International Business Machines Corp (IBM) 2009 Q4 法說會逐字稿

Greetings and welcome to the Kenexa Corp fourth-quarter 2009 earnings conference call.

(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 Corporation.

Thank you, Mr.

Volk.

You may begin.

Thank you, Doug.

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 fourth-quarter and full-year 2009 results and provide guidance for the first-quarter and full-year 2010.

And then we will open up the call for questions.

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

These statements may 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 Web company website, www.kenexa.com with the press release issued after the close of market today.

I will 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 fourth-quarter results, which were consistent with our expectations and further reinforced our view that Kenexa's financial performance has reached a point of stability.

Our subscription revenue is consistent with levels throughout 2009, deferred revenue growth was strong, and the Company continued to generate solid cash flows from operations.

We believe that Kenexa has weathered the worst of the economic storm, and entering 2010 we believe the Company is positioned to return to year-over-year growth.

From a longer-term perspective, we believe that Kenexa's market position, differentiated end-to-end value proposition and business model will enable Kenexa to return to even higher growth levels combined with a return to operating margin levels previously delivered.

Taking a look at our results for the quarter, total revenue came in at $39.1 million, down sequentially from $40.3 million and within the general range of $39 million to $40 million that Kenexa has delivered throughout 2009.

Subscription revenue of $33.3 million was up slightly on a sequential basis and was also consistent with levels delivered throughout 2009.

Non-GAAP operating income was $3.3 million consistent with our guidance and down from last quarter, due primarily to the decrease in our other revenue.

Deferred revenue was $50 million, an increase of $5.8 million sequentially and 29% on a year-over-year basis.

Finally, we generated approximately $13 million in cash flows from operations.

From a high-level perspective, our view on the marketplace is largely similar to that we have shared on recent calls.

We have seen a slight improvement in the sales environment each quarter, but from a general perspective, the level of scrutiny on both IT and HR budgets remains high.

There continues to be growing optimism that the economy is stabilizing with improvement expected during 2010, which is aligned with our expectations but current data points continue to be somewhat choppy.

As an example, on January 7, the President of the St.

Louis Federal Reserve Bank commented that the labor market in the US is improving, and the economy was close to the point when the unemployment rate would start to fall.

The very next day a report came out saying the lack of confidence in the economic recovery led employers to cut 85,000 net jobs in December and that the under-employment rate, which includes [discouragement in] part-time workers, that would prefer full-time employment rose to 17.3% in December as compared to 17.2% in November, which is just below the highest levels on record dating back to over 15 years.

More recently, the ASA Staffing Index suggests that the five-month winning streak for temp employment might not continue in January.

The monthly fall in the ASA index is larger than any of the positive seasonal adjustments that have been recorded for temp employment since the CLS started publishing the series in 1991.

Last quarter we discussed the fact that our Kenexa Research Institute performs a statistical analysis that results in what we call the Employee Confidence Index, a metric that we have tracked for a couple of years now.

We have found the Employment Confidence Index to be highly correlated to multiple economic and business performance outcomes, including consumer confidence in GDP growth.

For the fourth quarter, the global employee index score of 98 was up slightly from 97.9 in the third quarter, while the index reported an increase of approximately 4 percentage points from the first quarter of 2009 to the fourth quarter.

In addition, the 12 largest economies reported an increase in Employee Confidence Index scores during the full-year 2009 with the exception of Japan.

We believe the trend line in Kenexa's Employee Confidence Index, including the most recent data points being slightly higher, is a positive indicator for improved economic and organizational performance during 2010.

We believe the primary factor that will impact spending levels for HR software and particularly service is the unemployment rate.

While optimism is growing related to the economy, the unemployment rate is not expected to stabilize until somewhat around the midpoint of 2010.

As we have stated in the past, our view is that Kenexa will face headwinds until the unemployment rate stabilizes.

Consistent with this view, we look to the first quarter.

We believe it is appropriate for us to maintain the stable quarterly revenue guidance range that we have targeted in recent quarters.

Our expectation of stability in our business in 2009 played out as expected as evidenced by the fact that our subscription revenue and total revenue in the fourth quarter of the year were just about comparable levels in the first quarter of the year.

