Kenexa Announces Financial Results for Second-Quarter 2007

Kenexa (Nasdaq: KNXA), a leading provider of software, services and proprietary content that enable organizations to more effectively recruit and retain employees, today announced its operating results for the second quarter ended June 30, 2007. For the second quarter of 2007, Kenexa reported total revenue of $45.2 million, representing an increase of 83% over the $24.7 million recorded for the second quarter of 2006. Subscription revenue was $37.0 million for the second quarter of 2007, an increase of 86% compared to the second quarter of 2006, while professional services and other revenue was $8.2 million for the second quarter of 2007, an increase of 71% over the same period of 2006. The second quarter of 2007 includes revenue resulting from the Company’s acquisition of BrassRing in November 2006. Rudy Karsan, Chief Executive Officer of Kenexa, stated, "We were pleased with the Company’s second quarter results, which were highlighted by solid organic and acquisitive revenue growth, profitability and cash flow. Market demand is strong, and Kenexa’s brand recognition continues to grow as reflected by the growing number of inbound inquiries that we are fielding related to our total solution offerings.” Karsan added, "After working on the integration of BrassRing for nearly nine months, we are increasingly confident that Kenexa will capitalize on the large opportunity associated with their offerings. While we expect to make continual improvements in the sales, service and support of our BrassRing solutions, we believe the heavy lifting in the integration process has been completed. Our entire management team is highly focused on extending our leadership position in both recruiting and retention solutions, across customers of all sizes, and we believe our domain expertise and differentiated total solution offerings position us well for the long-term.” Kenexa’s income from operations before income tax and interest income, determined in accordance with generally accepted accounting principles (GAAP), was $7.9 million for the three months ended June 30, 2007, compared with $3.8 million for the corresponding period of 2006. GAAP net income available to common shareholders was $5.8 million or $0.23 per basic and diluted share for the quarter, compared to $3.3 million or $0.16 per basic and diluted share for the same period of 2006. Non-GAAP income from operations before income taxes and interest income or expense, which excludes stock-based compensation expense and amortization of intangibles associated with recent acquisitions, for the three months ended June 30, 2007 was $9.2 million compared with $4.7 million during the same period last year, representing an increase of 94% on a year-over-year basis and a non-GAAP operating margin of 20%. Non-GAAP net income per diluted share, which excludes stock-based compensation expense and amortization of intangibles associated with recent acquisitions, was $0.28 for the quarter ended June 30, 2007, based on an estimated non-GAAP effective tax rate of 30%. This represents an increase of 40% compared to $0.20 non-GAAP net income per diluted share for the quarter ended June 30, 2006, based on a non-GAAP tax rate of 23%. 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 and cash equivalents and short term investments of $108.5 million at June 30, 2007, a decrease from $111.7 million at the end of the prior quarter. The decrease in cash and short term investments for the three months ended June 30, 2007 was due to our purchase of Straight Source net of our cash from operations of $6.0 million, which was a significant increase compared to $1.4 million in the year ago period. Deferred revenue was $32.0 million at the end of the quarter, an increase of 87% on a year-over-year basis. Don Volk, Chief Financial Officer of Kenexa, stated, "In addition to delivering solid results from a P&L perspective, we were pleased to again generate cash from operations that was up significantly from the previous year. For the first six months of 2007, cash from operations of $12.2 million has increased by more than fivefold compared to the first six months of the prior year. We remain confident in Kenexa’s long-term profitability and cash flow model.” Other Second Quarter Highlights More than 40 "preferred partner” customers were added during the quarter (defined as customers that spend more than $50,000 annually). The average annual revenue from the Company’s top 80 customers was greater than $1.1 million, up from the $800,000 level at the end of 2006. Kenexa announced the acquisition of StraightSource, which has provided recruitment process outsourcing (RPO) services to leading Fortune 500 companies for over 10 years. Kenexa received a "Positive” rating in Gartner’s "MarketScope for Employee Performance Management Software, 2007.” Kenexa was one of 28 vendors evaluated in the report. Evaluation criteria for inclusion in the MarketScope included marketing strategy, product strategy, business model, product or service, overall viability, sales execution and pricing, and customer experience. Providers had to demonstrate that they possessed at least 25 customers, 15 of which were production customers that are live with more than 