International Business Machines Corp (IBM) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, to the Kenexa second quarter 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 (OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference is being recorded and would like to turn the conference over to Mr.

Don Volk, Kenexa's Chief Executive Officer.

Please go ahead, sir.

Thank you, Nicole.

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

Today we will review Kenexa's second quarter 2008 results and provide guidance for the third 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 would cause Kenexa's actual performance to vary from our current expectations, is available in the Company's'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 of this call.

I will discuss the reconciliation of adjusted numbers to GAAP numbers and a reconciliation schedule showing the GAAP versus non-GAAP 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.

Rudy?

Thanks, Don, and thanks to all of your for joining us on the call as we review our second quarter results.

We are pleased with the Company's execution and performance in the quarter, particularly considering the fact that the macroeconomic environment has been both challenging and tough over the past six months of the year.

Our second quarter revenue and profitability were consistent with the guidance we provided last quarter and were highlighted by a material sequential increase in our revenue run rate and another record quarterly operating profit.

At the same time we continued to generate strong cash flows from operations and used our cash wisely to return capital to shareholders by executing against our share buy-back program.

We believe Kenexa is one of the best positioned human capital management vendors to continue to grow profit through this more difficult economic time period as a result of our critical mass, high levels of existing profitability and our increasingly efficient global execution model.

From a critical mass perspective the combination of solid sequential growth and the integration of Quorum International in the second quarter, enable Kenexa to become the first independent talent management vendor to pass the $200 million annualized revenue run rate level, and as we have said in the past we will remain focussed on delivering profitable growth in any market environment.

We consider this our responsibility on behalf of our shareholders.

In terms of the current environment buyers have been more cautious over the first six months of the year and deals get more scrutiny before they're signed.

With another quarter's worth of data points under our belt in this uncertain environment we've slightly adjusted our top-line expectations this year, though we've increased our profitability expectations due to positive impact of our (inaudible) planning efforts.

Even after the adjustment we continue to expect to generate solid revenue growth in 2008 that will result in market share gains.

Don will share more on our financial outlook in a moment.

We believe that the space continues to be viewed as strategic and high-ROI purchase by a growing number of organizations.

Unemployment rates have been on the rise, which increases the available talent pool to hiring managers.

However, the sum of unemployed workers are a small fraction as compared to the number of employees that naturally turn over each year.

At the same time retention and productivity of existing employees become all the more important in a difficult economic environment.

It's also important to not to lose sight of the long term, given that we're still in the early stages of market growth.

We believe the underlying drivers of market demand remain intact.

The aging of the work force, declining tenure of employees, increased globalization, fluidity of organizational structures and pressures on the HR department to minimize costs.

We believe Kenexa is ideally suited to help companies of all sizes, and in particular the largest 2,500 global organizations as they face these issues.

Kenexa's go-to-market strategy combines industry-leading domain expertise with a unique combination of content, software and services.

This is what enables Kenexa to be a true business partner to our customers as opposed to just another software provider.

There are three key -- five key areas that we are focussed on that we believe will help Kenexa to thrive through the current economic environment and execution in these areas should help Kenexa to gain market share and emerge an even stronger Company when the economic environment improves, as it inevitably will.

These five areas are: One, adding new preferred partner customers; two, delivering value to our customers and expanding our relationship;three, expanding our global presence; four, continuing to innovate; and, five, identifying and retaining talented employees to ensure that we continue to execute at the highest level.

I'd like to touch on progress we're made in each of these areas.

First, during the second quarter we are pleased to see a high level of interest in our solutions, highlighted, by over 50 new preferred partner customers joining Kenexa, which is the same record level as in the previous quarter and compares to 40 new preferred partner customers added in the prior-year period.

On talent and acquisitions we closed business with customers, such as: Naval Medical Centers; Mobile Telecommunications Group; Convergys; Amex; PMI Group; and Telephone Data Systems.

As it relates to our employee retention solutions we closed business with customers, such as: Aleon; Foster's Group; Alina Healthcare; Capgemini; Imperial Oil; and [ARASA Benchmark Group].