At the same time, the slight quarter to quarter improvement in the sales environment that we have witnessed is evidenced in part by the solid growth in our deferred revenue.

We expect this growth combined with further improvement in the sales environment as the unemployment rate stabilizes to meet the growth in our quarterly revenue run rate over the course of 2010.

This would also position Kenexa to return to full-year growth during 2010 as well with the potential for further accelerated revenue growth longer-term as HR departments have greater access to IT budget dollars to invest in strategic projects.

A couple of quarters ago we announced we were beginning to increase our investments in sales and marketing, which at the time included the rebranding of Kenexa to put further focus on our unique end-to-end HR solution value proposition.

We plan to further increase our investments in sales and marketing to gain market share as the spending environment is expected to improve during 2010.

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, content and services positions Kenexa well to meet the evolving needs of these customers.

Within our end-to-end product suite, the area that has enjoyed growth throughout the economic downturn and where customer and industry analyst response continues to be overwhelmingly positive is our talent acquisition solutions and in particular our Kenexa Recruiter BrassRing, or KRB, offering, which is a global recruiting solution.

During the fourth quarter, we announced that Gartner positioned Kenexa in the leader's quadrant after e-Recruitment software vendor evaluation, which is based on the completeness of our vision in the talent acquisition segment of the market combined with our leading ability to execute.

KRB is a robust solution for global organization, and it reaches top talent in 25 different languages and supports 27 dialects and locales.

Customers are responding very favorably to our leading reporting capabilities, redesigned user interface and integrated hourly and high volume hiring capabilities.

We are winning head to head evaluations with the largest global organizations based on the strength of our technology and even more so when customers are taking a strategic view of talent management and evaluating vendors based on domain expertise, content, services, as well as software.

During the fourth quarter, we added customers such as AOL, MasterCard, Dow Corning, Royal Bank of Scotland, Kaplan Learning, University of Pennsylvania Working School, and Carnegie Mellon.

In total, we added over 30 preferred partner customers during the fourth quarter, which was up from the over 20 level in recent quarters.

Even more interesting than simply the number of preferred partner additions is the fact that a growing number of these are multi-element deals with over $100,000 in annual spend.

While their business environment was challenging during 2009, we won more strategic deals with large global organizations than in any year in Kenexa's history, which is very encouraging from a long-term perspective.

You asked if our business faces the greatest headwinds as a result of the challenging economy and jobs market is a services-related component?

We expect the consulting portion of our business to remain choppy during the first half of 2010 with improvement beginning in the second half of the year.

Our customers continue to tell us that they plan on moving forward with our differentiated and high-value strategic services when the economic environment improves and they have greater access to resources.

The final component for our business that I will touch on is our Recruitment Process Outsourcing or RPO.

During the fourth quarter, our RPO revenue came in at just under $9 million in revenue, which was down slightly from the third quarter but taken selectively represents approximately nine months of fairly stable performance.

Feedback in the marketplace relative to our RPO offering remains to be positive.

In fact, during the fourth quarter, Berson & Associates, a leading research and advisory firm in the talent management market, recognized Kenexa is not only widely recognized as a leading talent management technology provider, but we also have a strong commitment to services.

As we look at our RPO business, it is important to keep in mind the manner in which RPO contracts are structured and were increasingly restructured during the depths of the economic downturn.

While each contract is individually negotiated, these are typically multiyear contracts, and the customers often elect to have the annual minimum spend decrease in each year of the contract.

If this is the structure, it also means that there is a greater variable component in each subsequent year of the contract.

We refer to this variable component as our success fees, and these are based on the number of employees that are hired.

Our variable success fees have obviously been relatively low during the weak jobs market of the past couple of years, and we continue to have measured expectations for the first half of 2010.

While we have already experienced the downside of the most cyclical nature of our RPO business, which is over 20% of our total revenue, we are encouraged that we have found a level of stability, and we expect our RPO-related revenues to rebound as the economy improves.

The unemployment rate stabilizes, and improved hiring drives increased success fees.

A common metric that we share which includes RPO, along with other consulting services and technology solutions, is 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 fourth quarter, which is consistent with recent quarters.

So from a summary perspective, we faced the most challenging business environment in the history of the Company during 2009.

There are a number of positives to take from this year.

