International Business Machines Corp (IBM) 2011 Q4 法說會逐字稿

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  • Operator

  • Greetings and welcome to the Kenexa Corp fourth quarter 2011 earnings conference call.

  • At this time, all participants are in 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, Don Volk, CFO of Kenexa Corp.

  • Thank you, Mr.

  • Volk.

  • You may begin.

  • Don Volk - CFO

  • Thank you, [Roya].

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

  • Today, we will review Kenexa's fourth quarter and full-year 2011 results followed by our current guidance for the first quarter and full year 2012.

  • We'll then open up the call for questions.

  • Before we begin, let me remind you 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 and 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 after the close of market today.

  • I will now turn the call over to Rudy Karsan.

  • Rudy.

  • Rudy Karsan - Chairman and CEO

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

  • We've got exciting news to review today including another strong quarterly performance, as well as today's announced acquisition of OutStart, a leading provider of e-learning solutions that provides Kenexa with another important component within our end-to-end suite of strategic HR solutions.

  • As it relates to our fourth quarter, Kenexa delivered revenue and profitability that exceeded our guidance, and it was encouraging to see all areas of our business continue to perform at a high level, software, content, and services.

  • Uncertainty regarding the global economy remains at a high level.

  • However, we have continued to experience solid global demand for our solutions.

  • As we shared in our press release, we are cautiously optimistic regarding Kenexa's outlook for 2012.

  • We expect our differentiated offering and business model to drive continued market share gains, and from a profitability perspective we plan to continue investing for growth, but believe we can also deliver modest non-GAAP operating margin expansion.

  • This is due to added investment in sales, marketing, and R&D to capitalize on our expanding market opportunity and strong business momentum.

  • Taking a look at our financial results, total non-GAAP revenue was $79.6 million for the fourth quarter, above our guidance and representing a year-over-year increase of 24%.

  • From a profitability perspective, non-GAAP operating income was $9.9 million and non-GAAP diluted EPS was $0.27, both of which were also above our guidance.

  • On a full-year basis, 2011 was one of the most successful years in the history of Kenexa, if not the most successful year.

  • Our initial revenue guidance for 2011 was $235 million to $245 million.

  • We finished the year with over $290 million in revenue, representing over 20% up side from the mid point of our initial expectation.

  • From a profitability perspective, our initial non-GAAP operating income guidance was $19 million to $27 million and we ended up delivering nearly $30 million, representing nearly 30% up side from our initial guidance mid point.

  • Clearly, the economy remains front and center on everyone's mind.

  • As our fourth quarter results indicate, we have not seen a meaningful change in the buying environment.

  • Demand remains solid in North America, by far our largest end market.

  • As we have previously shared, the mid market in Europe remains the most challenged region from our perspective, but this only represents a small single-digit percentage of our overall business, given the fact that we're primarily focused on the higher end of the market where International customer demand continues.

  • Most recently, the US unemployment rate declined to 8.3%, the lowest level since June of 2008.

  • While this is clearly an encouraging data point for any HR-related solutions company, there have also been continuing reports of concern regarding the health of the European economy.

  • All things considered, we're expecting the 2012 macroeconomic environment to be fairly similar to what we experienced in 2011.

  • If that turns out to be the case and the unemployment rate does not spike, we believe Kenexa is well-positioned to deliver another year of solid top-line growth.

  • Other recent macro news particular to the HR solutions industry is SAP's acquisition of Success Factors.

  • We believe that this is a positive event for Kenexa for several reasons.

  • First, it is evidence of the growing strategic importance of Talent Management Solutions with Executives.

  • Second, it shows that it would be difficult for new entrants to build their way into the Talent Management segment of the market.

  • Finally, potential competition from ERP vendors is something that we've long prepared for at Kenexa.

  • The Talent Management industry is a growing multi-billion dollar market opportunity, which is certain to attract the attention of large software providers over time.

  • While we did not compete with Success Factors very often, due to their primary focus in the mid market, we believe that Kenexa is the best-positioned vendor to continue thriving as competition with ERP vendors occurs over time.

  • We have the most differentiated business model in value proposition, based on our unique combination of strong technology, proprietary content services, and RPO capabilities.

  • We believe Kenexa's unique business model is a core driver to our strong market share gains during 2011.

  • We finished the year with growth of over 30%, excluding the contribution from Salary.com, which represented a significant acceleration and demonstrated that Kenexa has clearly regained its market momentum.

  • We believe there's growing awareness in the marketplace related to Kenexa's unique value proposition and market leadership position.

  • We invested in rebranding Kenexa coming out of the recession in order to better educate the marketplace on our end-to-end capabilities.

  • We also increased other marketing related investments and significantly expanded our direct sales organization.

  • The payback on our investments is seen not only in our accelerated revenue growth, but also in increased customer adoption.

  • During the fourth quarter we added over 70 preferred-partner customers contributing to over 700 preferred- partner customers at the end of 2011.

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

  • Our P3 metric, which measures the average annual revenues from our top 80 customers, continued at a record level of over $1.6 million at the end of the fourth quarter, which is an increase compared to over $1.2 million at the end of the year-ago quarter.

