International Business Machines Corp (IBM) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Kenexa Corp., third quarter 2011 earnings conference call.

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

A 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, Don Volk, Chief Financial Officer for Kenexa Corp.

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 third quarter 2011 results, followed by our current guidance for the fourth quarter and full year 2011.

We'll 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, and a reconciliation schedule showing the GAAP versus non-GAAP financial measures is currently available on our company website, www.kenexa.com, with the press release issued today after the close of market today.

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

Rudy.

Thanks, Don, and thanks to all the people joining us on the call.

We are pleased with the company's performance in the third quarter, which is once again highlighted by revenue and profitability that exceeded our guidance.

All areas of our business performed well.

Software, content, and services and our RPO business experienced record quarterly revenue and included the two largest customer wins in the history of our company.

Kenexa continues to benefit from a growing number of organizations looking for a strategic partner to transform their overall HR functions, and they are selecting Kenexa due to our unique end-to-end value proposition.

While we continue to watch the global economy carefully, our confidence regarding Kenexa's long-term market position continues to remain strong and we are increasing our 2011 outlook based on our strong third quarter performance and continued market share gains.

Taking a look at the results for the quarter, total non-GAAP revenue was $77.2 million, which was above our guidance and represented a year-over-year increase of 52%.

From a profitability perspective, non-GAAP operating income was $8.3 million, and non-GAAP diluted EPS was $0.23, both of which were also above our guidance and represented solid growth.

From a macro perspective, economic data points continue to be volatile on a global basis.

For example, since our last call, challenges in Europe have become more pronounced and well documented.

We continue to expect that the most likely macro scenario is one in which the global economic recovery will remain choppy for the foreseeable future.

However, customer interest levels remained high, which is reflected by our third quarter results and ongoing sales pipeline momentum.

Talent management is becoming more and more strategic at the [C suite], and HR organizations are being asked to do more with less.

As a result, more so now than ever, we see global organizations that are looking for a strategic HR solutions partner.

They need more than just software.

They need the software along with a comprehensive suite of solutions, proprietary content, behavioral sciences, leadership development, and range of service-based solutions to help them transform their talent management processes.

We believe that Kenexa is well positioned to capitalize on these market trends in the multibillion-dollar talent management market.

The strong market share gains that Kenexa has been enjoying reinforces this belief.

Excluding the contribution from salary.com, our revenues have grown approximately 30% on a year-to-date basis as compared to the prior year period.

This is several times the rate of market growth and compares favorably with the other large talent management software and services providers.

What is most encouraging for the long term is that all the key areas of our business, software, content, and services, are contributing to our strong growth and market share gains.

During the third quarter, we continued to win competitive engagements with large enterprises across our talent acquisition and talent retention solutions.

Such wins included Armstrong Industries, Humana, Novartis, NCR Corporation, Nokia, and Samsung, among many other wins in the quarter.

As we discussed in depth on our analyst day, our RPO-related business also continues to perform at a high level.

Our RPO revenue is approximately $20 million for the third quarter, which is a record performance, and it is up over 50% compared to the $13 million level in a year-ago period.

We previously announced that we won an eight-figure RPO engagement with Baker Hughes during the third quarter.

And I'm pleased to share that we won a similar size RPO engagement with the Life Sciences Company during the third quarter as well.

This represents a multi-element solution, including our software, content, and services.

These two wins, on the heels of winning the multi-element engagement with Ford, means that Kenexa has won the three largest talent management engagements that we are aware of during 2011.

This is a tremendous accomplishment and a reflection of our unique value proposition and global advantage.

Our RPO business provides Kenexa with leverage to the hiring success of our customers.

We believe upside far outweighs the negative and it is in Kenexa's best interest if you believe in the talent management industry long term.

During 2008, we experienced the downside of this leverage when unemployment rate went from 4% to approximately 11%.

That was an unprecedented increase in such a short period of time.

We have proven our ability to grow our RPO business in a 9% to 10% unemployment market.

The fact is, we are now up around 150% from our base.

Looking ahead, if we experience a significant increase in employment, comparable to what had occurred in 2008, we would expect our RPO business to face significant challenges.

But if the unemployment remains relatively stable in the 9% to 10% range, we expect the RPO aspect of our business to continue growing.

We believe that several factors have driven this rebound and our continued success.

From a macro perspective, the unemployment rate for skilled [rate] labor is under 5%, as compared to 9% overall unemployment rate.