We continue to deliver solid cash from operations, which is over 20% of the percentage of our revenue.

Our deferred revenue grew by 29% on a year-over-year basis.

Our subscription revenue and total revenue is stable from start to finish.

Our renewal rates improved from the 70% range at the start of the year to the 80% range exiting the year.

We were successful in Kenexa's rebranding.

Our technology solutions, particularly in the area of talent acquisition continued to grow, and the strength of the market position was validated by industry analysts and numerous high profile wins.

And our RPO business stabilized in the final nine months of the year and is positioned to benefit from an expected improvement in the economy and jobs market in the second half of 2010.

We expect consistent performance to start the new year improving performance of 2010 plays out and will remain optimistic about Kenexa's position in the market and our business prospects from a 12 to 18-month perspective.

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

Don?

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

Total revenue for the fourth quarter was $39.1 million, consistent with our guidance of $38 million to $40 million.

Subscription revenue was $33.3 million, a slight sequential increase, and representing 85% of our fourth-quarter total revenue.

Our services and other revenue came in at $5.7 million, down sequentially and representing the remaining 15% of our fourth-quarter total revenue.

We continue 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 7723, consistent with the previous quarter.

Movements 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 fourth quarter, which is generally consistent with the third quarter.

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

During the fourth quarter, overall renewal rates for our suite of solutions crossed the 80% level, which is an improvement from the over 70% level in previous quarters during 2009.

We continue to expect renewal rates to improve to the 90% range from a long-term perspective as the business environment improves.

Turning to profitability, we will be providing non-GAAP measures for each fourth-quarter 2009 expense category, which exclude $1.3 million of share-based compensation charges associated with FAS 123R and $1.3 million of amortization of acquired intangibles.

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

Non-GAAP gross margin was 67.2%, was flat on a year-over-year and sequential basis.

From an operating expense perspective, total non-GAAP operating expenses of $23 million were essentially flat on a sequential basis and were down from $24 million in the year ago quarter.

This led to non-GAAP income from operations of $3.3 million, consistent with our guidance and representing an 8.5% non-GAAP operating margin.

As Rudy mentioned, the supernatural decline in non-GAAP operating income was primarily related to the sequential decline in our other revenue, which is the variable component of our revenue.

Non-GAAP EPS was $0.13, consistent with our guidance range for the quarter.

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

Cost of revenue $12.9 million, sales and marketing $9.2 million, R&D $2.2 million, and G&A $9.8 million.

For the fourth quarter, GAAP income from operations is $788,000.

Net income applicable to common shareholders is $294,000, resulting in GAAP net income per share of $0.01.

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.

Turning to our balance sheet, Kenexa has cash, cash equivalents and investments of $58.8 million at December 31, 2009, an increase from $50.2 million at the end of the prior quarter.

Cash from operations were approximately $13 million during the fourth quarter, leading to full-year cash from operations of $35.5 million.

As we have discussed in the past, cash from operations can vary on a quarter to quarter basis due to many timing factors.

In addition to being on the positive side of some of this natural variability during the fourth quarter, there were several customers who elected to pay for more of their subscription up front due to calendar year-end activities on their part.

Accounts Receivable DSO were 62 days at the end of the quarter compared to 66 days at the end of last quarter, and our deferred revenue at the end of the quarter was $50 million, up $5.8 million from the end of the third quarter and up 29% from the end of the fourth quarter of 2008.

And now I would like to turn to guidance, starting with our thoughts for the full-year 2010.

Assuming stabilization in the unemployment rate in the mid-part of the year and a slightly improved business environment in the second half of the year, we are currently expecting revenue to be in the range of $160 million to $168 million.

From a profitability perspective, we are currently expecting full-year 2010 non-GAAP operating income to be $14.5 million to $18.5 million.

This would represent a non-GAAP operating margin of approximately 9% to 11%.

We are confident that our business will return to our target model of below 20% non-GAAP operating margins over time.

However, we have previously shared that the path of expanding margins may not be comparable to the last time we achieved our target model.

We are increasing investments in sales and marketing to gain market share as the macro environment improves.

In addition, we expect our 2010 non-GAAP operating margin to be depressed by approximately 250 basis points as a result of litigation expenses related to the patent lawsuit that we are pursuing.