Continuing to add a healthy number of new customers on a quarterly basis provides Kenexa with a growing opportunity to go back to these clients to sell additional modules in a broad and expanding suite of solutions.

This is our second major focus.

Our ability to deliver value to our customers is evidenced, in part, by consistent and solid growth in our PQ metrics.

This metric increased over $1.4 million at the end of the second quarter, which was up from last quarter and up from the $1.2 million level at the beginning of the year.

Our third key strategic priority is growing our global presence.

At the beginning of the second quarter the acquisition of London-based Quorum International expanded our global capabilities in the EMEA region and in recent weeks we acquired a 49% stake in a talent management company based in China, which will provide Kenexa with local talent management domain expertise and get our foot in the door what could be a large geographic market opportunity over the long term.

This is similar to our previous acquisition of HRC in Germany.

Over the past six to 12 months we have begun to realize the pay back on the increased resources and attentions we have dedicated to these global markets.

An important factor in our growing global success also ties back to our acquisition of our Kenexa Recruiter® BrassRing solution a little over 18 months ago.

This provided Kenexa with key multi-lingual capabilities and a talent acquisition market segment that we previously did not have.

With strong technology and global execution capabilities from a domain expertise perspective we believe we're well positioned to continue scaling our global operations.

Our four strategic priority is continuing to invest R&D to drive innovation.

While our domain expertise and proprietary content are important differentiators that we believe are more difficult to replicate by a competitor, the strength of Kenexa's technology solutions also continues to be recognized by customers and industry analysts.

For example, during the quarter Kenexa was recognized as one of the market leaders in the area of e-Recruitment software by the Gartner Group.

Interestingly, when the same report was issued in June 2008 Gartner Group estimated the market grew by 12% in 2006 and by approximately a similar amount again during 2007.

This represents a data source to demonstrate Kenexa's market share gain.

During the second quarter we continued to introduce new solutions in the marketplace, such as the latest release of Kenexa Recruiter® BrassRing.

We expanded our talent acquisition capabilities to include additional global support, increased multi-lingual and sourcing capabilities and job family expertise.

We also released Kenexa Cultural Fit and Compatibility Fit, which are web-based assessment tools designed to increase retention, decrease turnover, and increase organizational and job commitment.

Kenexa Performance Indicators, or KPI, was launched as a web-based suite of preemployment assessment tools designed to identify perspective employees who have a propensity to be engaged, to work well on a team, and to demonstrate excellent customer service orientation.

Finally, we launched SimsSJT customer service, our new on-line simulation platform designed to assess customer service aptitude.

We will continue to invest in R&D, enhancing our current solutions and introducing modules that enable our customers to implement world-class talent management business processes.

This is a tangible, positive business impact during both robust and weak economic environments.

The final area that we're focussed on is ensuring we have the right team in place to execute our growth plans as we take the Company to the next level.

In order to help Kenexa scale from the $200 million annualized run rate to the $0.5 billion range and beyond we continue to add to our senior executive leadership team.

For example, we recently announced that Tim Beaumont joined Kenexa as VP of sales for our talent management offerings.

Jim has had over 20 years of sales experience, 14 of which in the talent management space, including leading the sales efforts at Vurv during their high growth years.

We also recently welcome Ron Hanston to lead our product strategy across our entire suite of products and solutions.

Ron has a rich ATM background, including Oracle, where he was VP of ATM applications marketing and oversaw all pre-Oracle ATM product line.

In summary, our second quarter results were in line with our expectations.

The market environment remains challenging and our current expectations is that it will be so for the remainder of the year.

We will continue to focus on gaining market share, servicing our customers, driving innovation and delivering strong profitability for our shareholders.

I will now turn it over to Mr.

Volk, to review the financials in more detail.

Thanks, Rudy.

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

Let me start with the P&L.

Total revenue for the second quarter was $56.4 million, consistent with our guidance and an increase of 25% over the last year and 17% on a sequential basis.

The strong sequential growth was driven primarily by increased business activity during the prior two quarters, which started to come online during the second quarter, and secondarily by the integration of Quorum International's operations during the quarter.

