International Business Machines Corp (IBM) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to today's Kenexa Corporation Second Quarter 2009 Earnings Conference.

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.

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

Now I would like to turn the conference over to CFO Don Volk.

Please go ahead, sir.

Thank you, Audrey.

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

Today we will review Kenexa's second quarter 2009 results and provide guidance for the third quarter and 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 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 and Exchange Commission.

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

We may refer to certain 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.kenexa.com with the press release issued after the close of market today.

I'll now turn the call over to Rudy Karsan.

Rudy?

Thanks, Don.

And thanks to all of you for joining us on the call to review our second quarter results.

We are pleased with the Company's execution in what continues to be a challenging economic environment.

This resulted in second quarter revenue growing sequentially, deferred revenue continuing to grow, and we delivered solid profitability and cash flows from operations.

While there is room for improvement, we're encouraged by our second quarter results, interest levels in our solutions remain high and we are confident of the Company's long-term market position and opportunity.

Taking a look at our results for the quarter, total revenue came in at $39.5 million, up sequentially from $38.8 million and above our guidance.

Non-GAAP operating income was $4.4 million, up from $3.9 million last quarter.

Deferred revenue was $42.2 million at the end of the quarter, up sequentially and an increase of 9% on a year over year basis.

Finally, we generated $7.5 million in cash flows from operations.

From a high level perspective we continue to expect the economic environment to remain challenging throughout the remainder of 2009.

In addition, many economists believe that the unemployment rate will peak in the double-digit range around the midpoint of 2010 which, other things being equal, creates a headwind for HR related solution providers.

That said, based on what we see in the market and know about our business, we believe that we have weathered the most difficult part of the economic storm and our revenue run rate has reached a point of general stability.

We believe our unique combination of software, science, and service represents the most robust solution for meeting the hiring and retention needs of our customers and that differentiated selling proposition is resonating with prospects as well.

We continue to have significant success with our Kenexa Recruiter BrassRing or KRB offering.

Feedback from customers and industry analysts relative to our KRB offering is very positive, including commentary related to our industry leading reporting capabilities, redesigned user interface, and integrated hourly and high volume hiring capabilities that were included in the most recent release of KRB.

We believe that Kenexa is establishing a strong technology leadership position in the talent acquisition segment of the market as evidenced by the fact that we continue to win highly competitive bids with the world's largest and most complex organizations.

In addition to the strength of our product offering, we believe the breadth of Kenexa's domain expertise and end-to-end product suite is unmatched in the industry.

During the second quarter, a leading industry analyst was quoted as saying, "Unlike its competitors, Kenexa offers a broad range of services including qualitative research and insight, assessment, and value added services such as employment branding.

Kenexa is the only talent management vendor applying human sciences as a foundation for their products and services.

Robust technology and ability to truly serve as a strategic business partner is important to global 2500 organizations and its competitive win rates are both high and improving."

During the second quarter, we added talent acquisition customers such as AMC, Proctor & Gamble, [Ditsudanku], Harley Davidson, and [Synopsis], among others.

During the second quarter we also added customers such as Carlton Hotels, Deloitte, and Dollar General for our talent retention solutions.

In total, we added over 20 preferred partner customers during the second quarter which was consisted with the proceeding quarter.

On our first quarter call, we noted our belief that the consulting and science areas of our business which have been more challenged during the economic slowdown were approach a level of general stability.

Our second quarter results and expectations for the third quarter support this perspective.

As a result of the stabilization, our overall renewal rates remain consistent with slight throughput on the margin during the second quarter as compared to the first quarter.

We believe that we will see progress in our renewal rates over the next 12 to 18 months, ultimately returning to 90% plus range that we experienced prior to the economic slowdown.

Most important from a long-term perspective, we believe the differentiation and quality of Kenexa science and consulting is unquestionable.

Across all technology sectors, services related projects are often put on hold during challenging budgetary environments and this is no different in the HR solutions market; however, business consulting assessment and science are areas that are highly strategic and important to driving business process improvements which is why customers tell us that they plan on moving forward with these services when the economic environment improves and they have great availability to IT resources.

Let me spend a moment reviewing the final component of our business, our recruitment process outsourcing services or RPO.

During the second quarter, our RPO revenue came in at $8.7 million which was down from $9.4 million in the prior quarter but was ahead of our expectation of $8 million.

The fact that the rate of sequential decline in our RPO revenue became much smaller during the second quarter is encouraging, as is the fact that this segment of our business exceeded our expectations.