  • One of the drivers to the growth in our P3 metric is the growing adoption of multiple elements of our end-to- end solution suite.

  • Today, a majority of our deals are for multiple elements and even more important, Kenexa is consistently winning a high share of the largest deals where customers are looking for long-term strategic partner to help them turn the Talent Management business processes into a competitive advantage.

  • During 2011 Kenexa won the three largest Talent Management deal opportunities.

  • Each of these opportunities included our RPO capabilities, which are unique compared to our software-only competitors, and they included elements of our technology and marketing investments.

  • Another important reason that Kenexa has been able to gain market share coming out of macro challenges is the fact that we continue to invest aggressively in R&D during and after the recession.

  • We continue to add additional capabilities on our next generation 2x platform.

  • Our recruiting application is considered best-in-class at the high end of the market.

  • Following the release of our on boarding solution we recently launched our 2x platform solution which automates and integrates goals, appraisals, compensation, competencies, development, courier path and succession planning.

  • We have completed early adoption implementations with 2x platform and have seen a high level of customer interest.

  • We expect sales to start ramping up over the course of 2012, and increasingly so beyond.

  • We're at the forefront of integrating social media capabilities across our Talent Management suite, and doing so in a way that has real business benefit to our customers.

  • During the third quarter we introduced Kenexa social solutions which goes well beyond sharing jobs across social networking sites by offering sourcing strategies, candidate relationship management, and consulting services that help attract, connect, and recruit talent.

  • More recently, we announced an alliance with LinkedIn, including integrations with LinkedIn to support candidates throughout the job application process and enable recruiters to work faster, smarter, and more effectively in managing these candidates.

  • We're very committed to accelerating the benefit of social recruiting for our global clients and our new tools for LinkedIn are currently being incorporated into future product releases.

  • Kenexa also has a first mover advantage relative to the competition as it relates to the launch of the full mobile capabilities, which enables our users to access our solutions through a user interface that is native to their devices, compared to simply taking the same PC-based user interface and moving it over to a mobile device and resulting in a clunky user experience.

  • We won HR Tech Product of the Year in addition to a wide range of accolades from industry analysts and customers alike for our mobile capabilities, and it is another example of Kenexa delivering robust and innovative technology capabilities.

  • In addition to competing very strong in the technology front, what truly stands out is the fact that Kenexa's content, domain expertise and services are unmatched by our software competitors.

  • We continue to expand our leadership in the area of proprietary content.

  • During 2011 we integrated, stabilized, and regenerated growth relative to our compensation management solutions and proprietary compensation related data from Salary.com.

  • During the fourth quarter we also announced a tuck-in acquisition of Batrus Hollweg.

  • They had what is recognized as some of the top notch content and solutions in our industry today, particularly in the hospitality industry.

  • And today we announced the acquisition of OutStart, a leading SaaS-based provider of next-generation e-learning solutions.

  • They deliver a powerful suite of inter-related mobile, social, learning content management systems and learning management solutions.

  • Their learning content management system enables customers to develop, manage, maintain, and deliver modular and personalized training.

  • Their full-featured and highly configurable learning management system administrates, documents, tracks, reports, and delivers courses in support of classroom on-line and mobile learning.

  • The value to customers is that they can derive more value from their people assets and enable them to more effectively collaborate, converse and learn, while increasing their social and knowledge capital.

  • OutStart has been recognized as a visionary in Gartner's Magic Quadrant for the last seven years.

  • In addition, they have won a wide range of awards for having the top learning portal in the industry.

  • The strength of the solution is further validated by their blue chip customer base which includes Alcatel-Lucent, Boeing company, BT, Capital One, CVS Caremark, DirecTV, McDonald's, MetLife, Internal Revenue Service, UK Ministry of Defence, Verizon Wireless, Xerox, and Yum brands.

  • Learning management has a large market opportunity estimated at approximately $1 billion in annual spend by industry analyst firm Brandon Hall.].

  • They also support our view that learning content management and learning management are linked in the market and that mobile and social services are key elements of the overall value proposition.

  • Interestingly, Brandon Hall also believes that OutStart has leading mobile and social capabilities.

  • Our acquisition of OutStart follows on the heels of our recent partnership with SkillSoft, which provides complimentary capabilities in the learning management space.

  • We believe that Kenexa has again taken a step ahead of the pack with our unmatched value proposition.

  • It also comes at an important time in the market, as well.

  • We're not only seeing more and more multi-element deals, we have seen increased demand from customers for a learning management system that is integrated as part of the overall value delivery.

  • Kenexa is the only vendor that can meet this demand along with integrated recruiting, performance management, compensation management, proprietary content, and industry leading domain expertise.

  • In summary, 2011 was a terrific year for Kenexa.

  • While we're expecting a continued volatile macroeconomic environment, we believe Kenexa can continue to deliver solid growth and expanding profitability.

  • We also believe that Kenexa will continue to gain market share due to our unique value proposition, which is further strengthened and expanded with the learning management capabilities that we've gained with the acquisition of OutStart.