Within total revenue subscription revenue is the most strategic revenue source and it was $43.7 million, representing growth of 18% on a year-over-year basis and 12% sequentially.

Subscription revenue was also consistent with out guidance and approximately 77% of total revenue it was within our targeted mix of the high 70% to 80% range.

As a reminder, 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.

The remaining $12.7 million of our total revenue in the second quarter came from other and professional services, which increased 57% over last year and 41% over the prior quarter.

The significant sequential increase was driven primarily of the integration of Quorum International's results in the quarter, as a majority of their revenue contribution falls into our other revenue category.

Turning to profitability, we will be providing non-GAAP measures for each second quarter 2008 expense category, which excludes stock-based compensation charges associated with the implementation of FAS 123(R) and amortization of intangibles associated with previous acquisitions.

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

Non-GAAP gross margin was 70% in the quarter.

This is down from 73% in the prior quarter and 72% in the prior year, and was in line with our gross margin expectations following the acquisition of Quorum.

Looking at operating expenses, non-GAAP sales and marketing came in at $10.7 million, or 19% of revenue, an increase of slightly over $1 million in absolute dollars on a sequential basis, but slightly lower as a percentage of revenue from both the prior quarter and year-ago period.

Non-GAAP R&D expense came in at $4.2 million, down roughly $300,000 sequentially and representing 7% of revenue.

This is down from 9% of revenue in both the prior quarter and year-ago periods and it is written our long-term targeted R&D spend of 6% to 9% of revenue.

Non-GAAP G&A expenses were approximately $11.9 million, an increase of $1.1 million on a sequential basis and representing 21% of revenue.

During the quarter, our G&A expense included approximately $300,000 in charges related to our Indian office move to Vizag.

As we discussed last quarter these one-time moving charges are being recognized throughout the year of 2008 as opposed to all in the first quarter as we originally anticipated.

We do not expect to incur these charges in 2009.

Our non-GAAP income from operations was a record $10.9 million for the second quarter, which was consistent with our guidance.

During the second quarter our non-GAAP tax rate for reporting purposes was 20%, resulting in non-GAAP net income of $9 million and non-GAAP diluted earnings per share of $0.39 based on 22.8 million shares outstanding.

Our tax rate was lower than expected during the quarter due to the positive impact of tax planning efforts on a global basis, and this contributed $0.05 to our bottom line in the quarter.

Turning to our results on a GAAP basis, which include $1.5 million related to the allocation of stock-based compensation, and $1.6 million related to the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP: Cost of revenue $17.2 million; sales and marketing $11 million; R&D $4.3 million; and G&A $12.8 million.

For the second quarter our GAAP income from operations was $7.9 million.

Net income applicable to common shareholders was $6 million, resulting in GAAP diluted EPS of $0.26.

A 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, cash equivalents and short and long term investments of $49.3 million at June 30, 2008, a decrease of 68.1 million at the end of the prior quarter.

The decrease in cash was the result of approximately $20 million related to the acquisition of Quorum, and approximately $5 million in cash used to repurchase the Company's common shares during the quarter.

During the second quarter we repurchased almost 300,000 shares associated with our second repurchase program, which was announced in February.

The cash outflow relative to the acquisition and repurchase plan was partially offset by $12.9 million in positive cash flows from operations in the quarter.

Accounts receivable DSOs were 65 days at the end of the quarter compared to 62 days at the end of the prior quarter and 66 days at the end of the year-ago quarter.

Our deferred revenue at the end of the quarter was $38.7 million, up from $37.5 million in the prior quarter, and over 20% compared to the end of the previous-year's quarter.

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

For the third quarter of 2008 we expect the following.

Revenue to be $57 million to $59 million.

We expect subscription revenue to continue running in the upper 70% range as a percentage of our total revenue.

Non-GAAP income from operations to be $11.4 million to $11.8 million.

Assuming a 25% tax rate for reporting purposes and 22.8 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.38 to $0.39.

For the full-year 2008 we expect total revenue of $225 million to $230 million.

