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KENEXA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Quarterly Report on Form 10-Q, including the following Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended, and the Private Securities Litigation Reform Act of 1995,
that involve a number of risks and uncertainties. These forward-looking
statements include, but are not limited to, plans, objectives, expectations and
intentions and other statements contained herein that are not historical facts
and statements identified by words such as "expects," "anticipates," "will,"
"intends," "plans," "believes," "seeks," "estimates" or words of similar
meaning. These statements may contain, among other things, guidance as to future
revenue and earnings, operations, 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 risks related to the pending and
consummation of our proposed acquisition by IBM, as well as those risks set
forth under the caption "Risk Factors" in our most recent Annual Report on Form
10-K as filed with the Securities and Exchange Commission, as amended and
supplemented under the caption "Risk Factors" in our subsequent Quarterly
Reports on Form 10-Q filed with the Securities and Exchange Commission. Actual
results may differ materially from these expectations due to changes in global
political, economic, business, competitive, market and regulatory factors, our
ability to implement business and acquisition strategies or to complete or
integrate acquisitions. We do not undertake any obligation to update any
forward-looking statements contained herein as a result of new information,
future events or otherwise. References herein to "Kenexa," "we," "our," and "us"
collectively refer to Kenexa Corporation, a Pennsylvania corporation, and all of
its direct and indirect U.S., U.K., Canada, India, and other foreign
subsidiaries.
Overview
We are a leading provider of software-as-a-service, or SaaS, solutions that
enable organizations to more effectively recruit, retain and develop employees.
Our solutions are built around a suite of easily configurable software
applications that automate talent acquisition and employee performance
management best practices. We complement our software applications with tailored
combinations of proprietary content, outsourcing services and consulting
services based on our 25 years of experience assisting customers in addressing
their Human Resource (HR) requirements. Together, our software applications,
content and services form complete solutions that our customers find more
effective than the point technology or service solutions available from other
vendors. We believe that these solutions enable our customers to improve the
effectiveness of their talent acquisition programs, increase employee
productivity and retention, measure key HR metrics and make their talent
acquisition and employee performance management programs more efficient.
We derive revenue primarily from two sources, subscription fees for our
solutions and fees for discrete professional services. We offer our talent
acquisition and employee performance management solutions on a subscription
basis and currently generate a significant portion of our revenue from these
subscriptions. We generate the remainder of our revenue from discrete
professional services that are not provided as part of an integrated solution on
a subscription basis.
For the three and nine months ended September 30, 2012, subscription revenue
represented approximately 71% of our total revenue. Our customers typically
purchase multi-year subscriptions, and during the three and nine months ended
September 30, 2012 our customers renewed approximately 92% and 89%,
respectively, of the aggregate value of multi-year subscriptions for our
on-demand talent acquisition and performance management solution contracts
subject to renewal for each of those periods. In addition, we recognize
subscription revenue ratably over the term of the underlying contract. These
aspects of our business model provide us with recurring revenue streams and
revenue visibility. We expect non-GAAP subscription revenue will be within a
target range of 70% to 75% of our total revenues in 2012.
We market our solutions primarily to organizations with more than 2,000
employees. As of June 30, 2012, we had a global customer base of approximately
8,500 companies across a number of industries, including financial services and
banking, manufacturing, government, life sciences, biotechnology and
pharmaceuticals, retail, healthcare, hospitality, call centers, and education,
including approximately 286 companies on the Fortune 500 list published in May
2012. Our customer base includes companies that we billed for services during
the nine months ended September 30, 2012 and does not necessarily indicate an
ongoing relationship with each such customer. Our top 80 customers contributed
approximately $43.2 million and $119.0 million, or approximately 47.6% and 46.7%
of our total revenue for the three and nine months ended September 30, 2012,
respectively.
On November 14, 2011, we entered into a share purchase agreement with BHI, a
provider of talent management solutions, primarily in the hospitality sector
based in Frisco, Texas for a purchase price of approximately $14.7 million,
including legal, accounting, other professional fees and contingent
consideration. We have accrued $2.5 million of contingent consideration, based
upon our estimated revenue growth within the hospitality industry. We believe
the acquisition of BHI, along with their extensive research on talent management
best practices, will add to the Company's existing research and content
portfolio.