With the unemployment rate expected to peak during the middle of 2010, we continue to believe that it is appropriate for Kenexa to have measured expectations relative to our RPO revenue from a short-term perspective.

As such, we're forecasting approximately $8 million in RPO related revenue in the third quarter, similar to our recent expectations for the second quarter.

Taking a longer-term view, RPO helped to develop deep relationships with customers, our pipeline of opportunities remains solid, and it is encouraging that some highly skilled sales professionals in this market segment recently made the decision to join Kenexa.

A common metric that we share which includes our RPO services along with our other consulting services and technology solutions in our P3 metric which measures the average annual revenue contribution of our top 80 customers.

This metric came in at over $1 million during the second quarter which was consistent with the level during the first quarter.

We continue to expect our P3 metric to remain stable over the course of the year.

I would like to briefly discuss the rebranding of Kenexa during the second quarter and why we are very confident about our long-term market position.

During June, Kenexa launched a rebranding initiative following a significant amount of research with our customers, prospects, and industry analysts.

You will find that we have completely redesigned the Company website, we have updated our Company tagline to "Kenexa - HR Success Multiplied" and we've changed our corporate logo to highlight the X in Kenexa.

Our rebranding effort puts increased focus on Kenexa's unique integrated offerings that combine employee science, technology, business process and consulting to positively impact business performance.

Unlike many talent management vendors that claim to have an integrated suite of solutions because they have two or three software modules, Kenexa is the only Company that we're aware of in the HR solution marketplace that delivers an integrated value proposition across each of these key disciplines to drive real ROI.

Our research shows that a major reason customers buy from Kenexa is their ability to help them integrate the right individual into the right environment.

Based on our experience, we believe it's important to have a broad suite of integrated applications to automate and streamline end to end HR business processes but it's even more important to have the science behind the software.

Kenexa's domain expertise enables organizations to optimize their business, resulting in productivity and overall business performance improvements that are not possible by simply deploying a software solution.

Our rebranding initiative was launched in order to closely align our corporate messaging with Kenexa's unique value proposition.

How our customers see Kenexa and where we believe the market is heading based on a growing number of strategic discussions with large, global organizations.

During the most challenging of times, we continue to focus on driving profitability and cash flows from operations.

This was a commitment we made to our shareholders and we stand by that.

We will continue to operate with this focus in mind and we're also planning to selectively increase investments in R&D and sales and marketing to capitalize on an expected improvement in the buying environment during 2010 and beyond.

These incremental investments will leverage the significant investments we've already made in the development and launch of our Kenexa 2X platform, continued enhancements to our best in class Kenexa Recruiter BrassRing solution, as well as our recent rebranding initiative.

We believe that Kenexa's value proposition resonates at the sweet spot of where customer demand is and will be for the foreseeable future and we want to make the right investment at the right time to capture this demand and become one of the ultimate winners in the HR solutions marketplace.

In summary, our second quarter results are better than our expectations.

We believe the market environment will remain challenging for at least the remainder of the year and possibly into the beginning of 2010 as well; however, we're becoming more positive on the underlying fundamentals of Kenexa's business and we believe that we've weathered the worst of the economic storm.

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

Don?

Thanks, Rudy.

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

Total revenue for the second quarter was $39.5 million, above our guidance of $36 to $39 million and up 2% on a sequential basis.

Subscription revenue was $34 million, an increase compared to $33.3 million last quarter and representing 86% of our second quarter total revenue.

Our services and other revenue came in at $5.5 million, compared to $5.6 million last quarter and representing the remaining 14% of our second quarter total revenue.

The higher mix of subscription revenue relative to our long-term target of the upper 70% to 80% ranges due primarily to two factors.

First, growth related to our technology solutions and second, lower services and RPO related revenue which continued to be the areas of our business most impacted by the current economic environment.

When the macro and hiring environments improve, we expect our revenue mix to progress back toward our target range.

From a geographic perspective, our revenue mix of domestic versus international revenue was 81%, 19% which compares to the previous quarter of 83%, 17%.

The weakening of the U.S.

dollar during the second quarter had a positive impact on revenue in the range of $400,000 to $500,000 compared to the first quarter of 2009.

From a detailed perspective, RPO represented approximately $6 million of our subscription revenue and $8.7 million of our total revenue in the second quarter which compares to $6.8 million and $9.4 million in the first quarter respectively.

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

During the second quarter, overall renewal rates for our suite of solutions were over 70%, consistent with our expectations and the previous quarter.

Turning to profitability, we'll be providing non-GAAP measures for each second quarter 2009 expense category which exclude $1.5 million of share based compensation charges associated with FAS123R, $1.1 million of amortization of intangibles, and approximately $300,000 related to onetime charges associated with the Company's decision to retire its line of credit.