We expect subscription revenue to continue running in the upper 70% range as a percentage of our total revenue and non-GAAP operating income of $45.2 million to $46.2 million.

Assuming a 25% tax rate for reporting purposes, and 23 million shares outstanding, we expect our diluted non-GAAP EPS to be $1.52 to $1.55.

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 will incur throughout the year.

In summary, we remain focussed on maintaining high level of execution and extending our market-leadership position in what is currently a challenging economic environment.

We continue to expect solid growth and strong profitability during 2008 and we believe we are well positioned to both survive through this time period as well as emerge an even stronger Company when the economy improves.

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

Nicole?

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go first to Andrey Glukhov with Brean Murray.

Yes, thanks.

Don, if I can get a couple of metrics around the business.

Historically you guys provided us the revenue contribution from EPO, maybe you can provide us a comparable metric this quarter?

Our EPO revenue is approximately 25% to 30% of our total.

Okay.

All right.

And given the fact that you tweak the guidance, is that assumption consistent going forward?

Yes.

Yes.

Okay.

And the other question I wanted to ask, basically if I look at your guidance, you guys are assuming a slightly faster sequential ramp in Q4 versus what you're assuming in Q3, maybe give us some color, what is it that you're think would help facilitate that?

Thank you.

Andrey, once again looking at our pipeline and our backlog and knowing when the customer is going to come on line.

It was the same question we were asked at the end of Q1, which is how can your sequential growth be so much faster in Q2, and the answer was, because we could see our pipeline.

From what we're seeing right now, Q4 looks like it's going to grow a little faster than Q2 over Q2.

Okay.

Thanks.

And we will go next to Bryan McGrath at Credit Suisse.

Hey, guys, I've got a couple of questions here.

In the past you talked about your visibility metric and I wonder if it might be a could be a good time to review that and see what you're seeing as far as visibility right now, given your guidance.

If you remember, every year at the beginning of the year we give that visibility number that's calculated by contracted revenues plus renewals at 90%, and at the beginning of the year it comes to 70% to 71% of our total guidance for the year.

And then as we proceed through the year it gets -- the percentage becomes more and more, and as Rudy said, we base our guidance in Q4 and Q3 based on that visibility and based on that improved visibility throughout the year.

So that number is getting better but we only give that number on January 1st each year.

All right.

Got it.

I think it's -- I have a good idea on how to model subscription revenue, but I'm just trying to figure out a good way -- maybe give us any hints on what kind of growth rate we should think about as far as modeling other service revenue and other?

Well, as we've always said other revenue is lumpy and it's harder to model.

And with Quorum coming in as the majority of their revenue being other revenue, it's a bigger problem for you.

But that being said, the number that we've said is, in the upper 70% range of our total revenue is expected to be other revenue.

Okay.

That makes sense.

Just maybe lastly can you give us an update on sales rep hiring.

I know you added some last quarter -- or this quarter with Quorum closing, what you you have -- what you ended with and how you're planning on incrementally adding for the rest of the year, or are you on target?

We're on target in terms of the hiring.

We're going through a little bit of a growth.

We hired Tim Beaumont, we hired about three or four ex-Vurv sales people, so I would say our number is now probably closer to 180, about 75% that carry a quota, and we will continue to be very vigilant on those costs as we move forward through the balance of the year.

Okay.

Thank you very much.

And we will go next to Peter Goldmacher with Cowen & Company.

Hi, guys, congratulations on the quarter.

This is Joe Del Callar for Peter Goldmacher.

Hi, Joe.

We looked at each other because Peter never congratulates us.

What's wrong with him?

I'm being nice.

Yes, I hear you.

So now that Taleo acquired Vurv how do you see the competitive landscape shaping up?

Are you guys going to see a tailwind in the near future, or what sort of competitive pressure do you see coming from the combined entity?

Joe, this is Troy.

We see it as an opportunity.

Any time there's consolidation in the market it takes out some of the sloppiness that you'll see on some of the pricing, it sort of narrows the field for us.

We're optimistic of converting some of that business.

It's at the early stages, though.