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On February 6, 2012, we acquired substantially all of the outstanding capital
stock of OutStart, a leading provider of SaaS e-learning solutions and services,
based in Boston, Massachusetts, for a purchase price of approximately $46.4
million, including legal, accounting, other professional fees and adjustments
for certain working capital accounts as defined in the purchase agreement. The
acquisition of OutStart will expand the Company's reach into the e-learning
market and enable Kenexa to provide a broader and deeper suite of talent
management solutions. We will integrate OutStart's Learning Management Suite,
which includes award-winning social and mobile learning solutions, with Kenexa's
Global Talent Management solutions including its Performance Management suite.
On August 25, 2012, Kenexa entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") with International Business Machines Corporation
("IBM") and Jasmine Acquisition Corp. ("Sub"), a wholly owned subsidiary of IBM.
Pursuant to the terms of the Merger Agreement, and subject to the conditions
thereof, Sub will merge with and into Kenexa, and Kenexa will become a wholly
owned subsidiary of IBM (the "Merger"). If the Merger is completed, Kenexa's
shareholders will be entitled to receive $46.00 in cash (the "Merger
Consideration") for each share of Kenexa's common stock owned by them as of the
date of the Merger. The consummation of the Merger is subject to certain
conditions, including adoption of the Merger Agreement by Kenexa's shareholders,
the continuing accuracy of Kenexa's and IBM's respective representations and
warranties, and the expiration or termination of any waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as any
similar filings that need to be made in foreign jurisdictions. The date for
Kenexa's shareholder meeting to vote on adoption of the Merger Agreement has
been scheduled for November 29, 2012.
Sources of Revenue
We derive revenue primarily from two sources: subscription revenue and other
revenue.
Subscription revenue
Subscription revenue for our solutions is comprised of subscription fees from
customers accessing our on-demand software, proprietary content, outsourcing
services and consulting services and from customers purchasing additional
support that is not included in the basic license fee. Our customers primarily
purchase renewable subscriptions for our solutions. The typical subscription
term is one to three years, with some terms extending up to five years or
beyond. We generally price our solutions based on the number of software
applications and services included and the number of customer employees.
Accordingly, subscription fees are generally greater for larger organizations
and for those that subscribe to a broader array of software applications and
services.
Consistent with our historical practices, revenue derived from subscription fees
is recognized ratably over the term of the subscription agreement. We generally
invoice our customers in advance in annual or quarterly installments and typical
payment terms provide that our customers pay us within 30 days of invoice. The
majority of our subscription agreements are not cancelable for convenience, but
our customers have the right to terminate their contracts for cause if we fail
to provide the agreed-upon services or otherwise breach the agreement. A
customer does not generally have a right to a refund of any advance payments if
the contract is cancelled. For the three and nine months ended September 30,
2012 our customers renewed approximately 92% and 89%, respectively, of the
aggregate value of multi-year subscriptions for our on-demand talent acquisition
and performance management solution contracts subject to renewal.
Amounts that have been invoiced are recorded in accounts receivable prior to the
receipt of payment and in deferred revenue to the extent revenue recognition
criteria have not been met. As of September 30, 2012, deferred revenue increased
by $8.0 million, or 9.0%, to $96.8 million from $88.8 million at December 31,
2011. The increase in deferred revenue is a result of the increase in bookings
and billings for our products, content and services, sales of multiple
arrangements and from certain acquisitions.
Other revenue
We derive other revenue from the sale of discrete consulting services and
translation services, as well as from out-of-pocket expenses. The majority of
our other revenue is derived from discrete consulting services, which primarily
consist of consulting and training services and success fees. This revenue is
recognized differently depending on the type of service provided. Refer to
"Revenue Recognition" in the Notes to Consolidated Financial Statements for
details.
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Revenue by geographic region
For the nine months ended September 30, 2012, approximately 71.6% of our total
revenue was derived from sales in the United States. Foreign revenue that we
generated from customers in the United Kingdom, Canada and China represented
approximately 10.2%, 3.4% and 2.6% of our total revenue, respectively. Revenue
from other countries amounted to an aggregate of 12.2% of our total revenue.