1,000 employees in one category. Kenexa’s common stock was selected for inclusion in both the Russell 2000 and Russell 3000 Indices. Rudy Karsan, CEO of Kenexa, received the Ernst & Young Entrepreneur Of The Year® 2007 Award in the Software and Technology category in the Greater Philadelphia area. Business Outlook Based on information as of August 8, 2007, the Company is issuing guidance for the third quarter and full year 2007 as follows: Third Quarter 2007: The Company expects revenue to be $48 to $50 million, subscription revenue to be $38.4 to $40 million and non-GAAP operating income to be $10.8 to $11.3 million. Assuming a 30% effective tax rate for reporting purposes and 25.9 million shares outstanding, Kenexa expects its non-GAAP diluted earnings per share to be $0.31 to $0.33. Full Year 2007: The Company expects total revenue to be $188 million to $192 million, subscription revenue to be $150 to $153 million and non-GAAP operating income to be $40.7 to $42.8 million. Assuming a 30% effective tax rate and 25.7 million shares outstanding, Kenexa expects its non-GAAP diluted earnings per share to be $1.18 to $1.25. Conference Call Information Kenexa will host a conference call today, August 8, 2007, at 5:00 pm (Eastern Time) to discuss the Company's financial results and financial guidance. To access this call, dial 800-811-0667 (domestic) or 913-981-4901 (international). A replay of this conference call will be available through August 15, 2007, at 888-203-1112 (domestic) or 719-457-0820 (international). The replay passcode is 6898594. A live webcast of this conference call will be available on the "Investor Relations" page of the Company's Web site, (www.kenexa.com) and a replay will be archived on the Web site as well. Forward-Looking Statements This press release includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts and statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or words of similar meaning. These statements may concern, among other things, guidance as to future revenue and earnings, operations, expected benefits from the BrassRing transaction, prospects of the business generally, intellectual property and the development of products. These statements are based on our current beliefs or expectations and are inherently subject to various risks and uncertainties, including those set forth under the caption "Risk Factors" in Kenexa’s most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission and as revised or supplemented by Kenexa’s quarterly reports on Form 10-Q. Actual results may differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors, Kenexa’s ability to implement business and acquisition strategies or to complete or integrate acquisitions (including BrassRing). Kenexa does not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise. Non-GAAP Financial Measures This press release contains non-GAAP financial measures. Kenexa believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Kenexa’s financial condition and results of operations. The Company’s management uses these non-GAAP results to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the Company’s Board of Directors. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with other companies in the Company’s industry, many of which present similar non-GAAP financial measures to investors. Management of the Company does not consider such non-GAAP measures in isolation or as an alternative to such measures determined in accordance with GAAP. The principal limitation of such non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. In order to compensate for these limitations, management of the Company presents its non-GAAP financial measures in connection with its GAAP results. Kenexa urges investors and potential investors in the Company’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the Company’s business. Kenexa presents the following non-GAAP financial measures in this press release: non-GAAP income from operations before income taxes and interest income or expense; non-GAAP net income available to common shareholders; non-GAAP sales and marketing expense; non-GAAP general and administrative expense; non-GAAP research and development expense; non-GAAP diluted earnings per share; and non-GAPP effective tax as described below. The Company’s non-GAAP financial measures exclude stock-based compensation and amortization of acquired intangible assets related to the Company’s acquisitions, Stock-based compensation. Stock-based compensation consists of expenses for stock options and stock awards that the Company began recording in accordance with SFAS 123(R) during the first quarter of 2006. Stock-based compensation was $1.1 million for the three months ended June 30, 2007 and $0.8 million for the three months ended June 30, 2006. Stock-based compensation expenses are excluded in the Company’s non-GAAP financial measures because share-based compensation amounts are difficult to forecast, because the magnitude of the charges depends upon the volume and timing of stock option grants – which are unpredictable and can vary dramatically from period to period – and external factors such as interest rates and the trading price and volatility of the Company’s common stock. The Company believes that such exclusion