International Business Machines Corp (IBM) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Kenexa third quarter 2009 earnings conference call.

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

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Don Volk, Chief Financial Officer for Kenexa.

Thank you.

Mr.

Volk, you may begin.

Thank you, Operator.

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 third quarter of 2009 results and provide guidance for the fourth 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 express written consent of Kenexa.

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

I will discuss the reconciliation of adjusted numbers to GAAP numbers, and a reconciliation schedule showing the GAAP versus non-GAAP is currently available on our Company website, www.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 third quarter results, which we believe provide further evidence that Kenexa's financial performances reached the point of general stability.

Our total revenue grew slightly on a sequential basis; deferred revenue continued to grow; and the Company continued to generate solid cash flows from operations.

Most important from a long-term perspective, we see growing evidence of customers recognizing the power of Kenexa's unique value proposition, as evidenced by a series of high profile, highly competitive wins during the third quarter.

Interest levels in our solutions remain high, and we believe Kenexa is well-positioned to re-accelerate growth when the unemployment rate eventually stabilizes and improves.

Taking a look at our results for the quarter, total revenue came in at $40.3 million, up sequentially from $39.5 million and above the high end of our guidance.

Non-GAAP operating income was $4.3 million, consistent with our guidance, and essentially flat with last quarter.

Deferred revenue was $44.2 million, an increase of $2 million sequentially and 20% on a year-over-year basis.

Finally, we generated $6.1 million in cash flows from operations.

From a high-level perspective, our view of the market has not changed materially since our last call.

While we do not believe the business environment is getting any worse at the moment, we are planning our business based on the assumption that the economic environment will remain challenging from a near-term perspective.

There is growing optimism that we may not be far from an economic recovery as evidenced by Q3 GDP growth, which is encouraging; but the face and shape of such a recovery is still quite unknown.

As an example, the Kenexa Research Institute performs a rigorous statistical analysis that results in what we call the Employee Confidence Index, a metric that we have tracked for a couple of years now.

A high level of employee confidence is achieved when employees perceive their organization as being effectively managed and competitively positioned, and believe they have a promising future with their organization, job security, and skills that are attractive to other employers.

Employee confidence influences individual behavior and has implications for organizational performance and economic conditions.

In fact, we have found the Employee Confidence Index to be highly correlated to multiple economic and business performance outcomes, including consumer confidence and GDP growth.

During the second quarter, the Kenexa Research Institute reported an increase of 5.3% in the US employee confidence from the first quarter.

However, that figure declined by 1.2% from the second quarter to the third quarter.

Moreover, nine of the 12 countries studied showed third quarter declines compared to the second quarter of 2009 -- an indication that we're not out of the woods yet.

The positive news is that none of the countries completely lost the gains made in the third quarter.

This is a figure that we will continue to track closely and report on.

The face and shape of the recovery will also have an influence on the unemployment rate, which is widely expected to increase in the near-term, reaching a point of stability around the midpoint of 2010.

As we have commented in the past, our view is that we will continue to face headwinds as long as the unemployment rate is increasing.

For this reason, combined with variability related to currency rates in our other revenue, we believe it's prudent for us to maintain a stable quarterly revenue guidance range that we have targeted in recent quarters, which Don will comment on later.

We believe the stability of our results around the strengths during the first nine months of this year, combined with solid growth in our deferred revenue, is positive evidence that Kenexa has weathered the most difficult part of the economic storm.

As we look forward, we continue to be confident in Kenexa's market position, due in large part to our highly differentiated value proposition.

We see a growing number of large global organizations evaluating vendors based on the breadth of their offering, global footprint, domain expertise, and ability to serve as a strategic partner to help customers implement best practices.

We believe that Kenexa's unique combination of strong technology, science, and services positions Kenexa well to meet the evolving needs of these customers.

Another area for end-to-end products which continues to enjoy significant success is 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.

