International Business Machines Corp (IBM) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Kenexa Corporation first quarter 2009 earnings conference call.

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

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

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

I would like to remind everyone that this conference is being recorded.

I would now like to turn the conference over to Mr.

Don Volk, Kenexa's Chief Financial Officer.

Please go ahead, sir.

Thank you, Kristin.

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 first quarter 2009 results and provide guidance for the second quarter, and then we'll open up the call for questions.

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

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

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

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

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

I will discuss the reconciliation of adjusted numbers to GAAP numbers, and a reconciliation schedule showing GAAP versus non-GAAP is currently available on our Company website with the press release issued after the close of the market.

I will turn the call over now to Rudy Karsan.

Rudy.

Thanks, Don, and thanks to all of you for joining our call as we review our first quarter results.

Total revenue of $38.8 million, non-GAAP operating income of $3.9 million, and non-GAAP EPS of $0.14 were all in line with our previously issued guidance.

We also generated strong cash flow in the quarter with almost $9 million in cash flow from operations, and our deferred revenue was up sequentially as well as year-over-year.

From an overall perspective we were pleased with the Company's execution in light of the macroeconomic environment.

During the first quarter the unemployment rate continued to climb reaching the highest levels in the past couple of decades to almost 9%.

This factor combined with the decline in the global economy has kept pressure on the available IT budgets for each organization.

While market conditions for the talent management industry remain challenging and we expect it to remain so for the balance of the year, we currently believe our quarterly revenue run rate is approaching a point of stabilization.

One of the key reasons supporting this view is the solid momentum of our talent acquisition solutions.

On last quarter's call we highlighted the fact we signed a record new number of ATS customers and that new customer momentum continued in the first quarter combined with renewal rates that remained at high levels.

A primary driver to our success in the talent acquisition segment of the market is the strength and continued enhancement of our Kenexa recruiter BrassRing offering.

Customer and prospect feedback relative to our functionality, usability, and analysis and reporting capabilities is overwhelmingly positive.

During the first quarter we released the latest version of Kenexa Recruiter BrassRing which included drag-and-drop dashboarding, new comprehensive hourly recruiting support, Symantec surge, a completely new user interface and significantly enhanced industry leading reporting capabilities.

In addition we also added support for traditional Chinese, simplified Chinese and Slovenia to the over 20 languages already support by Kenexa Recruiter BrassRing.

In many situations, Kenexa was selected as a talent acquisition vendor of choice based on the standalone strength of our technology.

This does not even take into consideration the fact that Kenexa is the only talent management vendor able to combine best of breed technology with a broad range of services such as our assessment, insight from our Kenexa Research Institute, and proprietary industry content.

The ability to deliver all of these components in an overall total solution is particularly important to large global companies who increasingly view talent management as a highly strategic component of the company's overall success.

It also provides Kenexa with the ability to increasingly expand our presence with accounts over time.

During the first quarter our new talent acquisition customers included Invesco, Origin Energy, Cadbury, Amnesty International, MASCO and United Utilities.

We also continued to add to our talent retention customer base of first quarter wins including names such as (inaudible) laboratories, Edwards Life Sciences, Mutual of Omaha, Telenor, (inaudible) Global, Southern California Edison, ANZ, and Winn-Dixie, to name but a few.

In total we added over 20 new preferred partner customers during the first quarter which was consistent with last quarter.

An area of business that faces the greatest short-term pressures as a natural result of the slowdown in the hiring market is our RPO business.

While a portion of our RPO revenues related to (inaudible) content the majority of this revenue is tied in one form or another to the number of employee that are hired as part of our end-to-end outsourcing recruiting offering.

Our total RPO revenues in the first quarter was $9.4 million which is down from $11.3 million in the fourth quarter of 2008 and was approximately half the peak level in the second quarter of 2008.

Looking ahead we expect our RPO revenues to be in the range of $8 million in the second quarter of 2009.

As long as the unemployment rate continues to increase and the overall jobs market remains weak our RPO business will face headwinds.

We are cautiously optimistic that the rate of decline in our RPO business is slowing based on the current run rate of the business and high majority of customers that are already operating in guaranteed minimum levels, combined with the pipeline of new opportunities that has the potential to offset nonrenewals.

The customers simply aren't hiring at the time of renewal.