And Kenexa is primarily focused on helping our customers identify [an] onboard skilled professionals.

From an industry perspective, we see a growing focus in strategic deployments, CEO engagement in the HR transformation process, and multiple element solutions that leverage Kenexa's full value proposition to drive results.

For these reasons, our competitive win rates have been high, and we continue to see a strong pipeline of RPO opportunities that include all elements of our value proposition.

In total, we added over 60 preferred partners worldwide during the third quarter, compared to over 40 preferred partners added during the year-ago period.

Our growing base of preferred partners not only reinforces strength of our solutions, they also provide a significant cross-sell opportunity from a long-term perspective.

We have a proven track record of growing our customer relationships over time, in our PQ metric, which measures the average annual revenue from our top 80 customers, was a new record at over $1.6 million at the end of the third quarter, which is an increase compared to over $1.2 million at the end of the year-ago quarter.

We are continuing to invest in our suite of solutions to expand and deepen our value proposition, in addition to providing us with the capabilities to continue to grow our customer relationships.

In many situations, Kenexa wins competitive engagements [in] the strength of our technology, outstanding domain expertise, proprietary content, and services leadership position.

To that end, during the third quarter, we launched Kenexa 2x Perform, which offers integrated enterprise class performance management, succession, and compensation planning tools to drive organizational alignment and ensure top performers are retained and engaged.

Built on the Kenexa 2x platform, the new solution complements Kenexa's other integrated talent management solutions such as recruiting and on-boarding, by automating and integrating goals, appraisals, compensation, competencies, development, career path, and succession planning.

Providing a solution that integrates functions and data that traditionally have been siloed, means businesses can achieve greater efficiency, enabling maximized performance and results.

The release of Kenexa 2x Perform, combined with our best-in-class Compensation Analyst products and proprietary contents of salary.com, positions Kenexa uniquely to deliver these benefits to our customers.

We continue to be pleased with the performance of our Compensation Analyst Solutions, following the acquisition of salary.com.

After winding down some non-strategic products, we have stabilized salary.com's revenue run rate a quarter earlier than expected, and we're experiencing record bookings related to our comp analyst products, including closing the five largest Compensation Analyst deals ever for salary.com.

From a distribution perspective, we are taking your Compensation Analyst Solutions to China and the UK in the back half of 2011, which is earlier than the original plans for doing so in 2012, and as a result of our satisfaction with the progression of our integration plans and market perceptivity to our expanded value proposition.

During the third quarter, we also introduced Kenexa Social Solutions, which [draw on our] deep industry expertise in sourcing, recruiting, employment branding, and social media to deliver positive outcomes for hiring employees as well as job candidates, and all from a single vendor.

Many companies want to harness the tangible benefits of social recruiting, but whether due to resources, time, and other commitments, cannot readily tap into its full range of possibilities.

Kenexa Social Solutions goes past just posting and sharing jobs across social media such as Facebook, Linked In and Twitter, by offering [sourcing] strategies, candidate relationship management, and consulting services that help attract, connect, and recruit talent.

Kenexa Social Solutions is available now and is being field tested by one of the world's largest retailers.

In addition to our organic development, we've expanded our value proposition through increased partnership efforts.

We recently announced an alliance with SkillSoft, a leading staff provider of e-learning content, technology, and services, to provide an integrated solution of performance management, learning management, and learning content.

We have already partnered with SkillSoft in a number of new opportunities, and our existing customer base is excited by the potential of seamless access to contents directly from Kenexa platforms.

In summary, the economy is on everyone's mind and it is something that we continue to monitor closely.

No vendor would be immune if the economy fell into another deep recession.

However, we are focused on execution, winning market share, and positioning Kenexa for the long term.

Our strategy has proven to be successful.

We are growing at several times the rate of market growth and we're winning the largest talent management deal opportunities.

And we continue to expand our unique value proposition of software, content, and services.

We believe Kenexa is well positioned to capitalism on the growing trend of global organization seeking a strategic HR solutions partner.

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

Don.

Thanks, Rudy.

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

On a GAAP basis, our total revenue for the third quarter was $75.7 million.

Excluding the deferred revenue write-down of purchase accounting related to the salary.com acquisition, total non-GAAP revenue was $77.2 million, which was above our guidance of $72 to $74 million, and up 52% compared to last year's third quarter.

