International Business Machines Corp (IBM) 2012 Q2 法說會逐字稿

Greetings and welcome to the Kenexa Corporation's second quarter 2012 Earnings Conference Call.

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

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Don Volk, Chief Financial Officer for Kenexa Corporation.

Thank you, Mr. Volk.

You may begin.

Thank you, Robin.

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

Today we will review Kenexa's second quarter 2012 results followed by our current guidance for the third quarter and full year 2012.

We will then open up the call for questions.

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

These statements may contain among other things guidance as to future revenues and earnings, operations, transactions, prospects, intellectual property and the development of products.

Additional information that may affect the Company's business and financial prospects as well as factors that would cause Kenexa's performance to vary from our current expectations are available on the Company's filings with the Securities and Exchange Commission.

I would also like to remind you that today's call may not be reproduced in any form without the express written consent of Kenexa.

Finally, 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 available in our press release issued after the market closed today.

This press release can be found on our website at www.kenexa.com.

I will now turn the call over to Rudy Karsan.

Don, thank you very much and thanks to all of you for joining us on the call today to review our second quarter results which exceeded our guidance on both the top and the bottom line.

We continue to see a growing number of customers that are looking to turn their Human Resource functions into an area of competitive advantage and they are focused on partnering with vendors who can deliver an end-to-end solution.

We believe that Kenexa is benefiting from this trend as the result of our highly differentiated value proposition which is based on a combination of best-in-class product offerings and decades of HR domain expertise.

In addition we are now the largest human capital management pure play following the consolidation in our industry.

Kenexa delivered a strong performance for the second quarter and the first haft of the year despite the volatile news regarding the global economic environment.

The growing momentum of our technology platform wins with blue chip customers helped us to drive a record sales performance and this is contributing to greater scale in our business when combined with faster efficiency gains with our largest RPO customers.

These factors along with the continued growth in our pipeline of opportunities support our increased revenue guidance and even more meaningful increase in our profitability expectations for the full year 2012.

Don will provide additional details on our guidance later but let me now turn over to a summary of the review of our financial results for the second quarter.

Total non-GAAP revenue was $88.2 million above our guidance and representing a year-over-year increase of 24%.

We saw strong performance across all aspects of our business, software, data and services.

From a profitability perspective non-GAAP operating income was $9.8 million and non-GAAP net income available to common share holders was $0.27 per diluted share which was $0.04 above the high-end of our guidance.

From a macro perspective like everyone else we're mindful of the economic headlines and watching its potential impact on the face of IT spending among HR organizations very carefully.

While there are differences from one geography to the next we continue to see sales activity at very healthy levels from an overall global perspective.

When we are talking to HR executives at large multi-national organizations the conversations are not dominated by discussion of what is going on in European economies.

The discussions are much more focused on the fact that they are facing increasing pressure from the sea level suite with respect to how they are going to transform their company with improved talent and productivity levels as well as tight time frames for doing so.

These organizations need a business partner and technology solutions provider to help them achieve these goals.

Clearly jobs growth has not been robust notice US but the fact that there is still positive job creation and a relatively stable unemployment rate that is well below the peak levels seen during the recession, it is important to remember the type of hiring that our target customers are focused on which is skilled labor that is in shorter supply and greater demand.

Because companies are continuing to hire in the job families that we are primarily supporting we have been age to continue growing throughout this period of relatively high unemployment and we believe we're well-positioned to continue to do so.

We also believe we are benefiting from market share gains.

Kenexa has seen greater customer recognition that our staff platform offers industry-leading functionality, scalability, security and overall product breadth.

Our integrated human capital management platform address the entire life cycle of the employee including recruitment, on-boarding, compensation management, learning and performance management among others.

We are winning a growing number of opportunities where blue chip customers are selecting Kenexa as their strategic human capital management platform and solutions provider.

In doing so the ultimate plan is to consolidate internal systems and point solutions into Kenexa as a focus on all the elements of workforce transformation.

Our [NTN] solution set is the combination of years of extensive investment in our 2x platform that unified our code base and user-interface across our product suite.