Other than the countries listed, no other country represented more than 2.0% of
our total revenue for the nine months ended September 30, 2012. The percentage
of revenue derived from sales in the United States for the nine months ended
September 30, 2012 decreased slightly compared to the prior year.
Cost of Revenue and Operating Expenses
Cost of revenue
Our cost of revenue primarily consists of compensation, employee benefits and
out-of-pocket travel-related expenses for our employees and independent
contractors who provide consulting or other professional services to our
customers. Additionally, our application hosting costs, amortization of
third-party license royalty costs and reimbursed expenses are also recorded as
cost of revenue. Many factors affect our cost of revenue, including changes in
the mix of products and services, pricing trends, changes in the amount of
reimbursed expenses and fluctuations in our customer base. Because cost as a
percentage of revenue is higher for professional services than for software
products, an increase in the services component of our solutions or an increase
in discrete professional services as a percentage of our total revenue would
reduce gross profit as a percentage of total revenue. As our revenues increase,
we expect our cost of revenue to increase proportionately, subject to pricing
pressure related to economic conditions and influenced by the mix of services
and software. To the extent new customers are added, we expect that the cost of
services as a percentage of revenue will be greater than the cost of services
associated with existing customers.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel and related costs
for employees engaged in sales and marketing, including salaries, commissions,
and other variable compensation. Travel expenses and costs associated with trade
shows, advertising and other marketing efforts and allocated overhead are also
included. We expense our sales commissions at the time the related revenue is
recognized.
General and Administrative
General and administrative expenses primarily consist of personnel and related
costs for our executive, finance and accounting, human resources and
administrative personnel. Professional fees, rent and other corporate expenses
are also included in general and administrative expense.
Research and Development
Research and development expenses primarily consist of personnel and related
costs, including salaries and employee benefits for software engineers, quality
assurance engineers, user experience/interface designers, architects, product
managers, project managers, HR-related subject matter experts, and management
information systems personnel and third-party consultants. Our research and
development efforts have been devoted to the development of new products and new
features for our existing products. Investments also include further
development, partner integrations, and deeper integrations of Kenexa content in
support of its integrated talent management strategy.
We continue to enhance our 2x product suite which includes Kenexa 2x Recruit®,
Kenexa 2x BrassRing®, Kenexa 2x Perform®, Kenexa 2x Onboard® and Kenexa 2x
Mobile®, Kenexa 2x Assess™ and Kenexa 2x Compensation™ with increased
functionality, module touch points, and performance. Kenexa is beginning work to
integrate its learning solutions to be tightly integrated with the 2x suite.
Kenexa will continue to invest in new 2x modules. We believe that Kenexa 2x
enables customers to improve productivity, increase cost savings, ensure
compliance with corporate and legal mandates, and raise employee engagement.
Depreciation and Amortization
Depreciation costs are related to our capitalized equipment, software, furniture
and fixtures, leasehold improvements, and building. Amortization costs are
related to our intangible assets.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles. The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to uncollectible accounts
receivable and accrued expenses. We base these estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Our actual results may differ from these estimates.
There have been no material changes during the nine months ended September 30,
2012 to the critical accounting policies discussed in our Annual Report on Form
10-K for the year ended December 31, 2011.
Key Performance Indicators
The following is a discussion of the key performance indicators that we consider
to be material in managing our business. The information provided below is
stated in thousands (other than percentages).
Deferred revenue. We generate revenue primarily from multi-year subscriptions
for our on-demand talent acquisition and employee performance management
solutions and our compensation module. We recognize revenue from these
subscription agreements ratably over the hosting period, which is typically one
to three years. We generally invoice our customers in annual, quarterly or
monthly installments in advance. Deferred revenue, which is included in our
consolidated balance sheets, is the amount of invoiced subscriptions in excess
of the amount recognized as revenue. Deferred revenue represents, in part, the
amount that we will record as revenue in our consolidated statements of
operations in future periods. As the subscription component of our revenue has
grown and our customers are more willing to pay us in advance for their
subscriptions, the amount of deferred revenue on our balance sheet has grown.
This trend may vary as business conditions change.