  • With that, let me turn it over to Don to review our financials and the acquisition of OutStart in more detail.

  • Don.

  • Don Volk - CFO

  • Thanks, Rudy.

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

  • On a GAAP basis, our total revenue for the fourth quarter was $78.3 million.

  • Excluding the deferred revenue write-down of purchase accounting related to the Salary.com acquisition, total non-GAAP revenue was $79.6 million which was above our increased guidance of $76.7 million to $78.7 million and up 24% compared to last year's fourth quarter.

  • Non-GAAP subscription revenue was $56 million, an increase of 15% compared to last year and it represented 70% of our fourth quarter total revenue.

  • Our services and other revenue was $23.6 million, up 52% compared to last year, and representing the remaining 30% of our fourth quarter total non-GAAP revenue.

  • One of the primary drivers to the growth of our other revenue is the momentum of our RPO business.

  • This component of our business generated approximately $20 million in revenue for the fourth quarter, which is another record performance and is up over 54% compared to the $13 million level of the year-ago period.

  • From a geographic perspective, our non-GAAP revenue mix of Domestic versus International revenue was 73%/27% compared to 75%/25% last quarter.

  • During the quarter we faced a currency headwind of approximately $200,000.

  • During the fourth 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 our fourth quarter 2011 operating results, which excludes the aforementioned $1.3 million in deferred revenue write-down related to the Salary.com acquisition, $1.8 million of share-based compensation charges associated with FAS 123R, $3.7 million of amortization of acquired intangibles, a gain of $200,000 associated with the sale of an asset, and acquisition-related fees of $400,000.

  • All comparisons will be used in the non-GAAP current period results.

  • Non-GAAP gross margin of 60% for the fourth quarter compares to 62% last quarter and 67% in the year-ago period.

  • The lower gross margin relates to the rapid growth of our RPO business during the fourth quarter and full year 2011 including the ramp of several large programs that were won and moved into production during the second half of the year.

  • From an operating expense perspective, non-GAAP operating expenses of $37.5 million were down from $39.4 million last quarter and up from $35.3 million in the year-ago quarter.

  • The sequential decrease in expenses was driven primarily by reduced G&A expense while sales and marketing and R&D investments were up over the prior period.

  • Non-GAAP income from operations was $9.9 million above our guidance of $9.2 million to $9.6 million and represented 12.4% non-GAAP margin, an increase from the year-ago period and 11% last quarter.

  • Non-GAAP income from operations increased 35% compared to the year-ago period, leading to non-GAAP EPS of $0.27 for the fourth quarter of 2011, above our guidance of $0.25 to $0.26.

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

  • Cost of revenue $32.3 million.

  • Sales and marketing $17 million.

  • R&D $4.9 million and G&A $12.9 million.

  • For the fourth quarter GAAP income from operations is $2.9 million.

  • Net income allocable to common share holders $600,000, resulting in the $0.02 GAAP net income 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 8-K filed with the SEC.

  • To briefly summarize our results on a full-year basis, our non-GAAP revenue for 2011 came in at $291.1 million, up 46% compared to 2010.

  • Non-GAAP operating income came in at $29.6 million, up 68% year-over-year, and representing a 10% non-GAAP operating margin.

  • Non-GAAP EPS came in at $0.84, up 35% compared to $0.62 in the prior year.

  • While GAAP loss per share came in at $0.28, compared to a loss per share of $0.25 in 2010.

  • Turning to our balance sheet, Kenexa had cash, cash equivalents, and investments of $129 million at December 31, 2011, an increase from $124.9 million at the end of the prior quarter.

  • We generated cash flow from operations of $23.9 million during the fourth quarter and $55.3 million for the full year.

  • We generated free cash flow of $31.8 million for the full year, which is above our guidance of the mid $20 million range for the year.

  • Our accounts receivable DSO was 61 at the end of the fourth quarter compared to 65 at the end of 2010.

  • Deferred revenue was $88.8 million at the end of the fourth quarter, up 17% from the end of the fourth quarter of 2010.

  • Let me review some of the financial details associated with the acquisition of privately held OutStart.

  • The purchase price of the acquisition was $38.9 million, and was financed with our existing cash balance.

  • This cash outflow will impact our first quarter 2012 cash balance.

  • From a business model perspective, OutStart is the software as a service provider of e-learning solutions.

  • Historically, they have also sold solutions on a perpetual license basis.

  • However, that will not be a focus of Kenexa as we move forward as an integrated company, and it is not factored into our revenue plan.

  • We expect OutStart to contribute approximately $17 million in non-GAAP revenue to Kenexa during 2012 with approximately 80% of that revenue coming in the form of recurring revenue, and the remaining 20% related to services.

  • This also prices the acquisition at around two times annualized revenue.

  • It is also worth pointing out that OutStart has run their business in an efficient and profitable manner as a private company.

  • I would now like to turn to guidance, starting with full year 2012.

  • We expect GAAP revenue of approximately $344 million to $354 million.

