Attached files
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| 8-K - 8-K - KENEXA CORP | form8-k.htm |
| EX-99.1 - PRESS RELEASE - KENEXA CORP | ex99-1.htm |
Exhibit 99.2
Don Volk - Kenexa -
CFO
Thank you, Jen. With me today is Rudy Karsan,
our Chief Executive Officer, and Troy Kanter, our President and Chief Operating
Officer. Today we will review Kenexa's first quarter 2010 results and provide
guidance for the second quarter and full year 2010 and then we'll open up the
call for questions.
Before we begin, let me remind you that this presentation
may contain forward-looking statements that are subject to risks and
uncertainties associated with the Company's business. These statements may
contain among other things, guidance as to future revenues and earnings,
operations, transactions, prospects, intellectual property, and the development
of products. Additional information that may affect the Company's business and
financial prospects, as well as factors that would cause Kenexa's performance to
vary from our current expectations are available in the Company's filings with
the Securities and Exchange Commission.
Also, I would like to remind you that today's call may not
be reproduced in any form without the expressed written consent of
Kenexa.
We may refer to certain 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 is currently
available on our Company website, www.kenexa.com, with the press release issued
after the close of market today.
I'll now turn the call over to Rudy Karsan.
Rudy?
Rudy Karsan - Kenexa - Chief
Executive Officer
Thanks Don. And thanks to all of you for joining us on the
call to review our first quarter results, which were highlighted by a return to
positive year-over-year revenue growth and cash flow that materially exceeded
our reported profitability.
The underlying momentum of Kenexa’s business is evidenced
by the continued growth of our deferred revenue and another strong quarter of
competitive wins with large, global organizations – the combination of which
provides us with confidence that our revenue run rate will increase in the
second quarter. While we will remain slightly cautious till we have
another couple of quarters behind us, our optimism about Kenexa’s market
position and long-term opportunity continues to grow.
Taking a look at our results for the
quarter. Subscription revenue was $33.3 million and total revenue was
$39.7 million, which was consistent with our guidance and in the general range
of what Kenexa delivered throughout 2009. From a profitability
perspective, non-GAAP operating income came in at $2.3 million. This
was also consistent with our expectations and reflected the increase in sales
and marketing investments in the quarter – which speaks to the growing optimism
we have for our medium-and-long-term outlook as we are aggressively pursuing
market share gains and enhanced growth moving forward.
Deferred revenue was again strong, ending the quarter at
$54.5 million, which was up from $50 million at the end of the prior
quarter. We also generated $8.8 million in cash flows from
operations, which was a solid performance considering the strong cash flow
generated during the fourth quarter.
From a high level perspective, the level of scrutiny on
both IT and HR budgets remains at higher levels than
pre-recession. The unemployment rate of 9.7% remains well above
levels associated with a healthy economic environment, and leading economists
suggest that it may remain relatively high not only throughout 2010 but also
through the end of 2011. There are reasons to be optimistic
longer-term, however.
First, we have recently witnessed stabilization in the
unemployment rate, following a multi-year period of continual
increases. Second, while the unemployment rate is expected to remain
relatively high, it is expected to come down over the balance of 2010 and during
2011 as well. Finally, a recent survey of over 100 CEO’s from big US
corporations estimated that they would add more jobs than they would be cutting
for the first time in two years.
Over the last several quarters, the slight
quarter-to-quarter improvement in the sales environment was apparent in the
solid growth of our deferred revenue. Given the earlier comments and
visibility into recognizing revenue associated with increased sales activity the
last several quarters, we currently expect Kenexa’s second quarter total revenue
will be in the range of $41 to $43 million. The mid-point of that
range would represent sequential growth of 6% and nearly the same level of
growth on a year-over-year basis.
We do not view the corner as completely turned at this
point because we do not believe the economy is on a straight, up and to the
right trajectory, which means spending decisions may still move at a measured
pace in the near-term. However, we are increasingly confident in the
medium-to-longer term view of the HCM market, as well as our market
position.
We continue to see a growing number of large, global
organizations evaluating vendors based on the breadth of their offering, global
footprint, domain expertise and ability to serve as a strategic partner to help
customers implement best-practices. We believe that Kenexa’s unique
combination of strong technology, content and services positions Kenexa well to
meet the evolving needs of these customers.
It’s not just Kenexa that has this view. Last
quarter, we announced that Gartner positioned Kenexa in the “Leaders Quadrant”
of the e-Recruitment software vendor evaluation. Following up on this
acknowledgment, during the first quarter, IDC named Kenexa as a major player in
the human capital management market based on the strength of our capabilities
and strategies.
I would like to share some of their specific comments as I
believe it validates our views. In particular, IDC said that Kenexa has
strengths in global reach, tools to help prospects and clients justify
investment, and a large R&D organization that takes advantage of offshore
resources. They added that differentiation in the market place is
becoming harder to attain, but that Kenexa has global reach that enables it to
stand out as a major player and our marks for innovation and R&D are
increasing.
