was comparable to Kenexa?

Yes.

It was consistent in terms of-- both in terms of spread as well as in terms of size.

The means were about the same, Andrey.

Okay.

And then Don, the revenue from Quorum, does it all flow through the nonrecurring component of the P&L, or did they have any recurring engagements?

They have some recurring engagements less than what we had.

It's in the 40% range.

Okay.

Thank you.

We'll go next to David Hilal with FBR.

Great, thank you.

Two questions.

First it looks like your guidance for '08 is going up less than what Quorum brings to the table.

So I wanted to I guess confirm that and understand the nuance there.

Okay.

Our guidance for-- our process for formulating our guidance is the same this quarter as it's been every quarter.

We take a look at the business environment, our business backlog, our renewals, our pipeline, and what we believe we'll close and how that will translate into revenue.

We did that process this quarter and we shared with you our best estimate of what the Company can deliver this year.

We believe the guidance is solid with growth of over 20%.

Adding in strategic acquisitions on top and operating margins of 20% plus with strong cash flow, we continue to see a high level of interest in our solutions.

We just equaled a record number of new preferred partners and we're making progress, significant progress in our EPO business.

So we feel pretty good about things.

Okay.

And then if I could just ask, Rudy I know you don't like to break out specifically performance management versus talent acquisition, but if you can talk about those two areas qualitatively in terms of maybe if one saw more strength in the quarter than the other.

And if in this environment where there's some IT spending slowdown does one tend to do better than the other?

Thanks.

Yes, so we've said historically in the past is our service solutions tend to get slowed down in the first year in slowdowns.

We did see this happen in Q1.

We did see deferrals and slowdowns on that.

So if I was looking at our business in general, we are about 70/30 in '07 between kind of acquisition versus retention or hiring versus retention solution.

I would say Q1 -- I don't have the exact numbers (inaudible), would be probably slightly above 70 on the hiring side and slightly below 30 on the retention side.

Troy, do you want to add anything to that?

Those numbers are dead on.

Great thank you.

Go next to Laura Lederman with William Blair.

Yes, thank you for taking my question.

Can you talk a little bit about acquisitions?

Would they be large, medium, small, all of the above?

Obviously the one you made was relatively small and BrassRing was huge, but if you could give us a sense of sort of bigger than a breadbox and smaller than an SUV?

I'm sorry I didn't understand the-- are you saying what's in our pipeline?

No, would the acquisitions be of small companies and big companies, that's what I'm trying to get at.

Would they be small like Quorum or potentially large like--

What do you mean, future acquisitions?

That is correct.

Micro, small and medium.

Okay.

And if we're going to do a big one we wouldn't say it before we were going to do it anyway, Laura so--

Sure, I-- well I'm just trying to get a sense of if there's just a lot of small ones or a few medium ones.

I'm just trying to get a sense of the balance there.

So you're saying, Laura, Quorum was small or medium?

Quorum was small.

Okay.

So it'd be micro, small and like I said we wouldn't talk about large.

And then we continue to have sort of our three areas of focus on acquisitions, Laura.

It's for number one geographic expansion.

The second would be either expansion of our content solutions or expansion of the technology.

Or third expansion of our industry verticals.

And it'd have to be accretive.

Following-up on the accretive comment, any guidance at all or thought on how much or how accretive Quorum is going to be for '08?

Is it $0.01, $0.02?

Just give us a rough feel for the amount of accretion?

Well we're not assigning a specific level of accretion to the Quorum deal, but that's one of the factors we took into consideration in giving our guidance.

The raise in our EPS guidance was more than the raise that what would be called for by lowering our share count due to the share buyback and then that raise was largely-- the additional raise was largely driven by the accretion of the Quorum deal.

Okay.

That's helpful.

Following-up on an earlier question on the economy besides serving slowing down was there any other piece of the business that felt like it was impacted by the economy?

No.

In general Laura, we're not seeing that.

I think what we are seeing, if I see any differences in our funnel I'm seeing the large complex strategic deals, those are all moving forward at the same rate.