This is consistent with our expectations last quarter, and we believe this course of action is in the best interest of Kenexa.

Assuming an effective tax rate for reporting purposes of approximately 20% and approximately 23 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.52 to $0.66 for the full-year 2010.

Turning to the first quarter of 2010, we are targeting revenue in the range of $38 million to $40 million, which is consistent with the quarterly revenue guidance range provided in recent quarters, as well as our commentary that we expect our business to be stable until the employment rate stabilizes.

In addition, due to the multielement nature of many of our larger customer wins, we do not expect them to translate to recognized revenue until the mid-part of 2010.

We are targeting non-GAAP operating income to be $2.2 million to $2.6 million in the first quarter.

As compared to the fourth quarter of 2009, there is increased payroll-related expense at the start of the new year, and as I just mentioned, we plan to make increased investments in sales and marketing.

As it relates to legal expenses, we expect Q1 legal expenses to be in line with the levels realized in the fourth quarter, which is consistent with our initial commentary on this topic.

Assuming a 20% effective tax rate for reporting purposes and 23 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.08 to $0.09 for the first quarter.

In summary, we are encouraged by the continued stability in our financial results, combined with solid growth in our deferred revenue and strong cash flow performance.

We believe Kenexa is well positioned to return to growth during 2010 and for enhanced revenue growth and margin expansion from a long-term perspective and following improvement at the macro level.

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

Doug?

(Operator Instructions).

Peter Goldmacher, Cowen & Co.

I just want to ask you a couple of quick questions.

It is a little surprising that your guidance in the first half of the year is so subdued given that your deferred revenue growth through the year and for 4Q is so strong.

Is something not flowing through, or how do we -- how shall we interpret that strong deferred revenue growth and the subdued guidance for the first half?

Well, Peter, as we said, we are selling a lot of multielement deals, and we sold a lot of multielement deals in the second half of 2009, which we do not believe will get into revenue recognition until the latter half of 2010 because of the accounting rules.

So what would get them into revenue recognition if somebody -- let me just ask that, what would get them into revenue recognition?

Well, because they are multielement, everything has to be implemented fully before we recognize any revenue on them.

So each element of the deal has to be fully implemented, and then we would start recognizing the revenue on all of the deals and all of the contracts.

Right.

Oh, so everything -- it is not a time basting -- it is just as everything is fully implemented?

Yes, because there are so many elements to the deal, there are so many implementations.

Right.

Okay.

And then so if we just look at the guidance in the back half of the year, you would assume that the average implementation time is two quarters-ish, and then if you start to see that uptick in hiring, then the other revenue should tick up from success fees, right?

That is right.

And so would you characterize -- I guess I'm trying to put words in your mouth.

Would you characterize your guidance as subdued?

I guess the way I would answer that one, Peter, -- this is Rudy -- the way I would answer that one is that is kind of what the data is showing us right now.

So if we look at our waterfall, we are assuming that, as we mentioned, I think through the prepared comments that unemployment is not going to stabilize until first half of the year.

We are not smart enough to say whether it's going to be January or June or whatever that is.

And as soon as that starts to stabilize and to improve, we are expecting there to be growth associated with other revenues.

If you do the math, the math is pretty -- if you say 38 to 40 and then 160 to 168, you don't need to be an actuary to figure out what the numbers are going to look like.

Right.

It is interesting.

Your revenue guidance is inconsistent with your expense guidance, right?

Because you are saying we are increasing sales and marketing spend because we want to be there when people can spend again, but we are not modeling them to spend again.

We are not modeling the spend -- we are not modeling that the revenue is going to hit the income statement.

We are not saying anything about deferred.

Right.

Okay.

Thank you.

Brad Reback, Oppenheimer.

Don, you had mentioned something to the effect of customer prepayments late in the quarter, I'm assuming.

Could you give us a sense of how much the change in deferred sequentially was driven by net new customer adds or net new business of customers versus those prepayments?

So we had in excess of $5 million in deferred, and our deferred is increased by billings, right?

So the majority of the increase in deferred came in from billings on new contracts.

Now the increase in cash with the $13 million coming in from cash from operations, that was accounted for by customers paying in advance for their subscription for the year.