Non-GAAP subscription revenue was $55 million, an increase of 38% compared to last year, and 5% on a sequential basis, and it represented 71% of our third quarter total revenue.

Our services and other revenue was $22.2 million, up 102% compared to last year, 16% sequentially, and representing the remaining 29% of our third quarter total non- GAAP revenue.

As we have shared in the past, our service and other revenue has the greatest amount of quarter-to-quarter variability.

To that end, approximately $1.5 to $2 million of the $3 million in upside to our third quarter revenue was related to unexpected short-term hiring burst at a few RPO customers, that started and finished during the third quarter.

The strength of our other revenue over the last several quarters has benefited from the fact that we have structured many of our RPO engagements so that Kenexa benefits at a hire level, as recruiting ramps at our clients.

We do our best to try to plan our business such that variability, if it occurs, is on the upside.

From a geographic perspective, our non-GAAP revenue mix of domestic versus international revenue, was 75%/25%, compared to 74%/26% last quarter.

During the quarter, we faced a currency headwind of approximately 800,000, which impacted the geographic mix for the quarter.

During the third quarter, overall renewal rates for our suite of solutions continued to approach the 90% range, similar with recent quarters.

Turning to profitability, we'll be providing non-GAAP measures for each third quarter 2011 expense category which excludes the aforementioned $1.5 million in deferred revenue write-down related to the salary.com acquisition, $1.8 million of share-based compensation charges associated with FAS 123R, and $3.6 million of amortization of acquired intangibles.

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

Non-GAAP gross margin of 62% for the third quarter was consistent with last quarter and compares to 65% in the year-ago period.

The year-over-year decline (inaudible -- background noise) is due to the fact that other revenue has grown by over 100%, and it has a lower gross margin compared to our subscription revenue.

From an operating expense perspective, non-GAAP operating expenses of $39.4 million were up from $38.1 million last quarter and $28.7 million in the year-ago quarter.

The increase in expenses was driven primarily by increases in sales and marketing and R&D, though we did see increased leverage in our business on both a sequential and year-over-year basis.

Non-GAAP income from operations of $8.3 million was above our guidance of $7.1 million to $7.5 million, and represented an 11% non-GAAP operating margin, which was an increase from an 8% margin in the year-ago period, and 9% last quarter.

Non-GAAP income from operations increased 98% compared to the year-ago period, leading to non-GAAP EPS of $0.23 for the third quarter of 2011, above our guidance of $0.19 to $0.20 and up 44% on a year-over-year basis.

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

Cost of revenue $29.7 million, sales and marketing $16.4 million, R&D $4.9 million, and G&A $15.1 million.

For the third quarter, GAAP income from operations is $1.3 million, net loss allocable to common shareholders is $3.1 million, resulting in a $0.12 GAAP net loss per share.

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

Turning to our balance sheet.

Kenexa had cash, cash equivalents, and investments of $124.9 million at September 30th, 2011, a decrease from $127.5 million at the end of the prior quarter.

The primary drivers to the decline in cash were $4.2 million used to pay down long-term debt, and $1.8 million used to settle legacy shareholder lawsuits for salary.com.

We generated non-GAAP cash flow from operations of $12.6 million, and continue to expect to generate record annual cash flow from operations in the mid-$40 million range and free cash flow in the mid-$20 million range for the full-year 2011.

This assumes a seasonally strong cash flow performance in the fourth quarter, which is consistent with our experience in prior years.

A strong increase in accounts receivable for $46.9 million at the end of the second quarter to $54.7 million at the end of the third quarter, provides a significant base for collections in the fourth quarter.

Strong business activity contributed to the increase in accounts receivable.

In addition to our deferred revenue, which was $87.3 million at the end of the third quarter, up 3% from the end of the second quarter and up 49% from the end of the third quarter of 2010.

I'd like to turn to guidance, starting with the fourth quarter.

We are targeting GAAP revenue of $74.7 million to $76.7 million, and non-GAAP revenue in the range of $76 million to $78 million, which represents an increase of 19% to 22% on a year-over-year basis.

We assume a relatively flat sequential performance in the fourth quarter.

However, it is important to keep in mind the previous mentioned $1.5 million to $2 million of nonrecurring RPO revenue that occurred in the third quarter, in addition to the fact that our other revenue can have quarter-to-quarter variability.

It is also worth highlighting that the midpoint of our updated fourth quarter revenue guidance is over $3 million greater than our implied fourth quarter midpoint provided on last quarter's call.

