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Operator
Good afternoon, ladies and gentlemen.
Welcome to the Kenexa Corporation's fourth quarter 2008 earnings conference call.
(OPERATOR INSTRUCTIONS.) I would like to remind everyone that this conference is being recorded.
And now I would like to turn the conference over to your host and moderator, Mr.
Don Volk.
Please go ahead, sir.
Don Volk - CFO
Thank you, Martin.
With me today is Rudy Karsan, our Chief Executive Officer, and Troy Kanter, our President and Chief Operating Officer.
Today, we'll review Kenexa's fourth quarter and full year 2008 results and provide guidance for the first quarter of 2009.
Then we'll 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 cause Kenexa's performance to vary from our current expectations are available in the Company's filings with the Securities & Exchange Commission.
Also, I'd 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 is currently available on our Company website, www.kinexa.com with the press release issued earlier today.
Finally, please note that we will be discussing preliminary GAAP financial results on this call for both the fourth quarter and the full year 2008.
As shared in our press release, results are preliminary in nature as the Company has not yet finalized the amount of a noncash goodwill impairment charge to be recorded as part of its GAAP results for the fourth quarter ended December 31st, 2008.
I'll now turn the call over to Rudy Karsan.
Rudy?
Rudy Karsan - Chairman and CEO
Thanks, Don.
And thank to all of you for joining us on the call to review our fourth quarter and full year 2008 preliminary results, which were consistent with our previously issued guidance.
Similar to recent quarters we saw the macroeconomic environment become more daunting on the margin as the quarter played out and the unemployment rate steadily increased.
During the fourth quarter the unemployment rate was announced at 7.2%, which was ahead of most economists' predictions.
Before and after this announcement we continue to see major global corporations announcing layoffs numbering in the thousands per organization.
2008 turned out to be the most challenging operating environment that Kenexa has faced.
While we are disappointed that our financial results fell short of our original target entering the year, it is important to highlight our accomplishments.
We exited the year as one of the largest vendors in the overall ACM and on demand market, providing Kenexa with significant critical mass.
We generated over $36 million in non-GAAP operating income for a non-GAAP margin of 18%.
We generated over $32 million in cash flows from operations.
We used that strong cash flow to buy back over 1.6 million shares during the year, reducing our shares outstanding by 7%.
We added over 150 preferred partner customers.
Our solutions were used by the largest and most complex organizations in the world, such as GE, Unilever, PWC, Exxon Mobil, amongst many others.
Our technology was recognized as market leading by independent industry analysts.
We expanded our value proposition via internal development and complementary acquisitions, and we grew our global footprint, exiting the year with operations in over 15 countries.
As we enter 2009 in a strong financial and fundamental position, we believe that Kenexa is well positioned to weather the economic storm based on our proven value proposition, critical mass, premier customer base, strong balance sheet, and history of profitability.
We expect the talent management market to continue consolidating as customers increasingly turn to vendors, such as Kenexa, that are viewed as a safe choice.
While we remain bullish about the long-term opportunities associated with the talent management market, the increasingly challenging economic environment and its related impact on the jobs market has had a clear impact on HR related technology and consulting spending.
It remains uncertain as to when the business environment will improve, so we continue to operate with the view that it will remain challenging throughout 2009.
We'll continue to monitor the health of the global economy and take appropriate actions to balance delivering profitability and cash flow with ensuring we're well positioned to drive long-term growth.
To that end, last quarter we discussed the fact that we were realigning our cost structure for the lower revenue run rate of the business during this difficult economic environment.
This was completed during the fourth quarter, and we have recently communicated an incremental workforce reduction of approximately 150 employees in order to further adjust our infrastructure with the current state of the market.
It is important again to stress that these moves will not slow our product delivery commitment or developmental plans, and our service delivery and customer support efforts will continue to receive the highest levels of commitment and focus.
The most significant positive from the fourth quarter and the full year 2008 is that our competitive position does not only remain strong but we believe is actually improving.
As a point of reference, we signed a record number of customers for our applicant tracking systems during the fourth quarter and our renewal rate in this category remained in the 90% plus range.
This segment of our business continues to hold up well in spite of the difficult economic environment, which we believe is a result of two factors.
First, it shows that the more sophisticated companies are continuing to move forward with talent management related projects.
Second, we are realizing the benefits from our aggressive investment in R&D, in particular relative to the significant enhancement of our Kenexa [recruiter] BrassRing offering.
The strength of the ATS portion of our business is fairly widespread, from medium sized organizations to displacement of competitors as they work through acquisition digestion, to the high end of the market, where we believe our solution sets the industry standard.
As it relates to the RPO segment of our business, we shared with you last quarter that we expected RPO contribution to decline materially as it is most directly tied to hiring trends and the slow-down or up tick in the economy.
Our RPO revenue came in at $11.3 million in the fourth quarter, which compares to our expectations of $12 million and approximately $18.5 million in the second quarter of 2008.
We have estimated approximately 40% of our RPO clients have frozen hiring, which is a significant reason why approximately 80% are operating at or below levels that are triggering guaranteed minimum.
This obviously reduces our revenue that is tied directly to the number of employees we hire.
As we have discussed before, our RPO revenue is not 100% service based.
It also includes software and content to a degree.
While the RPO segment of our business adds leverage to our revenue, which is a positive during a healthier economic environment, it's clearly a negative during the recessionary environment.
That said, there are some positive developments related to this business.