The strength of our technology was evident in the significant applicant tracking system win with a Fortune 100-type aerospace and defense company during the third quarter.

In this situation, the overall landscape of vendors was reevaluated, including the incumbent vendor looking to move the customer over to their internally developed high-end offering.

And it was determined that Kenexa's roadmap and KRB solutions, including our system security practices and protocols, was best positioned to meet their needs.

This is just one example of the growing number of situations in which Kenexa is winning competitive evaluations based on the strength of our technology.

We have a couple of other customary examples that illustrate the strength of Kenexa's end-to-end value proposition.

Standard feedback from customers continues to [be] as Kenexa wins -- of our long-term partnership focus, and because of our ability to link HR to actual income statement outcomes.

Our individual times environment equals success brand, reflects the fact that we are uniquely positioned to help customers hire the right person for every job, create the optimal environment for each person, which has a multiplicative effect on business outcomes.

During the third quarter, we won a highly competitive selection as one of the largest home improvement retailer chains in the world.

In addition to selecting our KRB applicant tracking system, they also selected Kenexa's onboarding and assessment solutions for enterprise-wide deployment.

Kenexa will become the global ATS solution and we are building custom field level assessments for store hiring.

This customer has an extremely well-respected organization in the HR community, and they felt a strong connection to Kenexa's strategic mission, vision, and values.

Finally, for those of you who attended our annual users group meeting in Dallas, you had the opportunity to hear one of our featured keynote speakers, Wal-Mart stores, who has more than 8,000 retail units under 55 different banners in 15 countries, and employs more than 2.1 million associates worldwide.

In addition to being one of the more forward-thinking companies from an HR perspective, one of the reasons that Wal-Mart was in attendance at our users group is because they are one of the latest companies to partner with Kenexa.

It's worth pointing out that Kenexa now has relationships with three out of the five largest companies in the world.

During the third quarter, we also won competitive evaluations and added high profile talent acquisition customers such as [Bro-Comm], Harvard University, and 24 Hour Life Fitness.

In addition from a talent retention perspective, we added customers such as HEB Grocery, ADP, Caribou Coffee, SunPower, Scott's Company, and (inaudible).

In total, we again added over 20 preferred partner customers, which is consistent with recent quarters.

We believe the differentiation and quality of Kenexa's size and consulting is unquestionable, and this is important when we are competing against vendors that are only able to deliver the software component of the value proposition.

Large global organizations are looking for more than just a software package.

They want a business solution and a business partner.

The aspects of our business that is most challenged as the result of a sluggish economic environment, however, is the services-related component.

Across all technology sectors, service-related projects are often put on hold during challenging budgetary environments, and this is no different in the HR solutions market.

We expect the consulting portion of our business to remain choppy for the next couple of years -- for a couple of quarters, pardon me -- until the employment rate stabilizes.

However, customers tell us their plan on moving forward with these statistics services when the economic environment improves and they have greater access to resources.

Let me spend a moment reviewing the final component of our business, our Recruitment Process Outsourcing services, or RPO.

During the third quarter, our RPO revenue came in at approximately $9 million, which was recently flat to up slightly from last quarter.

The sequential decline in our RPO revenue has been increasingly small in recent quarters, and the third quarter represented the first time in six quarters that our RPO revenue was flat to up.

We're encouraged that our RPO revenue has stabilized.

Not only have we had some customers who have [upped] their contracts [at minimum] during the quarter, but we also added (inaudible) as a new RPO customer.

We continue to invest in the strategic part of Kenexa as evidenced by recently adding top-notch RPO sales talent, and we have a solid pipeline of opportunities as a result.

However, with the unemployment rate not expected to peak until the middle of next year, 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 continue to forecast our RPO-related revenue to be flat to possibly down for the next couple of quarters.

When the economy recovers, we're optimistic that our RPO-related revenue will rebound, and it's important strategically because it provides Kenexa with unmatched domain expertise and helps us to develop deeper relationships with our clients.