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

Non-GAAP gross margin was 66% in the quarter which was relatively consistent with recent quarters.

Non-GAAP sales and marketing expense came in at $7.9 million or 20% of revenue compared to 21% of revenue last quarter.

Non-GAAP R&D expense came in at $2.4 million or 6% of revenue consistent with last quarter.

Finally, non-GAAP G&A expenses were approximately $9 million or 23% of revenue down from 24% last quarter.

Our non-GAAP income from operations was $4.4 million for the quarter and represents a 11% non-GAAP operating margin which was up slightly from a 10% margin in the first quarter.

During the second quarter, our non-GAAP tax rate for reporting purposes was 12%, resulting in non-GAAP net income of $4.1 million.

Based on 22.7 million shares outstanding, non-GAAP diluted earnings per share was $0.18, $0.02 above the high end of our guidance due to the lower than expected tax rate.

Turning to our results on a GAAP basis, the following were expense levels determined in accordance with GAAP -- cost of revenue, $13.6 million, sales and marketing, $8.2 million, R&D, $2.5 million, and G&A, $9.9 million.

For the second quarter, GAAP income from operations is $1.9 million.

Net income applicable to common shareholders is $1.3 million resulting in GAAP net income per share of $0.06.

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

Kenexa has cash, cash equivalents, and investments of $47.2 million at June 30, 2009, an increase from $46.7 million at the end of the prior quarter.

Positive cash from operations of $7.5 million during the second quarter was primarily offset by capital expenditures and earn out payments associated with previous acquisitions.

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 $42.2 million, up $800,000 from the end of the first quarter and up 9% from the end of the second quarter of 2008.

I'd now like to turn to guidance for the third quarter of 2009.

We expect revenue to be in the range of $37 million to $40 million.

Guidance for the third quarter of 2009 assuming generally stability in our subscription revenue while we continue to expect a level of quarter to quarter variability in our other services based revenue in the short-term as Rudy mentioned earlier.

We are targeting non-GAAP operating income to be $3.7 million to $4.6 million, assuming a 23% effective tax rate for reporting purposes and 22.9 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.13 to $0.16.

In summary, while the economic environment remains challenging, we are encouraged that the Company's business performance is starting to improve.

We will continue to focus on operational efficiency and generating profitability and cash flow and we are taking steps to ensure that Kenexa is well positioned to gain market share when the economic environment improves.

Kenexa has a unique position in the HR solutions market and we believe we have the opportunity to create a very large Company over time.

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

Audrey?

(Operator Instructions) Our first question will come from Brendan Barnicle with Pacific Crest Securities.

I was wondering if gross margins, based on where you're talking about it, it hasn't sort of bottomed out at this levels?

Well, Brendan, gross margins are a function of renewal rates and also a function of subscription versus services revenue.

And we believe renewal rates will be starting to climb as we indicated and our subscription will be consistent.

So, I guess you have to take it from there.

Okay.

Great.

And then, Don, interest income took a nice move up from last quarter.

Do you think that's a -- that same rate is a fair assumption for the remainder of the year?

I think interest rates are remaining to get pressure and I think if you're going to model you should assume they will be down a bit.

Great.

And then, Rudy, I was interested in -- you mentioned some new talent you brought over on the RPO side of the business.

I was wondering if you could give us a little more color on who those folks are and their background and what they might be bring?

I'm really excited about that, Brendan.

Our top sales person in 2006 was a guy by the name of Kevin Hudson who left in 2007.

And he has joined us.

He's rejoined us again.

He became a partner in a search firm and we have been kind of almost stalking the guy for a couple of years and he finally capitulated and rejoined us about a month ago.

We also got the top sales person out of our biggest competitor in Europe, a company called Alexander Mann Solutions.

We picked up a guy by the name of Jerry Collier who was their top sales person in '06 and '07.

Psyched about that.

Excellent.

That's terrific.

And then just lastly, anything new on pricing?

Any changes there that you're seeing?

Generally flat.

Troy, any color?

Yes.

The larger enterprise deals, everything's more competitive than it used to be but we're for the most part maintaining price points.

Mid-market type deals, we're seeing much more significant pressure on pricing.

But again, given that most of our focus is on that, the largest 2,500 corporations globally, we're a little bit immune to some of that mid-market pressure that we're seeing.

Downward pressure, a little bit of renewals, throw in a little bit of module to kind of preserve the total sense and increase it a little bit, but generally I would say not as bad as we thought we would be given the environment.