For example, we recently added Verizon Business Services as a client in EMEA, and we continue to pursue other opportunities.
The final area of the business I would like to point out relates to our content and services.
Similar to last quarter, this area of the business remains challenged and on the margin we saw more pressure in these areas in the past several months.
Content and service is a critical aspect of our long-term success.
They're are also drivers to customer value and create competitive barriers.
In the short term, however, some customers are trying to get by with bare minimum investments due to the overall challenges the businesses are facing, leaving optimization for a later date.
This can impact the size of total solution sales and renewals.
However, we expect demands for content and services to come back strong when the economy improves, and we continue to see more sophisticated new customers signing up for content and services.
Turning to some of the key metrics that we normally report, we added over 20 preferred partner customers during the quarter.
On the employee retention side of our business, we closed business with customers such as Accenture, Ernst & Young, [Wyeth], Indianapolis Power & Light, among others.
As it relates to our talent acquisition solution, we closed business with customers such as PricewaterhouseCoopers or PWC, Memorial Healthcare Systems, Hong Kong Jockey Club, [Wireless Observatory], and Boston Market, among others.
Our [PQ] metric, which measures the average annual revenue contribution of our top 80 customers was over $1.4 million during the fourth quarter, which is consistent with last quarter's level.
As previously discussed, we expected a flattening of this figure depending, given, sorry, the current macroeconomic environment, and the PQ metric may decline to a degree in the short term depending on the length of the economic downturn.
If it were to decline, we believe it would be due to the decline of our services revenue as opposed to our software subscriptions which continue at a high level.
When the economic environment stabilizes and eventually improves, we continue to believe that Kenexa will be a primary beneficiary and we would expect our PQ metric to resume growth at which we've become accustomed to in previous years.
As we enter 2009 we're evaluating the market and our business in multiple scenarios, based on our latest reads of the marketplace, which is below our viewpoint as recently as a month or two ago.
The bear case assumption which has a macroeconomic environment getting more difficult than what we're seeing today is a quarterly revenue run rate in the range of $35 million to $37 million.
In such a scenario we will target non-GAAP operating margins in the 10% to 12% range.
The middle case is quarterly revenue run rate in the range of $38 million to $42 million.
This assumes that the unemployment rate increases marginally, the environment does not get materially tougher, and while not robust more projects will make it through.
We will target margins in the 12% to 14% range in this scenario.
The bull case planning, which would have a quarterly revenue run rate of over $43 million, in such a situation the macroeconomic environment would need to improve.
If this were to be the revenue level we would target margins in the 15% plus range.
As Don will cover when he reviews our guidance in a moment, we're currently running our business in the middle case scenario.
We will evaluate the market environment over the next quarter or two, and as we gain greater clarity to which way the economic and macro environment is trending we will provide greater detail to you as to our full year plan for 2009.
The framework just provided, however, should help you understand how we're thinking about the business and to model our business based on your expectations for unemployment and the health of the overall global economy.
We clearly remain cautious in the near-term outlook based on the economy and unemployment.
There are, however, reasons that support our overall positive view of the talent management market.
For starters, the level of RFPs remain solid enough to support our middle case scenario.
Customers while cautious in the near term are speaking about reengaging more fully in the back half of 2009.
We are seeing more multi-element deal opportunities.
We believe there will be a further shakeout of the market over the next 12 to 24 months, as vendors not as well positioned need to find larger partners to survive.
And, finally, longer term the demand drivers of this space remain intact.
In summary, we will look to deliver solid profitability and cash flow during this difficult economic period.
Longer term the talent management market is a big market opportunity, and Kenexa the market leader that we believe is well positioned to weather the current storm.
I will now turn it over to Don to review our fourth quarter results and first quarter outlook in more detail.
Donald?
Don Volk - CFO
Thanks, Rudy.
Let me begin by reviewing our preliminary results for the fourth quarter, starting with the P&L.
Total revenue for the fourth quarter was $45.1 million, consistent with our guidance range.
As expected fourth quarter total revenue decreased on a year-over-year and sequential basis by 6% and 17% respectively.
Subscription revenue was $37.6 million, representing a decrease of 3% on a year-over-year basis and 13% sequentially.
Subscription revenue was 83% of total revenue, which is above our longer term targeted mix of the upper 70% to 80% range.
At $7.5 million in the fourth quarter our services and other revenues declined 17% on a year-over-year basis and 32% sequentially.
As we previewed last quarter this sequential decline was driven by the slow-down in consulting revenue and hiring trends at our RPO customers, both caused by the more challenging economic environment.
We expect both of these components to return to growth as the economy stabilizes and improves over time.
From a geographic perspective our revenue mix of domestic versus international revenue was 79% to 21%, which compares to the previous quarter at 74%, 26%.
Strengthening in the U.S.
dollar during the fourth quarter had a negative impact of approximately $2.5 million on revenue compared to the third quarter of 2008.
From a detailed perspective, RPO represented approximately $7.3 million of our subscription revenue and $11.3 million of our total revenue in the fourth quarter, which compares to $9 million and $15.6 million in the third quarter, respectively.
Clients typically purchase multiyear subscriptions with an average length of approximately two years.
During the fourth quarter our renewal rates were in the 70% range, which is down from our well established long-term history of the 90% plus range in better economic environments.
Turning to profitability, we'll be looking -- we'll be providing non-GAAP measures for each fourth quarter 2008 expense category, which includes stock based compensation charges associated with FAS 123R, the amortization of intangibles associated with previous acquisitions, the R&D tax credit, and restructuring and impairment charges.
