International Business Machines Corp (IBM) 2010 Q1 法說會逐字稿

Greetings and welcome to the Kenexa Corp.

first quarter 2010 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, CFO for Kenexa Corp.

Thank you, you may begin.

Thank you, Jen.

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 first quarter 2010 results and provide guidance for the second quarter and full year 2010, 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 nonGAAP financial measures on this call.

I will discuss the reconciliation of adjusted numbers to GAAP numbers, and a reconciliation schedule showing the GAAP versus nonGAAP is currently available on our Company website, www.kenexa.com, with the press release issued after the closing of market today.

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

Rudy?

Thanks a lot, Don, I appreciate it.

And thanks to all of you for joining us on the call to review our first quarter results which were highlighted by a return to positive year-over-year revenue growth and cash flow that materially exceeded our reported profitability.

The underlying momentum of Kenexa's business is evidenced by the continued growth of our deferred revenue and another strong quarter of competitive wins with large global organizations, the combination of which provides us with confidence that our revenue run rate will increase in the second quarter.

While we remain slightly cautious til we have another couple of quarters behind us, our optimism about Kenexa's market position and long-term opportunity continues to grow.

Taking a look at our results for the quarter.

Subscription revenue was at $33.3 million, and total revenue was at $39.7 million, which was consistent with our guidance and in the general range of what Kenexa delivered throughout 2009.

From a profitability perspective, nonGAAP operating income came in at $2.3 million, this was also consistent with our expectations and reflected the increase in sales and marketing investments in the quarter, which speaks to the growing optimism we have for our medium and long-term outlook, as we are aggressively pursuing market share gains and enhanced growth moving forward.

Deferred revenue was again strong, ending the quarter at $54.5 million, which was up from $50 million at the end of the prior quarter.

We also generated $8.8 million in cash flows from operations, which was a solid performance considering the strong cash flow generated during the fourth quarter.

From a high level perspective, the level of scrutiny on both IT and HR budgets remains at higher levels than pre-recession.

The unemployment rate of 9.7% remains well above levels associated with the healthy economic environment, and leading economist suggest that it may remain relatively high not only throughout 2010 but also through the end of next year.

There are reasons to be optimistic longer term.

First we have recently witnessed a stabilization in the unemployment rate following a multi-year period of continual increases.

Second, while the unemployment rate is expected to remain relatively high, it is expected to come down over the balance of 2010 and during 2011 as well.

Finally, a recent survey of over 100 CEOs from the larger US corporations estimated that they would add more jobs than they would be cutting for the first time in two years.

Over the last several quarters, the slight quarter-to-quarter improvement in the sales environment was apparent in the solid growth of our deferred revenue.

Given the earlier comment and visibility into recognizing revenue associated with increased sales activities the last several quarters, we currently expect Kenexa's second quarter total revenue will be in the range of $41 million to $43 million.

The mid-point of that range would represent sequential growth of 6% and nearly the same level of growth on a year-over-year basis.

We do not view this corner as having completely been turned at this point, because we do not believe that the economy is in a straight up and to the right trajectory, which means spending decisions may still move at a measured pace in the near term.

However we are increasingly confident in the medium to longer term view of the [ACM] market as well as our market position.

We continue to see a growing number of large global organizations evaluating vendors based on the breadth of their offerings, 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.

It's not just Kenexa that has this view, last quarter we announced regarding our position Kenexa in the Leaders Quadrant of the e-Recruitment software vendor evaluation.

Following up on this acknowledgement during the first quarter, IDC named Kenexa as a major player in the human capital management market, based on the strength of our capabilities and strategies.

I would like to share some of your specific comments as I believe it validates our views.

In particular IDC said that Kenexa has strengths, and global reach, tools to help prospects and clients justify investment, and a large R&D organization that takes advantage of offshore resources.

They added a different (inaudible) in the market place is becoming harder to obtain but that Kenexa has global reach that enables to stand out as a major player and our marks for innovation and R&D are increasing.

We are not resting from a product perspective.

Yesterday we formally launched the Kenexa 2x platform to the marketplace which provides the essential tools necessary for human resources professionals to transform and optimize the way their businesses are run.

Included in this release was a newly branded Kenexa 2x BrassRing which is a recruitment technology for the largest organizations in the world.

Kenexa 2x Recruit which is our recruitment technology targeted at the mid-market, Kenexa 2x Onboard, which delivers an improved candidate to employee experience while insuring compliance with legal and corporate policies, and Kenexa 2x Mobile, which is a cutting edge mobility solution for recruiters and hiring managers on the go.