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

This metric came in at over $1 million during the third quarter, which was consistent with recent quarters.

From a summary perspective, we're not out of the woods yet as it relates to the macroeconomic environment.

There is growing optimism that a recovery is around the corner, but we believe it will be a couple of quarters before it translates into customers moving ahead more aggressively with software and service engagements in the HR organization.

That said, we continue to grow more bullish about Kenexa's position in the market and our business prospects from a 12 to 18-month perspective.

We are encouraged that Kenexa's total revenue stabilized in recent quarters, while the solid growth of our deferred revenue reflects the stabilization in our renewal rates combined with the momentum of our sales activities.

Large global organizations are increasingly [valuing] vendors on their ability to deliver a total value proposition.

That means having both a broad integrated suite of HR solutions, as well as the domain expertise science and services to serve as a strategic partner and advisor to the client.

We believe the strength and differentiation of Kenexa's solutions and business model, as evidenced by highly competitive wins with some of the largest companies in the world among others.

We continue to believe Kenexa will be a primary beneficiary when the unemployment rate eventually stabilizes.

With that, let me turn it over to Don to review our financials in more detail.

Don.

Thanks, Rudy.

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

Total revenue for the third quarter was $40.3 million, above our guidance of $37 million to $40 million, and up 2% on a scheduled basis.

Subscription revenue was $33.2 million, and represented 82% of our third quarter total revenue.

Our services and other revenue came in at $7.1 million, representing the remaining 18% of our third quarter total revenue.

We continued to expect our subscription revenue mix to be in the upper 70% to 80% range from a long-term perspective and in a more healthy economic environment.

From a geographic perspective, our revenue mix of domestic versus international revenue was 77% and 23%, which compares to the previous quarter of 81% and 19%.

Movement in currency rates did not have a material impact on our geographic mix during the quarter.

From a detailed perspective, RPO represented approximately $6 million of our subscription revenue, and approximately $9 million of our total revenue in the third quarter, which compares to $6 million and $8.7 million in the quarter, respectively.

Our clients typically purchase multiyear subscriptions with an average length of approximately 2 years.

During the third 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 third quarter 2009 expense category, which exclude $1.4 million of share-based compensation charges associated with FAS 123R, and $1 million of amortization of acquired intangibles.

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

Non-GAAP gross margin was 67.5% in the quarter, which was up from 65.7% in the prior quarter.

Non-GAAP sales and marketing expense came in at $8.8 million or 22% of revenue, compared to 20% of revenue last quarter.

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

Finally, non-GAAP G&A expenses were approximately $9.3 million, or 23% of revenue, also in line with last quarter.

Our non-GAAP income from operations was $4.3 million for the quarter, consistent with our guidance and representing an 11% non-GAAP operating margin.

Of note, our non-GAAP operating expenses in the third quarter included legal and professional fees that were approximately $300,000 higher than our original estimate.

As we have disclosed in our filings, we are pursuing litigation against one of our competitors that we believe has infringed upon one of our patents, and we intend to continue to aggressively pursue this matter.

Even after this higher expense, non-GAAP EPS was $0.18, which was above our guidance of $0.13 to $0.16, due to a lower-than-expected tax rate contributing $0.02 per share.

Turning to our results on a GAAP basis, the following were expense levels determined in accordance with GAAP -- cost of revenue, $13.1 million; sales and marketing, $9.1 million; R&D, $2.5 million; and G&A, $10.2 million.

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

Net income applicable to common shareholders is $1.6 million, resulting in GAAP net income per share of $0.07.

The reconciliation of non-GAAP to GAAP expenses and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.

Kenexa has cash, cash equivalents, and investments of $50.2 million at September 30, 2009, an increase from $47.2 million at the end of the prior quarter.

Positive cash from operations of $6.1 million during the third quarter was partially offset by capital expenditures.