All comparisons will be using the non-GAAP current period results.
Non-GAAP gross margin was 67% in the quarter compared to 70% in the third quarter and 73% in the year ago quarter.
Non-GAAP sales and marketing expense came in at $9.3 million or 21% of revenue, compared to $10.2 million and 19% last quarter, and 19% in the year ago quarter.
Non-GAAP R&D expense came in at $2.9 million or 6% of revenue compared to $3.6 million and 7% last quarter and 9% in the year ago quarter.
Of note, the sequential decline in reported R&D spend was driven by the strengthening U.S.
dollar, Rupee exchange rate, and increased projects qualifying for capitalization.
Non-GAAP G&A expenses were approximately $10.1 million or 22% of revenue, compared to $11.7 million and 22% last quarter and 20% in the year ago quarter.
Our non-GAAP income from operations was $6.3 million for the quarter, consistent with our guidance and representing a 14% non-GAAP operating margin.
During the fourth quarter non-GAAP tax rate for reporting purposes was 8%, resulting in non-GAAP net income of $6 million.
Based 22.6 million shares outstanding, non-GAAP diluted earnings per share was $0.27, above our guidance due to a $0.05 impact from the lower than expected tax rate in the quarter.
Turning to our results on a preliminary GAAP basis, which include $1.3 million related to the allocation of share based compensation, $1.5 million related to the amortization of intangibles associated with previous acquisitions, $2.5 million related to restructuring charges.
In addition, we expect to recognize a goodwill impairment charge in the range of$ 96 million to $167 million.
The final amount is still being determined and will be included in our Annual Report on Form 10-K, which we expect to file by March 16th, 2009.
The following were expense levels determined in accordance with GAAP.
Cost of revenue $14.9 million, sales and marketing expense $9.6 million, R&D $3 million, and G&A $11.4 million.
For the fourth quarter GAAP loss from operations is expected to be in the range of $94.6 million to $165.7 million.
Net loss applicable to common shareholders is expected to be in the range of $68.7 million to $120.6 million, resulting in GAAP loss per share of $3.05 to $5.35.
A reconciliation of non-GAAP to GAAP expenses and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.
On a full year basis our revenue for 2008 came in at $203.7 million, up 12% compared to 2007.
non-GAAP operating income came in at $36.6 million for a margin of 18%.
Non-GAAP earnings per share came in at $1.35 compared to $1.16 in 2007, while GAAP loss per share is expected to be in the range of $2.31 to $4.58 compared to diluted EPS of $0.94 in 2007.
Kenexa has cash, cash equivalents, and short and long-term investments of $42.8 million at December 31st, 2008, a decrease of $1.1 million from the end of the prior quarter.
Positive cash from operations of $7.4 million during the fourth quarter included an impact of approximately $2.5 million related to the restructuring.
Positive cash from operations was offset by $4.2 million in capital expenditures, $2.7 million in cash paid for acquisitions, and $400,000 associated with the execution of the Company's share buyback program.
In addition, the Company wrote-down the auction rate securities portion of its marketable securities balance by $1.5 million.
The remaining net balance in auction rate securities at the end of 2008 was $16.3 million, of which we have received cash of approximately $1.1 million in early 2009.
Accounts receivable DSO were 70 days at the end of the quarter, compared to 65 days at the end of the prior quarter and 60 days at the end of the year ago quarter.
Our deferred revenue at the end of the quarter was $38.6 million, up $1.6 million from $37 million at the end of the third quarter.
I'd now like to turn to guidance for the first quarter of 2009.
We expect the following -- revenue to be $38 million to $41 million.
We have some prospective (inaudible) revenue relative to Q4 levels, we currently expect our ATS business to remain solid during the first quarter, from both a renewals and new sales perspective.
Offsetting this is the fact that we currently estimate foreign exchange rates to negatively impact our reported Q1 revenue by approximately $1 million, as compared to Q4.
In addition, we are assuming the market environment will continue to challenge the RPO content and consulting segments of our business during the first quarter.
From a summary perspective, our revenue expectations are consistent with the middle case scenario that Rudy described earlier.
Taking into consideration that operating expenses are typically higher in the first quarter from a seasonality perspective, we are targeting non-GAAP operating income of approximately $3.8 million to $4.1 million.
Assuming a 23% tax rate for reporting purposes and 22.6 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.13 to $0.15.
Of note, our non-GAAP guidance excludes the restructuring charge we expect to incur as a result of the workforce reduction we mentioned earlier.
In summary, we will continue to monitor our expenses closely and focus on profitability and cash flow during this challenging economic environment.
We'd now like to turn it over to the Operator to begin the Q&A session.
Martin?
Operator
Thank you very much, sir.
(OPERATOR INSTRUCTIONS.)
And we take our first question from Brendan Barnicle with Pacific Crest Securities.
Please go ahead, sir.
Brendan Barnicle - Analyst
Yes, Don, I just wanted to follow-up on your guidance there.
Should we be assuming a similar breakdown between subscription revenue and other revenue as we saw in Q4, and so basically have this currency impact it universally?
Don Volk - CFO
Yes.
Brendan Barnicle - Analyst
Okay.
So that 83 type percent rate is about the right level to be at?
Don Volk - CFO
Yes, trending a little bit higher to 83% to 85%.
Brendan Barnicle - Analyst
Okay.