The following table reconciles beginning and ending deferred revenue for each of
the periods shown:
For the three months ended For the nine months ended
September 30, September 30,
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
Deferred Revenue at the
beginning of the period $ 96,436 $ 84,950 $ 88,837 $ 76,052
Total invoiced subscriptions
during the period 64,610 55,843 185,439 160,811
Deferred revenue from
acquisition - - 4,319 -
Subscription revenue recognized
during the period (64,190) (53,462) (181,739) (149,532)
Deferred revenue at the end of
the period $ 96,856 $ 87,331 $ 96,856 $ 87,331
Non-GAAP financial measures. We believe that non-GAAP measures of financial
results provide useful information to management and investors regarding certain
financial and business trends relating to our financial condition and results of
operations. We use these non-GAAP measures to compare our 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 our Board of Directors. We believe 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
financial measures with other companies in our industry, many of which present
similar non-GAAP financial measures to investors.
We do not consider these non-GAAP measures in isolation or as an alternative to
measures determined in accordance with GAAP. The principal limitation of such
non-GAAP financial measures is that they exclude significant expenses that are
required to be recorded under GAAP. 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, we present our non-GAAP financial measures in
connection with our GAAP results. We urge investors to review the reconciliation
of our non-GAAP financial measures to the comparable GAAP financial measures
included below, and not to rely on any single financial measure to evaluate our
business.
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--------------------------------------------------------------------------------The Company's non-GAAP financial measures as set forth in the tables below may
exclude the following:
Deferred revenue associated with acquisition. Deferred revenue consists of the
impact of the write down of the deferred revenue associated with purchase
accounting for the Salary.com and OutStart acquisitions. This effect is added
back because we believe its inclusion provides a more accurate depiction of
total revenue arising from these acquisitions.
Share-based compensation. Share-based compensation expense consists of expenses
for stock options and stock awards recorded in accordance with ASC 718.
Share-based compensation expense is excluded in our non-GAAP financial measures
because the magnitude of the changes associated with share-based compensation
are difficult to forecast as a result of their dependence 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 our common stock). We believe that this
exclusion provides meaningful supplemental information regarding our operating
results because these non-GAAP financial measures facilitate the comparison of
results over multiple periods.
Amortization of intangibles associated with acquisitions. In accordance with
GAAP, operating expense includes amortization of acquired intangible assets
which are amortized over the estimated useful lives of such assets. Amortization
of acquired intangible assets is excluded from our non-GAAP financial measures
because we believe that such exclusion facilitates comparisons to our historical
operating results and to the results of other companies in the same industry,
which have their own unique acquisition histories.
Acquisition-related fees. In accordance with ASC 805, Business Combinations,
acquisition-related fees including advisory, legal, accounting and other
professional fees are reported as expense in the periods in which the costs are
incurred and the services are received. Acquisition-related fees include legal,
travel, and other fees not expected to recur from our acquisitions.
Acquisition-related fees are excluded in the non-GAAP financial measures because
we believe that such exclusion facilitates comparisons to our historical
operating results and to the results of other companies in the same industry,
which have their own unique acquisition histories.
Contingent Consideration. In accordance with ASC 805, Business Combinations,
contingent consideration adjustments may result from changes in the preliminary
earnout calculation or changes in the forecasted projections. Contingent
consideration adjustments are excluded in the non-GAAP financial measures
because we believe that such exclusion facilitates comparisons to our historical
operating results and to the results of other companies in the same industry,
which have their own unique acquisition histories.
Taleo settlement and litigation-related fees. Litigation-related activity which
includes settlement proceeds and nonrecurring litigation fees, is excluded from
our non-GAAP financial measures due to its infrequent and/or unusual nature and
are not expected to recur. We believe that excluding these amounts provides
meaningful supplemental information regarding our operating results because
these non-GAAP financial measures facilitate the comparison of results for
future periods with results from past periods.