By the end of 2010 we plan to launch our 2x Perform solution and further out we will be adding 2x Assess, 2x Analytics and 2x Survey to the 2x platform.

Not only is Kenexa already in a very strong position from a technology perspective, but we believe that we are distancing ourself from the competition with the release of this broad suite of solutions on our state of the art Kenexa 2x platform.

The strength of our technology, and in particular our Kenexa 2x BrassRing offering, was further reinforced as we were recently named a finalist for the Best Human Capital Management CODiE Awards by the Software & Information Industry Association.

In total, we added over 30 preferred partners during the first quarter which is consistent with last quarter and up from the over 20 level for much of 2009.

It is equally important that we continue to see a growing number of our new preferred partner relationships being for multiple elements of our end-to-end product suite.

The first quarter was one of our stronger quarters for winning head-to-head competitions in major strategic fields.

Wins during the quarter included companies such as [ASP.NET], Ingersoll Rand, SAP, KPMG, (inaudible), Saudi Aramco, Diageo, Deloitte and [Heinz] to name a few.

In addition to our technology and value proposition, being validated by leading industry analysts, product evaluators and the world's largest organizations we also find Kenexa's view as a desirable place to work by top talents in the industry.

One of the reasons our expenses were at the higher end of what we planned is that we were able to hire in sales and marketing more quickly than we originally anticipated.

We are now over 220 professionals in sales and marketing with a quarter-over-quarter increase of approximately 10%.

Our standards for hiring at the same high level as they've always been, however, we are seeing more highly qualified sales and marketing professionals that are seem to work with Kenexa because of our differentiated value proposition, momentum with the largest global organization, an approach to partnering with our customers.

The aspect of our business that faces the greatest headwinds as a result of the challenging economy is the services-related component which includes consulting and related offerings such as assessments and surveys.

While we expect our revenues to scale during the second quarter, we continue to expect services revenue to be variable during 2010, given the currently anticipated pace of the economic recovery.

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

Our RPO revenue came in at just over $9 million which was up slightly from the fourth quarter and now represents a full year in which our RPO business has been stable.

We recently added Whirlpool as an RPO customer and our pipeline of opportunities is building as companies evaluate the timing of when they will re-engage on the hiring front and when they do, the most efficient way to move forward.

We believe that the RPO business will serve as a source of leverage if the hiring environment improves over the next several years, but it is something that will take time.

Keep in mind that while hiring is expected to improve, unemployment is expected to remain at relatively high levels through next year.

From a summary perspective, we remain slightly cautious until we have another few quarters under our belt and we continue to be optimistic about Kenexa's medium to longer term outlook.

We're competing very well in engagements with the largest global organizations in the world, the strength of our technology continues to be reinforced, we are launching (inaudible) solutions to our 2x platform and RPO business continues to firm.

We believe that we started to increase sales and marking investments at the right time and are confident that we will gain leverage on these investments over the longer term.

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 first quarter starting with the P&L.

Total revenue for the first quarter was $39.7 million, consistent with our guidance of $38 million to $40 million.

Subscription revenue was $33.3 million, which was flat with the first and the fourth quarters of 2009, and it represented 84% of our first quarter total revenue.

Our services and other revenue came in at $6.4 million, up 11% sequentially and representing the remaining 16% of our first 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 78%, 22% compared to 77%, 23% last quarter.

Movements in currency rates affected our revenues negatively by approximately $400,000.

From a detailed perspective, RPO represented approximately $6 million of our subscription revenue and just over $9 million of our total revenue in the first quarter, which is generally consistent with the fourth quarter.

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

During the first quarter, overall renewal rates for our suite of solutions were over the 80% level.

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

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

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

Turning to profitability, we'll be providing nonGAAP measures for each first quarter 2010 expense category, which exclude $1.3 million of share-based compensation charges associated with FAS 123R, and $900,000 on amortization of acquired intangibles.

All comparisons will be using the nonGAAP current period results.

NonGAAP gross margin of 65% compared to 67% in the year ago and sequential quarter.

From an operating expense perspective, the nonGAAP operating expenses of $23.7 million were up about $800,000 on a sequential basis and up from $22 million in the year ago quarter.

This led to nonGAAP income from operations of $2.3 million, consistent with our guidance and representing a 6% nonGAAP operating margin.

NonGAAP EPS was $0.10 for the first quarter of 2010, above our guidance due to a positive impact on our tax rate.