During the second quarter we introduced further enhancements to our 2x platform including the release of 2x Assess.

This is an exciting product release for us as it leverages both the 2x technology platform and our world class predictive assessment content business.

With the release of 2x Assess customers are now able to offer all assessment tests on a single platform and seamlessly integrate that data across other 2x modules like applicant tracking.

This speaks directly to the increased value proposition of having a unified software platform that enables more efficient data sharing which leads to improved decision making and business value for customers.

We also announced the introduction of our latest mobile release with introduction of Hot Lava Mobile 3.0 which is targeted at the Mobile Learning marketplace.

With this solution customers will be able to develop their own unique learning content and then securely deliver it to their employees in the field for tutorials across their smartphones and tablets.

As our customers have more of their employees working remotely and on the go, we will continue to bring more of our solutions directly to their fingertips.

Looking ahead we believe we have an exciting opportunity to further expand our technology and product lead versus the competitors.

We believe that global organizations are looking for the best and most focused HR solutions provider that can deliver a comprehensive offering to address their workforce transformation needs.

We will continue to make significant investments in our products to push the pace of innovation and represent the standard by which other human capital management vendors are being compared.

There are a growing number of customers that are selecting Kenexa based purely on the strength of our software and we're winning many head-to-head technology evaluations.

Our combination of a product suite that is recognized by customers and industry analysts as best-in-class, decades of deep Human Resource domain expertise and our agnostic stances towards third-party ERP systems has created a value proposition that we believe is difficult for others in the market to compete with.

During the second quarter we had exciting software wins with customers such as NetApp, SPX Corporation, Cracker Barrel, Brady Corporation and Cottage Health Systems.

As you can see our software solutions are being adopted across a wide range of verticals including technology, industry retail and healthcare.

From an overall perspective we won over 100 new preferred partner customers in the quarter, which is up from over 50 in the second quarter of 2011 and over 70 during the first quarter of 2012.

Our expanding customer base offers a ready made opportunity to make additional sales from our expanding product offering into our installed base.

The success of our cross-selling strategy is reflected in our PQ metric annual revenues from our top 80 customers.

In the second quarter our PQ metric exceeded $1.9 million which was an improvement from $1.8 million at the end of the first quarter and $1.5 million in the year-ago period.

We expect our PQ will cross the $2 million mark threshold during 2012 which was the long-term goal we set for ourselves at the time of our IPO in 2005.

We now believe we can drive this metric towards the $5 million mark over time.

The five fold increase in our PQ metric since we have been a public company demonstrates customers are increasingly looking to Kenexa to be the strategic human capital management vendor.

We are also seeking continued demand for our RPO offering which is benefiting from large enterprises looking to refocus on their core competences and leverage a Human Resource domain expertise to improve their hiring methodology and processes with the end goal of ultimately improving their employee base.

In the second quarter we added another blue chip RPO customer with our win at British Telecom.

In addition, we have completed the process of ramping the three largest RPO contracts we were awarded in 2011.

Our ability to scale the three largest RPO deals of 2011 simultaneously is a terrific validation of Kenexa's execution capability and capacity for growth.

In addition, the institutional knowledge we have gained in optimizing large RPO roll out will enable us to deliver time to value even quicker for future large RPO clients.

To summarize we have delivered a strong performance so far in 2012 and are targeting continued market share gains and greater operating leverage in our business as we look to the second half of the year.

We're widening our technology lead versus our traditional competitors and are hard at work ensuring that we execute effectively against the growing pipeline of opportunities we are seeing in the market.

We believe Kenexa is well-positioned to become one of the major winners in this multi-billion dollar industry.

With that let me turn the call back over to Don to review our second quarter financials and to provide further details on our increased guidance for 2012.

Don.

Thank you Rudy.

I will begin by reviewing our second quarter results starting with the P&L.

On a GAAP basis our total revenue for the second quarter was $86.3 million.

Excluding the deferred revenue write-down of purchase accounting related to certain acquisitions total non-GAAP revenue was $88.2 million.

Which exceeded our guidance of $86 million to $88 million and represented a 24% increase compared to the second quarter of 2011.