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Kenexa Corporation and Subsidiaries
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except for per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue and Gross Profit:
GAAP subscription revenue $ 64,190 $ 53,462 $ 181,739 $ 149,532
Deferred revenue associated with
acquisitions 1,329 1,525 5,485 6,809
Non-GAAP subscription revenue 65,519 54,987 187,224 156,341
Other revenue 26,558 22,241 73,095 55,164
Non-GAAP revenue $ 92,077 $ 77,228 $ 260,319 $ 211,505
GAAP cost of revenues $ 32,580 $ 29,693 $ 97,970 $ 79,905
Share-based compensation expense 62 69 249 187
Cost of revenue adjustment 62 69 249 187
Non-GAAP gross profit $ 59,559 $ 47,604 $ 162,598 $ 131,787
Expenses:
GAAP operating expenses $ 60,230 $ 44,660 $ 162,064 $ 125,778
Share-based compensation expense (2,298) (1,738) (6,461) (4,406)
Amortization of acquired
intangibles (5,783) (3,571) (16,999) (10,685)
Acquisition-related fees (4,686) - (4,959) (159)
BHI contingent consideration
adjustment - - 224 -
Taleo settlement - - - 3,000
Nonrecurring litigation charges - - - (1,416)
Total operating expense adjustment (12,767) (5,309) (28,195) (13,666)
Non-GAAP operating expenses $ 47,463 $ 39,351 $ 133,869 $ 112,112
Results:GAAP (loss) income from operations $ (2,062) $ 1,350 $
(5,200) $ (987)
Deferred revenue associated with
acquisitions 1,329 1,525 5,485 6,809
Cost of revenue adjustment 62 69 249 187
Operating expense adjustment 12,767 5,309 28,195 13,666Non-GAAP income from operations $ 12,096 $ 8,253 $
28,729 $ 19,675
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Results of Operations
The following table sets forth certain unaudited condensed consolidated
statements of operations data expressed as a percentage of total revenue for the
periods indicated. In our Comparison of the three and six months below, we have
included two types of tables: period over period changes in income statement
line items, and summaries of the key changes in expenses by natural category for
each expense line item. Amounts shown are in thousands, except percentages.
Period-to-period comparisons of our financial results are not necessarily
meaningful and you should not rely on them as an indication of future
performance.
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Condensed Consolidated Statement of
Operations Data: (unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Subscription 70.7% 70.6% 71.3% 73.1%
Other 29.3% 29.4% 28.7% 26.9%
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 35.9% 39.2% 38.4% 39.0%
Gross profit 64.1% 60.8% 61.6% 61.0%
Operating expenses:
Sales and marketing 22.6% 21.7% 22.8% 22.6%
General and administrative 22.4% 20.0% 19.2% 20.1%
Research and development 9.0% 6.5% 8.7% 6.9%
Depreciation and amortization 12.4% 10.9% 12.9% 11.8%
Total operating expenses 66.4% 59.1% 63.6% 61.4%
(Loss) income from operations -2.3% 1.7% -2.0% -0.4%
Interest (income) expense, net -0.3% 0.1% -0.3% -0.4%
(Loss) gain on change in fair
market value of investments, net 0.0% -0.1% 0.0% -0.2%
(Loss) gain before income taxes -2.6% 1.7% -2.3% -1.0%
Income tax (expense) benefit -2.1% -2.1% -1.0% -1.1%
Net loss -4.7% -0.4% -3.3% -2.1%
Loss (income) allocated to
noncontrolling interest 0.0% -0.4% 0.1% -0.2%
Accretion associated with variable
interest entity 0.0% -3.3% 0.0% -1.5%
Net loss allocable to common
shareholders' -4.7% -4.1% -3.2% -3.8%
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--------------------------------------------------------------------------------Comparison of the Three and Nine months ended September 30, 2012 and 2011
Revenues
For the three months ended September 30, For the nine months ended September 30,
2012 2011 Change Percent 2012 2011 Change Percent
Revenues:
Subscription $ 64,190 $ 53,462 $ 10,728 20.1 % $ 181,739 $ 149,532 $ 32,207 21.5 %
Other 26,558 22,241 4,317 19.4 % 73,095 55,164 17,931 32.5 %
Total revenues $ 90,748 $ 75,703 $ 15,045 19.9 % $ 254,834 $ 204,696 $ 50,138 24.5 %
Summary of changes in Revenues
Subscription revenue increased due to large customer wins, successful renewals
of existing customers, increased demand across our product and service offerings
and from the addition of customers through our acquisitions of Ashbourne in
August 2011, BHI in November 2011 and Outstart in February 2012. The increase in
other revenue is primarily due to increased success fees received from our
recruitment process outsourcing or "RPO" activity, which contributed $1.8
million and $13.1 million to the change for the three and nine months ended
September 30, 2012, respectively, compared to the prior year. To a lesser
extent, revenue from discrete professional services, which consist of consulting
and training services, also contributed to the increase in other revenue.