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

Cost of revenue $13.8 million, sales and marketing $9.6 million, R&D $2.3 million and G&A $9.8 million.

For the first quarter, GAAP income from operations is $62,000.

Net loss allocable to common shareholders is $18,000 resulting in breakeven GAAP net income per share.

The reconciliation of nonGAAP 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 $62.6 million at March 31st, 2010, an increase from $58.8 million at the end of the prior quarter.

Cash from operations was $8.8 million during the first quarter, which was a strong performance considering our fourth quarter cash flow benefited from timing factors as well as a greater number of customers that paid up front for their transactions.

Accounts receivable DSO were 59 days at the end of the quarter compared to 62 days at the end of the last quarter.

And our deferred revenue at the end of the quarter was $54.5 million, up $4.5 million from the end of the fourth quarter and up 32% from the end of the first quarter of 2009.

I now like to turn to guidance and begin with the full year 2010.

Assuming continued stabilization in the unemployment rate and a slightly improved business environment in the second half of the year, we are currently expecting revenue to be in the range of $162 million to $169 million, which is an increase from our prior guidance of $160 million to $168 million.

From a profitability perspective, we previously provided guidance of $14.5 million to $18.5 million.

We are pleased that the Company was able to get off to a faster than expected start with respect to on boarding sales resources.

Taking into consideration these hires and related expenses associated with making sales resources productive as well as incremental investments in sales and marking, we are tracking closer to the mid-point of our full year nonGAAP operating income range at this time.

As a reminder we expect that our 2010 nonGAAP operating margin will be depressed by approximately 250 basis points, as a result of litigation expenses related to the patent lawsuit that we are pursuing.

Assuming an effective tax rate for reporting purposes of approximately 20% and approximately 23.2 million shares outstanding, we expect nonGAAP net income per diluted share to be $0.52 to $0.66 for the full year of 2010.

As we are currently tracking closer to the mid-point of our nonGAAP operating income range, the same would hold true for nonGAAP EPS.

Turning to the second quarter of 2010.

We are targeting revenue if the range are of $41 million to $43 million, which would mark the first material sequential gain in revenue an increased quarterly target range that we have cited since the beginning of 2009.

We are confident in our second quarter outlook based on the fact that the revenue step up is largely based on the ability to recognize revenue associated with prior sales activity.

The ongoing momentum of our business is more reflected in the slight uptick of our full year revenue target.

We are targeting second quarter nonGAAP operating income of $3.7 million to $3.9 million which is a step up from our first quarter profitability level and reflects a full quarters impact of the increased sales resources that were brought on board during the first quarter.

Assuming a 20% effective tax rate for reporting purposes and 23.2 million shares outstanding, we expect nonGAAP net income per diluted share to be $0.12 to $0.13 for the second quarter.

In summary, we are pleased with the Company's first quarter financial results.

Looking ahead, we are investing in the business because we are optimistic that the demand environment is firming and we believe that Kenexa is well positioned to gain share as a result of our strong market position, differentiated value proposition and the ramping of our Kenexa 2x launch.

We believe that we are returning to growth mode, and while we are executing against our plan of increasing investments in 2010, we are still delivering profitability, positive cash flow and we are confident in our long-term operating model which the Company has already proven in the past.

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

Jen?

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Brendan Barnicle with Pacific Crest Securities.

Please proceed with your question.

Great.

Thanks, guys.

Cash flow was better than what most of us had expected, and we've got earnings that look like they'll at least be around in line with a year ago.

Should we think-- as we think about cash flow for the full year, should we expect to see flat to even some growth there or should we still expect it to lag a little bit?

Well, Brendan we don't-- it's hard for us to predict cash flow, right.

And so we don't believe our first quarter performance will negatively impact cash flow in the second quarter.

But there's always a level of variability there in quarter-to-quarter.

So we're expecting positive-- we're expecting strong cash flow for the year and the first quarter is, it was just a good performance.

Okay.

Great, that's helpful.

And also as we think about the recovery and so the leverage based on the guidance that you're giving today, we're not seeing a whole lot of improvement in operating margins yet, but as we get into a healthier environment say next year, would you guys go back to sort of a 200 to 300 basis point a year improvement in margins, or do you have investments that you want to do where you'd limited to 100 a year or 200 a year, or anything like that that you've thought about in your planning?

I think as we're thinking about this, Brendan the way we're looking at is we're going to get relief first and foremost on the legal situation.

So sometime in the next eight quarters, that should disappear, so we should pick up a couple of hundred basis points there.

We are looking to increase sales and marketing because we believe long term that that would be to our benefit.