We are
not resting from a product perspective. Yesterday we formally
launched the Kenexa 2x Platform to the marketplace, which provides the essential
tools necessary for Human Resources professionals to transform and optimize the
way their businesses are run. Included in this release was our newly
branded Kenexa 2x BrassRing, which is our Recruitment Technology for the
largest organizations in the world; Kenexa 2x Recruit, which is our Recruitment
Technology targeted at the mid-market; Kenexa 2x Onboard, which delivers an
improved candidate-to-employee experience, while ensuring compliance with
legal and corporate policies; and Kenexa 2x Mobile, which is a cutting-edge
mobility solution for recruiters and hiring managers on the
go.
By the
end of 2010, we also plan to launch our 2x Perform solution, and further
out we will be adding 2x Assess, 2x Analytics and 2x Survey to the 2x
Platform. Not only is Kenexa already in a very strong position from a
technology perspective, but we believe that we are distancing ourselves from the
competition with the release of this broad suite of solutions on our
state-of-the-art Kenexa 2x platform.
The strength of our technology, and in particular our
Kenexa 2x BrassRing offering, was further reinforced as we were recently named a
finalist for the Best Human Capital Management Codie awards by the Software and
Information Industry Association.
In total, we added over 30 preferred
partners during the first quarter, which is consistent with last
quarter and up from the over 20 level for much of 2009. It’s equally
important that we continue to see a growing number of our new preferred partner
relationships being for multiple elements of our end-to-end product
suite. The first quarter was one of our stronger quarters for winning
head-to-head competitions in major, strategic deals. Wins during the
quarter included companies such as Aetna, Ingersoll Rand, SAP, KPMG, Adidas,
Saudi Aramco, Diageo, Deloitte and Heinz to name a few.
In addition to our technology and value proposition being
validated by leading industry analysts, product evaluators and the world’s
largest organizations, we also find that Kenexa is viewed as a desirable place
to work by top talent in the industry. One of the reasons our
expenses were at the higher-end of what we planned is we were able to hire in
sales and marketing more quickly than we originally anticipated. We
are now at over 220 professionals in sales & marketing with a quarter over
quarter increase of approximately 10%. Our standards for hiring are
at the same high levels as they have always been. However, we are
seeing more highly qualified sales and marketing professionals that are seeking
to work with Kenexa because of our differentiated value proposition, momentum
with the largest global organizations and approach to partnering with our
customers.
The aspect of our business that faces the greatest
headwinds as a result of the challenging economy is the services related
component, which includes consulting and related offerings such as assessments
and surveys. While we expect our revenue to scale during the second
quarter, we continue to expect services revenue to be variable during 2010 given
the currently anticipated pace of the economic recovery.
The final component of our business that I will touch on is
recruitment process outsourcing or RPO. Our RPO revenue came in at
just over $9 million, which was up slightly from the fourth quarter, and now
represents a full year in which our RPO business has been stable. We
recently added Whirlpool as an RPO customer and our pipeline of opportunities is
building as companies evaluate the timing of when they will re-engage on the
hiring front, and when they do, the most efficient way to move
forward. We believe that our RPO business will serve as a source of
leverage if the hiring environment improves over the next several years, but it
is something that will take time. Keep in mind that while hiring is
expected to improve, unemployment is expected to remain at relatively high
levels through next year.
From a summary perspective, we will remain slightly
cautious until we have another few quarters under our belt, and we continue to
be optimistic about Kenexa’s medium to longer-term outlook. We are
competing very well in engagements with the largest global organizations in the
world, the strength of our technology continues to be reinforced, we are
launching enhanced solutions on our 2x platform and our RPO business continues
to firm. We believe that we started to increase sales and marketing
investments at the right time, and are confident that we will gain leverage on
these investments over the long-term.
With that, let me turn it over to Don to review our
financials in more detail. Don?
Don Volk - Kenexa -
CFO
Thanks, Rudy. Let me begin by reviewing our
results for the first quarter starting with the P&L. Total revenue for the
first quarter was $39.7 million, consistent with our guidance of $38 to $40
million. Subscription revenue was $33.3 million, which was flat with the first
and fourth quarters of 2009 and it represented 84% of our first quarter total
revenue. Our services and other revenue came in at $6.4 million, up 11%
sequentially and representing the remaining 16% of our first quarter total
revenue. We continue to expect our subscription revenue mix to be in
the upper 70% to 80% range from a long-term perspective and in a more healthy
economic environment.
From a geographic perspective, our revenue mix of domestic
versus international revenue was 78/22%, compared to 77%/23% last
quarter. Movements in currency rates affected our revenues negatively
by approximately $400,000.