And then, also, a lot of buy back activity last year.
What should we be using for a share count assumption in Q1, and what's that buy back activity look like going forward?
Don Volk - CFO
Go ahead, Rudy?
Rudy Karsan - Chairman and CEO
Well, from a share count perspective it's [22 point] --
Brendan Barnicle - Analyst
Oh, that's right, you gave that.
Rudy Karsan - Chairman and CEO
Yes.
Well, if we go looking forward, Brendan, you know we have a line with [PMC], and that line has certain covenants in it, so with the writedown of the intangible goodwill we'll be negotiating with the bank, once we get a better handle on our debt facilities and get more clarity and visibility in the auction rate securities we will make further buy back decisions later on for the year.
Brendan Barnicle - Analyst
Got it.
Very clear.
And then just lastly, Rudy, you were mentioning benefits in consolidation, that you were expecting to see and had seen.
Who do you expect to be taking most of that share from?
Rudy Karsan - Chairman and CEO
A lot of the smaller players that have either vertical specialties or they are organizations that may have two or three clients to it, those are the kinds of companies that we would expect, no names mentioned.
Troy, do you want to add anything to it?
Troy Kanter - President and COO
Yes, the trend that we're seeing in the sales cycle now that in due diligence, the financial due diligence piece in this environment has become a major gating issue, so if that continues to be a major gating issue you'll see that to be a benefit for Kenexa given sort of our history of profitability and strong balance sheet, and we'll see that to continue to put additional pressure on a lot of our smaller to midsized competitors beyond what they're currently experiencing, just given the downturn that we're all dealing with.
Brendan Barnicle - Analyst
Great.
And then just lastly, the RIF, where is most of those or what's the distribution of those cuts?
Don Volk - CFO
In cost of goods sold and G&A.
Brendan Barnicle - Analyst
Great.
Don Volk - CFO
With -- just reflecting the RPO business more than anything else.
Brendan Barnicle - Analyst
Okay.
Great.
Thank you very much.
Operator
And we take our next question from Mr.
Richard Davis.
Please go ahead, sir.
Richard Davis - Analyst
Okay, thanks very much.
Well, that was actually helpful, kind of talking about how you want to manage the Company through this challenge, and I know no one really knows when the turn is going to come and that kind of thing, but when you think about it from the inside of the Company what are you looking for that will tell you that we're kind of getting close to a turn?
I mean obviously you pointed out market share gains, head-to-head, and those things, and that's one thing.
And then, secondly, now we're sitting at the outside, we obviously don't get to see the sales pipeline, on the outside if you were looking into Kenexa, what are the things that you would look for that are maybe, other than just, oh, we hit our numbers and we guided up, or something like that?
What are some of the details that you would be looking for that would tell us that you guys are actually making traction and the business starts to turn?
Rudy Karsan - Chairman and CEO
I would say if I was looking at the outside, for outside indicators, once the credit starts opening up, Richard, you'll start seeing more CapEx that will affect the solutions sales and you will see more hiring begin that will affect our revenues throughout all lines of our business.
So I would say probably the leading indicator would be the credit market opening up.
The next thing internally that we would see is how many, and this is a point that we have noticed, and I think we mentioned a couple of quarters ago which is what's the conversion rate from verbal to signed contracts, and we mentioned I think in Q4 that Q3 was notoriously weak for that.
We continue to move those that didn't close in Q3, we closed some of them in Q4, not all of them.
We've closed a significant number, but we walk into Q1 again with a bunch of verbals sitting out there.
So once we see the conversion rate and sales cycle starting to tighten and shorten we know that they're real.
I think from the outside the biggest indicator would be our deferred.
If you see that thing act in a nontraditional manner, like this Q4 it moved up, well, every Q4 it moved up, but (inaudible) is the reason.
If in Q1 which historically is either remained level or come down a little bit, if it remains level or comes down a little bit, that's a sign that it's ending.
If it comes down a lot we're still in the midst of the cycle.
If it goes up, then we will be very, very surprised.
Richard Davis - Analyst
Got it.
Well, that's helpful.
Appreciate it, and hang in and there good luck.
Rudy Karsan - Chairman and CEO
Thank you.
Operator
And we take our next question from Peter Goldmacher with Cowen and Company.
Please go ahead.
Joe - Analyst
Hey, guys, it's Joe here for Peter.
So what we want to know right here is like what -- how do we think about how your business will recover when the economy stabilizes?
What do you think will recover first, subscriptions or services?
And that's it, that's all I have.
Rudy Karsan - Chairman and CEO
I would say you will see the services climb a lot faster than the subscription, and the increase in the subscription will take place in the increase in the deferred, as we mentioned to Richard earlier.
Troy Kanter - President and COO
Yes, I think you'll see a big pop in the services business, as our clients have scaled back dramatically there's been sort of a -- as our customers can't get visibility to their revenue there's been a big overreaction to spend reductions, a lot of headcount reductions, as companies start gearing back up their hiring programs and reinvesting in their performance management and learning programs, and they're going to be reluctant to add a lot of new staff.
So we're hopeful that we're well positioned to capitalize on that when our clients and prospects start moving in that direction.
Joe - Analyst
Okay.
Thanks a lot.
That's all I had.
Operator
And our next question comes from Bryan Mcgrath with Credit Suisse.
Please go ahead.
Bryan Mcgrath - Analyst
Hey, guys, thanks for taking my questions.