As an example during the first quarter, we officially began our RPO relationship at Verizon Business Services in EMEA and we continue to pursue other opportunities as companies are looking to streamline their overall cost structure related to talent acquisition business processes.

We believe that the financial performance of the consulting and content areas of the business which have also been more challenged during the economic slowdown are approaching a level of general stability.

Short-term pressure in this area of our business was a primary driver to our lower level of renewal rates during the fourth quarter of 2008, as customers still plan to move forward with these high value add offerings but they were postponing doing so until they had greater ability to spend against the budget plan.

During the first quarter we saw stability in our overall renewal rates though we believe the spending environment needs to improve before we'll see an increase in our renewal rates back to our well established levels of 90% plus.

Last quarter we mentioned that the peak cube metric which measures the average annual revenue contribution of our top 80 customers came in at over 1 million during the first quarter which was lower than the 1.4 million in the fourth quarter primarily as a result of the decline in our services revenue over the past several quarters.

We currently expect our key cube metric to remain stable over the course of this year.

While we appreciate that the uncertainty of the economic environment forces many investors to place more focus on the short-term, we believe it is important to not to lose sight of the long-term.

This is particularly important as it relates to the areas of our business most impacted by the slowdown in the economic environment and jobs market.

Another factor that we believe is particularly important from a long-term perspective is that we see a growing number of companies evaluating talent management vendors based on their ability to provide a comprehensive integrated suite of solutions.

We believe Kenexa is uniquely positioned to meet this growing demand based on our differentiated business model and industry leading product breadth and depth.

In fact, one of the industry analysts that attended our recent product strategy briefing commented that Kenexa was the first true vendor to launch a full talent management suite including talent acquisition, performance management and learning management.

Moreover, they commented that our overall product strategy plan should turn the market on its ear, unquote.

We're very confident in Kenexa's market position and ability to weather the economic storm based on our strong financial position, history of profitability and cash flow as well as our proven value proposition, critical mass and large base of premier customers.

Equally important, the high level drivers to the talent management market remain well intact from a long-term perspective.

In summary, our first quarter results were consistent with our expectations in view of the market, we remain understandably cautious from a short-term perspective.

However, one, we believe the Company's overall revenue is approaching the point of stability.

Two, the talent acquisition segment of our business continues to perform at a high level.

Three, the area of our business most challenged during the economic slowdown will also position Kenexa for above average market growth when the environment does eventually improve.

Four, customers continue to talk about starting to reengage more meaningfully beginning later this year and heading into next year.

And, five, we continue to invest in Kenexa's globalization including our recently announced expansion into China.

I will now turn it over to Don to review our first quarter results and second quarter outlook in more detail.

Don.

Thanks, Rudy.

Let me begin by reviewing our results for the first quarter starting with the P&L.

Total revenue for the first quarter was $38.8 million, consistent with our guidance range of $38 million to $41 million.

Subscription revenue was $33.3 million compared to $37.6 million last quarter and representing 86% of our first quarter total revenue.

Our services and other revenue came in at $5.6 million compared to $7.5 million last quarter and representing the remaining 14% of our first quarter total revenue.

The higher mix of subscription revenue relative to our long-term target of the upper 70% to 80% range is due to the larger relative decline in our services and RPO related revenue which is a result of the difficult economic environment and related impact on global hiring conditions.

As Rudy mentioned, when the macro and hiring environments improve we expect both of these components of our business to return to solid growth.

From a geographic perspective our revenue mix of domestic versus international revenue was 83%/17% which compares to the previous quarter of 79%/21%.

The strengthening in the US dollar during the first quarter had a negative impact of approximately $500,000 on revenue compared to the fourth quarter of 2008.

From a detailed perspective, RPO represented approximately $6.8 million of our subscription revenue and $9.4 million of our total revenue in the first quarter which compares to $7.3 million and $11.3 million in the fourth quarter, respectively.

From an overall perspective, Kenexa's $38.8 million run rate in the first quarter of 2009 was $17.6 million lower than the peak level achieved in the second quarter of 2008.

Over this same time period our RPO revenue declined by over $9 million, consulting revenue declined by approximately $7 million, and adverse movements in foreign exchange rates impacted our reported revenue by approximately $5 million.

The sum of these figures is approximately $21 million which alternatively shows that the revenue run rate of our business outside of these factors increased by approximately 10% over the past nine months.