Okay.

So that paying in advance just winds up in cash.

There is not an offset on the liability side in deferred revenue?

No, what goes into deferred is billings, and what comes out of deferred is revenue recognized.

Okay.

And can you tell us how much capitalized development you had in the quarter?

Yes, $2.5 million.

Pat Walravens, JMP Securities.

So my first question is, and forgive me if I missed this, but it seems like the operating margin if you take the midpoint is around 6% in Q1, and then it works its way up throughout the year.

Can you just tell us what the reasoning is behind that?

Sure.

We are investing in sales and marketing, and we are not getting the revenue to the income statement until later on in the year.

So we have to incur that sales and marketing expense in the first quarter and in the second quarter, and it does not go down as a percentage until we start recognizing the revenue.

Got it.

And did I miss it on the call, did you characterize what those investments are like?

You know, how many people you are hiring and what are you doing in marketing that you are not doing now?

So in terms of headcount, we have probably got about 140 or so commissioned people, and these are approximate numbers.

And we are planning to increase our pure marketing spend by between 150 to 200 basis points over 2009.

Okay.

And then, Rudy, will RPO be up sequentially?

Between what quarter and what quarter?

This quarter in Q1.

I would think about it as being flat more than up.

But when I say flat, think of it in the 8.5 to 9.7 range.

When I think flat, I think $9 million plus or minus call it 7% to 10%.

Okay.

And then a last quick question.

I mean if a jobs bill goes through, is that -- how does that work out for your business?

Is there a direct impact?

If what goes through?

A jobs bill.

Oh, if a jobs bill goes through.

Unlikely to have a direct impact, likely to have an indirect impact.

So if any form of a job bill goes through, it is probably going to hit a certain level primarily of unskilled or lower skilled levels, which will then have a cascading effect in hospitality and retail, and we should start seeing it impact pretty reasonably.

But there will be a little bit of a lag to it.

Okay.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

If I look through how this looks like it may flow through the year, it looks like the sales and marketing will sort of take a big step up in Q1 and then remain at that absolute level may move up much more moderately through the remainder of the year.

Is that the right way to think about it, that you're going to take the big expense that's going to start to come on in Q1?

Yes, so what we did is most of the headcount increases we went through we put in Q4.

We did a lot of the hiring then.

So the analysis in terms of the headcount through the year will remain within 5% to 7% of this number.

(multiple speakers) Sorry, go ahead.

But did you not have the full expense of all those people, so that is why you are going to get a bigger bump up in Q1 related because you have a full quarter of that expense built-in?

Correct.

And the commission portion obviously is a marginal expense.

And then the litigation is obviously -- that is purely a best estimate number on our part.

There could be a lot of volatility quarter to quarter in that number, and we will continue to disclose that when it is happening.

And just so I get clarity on that -- I don't know if I missed it -- but Don, did you give us what that legal expense number had been for Q4 because you were saying it should be about the same for Q1, right?

Yes, we said it was consistent with what our expectations were, which I think we announced in Q3 is about $1 million.

Okay.

Great.

Thanks,guys.

Richard Davis, Needham.

So, as an outside investor, would you view what is going on in your business right now as a situation where you are gaining share or you are losing share or you are holding your market share?

And the reason I ask is, because I know one of the questions will be given the fact that you're increasing spending on sales and marketing, is this an offensive or defensive play?

So if you could kind of give us some color around how you guys are thinking about the business in that regard.

I would say that in terms of total share we believe we are gaining share, and I think that is to a certain extent reflected on our deferred.

Because that is up quite a bit.

And our expectations are that there should be tail winds coming in from two major areas.

The first one is, as the unemployment rates stops increasing and starts to decrease, that should be the first tailwind.

And then as the HR departments are a little bit resistant to doing the new hires, we believe that there will be outsourcing capabilities and additional efficiencies will be needed through software.

We know that the selling cycle before the recession was running around six months, and we note that number we have disclosed in the past over the years consistently.

And so in the new world, we don't know whether it's going to be six months.

We're going to come back to six months.

Is it going to be closer to the kind of the nine-month area?

So, as we look at the back half of the year, we want the additional salespeople to be completely fluent in the range of our products and offerings so that they are in a position to close deals.