Non-GAAP subscription revenue was $64.1 million, an increase of 23% compared to last year and it represented 73% of our total second quarter revenue.

Services and other revenue was $24.1 million, up 26% compared to last year and representing the remaining 27% of our total second quarter non-GAAP revenue.

Our revenue growth is being driven by strength across both our subscription software business, which was up a robust 10% on a sequential basis, as well as the continued momentum in our services and other business, which is due in part to the ongoing strength of our RPO business.

We generated approximately $20 million in RPO revenue in the second quarter which was up 24% from the year-ago period.

While the economic environment has become more volatile, our RPO business continues to perform well due to a combination of factors.

First, the unemployment rate is well below peak levels of several years ago and our customers are hiring in the key job families that we support, which is skilled labor that is in short supply.

Second, as we have shared in the past we believe our portfolio of RPO engagements is higher quality today than compared to several years ago.

The combination of these factors along with a robust pipeline of RPO opportunities supports our expectations for continued solid growth in our RPO business as we look ahead.

Looking at our revenue from a geographic perspective our non-GAAP revenue mix of domestic versus international revenue was 71%/29% versus 74%-26% in the second quarter of 2011.

During the quarter currency negatively impact our total revenue by approximately $800,000.

Our renewal rates across our suite of solutions continued approach the 90% range consistent with recent quarters.

Turning to profitability, we'll be providing non-GAAP measures for each second quarter 2012 expense category which excludes $2.4 million of share based compensation expense associated with FAS123r.

$5.8 million of amortization of acquired intangibles, a $200,000 adjustment related to acquisitions that also includes the previously mentioned $1.9 million in deferred revenue write-down.

Comparisons will be made using the non-GAAP results from each period.

Non-GAAP gross margin was 63% in the second quarter, up from 60% in the previous quarter and compared to 62% in the year-ago period.

The expansion in our gross margin is a result of two primary factors.

First, our growing momentum in winning large transactions focused purely on our SAS-based platform and second the fact that we have made faster than expected progress ramping efficiencies with the large RPO relationships that we added in the latter half of 2011.

We expect the combination of these factors to contribute to additional gross margin expansion to the mid 60s level as I mentioned on the last call in the second half of 2012.

Non-GAAP income from operations of $9.8 million was above our guidance of $8.3 million to $8.7 million.

This represented an 11.1% non-GAAP operating margin which is over 200 basis points of margin expansion compared to our 9% non-GAAP operating margin a year-ago.

Non-GAAP income from operations increased 53% compared to the year-ago period which led to non-GAAP diluted earnings per share of $0.27 for the second quarter of 2012 which was well above our guidance of $0.22 to $0.23 due to our revenue out-performance and better than expected gross margins.

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

Cost of revenue $33.1 million, Sales and Marketing $20.2 million, R&D $7.5 million and G&A $14.5 million.

For the second quarter GAAP loss from operations was $116,000, net loss allocable to common share holders was $1.7 million resulting in a $0.06 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 8-K filed with the SEC.

Turning to our balance sheet we had cash, cash equivalents and investments of $89.7 million at June 30th, 2012 which compares to $83 million as of March 31st, 2012.

Our Accounts Receivable DSO was 61 days at the end of the second quarter consistent with the year-ago period.

Deferred revenue at quarter end was $96.4 million, a 14% increase from $84.9 million in the year-ago period and consistent with the end of last quarter.

From a cash flow perspective we generated non-GAAP cash from operations of $17.2 million during the quarter compared to $16.8 million in the year-ago period.

For the full year 2012 we continue to expect strong cash generation in the second half of the year as we have experienced in the past.

We continue to target free cash flow of approximately $40 million or roughly equal to our non-GAAP operating income.

This would be up from $31.8 million in free cash flow for the full year 2011.

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

For the third quarter we are targeting GAAP revenue of $90.7 million to $93.7 million and non-GAAP revenue in the range of $92 million to $95 million, an increase of 19% to 23% on a year-over-year basis.

It also represents a solid 4% to 8% sequential increase from the second quarter of 2012.