  • After adding back the deferred revenue write-down associated with acquisitions, non-GAAP revenue is expected to be $352 million to $362 million for an annual increase of 21% to 24%.

  • As I mentioned a moment ago, our full-year 2012 revenue assumes a contribution of approximately $17 million related to the OutStart acquisition.

  • We are providing an initial 2012 non-GAAP operating income range of $36 million to $40 million, which includes the impact of the OutStart acquisition.

  • Our anticipated non-GAAP operating margin of 10.6% at the mid point of our guidance is up modestly from 2011 levels, and assumes continued investments in our growth initiatives, which we believe is appropriate given the size of our market opportunity, business momentum, and increasingly strong market position.

  • Assuming an effective tax rate for reporting purposes of approximately 20% and 28.6 million shares outstanding, we expect our non-GAAP net income per diluted share to be in the range of $0.95 to $1.07.

  • I would now like to turn to our expectations for the first quarter of 2012.

  • We are targeting GAAP revenue of $75.8 to $76.8 million, and non-GAAP revenue in the range of $78 million to $79 million, which represents an increase of 24% to 25% on a year-over-year basis.

  • We will only have OutStart for a stub period in the first quarter, and our current expectation is that they will contribute between $1.5 million and $2 million in non-GAAP revenue for the quarter.

  • Our first quarter revenue guidance also takes into consideration that during the fourth quarter we began the process of transitioning one of our larger RPO customers to an in-house model, which followed a change in leadership and internal strategy.

  • We obviously delivered better than expected revenue growth in the fourth quarter despite this development, and the overall momentum of our RPO business remains strong heading in to 2012.

  • We are targeting first quarter non-GAAP operating income of $6.1 million to $6.5 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 $0.15 to $0.17 for the first quarter.

  • As a reminder, as has been the typical historical pattern from a seasonality perspective, we have higher expenses that occur in the first quarter of the year, primarily due to employee payroll-related costs.

  • In summary, we are pleased with our performance during the fourth quarter and full year 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 gain and we believe our Company is well positioned to be one of the long-term winners in a multi-billion-dollar market opportunity.

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

  • Roya.

  • Operator

  • Thank you.

  • We will now be conducting a question-and-answer session.

  • (Operator Instructions) One moment while we poll for questions.

  • Thank you.

  • Our first question comes from the line of Mark Murphy with Piper Jaffray.

  • Please proceed with your question.

  • Matthew Coss - Analyst

  • This is Matthew Coss calling in for Mark Murphy.

  • As you look at OutStart, can you talk about any new either geographies or verticals that that will help you enter into, and then about how many employees does OutStart have and what are some of the other dynamics that you considered when purchasing?

  • Thank you.

  • Rudy Karsan - Chairman and CEO

  • The rationale on OutStart was an LMS and an LCMS and the size of the -- they had over 100 employees, most of which we're preserving, especially on the R&D side as well as in the sales and marketing side, as well as on the service side.

  • Their focus was heavily in the with US with over 80%, almost 90% of their revenues taking place in the US.

  • They have a Canadian piece as well as a European piece which is not significant.

  • In terms of the client list commonalities, there are a few clients that are similar, but does it give us opportunities to go and up-sell legacy Kenexa with them and vice versa, legacy Kenexa clients will then take advantage of OutStart's business.

  • I think that answers all your questions.

  • Am I correct?

  • Matthew Coss - Analyst

  • Yes, it does, thank you.

  • Operator

  • Thank you.

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

  • Please proceed with your question.

  • Scott Bert - Analyst

  • Hi, guys.

  • Nice execution on the quarter.

  • My first question is around guidance.

  • If my math is right at $17 million for OutStart and I believe $5 million for the November acquisition of Batrus, your guidance range assumes growth of, call it 10% to 14% organic growth within the next year.

  • Help me to reconcile the difference between the slowing organic growth and the continued spend and sales marketing.

  • Sounds like you are going to spend a lot more this year.

  • I assume the guidance would have been I guess a little bit higher than the range given.

  • Rudy Karsan - Chairman and CEO

  • So, if you look at the guidance there, I haven't worked the math.

  • I think it's closer to 15%.

  • Our deferred is up by 17%, Scott, so it's pretty well consistent on that front.

  • When we look at the 17% from OutStart, if you subtract that, Legacy (inaudible) $3.35 to $3.45 so you take $3.35 to $3.45, mid point is call it $3.40 on 291.

  • There's only $700,000 on two-thirds of the (inaudible) so in my mind, yes, okay so there is probably give or take $4 million that came in from there but there was 700 in the denominator.

  • So, I think it's closer to 15% than 13% or 14%, but I don't have the calculator here with me.

  • It's also consistent with our deferred growth.

  • Scott Bert - Analyst

  • Okay.

  • Fair enough.

  • Can you walk through the additional growth investments for this year because the street has clearly got the leverage and the model wrong and not accounting for enough, but is it more in sales and marketing head counts or is it more on the product side or a combination of both?

  • Don Volk - CFO

  • It's a combination of both, both sales and marketing expansion and R&D.

  • Scott Bert - Analyst

  • Fine.