We are targeting fourth quarter non-GAAP operating income of $9.2 million to $9.6 million.

Assuming a 20% effective tax rate for reporting purposes and 28 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.25 to $0.26 for the fourth quarter.

The combination of our strong third quarter results and Kenexa's continued market share gains leads to full-year 2011 guidance that is again being raised.

We expect total non-GAAP revenue to be $287.4 million to $289.4 million, an increase compared to our previous guidance of $279 million to $283 million.

A raised guidance also represents year-over-year growth of 44% to 45%.

On a GAAP basis, we expect total revenue to be $279.4 million to $281.4 million.

We are raising our non-GAAP operating income range from $27.5 million to $28.5 million, to $28.9 million to $29.3 million.

Our targeted non-GAAP operating income reflects continued investment in our growth initiatives, which we believe is appropriate at this stage of the market and our focus on gaining share.

Assuming an effective tax rate for reporting purposes of approximately 20% and 26.5 million shares outstanding, we now expect our non-GAAP net income per diluted share to be in the range of $0.81 to $0.82.

In summary, we are pleased with our performance during the third quarter and believe Kenexa is among the best performing companies in the talent management market.

We have a differentiated value proposition that is driving market share gains, and we believe our company is well positioned to be one of the long-term winners in a multibillion dollar market opportunity.

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

Doug.

Thank you.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

(Operator Instructions) Our first question comes from the line of Mark Murphy with Piper Jaffray.

Please proceed with your question.

Yes.

Thank you very much.

Congrats on the results.

Rudy, I wanted to ask you, heading into 2012, do you have any thoughts on the hiring pace for your quota-carrying reps?

In other words, do you think you -- by what percentage do you think you might augment that?

And also, is there any inclination to increase the quotas here over time, just given the unique value prop, the strength of the 2x Platform, and the momentum that you've got here with these larger multi-element deals?

Yes, we knew expect to do that.

If you notice, our sales and marketing costs over the last three quarters have dropped from 22 and change down to 20 and change.

That -- those efficiencies are now being felt -- are now the result of some of the hiring we did in 2010.

So looking foreword, I would say that those efficiencies should continue.

However, given the market opportunities, Mark, we may continue with the hiring.

So depending on the rate at which we do the hiring, balancing out those efficiencies may result in a little bit of a flattening through the first half of next year.

So I guess what I'm saying is, yes, we're happy with the added efficiency of the sales force.

We are expecting better performance going forward.

We are adding new staff.

The net impact might be a flattening on that efficiency before it starts to improve again a little bit more.

Having said that, we are also thinking of spending more on sales and marketing.

So -- I'm sorry.

On pure marketing.

So that number should sort of climb upwards a little bit.

Okay.

And then also, for Don, can you remind us the overall margin profile on the RPO business?

You commented on it at the gross margin line.

I'm just wondering what you typically see at the operating margin line.

And I know that it's a small piece of the business, but it is growing.

And I'm also just wondering, is the margin on that business constant or does a given RPO contract began in a low margin phase and then maybe take some time to ramp up over a few quarters.

Mark, margins on the RPO business are generally in line with company margins in the low double-digit as we experienced in Q3.

The margins are affected by the large deals, as they do undergo some pressure in the beginning as we build up the staff to deliver for the particular large deals.

Okay.

Then one last one, if I may.

Is there any way you could take an estimate of what percentage of your new bookings in Q3 would have been the full suite or multi-element deals?

The majority of new deals, Mark, that are crossing the desk have multi-elements in them.

I'm just looking at Don.

What would you estimate, three quarters of them?

Yes, 70%.

Have multiple elements to them.

Yes.

But as far as the full suite, we did not have any full suite deals.

And Troy, has that number on the multi-element mix, is it safe to assume that that has been increasing, say in the course of the last 12 months.

Yes, we're really pleased with that.

Thank you.

Are next question comes from the line of David Hilal from FBR Capital Markets.

Please proceed with your question.

Great.

Thank you.

I guess first, Rudy, with 2x Perform, of the deals you've seen so far, roughly what percent of those are into the installed base where you're having success cross-selling versus maybe a complete new customer acquisition win?

I'll take it, David.

This is Troy.

It's really, it's a good blend.

It's about 50/50 of the current install base that's taking it up, as well as new logos that we're picking up.

The big differentiator for us on that product is similar to the other product categories.