We are targeting third quarter non-GAAP operating income of $11 million to $12 million, assuming a 20% effective tax rate for reporting purposes and 28.4 million shares outstanding.

We expect non-GAAP net income per diluted share to be $0.29 to $0.32 for the third quarter.

For the full year 2012 we now expect total GAAP revenue to be $352 million to $359 million and after adding back the deferred revenue write-down associated with certain acquisitions and non-GAAP revenue -- non-GAAP revenue in the range of $359 million to $366 million.

This represents year-over-year growth of 23% to 26% and is an increase from our previous guidance of $355 million to $365 million.

We are increasing our full year non-GAAP operating income guidance to $40 million to $43 million an increase from our previous guidance of $37 million to $41 million.

Our guidance also reflects the continued investments in our growth initiatives and product road map which we view as the best way to drive long-term shareholder value giving our increasingly attractive competitive positioning in the marketplace.

Assuming a 20% non-GAAP tax rate for reporting purposes in 28.3 million shares outstanding we are now targeting full year 2012 non-GAAP net income per diluted share in the range of $1.07 to $1.16, an increase from our most recent guidance of $0.98 to $1.09.

In summary we are pleased with our performance during the second quarter and we believe we are well-positioned for solid performance in the second half of the year.

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

Robin.

Thank you.

(Operator Instructions).

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

Please proceed with your question.

Thank you.

Congrats on the strength.

I wanted to ask, Rudy or Troy, if you're there, in terms of the core software business you really had impressive strength in Q1 with three Fortune 50 deals.

It looks like it continued in Q2 with the upside on the subscription side.

So I'm curious to what extent would you attribute that to -- to the 2x platform versus sales execution versus maybe some other factors and as a part two to that just based on the pipeline do you think that the -- this level of unusual strength on the software side feels sustainable going forward?

Hi Mark.

This is Troy.

Let's see.

I think it's all the above from an execution perspective.

I believe the investments that we have made over the last couple of years are really distancing ourselves just purely on the functionality side.

I think the other thing that -- you know, I think that the street continues to underestimate is the power of this integrated data package combined with our software.

The chief HR officers, company operators, we can answer questions about the productivity of their workforce, make predictions about the success and productivity of their work force that pure-play software people just can't do.

You know, the per person sales productivity continues to improve.

You know, I -- again, I think it's a combination of the tack sales execution and our value prop is really, really resonating.

And as a follow-up for Don, as you mentioned Kenexa really is the largest independent HCM vendor now so as you are approaching $400 million in revenue when we look back, I think you have been in a long period of heavy investment to develop the 2x platform, you have been adding distribution capacity, you had -- you were carrying some legal expenses for a while and so I think this quarter felt different because you had material earnings upside and I think the -- the upward guidance revision here is -- is unexpected, at least to that extent so do you think that we're at an inflection point here in terms of Kenexa's margins?

Well, I don't know if we're at an inflection point, Mark, but I know that we are expanding margins and our guidance reflects that as we're expanding through the rest of the year and, you know, we -- we have worked really hard on gross margins to -- to increase them into the middle 60s and we expect that to continue throughout the year.

Thank you.

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

Please proceed with your question.

Hi, guys.

This is Joe for Peter here.

Thanks for taking our call.

Just two questions.

One a housekeeping question.

First, how much was deferred revenues impacted by FX this quarter?

Joe, not materially.

There was a couple hundred thousand dollars, but deferred revenue -- deferred revenue is a mixed bag.

There's timing of invoices, there's mixed terms, but in terms of sales activity we're really pleased with the performance of the quarter and that's what led to our -- our guidance being increased.

Okay.

In spite of the currency headwinds.

Okay.

Thanks.

And it seams like the PQ metric that your target, your long-term goal of $5 million is multiples obviously above what it is today.

Can you give us some color on how you intend to get there and sort of what gives you confidence in that target?

Thanks a lot.

Well, we put the target far enough away in the future so we hopefully that you forget by then or will have moved jobs.

I'm just kidding you.

Basically if you look at the track record since 2005 over the last seven years we have increased our PQ on average by about 25% a year.

If you look at the number of modules it has increased by about 100%.