So and I think we said this a couple of times in the past and we really do think that on the way back up again, we won't expect to see the same ramp up of operating margins like we did on the way down.

So let's assume that when we were at 15 we were running at call it 18, I wouldn't model 15 and 18.

Great.

That's very helpful.

Thank you.

That's all I had for right now.

Thank you.

Our next question comes from the line of Peter Goldmacher with Cohen and Company.

Please proceed with your question.

Hi, guys this is Joe for Peter here.

Thanks for taking my question.

Peter and I had a question regarding the deferred revenues and we were wondering sort of what characterized the strong growth in deferred revenues, are invoicing terms getting longer?

Does this mean that more and more bigger deals are coming on board?

It -- what the characterization is strong sales activity of course and the improvement in renewal rates in the first quarter, so deals are larger.

But one thing you have to be careful about is the driver in growth of that deferred was the way we had to recognize revenue.

So when we change the revenue recognition rules in 2010, we're probably not going to get as much growth in our deferred revenue as we start to recognize and separate some of the services from the licenses.

Okay, thanks a lot.

That's all I had.

Thank you.

Our next question comes from the line of Brad Reback with Oppenheimer Funds.

Please proceed with your question.

Hey guys, how are you?

Hey, brad.

So, Don on that last comment there around the EITF sort of hinge in the accounting rules, could you help us understand sort of what type of acceleration you may see on the services line from that, when you expect to implement that?

Well we implemented the separation of services from license fees in the first quarter, and it was about a $700,000 impact to our revenue line.

So I think that going forward, that that number will be variable based on when we sign deals and what part of the quarter we sign them.

Great.

And can you just tell us what the capitalized software was in the quarter?

It was $2.6 million.

Great.

Thanks a lot.

Thank you.

Our next question comes from the line of Laura Lederman with William Blair.

Please proceed with your question.

Yes.

Thank you for taking my questions.

The first one is use of cash now that the (inaudible) get cash (inaudible) the markets (inaudible).

Can you talk about--

Laura.

Yes, can you hear me now?

That's better.

Thanks.

Okay.

Can you talk a little bit about the acquisitions uses of cash and on the acquisition front, if that's a planned use of cash or does it give up the signs of maybe small (inaudible) or larger?

Thank you and then I'll come back with another one.

Use cash, we still (inaudible) I think the auction rate security issue will get cleared up in the next few weeks, hopefully by the end of the quarter.

We are, as we've said in the past, (inaudible) about doing acquisitions.

We are [hosting] at all kinds of acquisitions, but I would say our focus will be primarily on the tuck-ins.

Okay.

And a question on the 801 (inaudible), are you-- can you talk a little about if you're using percentage completion or completion a sense of what are the (inaudible) doing now in terms of recognition of let's say the professional services component?

Sure.

We're-- we sell multi-element deals so there are-- so a lot of times we'll sell an assessment pre-employment testing with our applicant tracking.

And in the past we would have to delay the recognition of the revenue on the assessment until the applicant tracking was implemented.

So now we can separate that based on selling prices and commonly observed selling prices.

So we're able to separate those pieces.

And then we're also able to separate services from license fees.

And we're doing that over an estimated time period of the implementation.

Okay, that's real helpful.

Thank you.

Thank you.

Our next question comes from the line of Mark Murphy with Piper Jaffray & Co.

Please proceed with your question.

Thank you.

Rudy, your employee confidence index declined in Q1, and I think in the past you've commented that that index has strong predictive value as far as I think GDP changes by country or by region around the world.

And so I guess I'm just wondering how do you reconcile that versus just some of the strength that you saw here in Q1?

And also in your mind, does the confidence index in anyway kind of signal increased odds of a double dip recession?

We've had the employee confidence index going for a little over two years now, and have seen very close correlation to the GDP.

So one can argue that we-- if you just looked at the data straight up, it would be signaling kind of Q2, Q3 GDP either flattening out or contraction.

There is one thing that we have been picking up which is kind of contrary to just the raw data, and that is we have detected a level off in patience in our survey and in our additional research.

So we're thinking that the confidence might be plugged by a level of lack of patience on the part of the employees that kind have stuck it out for the last year or two.

So we think the results this quarter might be a little tainted, so we're keeping a close eye out on that.

Based on what we are hearing from our customers in terms of inquiries, we are not picking up any signs of a double dip.

Okay.

Thank you.

And, Don a question for you that your subscription revenue has been running between I think $33 million and $34 million for about five consecutive quarters.