Our clients typically purchase multi-year subscriptions with an average length of approximately two years.

During the first quarter overall renewal rates for our suite of solutions were again in the 70% range, consistent with our expectations in the previous quarter.

We expect our overall renewal rates to return to their historical range of 90%-plus when the business environment improves and assessments and survey related projects move forward at a more accelerated pace.

Turning to profitability, we'll be providing non-GAAP measures for each first quarter 2009 expense category which exclude $1.2 million of share-based compensation charges associated with FAS 123-R, $1.1 million of amortization of intangibles, $700,000 of professional fees associated with our expansion into China, $1.2 million of severance expense, and $33.3 million noncash goodwill impairment charge.

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

Non-GAAP gross margin was 67% in the quarter, consistent with the fourth quarter and compared to 73% in the year ago quarter.

Non-GAAP sales and marketing expense came in at $8.3 million or 21% of revenue consistent with 21% of revenue last quarter.

Non-GAAP R&D expense came in at $2.3 million or 6% of revenue, also consistent with 6% of revenue last quarter.

Finally, non-GAAP G&A expenses were approximately $9.2 million or 24% of revenue, up from 22% last quarter due primarily to employee related expenses that occurred in the first calendar quarter of each year.

Our non-GAAP income from operations was $3.9 million for the quarter, consistent with our guidance and representing a 10% non-GAAP operating margin.

During the first quarter our non-GAAP tax rate for reporting purposes was 19% resulting in non-GAAP net income of $3.2 million.

Based on 22.5 million shares outstanding, our non-GAAP diluted earnings per share was $0.14, in line with our guidance.

Turning to our results on a GAAP basis, the following were expense levels determined in accordance with GAAP.

Cost of revenue $13.7 million, sales and marketing $8.7 million, R&D $2.6 million, and G&A $10.9 million.

For the first quarter GAAP loss from operations was $33.6 million, net income applicable to common shareholders is $34.3 million loss resulting in GAAP loss per share of $1.52.

A reconciliation of non-GAAP to GAAP expenses and income from operations can be found in our press release and current report on Form 10-Q filed with the SEC.

Kenexa has cash, cash equivalents, short-term and long-term investments of $46.7 million at March 31, 2009, an increase of $3.9 million from the end of the prior quarter.

Positive cash from operations of $8.9 million during the first quarter was partially offset by $3 million in capital expenditures as well as $700,000 associated with our expansion into China, and $1.4 million in payments associated with our expansion.

In addition, the Company wrote down the auction rate securities portion of its marketable securities balance by $300,000.

The remaining net balance in auction rate securities at the end of the first quarter was $15.5 million.

Accounts receivable DSO were 62 days at the end of the quarter consistent with the end of the year ago quarter, and our deferred revenue at the end of the quarter was $41.4 million, up $2.8 million from $38.6 million at the end of the fourth quarter.

I would now like to turn to guidance for the second quarter of 2009.

We expect revenue to be in the range of $36 million to $39 million.

Guidance for the second quarter of 2009 assumes general stability in the revenue associated with our talent acquisition and retention solutions potentially offset by foreign exchange headwinds and expected sequential decline in our RPO revenue which Rudy mentioned earlier is a slight decline more than recent quarters.

We are targeting non-GAAP operating income to be $3.6 million to $4.6 million.

Assuming a 23% effective tax rate for reporting purposes, and 22.7 million shares outstanding, we expect non-GAAP net income per diluted shares to be $0.13 to $0.16.

In summary, the business environment remains challenging.

However, we continue to generate solid profitability and cash flow, and we believe our base of revenue is approaching a point of stability.

With a strong market position and differentiated value proposition, we believe we remain well-positioned to resume growth when the economic environment improves.

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

We'll take our first question from Brendan Barnicle with Pacific Crest.

Thanks.

Hi, guys.

Rudy, I was wondering when the RPO business in the last cycle, what stage does that business start to come back at?

It seemed like potentially that could be an earlier stage cycle.

Do you have a sense at least historically when we have seen that come back?

Based on past experiences the RPO business just started in '04, so we haven't really seen it through any massive cycle.

I would say that given that we said we're going to run about $8 million, I don't want to go ahead and say this will be the bottom and we should start seeing it turn up, but there is enough activity in the pipeline that says to me I think we're bottomed out on that, and we should reach a point of stabilization start to turn.