Accounts receivable DSO were 66 days at the end of the quarter, compared to 62 days at the end of last quarter.

Our deferred revenue at the end of the quarter was $44.2 million, up $2 million from the end of the second quarter, and up 20% from the end of the third quarter of 2008.

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

We are targeting revenue in the range of $38 million to $40 million, which increases the low end of our guidance range from last quarter and is consistent with Rudy's commentary regarding stabilization of our results.

In addition to the fact that we believe it is prudent to allow for a level of variability in our other revenue and currency rates, it is worth the reminder that while several of the larger, higher profile wins contributed to the growth of our deferred revenue, we do not expect to begin recognizing revenue related to these relationships until mid-2010, most likely, due to the multi-element nature of those deals.

We are targeting non-GAAP operating income to be $3.3 million to $3.9 million, which includes an expected sequential increase in our legal and professional fees of approximately $300,000 to $500,000 related to the previously mentioned patent lawsuit that we are pursuing.

Our current expectation is that our fourth quarter legal expense run rate will continue into 2010, as we believe we have a strong case that is worth continuing.

Assuming a 15% effective tax rate for reporting purposes and 22.9 million shares outstanding, we expect non-GAAP income per diluted share to be $0.13 to $0.15.

In summary, we are encouraged by the continued stability in our financial results, while solid growth and deferred revenue, and numerous high-profile customer wins support our growing long-term optimism.

When the unemployment rate stabilizes and improves, and HR organizations increase their spending on technology investments and related services, we believe that Kenexa will be a primary beneficiary.

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

(Operator Instructions).

Mark Murphy, Piper Jaffray.

This is Brian Schwartz for Mark Murphy.

Don, I wanted to dive in your comments, you sound like there is stabilization improvement.

I wanted to see if you could comment on the trends of purchase orders that you're seeing from the staffing companies and the consulting companies.

Are you seeing any improvement or any interest to increase purchases from that customer base?

None that can point to a trend.

Okay.

And it looks like the international segment of the business picked up here [a] percentage.

Wonder if you could comment where the strength was coming from, what type of regions?

The strength is coming primarily from Europe, which is the bulk of our -- it makes up 85% to 90% of our investment revenues with a little bit of business in the rest of the world.

I would say the rest of the world makes up less than $1 million -- less than 1% or 2% of our -- less than 2% of our revenue base.

Great.

And [I thought I'd] also just touch in on the gross margins here.

We've had a couple of quarters now of improvement.

Do you think that that has pretty much bottomed here a couple of quarters ago and there's still some leverage on that line here, as we move into [2010]?

Well, one of the reasons that our gross margin improved in the third quarter was because we reached more than minimums on some of our RPO contracts.

And those reward fees have high gross margins.

So that contributed to most of the improvement -- [for] the [67].

Okay.

And then last question for me here -- the patent case that's going on here and the additional legal expense here, Rudy, can you give us any more color possibly on the time length that you think that this may go ongoing?

And possibly why you think that you have a strong case here?

That's all I have.

Thanks.

When you're looking at legal matters, the timeline is -- we just really don't know.

It can take a quarter; it can take four quarters; it can take two quarters; we just don't know.

As far as the level of conviction that we have, I guess the level of conviction is given by the fact that we're willing to invest the dollars.

And then we basically have a policy in terms of we don't really comment on the validity of the case while it's ongoing.

And just so from an internal perspective, we don't discuss any legal issues.

Great.

That's all I have.

Thank you for taking my questions.

(Operator Instructions).

Peter Goldmacher, Cowen and Company.

Nice quarter.

This is [Joe Delkiyar] for Peter Goldmacher.

So I was just wondering if you could, like, provide any additional color as to the sequential guide down in revenues.

And I also had another question on -- if you could give us, like, some more color on what people are interested in, in -- like, sort of add-on applications and services when you're -- as you go forward, now that all of the HR market has potentially been turning towards outsourced HR.