When you combine the content and analytics, that tends to be a really big differentiator for us as well.

So for those that are adding it to what they already have, how much of a dollar uplift is -- are they basically doubling -- is it 50% more?

How much more dollars are you getting from that customer who then proceeds to buy 2x Perform, on average.

Let's see.

It's -- that's a tough one for me to -- I'm not trying to be -- I'm not trying to avoid the question.

It's a tough one because there's such a range because we've got mid-market customers that are adopting as well as some of the largest installs in our portfolio are moving on to that Perform platform as well.

So there's quite a range there, David.

Okay.

Don, on the $20 million of RPO business, what's the split between the two revenue lines?

And is a mix this quarter or did it change one way or the other from what it historically has been running at?

The split is approximately 40 subscription, 60 other, and it's been consistent over the last three quarters.

Okay.

Great.

Thank you.

Nice work.

Our next question comes from the line of [Evan Canfield] from William Blair.

Please proceed with your question.

Hi, guys.

This is Evan on for Laura.

Thanks for taking my questions.

You spoke last quarter about the RPO pipeline being at record levels.

And over the past couple quarters, I know you've signed these three large eight-figure RPO deals.

Just wondering if you could talk a little about the makeup of the pipeline and if you're seeing maybe similar deals out there.

Do you expect these eight-figure deals maybe to become the norm?

Thanks.

Eight-figure -- the day that eight-figure deals become the norm, I'll think about retiring.

So we've just hit -- we just got very fortunate this year that we were able to pick up three of the largest deals.

We do have eight-figure deals in our pipeline, as we have had now for two, three years.

These things take a long time to close.

Quite often, the sales process lasts longer than a year.

The pipeline continues to remain very strong in spite of the fact that we did the two big deals.

I would say the pipeline is as robust today as it was at the start of the second quarter -- I'm sorry -- at the start of the third quarter.

So we've been able to kind of replace the sales with new opportunities.

And looking into it for next year, if the -- if the buoyancy continues, we should hopefully see a couple of deals close next year as well.

And then, if I'd add, Evan, long term, we are exceptionally optimistic about this model.

All of a sudden, when you combine the content and the analytics with our RPO, the size of these new deals is creating a new model for other companies in the corporate world.

So as these become successful, again, long term, we think this is really a trend that we'll be able to take advantage of.

Okay.

Great.

And I guess on that Baker Hughes and that other Life Sciences deal you just mentioned, can you talk about who you competed against or maybe what other solution they had prior to signing with you guys?

Yes, in terms of Baker Hughes thing, it was -- we were involved with -- we were involved against a partnership of providers.

And we were kind of the only choice to go with the single (inaudible).

So the usual suspects were involved in that.

And in the Life Sciences deal, we were up against a partnership of global providers, but none of whom had our footprint.

And so once again, it was kind of against the usual suspects with us being -- entering into the agreement as the only single (inaudible) provider.

So our competition's always a partnership of vendors.

Okay.

Great.

Thanks, guys.

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

Please proceed with your question.

Hi, guys.

Very good quarter here.

Couple quick questions.

First of all, on the global perspective, can you refresh us what your exposure is on the European side of your international business and what you're seeing in terms of any impact, positive or negative?

European business makes up little under 20% of our business.

I think we're all reading the same paper.

So is there a softness there?

I wouldn't say it's significant.

If you look at the numbers for Q3, the -- if we did not get the currency headwinds, we would have stayed at kind of the 76/24 -- I'm sorry 74/26 mark, which shows continued progress in the right direction.

The large, kind of the two large eight-digit RPO wins are clearly kind of sucking up the marketing news.

But the -- we closed another big RPO deal.

And the other two RPO deals both closed in Europe.

So I'd say we're doing fine there.

Okay.

Speaking of RPO, now, given Don's comments of the $1.5 million to $2 million in the third quarter that was kind of a one-time revenue recognition based on short-term bump up in hiring, are you guys anticipating or at least expecting RPO revenues in the fourth quarter to be kind of flat relative to the third quarter with the deals that were signed in the third quarter or should we expect a small step behind?

I think it'll be safer to assume it's flat.

So the kind of tailwind we've had in the RPO wrap-up quarter-over-quarter over the last three quarters, that's going to be flat.

Most of our growth will come from non-RPO.

And I guess my last question is, is on the mix of business, this was certainly, at least from what I can tell, this is your highest quarter with regards to other revenues being a total percent of revenues at 29%, and gotten away from historical percentage.

