International Business Machines Corp (IBM) 2010 Q3 法說會逐字稿

Greetings and welcome to the Kenexa Corporation third 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, Chief Financial Officer for Kenexa.

Thank you.

You may begin.

Thank you, Jen.

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

Today we will review Kenexa's third quarter 2010 results and provide guidance for the fourth quarter and full year 2010, as well as our initial views of 2011.

We will then 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 in 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 will now turn the call over to Rudy Karsan.

Rudy.

Thanks, Don, and thanks to all of you for joining us on the call.

We are pleased with the Company's performance in the third quarter and the continuation of the business momentum that we saw building in the first half of the year.

This ultimately contributed to third quarter revenue and profitability that were above our guidance.

We continued to expect the pace of economic recovery to be choppy over at least the next 12 to 18 months, but there are a number of reasons our longer term confidence continues to grow.

Each area of our business contributed to the top line over performance in the third quarter from software to content and including our RPO business.

Interest levels are high and our sales pipeline continues to expand across each of our major solutions.

We continue to win highly competitive engagements with the world's largest organizations due to our unique business model and strong portfolio of technology solutions.

Finally, we are executing against an aggressive product road map to introduce new and expanded functionality on an organic basis.

And we just expanded our value proposition by becoming the industry's leading provider of on demand compensation management solutions with our acquisition of Salary.com.

As Don will discuss in more detail in a moment, we are again increasing our revenue forecast for 2010 and we expect to continue growing in 2011 in spite of ongoing economic headwinds.

At the same time, we will continue to invest in sales and marketing, research and development, and customer-facing professionals based on Kenexa's growing momentum and the attractive long-term opportunity that we believe Kenexa is well positioned to capitalize on.

Taking a look at our results for the quarter, total revenue is $50.8 million, which was above our guidance and represented a year-over-year increase of 26%.

From a profitability perspective, non-GAAP operating income came in at $4.2 million, which was also above our guidance.

Deferred revenue was again strong ending the quarter at $58.7 million, which was up 33% on a year-over-year basis.

We also generated $6.6 million in cash from operations bringing our year-to-date total to $22.6 million, which is more than double the Company's non-GAAP operating profitability over the same timeframe.

From a macro perspective, we still do not believe the buying environment is back to pre-recessionary levels and we are mindful that economic data points continue to be choppy, including those related directly to employment.

For example, during September (inaudible) payroll payment employment edged down 95,000 jobs and the unemployment rate showed no improvement remaining at 9.6%.

In addition, the Kenexa Employee Confidence Index showed a sequential decline from 98.4 in the second quarter to 97.5 in the third quarter for the US.

We have consistently shared our belief that the economic recovery will not be straight up and to the right, but we do see a better environment today than we did a year ago and this is supported by more projects getting funded and moving ahead.

There are several other data points that further support our view that the demand environment has improved on the margins.

At our recent world conference attendance was at over two and a half times compared to last year's event.

Within the event itself, our demonstration rooms, where our technical sales professionals walked customers and prospects through the features, functionality, and business benefit of our solutions.

Activity at these demo stations was up approximately five times compared to last year's event.

Finally, we have seen increased job activity hitting our talent acquisition systems across our collective customer base.

By itself, we do note view the increase as statistically significant, but it is encouraging, particularly when taken together with other data points I just referenced.

While net new job creation remains relatively stagnant at best, we believe Kenexa's suite of solutions and related value proposition can drive top line growth if the hiring environment is at least stable.

Even though the unemployment remains relatively high near the 10% level, it has been stable.

And as this has occurred we have seen Kenexa's growth improve as our market position is both strong and we believe improving.

We continue to 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 sweet spot of where we see customer demand evolving.

These factors were the drivers to Kenexa having another strong quarter in the third quarter relative to winning competitive engagements with large enterprises.

For example, with respect to our talent acquisition solutions, we added Ahold and Disney.

As it relates to our retention solutions, we won engagements with high profile customers such as Hershey, Neiman Marcus, and T.J.

Maxx.

With our comprehensive RPO services offering, we added customers such as US Steel and Case New Holland.

Another new customer engagement that I would like to highlight that supports both the strength of our value proposition, as well as our growing global presence is our win with Saudi Aramco.

This state-owned national company is the largest oil corporation in the world.