From a detailed perspective, RPO represented approximately
$6 million of our subscription revenue and just over $9 million of our total
revenue in the first quarter, which is generally consistent with the fourth
quarter.
Our clients typically purchase multi-year subscriptions
with an average length of approximately two years. During the first quarter,
overall renewal rates for our suite of solutions were over the 80%
level. We continue to expect renewal rates to improve to the 90+%
range from a long-term perspective, as the business environment
improves.
A common metric that we share which includes RPO along with
our other consulting services and technology solutions is our P3
metric which measures the average annual revenue contribution of our top 80
customers. This metric came in at over $1 million during the first quarter,
which was consistent with recent quarters.
Turning to profitability, we'll be providing non-GAAP
measures for each first quarter 2010 expense category which exclude $1.3 million
of share-based compensation charges associated with FAS123R and $900,000 of
amortization of acquired intangibles. All comparisons will be using
the non-GAAP current period results.
Non-GAAP gross margin of 65% compared to 67% in the year
ago and sequential quarter. From an operating expense perspective,
the non-GAAP operating expenses of $23.7 million were up about
$800,000 on a sequential basis and up from $22.0 million in the year ago
quarter. This led to non-GAAP income from operations of $2.3 million,
consistent with our guidance and representing a 6% non-GAAP operating
margin. Non-GAAP EPS was $0.10 for the first quarter of 2010, above
our guidance due to a positive impact on our tax rate.
Turning to our results on a GAAP basis, the following were
expense levels determined in accordance with GAAP -- cost of revenue, $13.8
million, sales and marketing, $9.6 million, R&D, $2.3 million, and G&A,
$9.8 million. For the first quarter, GAAP income from operations is
$62,000. Net loss allocable to common shareholders is $18,000
resulting in breakeven GAAP net income per share. The reconciliation
of 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, Kenexa has cash, cash
equivalents and investments of $62.6 million at March 31, 2010, an increase from
$58.8 million at the end of the prior quarter. Cash from operations
was $8.8 million during the first quarter, which was a strong performance
considering our fourth quarter cash flow benefitted from timing factors as well
as a greater number of customers that paid up front for their
transactions.
Accounts receivable DSO were 59 days at the end of the
quarter, compared to 62 days at the end of last quarter. And our
deferred revenue at the end of the quarter was $54.5 million, up $4.5 million
from the end of the fourth quarter and up 32% from the end of the first quarter
of 2009.
I'd now like to turn to guidance and begin with the full
year 2010. Assuming continued stabilization in the unemployment rate
and a slightly improved business environment in the second half of the year, we
are currently expecting revenue to be in the range of $162 million to $169
million, which is an increase from our prior guidance of $160 to $168
million.
From a profitability perspective, we previously provided
guidance of $14.5 million to $18.5 million. We are pleased that the
company was able to get off to a faster-than-expected start with respect to
onboarding sales resources. Taking into consideration these hires and
related expenses associated with making sales resources productive, as well as
incremental investments in sales and marketing, we are tracking
closer to the mid-part of our full year non-GAAP operating income range at this
time.
As a reminder, we expect that our 2010 non-GAAP operating
margin will be depressed by approximately 250 basis points as a result of
litigation expenses related to the patent lawsuit that we are
pursuing.
Assuming an effective tax rate for reporting purposes of
approximately 20% and approximately 23.2 million shares outstanding, we expect
non-GAAP net income per diluted share to be $0.52 to $0.66 for the full year
2010. As we are currently tracking closer to the mid-part of our
non-GAAP operating income range, the same would hold true for non-GAAP
EPS.
Turning to the second quarter of 2010. We are
targeting revenue in the range of $41 million to $43 million, which would mark
the first material sequential gain in revenue and increased quarterly target
range that we have cited since the beginning of 2009. We are
confident in our second quarter outlook based on the fact that the revenue step
up is largely based on the ability to recognize revenue associated with prior
sales activity. The on-going momentum of our business is more
reflected in the slight uptick of our full year revenue target.
We are targeting second quarter non-GAAP operating income
of $3.7 million to $3.9 million, which is a step up from our first quarter
profitability level and reflects a full quarter’s impact of the increased sales
resources that were brought on board during the first quarter.
Assuming a 20% effective tax rate for reporting purposes
and 23.2 million shares outstanding, we expect non-GAAP net income per diluted
share to be $0.12 to $0.13 for the second quarter.
In summary, we are pleased with the company’s first quarter
financial results. Looking ahead, we are investing in the business
because we are optimistic that the demand environment is firming and we believe
that Kenexa is well positioned to gain share as a result of our strong market
position, differentiated value proposition and the ramping of our Kenexa 2x
launch. We believe that we are returning to growth mode, and while we
are executing against our plan of increasing investments in 2010, we are still
delivering profitability, positive cash flow and we are confident in
our long-term operating model, which the company has already proven in the
past.
We'd now like to turn it over to Jen to begin the Q&A
session.