And just to be clear, do you feel now that you're at a point where that is now going to break free of that range in Q2 and beyond or is the sequential growth that you're calling for in Q2 is that going to be partly driven by the other revenue line?

It's going to be partly driven by the other revenue line, but we are expecting subscription revenue to increase although we don't guide to that number.

Okay.

And then just one final one, is there any update on the status with some of the large applicant tracking deals that you signed starting around Q3 of 2009, is there anything new to comment on just in terms of the expected deployment time frames, or are any of those potentially going to go live in the current quarter here in Q2?

That's part of the reason why you're seeing an uptick in revenue is they're going live.

Thank you.

Thank you.

(Operator Instructions) Our next question comes from the line of Michael Nemeroff with Wedbush Capital.

Please proceed with your question.

Hi, guys thanks for taking my questions.

Don, just a quick one for you on deferred revenue.

As some of these larger contracts start to come off and you start to recognize them, should we expect the deferred revenue balance to decrease throughout the year because last year it was small but it was sequential upticks each-- with each successive quarter?

Mike, I think we had, in the last couple of quarter, we've had significant upticks in deferred.

And I think that we don't expect the deferred to decrease but it can happen because of just recognizing that revenue coming through.

So right now, I'm kind of planning on it to be flat.

Okay.

And then the tax rate you guided to a full year tax rate of about 20% which would imply that you're guided for Q2 at 20% maybe a slight increase in Q3, Q4, is that-- am I reading that wrong or is it on a blended average basis for the year it would have to go up in Q3 and Q4, is that going to be the case?

That's the case, yes.

Okay.

Is there any reason, a specific reason for that?

It's just the way the income comes in and it's allocated across the world.

And then, Rudy if you could maybe quantify how many new RPO customers you've signed in Q1?

And if you could maybe qualify and/or quantify, if you would, the pipeline of RPO customers currently?

I think we announced one, if I remember correctly, we have received I think one other verbal last quarter, but these are rough numbers, I don't have the exact data.

And what was the second part, what's the pipeline like?

Pipeline continues to remain strong, well you've seen one signed and one verbal.

We are expecting this year to be a decent year in RPO.

And how many are up for renewal in Q2 and for the rest of the year, any pretty sizable ones?

Are you expecting any material change?

I do not.

The normal renewal rates are kind of one or two a quarter, so we clearly didn't lose any last quarter.

I think if you're kind of modeling it out, I would assume from a modeling perspective kind of one-and-a-half renewals a quarter with a 50%, 60% closing rate.

Just because we haven't lost one in two quarters that doesn't mean that we won't in the future.

Okay, guys thanks very much.

Thank you.

Our next question comes from the line of Steve Koenig with Longbow Research.

Please proceed with your question.

Hi, good afternoon, thanks for taking my question.

I'd like to just get some just quick housekeeping out of the way.

Don, you said 2.3 million shares in Q2 and, excuse me, 23.2 million shares in Q2 and for the year?

Yes.

Okay.

And it looks-- did you say why the tax rate was lower, was it just geography?

Yes.

Okay.

Now in looking at your-- the uptick you're seeing in the guidance for Q2 and for the year, I'm wondering about the-- if you remove the effect of the EITF should we see that-- should the other line continue to grow at a-- at the same pace as the other lines of business?

You mentioned consulting and surveys would be a little pressured this year, and so I'm wondering about that piece as well.

Would you expect to see that grow this year or be flattish?

Well the other line is variable as we've always said, right, and it's hard to predict.

We're expecting it to grow and we're expecting it to grow in the same proportion that we guided to the growth for Q2 and in the same proportion that we guided in the growth for the whole year.

Okay.

And what would drive that then?

Don, would that be-- it sounds like RPO is potentially going to be a better contributor in the near term the growth than the consulting or the surveys?

RPO is growing.

We signed the new deal.

The majority of, well not the majority, but the split in the revenue in the RPO is more towards other than it is subscription, so that helps the other grow.

And then success fees on RPO, which are very hard to predict on a quarter-to-quarter basis, are also expected to grow towards the later part of the year.

Terrific.

Thanks a lot for the color, I appreciate it.

Thank you.

Ladies and gentlemen, at this time there are no further questions.

I would like to turn the conference back to Mr.

Volk for any closing comments.

Okay, I would like to turn it over to Rudy for the closing comments.

I just wanted to thank again the street for the support you've given us.

And to reiterate a comment, we are cautious short term and reasonably optimistic medium and long term.

Til next quarter.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.