They are a very large ERP customer of SAP and they selected Kenexa's 2x BrassRing solution to automate the talent acquisition business processes.

Our on boarding solution was also selected to manage the numerous forms exchanged when managing the [extenuate] process.

Wins with customers such as these not only reinforces (inaudible) solutions across our end to end suite, but they also provided a significant cross-sell opportunity from a long term prospective.

We have a proven track record of growing our customer relationships over time and our P-cubed metric, which measures the average annual revenue from our top 80 customers was $1.2 million at the end of the third quarter, which is an increase compared to the $1.1 million in Q2.

In total, we added over 40 deferred partner customers across the globe during the third quarter and the majority of our new preferred partner relationships were for multiple elements of our end-to-end offering.

As discussed at our Analyst Day, we now see approximately two thirds of our engagements being for multiple elements.

We had the opportunity to provide our customers with further updates related to the expanded capabilities of our solutions as well as our product road map at our world conference in September.

The feedback that we are receiving from customers continues to be positive.

We already have our core talent acquisition solutions on our 2x Platform as well as our 2x Onboard solution that I just referenced in our win with the largest oil corporation in the world.

And our first to market 2x Mobile solution that recently won an award for HR product of the year.

Over the next several months, we will be launching our Kenexa 2x perform solution, and in 2011 we are planning to bring out 2x Access and 2x Analytics.

During the third quarter, we also significantly expanded our value proposition and long term cross-sell opportunity with the acquisition of Salary.com, the established leader in on demand conversation management solutions.

Competition management is one of the areas that we have discussed in the past that Kenexa would likely acquire to enter the market.

It is a specialized solution category that requires significant investment in both software development as well as domain expertise and content creation in order to be successful.

Salary.com's market pricing and compensation analysis software helps customers benchmark, compensate, and reward its employees.

It is an important solution when organizations are determining how to compensate new employees in addition to setting compensation policies across all jobs on an ongoing basis.

Salary.com also provides users with access to a wealth of proprietary data sets that are a combination of North American market data, executive compensation filings, International market data through the survey offerings, and competency data.

Not only are these data components are key competitive differentiator, they are also a significant barrier to entry.

There are a number of reasons that the acquisition of Salary.com is compelling for Kenexa and for our shareholders.

First, the market for compensation management solutions is a large industry that's highly synergistic with Kenexa's existing product suite and it is a market that is increasingly moving to automated tools and on-demand solution delivery.

This is similar to the evolution of other HR related business processes.

Second, Kenexa is adding best in class compensation management capabilities.

These product offerings are providing Salary.com customers with access to our broader suite of best in class talent acquisition and retention solutions.

Third, Salary.com and Kenexa have complementary business models as both companies deliver a combination of software and proprietary content through a subscription based on demand model.

Fourth, we believe there are significant opportunity to expand Salary.com adoption in large organizations and across the board.

Over 90% of Salary.com's revenue has been driven by the US markets compared to Kenexa's International revenue increasing to the mid 20s range.

In addition, Salary.com's compensation management solutions have often been sold at a department level and Kenexa is well positioned to bring their solutions higher up in our enterprise clients.

Finally, as Don will review in more detail in a moment, we expect the transaction will have a positive impact on Kenexa's non-GAAP operating results.

While Salary.com reported operating losses for much of their history, their compensation management business was profitable.

In addition, Salary.com has already taken steps to reduce their cost structure prior to their acquisition by Kenexa.

Since the time the acquisition closed, we have taken steps to eliminate redundancies and realized efficiencies between our respective organizations and these actions are expected to reduce the cost structure associated with Salary.com's operations by over $5 million.

In addition to the long-term growth opportunities associated with the acquisition, we expect the acquisition to be accretive in its first full year of contribution in 2011.

In summary, we continue to have a cautious stance on the economy near term.

However, we are increasingly confident of Kenexa's long-term market position.

We continue to win high profile customers, we're introducing new and enhanced products to the marketplace, and we just expanded our value proposition with the leading on demand compensation management solutions.

We are seeing the payback on our increased investments in sales, marketing, and R&D and we will continue to pursue our investment strategy as we head into 2011, based on the growing momentum of our business and opportunity that we see to create a very large and profitable company over time.

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

Donald?