So we are hoping that we get into an alignment between our selling costs.

The macroeconomic changes that are taking place in combination with customer demand should come in together in the back half of the year.

And Richard, this is Troy to add on to Rudy's comments.

You're not seeing it on the revenue line, but you are seeing it on our deferred.

The other number that was good for the quarter was our preferred partner number in terms of total number of wins was 30, up from 20 in Q3.

And the quality of the logos and the size of the deals that we are winning and the number of multielement deals that we are winning again are putting us in feeling like it is time to play more offense, just to highlight a couple of other things off of Rudy's comments.

Got it.

Thank you very much.

[Jeff Keane], William Blair & Co.

It is Laura Lederman.

Can you talk a little bit about just in (inaudible) how much of the business is applicant tracking?

Earlier you mentioned RPO was 20%.

I would assume that applicant tracking is roughly twice that sort of as a guess, and you can tell me if I'm way off base.

Also, can you talk a little bit about the pipeline for new RPO?

I know that there were a lot of deals.

If you looked at what were in the pipeline, did any of them close in Q4 or was the improvement in Q4 in deferred off an [ATF]?

So I would say that in terms of breaking down the offerings beyond RPO we have not done that in five years.

I don't believe we are going to start now.

You can't blame a gal for trying.

I hear you, and I don't blame you for asking.

I was ready for it.

As far as the RPO pipeline goes, what we have seen on that front is for us as the renewals are coming in, you would have expected as we explained in the prepared comments that the subs should start coming down as some of these contracts get anniversaried.

And since that is not happening, I think we had one win, Troy, if I remember correctly in Q4.

Correct.

And the pipeline still continues to remain at double digits.

The other thing that we are seeing in that pipeline that tends to correlate to good news is that there is a lot of -- a lot more operational involvement.

Typically these larger deals do not get done unless there is involvement from the operations folks, not just the HR and staffing executives.

So that is also encouraging within the pipeline.

Great.

Final question from me, just an update on surveying skills and behavioral assessment.

How much of that historically has fallen in the subscription line versus services line, and how was that business going, and do you expect that to pick up in the second half of the year as well?

That was kind of -- I think we mentioned that on a couple of calls before that that is where we saw a deterioration in our renewal rates.

So I would say that given that the average duration is about two years and we are reaching the tail end of most of the business that was written in Q2 of '08 and before the implosion, I would say that that business should continue to head uphill or should head higher.

The consulting that is around that business is still under a little bit of stress and will remain under that stress for the first half of the year.

Mark Murphy, Piper Jaffray.

Don, if you dis-aggregate the deferred revenue balance, how much of that at this point is related to the applicant tracking, subscription revenues versus any other type of revenue in the mix?

It is all related to subscription.

So -- and then, Don, just to clarify, is all of that related to applicant tracking then?

You cannot say that.

There is -- it is all contracts that and old billings that we have signed that have not been recognized in revenue yet.

Okay.

Would it be fair to say 80% of it relates to applicant tracking?

Is there any way you can help me directionally on that?

No, the hard part about that is, you know, we have signed so many multielement deals at the end of the year and throughout 2009, and they are there.

So how -- and we don't typically break up those sales prices.

So that is really hard to say.

Okay.

So Don, I think what I'm just struggling with personally is that it is very exciting to see your deferred revenue growth of 29% in Q4.

It is obviously a positive development.

I'm trying to understand what do we conclude from that?

Would we conclude that the whole business could grow 29% a year from now as the multielement deals get deployed?

Would we conclude that only the ATS business will be growing at that rate a year from now, or is it really none of the above?

If there is any way you can help me just try to understand that, what are the future -- what exactly are the future implications of this deferred revenue growth?

I guess I think if you think about it a little differently -- this is Rudy -- remember that the deferred also does not necessarily have linearity to it, right, if the deal is closed a little earlier in the quarter and if it got an early implementation.

So there is a lot of stuff that goes along with the deferred.

I would say to assume 30% growth nine months from now if you assume an implementation timeline of three quarters would be very aggressive.

I would look at if you wanted to build in a correlation of some sorts on it, I would look at it more on a subscription line rather than the total revenue line.