Great.

And lastly, Rudy, you had mentioned that you think it's probably mid-2010 before we see unemployment rates spike.

Is there any chance that the RPO business starts to benefit as we get towards that end where you'll start to outsource that recruitment before they actually bring people in themselves and we see that as some kind of forward indicator of demand?

Yes.

The short answer is "yes".

I'll just elaborate on that if you don't mind.

There are two points and they're almost countervailing trends.

The first one is -- what we'll see is we'll see the business come back with shorter contracts and smaller contracts.

Generally RPO duration that sits around two to four years, call it three, will probably be a year to two years.

And we'll see less in subscription, more in other.

We'll see larger amount of success fees.

And then the other part of the trend is that most HR departments have decimated their staffing ranks as you would expect and with the uncertainty, they'll have to make a kind of buy versus build decision so we believe this market will start to grow fairly quickly come 2010 and it might even kind of go ahead because people will start making the buying requests before the actual hiring decisions.

Terrific.

Thank you very much.

The next question will come from Peter Goldmacher with Cowen and Company.

Thanks.

A couple quick questions.

You had mentioned that the RPO business was down and you had them modeled to be -- you are expecting it to be a little bit next quarter but you also beat expectations on revenues.

So, Rudy, you had mentioned that you were having some success with other solutions.

What specifically are you having success with that's ahead of your expectations?

We look at it, we kind of said we would do 36 to 39.

Call it 37.5 central point and we came in at about 39.5.

So a couple million, some of which was made up from RPO, some of which was made up from FX and kind of the balance of it was made up from ATS, Applicant Tracking Systems.

Just selling the software, right?

Yes.

Okay.

And then you had also mentioned that you're looking forward to selling HR solutions and I think part of the story going forward is branching out beyond the RPO business into other aspects of HR.

Are you seeing any early traction with that and if you are what category specifically are you seeing interest?

From an additional service perspective, the service that we rolled out a couple quarters ago was our employment branding service.

And that ties really nicely to our RPO business as well as companies that are implementing our Applicant Tracking solutions or performance management solutions on the applicant tracking side, we can help them do a complete rebranding of their recruitment brand message as well as it's also we're finding a decent amount of uplift on the performance management side as companies are going through the change manager initiative.

So, that's the one new service that we rolled out in '08 and we are picking up some nice incremental contracts and up sells on that.

Great.

Thanks, guys.

The next question will come from [Reynaud Debucar] with Oppenheimer.

Hey, guys.

How are you?

Good.

I was wondering if you could give us some color around the comments here in the press release with regards to the incremental investments in R&D and sales and marketing.

What we are doing is as we are going into next year we're going to be selective in terms of where we're going to be spending extra.

We gave the example of the two kind of highly successful and kind of powerful salespeople in the RPO joining us.

With a very long selling cycle, there's an investment that's needed to get them off the ground.

We will be looking at additional key hires, whether it will be in the product management side, or whether it will be on additional sales and marketing side, and on the government solutions.

So, those are the areas in which we're looking at additional spends.

On the R&D side, we will continue to expand our R&D efforts in India.

We're looking to hire maybe a couple more executives across the board from kind of running our solutions faster because 2X is coming out or has come out, rather, we'll be rolling out new modules later on this year into next year.

We've got a schedule of about three or four modules over the next 12 months.

So, we'll need some additional resources in terms of trying to ensure that the customer experience is tremendous.

Through the rebranding, we will continue to expand not only here domestically but globally as well as we take our brand forward.

Okay.

Great.

Thank you.

Next we'll hear from Bryan McGrath with Credit Suisse.

Hey, guys.

Hi, Bryan.

Two questions.

Again with the RPO coming in better than you expected, I think you mentioned you had two renewals coming in this quarter but you didn't sound like you're optimistic about getting them done.

Did one or two renew and that helped push RPO above what you're thinking for the quarter.

We're still okay on those renewals.

We're in a holding pattern on those.

They are -- both of those are operating at contractual minimums anyway.

So, we have factored those into the guidance that we've given on the business for next quarter.

So, still kind of maintaining conservative assumptions but they could provide upside if they did renew ahead of when you guys think they will.

Not if they renewed.

But then as hiring activity picked up at those particular organizations.

Okay.

Got it.

And then last question, this is the second quarter in a row we're kind of -- you said things have been stable.

And maybe I can drill down a little bit.

Can you talk about geographically what overall stable means?

Is the U.S.

stabilized but Europe still weakening?

Or is that stable as well?

Standing with Asia?