  • I will jump bang the queue.

  • Thank you.

  • Operator

  • Thank you.

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

  • Please proceed with your question.

  • Peter Goldmacher - Analyst

  • Hi, guys.

  • I want to ask you a couple questions.

  • First of all, Don, it sounded like you were saying you had a customer defection towards the end of your prepared comments.

  • A little more detail on that would be great.

  • Also, you had a couple of really big deals this year.

  • How are you guys looking at 2012?

  • What are the big deals in the pipeline lining up for?

  • Just a little more explanation on the mix of growth and margin.

  • I would have thought that with all the investments in growth you've made certainly since 2009, call it, that we'd start to get a little bit more margin up side.

  • So can you tell us what's holding you guys back because one of the things that I think puts pressure on the stock is the perception that you're a heavily service oriented business and as revenue grows and you're not delivering margins it sort of lends credence to that case?

  • Thanks.

  • Troy Kanter - President and COO

  • Hi, Peter, this is Troy.

  • I will try to break it down for you.

  • The first part of your question was around the customer defection that is a large multinational.

  • The outsourcing services we were providing them was primarily European centric.

  • It's a company that they've had a change in leadership and with that change in leadership they're pulling a number of the HR service functions that they had outside partners back in-house.

  • So, it's something that we had been working on.

  • We weren't quite sure what direction they were going to go, but that sort of explains it.

  • So, it is an amicable good relationship and I would imagine that somewhere down the road we will probably partner with this firm again.

  • But even with that we still had, even with that headwind plus combined with the currency headwind we still had a tremendous quarter.

  • As it relates to your comment on are we getting -- are you guys getting the model right, I think part of it is we won the three largest deals in the industry this year.

  • Large, significant integrated technology content and outsourcing deals and as you ramp those three really significant deals up, that's putting significant pressure on the gross margin.

  • So, as we start coming out and working our way through the gross margin differences, you will start to see more leverage in that.

  • But, again, when you win the three biggest deals in the space and those deals were things that have never even been done or contemplated in this space so there are some pressures gross margin-wise as we get those things live and get them fully deployed around the world.

  • Peter Goldmacher - Analyst

  • Great.

  • Thanks, Troy.

  • Then just what are the next three biggest deals in the industry looking like?

  • Troy Kanter - President and COO

  • The good news is, is that it's hard to forecast these kind of big game changing deals but if I look at the funnel on where the number of large deals where that sits today compared to where that sat a year ago, we're ahead of the curve on it and we're hopeful, as we've shared with a lot of you on the call, as we start experiencing success with these three great big deals, and the rest of the marketplace starts to see this new model, we're optimistic that we can hit a tipping point on this.

  • So, again, the funnel is stronger now than it was at this time last year, but it is really tough to forecast close dates and how quickly you can get to the income statement because, again, on these sort of marlin or giant deals there's some complexity in the sales cycle.

  • Rudy Karsan - Chairman and CEO

  • The other thing to bear in mind is the euro has been about a headwind of about 3% to 4% on whatever is 18% of our business.

  • So you will see 75, 80 basis points headwind which doesn't account for it because the drop took place between the time we did the earnings last time and the time we did the earnings this time.

  • Peter Goldmacher - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Thank you.

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

  • Please proceed with your question.

  • Laura Lederman - Analyst

  • Yes, thanks for taking the questions.

  • A few of them.

  • One, can you talk about the learning company you bought and who you see it competing with, low end, high end, where it is in the market, and also can you talk a little bit about competition in the applicant tracking space and what you're seeing there as well?

  • Thank you.

  • Troy Kanter - President and COO

  • Hi, Laura.

  • Why don't we take them in reverse order as it relates to the ATS or the applicant tracking space.

  • The only change is that there's fewer of us around.

  • Our emphasis is really of that big global enterprise level where it's really primarily us and Taleo.

  • As you start seeing more integrated deals at the mid market you're seeing a handful of players in there, but I would say really no significant changes to the landscape.

  • 2011 was a record year for Kenexa.

  • The sales force executed exceptionally well.

  • The R&D team with the releases and the drops, specifically on that product as well as the broader 2x platform, was the best year we've ever had in the history of the company.

  • So, in terms of our positioning on the software side, we're feeling stronger than we've ever felt.

  • To the OutStart question, as we start to look at the universe there, one of the things that we got really excited about with OutStart was how comprehensive that product is.

  • You review some of the analyst reports.

  • When you combine the mobile and social capabilities built into that product complemented with probably the clear-cut winner in the content management space with really innovative and rich functionality wrapping it together with broader LMS, it's an outstanding product.

  • A company that size sometimes has problems competing with the bigger publicly traded companies on these large enterprise deals.

  • We see combining OutStart's best-in-class product with all of our content into our broader suite to really see something really exciting happening there.

  • We're seeking in that broader learning space there are three to four trends that we're excited about.

  • One, there's an upgrade cycle that's occurring at the enterprise.

  • We believe that this OutStart product integrated with Kenexa will really allow us to capitalize on that.