And what is really driving that is that our industries are shutting jobs like crazy.

So if you take Q1 of 2009 as an example, in the US we shed 2.5 million net jobs.

But the way it was made up, the way the 2.5 million number was made up, is we shed 7 million jobs and created 4.5 million, so that's why we shed 2.5 million.

So there are industries that are now starting to come back, and we're seeing that in terms of requests, and normally it is about a six to nine month selling cycle, so we've lost the couple of renewals we're supposed to have, none of those happened, and like I said we're seeing added inquiries and in from other verticals, especially globally.

Troy, I don't know if you add anything more to that.

At the end of the year finishing Q4 was just a real stale selling environment, but here in Q1 we have had the greatest amount of large deal activity that we have seen in about a year-and-a-half now.

Now we have to be able to see that coming to fruition, but the number of large global deals that are coming around gives us reason for optimism.

So it is really the pipeline driving your comments about starting to see some kind of bottom here.

Yes.

Perfect.

Over in the talent management side, any more guidance on what that rate, what that grew at?

If you subtract -- and that's why we did the analysis in Q2 and Q1, so that's about almost like 12 or 13 we said over 10, so if you subtract that RPO consulting and FX impact, that would be about 15% year-over-year growth or whatever it was 11% or 12% over a nine-month period.

Good.

Just wanted to get clear on that.

Lastly, BrassRing, new release coming, some good reviews there.

What kind of uplift or contribution do you think you might get from that?

I think we'll see some decent numbers in the back half of this year into next year, from a pipeline perspective it's looking really strong.

Q1 was a record quarter in terms of new enterprise deals added, and the sales force is as busy and as optimistic as we have been, so we're, again it is a tough environment, but we're hopeful that we'll set some more quarterly sales records in that group.

Great.

Lastly, on the commentary about flattening out in terms of the revenue, should we use this like a baseline revenue run rate for the remainder of the year?

Would that be reasonable, Don?

What you're saying is if you haven't given us guidance, why don't you just give us guidance anyway.

And from a modeling perspective, I guess the best way to think about it, Brendan, would be to say we really don't know, but if we knew, we would tell you.

I would say from a business perspective if Q2 is not the bottom, Q3 will be the bottom.

And if you look at the balance of the business, we're growing.

It is going to be the RPO that is going to help think it through, so I would say, I don't know, use 8, and if you want to be conservative, use 7.5 in Q3 and stabilize it at 7.5 in Q4 RPO and then picking your assumptions on the solutions side.

Great.

Thanks, guys.

We'll take our next question from Mark Murphy with Piper Jaffray.

Hi.

This is Brandon Chen for Mark Murphy.

Thanks for taking my question.

Hi, Rudy.

On the last earnings call you mentioned business should improve when the credit starts opening up.

On our recent run of channel checks we're hearing more feedback that credit is gradually opening up.

Are you seeing the same thing and when do you think Kenexa will benefit from it?

Let me give you a data point that might be helpful.

RFPs in Q4 of 2008 was 129 proposals that we got, requests for.

Q1 of '09 we got 149.

That is a mostly 15% quarter over quarter increase which then ties in with the your channel checks on credits opening up.

This is the first increase we have seen of this level I think since 2000 -- I want to say since light '06 or early '07.

If you remember back in May of '07 when we started getting (inaudible), this was a number I think we mentioned on the street, as well, that we had seen come down.

So I think from what Troy was saying earlier on, here is a data point where we believe things are starting to improve.

The question is what's going to be the size of the ultimate deals that close and how long will be the selling cycle, and we're moderately optimistic on that, or I should say the official corporate terminology is we are cautiously optimistic.

Okay.

Thanks.

I have a follow-up question for Don.

Don, how are you thinking about the margins for the remainder of the year?

Do you think the margins should expand from the Q1 level?

Yes.

On the last call we talked about the three different scenarios.

And our thinking now is consistent with those three scenarios.

Okay.

Thanks.

We'll take our next question from David Heinz with Needham & Company.

Hey, thanks.

Rudy, last quarter you gave some metrics around the RPO side of the business about how many customers had frozen hiring and I think you said 80% of customers were operating at or below minimum.

Is that consistent with what you're seeing?

Any changes there in those metrics?

Fairly consistent.