Just kind of curious what your thoughts are there.

In terms of real units sold, in terms of dollars, clearly if you look at it, we went from 17% to 19% in non-U.S.

denomination.

That was about a 10% growth and it almost makes up half our growth from Q1 to Q2.

If you look at it in a non-dollar denomination basis, I would say that Europe is more or less flat to slightly up.

The U.S.

is up a little bit more than Europe is.

And in Pacific-Asia, Middle East, it's an immaterial amount of revenue.

It's under $1 million.

Got it.

Thank you very much.

We'll hear from Richard Davis with Needham and Company.

Thanks.

First question is and I doubt there's any amount, but I decided to ask anyway.

Are there any revenues, you talk about strategic evaluations from your customers.

Do you get any kind of service revenues at all from that?

I can't imagine you do but I just wanted to check it.

It sounds like it more of a pipeline optimism than --

Yes.

It's part of the sales process.

Okay.

Got it.

And then -- go ahead?

If you ever figure out how we can charge for sales calls, let me know.

Exactly.

We'll work on the same thing on our side too.

And then the second thing is what do you have left in your view that you need to integrate with regard to the acquisitions you've made and how do you think about how that plays into your ongoing R&D budget in terms of over the next few quarters if not maybe the next 18 to 24 months?

What needs to be integrated -- our testing platform is all sitting on the Kenexa platform now.

Kenexa Recruiter BrassRing and 2X are common services.

That should be done by 12 to 15 months out.

Give it notorious delays, call it end of next year.

Just about everything -- there isn't anything else material that stands out there based on all the acquisitions we've made.

Will this require an increase in R&D or is it you can just run that and that's part of your kind of existing budget as is?

Right now it's part of our existing budget but with R&D you never know.

You can get some (inaudible).

Got it.

Okay.

That's very helpful.

Thank you.

Next we'll hear from Mark Murphy with Piper Jaffray.

Thank you.

Can you comment on the pipeline of new opportunities at this point for the RPO business and your ability to offset any non-renewals that might occur going forward?

Let's see.

We've had quite a bit of activity in the sales pipeline on RPO.

That's primarily driven by companies are starting to feel more optimistic about their business models combined with a pretty significant downsizing of their HR staff internally.

So, right now we're at the -- say there's a little bit of a longer sales cycle in RPO to begin with but also what adds a little bit of murkiness to the sales process is our customers or prospects are having trouble getting their arms around their workforce planning as they're trying to bring in and see where their sales numbers are hitting.

So, as that's going on, we've seen again quite a bit of activity happen.

We're, again, we're cautiously optimistic that we've bottomed out in that business and the influx of opportunities that we're working on should play pretty well for us into the future.

One trend that we are seeing with a lot of the new deals that are coming in is they're slightly smaller than the deals that we had seen back in '06, '07, but again I think that also has to do with the environment in which our customers and prospects are operating on.

They're focusing on their most important key job families that are the first to emerge as their business cycles pick up.

So, sales, engineering, special engineering or special skill sets.

That's just a little more color on what we're seeing in the funnel.

Then is there any way you can approximate what your growth rate was in the applicant tracking segment to revenue growth rate in Q2 or if you can't do that, can you talk us through -- how do you think your win rates held up in some of the ATS only deals that you saw?

Two questions, yes, because we get a lot of kind of merging and meshing of the deals, we don't -- it's hard for us to give those numbers.

Being a comment, seeing what The Street, that we can't add transparency on the different modules that we sell.

So, if you look at our -- our win rates are I would say on average we're probably, we're about 60% across the board for all lines of business.

Okay.

And then one final one.

Rudy, we've heard some commentary that demand for contingent labor globally started to stabilize in June and in certain segments it may be showing an uptick for July although it's hardly an across the board kind of phenomenon.

Does that generally fit in with your view of the world at this point?

Absolutely.

We're seeing, as Troy mentioned, the cautious optimism.

We're definitely seeing uptick on the part of our clients' desire to increase contingent labor.

The company is stunned, you talk about growth, they can't cut anymore.

There is selective hiring that's taking place.

We're noticing that in places where we're rising from our minimums, they're happening in discreet and clearly identifiable job families, primarily related to growth.

So, they're either kind of selling customer facing, new R&D, those kind of job families are the ones that are seeing the most amount of uptick.

Okay.

Thank you very much.

The next question will come from Laura Lederman with William Blair.

Thank you for taking my questions, a few of them.

Sorry.

If you look at the RPO business, can you remind us how many renewals are up for the rest of the year and when they're expected to occur and also when you would expect net new customers to close as well?