provides meaningful supplemental information regarding the Company’s operating results because these non-GAAP financial measures facilitate the comparison of results for future periods with results from past periods. The dilutive effect of all outstanding options is included in the calculation of diluted earnings per share on both a GAAP and a non-GAAP basis. Amortization of acquired intangible assets. In accordance with GAAP, operating expenses include amortization of acquired intangible assets over the estimated useful lives of such assets. The amortization of acquired intangible assets was $0.2 million for the three months ended June 30, 2007 and 2006. Amortization of acquired intangible assets is excluded from the Company’s non-GAAP financial measures because the Company believes that such exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry, which have their own unique acquisition histories. Kenexa’s management uses non-GAAP income from operations before income tax and interest income, non-GAAP net income from operations and non-GAAP diluted earnings per share in internal reports used by management in monitoring and making decisions regarding Kenexa’s business. For example, these measures are used in monthly financial reports prepared for management, and in quarterly reports to Kenexa’s Board of Directors. Kenexa also uses non-GAAP diluted earnings per share as a measure that determines executive cash incentive compensation, along with GAAP measures, such as revenue. Each of non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP research and development expense, and estimated non-GAPP effective tax rate are each components necessary to calculate non-GAAP income from operations before income taxes and interest income, non-GAAP net income from operations and non-GAAP diluted earnings per share and are calculated by adjusting the corresponding GAAP measure for the applicable period by the applicable portion of stock-based compensation and amortization of acquired intangible assets. About Kenexa Kenexa Corporation (Nasdaq: KNXA) provides outsourcing, employee research and software to help organizations more effectively recruit and retain a productive workforce. Kenexa solutions include applicant tracking, employment process outsourcing, onboarding, skills and behavioral assessments, structured interviews, performance management, multi-rater feedback surveys, employee engagement surveys and HR Analytics. Headquartered in Wayne, Pa. (outside Philadelphia), Kenexa employs more than 1,200 people worldwide. More information about Kenexa and its global locations can be accessed at www.kenexa.com. Note to Editors: Kenexa is a registered trademark of Kenexa Corporation. Other product or service names mentioned herein remain the property of their respective owners. Kenexa Corporation and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share data)   June 30, December 31, 2007 2006 (unaudited)     Assets   Current assets Cash and cash equivalents $29,180 $42,502 Short term investments 79,360 - Accounts receivable, net of allowance for doubtful accounts of $1,300 and $975 34,382 31,493 Unbilled receivables 2,051 1,005 Deferred income taxes 12,611 8,093 Prepaid expenses and other current assets 3,275   3,578 Total current assets 160,859   86,671   Property and equipment, net of accumulated depreciation 11,540 8,469 Software, net of accumulated amortization 1,566 2,122 Goodwill 172,386 161,329 Intangible assets, net of accumulated amortization 4,213 4,570 Deferred income taxes, non-current - 1,430 Deferred financing costs, net of accumulated amortization 813 1,295 Other assets 1,905   1,573 Total assets $353,282   $267,459   Liabilities and Shareholders' Deficiency   Current liabilities Accounts payable $6,180 $5,672 Line of credit - 20,000 Notes payable, current 320 138 Commissions payable 1,406 1,674 Accrued compensation and benefits 7,073 9,878 Other accrued liabilities 8,201 6,086 Deferred revenue 32,007 31,251 Capital lease obligations 175   229 Total current liabilities 55,362   74,928   Term loan - 45,000 Capital lease obligations, less current portion 92 145 Notes payable, noncurrent 88 111 Other noncurrent liabilities - 114 Deferred income taxes 825   - Total liabilities $56,367   $120,298   Commitments and Contingencies   Shareholders' equity   Class A common stock, $0.01 par value; 100,000,000 shares authorized; 25,451,425 and 20,897,777 and shares issued, respectively 255 209 Additional paid-in capital 315,247 176,345 Accumulated other comprehensive loss 393 96 Accumulated deficit (18,980)   (29,489) Total shareholders' equity $296,915   $147,161       Total liabilities and shareholders' equity $353,282   $267,459 Kenexa Corporation and Subsidiaries Consolidated Statements of Operations (unaudited) (In thousands, except share and per share data)   Three Months Ended Six Months Ended June 30, June 30, 2007   2006 2007   2006   Revenue Subscription revenue $ 37,009 $ 19,947 $ 71,696 $ 37,540 Other revenue 8,155 4,760 15,685 10,182             Total revenue 45,164 24,707 87,381 47,722   Cost of revenue   12,600     6,672   24,032     13,026   Gross profit   32,564     18,035   63,349     34,696   Operating expenses: Sales and marketing 9,094 5,717 17,324 11,445 General and administrative 