Within that RPO business we've had a number of our customers that have just frozen up, and they're operating at the minimums, that's why we're trying to give a little more visibility on where that business is going.

Are you guys putting any thought to spinning the RPO business off and running it as a separate operation?

No.

Long-term it adds significant strategic value to our customers.

We have done a tremendous amount of work in even bringing our costs of being in that business down.

We've done a lot of work on creating four regional service centers that are bringing great efficiency to the business, so as that business begins to bounce back, we see that as being really core and key to our long-term growth objectives.

The business operates at 50%-plus gross margin, it is profitable, even given this horrific economic condition we're in, we're still making money at it.

And again as we're dealing with these large, global, complex organizations, there is really a significant need there, and on every single engagement we can show significant business improvement and significant cost reduction for our customers.

Long-term we're going to keep it, it's the core to Kenexa's value proposition.

Also, when you invest at a tremendous amount of money over the last two years, collected all the noise from the street, and got kind of being pounded on that, now -- and the turnaround will come, I don't know if it is going to be next quarter, the quarter after, whenever it is, it will come -- and that's when this business is going to start to knock the cover off the ball.

This will be the wrong time to think about jetisoning something that we spent a lot of time, energy, strategic fit, and man we can't wait for this thing to turn.

And we're really well-positioned as companies begin hiring again, we're the only vendor that is a true global provider.

We have a large service center on mainland China, large center in India, large center in Krakow, Poland for Europe, two large considers in Lincoln, Nebraska, and Dallas, Texas for North America.

So even given the economic downturn we have been able to get a lot of work done on that business to have it really well-positioned as things start to come back.

Got it.

Lastly, maybe an update on the competitive landscape.

We saw an announcement this morning from ADP and Cornerstone, and you said that you feel as though by strength in the pipeline you feel like you're gaining market share.

I guess who do you think you're taking market share from and any other interesting competitive updates?

On the ADP, Cornerstone announcement, when we're doing our funnel reviews, we typically see them more on mid-markets, small business.

We don't see them typically in the large enterprise deals.

Again, our core focus is that global 2,500 employers, and so it is the same cast of characters.

There is only a couple of us that really compete very effectively at that large enterprise basis, and so we really haven't seen the landscape on those large deals change very much over the last couple of years.

Okay.

Thanks a lot.

We'll take our next question from Peter Goldmacher with Cowen and Company.

Hi, guys, this is Joe for Peter.

I just had a question about how well your Chinese business did in the quarter and what the outlook is for the business for the rest of the year?

Thanks.

In China we have a partnership right now, so it was growing, and it grew very nicely in Q1, but it doesn't sit on our top line at all right now, and only sits on our bottom line and contribution to margin was under $50,000, right, Don?

That's correct.

We continue to expand that business, and when we bring it into the fold over the next few quarters, we'll keep the street informed.

But I spent about a week in Shanghai and I would say that right now we're about as optimistic about China as we've been, so we're in a good place there.

Okay.

Thank you.

We'll go next to Brian McGrath with Credit Suisse.

Hi, guys, a couple of questions.

One, on the strong seasonal uptick in deferred revenue, was that driven just predominantly by strong bookings and renewals or were you able to negotiate better upfront payment terms on that?

Strong bookings.

No change in the payment term that we've been modeling in the past?

Not really.

And then you talked about revenue stability, but from an OpEx standpoint should we look at Q1 as the run rate for modeling operating expenses going forward or is there still a little bit of downtick going into Q2 from some of the headcount reductions you did in the quarter?

There's still a little downtick from headcount reductions, and traditionally Q1 is our weakest quarter from an operating income standpoint because there is some employment taxes that are charged in the first quarter.

So we should expect, if you go back to those three scenarios we talked about last quarter with the revenue range, in the bare case that the operating income 10% to 12%, in the medium case 12% to 14%, and in the bulk case 14% plus.

We're still comfortable with those operating income rates.

Got it.

Thank you very much.

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

Thanks for taking my question.

Can you hear me okay?

Yes.

Thanks.

I would love to know your expectations for content and for consulting.

You said those have been pressured and down a bit.

Do you expect to see those down sequentially in Q2 and/or Q3, any sort of color on those aspects of the business?