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 $50.8 million above our guidance of $45 million to $47 million and up 26% compared to last year's third quarter.

Subscription revenue was $39.8 million, an increase of 20% compared to last year and 10% on a sequential basis.

And it represented 78% of our third quarter total revenue.

Our services and other revenue came in at $11 million, up 55% compared to last year and 26% sequentially.

And representing the remaining 22% of our third 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.

From a geographic perspective, our revenue mix of domestic versus International revenue was 7228 compared to 7327 last quarter.

Positive foreign exchange rates contributed to $800,000 of our Q3 revenue upside.

During the third quarter, overall renewal rates for our suite of solutions continued to improve and were over the 80% level.

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

Turning to profitability, we will be providing non-GAAP measures for each third quarter 2010 expense category, which excludes $1 million of shared base compensation charges associated with FAS123R, $777,000 of amortization of acquired intangibles, and $945,000 of expenses associated with the closing of the Salary.com and CHPD acquisitions.

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

Non-GAAP gross margin of 65% compared to 68% in the year ago period and 67% last quarter with the primary driver to the difference being the higher mix of other revenue during the third quarter.

22% compared to 20% last quarter and 18% in the year ago period.

From an operating expense perspective, non-GAAP operating expenses of $28.6 million were up about $2.6 million on a sequential basis and up from $22.9 million in the year ago quarter.

The sequential increase in operating expenses was driven by a few factors.

First, we had higher selling costs during the quarter due in large part to our world conference.

Second, we had increased investments in R&D, and finally in the third quarter included operating costs relative to the CHPD acquisition.

This led to non-GAAP income from operations of $4.2 million, above our guidance of $3.4 million to $3.6 million representing an 8% non-GAAP operating margin.

Non-GAAP EPS was $0.16 for the third quarter of 2010 with $0.01 attributable to a lower than expected tax rate, and $0.02 due to operating performance.

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

Cost of revenue $18 million, sales and marketing $11.6 million, R&D $3.3 million and G&A $12.1 million.

The third quarter GAAP income from operations is $1.5 million.

Net income allocable to common shareholders is $150,000 resulting in $0.01 GAAP net income per share.

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

Turning to our balance sheet, Kenexa has cash, cash equivalents, and investments of $90.4 million at September 30th, 2010, an increase from $65.5 million at the end of the prior quarter.

The primary driver to the increase in cash was $25 million that was drawn against our line of credit at the end of the quarter in anticipation of closing the Salary.com acquisition.

Cash from operations was $6.6 million during the quarter.

If we were to look at our cash and debt position on a pro forma basis, assuming the Salary.com acquisition had closed at the end of our September quarter, we would have a cash balance of approximately $10 million and debt of $25 million.

We also currently have $35 million of available capacity against our credit line which provides the Company with additional financial flexibility.

Accounts receivable DSO were 62 days at the end of the quarter consistent with 62 days at the end of last quarter and within our normal range of quarterly fluctuation, and our deferred revenue at the end of the quarter was $58.7 million, up $900,000 from the end of the second quarter and up 33% from the end of the third quarter of 2009.

I would now like to turn to guidance starting with the fourth quarter.

We are targeting non-GAAP revenue in the range of $58 million to $60 million, which assumes that compensation analysts and other compensation tools contribute approximately $8 million to $9 million on a non-GAAP basis.

Important to note that the core assets of Salary.com that drove our decision to acquire the Company are expected to generate a non-GAAP revenue run rate of approximately $8 million.

There is also revenue potential of as much as $1 million per quarter that will contribute from a near term perspective, but which we expect will wind down over the next couple of quarters.

In addition, Salary.com's contribution to Kenexa's GAAP revenue will be lower than the $8 million to $9 million range due to the purchase accounting write down of their revenue.

We do not have a precise range, but it will likely be at least several million dollars.

We are targeting fourth quarter non-GAAP operating income of $6 million to $6.9 million, assuming a 20% effective tax rate for reporting purposes and 23.6 million shares outstanding.

We expect non-GAAP net income per diluted share to be $0.19 to $0.22 for the fourth quarter.

We are raising our full year 2010 guidance to reflect the upside of our third quarter results.

Increase view for core Kenexa finishing the year as well as the expected contribution from Salary.com during the fourth quarter.

We now expect our full year non-GAAP revenue to be in the range of $193 million to $195 million.