We were a little under two and we are now north of three per customer.

The size of the number of users in our client has also expanded so we're increasing by the dimension of number of modules as well as number of employees captured into our application.

We believe that we are at the early innings of that growth.

A lot of wins we have had recently and the ones we announced last quarter and this quarter involve consolidation of larger performs, and so that tailwind combined with the number of modules we have and layering in RPO which has how come back very strongly, we believe that that number is very do-able in the next few years.

Great.

Thank you.

Congrats again.

Thanks.

Our next question comes from the line of Terry Tillman with Raymond James.

Please proceed with your question.

Yes.

Good afternoon guys and congrats from me as well.

The first question just relates to the strength of the guidance for the full year on the revenue front.

Could you make attribute that to -- I know sometimes it's hard to break them apart but if we look at the software business, data.

and then RPO what were the primary drivers of the extent of that revenue race?

Well, it's a combination, Terry, of the strength and the entire business.

As Troy indicated previously, our value proposition is really resonating and we have been able to do some things with RPO and with software that -- that we will continue to do through the rest of the year.

I guess on the RPO front you talked about BT so maybe we could get a sense on expectation for that in the second half of the year and has there been any change in terms of just the level of RFP activity that you were talking about and some of the megadeals that are out there if are they all still out there or do you still sense that there will be -- they will close.

The question is whether you win them or not I guess is another topic but is the activity level still the same accelerating or decelerating?

So over and above British Telecom we closed with FMC on the RPO front.

I think I talked about four big deals the last time.

so we won two of those.

One we're still in negotiation with so we're one of two or three vendors and one we have gotten the verbal on.

Okay.

That's good color.

Thank you.

I guess just lastly -- I don't know who this would be for, Rudy or Troy, but clearly you are seeing benefits from the investments you have made in sales capacity and product innovation on the recruiting side.

How much benefit are you seeing in the areas of learning and performance management in terms of investing in those products beyond just acquisition that you did in learning or is that still more you think of a future dynamic in terms of driving the -- the technology side of your business?

There thank you.

In our prepared comments we talked about the HotLava release which came out of learning so we feel we are making some pretty big strides fairly quickly out of the gates on our OutStart acquisition.

Just like a couple years ago we talked about we will have the top platform in the recruiting space with the innovation that we have combined with all of the data capabilities that we have, we have the same level of confidence on the learning side just as we do -- just as we did on the recruiting side.

And we executed on that and we're going to execute, you know, on the LMS side as these applications come together.

And we're starting -- I think we're ahead of schedule on the integration with OutStart.

You know, if you look at the tenure of the management team at Kenexa I think it's pretty impressive if you benchmark it against anything else in the industry and we have had a lot of learnings over the years of how we really accelerate these integrations.

So we're feeling really good about what we're getting accomplished on the learning and performance side.

Thank you.

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

Please proceed with your question.

Hi.

Samad Samana here for David.

I have a question and a follow-up.

As I look at kind of the buckets of customers that are either new to talent management or legacy to [layers] success customers that Kenexa brought over post the acquisitions, or upsell to existing customers which bucket would you say is driving the greatest strength for you guys right now and where do you see the best opportunity going forward.

New customers.

New customers.

And then I guess as I -- as I look deeper into that, thinking across the modules, I think 2x Perform has been out since late last year now and you have had some other stuff come out of 2x what's driving the most deals now?

Is it still talent or do you see more coming from the performance and the other modules that you brought out with the 2x.

Samad, what we're really seeing in the marketplace is these platforms coming together and what we're also really seeing is people wanting to use or data in analytics across both sides of the platform as well.

So if we really look at the deals that are coming through the system, look at the deals that are keying up for the out quarters this year and into next year we're really seeing a high -- much higher percentage of combination -- combination product deals out there as opposed to just one category level kind of transaction.

I think that also gets reflected everyone our PQ number.

Okay.

Thanks.

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

Please proceed with your question.

Yes.

My congratulations on the quarter as well.

Nice job.

And thank you for taking my questions.

First one is kind of following up on an earlier one on the applicant tracking side of the business.

How much of the benefits do you think is because Teleo being bought from Oracle?