Really what we're seeing is we don't know when this thing is going to turn because if we did, we would have given the guidance on it, so if you thinking about it from two different ways, if you're thinking about it from a modeling perspective, I think you can end up using your 70% range for renewals for Q2 and Q3, and then you've got the bookings information coming in from the deferred and you will be able to model it out into Q3 and Q4.

If you're thinking about it more from a strategic standpoint and from a business standpoint, the way I would think about it is that usually this business comes in ahead of the unemployment rate maxing out because people start to think about things like, okay, there are portions of our business that are growing, we don't want to rehire in certain areas, we're going to go to our vendors and say, "Help us think some of this through or help take some of this off our plate." So I would say if you're looking at it from a modeling perspective and you're expecting unemployment to, call it max out in Q2 of 2010, then I would say we should start seeing an uptick in Q3, Q4.

If you assume that it is going to maximum out in Q1, subtract a couple of quarters from that, and that should give you a handle.

That's great.

That's helpful.

Can I follow up?

You got the floor, man.

Great.

Thanks.

I would love to know on BrassRing, can you tell me how many adds you made some quarter, and more qualitatively, when you're selling either performance or talent acquisition and you're winning, how are you differentiating from the other suite vendors in the enterprise space?

We typically don't break out the individual product category numbers.

On the part of your question around differentiating, again on the large, global, complex implementation there is really only a couple of us that are well-positioned to win that business from a product functionality perspective and a geographical region ability to service, as well as having the balance sheet, that procurement has become so difficult to deal with in this kind of an environment.

Again having the profitability, having the balance sheet that we do is pretty significant differentiator at that degree.

When we're looking at those pure play tournaments, where they're just looking at performance or just looking at applicant tracking, we win a lot just on best of breed functionality.

And then the real significant differentiator is when you can layer in all of our analytics, science, and our content, especially when we're dealing with a very strategic buyer, someone who is really responsible not only for -- typically the only reason anyone automates anything is do it faster, cheaper.

If you sell software, everyone can claim that story.

But when we're dealing with a fairly sophisticated buyer in these large global corporations, sometimes faster and cheaper isn't good enough, and then when you can layer in our content, layer in our analytics, it gives our customers a chance to really get at the opportunity side of their income statement and show really significant impacts on the quality of hire metrics.

Again, with the real deep set of expertise we have with our psychologists and statisticians we're able to really, really differentiate there and add significant value to our customers.

Thanks, Troy.

We'll take our next question from Brad Reback with Oppenheimer.

Hey, guys, how are you?

Troy, I believe earlier in the call you talked about the RPO business having a 50% gross margin but also doing a really good job on cutting costs.

I am trying to figure out if that's where you exited the quarter or that's where you were for the quarter and that there is upside from that number going forward?

Well, we believe the upside will come with revenue growth.

We've got the infrastructure in place that gives us good scalability as we get back to growing the revenue.

But think about the gross margin remaining at about the 50% plus level.

There is also a component of G&A and selling that will be stabilized.

We don't need to add salespeople to add another five accounts over the next five quarters, for example.

Got it.

Thanks very much.

We'll go next to Horatio Zambrano with Jefferies and Company

Thank you guys.

Just a qualitative question about performance management relative to applicant tracking or talent acquisition.

I guess there was a view that potentially recruiting or talent acquisition might be more discretionary or with higher unemployment be affected more.

What's your take on the nature of discretionary -- those two areas being discretionary in this environment?

I will attempt to answer it and then Troy will give you customer reaction to it.

I think the street's perspective of discretionary versus required, the buyers don't view it in those two boxes.

It is a continuum.

So I would say there is nothing that we sell is absolutely required.

It is not like breathing air.

It is not like security which is absolutely required.

Nor is it absolutely discretionary like some of the modeling software that some companies produce.

I would say we're closer to being in the middle of those two buckets, closer to the required part, and that's why you have seen our revenues grow whatever it was 11%, 12% over the last three quarters in that solution side.

Now, I believe what will happen is as we have seen happen in the past and as we see looking forward, the stresses that organizations will face are going to shift if I look forward from talent acquisition to retention because you will see things like the Employee Free Choice Act that's going to come on in front of Congress I think the summer session if not before then, how are organizations going to handle that?

How are we going to be handling some of the stimulus money as it comes through and there's a buoyancy that starts kicking in there.

As of now from a required standpoint, talent acquisition was a little ahead of the curve over performance management.