Can you talk about how many potential RPO contracts you have still up for renewal in '09?
Also, I think you said and I was looking at my notes from last quarter that you had a renewal (inaudible) that didn't renew last quarter that you thought might re-up this quarter, and I'm wondering if you had an update you can share on that?
Rudy Karsan - Chairman and CEO
No, it did not re-up, so you saw subscription on the RPO, that was part of the reason why our subscription dropped.
Subscription on RPO dropped from 9 to 7.3, or 7.5 roughly, and a lot of it was made up with that.
We have four contracts renewing this year, and so I think the way you want to think about the RPO business as you're modeling it out is as follows.
About $7.5 million in subscription in that business.
Assume about eight quarter life cycle to it.
There are two levels of degradation that take place, one is nonrenewal, two is anniversarying.
You need to every time -- a lot of these contracts when you anniversary them their minimums drop.
This was negotiated months and years ago, so it comes in very long, fixed obligations.
And so from a modeling perspective if you think, if you like kind of think about it going from 7.5 to zero, in a linear slope, that would be a good model, and then if we sign on any new business we would let you know.
Bryan Mcgrath - Analyst
Great.
Maybe one more question, if you'll let me?
Going to the [EED] there's a spike in ATS customers you had in the quarter?
I mean that's kind of -- I'm still trying to get my arms around what would cause a company or businesses that were theoretically probably going through headcount reductions and perhaps budget cuts or flat budgets to add, to buy ATS solutions in this current time period?
Troy Kanter - President and COO
There are even companies that are going through really significant headcount reductions, still are hiring specialized positions in various parts of the world, and on that ATS platform we have quite a few installs and so that the documented ROI there is fairly significant, and it's a fairly safe bet for our customers to make.
And there's also a phenomenon occurring in the marketplace right now where there have been some consolidation and so there are a lot of customers that are currently reviewing their current platform and looking at other platforms, as well as organizations that have implemented platforms on a geographic basis that are now looking at how do we consolidate three or four platforms into one global platform, so we're sort of capitalizing on the benefit of a couple of things that have happened here in the marketplace recently.
Bryan Mcgrath - Analyst
Thanks a lot.
I really appreciate the extra color.
Operator
And our next question comes from Laura Lederman with William Blair.
Laura Lederman - Analyst
Yes, thank you for taking my questions, as well.
Can you give us a feel for in those different scenarios what cash flow and CapEx might look like?
And, also, can you talk a little bit about market pricing in the different segments and what's kind of happening in the pricing environment?
And then I have a follow-up.
Thank you.
Don Volk - CFO
On cash flow, Laura, the last three years our cash flow has basically mapped to our non-GAAP operating income, so our operating cash flow and our non-GAAP operating income are basically the same.
Laura Lederman - Analyst
So you don't expect any shrinking and billing durations?
Rudy Karsan - Chairman and CEO
We've taken a lot of the hit, we're up to 70 days DSO at the end of Q4.
Is it going to get worse?
Yes.
Is it likely it's going to get much worse?
Probably not.
Laura Lederman - Analyst
And can you talk a little bit about if you look at the price of acquisitions out there would you hold off just because you want to absorb what you have and hold on to cash, or would you look at this environment as a way to add additional pieces to your business that you might think you need for the long term?
Rudy Karsan - Chairman and CEO
I think from an M&A perspective there would be various elements that we would look at.
The first, the most obvious one is why would a seller sell in this environment?
What do they know that we don't have?
So if we could get satisfied with that first basic question, then it would go back to our old rules is it adding to geography, is it adding to verticals, is it adding to offerings?
If the answer to that is yes, can we make it profitable?
If it's yes, yes, then we would look at it.
And as in the past, most if not all of these deals have been accretive first [full] quarter, we would still have that criteria, and at the current stock price, where it's trading, it's got to be a pretty low price for it to be accretive, so we'll think about it that way.
Laura Lederman - Analyst
And the -- answer the question on the market pricing and what you're seeing out there in terms of price aggression on the part of competition?
I know you had (inaudible).
Troy Kanter - President and COO
Sure, Laura.
In a market like this obviously we are seeing some price competition.
The good news for Kenexa on that front is that we compete primarily on that global 2500, and there's a much smaller number of competitors or other vendors that can really service those types of large complex global organizations.
So that, so we have seen some pricing pressure, but not to the degree that we're seeing in some of the midmarket tournaments that we're in.
And then obviously with current customers that are going through really significant headcount reduction, a lot of our applications are tied to a number of employees, so we've seen a little bit of price erosion there.
Laura Lederman - Analyst
Thank you.
Operator
And our next question comes from Terry Tillman with Raymond James.
Please go ahead.
Terry Tillman - Analyst
Hey, good afternoon, guys.
Thanks for taking my questions.
Just a first question, Rudy, I know you're not giving full year guidance but I appreciate the scenario analysis.
And on that bear case, the $35 million to $37 million, does that just assume just a mildly increased minimum level for your RPO customers or why could -- why shouldn't we assume that most all of your RPO customers go to minimums in terms of the level they're operating at?
Rudy Karsan - Chairman and CEO
Yes, they could.
Terry Tillman - Analyst
But you had given a percentage, can you remind me what that percentage is in terms of what -- how many are at minimums now?
Rudy Karsan - Chairman and CEO
80% are at minimums now.
Terry Tillman - Analyst
Okay.
Okay.
So you're kind of almost there then?
Rudy Karsan - Chairman and CEO
Yes.