If we look at some of the more category type purchases, that's where we'd be seeing a slight slowdown.

Those are the only minor trends beyond Rudy's comments of our content business on the performance management that we would see.

Thanks so much.

I appreciate it.

We'll go next to Ross McMillan with Jefferies Company .

Thanks.

Just to-- firstly Don.

Was the entire consideration for Quorum in the quarter?

I can see that on the cash flow, is that the entire amount?

There is -- no.

The Quorum deal was done on April 2nd.

So that's outside the quarter.

Okay.

That's fine.

And then just one point of clarification on-- I just noticed the slight sequentially uptick on the young billed receivables.

Any driver to that, any reason why we'd see that in Q1 maybe seasonality or something?

Yes, seasonality.

And that is particularly driven by end of the quarter consulting revenue which is billed in arrears.

Great.

Thank you.

We'll go next to Steve Koenig with Keybanc Capital Markets.

Hi, thanks.

One question and one quick follow-up.

The first question just would be the guidance for subscription revenues look like a strong sequential increase almost $5 million or so.

And even with-- if you assume maybe you said 40% of Quorum is reccuring, it's still a pretty strong increase.

What's driving that?

Well we talked about the back end of our year from Q1, Q2, Q3, Q4 and what's driving that -- the increases in our guidance towards the back end are the deals that we did at the end, the later part of 2007.

Because of our subscription model we don't get our revenues into -- into revenue -- we don't get our revenue into recognized revenue as we sign the deals there.

It's delayed until our implementations.

So that is what's driving that subscription revenue and it's also driving the sequential increases in our revenue guidance.

Okay.

Great.

Thanks.

That helps.

A then just a quick follow-up on BrassRing in particular.

There seems to be some confusion out there among industry analysts and others in terms of how many customers you're adding on BrassRing either in '07 or in the quarter.

And wondering if you'd be willing to comment on that?

And also regarding BrassRing, any plans yet for how you provide them an upgrade path to the new architecture, the core architecture?

Boy that's-- there's a lot of questions there.

So let's go with the BrassRing.

No we do not provide solution-by-solution sales or category sales.

So we have a total of something like 11 products out there.

The sense we have given I think in Q4 was that it was a fairly strong quarter.

We wrote more business then on BrassRing.

And I think in the industry analyst meeting we said we wrote 14, (inaudible) if I remember correctly, was that the right number in Q4 of '07?

Q1 of '08 was also pretty strong quarter for us.

We're deliberately not giving out those deals because a lot of times we add assessment on to it and in some cases we don't.

In some cases we have on boarding attached to it and in some cases we don't.

In some cases we have CareerTracker attached to it and some cases we don't.

So that's why we're-- we avoid giving singular per product data points, because it gets really confusing as you dig down deeper into the various numbers.

Now as far as on the product side on BrassRing we're continuing an aggressive R&D investment there.

Since we've owned the product we've had three major releases.

We do a slip stream every three weeks.

The last release, which was this quarter, I think we had-- I think it was the most robust release in the history of the product.

Added four additional languages including Japanese, Hebrew, Arabic, but really advanced the reporting functionality.

Added really sophisticated analytics to the reporting.

We already had some of the most advanced contact management functionality, we even upgraded that.

So the ongoing R&D is around a common services platform where we're continuing to lift out the very best of all of our applications and build them on a common services platform, which our customers will just receive continually through their slip stream upgrades, as well as through these major releases that we've done.

Okay, thanks guys.

That's real helpful, I appreciate it.

Great.

We'll go next to [Sasha Gorvich] with Goldman Sachs.

Thank you.

My first question would be regarding the international breakdown of your revenues, if you can provide that please?

Sure.

In Q1 '08 the US portion was 82%.

So we continue to grow that outside of U.S.

portion.

And then secondly as a follow-up really, more about regarding sort of the competition and if you have seen really any changes in terms of win rates or maybe more broadly who you're seeing in the deals throughout the quarter or kind of what the (inaudible) situation has changed any from a quarter ago?