Troy, I don't know if you want to add any more to that.

Yes, those businesses are our best performing businesses right now.

Really the majority of our slowdown has come in our service consulting in our outsourcing business.

The core technology businesses are doing well given everything that's going on in the marketplace.

And on the performance management, are there a lot of greenfield there where you're not displacing a solution?

And is the attach rate between your talent acquisition now and performance pretty high or are you doing stand lone deals just in the performance area?

Both standalone and attachment.

I do believe there is significant greenfield in that space.

Again, when you're focused on that global 2,500, there is something in place, but typically it hasn't been operationalized on a global scale.

There is also a lot of business process consulting opportunities there if you're helping companies rethink through their performance management strategies and pull that together on a global basis or pull that together on a global job family basis.

So typically what we're doing there is consolidating multiple vendors or replacing some old legacy systems that have been in place for a while.

Thanks.

We'll take our next question from James Friedman with Susquehanna.

Thank you for taking my question.

I believe last quarter you had described four RPOs that were up for renewal.

I might have missed it in your commentary.

What's the update about those four prospects?

Two turndowns, two we'll find out in the next quarter, not overly optimistic about it.

Okay.

And then maybe a related question, Rudy you mentioned you had some 149 RFPs.

If I could use two acronyms in the same sentence, of those RFPs, is there a significant portion of RPOs?

Five in the pipeline right now, Troy?

Later stage.

Total is 16?

Yes, again, those deals there is not as much of them, but they're obviously very large.

And just so we have a benchmark, is five and 16, is that a lot or a little?

That's a huge number.

Comparable to same time last year was probably zero and two, or one and three, something like that, 400% increase.

Nice.

Don, the way you used to do the guidance or at least the last few quarters where the porridge was hot, cold or medium, relative to the porridge this quarter, does this contemplate the medium porridge?

Or what's the temperature of the porridge these days?

I don't know if that's a GAAP term or not.

Medium is the contemplation.

So this is the base case scenario.

The medium, the low end goes down into the bare case, and the middle is base case.

Thank you.

Thank you very much.

We'll take our next question from Terry Tillman with Raymond James.

This is Andrew Shaw in for Terri.

On learning management products, any update on that, is that fully developed, and are you seeing any benefit there yet?

Our investment in learning management is really a long term strategy.

We're not out actively competing on standalone learning management deals.

We're wrapping portions of that functionality into our performance product and into our content products.

It is part of our long-term strategy on our platforms to have an end-to-end talent management solution that becomes the single talent record for our client organizations.

There is no one in the marketplace that has all of the components pulled together, and we feel we're a little bit ahead of the market on that, and we feel that long-term that's where a lot of buying decisions are going to be made.

As opposed to individual category level decisions they'll look at a more holistic approach to talent management.

Thanks.

And then any comments on a strategy for intermediate use cash?

Like, are we buying back stock?

Yes, just in the short, intermediate term.

With everything that has happened, the auction rate securities, if I could turn the clock back, I wish we bought a bunch at $3.60, but obviously you can't do that.

I would say we'll probably place fairly conservative from here ongoing out at least for the balance of this year.

Thanks.

We'll take our next question from Sasa Zorovic with Janney Montgomery.

Thank you.

My first question would be,if you look at the progression of business and bookings throughout the quarter, if you have noted any kind of pickup as the quarter progressed which would be different from what a typical seasonality would be?

Not really.

So it was all just typical seasonality through the quarter?

It is like I guess if you go through a large number, Sasa, the typical distribution on whatever it is, 20 closes, it is really meaningless from a statistical standpoint, so we could say something but we'd probably just be making up stuff.

Okay.

In terms of your business domestically versus internationally, are you looking this tentative stabilization to be equally across here as well as abroad, or is there a difference?

I think that in Europe we're starting to see the upturn now.

I would say we're probably seeing more activity in India than we expect in China.

I would say probably across the board assuming no FX impact we would see global going a little bit faster than the domestic.

Okay.

Thank you very much.

You're welcome.

(Operator Instructions).

We'll go next to Brad Mook with MKN Partners.

Hey, guys.

Recognizing that you don't know exactly when the turn is going to take place, and also recognizing that you haven't lived through a rebound off of a cycle like this in the RPO business, do you have any sense as to the pace of recovery?