We expect our subscription-based and other revenues to continue to increase in
2012 due to the improved business environment for our products, content and
service, renewals by existing customers, sales to new customers and new sales of
our 2x platform™ and the addition of our learning module obtained with the
acquisition of OutStart.
Cost of Revenues
For the three months ended September 30, For the nine months ended September 30,
2012 2011 Change Percent 2012 2011 Change Percent
Cost of revenues $ 32,580 $ 29,693 $ 2,887 9.7 % $ 97,970 $ 79,905 $ 18,065 22.6 %
Summary of changes in Cost of Revenues
Change from 2011 to 2012
Three months ended Nine months ended
September 30, September 30,
Employee-related $ 3,387 $ 18,054
Third-party fees (46) (258)
Reimbursed expenses (447) 208 Share-based compensation (7) 61
$ 2,887 $ 18,065
Employee-related expenses increased as a result of an increase in compensation
costs due to hiring activity necessary to support our new and expanded
customers' demand for our solutions and services and merit pay raises and
incentive compensation, as well as increased headcount from our acquisitions of
Ashbourne in August 2011, BHI in November 2011 and OutStart in February 2012.
The decrease in third-party fees for the three months ended September 30, 2012,
was due to reduced non-billable travel and other expenses, job postings and
outside consultants as we replaced third party implementation consultants with
internal resources. The increase in share-based compensation expense for the
nine months ended September 30, 2012 resulting from the issuance of new
long-term incentive awards in the first two quarters of 2012 combined with an
overall increasing trend in our stock price in this period was off-set in part
by the full amortization for prior year's grants which contributed to the
overall decrease for the three months ended September 30, 2012. Overall, the
combined increased headcount and changes in the mix of other revenue versus
subscription revenue increased the cost to deliver our solutions in absolute
dollars but decreased as a percentage of revenues.
We expect cost of revenues to increase in absolute dollars for the remainder of
2012 over the prior year due to increased headcount from our acquisitions and
hiring to support increased revenues. We expect cost of revenues to continue to
decrease as a percentage of revenues over the course of 2012, compared to the
prior year.
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Operating Expenses
For the three months ended September 30, For the nine months ended September 30,
2012 2011 Change Percent 2012 2011 Change Percent
Sales and marketing $ 20,474 $ 16,390 $ 4,084 24.9 % $ 58,214 $ 46,353 $ 11,861 25.6 %
General and
administrative 20,361 15,114 5,247 34.7 % 48,961 41,081 7,880 19.2 %
Research and
development 8,148 4,912 3,236 65.9 % 22,126 14,176 7,950 56.1 %
Depreciation and
amortization 11,247 8,244 3,003 36.4 % 32,763 24,168 8,595 35.6 %
Total $ 60,230 $ 44,660 $ 15,570 34.9 % $ 162,064 $ 125,778 $ 36,286 28.8 %
Summary of changes in Sales and Marketing
Change from 2011 to 2012
Three months ended Nine months ended
September 30, September 30,
Employee-related $ 2,737 $ 10,014
Marketing 424 825 Share-based compensation 178 453
Various other expenses 745 569
$ 4,084 $ 11,861
Employee-related expenses increased as a result of an increase in compensation
costs due to additional hiring to expand our sales and marketing teams, merit
pay raises and incentive compensation due to increased sales, as well as
headcount from our acquisitions of Ashbourne in August 2011, BHI in November
2011 and OutStart in February 2012. Marketing expense increased as a result of
continued investment in our branding and marketing campaigns for all products
and timing of various marketing events, including the World Conference versus
the prior year. Share-based compensation expense increased as a result of
long-term incentive awards issued in the first two quarters of 2012 combined
with an overall increasing trend in our stock price in this period. The increase
in other expenses was due to increases in travel, bad debt reserve and
third-party consultant expenses.