So, Joe, on the guidance question, we've been consistent in our messaging that we expect the Company to face headwinds as long as the unemployment rate is increasing.

So even though there are signs that make us more bullish on the longer-term outlook, we believe that that's the case.

Our subscription revenue is stable.

Our renewal rates have been stable to improving.

And our deferred revenue grew solidly on a year-over-year and a quarterly basis -- on a quarter-over-quarter basis.

From a product category, where we're seeing demand and requests are -- we announced this quarter, what, 20-plus preferred partner deals; over 50% of them were multi-element deals with the really large global complex deals, almost all of them were multi-element deals.

You look at the applicant tracking or Kenexa BrassRing package being the lead platform on the hiring side, you'll see onboarding, analytics assessments continually bundled into that.

The same on the performance management side; if you think of that as sort of a platform product, you'll see a lot of the analytics added on there.

We are seeing a lot of shopping or a lot of tournaments on the RPO side right now.

We're as active as we have been in awhile in terms of the number of tournaments that are in play.

I think we're optimistic on those.

And we're hoping for more decision points or conviction around decision points, as our prospects and client organizations start to see stability in their revenue models.

And as they can better call their revenue, then the hiring initiatives will kick in.

Excellent.

And then -- are there any other services from you, that they have been inquiring about, from you guys?

It's fairly consistent with the core portfolio that we have now.

Okay.

Thank you.

Pat Walravens, JMP Securities.

I was hoping you could just tell me when the trial was going to be.

Oh, man, if you can't figure that one out, let me know.

Well, it was really supposed to be October 19, so I'm assuming that didn't happen.

Is that right?

That's right.

Okay.

You don't have any idea how long -- I mean, the Judge must have set another date?

There's all sorts of other dates set, Pat.

Okay, I'll dig into it.

You also have -- in that same court, you also have a case you filed in 2008 against Vurv and then another one you filed also in 2008 against Taleo -- did those come to a resolution?

No, those are ongoing.

Those are ongoing as well?

Yes.

Okay.

And so can you just quantify for us exactly how much the incremental legal expense is going to be?

I heard the $300,000 to $500,000, but I wasn't sure if we were supposed to be adding that to some other number from Q3?

Oh, yes, it's in addition to what we have from Q3 and it indicates -- it's why we are giving consistent revenue guidance and dropping from 4.3 to -- or to 3.3 to 3.9.

Okay, so I must've missed it.

How much did you spend in Q3 on legal for the trial?

We said $300,000 more than we anticipated.

And then we expect it to be more than in Q3 and Q4 -- by $300,000 to $500,000.

Right.

So we're sort of $600,000 to $800,000 for this particular litigation in Q4?

Is that a fair way to think about it?

It's fair.

Okay, great.

Thank you.

Brad Reback, Oppenheimer.

I think I missed it -- during the prepared comments and I'm not sure if it was Rudy or Don, there was some comments around the RPO business, existing customers.

Are they all running at their minimums right now?

They're starting to move off their minimums.

But as we've explained in the past, when the anniversary, the minimums drop in a lot of these contracts.

So when we were talking about this two or three quarters ago, we said make sure you build in kind of a dip every quarter in your modeling.

We're not saying the same thing, because a lot of these companies have now started moving off their minimums.

(multiple speakers) And hence, you saw the number climb, but its number climbed, even though there was a reduction in some of the minimums.

Okay.

And as we think about it, just so I'm clear on this, all those annual renewals are pretty much now behind us?

Or there's still a handful out there that could put some --

No more this year.

We're pretty well done for this year.

And as we head into next year, as long as the activity remains where it is, we should be okay on that front?

I would say look at the portfolio being 15 to 20 companies, three to five renewals -- so you get the kind of the three to five renewals every year.

Okay.

And then Don, on your comment around the increase in the deferred revenue, obviously, you signed a bunch of contracts in the quarter; you had talked about not being able to recognize revenue there until middle of 2010.