Terry Tillman - Analyst
Okay.
And then just the second question relates to, Don, I think you had talked about $9 million related to the RPO and subscription in 3Q and then $7.3 in 4Q, can you give us the numbers so we can see comparability to the prior year?
Don Volk - CFO
We haven't disclosed prior year.
Troy Kanter - President and COO
We don't even know what they are.
Don Volk - CFO
And I don't have those numbers with me, Terry.
Terry Tillman - Analyst
Okay.
Because what I was just curious on is I was curious if you back out that RPO side, what just the traditional enterprise business like the BrassRing stuff, what the growth rate or the decline is in that part of the subscription line?
Rudy Karsan - Chairman and CEO
We can give you the total for the last three quarters.
It was 18.6 in Q2, 18.5 in Q2, and subscription was 9 out of that.
Q3 was -- and 9 again.
I don't think subscription moved.
Don Volk - CFO
No, it didn't, it stayed the same.
Rudy Karsan - Chairman and CEO
And then last quarter was 11.3 and 7.6?
Don Volk - CFO
Yes.
Terry Tillman - Analyst
Okay.
And I know when you bought Quorum, I think there was talk earlier in the year in a different world we were in that that would do about $11 million in the stub period.
I mean was that -- and I know that's a smaller piece so it's less material than the rest of the RPO business, but was that incrementally harder hit or was that actually relatively speaking better or about in line with the same, with the broader RPO business?
Rudy Karsan - Chairman and CEO
(Inaudible.)
Terry Tillman - Analyst
Okay.
Okay.
And I guess just a last question, Troy, just if you could maybe give us an update on the learning and development type solutions, with the newer stuff that you all had highlighted at the Analyst Day, is it still too early to think about that in terms of driving new bookings and revenue, or are you starting to sell that, or where are you in that process?
Thanks.
Troy Kanter - President and COO
Let's see, the funnel is starting to build out on that.
We've yet to realize any significant benefit to revenues on the income statement, but as organizations again there's been a holdback there at the large enterprise level.
But we've mentioned there are some pretty impressive organizations that we won on the retention side in Q4, and I think that a lot of those wins have to do with sort of how we are joining together these comprehensive solutions from hiring, on boarding, on through individual development, learning, performance management, succession planning, and I think that's getting reflected in some of the deals we're winning, as well, with how the funnel is building.
Terry Tillman - Analyst
Okay.
Thank you.
Operator
And our next question comes from [Brad Luke] with MKM Partners.
Please go ahead.
Brad Luke - Analyst
Thank you very much.
Just to follow-up on that, are you seeing -- Troy, you mentioned some specialized applications of the ATS, you also mentioned consolidation kind of globally amongst ATS vendors for large customers, are you seeing any trend either specific to ATS or more broadly across your business in terms of initial engagement sizes?
Troy Kanter - President and COO
We're seeing deal size improve.
What -- with our business, again given that we're focused on that global 2500 the stuff that is sticking with current customers, as well as the new deals, are those projects that have visibility to the Operating Committee.
And typically when it's visible to the Operating Committee, it is not, it's much more of a strategic buying decision, where it's a large multi element deals that are part of larger business initiatives and organizational initiatives.
So we are seeing deal size rise, as well as the number of deals that we're winning that have multiple elements to them.
Brad Luke - Analyst
Okay.
All right.
So that explains the multi element, the opportunity point, as well.
On the RPO, Rudy, you talked about nonrenewal or reduced renewals, anybody under contract ask for relief to get out?
And did any of them, did anybody get it?
Rudy Karsan - Chairman and CEO
Well, we're in ongoing discussions and negotiations.
Brad Luke - Analyst
Okay, so perhaps in process?
Rudy Karsan - Chairman and CEO
But I would -- I mentioned earlier on the way to think about the business, which is assume that the subscription will drop by whatever it is, I think it works up to 800,000 or 900,000 per quarter.
That would be a decent estimate going forward.
Brad Luke - Analyst
Okay, so that would incorporate any potential impact from relief granted?
Is that a fair way to look at it?
Rudy Karsan - Chairman and CEO
It's hard for me to answer that question specifically because I don't have all the data in front of me, but I would say it would be in the ballpark.
Brad Luke - Analyst
Okay, because if we model it linearly and that happens, it's possible to see a step function reduction and that's all I'm asking about.
Rudy Karsan - Chairman and CEO
Yes, I think, if you model it incrementally through the balance of the year, then you're going to see it drops in Q2, 3, ad 4, right?
So then you would see a larger quantum leap if there was a company that kind of got out of the deal or whatever the case might be.
Brad Luke - Analyst
Yes.
Okay.
And then, last question, just with respect to acquisitions, would it be fair to say that the covenant renegotiation on your line would limit your ability to make any acquisitions here in the front half of the year?
Rudy Karsan - Chairman and CEO
I would say probably we would just renegotiate the covenants -- oh, no, the bank just found out about this, we're talking about minutes ago, when the press release hit, because we had not shared this information with the commercial banks until we were letting the Street know about it.
So we don't know how they're going to respond.
Brad Luke - Analyst
Okay.
All right.
Thank you.
Operator
And our next question comes from Thomas Ernst with Deutsche Bank.
Please go ahead.
Joe Matthew - Analyst
Hi, thanks for taking my question.
This is actually [Joe Matthew] on behalf of Tom.
My question is where are you seeing greatest slowdown within your talent acquisition and retention businesses?