A number of those clients had long-term contracts, so as those come up for renewal, based on some of the comments from the Taleo management team about converting them to their platforms I'm sure they'll shop, so we're optimistic about trying to win our share of them.

Okay.

Thanks, that's all I had.

And we'll go next to Brad Reback with Oppenheimer.

Hey, guys, how are you.

Hey, Brad.

Just a quick housekeeping note, Don.

On the CapEx side should we expect to remain in this $5.5 million and $6 million range for the remainder of the year?

Brad, we don't expect it to be that high going through the rest of the year.

We have been capitalizing some R&D expenses for new products and we expect that to continue in the $2 million range, but we did pay off the majority of the building in Visag.

We've got about $500,000 left of that.

We did accomplish an office move in our Dallas facility into Frisco.

We did accomplish a couple of other office moves.

We set up our data center in Virginia, moved that from internally.

We set up additional disaster recovery.

So we expect that number to tail off into the last half of the year.

The only major expense is putting up European hosting center in the second half of the year, over and above that.

Got it.

Okay.

And one other question.

With most of your metrics all going in the right direction, retention rates, higher revenue from customers, et cetera, what happened in the last 90 days that caused you to take down the revenue guidance?

Our pipeline, in a word.

Now, when you say your pipeline, Rudy, does that mean that people either cancelled existing projects or pushed out implementation dates?

What's that mean exactly?

A little bit of both.

There has been cancellation of some of our projects that we know that sits on the other and the is delays in implementation and the sales cycles have gone longer.

Troy, do you want to add anything to that.

Yes, it's a tougher selling environment, although we're experiencing success and we believe we're having good reasonable growth considering the market conditions.

But we want to be cautious and responsibility as we see some of these buying decisions get pulled out a little bit.

And are there ay themes across the projects that are getting delayed or cancelled.

I guess what we're seeing and we shared last quarter, we're seeing the larger, more strategic deals, where it's a multi-element deal, those are tending to move through the sales cycle.

Whereas on the radar screen of the operating committee, now having said that, when you get the multi-element deals that takes a little bit longer to get to the income statement and we're seeing the category-level stuff start to elongate on the sales cycle.

Got it.

Great, thanks a lot, guys.

We go next to Richard Davis to Needham & Company.

Okay.

Thanks.

Two questions.

One, Don, did you say what your percentage --I may have missed it, but did you say what percentage of your revenues for this quarter were from existing customers versus new?

If not I didn't write it down so I apologized.

All of our revenue's from existing customers.

So you had no -- no, you had new customers that you added, right.

Exactly.

(LAUGHTER The increase we are running about 60/40 between existing and brand new logos.

Got it.

Got it.

Was that the question?

Yes, that was it.

(LAUGHTER) We hope they're from exist -- and with regard to the China talent management -- again, I'm not as quick on the draw -- did you say it was 49% that you owned and is this bigger than a bread box?

How big is this company or do you have any extra color on the Chinese talent management company you have an investment in?

We're not at liberty to disclosed the name because we don't have official notification from the authorities in China.

With the Olympics and everything else the deal got delayed.

Right.

We have the business deal ironed out and the total revenue that will come into our financial statements in Q2 will be -- in Q3 will be less than six figures.

It will be five figures.

Very, very tiny.

And what percentage did you say you own of it?

49%.

49%.

Got it.

Got it.

Okay.

Those were the two easy questions I had .

Thanks a

Thanks, Brad.

And we will go next to [Sasha Gerovich] with Goldman Sachs.

Thank you.

So my first question would be with the lower tax rate that you had just had and you're guiding towards -- excuse me -- should we now expect for this to be more of a permanent type of a reset with the tax planning you have done?

Yes, Sasha.

And what is really behind that, if you could explain a bit more?

It's the -- it's sales globally.

It is reallocation of revenues into the lower tax rates.

We've gone -- we're going to the IRS for advanced pricing agreement and it's moving revenues, operations, creating that data center in a low tax rate facility in Europe, things of that nature.

Okay.

Now, going back to the question regarding the specifics about the environment that you've been noticing, the three things that you have specifically pointed out -- the cancellation of projects, push out (inaudible) limitations and longer sales cycles -- you did not mention competitive issues, is it that they not occur anymore, or should those be also added?