Given that most of our focus is in that global 2500, we typically see [Toleio], if it's a European headquartered company, we'll typically see [Stepstone], that's on the hiring side.

Let's see.

When we're selling a more (inaudible) at the category level on performance, that's still a fairly fragmented market where we'll see a handful of privately held.

There's a new public company that we'll see there.

We'll even see some of the ERP stuff there.

On the content side, again very fragmented market depending on what part of the world that you're in, we'll see different competitors.

When we're selling a more integrated wrap together solution, the playing field really changes in terms of who we're competing against typically what we'll see then are people that are trying to coble together partnership.

So I know that's sort of a broad answer.

But it really just depends on what part of the world we're in.

And if we're competing at an individual category level.

Where what we're starting to see more and more in the fun is when where we're wrapping a lot of this stuff together for a much more strategic offering.

But I-- could I-- am I right is saying that it hasn't really changed from a quarter ago, or it did change?

I would say it's fairly consistent.

Thank you.

At this time we have time for one last question in the queue.

We'll go next to Ajay Kasargod with Piper Jaffray.

Thanks, and Rudy, here'-- just a couple quick follow-ups.

Could you kind of give us your customer account, the number of new additions in the quarter?

Yes, certainly we had over 50 new preferred partners as compared to 40 at the same time last year.

And then how about your total client count?

Total client count would still be in that 4,000 range.

Okay and the reason is if I just do some back of the envelope and again this is a little back of the envelope without all of the hard data, but if you're top 80, which is again which grew sequentially to 1.3 million P3 metric, what does that really imply for the growth outside the top 80?

I mean at least in my numbers maybe it's a little flatish or maybe moderate growth.

Can you just kind of comment around that?

Yes, that's consistent with what we're said.

I think we said that on the analyst day and we've consistently said that our sandbox is the largest and the most strategical and most sophisticated employers globally.

So we're really focusing on employees that have over 5,000-- or depending on the part of the world you're looking at any where over 5,000 to over 25,000 employees.

If I look at the top 25,000 employers in the world, I mean top 2500 employers in the world, they mean at about 50,000 employees a piece and that's really our sandbox and that's where P3 continues to do.

So if you look at the balance, very small customers, that's our web traffic.

We don't really sell or market hard there.

It's when it comes in, it comes in.

There's very little human activity that buy the tests over the web, a lot of times using a credit card.

I would say 3,000 plus customers we've never even spoken to.

Okay then lastly just on Quorum, just as we talked about a little bit, just one follow-up there.

Was the Quorum deal driven at all by maybe a customer or two looking for better larger coverage or better coverage on I guess a big multi-national or is it just driven on a strategic requirement?

I think if I look at the way we do transactions it's, as Troy mentioned earlier, it's the basic three reasons are added geography, added offering or added vertical.

Now as we look at our acquisition pipeline, if there is commonality of customer or customer demands for a particular solution, it might speed up an acquisition or it might slow it down, depending on where in our pipeline it sits.

And sometimes if our customer needs we may speed up an acquisition.

In Quorum's case there really wasn't but there were existing customers that said to us that if we had a larger and more global footprint, that they would share more business with us.

And I think on the analyst day we also said that we were knocked out of a couple of RFPs because we didn't have European and Middle East exposure.

And so we're hoping that in the second half of this year we don't ever say that we were knocked out of an RFP because we didn't have a European footprint.

Great, thanks, Rudy.

You're welcome.

We have no questions in the queue.

I'd like to turn the conference back to the speakers for any additional or closing remarks.

All right.

I'd like to summarize as I normally do.

Thanks the street for time and the patience they had with us, the continued support, and as we look into the future we see a fairly buoyant '08 coming up.

Our sequential growth looks pretty strong for this quarter and we're hoping to continue this path for the balance of the year.

Thank you all for your time and good evening.

Ladies and gentlemen, this does conclude today's conference.

We appreciate your participation.

You may disconnect at this time.