I know some of that was impacted by the strong RPO strength.

But how should we look at that going forward, maybe into fiscal year '12, without guiding specifically?

Should that continue to be a relatively higher percentage than historical numbers or should that trend back down?

No, Scott.

We think that that trends back to our target model.

And it trend -- we believe that it's going to trend back into the upper 70% for subscription.

Very good.

That's all I have.

I'll jump in the queue.

Thank you.

Thanks.

(Operator Instructions) Our next question comes from the line of Steve Koenig from Longbow Research.

Please proceed with your question.

Good afternoon.

Thanks for having me on the call.

I'd like to maybe do one question and one follow-up.

The -- it looks to us, guys, that your -- the pace at which you're hiring has slowed down a bit over the last three months is -- looks a little bit to be what we gather.

I'm wondering, is there -- is that because you had to hire for big new RPO customers and that's getting completed?

Or can you comment on that at all or give us some thoughts behind that?

Yes, your assumption is correct.

Okay.

So it's mostly related to RPO.

Are you seeing -- are you -- any trends in terms of how you're looking to ramp up on the software and content side?

I guess I misunderstood your question.

So let me try and answer differently.

You're seeing a reduction.

The baseline hiring that you're not seeing the reduction on is on the engineering and sales and marketing and the service arms of the organization.

The drop-off you're seeing was the fill-in for the two big deals that we hired on.

Okay.

And, Rudy, that was the pharma deal and the Baker Hughes deal that you did most of your -- did you do most of your hiring for those in Q3 then?

We've done a part of the hiring.

It's going to take us a full six months to fully deploy in both those.

Okay.

All right.

Great.

Thanks.

And then I guess for the follow-up, you've given us some good commentary on RPO.

And, obviously, there's a lot of interest in that topic because that's a big growth driver here, and probably the success [views] clearly.

And maybe we've seen in the past some of the other parts of RPO are -- can be a fairly volatile part of your revenue streams.

Can you give us any thoughts on market growth and Kenexa's growth in RPO on, not so much Q4, but maybe a little bit longer term?

What kind of growth trends should we expect there, short of, obviously, you're not giving fiscal '12 guidance.

But how should we think about that market and your ability to grow in that market?

If you look at historical data, we're growing at multiples of the market.

So call it two to three times.

I think basically can Kenexa continue to grow at multiple of the market?

Reasonably confident in saying, yes, I think so, because the market is as fragmented as it is.

Most of the bigger players, the public players that have the balance sheets, will tend to win a lot of the bigger deals where you can kind of get that -- you can get the [juice] in your growth rate.

So I would say, looking forward, we should continue to grow about market, like most of the public companies, because of the fragmented nature of the business.

And, Rudy, that do you think about the growth rates for your servable portion of that market?

And also, how does ADP affect that dynamic going forward?

So the first part is, it depends on what your estimates are for the growth rate.

So whatever they are, I'd apply the multiple on that.

Right now, the marketplace is extremely kind of economic-based, if you will.

Most of the headlines are around what the Fed's going to do or what the ECB's going to do.

And that level of kind of macro-noise tends to make it fairly difficult for us to say, you know what, this is what we're expecting to see next year.

And normally we give guidance, like I said, at the start of the year.

Yes.

And then vis-a-vis kind of -- what was the second question again?

I was wondering your thoughts on how ADP affects the market going forward.

I guess it's both good news and bad news, right.

The good news is it's validating the strategy, now we've got kind of a major player who wants to play in services, content, with the purchase of AVERT two, three years ago, and software kind of similar to us.

So that validation is the good news.

The bad news is, they're a big company.

However, they tend to service -- their bread and butter are 10 to 1,000 employees.

That's the employment market that they -- that's the [employer] market that's their bread and butter and that's where they're very, very focused on.

We tend to focus in on kind of mid-market.

And most of our growth and most of our revenues come from companies with over 5,000 employees.

I think the numbers well over 80% of our revenues come from that market.

So [there's] validation, which is the great news, and also that they're going to be in the smaller market segment, that's the great news.

The tough news could be that once they come in, will somebody else come in?

Fair enough.

Fair enough.

Well, that's very helpful color.

Appreciate it, and congratulations on your quarter.

Thanks.

Our next question comes from the line of Eric Lemus from Raymond James.

Please proceed with your question.