This is Troy.

I'd say the competitive landscape has not changed that dramatically.

It's fairly consistent with where it has been the past few quarters.

Again from a competitive perspective we see our crows rate -- excuse me, close rates much higher when they're multi-element deals, when they're a much more strategic purchase and then we see a little more competition at the individual product or category level.

Having said that, we still sign on record number of customers this quarter, record in our PQ metric, so a lot of the leading indicators of the business are -- again, we're quite pleased with how we're competing, again, on the new customers, as well as with our current customer base, with the expansion there.

Thank you.

And we will go next to Robert Breza with RBC Capital Markets.

Thanks for taking my questions.

Rudy, as you look on making the changes on the head of sales here, and obviously the more challenging environment we're in, do you think that you're likely to make a change to the sales force, the model, how you sell, and if so, what are you exploring at these early days?

Rob, that's a question that is always work in progress at Kenexa so if you think through the model that we have, this -- in Q2 our sequential growth was the fastest that has been in the four or five quarters, so some of the changes that we took and put in place end of last year we're starting to reap rewards on that.

So as we look in the past we were very -- we were broken down heavily by category level and we were broken down on -- from kind of strategic selling.

Now we're moving more towards geographical distribution of sales force and sales people, so that will be work in progress, and it'll probably stretch into 2009.

Sales and distribution are the continual work in progress and we continue to evaluate it.

We've seen major changes in how customers are purchase, Whereas four or five years almost everything was bought at the individual category or product level, now we're seeing over half the turns that we're in are in a much more strategic level as opposed to an individual product element, the multi-element deal.

So as the market conditions and our buyers' expectations and needs and the globalization of this industry and the decisions being made at a global level as opposed to a regional level continue to evolve, we'll continue to evolve the distribution system to try to get ourselves in the best position to take advantage of that and to serve our customers.

Maybe a quick follow up.

As you look at the acquisition of Quorum and large customers like Microsoft, what are you seeing from an international opportunistic perspective?

Is Quorum dragging into deals more with them?

Are you becoming more strategic with large companies like Microsoft?

And then maybe as one note for Don.

Don, G&A was a little higher than what I had expected, despite the $300,000 Indian office.

Is anything else going on in G&A and how should we think of modelling that going forward?

Thanks.

Don, I'll stick to the global piece and then pass it back to you.

We just -- we opened our 19th country here recently.

We believe we are the most -- we have the largest global footprint of anyone in this space and we see that as a significant differentiator.

And you see that play through in our funnel, too, with the size and quality of the deals that we're winning and we will continue to expand that footprint, as it makes sense financially, as well as to continue to serve our customers and put us in a better position to win deals.

And, Rob, our G&A was -- is something where we think we can leverage going into the future, and it's a little bit higher than what we want it to be and we're going to be working on that as a leverage point in our P&L.

Great.

Thank you.

And we will go next to Jeff King with William Blair?

Yes, it's Laura Letterman; my phone wasn't working for around here.

Just a few questions and thanks for taking my call.

One is in following up on the earlier call on Vurv being bought by Taleo, are you seeing the combined company more, less, just a sense of how it's -- more detail impacting the competitive environment?

Also, on the subject of the economy, where are you seeing most of the weakness?

In other words, is it in skills, in behavioral assessment, or are you also seeing it in BrassRing, or are you seeing it everywhere or just in specific places.

And also can you give us sense of internal growth if you take out Quorum?

Thank you, sorry.

Let's see, on the market conditions or the combination on that latest acquisition, hey, Laura, we're really not seeing any difference, again, on the large global enterprise deals.

If it's a North American headquartered organization we were typically seeing Taleo.

If it was a European-headquartered organization, we would say Stepstone or occasionally Vurv or a SAP.

On the large global enterprise seals, here of lately we haven't been seeing Vurv as much anyway, because we were not as aggressive in the mid-market opportunities.

Let's see.

there were a few questions you had there, Laura, the second question was --

Yes, the second one is if you look at the economy, which product lines are being impacted.