And if possible can you give us a break-up of the acquisitions sold and the retention within the subscription?
And if I have time I'll ask a follow-up.
Thanks.
Rudy Karsan - Chairman and CEO
You have time so prepare your follow-up.
We -- the breakdown between retention and talent acquisitions is heading towards 70, 30 in favor of talent acquisitions.
Historically through the middle of 2008 that number was at 60, 40.
Towards Q4 it skewed towards kind of in the low to mid 60s and mid to high 30s.
For planning purposes through 2009 for your model assume 70, 30.
Joe Matthew - Analyst
Okay.
So that means you're seeing some kind of slowdown in retention businesses related to the acquisition?
Rudy Karsan - Chairman and CEO
Correct, it's slowing down faster there than on the acquisition side.
And this is not including RPO, by the way.
Joe Matthew - Analyst
Yes, I got it.
Okay.
Now, the other question I had -- I was thinking to ask is you had mentioned earlier that your services revenue, I mean if things get from bad to worse, you could literally model it from same point to zero -- is that true of the RPO and your subscription revenues, as well?
Rudy Karsan - Chairman and CEO
Yes, that's the -- that was a subscription component of our RPO.
Joe Matthew - Analyst
Oh, okay, okay, got it.
Thanks.
Operator
And our next question comes from James Friedman with Susquehanna.
Please go ahead.
James Friedman - Analyst
Hi, yes, thank you for taking my question.
Either Rudy or Troy, I was wondering if you could describe what you do in the government vertical and what sort of level of business activity you might be seeing there being that government is so topical these days?
Rudy Karsan - Chairman and CEO
We have a GSA license, we haven't had tremendous success in selling, though we have won a few contracts.
I think about a year ago we mentioned LA County, the Department of Agriculture, and there was a third one, I don't remember?
Don Volk - CFO
Navy.
Troy Kanter - President and COO
U.S.
Navy.
Rudy Karsan - Chairman and CEO
U.S.
Navy.
James Friedman - Analyst
Navy, yes.
Rudy Karsan - Chairman and CEO
And then in Europe I think a year ago we announced [Apso], which is a European equivalent to the, what do you call it?
The [EEOC], the purchase assessment tool.
We are continuing to really hammer away at that vertical.
We recently added a fairly significant global player out of Britain, who joined our leadership team, from retirement from the British Army, General Andrew Jackson is joining our London operation, and we're continuing to look for significant players here in the U.S.
So that's an area we will be investing in.
James Friedman - Analyst
Okay.
Andrew Jackson sounds like he would be important.
Rudy Karsan - Chairman and CEO
I know, it's a great name, isn't it?
James Friedman - Analyst
You mentioned a contract with Accenture.
Not to pry here, but just to clarify is that a contract for Accenture's internal compasses or is that a reseller arrangement with Accenture?
Troy Kanter - President and COO
Accenture is a new customer.
James Friedman - Analyst
Okay.
And then my last thing is not to beat a dead horse here, but with regards to the difference, and you just described a decline in subscription renewals, but the deferred revenue increased -- I realize there's seasonality to that, I'm just trying to reconcile the different directions of those two observations.
Thank you very much.
Rudy Karsan - Chairman and CEO
Assume a huge budget flush.
Operator
(OPERATOR INSTRUCTIONS.)
And we take our next question from [Horacio Zambrano] with Jefferies.
Please go ahead.
Horacio Zambrano - Analyst
Hi, thank you.
I had a question about the 150-person RIF, what is that o a percentage basis following your 12% RIF from before?
And I guess if you hit your bear case scenario would you need to -- where would that, most of the -- would you have to have an additional RIF and where would that come from?
Is it from the cost of goods sold line, as well?
Rudy Karsan - Chairman and CEO
The number is under 10%, much or let's say 8% or 9%, but somewhere between 7% and 9%.
Additional positions would depend very much where the reduction is coming from, so it's hard to answer that question in a vacuum without knowing the line items that are in the bear case.
So if it's, for example, if it's entirely attributable to RPO you'd have a different answer than if it was entirely attributable to consulting, or it would be a different answer if it was primarily software.
So it's hard for us to kind of give an answer in a vacuum around that component.
Would there be additional RIF?
Again, it's very difficult to answer the question in a vacuum.
An example might be we get into a bear case and our deferred clients buy 7 million and we know for sure we're going to have contracts, you'll have a different answer than we have a bear case and our deferred drops by $5 million.
So a lot of it would depend on the available data.
Horacio Zambrano - Analyst
Okay.
In terms of BrassRing integration can you talk about how you've integrated the different groups there from a sales and marketing and G&A perspective?
What's left of the original operations that you acquired?
Troy Kanter - President and COO
It's hard to even respond to that question anymore because it's been completely integrated for quite awhile, so it's hard to tell where one began and the other started, so I think that sort of the integration thing is probably kind of an irrelevant topic at this point, probably has been for a couple quarters.
Horacio Zambrano - Analyst
Okay.
And then a last question, what's the tax rate you guys are assuming I guess for next year?
Don Volk - CFO
We're not giving guidance on the year, but the tax rate for the first quarter is approximately 23% on a non-GAAP basis.
Horacio Zambrano - Analyst
All right.
Thank you.
Operator
And we'll take our next question from Steve Koenig with Keybanc Capital Market.
Please go ahead.
Steve Koenig - Analyst
Hi, guys.
Thanks for taking my questions.