We expect non-GAAP operating income in the range of $16.3 million to $17.2 million.

Assuming an effective tax rate for reporting purposes of approximately 20% and approximately 23.5 million shares outstanding we expect non-GAAP net income per diluted share to be $0.55 to $0.59 for the full year 2010.

We typically provide guidance for the next year on our fourth quarter call.

However given we closed the Salary.com acquisition at the beginning of the fourth quarter, we wanted to provide our initial views for 2011 at this time.

We expect total non-GAAP revenue to be $235 million to $245 million.

This assumes a core Kenexa growth rate of approximately 10% or better, combined with a contribution in the low to mid $30 million range from Salary.com.

We are not going to provide quarterly guidance for 2011 at this time but to help analysts in building their models it is worth pointing out that our fourth quarter 2010 and one quarter 2011 in revenue compare will be influenced by two factors.

First, as I just mentioned a moment ago, there is potential for a portion of Salary.com's revenue run rate to decline in the first quarter due primarily to the completion of consulting programs.

That Kenexa will not be focused on moving forward.

Second, there are multiple sources within our other revenue and there is potential for the sum of the parts to be down sequentially in the first quarter due to the timing of consulting projects starting and stopping.

In addition, from a profitability perspective please remember that operating expenses typically increase at the beginning the year from a seasonality perspective.

Our initial view is that full year 2011 non-GAAP operating income will be in the $19 million to $27 million range, which represents a non-GAAP operating margin of approximately 8% to 11%.

This would represent slight improvement from the roughly 8.5% margin in 2010 and reflects the fact that we are continuing to invest for growth which we believe is appropriate at this stage of the market rebound and share focus.

Our guidance also assumes legal expenses will continue to depress our non-GAAP operating margin by approximately 200 basis points in 2011.

Assuming approximately $1.5 million in interest expense related to the debt raised for the Salary.com acquisition, an effective tax rate for reporting purposes of approximately 20%, and approximately 24 million shares outstanding, non-GAAP net income per diluted share is expected to be in the range of $0.58 to $0.85.

In summary, we are pleased with the Company's operational and financial performance in the third quarter and we expect to finish the year with solid momentum.

We believe Kenexa is well positioned to continue building on its growth track record in 2011, which is reflected in our initial views just shared.

More over, while we will continue to invest from a near term perspective, we remain confident in the Company's abilities to scale margins back toward our long term target operating model over time, as we have done in the past.

We would now like to turn it over to the operator to begin the QA session.

Thank you.

(Operator Instructions).

One moment, please, while we poll for questions.

Our first question comes from the line of Peter Goldmacher with Cowen and Company.

Please proceed with your question.

Hey guys.

It's Joe here for Peter.

Congratulations on the quarter.

Thank you.

I had a question regarding your tax for this quarter in particular.

It seems quite low compared to what you guided for at least for the next quarter, 20% tax rate.

I was wondering sort of what that was and also my second question has to do with, how you expect to go forward coming to market with both salaries and Kenexa products and that's it.

Thanks.

All right.

This is Don.

I will answer the first question and I will turn the second question over to Rudy or Troy.

We started to get the benefits of our tax strategy in Q3 and were able to justify a very favorable tax rate in Q3.

With the uncertainty in rules and regulations that we think are coming about we think that the 20% rate is sustainable now into Q4 and into 2011.

The second question?

The second question is about if you look at Salary.com's talent management solutions, which is primarily a performance management solution with a few others, we have a commitment to the existing customers to complete the implementation of those which we fully expect to do and some of the customers of Salary are also customers of Kenexa and we welcome them into our family.

However, our primary solutions longer term will be Kenexa's total talent management solutions and will take areas of Salary.com solutions, where they have capabilities that Kenexa didn't and we'll add that to the product roadmap.

Exact timing and exact movement to be determined because we just kind of owned the property for a little over 30 days.

Okay.

Thanks, guys.

Congratulations on the quarter.

Thank you.

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

Please proceed with your question.

Yes.

Thank you.

I will add my congratulations.

Rudy, we have heard that some of the large staffing firms have seen a strengthening in their temp placements and have begun to see more temp to permanent activity, especially during Q3.