And when -- on a related point, sales cycles?

How long are they taking now?

Or what are they ranging in the RPO business?

Thank you.

Renewals, I think Troy mentioned earlier we've got a couple left.

We've been given good signals on that.

They're both offering at minimums, fairly small sales cycles.

I would say on the margin we're seeing customers acting a little bit more aggressive than we have seen in the last couple of years.

So, they call the meetings sooner.

They're more aggressive in that they attend our offices rather than forcing us to fly out to their offices all the time.

So, we are expecting to see maybe some sort of shrinkage that might take place later, back half of this year, early part of next year.

And if there's only two renewals for the rest of the year and, Don, if you could -- or Troy, if you could confirm that, how many new ones would you potentially expect to sign net new separate from the two renewals if they renew?

The two are confirmed, but we're not going to comment on pipeline account by account, I don't think.

Troy, do you want to add anything to that?

Not other than just a little color, Laura, we are seeing it across all industry sectors which was a little bit surprising.

A couple quarters ago, what little activity there was, was primarily reserved to tech.

Now we're seeing it in service, manufacturing, hospitality.

We're seeing so -- and again, the only other color that I'd mentioned earlier in the call is that we're seeing smaller sizes, more specialized, more focused types of projects that are being bid out.

And who are you seeing most competitively in the pipeline on those RPO deals?

It really depends on the region of the world.

We've made over the last year, two years, we've made really significant investments in our global infrastructure.

So, we have large fulfillment centers in China, India, Western Europe, Eastern Europe, multiple centers in North America.

So, we're competing against a whole variety of organizations because most of the people in this space are specialized in one particular geographic region and our funnel is almost kind of equally spread across North America, Europe, Asia, being India and China.

The deals in India and China are smaller.

There's higher headcount numbers that we're recruiting but the fees are not as high.

But from a total deal perspective, we're seeing kind of equal distribution on them.

Also, why would the RPO revenues decline sequentially?

I realize they were above plan this quarter but which areas would you expect them to decline or why would they decline modestly going into Q3?

We haven't been able to call our RPO revenue for five quarters.

What do you want us to do?

Say, "Oh, well, we're going to do nine and shave off $1 million." From just a credibility and a thinking perspective we said, "Okay, we're going to be flat." We're hoping for the best but expecting flat.

I mean, expecting down.

And kind of hold the guidance steady and hopefully we'll be pleasantly surprised.

Fair enough.

On the ATF side, besides Taleo, who are you seeing?

And the pricing when you talk about the middle market, I would assume that's not Taleo?

Yes, Laura.

Mid-market, there's still half a dozen to a dozen people that are still playing in kind of that mid-market, North America centric kind of tournament.

The big global tournaments are primarily Taleo StepStone if it's headquartered out of Europe, or occasionally we'll see the ERP providers on those large global tournaments.

That's -- the field's getting a lot smaller on those.

Thank you.

We'll hear from Sasa Zorovic with Janney Montgomery.

Yes, so if you could give us an update how you're thinking sort of in terms of acquisitions.

Do you anticipate that in this kind of an environment given where some of the valuations have kind of gone, if you anticipate maybe steeling them up some, or what just generally your thinking is in terms of acquisitions?

It's probably about the same it's been for the past few months.

We are interested in them.

Price points, differentials are pretty high.

We're not looking at anything major.

We don't expect to.

If we would look at anything, it would be very tiny, tuck in type deals.

We want to be very focused on conserving the cash and wait for the signs of us flattening out before we start investing in acquisitions.

Okay.

Secondly, if you could comment on any sort of pace of business through the quarter, if you could definitely say that the business is in sort of a -- the business felt better in June, sort of the pace of it in June more than it did in the beginning of the quarter more than it's just seasonal within the quarter?

My sense is that there wasn't any difference in linearity through the quarter.

Troy?

No.

I think we'd commented on our first quarter earnings call that there was just a general hiccup in optimism on our customers' and prospects' side.

I think that's -- it's been similar here over the last few months.

Thank you.

We'll hear from David Hilal with FBR.

Great.

Thank you.

On the renewals, when people aren't renewing, are they still in business but just opting not to have a solution?

I guess what I'm trying to -- I'm wondering are they potential candidates for future business once their business gets better?

Do you think they will come back to Kenexa in your pipeline down the road?

Great question.

We actually have individual executives within Kenexa that are assigned to pursuing those and maintaining relationships and contacts.

A lot of those are primarily on sort of the more of the service related businesses.

So, there's ongoing connections.