Are you seeing it in mainly skills assessment, or also in surveying and BrassRing.

In other words, where are you seeing (inaudible)?

Let me break up -- let me dissect the question into two components here, Laura.

First, let me remind you it's a record growth quarter, the best sequential growth I think in over four quarters.

Fair enough.

I'm not taking down guidance in the economy.

We've grown our business what we believe is significant and we're still calling for market share gains.

Now, where are we seeing the softness?

In the usual suspects.

Finance, retail, consumer-oriented stuff, technology remains historic -- remains somewhat strong, global is remained strong.

Could you talk a little bit, also help us understand where maybe sales cycles are getting longer and deals are being delayed and implementations are being delayed.

Is it impacting which products more than others?

Not as much product, Laura, I guess it's more region.

We're seeing a little more delay in North America than we are in Europe, if that helps add a little bit of color.

Yes, that helps.

And then we're seeing again category stuff get delayed a little bit more than we're seeing the bigger strategic deals getting delayed.

So whether it's skills or behavioral assessments or BrassRing, if it's a standalone deal it gets hit than like if it was skills assessment together with BrassRing?

Correct.

Got it.

With internal growth if you take out Quorum in the quarter?

Internal growth if you take out Quorum.

Ask the question another way, Laura.

Internal growth in the quarter if you take out all acquisitions?

Well, the only acquisition in play now is Quorum and we said -- I think it was like $11 million the balance of the year.

Right.

So that's $3.75 million per quarter, $11 million divided by three.

Okay.

Thank you.

And we will go next to Ross MacMillan with Jefferies.

Hi, this is Horatio for Ross.

All my questions have been answered, thank you.

We will go next to Steve Koenig with KeyBanc Capital Markets.

Hi, this is Justin Bandy on for Steve.

Just a quick question.

I was wondering if you could give us a breakout of your revenues international versus US?

Sure.

Year to date our revenue outside the US is 24% in the quarter, Q2 outside the US was 26%.

Okay.

Great.

And then a follow-up question, I was just wondering if you can -- this is somewhat similar to a question you got earlier but I was wondering if we could get a little more color on it.

I was wondering if you could give us a little more detail around how your different lines of businesses are doing; the assessments business, contract recruiting, applicant tracking, and maybe if you could tell us where the strengths are and maybe which of the businesses are having the weakness in related to the macro situation?

Thank you.

The overall composition of our business has remained more or less the same, with EP making up 25% to 30% -- or RP making up 25% to 30% of our business.

Off the balance hiring solutions are running at around 70% and retention solutions are running around 30%.

Okay, great.

And is there any way you could give us some color around maybe where the deals are getting elongated?

Is this in the assessments business or is this in applicant tracking?

Is there a noticeable difference between the product lines?

Again, as we look at the funnel, study the funnel, the time it's taking us to get decisions made, get deals live, we've seen, again, a slight delay.

We've spent a lot of time on this call answering questions about that, but again we've had -- we feel really good about new customer acquisition, we feel really good about expansion of the current customers, so just across the board we've just seen slight delays in purchasing decisions.

Okay.

Great.

Thank you very much.

And we will go next to Nate Swanson with ThinkEquity.

Hi, I jumped on late so excuse me if you covered this, but I'm wondering if you talked about any significant deals on the BrassRing side that you closed this quarter in terms of net new customers"

We just a gave a list of our -- it should be part of our script.

We gave a list of the new customers that we had on the hiring side.

We didn't break it down between BrassRing and not BrassRing, so I don't remember what.

Troy, I don't--

No, we haven't historically broken it out by individual product category.

That part of it gets tricky, too, when there's multiple elements within each one of those.

Okay.

Is it possible to break out what the growth rate of your recruiting business is?

You got the numbers already.

Sorry?

I said we've already given you the number.

It's about 25% to 30% of EPO.

Of the balance hiring solutions of 70% and retention solutions are 30%, which is the same as it was before.

So everything's growing about the same rate.

Okay.

All right.

And we will go next with Thomas Ernst with Deutsche Bank.