Are you doing different things in these most recent contracts to cause that to happen?

Well, these contracts are multi-element contracts and we don't recognize revenue until the final element is delivered.

So when you say multi-element, that includes aspects of RPO and ATS?

It would more include ATS and onboarding, and possibly survey, possibly testing.

Okay, thanks a lot.

Bryan McGrath, Credit Suisse.

Two questions, just from a competitive standpoint.

Have you seen any changes on the landscape?

I'm wondering if the tough macro we've had over the last, call it, 12 to 18 months has shaken out some of the smaller guys that were out there?

Yes, we've seen a little bit of that.

I think since the start of the year, we've probably -- if we're looking kind of our win/loss record, I would say that we can count on the fingers of one hand now we have lost two rather than if you look at '07 and '08, where you would have double-digit names of companies.

So you've got the Kronos/Unicru; you've got the Virtual Edge/ADP.

You've got Taleo/Vurv; and then you've got the Peopleclick and you've got the Steps Down.

That's helpful.

Don, real quick, given the, I guess, overall the strong bookings you saw in this quarter, the 20 partner/customer additions and the deferred revenue growth, that gives you pretty good visibility, obviously, into the next couple quarters.

How confident would you be in saying that maybe a $38 million quarterly revenue rate is probably the bottom or a flat bottom that you probably won't tip beneath, going forward?

Well, as I said, I think, Bryan, there's an element of variability in our other revenue.

So we believe it's prudent from a forecasting perspective to maintain the quarterly target that we've shared.

Right?

But we're encouraged by the strength of the market position and we're confident that the revenue run rate will begin to improve on a quarter-to-quarter basis, as soon as the unemployment rate stabilizes.

Got it.

Thank you very much.

Sasa Zorovic, Janney Montgomery Scott.

So my question would be regarding if you could provide us an update on your M&A strategy and what your plans might be regarding that.

Should we be anticipating -- you have not mentioned that in your prepared remarks.

First, the way we're thinking about M&A is that we would still be driven primarily by geography -- the added geography.

We'd be driven by added solutions and we would be driven by added verticals.

And we would want it to be accretive.

We are not looking at very large acquisitions.

We would be looking primarily at tuck-ins.

We know we have the ability to raise that if we ran into a larger transaction, but we don't have debt right now.

We closed the line that we had with [P&C] -- in Q1 or Q2, I don't remember which -- was it Q1?

Yes.

In Q1, we shut that line down.

So the way we're thinking about it is we are expecting to be active in it, but primarily only for tuck-ins.

And then my second question would be regarding the bookings that came strong, and trying again to reconcile, I guess, asking the same question in very many different ways here regarding your guidance.

So could you provide us with some kind of an insight into if we were to take some of these larger deals where the recognitions aren't going to be until mid-next year, how much would that take away from the bookings, if you could give us some kind of a sense into that rest part of the business?

I think you want to ask the question another way.

We're having trouble -- what's the number you're looking for here, Sasa?

So I'm trying to see if we were to exclude some of these larger deals, these deals that you have closed recently that -- where the revenue is going to be recognizing starting mid-next year, what the bookings number would have been without those.

We don't disclose the bookings number.

Are you talking about our deferred revenue, what would that be without the larger deals?

Yes.

I don't know that number.

I don't think we disclose it client by client.

Right, and we would we -- we wouldn't want to exclude those deals.

I mean, they make up the bulk of the difference between Q2 and Q3, if that's what you need.

Great.

Thank you very much.

Michael Nemeroff, Wedbush Securities.

Thanks for taking my questions.

Rudy, just to follow-up on the previous acquisition question.

What areas are you looking at?

I know they're going to be small and tuck-in.

Is it going to be more on the software side?

Is it going to be more on the services side?

And then also as a follow-up to a previous answer, you talked about the minimums on the RPO business.

Relative to last year's minimums, what percent lower are currently the average minimums?