A lot of those people, we invite to attend our regional user conferences and if we're doing speeches or events anywhere else, we've got an entire plan in place to ensure that we're maintaining contact and trying to maintain some form of relevance with those organizations.

So, those guys that aren't renewing, roughly what percent of them fit in that bucket, right?

In other words, they're still in business.

They didn't go to a competitor.

They're just trying to save money by going without any solution.

That would account for the lion's share of them.

Okay.

Rudy, you talked about kind of the worst is behind us.

You used the word "stabilized" a few times.

Do you think things have stabilized at a low level of activity?

I.e.

things are going to continue to be tough, but not really improved?

It's not getting worse.

Or do you see things actually starting to improve?

Without giving -- it's too early to call Q4 or next year.

I would say from a modeling perspective, the way I would think about the business is when we say "stable" we're thinking 37 to 40.

That's kind of how we'd be thinking about the business.

And then again even though the massive part of the storm has passed, there's still a lot of shakiness and uncertainty.

It's really, really hard to predict.

Okay.

We will become a growth Company again.

There's zero doubt in our minds.

The space itself is growing.

A lot of our service revenues have shrunk.

We're down to - less than I think 15% of our revenues are now service related.

Maybe that's a bit of an exaggeration.

Maybe less than 20% of our revenues are service related.

So, our software business continues to do well.

Okay.

Thank you.

And, Don, the lower than expected tax rate, why was that and any interest in revisiting the buybacks that you guys were doing previously?

The taxes are very -- it's very complicated on accruing taxes and our international strategy on taxes and so we've taken advantage of some deductions that came up from our impairment charges in the last two quarters and we're going to stay at 23% so we're not getting any negative surprises going into the future.

And then on the buyback, you want to answer that question, Rudy?

I think with the auction rate securities, getting finally to the middle of next year.

We just want to get comfortable in that area.

We know we're almost out of the water, but we're not quite out of the water yet.

We'll just wait until that happens and then we'll think about it again.

Okay.

Fair enough.

Thank you.

Next we'll hear from Pat Walravens with JMP Securities.

Thank you.

Nice quarter, you guys.

How much sort of payouts from prior acquisitions do you have left?

When we look at your free cash flow going forward, how much is going to go to pay for parts of acquisitions that you did in the past?

We have one more payout on earn outs that's likely in the second quarter of 2010.

We have one more that's unlikely.

Can you provide some sense of the order of magnitude?

The maximum would be in the same extend that it was this quarter and the minimum would be zero.

Okay.

Thank you.

Now we'll move on to Terry Tillman with Raymond James.

Yes.

Good afternoon, guys.

Thanks for taking my questions.

Rudy or Troy, earlier in, Rudy, your script, you'd talked about some high profile customers, people like P&G and Harley Davidson.

I would've assumed they already had an applicant tracking system.

Can you maybe talk about either those specific examples or just generally some of those higher profile companies?

Are you replacing an ERP?

Are you replacing nothing?

And then I had a follow-up on that.

Sure.

Let's see.

Instead of breaking out individual deals, there are in general on these large, high profile accounts, what companies are really looking at is one sort of the global footprint.

Can you support us in multiple regions of the world?

That really -- there are very few technologies that sort of run the enterprise for recruitment management that also include assessment that can operate in 30, 40 plus languages as well as have the service structure put in place.

Those are two really significant differentiators for us on those big global deals.

The other really significant differentiator that we've seen the activity pick up for us on is that these larger more sophisticated organizations are starting to think about, "Okay, by automating recruiting, that gets us cost reduction." But what the executive committee is really asking of the HR department is, "Okay, cost reduction is great.

Reduce our costs for hire.

But what we really want to change the accountability to is are we hiring better sales people?

Are we hiring more talented engineers?" Again, the business questions are changing.

It's not cost per hire, where do we stand against industry benchmarks on our HR costs?

It's more what is the per person contribution that the recruiting department can make to business outcomes.

So, as the questions become more complicated and more sophisticated, that really is a significant differentiator for us when you can combine all of the analytics and the content and the science that we bring to every aspect of the hiring process.

That's really playing well on these big tournaments.

So, again, it's a very short list of people that we compete against and then when the questions move from just cost reduction again to more per person productivity and influence on the opportunity side of the income statement, that kind of eliminates even the traditional ERP providers and really sets us up nicely.

Now, even when we announced some of these global 50 kind of wins, they will have applicant tracking systems or performance management systems in place but they're running different apps around the world and what they're typically looking to do is consolidate to one global platform.