Hi.

Yes, this is Greg Dunham on behalf of Tom.

Most of my questions have been answered.

I do have one more question on how should we think about gross margins going forward?

This is the first quarter it dipped below that 70% level and with EPO moving 25% to 30% of the business, what should we model looking out?

If you remember last quarter we said that the gross margin was going to be down because of the service component in the Quorum deal, and we said it was going to be 69% and actually we came in at rounded to 70%.

And we expect in the 70% range for the remainder of the year.

Okay.

So you're predicting stable in 70% range long term.

Yes.

Okay.

And you -- on the R&D front, would you expect to be closer to that 6% or that 9% as you scale with the business?

We expect to be a little bit up from the 6%.

The Quorum transaction helps on a percentage of revenue basis, being that it's EPO, but we do expect it to be in the 7% to 8% range.

Okay, that's all I had.

Thank you.

And we will take our final question from Michael Nemeroff with Wedbush.

Hi, guys, thanks for taking my question.

Just a couple of questions.

One, could you give us what the currency impact was on both the top and bottom line, Don?

It was minimal, Mike, not enough to comment on.

Okay.

Rudy, I understand that you don't want to talk about the name of the company that you acquired the 49% stake in China, could you tell us what that business was, was it an EPO company?

It is more of an HR consulting/training company.

We're looking for it as distribution source for our products.

Great.

Thanks very much for taking my questions.

Thanks a lot, Mike.

And we do have another question from Brad Mook with MKM Partners.

Hi, guys.

Just wondering on the EPR business -- or I guess you're calling it RPM now -- can you give an update in terms of your customer count or constant customer expectations in terms of what your existing customers are doing and then also what's going on in terms of new customers.

I think you said you were getting more looks and potentially adding more customers there.

We had a decent quarter in that in terms of new signings.

I don't remember exactly the number we're now at but after the core transaction I know it is in the high teens and low 20s.

We didn't have any customer losses, so I'd say we're in -- the business is now mimicking the overall business.

Think of it in terms of whatever it works out to, I think about 20% overall growth, plus or minus, but in terms of customers I don't know.

Troy, do you happen to know?

No.

Okay, I was just thinking about new adds.

And then what about exclusive of new adds, what are you seeing from your existing customers in terms of their activity levels?

Ask it again?

Activity levels among your existing EPO customers?

Oh, you mean in terms of the -- in terms of their growth rates as far as new jobs go?

Well, are they spending more with you, are they spending less with you?

How does that net out amongst the group?

I'd say because we're through so many different customers and so many different verticals, I would say in this quarter, namely Q2, we probably saw about a third of our customers come in above expectations, a third that were below and a third right in line.

As we think about the future of that business with our current customer base what we are seeing in the pipeline -- again, these are long sales cycles, but in some of these customers we're running Europe and Asia but not North America, or vice versa.

We're running North America and not Europe and Asia and with the integration of Quorum now, it does provide a global platform for our current customers.

So we're -- as we move forward and continue the integration there, we're optimistic long term about the growth in the current customer base in that business line.

Okay.

And then how about shorter term, what would you expect the second half in the third, third, third split?

I would say if I look at larger customers, we're seeing a certain amount of stability.

Bear in mind I still think (inaudible) that if you step back and look at the US, the number of jobs, the number of people employed has remained steady even though the unemployment rate has climbed.

We're still at about 154 million and change, number of employees.

I think the number of unemployed has climbed.

So the turnover, which makes up whatever -- 93%, 94%, 95% of our revenue on a lot of this stuff remains unchanged.

I would say that the balance of the year, unless it is some sort of a massive jolt, would be about the same as the first half of the year.

Okay.

Fair enough, thank you.

And there are no more questions at this time.

I'd like to turn the call back over to management for any additional or closing remarks.

I'd like to summarize the call by saying thank you very much.

We appreciate you showing up on a beautiful summer afternoon.

We appreciate the support on the Street and we'll talk to you in about a quarter.

Thanks a lot and good day.

That does conclude today's conference.

We appreciate your participation and you may now disconnect.