Is it 20%, 30% lower than last year?

And then I've got a follow-up for Don.

So we are looking at primarily software and content -- very little services, and most of the deals are tuck-in and real tiny.

So that answers the first question.

I'm not sure I completely understand the second question, so if you can kind of word it another way, if you don't mind.

Sure.

So you said the minimums are the -- people are coming off of the new minimums, but you said the minimums are lower than they were last year.

I just want to know relative to last year's minimums, where are the new minimums, just so we can kind of get a sense of how far below they still are from last year's minimums.

So the minimums generally is in the subscription number.

From the RPO?

From the RPO.

So, if you think about it and you're modeling it out, you've got a portfolio; you have to assume that you've got about eight quarters, maybe 12 quarters subscriptions; and assume that because you've got a large enough block, that it kind of grinds down to zero over a period of eight to 12 quarters.

There is a natural downward pressure on your subscriptions as they either anniversary or don't renew, and it's being refreshed by new business.

Right.

No, I was -- actually, I think I was referring to the customers that are still RPO customers, but they've lowered their minimums over the last year.

I just wanted to know --

Oh, that's what you mean.

Okay, so I would say, most contracts -- I don't have the exact number here, Michael -- but most contracts when they anniversary, they anniversary at a number that's lower than what it was in the preceding year.

So if you've got kind of -- if you've got a block of 15 to 20, then four of them anniversaried this quarter, then four of them would have a slight downtick.

Okay.

And then, Don, what was the -- I don't know if you've mentioned this, but was there a currency impact, a headwind or a tailwind during the quarter?

No, we said that there was none.

Okay.

And then also just one last one, if I may, a housekeeping.

Did you mention what the subscription guidance was for Q4?

Did you give guidance on subscription for Q4?

We said that it would be generally stable.

Okay, thanks, guys.

Thanks for taking my questions.

Terry Tillman, Raymond James.

This is actually [Andrew Shaw] in for Terry.

You talked about some improvement in ATS over the past few months.

Can you give us any other specifics there, in terms of how units might have grown year-over-year or sequentially?

Specifically on BrassRing or maybe a contract value type of figure and how that's trending?

Well, we don't disclose unit by unit or I should say, module by module; but basically software has grown in that double digit number.

I don't know exactly where it is year-over-year.

Okay, thanks.

And then I know that you're not giving guidance for next year, but are there any particular line items that we should look to as potential points, maybe of operating leverage?

Could you repeat that?

Operating leverage.

Operating leverages -- we've talked about the extra legal expenses.

So, eventually, we expect to be able to get back into our goal of 22% to 24% operating income on a non-GAAP basis.

But in the next few quarters, we would expect that we would have revenue headwinds.

And we don't expect to be returning to those levels until at least through 2010 and further.

Okay, thanks.

And then lastly, any update on your learning management product?

Is that driving any new deal activity?

Or is that more of a product for the future?

It's really a product for the future.

There is -- we're in R&D cycle on it now.

There are components of it that we pull out and embed within our performance management; but as a standalone product, we're looking for -- to see revenue on that sometimes in late 2010, most likely.

But again, there are components of it now that are out that are greatly enhancing the desirability and functionality of our performance management product, as well as some of our content products as well.

Okay, thanks for taking my questions.

David Hilal, FBR.

This is Michael on behalf of David.

Just a couple of questions here.

Can you provide a little more detail on your comment about increased sales activity as something that you've seen over the past few quarters?

And then specifically, how the close rates trended, and sales cycles, deal sizes, and RFPs?

Inbound RFPs continued to increase.

Close rates are flat to slightly up across the board.

Unit sizes are down.

Total contract value is down because duration is down.

Okay.

And then with regard to the success fees, can you provide some details on how large they are?

And I'm assuming that's what drove the other bucket a bit higher this quarter -- isn't that correct?

That's correct.