I guess I am just wondering, does that align with your observations and, if so and based on what you're seeing could that be a precursor to a decline in unemployment say six or 12 or 18 months down the road?

Yes, we are seeing similar things.

Our PO did fairly well in Q3.

We think it's going to be a little choppy, we don't think it's going to be up and to the right.

So I think the choppiness will remain with us for at least another 12 to 18 months and then we should start seeing what we believe are unemployment improvements towards the kind of back half of next year and into 2012.

And in terms of the texture of the deal pipeline do you see more of an increase in the large multi-element transactions or are you seeing this more in the form of some of the small and mid-sized expansion opportunities?

Hi Mark, this is Troy.

We are in the sales part of the deals that we're getting closed with we're seeing good uplift across all categories, but I think the big differentiator for us and that we're seeing on probably about two-thirds of the deals that we're signing are multi-element deals where we're combining multiple software products as well as combining our content and service businesses together.

So I would say that Mark, about two-thirds of the new deals that we're seeing are multi-element deals.

Okay.

Thanks, Troy, and then one last one for Don.

Don, I think the guidance for 2011 by my calculation, it does call for healthy double-digit organic revenue growth, I think something like 10% to 17%.

I guess I'm wondering based on the strength of that guidance what type of closed rate assumptions have you embedded into that forecast I guess in comparison to what you have seen recently?

Are you assuming that you're going to close a higher mix of what's in the pipeline or something else?

Our close rate assumptions into the guidance into 2011 are the same as the close rates that we've experienced through Q3.

Thank you.

Thank you.

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

Please proceed with your question

Thank you for taking my question and my congratulations on the quarter as well.

Could you talk a little bit about the (inaudible) business and a little more color of what you saw in Q3.

Also what was the internal revenue (Inaudible) takeout the small content and the applications?

Thanks.

Laura, we had trouble hearing the question so let me repeat it and tell me if we heard you right.

You said you were looking for more texture on the RPO business?

Yes.

And then I lost you after that.

Yes.

Sorry about that and then the next question is in relationship to the revenue growth internally if you take out the acquired revenues in the quarter, I realize not salary but the other acquisitions?

Okay.

So the other acquisition, the CHPD was pretty well, we owned it for most of the quarter in Q3 of 2009, I'm sorry 2010 so quarter-over-quarter it's about the same.

And that was already built into our guidance that we gave I think of 45 to 47.

The numbers came up to pretty close to guidance.

It was under a couple of million so it wasn't material and we had already built that into our guidance and that will continue into Q4 by the same run rate.

As far as the RPO business, we saw an uptick again this quarter as was seen in the last three quarters most companies have upped their minimums.

In Q4 historically RPO tends to shrink because in the fourth quarter the back half of December, most US clients stop the hiring process so our success fees goes down.

If the current economic trends continue into next year we should start seeing an uptick again and we added a couple more clients this quarter.

Can you talk a little bit about the upside of the quarter, how much of that came from conservatism versus businesses coming in better and which category of the business becoming better, did it come better in?

Zero came from conservatism.

So out of the balance I would say between the difference between $47 million and call it $50 million and change, or $2 million or $3 million, call it out of the $3 million roughly $800,000 was FX, about $1 million was RPO and then the balance was consulting and better close rates and quicker implementations.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of Scott Berg with Feltl and Company.

Please proceed with your question.

Hi, guys.

Excellent quarter.

A couple quick ones here.

I got dropped twice during the call.

Did you happen to break out how much of the revenue was RPO based both subscription and then total?

I don't think we did.

We're trying to get away from that now that the RPO is healed, but and I don't remember exactly but it was north of Q3.

I think Q3 was, I'm sorry Q2 was 12, Q3 was north of that.

Probably about an extra maybe half a million or a million.

Okay.

All right.

And then can you help us quantify the, and maybe you said this, I apologize if you did, quantify the impact of the Salary.com acquisition both on fourth quarter expenses along with fiscal year 2011 you know, specifically around any sort of additional cost for the integration?

I know they are obviously already baked into the guidance, but I want to understand kind of what that impact has on the units.

Okay.

So as we said, Salary.com had already taken some measures to reduce their costs and in addition to that, and they have got them themselves to a break even.

In addition to that, we cut out another $5 million in costs going through the year 2011 so the integration is currently going on.

We've owned the business for 33 days.