9,765 5,914 19,436 11,201 Research and development 4,297 1,815 8,620 3,351 Depreciation and amortization 1,477 768 2,907 1,490             Total operating expenses   24,633     14,214   48,287     27,487             Income from operations   7,931     3,821   15,062     7,209   Interest income, net 974 682 1,097 802   Income from operations before income taxes 8,905 4,503 16,159 8,011   Income tax expense 3,092 1,223 5,650 1,452             Net income $ 5,813   $ 3,280 $ 10,509   $ 6,559             Basic net income per share: $ 0.23   $ 0.16 $ 0.43   $ 0.34             Weighted average shares used to compute net income per share - basic   25,326,997     20,250,790   24,690,936     19,239,983             Diluted net income per share: $ 0.23   $ 0.16 $ 0.42   $ 0.33             Weighted average shares used to compute net income per share - diluted   25,743,996     21,056,536   25,116,145     19,972,040 Non-GAAP income from operations and net income available to common shareholders excludes stock-based compensation and amortization of intangibles:   Three Months Ended June 30, 2007   2006 (unaudited) (unaudited) Non-GAAP income from operations reconciliation:       Income from operations $ 7,931   $ 3,821   Add back: Stock-based compensation expense 1,069 769 Amortization of intangibles associated with acquisitions 221 152       Non-GAAP income from operations $ 9,221   $ 4,742 Non-GAAP income from operations as a percentage of revenue 20% 19%       Weighted average shares used to compute net income per share - basic   25,326,997     20,250,790   Dilutive effect of options and warrants 416,999 805,746       Weighted average shares used to compute net income per share - diluted   25,743,996     21,056,536       Net income $ 5,813   $ 3,280   Stock-based compensation expense 1,069 769 Amortization of intangibles associated with acquisitions   221     152 Non-GAAP net income $ 7,103   $ 4,201       Non-GAAP net income per diluted share $ 0.28   $ 0.20     Non-GAAP tax rate calculation       Income from operations before income taxes   8,905     4,503   Stock-based compensation expense 1,069 769   Amortization of intangibles associated with acquisitions 221 152       Non-GAAP Income from operations before income taxes   10,195     5,424   Income tax expense on operations 3,092 1,223       Non-GAAP tax rate   30%     23%   Other Non-GAAP measures referenced on earnings call excludes stock based compensation:     Gross profit $ 32,564 $ 18,035 Add: stock-based compensation expense   39     124 Non-GAAP gross profit $ 32,603   $ 18,159     Sales and marketing $ 9,094 $ 5,717 Less: stock-based compensation expense   (272)     (140) Non-GAAP sales and marketing $ 8,822   $ 5,577     General and administrative $ 9,765 $ 5,914 Less: stock-based compensation expense   (700)     (470) Non-GAAP general and administrative $ 9,065   $ 5,444     Research and development $ 4,297 $ 1,815 Less: stock-based compensation expense   (58)     (35) Non-GAAP research and development $ 4,239   $ 1,780 Kenexa Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)   For the Six Months Ended June 30, 2007 2006 (unaudited) (unaudited) Cash flows from operating activities Net Income from operations $ 10,509 $ 6,559 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,907 1,489 Non-cash interest expense 9 - Share-based compensation 1,784 1,341 Excess tax benefits from share-based payment arrangements (1,326) (767) Amortization of deferred financing costs 584 66 Bad debt expense 70 (62) Deferred taxes (1,874) (1,388) Changes in assets and liabilities Accounts and unbilled receivables (1,817) (5,227) Prepaid expenses and other current assets 410 (277) Other assets (335) 87 Accounts payable 331 278 Accrued compensation and other accrued liabilities 591 1,060 Commissions payable (268) 13 Deferred revenue 730 (823) Other liabilities (115) (23)       Net cash provided by operations   12,190     2,326   Cash flows from investing activities Purchases of property and equipment (4,610) (2,085) Purchases of available-for-sale investments (79,450) - Acquisitions, net of cash acquired (10,049) (34,629)       Net cash used in investing activities   (94,109)     (36,714)   Cash flows from financing activities Net repayments under line of credit agreement (65,000) - Repayments of notes payable (58) (139) Collections of notes receivable - 120 Share issuance from Employee stock purchase plan 91 - Excess tax benefits from share-based payment arrangements 1,326 767 Net Proceeds from public offering of common stock 130,471 66,514 Deferred financing costs (102) (123) Net Proceeds from option exercises 1,525 1,208 Repayments of capital lease obligations (115) (225)       Net cash provided by financing activities   68,138     68,122   Effect of exchange rate changes on cash and cash equivalents 459 (302)   Net (decrease) increase in cash and cash equivalents (13,322) 33,432 Cash and cash equivalents at beginning of year   42,502     43,499 Cash and cash equivalents at end of the period: $ 29,180   $ 76,931     Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 692 $ 387 Income taxes $ 2,783 $ 975   Noncash investing and financing activities Capital Leases $ 19 $ 114 Stock issuance for Gantz Wiley $ 650 - Stock issuance for StraightSource Acquisition $ 3,174 -