So, with a large organization, there's very few -- there's not very many Greenfield opportunities left, but there's an awful lot that don't have a consistent global process yet.

Okay.

And as it relates to that, there's a lot of maybe applicant tracking companies that's all they were trying to do that maybe are struggling.

Are you seeing any kind of ground swell where you're seeing more rapid replacement of those because of viability?

Or have you not really seen that yet but that could be something more in the future as a benefit?

I think it's the future.

I still think they have enough cash to go through for a little bit.

I don't think they're completely out of the cash.

But I think things will change in the next year or two.

Okay.

And I know recently you all talked about the analyst day -- or not recently, I guess this is several quarters ago, but about learning management.

I guess can we get an update?

Are you selling that product set or those modules yet?

Or is that still more of a futures type thing?

We're selling it more in a combined solutions.

We won't sell an LMS by itself but there are a few clients that are looking at it as part of a broader suite purchase.

That will be part of the 2X rollout in the back half of next year, maybe early 2011.

Okay, and then, Don, just the last question.

I don't know if you have this handy but you had given us the RPO numbers for the first quarter of '09.

Could you give us the comparable for 2Q '08 and then the full year '08?

Thank you.

No, I don't have that handy, Terry.

Q2 '08 RPO was $18.7 million.

Right.

I don't remember full year '08.

Okay.

That's good though.

Thanks.

(Operator Instructions) We'll hear from James Friedman with Susquehanna.

This is [Megna] on behalf of James.

Thanks for taking my question.

Don, you talked about FX impact on revenue.

Can you talk a little bit about the FX impact on the margins?

Yes, Megna, it's not a material number.

Okay.

And then the last question was with verticals the last three quarters you gave some color.

Do you know which verticals are buying?

For instance, healthcare, retail, manufacturing?

Can you give us any color regarding which verticals are you seeing more growth or demand versus the others?

Thanks.

Let's see.

We talked a little bit about earlier in the call, we're pleasantly surprised, we are seeing good activity across multiple industry sectors or multiple verticals.

We've deliberately focused on some government solutions, kind of opportunities.

And so we're seeing that pick up.

I don't know if that's what's going on in the market or we're just seeing more of it because we're investing more heavily in that area, but in general we're seeing nice activity across all sectors right now.

Thank you.

It appears that we have time for one last question today and that question will come from Horatio Zambranowith Jefferies and Company.

A question about your RPO subscription which is down quarter over quarter $800,000.

Is that happening just because slightly more of RPO base is moving to minimums or have we already hit the point where everybody's at a minimum and is that what would happen as we think about a scenario where Q3 would be lighter on RPO total revenue?

The answer to your question -- I agree with your question.

If you're looking forward, I would say to think about the minimums in terms of modeling.

We've got I think ten more quarters left depending on how far you want to take us down, but we're expecting it to go flat.

I would say that the minimums and the subscription will probably hold for the balance of this year if not into next year.

Okay.

And when we think about the renewals that are coming up next year, you talked about the deals that are coming up are smaller in size.

Is there a chance that next year maybe companies are feeling better and not necessarily leaving the RPO engagement but may want to readjust their minimums downward given that they may still see uncertainty in their hiring plans such that for the new renewals coming up in fiscal year 2010, that might be happening as well?

Is that a risk here?

Companies not hiring is a risk to that business in general.

That's why we've tried to give guidance to slightly above our current customer base -- excuse me, our current customer base operating slightly above those contractual minimums.

So, as we enter new renewals in 2010, certainly if our clients' business plans are not improving or getting worse, then we're libel to feel some pressure there with the opposite being true as well.

As their business starts to pick up, hopefully our business will pick up as well as prospects having laid off their entire -- a good portion of their HR department.

As they look to start rapidly deploying talent that we'll be in a good position to capitalize on that as well.

Okay.

And then just a last question is on the new hires, the strategic new hires you made in RPO, are they able to come in immediately and make a difference on the pipeline of deals you have for the back half of this year or would you anticipate they have to start to build their existing relationships, sort of rebuild deals for next year in terms of the ramp up time that you mentioned, also, a different part of the call?

I guess the way I'll answer the question, Horatio, is just the two of us talking and they're not listening, I expect them to not close for another nine to 12 months.

But according to what they've been told, they better close in the next quarter or two.

Great.

Thanks a lot.

Mr.

Karsan, I'll turn things back to you for any additional or closing remarks.

I'd just like to take this opportunity to once again thank The Street for their continued support.

Have a great balance of the summer and we'll take again in three months.

Good evening.

That does conclude today's conference call.

Thank you for your participation.