Is that a large percentage of that business being strong as well as of course you having a broader suite?

Just trying to dig into the Teleo thing.

As mentioned earlier and in the early question that was asked a lot of those wins are from the new logos.

They're not prior Teleo customers.

I didn't know what's that you meant by new logo.

And so we are continuing to see success with the new logos based on the strength of our software and then elaborate what Troy mentioned earlier on the ability for our clients to take our tools and bring about meaningful understanding into the insights of their own business through the data that we collect has become a significant competitive advantage for us.

And we can answer crucial questions that were before -- where organizations before had no clue on how to answer them and fresh insights, not only -- around productivity improvements but we're actually having sales impact.

I think Laura what I would add on to Rudy's comments is if we -- you know, we back in 2008 and 2009 we spent really aggressively on these platforms and I think if you go back and you look at the data from the end of 2009 beginning in 2010 from the big multi-national sort of the global 500 wins that Kenexa was announcing back again at the beginning of 2010 up until today versus everyone else that used to report or is currently reporting you will see even before some of the acquisition activity in our space we were winning the largest deals.

We were -- we were out-performing the market on the large multi-national complex global deals just purely on the tech front.

So I think the consolidation activity obviously helps the sales funnel.

But I believe just on a pure feature functionality perspective we started winning that marketplace a couple years ago.

That's helpful.

Was OutStart about $5 million in the quarter so that would place organic growth at about 17% for the quarter about I did my math correctly?

That's about right.

Okay.

Great.

And one final question then I will pass it on.

If you look at the RPO business, let's say five years from now would you expect it to be roughly the same percentage of the business in total as it is today or would you expect it to be a larger piece?

I think -- I think what -- the way we make the decision is on the relative size of the different parts of our business.

It is based on margin, it is based on value to the customer and it's based on the value of the partnership that we develop with our clients.

So we don't really, Laura, think about it as what percentage of our business will be RPO or what percentage of our business will be software or data or what have you.

We think about how do we effectively and consistently grow our organization and bring about value to our customers.

And actually I just thought of another question.

Acquisitions have played an important role in the running of your business.

Are there pieces of the suite that you would like to continue or areas that you would like to continue to acquire even if it's not functionality but geography?

Any thoughts forward on acquisitions?

So on the acquisition front we have gotten the platforms we want.

The only area around modules that we are both developing as well as looking at something we mentioned in the past around workforce analytics.

In terms of geography we are now looking to strengthen the existing locations that we operate out of.

We are covering roughly 80% of the world's GDP.

So there will be a focus towards additional growth in other geographies to increase our distribution and similarly if there are verticals that we are under represented in and we know what those are, we will continue to make investments in that area.

So when you say investments, you meaning acquisitions as well as.

Correct.

Thank you.

Okay.

Thank you.

Thanks, Laura.

Thanks.

Our next question comes from the line of Michael Nemeroff with Credit Suisse.

Please proceed with your question.

Hi, guys.

This is Mike Anderson for Michael.

Congrats on the quarter as well.

Thanks for taking our questions.

Thank you.

Can you just comment a little bit more I know in your prepared remarks you talked about the skilled labor environment is still somewhat -- you know, the larger enterprises are still hiring in the areas that you guys focus on, but can you comment around -- a little bit more around RPO if that's picking up within those companies that you already have as well as any pre-employment screening or testing?

Are you seeing any other micro indicators that might support that -- comment that you made?

Well, if you look at the RPO business, I think Don in his prepared comments mentioned a 24% year-over-year growth which was ex the loss of a fairly large customer that we talked about at the end of the 2011.

The pipeline for RPO continues to remain strong, we have closed two of the deals, we are in the hunt for others and the pipeline is filling up with new names.

The amount of jobs that are coming through our clients has stabilized on the RPO front over the last call it three to four months and when I look at our ATS data, which is the data we sometimes provide on the calls, we have seen an uptick in the month of July in year-over-year job postings.

So we are seeing a level of activity that doesn't make us overly concerned at this stage.

That's very helpful.

Thank you.

And one other thing I think you spoke to briefly on the last call.