And I would say -- I would -- you know, the average duration of amounts paid in advance has also climbed a little bit above three months.

It might be, call it, a little bit three months plus.

So a portion of that 29% is made up on a slightly larger deposit upfront as well.

But the 29% increase does portend growth.

Okay.

Thank you.

I appreciate that.

It is helpful.

And then just one final one, Don.

You had a pretty nice cash flow results here.

Any thoughts at a high level on how that operating cash flows should trend in 2010?

We have never given guidance to that.

But we have always said it should exceed our non-GAAP operating income.

And that it exceeded -- well, heck, it really exceeded our non-GAAP operating income this year.

I believe a good part of that is because of the increase in deferred, and another good part of it is good collection efforts because of the economy and because of the particular attention that we paid to companies that need to put cash on their balance sheet.

David Hilal, FBR Capital Markets.

This is Philip Dionisio for David.

When I look at bookings, which I approximate by revenues plus a change in deferreds, so that decline really improved in 4Q.

And when I think about how I modeled that going forward, is this going to continue to improve -- the year-over-year growth that is -- is it going to continue to improve in the first half and probably bump up a little more in the second half?

Are you asking about the balance in deferred?

Well, yes, well that would flow into that approximation for bookings.

So we never give guidance on bookings or we never give a total bookings, and it is really hard to give guidance on deferred revenue.

So I don't know --

Well, I'm just trying to take into consideration -- (multiple speakers)

There was also a little bit of budget flush that takes place at the end of the year.

You don't really quite understand what that is.

So from a modeling perspective, if you look over the last five years, we have generally seen a slight dip, except in the years we have done an acquisition or what have you.

So it's almost like you want to go slightly lower deferred number and then build some sort of a growth number after that.

I was trying to take into consideration the increased spending on sales and marketing and the impact on bookings.

Well, hopefully that has a positive effect on bookings.

Sasa Zorovic, Janney Montgomery Scott.

Yes, if you could give us a little bit more detail as you were mentioning adding sales and marketing that the quota-carrying people that you're adding here, to what specifically are you in terms of what specifically will they be kind of pursuing?

How are you looking at where do you see that opportunity incrementally that you are assigning them towards?

If you can give us some color on that.

The majority of the reps that we added in Q4 and here in Q1 are primarily enterprise reps that are focused on the higher-end solutions model across the entire portfolio.

The quotas are being built around, again not any particular product category, but customer penetration numbers.

So they are higher-end reps with high-end experience, and they are distributed geographically across North America, Europe and moving into Asia as well.

The other investment that we made was a new executive we brought in to head our technology business, which was Kevin Horigan.

Kevin has a terrific track record in a number of real high profile tech organizations, and so we are hoping to benefit from a lot of Kevin's experience as well.

Yes.

What would be -- you mentioned that renewal rates are picking up.

Is it are you sort of attributing that to some of the stabilization here in the economy, or is there something in addition to it?

If you think about -- yes, we are thinking it is a combination of a couple of things.

One is we expect it to start improving because of the improvement, as you said, in the macroeconomic conditions.

The other is, as I mentioned, and I think Laura mentioned, asked a similar question around renewal rates.

Which is once you have got past the two-year cycle that the customer base that is remaining purchased through the downturn, so we do not expect the headwinds to affect that group as dramatically as the group that went into this recession.

So, by the back half of the year, we are hoping to see continued elevation on our renewal rates.

Thank you.

And then finally, regarding sort of competitively, is there any sort of specific competitors you are seeing more of or less of, or has there been much change there?

And then what specifically then competitively makes you feel comfortable about gaining share as you mentioned toward the second-half of the year?

On the enterprise deals, it is a small list, and it is consistent over the last year.

On the midmarket there are still within each product category that we serve, there are still anywhere from half a dozen to a dozen different organizations that we will see at each product category within the midmarket, and we have seen that market become a little bit more competitive here over the last few quarters.

Gentlemen, there are no further questions in the queue.

I would like to hand it back over to Mr.

Karsan for closing comments.

Well, I will close in the same way I normally do.

I would like to thank the street for their continued support, and we are looking forward to a great 2010.

Good evening.

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

Thank you for your participation.

You may disconnect your lines at this time, and have a wonderful day.