Kenexa Announces Financial Results for Second Quarter 2008

Kenexa (Nasdaq: KNXA), a global provider of talent acquisition and retention solutions, today announced its operating results for the second quarter ended June 30, 2008.

For the second quarter of 2008, Kenexa reported total revenue of $56.4 million, representing an increase of 25% over the $45.2 million recorded for the second quarter of 2007. Subscription revenue was $43.7 million for the second quarter of 2008, an increase of 18% compared to the second quarter of 2007, while professional services and other revenue was $12.7 million for the second quarter of 2008, an increase of 57% over the same period of 2007.
Rudy Karsan, Chief Executive Officer of Kenexa, stated, “We were pleased with the company’s financial performance in light of the current macro-economic environment. The combination of solid sequential growth and integration of Quorum International enabled Kenexa to become the first independent talent management vendor to pass the $200 million in annualized revenue level during the second quarter. We continue to focus on innovation, adding new preferred partner customers and growing our relationships, expanding our global footprint and, ultimately, gaining market share.”
Kenexa’s income from operations, determined in accordance with generally accepted accounting principles (GAAP), was $7.9 million for the three months ended June 30, 2008, compared with $7.9 million for the corresponding period of 2007. GAAP net income was $6.0 million or $0.26 per diluted share for the quarter, compared to $5.8 million or $0.23 per diluted share for the same period of 2007.

Non-GAAP income from operations, which excludes stock-based compensation expense and amortization of intangibles associated with our acquisitions, was a record $10.9 million for the three months ended June 30, 2008, representing a 19% non-GAAP operating margin and an increase compared to $9.2 million in the year ago period. Non-GAAP net income was $9.0 million, or $0.39 per diluted share, for the quarter ended June 30, 2008, an increase from $0.28 in the year ago period. Results for the second quarter include a charge of approximately $0.3 million related to the relocation of Kenexa’s office in India.

A reconciliation of GAAP to non-GAAP results has been provided in the financial statement tables included at the end of this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

Kenexa had cash, cash equivalents and short and long-term investments of $49.3 million at June 30, 2008, a decrease from $68.1 million at the end of the prior quarter. The decrease was the result of approximately $20 million used in the acquisition of Quorum International and approximately $5 million in cash used to repurchase the company’s common shares during the quarter. The Company generated $12.9 million in positive cash from operations during the second quarter, and deferred revenue ended the quarter at $38.7 million, an increase compared to $37.5 million at the end of the first quarter 2008.

Don Volk, Chief Financial Officer of Kenexa, stated, “During the second quarter, the Company generated record non-GAAP operating income and we continued to return capital back to shareholders in the form of share buybacks. We remain committed to protecting and driving our profitability and using our cash flow to enhance shareholder value.”

Other Second Quarter and Recent Business Highlights

1. More than 50 “preferred partner” customers were added during the quarter (defined as customers that spend more than $50,000 annually)
2. The average annual revenue from the Company’s top 80 customers was greater than $1.4 million, up from the $1.3 million level at the end of the prior quarter.
3. Positioned in Leaders Quadrant of the “Magic Quadrant for e-Recruitment Software” report by Gartner, Inc.
4. Kenexa launched the latest release of Kenexa Recruiter® BrassRing, the Company’s on-demand talent management system tailored for global organizations to source and track employment candidates throughout the hiring process
5. Expanded its Talent Acquisition capabilities to include additional global support, increased multilingual and global sourcing capabilities and job family expertise.
6. Released Kenexa Cultural Fit™ and Kenexa Compatibility Fit™, web-based assessment tools designed to increase retention, decrease turnover, and increase organizational and job commitment.
7. Unveiled Kenexa Performance Indicators™ (KPI), a web-based suite of pre-employment assessment tools designed to identify prospective employees who have a propensity to be engaged, to work well in a team and to demonstrate excellent customer service orientation.
8. Launched SimsSJT™ Customer Service, the new online simulation platform designed to assess customer service aptitude. SimSJT engages candidates in a virtual 3D environment that measures knowledge of roles associated with excellent customer service – greeting, anticipating, information exchange, task performance, empathy, solving problems, adding value/upgrading and follow-up.

Business Outlook

Based on information as of today, August 4, 2008, the Company is issuing guidance for the third quarter and full year 2008 as follows:

Third Quarter 2008: The Company expects revenue to be $57 million to $59 million, subscription revenue to represent the upper 70% range as a percentage of total revenue and non-GAAP operating income to be $11.4 million to $11.8 million. Assuming a 25% effective tax rate for reporting purposes and 22.8 million shares outstanding, Kenexa expects its non-GAAP net income per diluted share to be $0.38 to $0.39.

Full Year 2008: The Company expects total revenue to be $225 million to $230 million, subscription revenue to represent the upper 70% range as a percentage of total revenue and non-GAAP operating income to be $45.2 million to $46.2 million. Assuming a 25% effective tax rate and 23 million shares outstanding, Kenexa expects its non-GAAP diluted earnings per share to be $1.52 to $1.55. Full year 2008 results include a one-time expense of $2.3 million, which will be recognized over the course of the year, associated with the opening of a new office location in India in the first quarter.