Can you give any update on the dialogue or the talks that you might be having with Workday and/or IBM in terms of building a partnership there?

Well, with Workday we are continuing in joint pitches and I think we are -- we've gotten -- Troy, is it two or three verbals?

Yes.

At least.

Yes.

Just across the book -- we've made more investments over the last two quarters in that area than ever before.

So generally in partnerships what we have done is we hired a very seasoned and highly talented executive at the end of last year who has really helped us rethink our strategy around partnerships and he has been doing an absolutely tremendous job for us in continuing to open up different avenues.

The brand of Kenexa is then allowing us to continue the dialogue and we are the largest independent player.

So all those factors are to our advantage.

Great.

And -- that's fantastic color.

And the final question I will have is just around talent and your own organization with respect to sales and marketing and based on the business strength that you are seeing right now do you have any change in your plans for hiring to the end of the year or increasing hiring -- the hiring rate going into next year that you can comment on at this time?

We generally grow our sales force in the same ratio that our business is grown and the guidance that we have given the street has basically said that our sales and marketing expenses will remain as a percentage over the long-term in the 20% to 22% mark.

So you if work backwards from that against recognized revenue you will see that we will continue to add sales force at the level of mid-teens plus whatever we pick up through mid-to-high teens plus whatever we pick up through acquisitions.

Great.

Thank you very much for taking my questions.

Pleasure.

(Operator Instructions).

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

Please proceed with your question.

Thank you and congratulations, you guys.

My question is are the three big RPO deals fully ramped up at this point?

Yes, they are, Pat.

And, you know, I had the sense that maybe other big potential RPO deals were waiting to see how those were going before they moved forward.

Is through and are you seeing -- are you seeing that forward momentum now?

Yes.

I think, Pat, that those deals that we announced last year again we are were kind of mega deals and that sort of changed the way and created a new model for the industry.

So we do still see a lot of people that are on the side lines watching that very closely and the success and the results that we're bringing for our clients I think are bringing more people to the table.

So we're not seeing the immediate impact of people rushing through the front door with contracts in their hands but we're seeing a lot of other big kind of mega deal opportunities start to engage in dialogue and discussion.

So we are into the future very, very optimistic about the success we're having on these larger mega deals and additional people in the marketplace, you know, watching closely.

And also two closes, right, this quarter?

And if I -- if I can add a follow-up to that, so I have noticed that a lot of the more traditional staffing companies seem to be taking a page out of your play book and launching or emphasizing their RPO practices more.

Is it getting more competitive and how are you -- how are you -- how are you in terms of your ability to differentiate from these new players.

Well, the differentiation is really a lot of the -- the staffing companies that are trying to move upstream.

They have an awfully difficult time competing with us on the technology component as well as all of the -- the deep, deep capabilities that we have around predicting performance, the assessment capabilities, the analytic capabilities.

That really differentiates.

So there is a bifurcation in the market that you will see.

There are deals that you'll see those organizations write, but they're at very different margin profiles than the type of business that we write.

Again, we're writing -- people that are writing business with Kenexa there is a initiative from the operating committee around workforce transformation quality of hire, higher scrutiny around the data that's being delivered from the recruiting department.

So if those kind of questions are coming into play and if it's a global deal and it's really high volume, our win rates are awfully, awfully good.

If it's more of a transactional cost for hire kind of model, there's probably some other people that, you know, and thankfully their win rates are higher than ours in those areas.

Another way to think about this, Pat, is outsourcing is driven along three dimensions.

Cheaper, faster and better.

When a client is only looking for the first dimension of cheaper, we have -- we are either not competing or we have extremely poor close rates.

If they are around dimensions of cheaper and faster, we are competitive, win our fair share provided we can protect the margin.

If the client want faster, cheaper and better, we are almost unbeatable because of our data capabilities, because of our software, because of our predictive analytics, because of our quality of hire, because of the global footprint.

We can go through the long list.

Great.

Thank you.

Our next question comes from the line of Brian Schwartz with Oppenheimer.

Please proceed with your question.

Yes.

Hi.

Thanks for taking my questions.