It sounds like pipeline activity is real good.

Does it take a year to work back to that high watermark where you were Q2 last year or is it going to take longer than that, quicker than that?

Brad, if we can get this baby turned that fast, that would be awesome.

I can't see us doubling our business in four quarters.

I don't mean necessarily four quarters from here, but four quarter from the turn is optimistic?

If you assume turn is three quarters out, seven quarters, I would say seven quarters is not that optimistic.

I would say that wouldn't be a bad assumption.

Okay.

So whenever we decide to place the turn, about four quarters back to that mark is a fair assessment.

If you think seven quarters from now, you're saying I need $10 million, that's $1.5 million per quarter, I would say that's reasonable.

Troy, what do you think?

Very reasonable.

The other thing, too, we're seeing in that marketplace is a little bit of a structural change.

That is, companies are starting to dramatically reduce their overhead and their shared services, namely headcount in their HR department, they're going to be reluctant to bring it back when they can go to a more full service provider that can take care of some of these for them on a global basis.

All right.

That's the pitch, and you expect that to play out.

Okay.

And then same type of idea on other products like the survey or do those turn on a little bit quicker?

We expect to see those come back a little bit quicker.

We start to see the content stuff come back quicker.

Okay.

That makes more sense.

Don, I missed the FX revenue impact in Q1.

Can you give that number again?

$500,000.

It was$4500,000.

And then it sounds like on your scenario cases, the three, you're kind of riding between the bare case and then your mid case, not sitting firmly in the mid case.

Is it still right to think about the bare case as being -- it sounds like a lot of activity is getting more encouraging, so is that bare case really solid in your mind?

If we knew that, we would be able to guide the year, but we can't, so --

But what you're not doing is you're not resetting the three scenarios so that your guidance is at the mid case, it is actually closer to the bare case, so that's why I am wondering if that non-calibration is actually matching up with that increasing optimism and you're actually calling about them?

In mathematics double negative is a positive in which case I would agree with you, Brad.

In this situation I would say the fact that this has happened says to me if it is not this quarter, it is going to be next.

If it is not next, I would be surprised.

That's assuming that the other shoe doesn't drop, right, like that's assuming that we don't get hit with a double whammy on swine flu which I know is now off the headlines, but if there is something like that.

There is a whole bunch of assumptions.

It is assuming that both GM and Chrysler go through restructuring without losing 500,000 or 600,000 jobs in this country in 30 days.

There's a whole bunch of assumptions along with it.

Sure, but nothing within your world suggests that there may be another shoe dropping?

No.

Thanks, guys.

We'll take our next question from Thomas Ernst with Deutsche Bank.

Hi.

Thanks for taking my question.

This is actually Joe on behalf of Thomas.

My question is regarding the RPO business.

You mentioned you expect $8 million next quarter.

What's the visibility you have into that stream of revenues right now?

I would say, what's it under, what's the sub on it last quarter, Don?

Subs were 6.4.

6.4 minus the one cancelation, so 6.1 would be a decent sub for Q2, so I would say we probably have visibility on about 80%, 82% of that number.

Okay.

And does this assume that the two who'll decide next quarter, do your numbers bake into the two which are up for renewal this quarter?

No.

The renewals would be in Q3, so I would say you won't see a significant -- if you assume no new business, you won't see a significant step down in Q3, but you would see one in Q4 assuming zero renewals.

Okay.

Got it.

And then on the other side CapEx looked a bit light this quarter.

How should we model it going forward?

About average, isn't it?

It's an average quarter for CapEx.

Oh, you know why?

You're comparing it to Q1 last year when we were completing our building in [Vitag], so that was the off line.

If you go back and carve out what we said was for Vitag in Q1 of '08 and just go back to our basic run rate which is around $10 million to $12 million mark, you should hit the $3 million.

Okay.

Got it.

Thanks.

At this time we have no further questions in your queue.

Mr.

Karsan, I would like to turn the conference back over to you.

Thank you very familiar.

I just wanted to thank the street again for the time we spent.

And as we said earlier on and hopefully the tenure and the way we answered the questions shows that we are fairly optimistic and bullish about Kenexa's prospects going forward, and we really appreciate the support the street has given us over the last few years, and hopefully we'll continue getting the same support going forward.

Have a good one until next quarter.

This does conclude today's conference.

Thank you for your participation.