Because you -- if you notice that the subscription is consistent at 6 million, right, so the additional amount is 300,000.

Okay.

All right, perfect.

Thank you, guys.

Horacio Zambrano, Jefferies.

How many RPO deals did you guys close in the quarter?

And would you characterize it as a large RPO deal, I think the one you mentioned on the call?

I would say that as you try to model out our RPO, think about RPO as being in that kind of $1 million to $2 million annual range.

Okay.

Because it sounds like from your comments that the market is sort of stuck in this RFP mode, kind of kicking the tires, getting ready for engaging.

But as I do checks on some of the staffing companies and some of your pure play competitors, it feels like there's still deals getting done.

And I'm just wondering from your perspective, about how many deals are up for bid to close, like in Q3 at this point in the cycle, and to what -- and when you lose, what do you think it is, against the staffing firms and some of your other pure play competitors, that people pick your competition for?

What's -- and how are you addressing that?

I'll answer the first part.

We've closed -- I think we've announced all wins this year so far are three -- three or four wins so far this year.

So, if you say that our block was whatever in the teens, the number of clients we have had is up by 20% to 25%.

On the win/loss side, I know of some -- again, you mentioned pure plays, but they're not public companies that have to disclose stuff.

But some of the things I've seen announced in this space -- when we were visiting with some of those organizations, a lot of what's getting announced is contingency hiring, or some block recruiting jobs; not a -- what we refer to as a true outsourcing kind of arrangement, where we're taking responsibility for the technology; taking over some of their people; moving our people on site; managing the process.

So, there are some things that we are aware of that are getting announced that are probably getting done at much lower margins; they're more commodity-type deals.

So, that's not to say every one of them are, but a large percentage of those announcements that we've seen would fall more into that sort of contingent recruiting, block recruiting kind of assignment as opposed to what we would think of as pure outsourcing.

So, if you look -- if you think about kind of maybe just like we win at the global footprint, reputation, and that technology/content back-end.

The main reasons why we lose are business mix -- it's business we don't want; so, the second one is price; and then the third one is -- it might be, I would call it, particular vertical expertise.

So we might not have tremendous amount of expertise in the education vertical, for example.

And those are the reasons we sometimes lose.

Okay.

And I guess the -- do you think that the -- we could look to the temporary staffing firms as a leading indicator?

I know those stocks have reacted positively recently.

Do you think that's going to be a leading indicator to the RPO business by maybe some amount of time -- some timeframe?

Yes, I think we've mentioned in the past that unemployment rate stabilization was one of the external factors is, if you look at the number of temp hours worked, it shows a steady decline.

In the past, they have been a leading indicator to the unemployment rate stabilizing.

And it's got about a six to nine month headstart on that.

So, it's -- I think there was one recession where it was only three months; but in all the others, it was closer to six, seven, nine months.

Great.

Thanks a lot.

Mark Murphy, Piper Jaffray.

Oh, yes, hi.

This is Brian.

I just had one follow-up question.

Rudy, you had mentioned -- or maybe Don can answer this -- that contract durations were down.

I was wondering if you could share with that metric, maybe what the average length was, if that was less than two years, which I believe is the normal duration?

Two years is still our average contract duration.

Okay, so no significant deterioration or possibly, Don, asked another way -- is there a certain percentage of the new PO's that you signed in the quarter that opted for shorter durations?

If you look at the whole block, it's two years.

So what happened is in certain quarters, you see a little bit of movement up or down from that two years.

And this quarter was a little bit down.

Okay.

Nothing significant, then?

No, nothing material.

Okay, that's helpful.

Thanks again for taking my questions.

There's no further questions in queue at this time.

I'd like to turn the floor back over to management for any closing comments.

Yes, I guess I'll end the call the way we normally have, which is we think we should thank the Street for their support, and look forward to talking to you again in three months.

Goodnight and good evening.

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

You may disconnect your lines at this time.

Thank you for your participation.