  • The other trend that you are seeing is more and more enterprise-level customers are looking for an enterprise solution, an end-to-end solution.

  • This really -- we had one hole left in the suite, which was learning.

  • Again, with all the features that come with OutStart, I think that catapults us to the front of the line, combine that with all of our other products, combine that with our content, combine that with the richness and the integration that we've accomplished with salary, we think we're in the absolute very best spot to compete on those end-to-end talent management deals as well as, again, I mentioned it earlier in my comments, the content management capabilities of number of the other players that (inaudible) company to actually supplement their LMS's just because of the strength of the content management capability within OutStart.

  • So, all in all, we're really excited about this acquisition.

  • Laura Lederman - Analyst

  • Thanks so much.

  • Operator

  • Thank you.

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

  • Please proceed with your question.

  • Steve Koenig - Analyst

  • Hi, guys, can you hear me okay?

  • Rudy Karsan - Chairman and CEO

  • Yes.

  • Steve Koenig - Analyst

  • Okay.

  • Great.

  • I wanted to ask you maybe two questions here.

  • One is on SAP buying success factors.

  • Do you see any movement by customers to want to consider HR integrated with Talent Management and just maybe any color on how that would impact recruiting versus performance management?

  • Rudy Karsan - Chairman and CEO

  • Too early to tell.

  • The deal hasn't closed yet.

  • Steve Koenig - Analyst

  • Do you see any demand from your customers for that sort of integration, whether it's on boarding or any of the performance management functions to tie into their ERPs?

  • Troy Kanter - President and COO

  • Steve, all of our products integrate in to whatever our customers' ERP platform is.

  • So the integration and touch points are fairly standard.

  • So we aren't anticipating a big shift with the combination of those two companies, but we'll continue to evaluate it and adjust the strategy as accordingly.

  • Steve Koenig - Analyst

  • Yes.

  • Okay.

  • That's very interesting.

  • I appreciate the commentary.

  • Second question would be the LinkedIn partnership.

  • It seems like a bunch of the Talent Management vendors are partnering now with LinkedIn.

  • Can you talk about how LinkedIn makes money off the deal and are you guys working differently with them than any of the other vendors?

  • Just a little bit of color hon that partnership works would be helpful.

  • Rudy Karsan - Chairman and CEO

  • Basically LinkedIn makes its money by selling licenses to corporations, including Kenexa.

  • So, our relationship with LinkedIn is a little different than your traditional software vendor.

  • The integration with the platform is similar to that of any other provider.

  • So, the platform is very remiss -- very careful about not giving any vendor an edge because it does create internal turmoil, so basically you work together and create a similar if not identical type structure around the platform, so Kenexa is in the same boat as Taleo or anyone else.

  • Over and above that, our RPO division is a client of LinkedIn license model and that's where we become a customer of theirs.

  • So our relationship with linked is in pretty strong because of those two fronts.

  • Their revenue model doesn't change very dramatically with this integration.

  • Their revenue model allows them to sell their licenses easier when they don't have to turn around and answer questions like, what am I going to do with my ATS after I buy your license.

  • Their response is, no problems, put your list of vendors that you are currently using on ATS, check that box and buy our license.

  • Steve Koenig - Analyst

  • Got it, great.

  • Thanks, guys.

  • I appreciate the help.

  • Operator

  • Thank you.

  • Our next question comes from the line of Pat Walravens with JMP Securities.

  • Please go ahead with your question.

  • Pat Walravens - Analyst

  • Don, can you tell us how much the lost RPO customer represented in 2011 revenue?

  • Don Volk - CFO

  • We don't disclose particular customers' revenues, Pat.

  • As we described, it was a decent headwind to our 2011 Q4 and it's included in our guidance for 2012.

  • Pat Walravens - Analyst

  • Okay.

  • And then maybe, Rudy, how do we think about -- presumably you had a contract with them.

  • Was the contract up for renewal?

  • Did you decide for sort of the longer term interest of the customer relationship to let them out of the contract?

  • How did that work?

  • Rudy Karsan - Chairman and CEO

  • So, basically the contract was like most contracts, starting the wind down phase.

  • So what basically happens is you have a subscription component and then you have an other component.

  • As you reach the tail end of the contract, the subscription component gets smaller and smaller as time elapses and your revenues under the other get larger and larger because when the contract was originally signed your subscriptions are generally a little higher and with less certainty two, three, four years out you have less and less clarity around it.

  • This contract was expected to end in the not too distant future.

  • They had virtually reached the end of their subscription cycle.

  • There was still a certain amount left.

  • We made a business decision because of the software implications associated with this relationship and the ability to then go back and partner with them in the future that the total loss of revenues on the subscription line was pretty low and we felt that the battle associated with protecting the other revenue through the balance of the contract would have created a tremendous amount of stress on our service arm and given us a somewhat adversarial relationship which we do not like to get ourselves into.

  • So given the depth in which the contract was, it was fairly deep into the contract, very little time, didn't want an adversarial relationship, wanted to part with friends, there's still a customer in a bunch of other areas, we made the business decision that it would make a lot of sense for us to move in that direction.