I too add my congratulations to a very strong quarter here in Q2.

Most of my questions actually have been asked here, but I did have a couple of little housekeeping and a quick philosophical question for Rudy.

On the housekeeping side, Don do you happen to have what is the current average module percustomer?

The peak -- our PQ number is in excess of $1.9 million in recognized revenue.

I think he said modules, though.

Oh, modules.

Oh, okay.

I'm sorry.

Around three.

Around three.

Okay.

So that's up from about 2.8 a few quarters ago.

That's great.

And then, you know, Rudy or Troy, I wanted to ask you guys about do you guys ever think and consider-- you've got such a strong toehold here tin the enterprise market and have for many years.

Do you ever consider potentially moving down market into that very large but fragmented mid-market potentially with a lighter version of your 2x platform?

Yes.

We -- Brian, we do have some strategies in that area and, you know, we're -- and they're in all the guidance that we have given and we're continuing to execute on it and we feel pretty good about it but just for competitive reasons we would rather get a couple more laps around the track before we lay it out publicly.

Okay.

And then, Troy, following up on the -- the sales performance or really the sales productivity you have been making quite a few additions here over the last few quarters.

Where are we do you think in terms of the productivity gains from these new hires?

Is that still potentially ahead of us here over the next four to six quarters?

Well, we saw a significant increase in Q2.

If you noticed the preferred partner announcement was 100.

Same time last year was 50.

That's 100% improvement.

So if that number reflects what Troy mentioned earlier as well as the productivity of our sales force.

So it is being reflected and it's also reflected in the guidance I might add.

Right.

And then last question just really on the guidance.

You know, Don, you have taken it up nicely here both on the top and bottom line.

You have commented on -- on a couple nice RPO wins and I think Rudy even highlighted in the comment of maybe a potential another win here coming that will keep our fingers crossed we will go to that contracting phase and another one you mentioned is, you know, kind of getting close to that finish line.

Is it fair to assume that if you are successful in these other two engagements that we could potentially see a much higher growth trajectory or raised growth trajectory similar to what we're seeing here exiting Q2?

Thanks.

Brian, our guidance is -- reflects what our best thoughts are on what we will do for the year.

So I don't think I can add any more to that.

Great.

Thanks for taking my questions then.

Our next question comes from the line of Scott Berg with Northland Capital Markets.

Please proceed with your question.

Hi, guys.

Congratulations on a very, very good quarter here.

I have one question and then a follow-up.

First of all, on sales hiring in the second half do you have a -- I guess is there a change to the philosophy as to where those adds going to be implemented, whether it's around software or the other technology platforms, maybe assessments versus RPO, or should we see additions in that area be similar to what we have seen over the last 6 to 12 months.

I think it will be similar, Scott.

You know, if there's any trend at all it's that the current sales force is becoming more and more proficient around selling across the platform and more and more of the new hires are people that come in with a stronger conceptual orientation around selling across the platform as opposed to individual category solutions.

Okay.

Great.

Then my follow-up is I'm not sure who wants to take it but RPO revenues were flat sequentially in the second quarter versus the first.

Assuming that all the three large deals are fully ramped and two new deals begin ramping obviously in the third quarter here, how should we view RPO growth in the back half of the year because I thought it would have been a little bit better in the second quarter even with the headwinds of the previous large customer loss.

Well, a lot of [farm were] RPO currency and Don talked about the currency.

If you notice our currency gain was -- was all due to software.

Our currency headwinds that Don talked about $800,000 or so was primarily due to the service part or the RPO part of our business.

So if I -- if you take those data points and assume that the currency remains pretty well stable, we should see -- we should see a corresponding increase going forward that we have seen historically.

I guess what I am saying in plain English is we're not expecting any significant losses, and if the unemployment rate remains stable here and it doesn't deteriorate tremendously in Europe, we should start seeing the effect of the wins.

Great.

That's all I have.

Thank you.

Uh-huh.

There are no further questions at this time.

I would like to turn the floor back over to Mr. Karsan for closing comments.

As I finish on every quarter I would like to thank the Street for their support and we'll talk again in one quarter.

Have a good evening.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.