Hey, guys.

Thanks for taking the question.

I had -- my first question is somewhat of a follow-up from a prior question on RPO.

As far as RPO renewals in the fourth quarter, are there any notable deals in the fourth quarter?

And any commentary on assumptions around new RPO business being one in the fourth quarter that could potentially swing things in 2012?

No, the -- we don't usually comment on expected closings because those things, like I said, they're a long, very long selling cycle, and there's a lot of uncertainty at the end.

As far as renewals go, we did not have any material, non-renewals in Q4.

Okay.

And then my last question, as far as any commentary on the preferred partner strength in the third quarter and how much of that base was attributable to a software win such as with Brass Ring and how much was related to traditional assessments, surveys, and content business?

That's the good news, we're getting a good blend.

A lot of the headlines this quarter are because of those really significant opportunities that we picked up on the RPO side.

But again, you [talk to one of] Rudy's earlier comments, the five largest deals ever won on Comp Analyst, we won those.

The content businesses continue to be really strong.

Our 2x Platform across the suite continues to be really strong.

And again, the logos that we're winning are who's who, the largest, most complex tournaments across our product suite.

I think our win rates out [seed] those of our competitors on those big global enterprise deals.

Great.

Thanks, guys.

Our next question comes from the line of Brian Schwartz from ThinkEquity.

Please proceed with your question.

Yes.

Hi.

Thank you for taking my questions.

I have two questions here, one for Don, one for Rudy.

Starting with Don first, this is really kind of adding on to Steve's question earlier.

Maybe I could ask it in a different way.

You know, it looks to me, based on my assessment hear that both your organic revenue, as well as your organic billings, are growing faster than 25% here for the past three quarters.

They're really closer to 30% growth here organically.

So if you do look into the pipeline here and how the market trends are lining up, would it be fair to assume that you have a higher level of confidence today that the business could consistently grow your revenue more towards the higher end of that longer term 15% to 20% growth rate?

Thanks.

And I have a follow-up for Rudy.

Well, Brian, were not giving 2012 guidance.

So that's a good way to ask that question, though.

I tried to get that in there, Don.

Rudy --

Go ahead.

Rudy, I apologize if you have to repeat yourself on this one.

But I was curious, you did announce a partnership towards the end of the quarter, with a learning management vendor.

And I was wondering if you could at least share with us or share with me here what the strategy and thoughts were behind signing this partnership.

And then maybe a real-time update here on where you're at in terms of the partnership from a technology standpoint integrating the service into your platform or offering and then possibly from the distribution side, if you do have plans to cross promote your products into each other's base.

Thanks.

We're taking a [cold walk/run] strategy with a partnership on both sides.

We have begun the first level of integration successfully.

We have had a couple of verbals on an integrated sale.

The reason we have taken the partnership route is because we believe that long term the marketplace is going to be looking at a single unified platform, and we want to play in that space.

The partner that we picked is the largest provider of content with the same heritage that we have around content.

So philosophically, both organizations look at outcomes provided by their solutions rather than simply saying we've got the best level of clicks in out solution.

So we tend to be players that focus on solutions and outcomes rather than just pure software players.

And SkillSoft has a rich heritage around content.

Their software is clearly world-class, and we're very, very comfortable with it.

As we continue to see early successes, we will make decisions on how to incorporate our respective solutions into one another's platform closer and closer.

That's helpful.

Thanks again for taking my questions today.

Thank you.

Our last question is a follow-up question from the line of Scott Berg from Feltl and Company.

Please proceed with your question.

And maybe it's a question for Don, is on your PQ metric for the quarter at $1.6 million, obviously the strongest in the company history, how can you character -- or can you characterize that for us at all with regards to how much the large RPO deals are impacting that metric?

Just trying to dissect a little bit on the strength versus the services or content or RPO side of the business.

Well, the large RPO deals are certainly part of that, although, the most recent wins are not in that yet because the revenue hasn't been recognized.

So in the top 80 customers, the large RPO deals are helping that number, especially when they are -- they are multi-element deals which include the applicant tracking, the assessments, the RPO all together.

So that's the reason why that's a record.

Okay.

Great.

Thank you.

There are no further questions.

I'd like to hand the call back over to management for closing comments.

Thank you very much, Doug.

And I'd like to take the opportunity to thank the Street for their continued support.

And we continue to remain fairly bullish about Kenexa over the long term - until next quarter.

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.