  • Pat Walravens - Analyst

  • Got it.

  • And can you tell us, I guess, two things on the same subject.

  • One is when you knew that this was going to be an issue with this RPO customer you lost.

  • Secondly, I'm sure is you've, as a result, gone back and reviewed the other ones.

  • How do you feel about the risk of seeing another significant RPO customer wind down?

  • Rudy Karsan - Chairman and CEO

  • We found out about it, we knew there was a leadership change at the beginning of the fourth quarter, it was the middle to the tail end of the quarter.

  • We realized that there were stresses and we took a proactive approach there like we do with all our clients.

  • Basically because, like I said, we were deep in that relationship and had begun dialogue on renewals we came to the conclusion that -- okay, back up.

  • In terms of standard operating procedure, 12 months before a renewal we begin dialogue with a client we have begun dialogue on the renewal side.

  • We got the sense of oh, we're not going to get this renewal so what the best way to part friends.

  • If I look at our renewal portfolio coming up, no different than what I said earlier at the Needham conference in January.

  • Think about a quarter of our business renewing, look at the portfolio and assume roughly an 80% renewal rate and that will give you an idea of some of the turnover rate in our portfolio of customers.

  • We can't judge and give it any more closer credence to that than what I just said.

  • Pat Walravens - Analyst

  • Great.

  • Thank you.

  • Rudy Karsan - Chairman and CEO

  • You're welcome.

  • Operator

  • Thank you.

  • (Operator Instructions) Thank you.

  • Our next question comes from the line of Michael Nemeroff with Morgan Keegan.

  • Please proceed with your question.

  • Michael Nemeroff - Analyst

  • Hi, guys.

  • Thanks for taking my questions.

  • On the RPO business, the three large contracts you've said are ramping up, I was wondering if you could quantify what the operating margin is as you ramp those and when you think that they could get up to the normal level of a large RPO kind of a normal large RPO contract?

  • Don Volk - CFO

  • So, Mike, we are at scale with two out of the three, but we are not maximizing our gross margins on any of the three.

  • What we need to do is we need to continue to perform and continue to do the hires for these customers and then we expect as we get into the later part of 2012 we will be able to bring our gross margins up on each one of these particular.

  • Michael Nemeroff - Analyst

  • Okay.

  • The, Don, if you could maybe just talk to us about a target operating margin model and at what length or period of time we should expect that?

  • I think the question here that a lot of people have had is on the margin.

  • Obviously it's come in a little bit lower for the 2012 guidance than what people were expecting, and I guess what I'm curious about is when and how quickly you can get it back up to whatever that target model you might give us is.

  • Don Volk - CFO

  • Sure, Mike.

  • Our target model, as we've stuck to for a number of years, is 22% to 24%.

  • And right now if we wanted to we could get that -- we could get those margins up to 20%, but we don't think that at our stage in the business and our stage in opportunities in the marketplace and the growth, and the growth opportunities that are available, that it's the right time to maximize those margins.

  • So, we're going to continue to invest and drive market share gains and further strengthen our marketing position in the short term, okay, and we believe that will create a much larger and highly -- and more highly profitable company in the longer term.

  • Troy Kanter - President and COO

  • I might add, too, even with the pressure on gross margins we still beat our op income guidance so we're being pretty diligent about.

  • To loop back to the RPO question this is a follow-up to Pat Walraven's question, this customer that transitioned out, we've got 30 plus customers in that space, we're very, very close to them, and I think what people should be aware of on this particular instance, it was a legacy customer, they ran pure outsourcing-- so many customers are rung much more of our suite where there's the content, the technology bundled around with the outsourcing, and those kind of relationships become much more sticky the further in-depth we are and the more strategic of a partner we are as opposed to purely just transacting recruiting services or transacting various aspects of the recruiting process in isolated spots around the world.

  • So, in general, we feel pretty good about the renewals on a forward basis.

  • Michael Nemeroff - Analyst

  • That's very helpful.

  • Thanks, Troy.

  • If I could ask one quick follow-up, I know you obviously don't want to give 2013 guidance, but is it safe to assume that we should expect a little bit faster margin expansion in 2013 and beyond?

  • Give us something to hang our hat on, to look forward to I guess is what I'm asking.

  • Rudy Karsan - Chairman and CEO

  • Okay.

  • Let me just dissect it.

  • If you look at the RPO business we did about $70 million last year.

  • We are expecting that number to go up in double digits percentages this year.

  • As the larger deals start to mature, those margins at the gross margin level will start to climb.

  • Over and above that, our G&A has been dropping and will continue to drop.

  • Now, for 2013 a lot is going to depend on the momentum in the market.

  • Right now we have really strong momentum and we're extremely bullish about our prospects not only 2012 but beyond.

  • So, if the momentum remains strong and we start posting gains that we believe are two to three times market, which is what we did in 2011 and believe that we will replicate in 2012 at multiples of market growth, we will continue to invest to grab that market share and pick up multiples of market growth.

  • If on the other hand, we see the market starting to slow down, then the margins will start to expand accordingly.