I just have two questions here.
The first one, we'd be interested in any color you can give us on the renewal rates, which trended down in Q4, kind of where was that weakness coming from, what drove that, what areas, et cetera?
Rudy Karsan - Chairman and CEO
(Inaudible) 90% on the ATS, so it was the other solutions, like performance management solution, service and assessments, where the balance came in from.
Steve Koenig - Analyst
Okay.
And would you expect those to trend further down to remain stable, any visibility on those?
Rudy Karsan - Chairman and CEO
We've assumed that it'll continue the same way for Q1 in our guidance.
Steve Koenig - Analyst
Okay.
Great.
And then -- that's helpful -- and that leads to my next question, I'd be interested in knowing for your different scenarios, what business areas could drive down side or up side in the scenarios, and would it be more likely to be Q1 or later in the year, et cetera, in terms of driving up side or down side to the bear case or bull case?
Rudy Karsan - Chairman and CEO
So the way we are thinking about it is I think I mentioned in the prepared comments that from a month or two ago our bear case has moved significantly.
We still think that if the credit markets open and companies start to -- (inaudible) corporation, so when corporations start to reinvest in their people and in their systems we should start to see that.
So I think, I guess the best way I can answer the question is if we can keep an eye out on the credit market, if they don't get much worse than they are now, and unemployment doesn't get much worse than it is now, I think the base case will prevail.
If that deteriorates significantly into the back half of the year we would get closer to the bear case.
Steve Koenig - Analyst
And, Rudy, if it were to deteriorate towards the bear case in the back half, any thoughts on which business areas would be more impacted or where it would come from?
Rudy Karsan - Chairman and CEO
Yes, it's hard to speculate, and that's part of the reason why we didn't give '09 guidance.
It's, at this point in time it would be just pure speculation.
I think there's an analyst that writes management guidance, management speculation, and we don't want to make the analyst look --
Steve Koenig - Analyst
Fair enough.
Rudy Karsan - Chairman and CEO
Okay.
Steve Koenig - Analyst
Fair enough.
Thank you for your answers.
Appreciate it.
Operator
And we take our next question from David Hilal with FBR.
Please go ahead.
David Hilal - Analyst
Hi, great.
Just a couple follow-ups to some previous questions.
First, on the $7.5 million, Rudy, you talked about modeling that linearly down over an eight-quarter average life.
Are you suggesting that $7.5 million is going to go zero, or is that your Draconian scenario?
Rudy Karsan - Chairman and CEO
Draconian scenario.
David Hilal - Analyst
Okay.
And then I wanted to ask a follow-up on the renewals, so if the ATS is kind of 90%, overall is 70%, could on extrapolate that the performance management content business is running maybe 50%, 60% renewals?
Rudy Karsan - Chairman and CEO
It's hard -- I don't have the data in front of us, so we'd be only speculating on an answer there.
David Hilal - Analyst
But you have, in terms of number of customers, you have more customers in performance management than ATS, even though the deals are smaller there's a greater number of customers, is that accurate?
Rudy Karsan - Chairman and CEO
No, there's more ATS customers.
David Hilal - Analyst
Okay.
Okay.
So maybe retention is sub 50 -- I'm just trying to play the math here.
Rudy Karsan - Chairman and CEO
70%, 30%.
David Hilal - Analyst
In terms of revenue contribution?
Rudy Karsan - Chairman and CEO
Correct.
David Hilal - Analyst
Yes, right.
Okay.
Those are my questions.
Thanks, guys.
Rudy Karsan - Chairman and CEO
Thank you.
Operator
And we take our next question from Michael Nemeroff with Wedbush Morgan.
Please go ahead.
Michael Nemeroff - Analyst
Hi, guys.
Thanks for taking my question.
Most of them have been answered already.
I was just curious, the uptick that you saw in the ATS product this quarter, does that have anything to do with [Tolaverv] or, and also if you could maybe talk a little bit about the competitive landscape, specifically in the ATS market that would be helpful?
Thank you.
Troy Kanter - President and COO
Sure, it's not only Tolaverv, but there's been a number of other consolidations, and less than great news on some of the other vendors in the ATS space, which helps our competitive position and helps our value proposition there.
And, again, and we're also benefitting from as companies look to again reduce cost and there are multiple systems, one system in North America, one system in Asia, one system in Europe, they look for, okay, well, what's the best global solution, and pull all those together.
So we're benefitting from that, as well.
From a competitive landscape perspective it's -- the field is getting smaller, especially on these large complex global deals.
It's a fairly short list of people that we're competing against.
Michael Nemeroff - Analyst
And then just one for Rudy, the unemployment rate, how much higher does it have to tick up, and how much worse does the environment have to get before you would get to that 35, to 37, 10% to 12% bear case scenario?
Rudy Karsan - Chairman and CEO
Man, you know, Michael, if I knew the answer to that question we probably would give you '09 guidance.
We just don't know.
Michael Nemeroff - Analyst
Okay.
Thanks very much for taking my questions.
Operator
And at this time there are no further questions in the queue.
I would like to turn the call back over to you, Mr.
Karsan, for any additional remarks.
Rudy Karsan - Chairman and CEO
Martin, thank you very much.
And, again, we'd like to thank the Street for joining the call, and as my Grandfather told me, "This too shall pass." So we look forward to talking to you again next quarter.
Good night and good evening.
Operator
And thank you for your participation in today's conference call.
Have a wonderful day.