We are analyzing some the costs that we think we could take out.

Maybe we can take out more some maybe less.

So it's an ongoing analysis, but as of right now we believe that the contribution to 2011 from an EPS perspective is going to be in the single-digits of [inaudible]

Okay.

Fabulous and I guess my last question is around, any buying trends in the quarter?

Rudy, I know you and I talked about before that pipelines seemed to lengthen a little bit as some customers maybe paused on some buying decisions a little bit.

But was there any other noticeable change in trends during the quarter whether it was in addition to those sales cycles or maybe how or what customers were buying?

Yes.

I remember saying that I didn't believe the because I thought it was bloated and people just being overly optimistic.

Yep.

Well, I have eaten my words.

Formally, tell you that the pipeline was real and it reflected on the upside.

That was the upside.

So through Q4, the pipeline still continues in the same vein, and I still don't believe it, so I will eat my words hopefully at the end of Q4.

All right.

Very good, that's all I have for now.

Thank you.

Our next question comes from the line of Matt Coss with Pacific Crest Securities, please proceed.

Hi.

Good afternoon.

Just a question on the legal expenses.

Is there any chance that legal issues could be resolved during 2011 and then you see some of those expenses be reduced or go away?

Matt, there's always a chance.

Do you want to provide any likelihood?

Well, the trial is still scheduled for December and we're fully expecting to go to trial, though, these things have a way of getting delayed and postponed so we want to provide, we wanted to provide enough guidance to take it through the rest the year.

Okay.

That's fair.

And with revenue, or excuse me.

With unemployment stabilizing and clearly you said that your business would improve if unemployment stabilized, can you quantify how growth might be impacted if unemployment were to go down or if the recovery that you anticipate might be shaky for the next 12 to 18 months?

If that is somehow improved, I mean how much maybe would revenue be impacted?

You've got it to Kenexa growth of 10% plus.

I mean could it be 12% or 14% or 18% plus if unemployment were to decline significantly?

Yes.

Okay.

Thank you.

Yes.

Thank you.

Our next question comes from Steve Koenig with Longbow Research, please proceed with your question.

Hi, guys.

Thanks for having me on the call.

Good quarter.

Congratulations.

Thanks.

Just a quick housekeeping question.

Don, what was the second consideration for modeling the fiscal 2011 quarters, it was about staffing and consulting, but I didn't quite catch it.

Yes.

We are committed to the contracts that the Company had in place.

We are going to deliver the consulting revenues that they have committed to.

Going forward from that, we're not sure whether we are going to continue in that vein and probably it's not a business that we will emphasize.

Okay.

And I'm sorry.

Do you have plans yet for the consumer business that you can talk about or what's the outlook for that business?

The consumer business is a fairly small portion of salary and it's almost immaterial for us at this stage.

So it will be, I mean we will look at it just like we look at every line of business, but it's not going to be kind of our initial focus up front.

Okay.

And the revenue it looks like you've given salary kind of a revenue haircut from -- we had more like a $40 million run rate even after selling off the payroll business.

So are you assuming any revenue synergy and why the kind of lower revenues in your forecast than what we thought the run rate was?

It was a bit less than that.

I think we mentioned last quarter or doing the call after the acquisition was closed it's kind of 38 and then we have given it a haircut because a large amount, not a large amount, but a certain amount of that business is consulting and executive comp and we will fulfill on the contracts on and a few other kind of odds and ends of products and solutions that we may choose to either sunset or just kind of move on from it.

Most of which would be in the consulting arena.

Okay.

And then just very last question here on salary.

What would be your cash costs associated with restructuring either a redundant connector resources or salary resource that you don't want to continue using?

I don't -- Don, I think it'll all happen this year and we'll probably want time -- we don't know the exact amount yet.

We don't know the exact amount of that number yet.

We're in the midst of it.

Yes.

We're in the midst of it and I don't want to commit to a number there.

Okay so should we think low single-digit in the millions?

That would be close.

Yes.

Okay.

Great.

Thanks a lot, guys.

Congratulations again.

Thank you ladies and gentlemen, I would now like to turn the conference back over to management for any closing remarks.

Well, once again, I want to thank the Street for the support that they have given us and to reinforce the point that while we are cautious over the short we're are a lot more optimistic and bullish over the medium long term.

Until 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.