  • So we're not going to try and guess where the market growth is going to be 12 months from now, but what we are willing to say is we will continue to manage Kenexa for multiple off the market in terms of our overall growth and strategically invest in the business to get to be in that billion plus market opportunity and we are aggressively going after that.

  • Michael Nemeroff - Analyst

  • Okay.

  • Thank you very much.

  • Have a good night.

  • Rudy Karsan - Chairman and CEO

  • Thanks, Mike.

  • Operator

  • Thank you.

  • We have time for one last question.

  • Brian Schwartz with Thinkequity.

  • Please proceed with your question.

  • Brian Schwartz - Analyst

  • Thanks for squeezing me in.

  • Couple questions.

  • Don, maybe numerically, two questions for you.

  • One was did you have any currency effect on the deferred revenue balance in the quarter?

  • And then also on changes in your sales capacity, is it possible to let us know here as the year has ended how many reps you added last year and maybe what the plan is for this year from the sales capacity standpoint?

  • And then I have a follow-up for Rudy and Troy.

  • Don Volk - CFO

  • All right.

  • So, on sales reps we have over 300 sales people that include sales and marketing, about 70% of those have a quota.

  • As far as the first question, can you repeat that first question?

  • Brian Schwartz - Analyst

  • Yes, the first question was on the deferred revenue balance.

  • I was wondering if there was any sort of currency hit that happened in the quarter.

  • Don Volk - CFO

  • Yes, there was a currency hit that happened in the first quarter.

  • It was a couple hundred thousand.

  • Brian Schwartz - Analyst

  • Okay.

  • Similar to what you saw in revenue.

  • And then for Rudy and Troy, just a question here on the acquisition that you did.

  • I guess quantitatively is it possible to let us know how many potential similar customers that you have within these two companies so we could see what type of greenfield versus up-sell opportunity?

  • And then, Troy, I was wondering if you could talk a little bit about what you were hearing in the market and what it actually means for your business to have a native LMS offering on the 2x platform, what that can mean for your future close rates and retention rates and deal sizes?

  • Have your customers been asking you for this type of solution?

  • Are competitors being extra noisy about lacking this capability?

  • Any additional insight would be real helpful.

  • Thank you for taking my questions today.

  • Rudy Karsan - Chairman and CEO

  • Just to answer the question, the OutStart business model was directed more towards the small and mid-sized market.

  • Their financial statements weren't conducive to go after the big -- to go after clients that looked at financial statements of public vendors and to compete accordingly.

  • The platform, if you notice, is given a tremendously high score by Gartner.

  • So, what would happen is they have a lot of mid size accounts which really don't tie in to Kenexa and a handful of large accounts, some of which I mentioned by name in my prepared comments, and some of those are Kenexa customers.

  • So the greenfield opportunity with the OutStart deal is enormous, and we're hoping to take advantage of that once we consolidate and truly integrate the organization within Kenexa.

  • On the native platform side, we will now reconsider what we are going to bring into the 2x platform faster, the comp analyst or the learn module.

  • We will hopefully make a decision on that within the next quarter or two and let the street know accordingly.

  • Troy Kanter - President and COO

  • Brian, to finish up, we're exceptionally excited about what this means for Kenexa.

  • If you look at what we've done on the software side over the past five years in this business, it's been absolutely phenomenal.

  • The customers that -- the biggest, most complex deals in the industry we're winning.

  • The one hole that we had on our platform was the learning and content.

  • Now -- the learning and content management, now to add that in with the really innovative features that OutStart has built over the years when you look at the social and mobile capabilities, to combine that with our broader suite, we think we now -- well, we don't think, we have the most robust end-to-end functionality in the entire talent management space.

  • When you overlap our content into that, we're really in a tremendous competitive spot.

  • The customers that we do share at the enterprise level where there is overlap and we were doing our diligence, those current customers are exceptionally excited about what that means to their business to be able to integrate those learning functions into the broader talent management suite.

  • So we're feeling like this has really put us in a good spot as the market continues to move to evaluate and select more end-to-end vendors as opposed to just pure point solution providers.

  • Brian Schwartz - Analyst

  • Thank you.

  • Don Volk - CFO

  • You're welcome, Brian.

  • Operator

  • Mr.

  • Karsan, I would like to turn the floor back over to you for closing comments.

  • Rudy Karsan - Chairman and CEO

  • Let me start by thanking you for your questions and before we end this call I want to add a few words.

  • We're proud of the fact that last year we added some amazing clients like Ford, Baker Hughes, PepsiCo, Disney, Eli Lilly and many, many others.

  • Not only that, we strive every day to bring together technology, content, and services to provide the best possible solutions for our customers.

  • It's this combination of the three elements to help our customers to get the most out of their work forces and to drive the growth of their business and which in turn is driving the growth of our business.

  • All lines of business indicated a growth and we're expecting and hoping that that will be replicated again this year.

  • So, thanks again for joining us on our call and we will see you again in a quarter.

  • Operator

  • This concludes today's teleconference.

  • You may disconnect your lines at this time and thank you for your participation.