Consistent with our past practice, we intend to continue to invest in sales and
marketing to pursue new customers and expand relationships with existing
customers at levels we deem appropriate given current economic conditions. We
expect sales and marketing expense to increase in absolute dollars for the
remainder of 2012 due to increased staff expenses and continued investment in
our branding and marketing campaigns, and remain constant as a percentage of
total revenue, compared to the prior year.
Summary of changes in General and Administrative
Change from 2011 to 2012
Three months ended Nine months ended
September 30, September 30,
Employee-related $ 640 $ 2,186 Share-based compensation 328 1,471
Professional fees 3,569 3,537
Software and licenses (97) 326
Rent and utility 494 (17)
Various other expenses 313 377
$ 5,247 $ 7,880
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For the three months ended September 30, 2012, employee-related expenses
increased as a result of an increase in compensation costs due to additional
hiring, as well as increased headcount from our acquisitions of Ashbourne in
August 2011, BHI in November 2011 and OutStart in February 2012. Share-based
compensation expense increased as a result of long-term incentive awards issued
in the first two quarters of 2012 combined with an overall increasing trend in
our stock price in this period. Professional fees primarily increased due to the
pending merger with IBM. Software and licenses expense decreased due to the full
amortization of prior years' licenses offset by additional maintenance support
and licenses needed to support the increased headcount of our general and
administrative teams both internally and from our acquisitions. The increase in
rent and utility expense resulted from the BHI and OutStart acquisitions and
increased telecommunication costs in connection with the pending IBM merger,
offset in part by the consolidation of offices in London and Waltham, MA. Other
expenses increased due to increases in travel expenses, subscriptions and other
taxes offset by decreases in repairs and maintenance expense, and other
corporate expenses.
For the nine month ended September 30, 2012, employee-related expenses increased
as a result of an increase in compensation costs due to additional hiring, merit
pay raises and incentive compensation offset by a $224 adjustment relating to
the BHI earnout, as well as increased headcount from our acquisitions of
Ashbourne in August 2011, BHI in November 2011 and OutStart in February 2012.
Share-based compensation expense increased as a result of long-term incentive
awards issued in the first two quarters of 2012 combined with an overall
increasing trend in our stock price in this period. Professional fees primarily
increased due to the pending merger with IBM. Software and licenses expense
increased due to additional maintenance support and licenses needed to support
the increased headcount of our general and administrative teams both internally
and from our acquisitions, offset in part from the full amortization of prior
years' licenses. The decrease in rent and utility expense resulted from the
consolidation of offices in London and Waltham, MA offset in part by increases
in rent and utility expense resulting from the BHI and OutStart acquisitions and
increased telecommunication costs in connection with the pending IBM merger.
Other expenses increased due to increases in travel expenses, subscriptions and
other taxes offset by decreases in repairs and maintenance expense, and other
corporate expenses.
We expect general and administrative expense to increase in absolute dollars for
the remainder of 2012 over the prior year due to continued investments in our
infrastructure and our recent acquisitions, while decreasing as a percentage of
total revenue, compared to the prior year.
Summary of changes in Research and Development
Change from 2011 to 2012
Three months ended Nine months ended
September 30, September 30,
Employee-related $ 2,739 $ 6,594
Professional services 432 1,236
Various other expenses 65 120
$ 3,236 $ 7,950
Employee-related expenses increased as a result of an increase in compensation
costs due to additional hiring to maintain our existing products, merit pay
raises and incentive compensation. In addition, costs to further develop and
improve feature enhancements not eligible for capitalization contributed to the
increase. Professional services increased as a result of additional resources to
aid in the development of our products. Other expenses increased due to
increases in other R&D costs and share-based compensation expense as a result of
long-term incentive awards issued in the first two quarters of 2012 combined
with an overall increasing trend in our stock price in this period.
As we continue to execute on our strategies, including continuing to develop our
2x platform™, we believe that research and development expenses will increase in
absolute dollars and remain constant as a percentage of total revenues for the
remainder of 2012, compared to the prior year.
39
--------------------------------------------------------------------------------Summary of changes in Depreciation and Amortization
Change from 2011 to 2012
Three months ended Nine months ended
September 30, September 30,
Depreciation expense $ 790 $ 2,280
Amortization expense 2,213 6,315
$ 3,003 $ 8,595
Depreciation expense increased due to increases in software development projects
qualifying for capitalization being placed into service during the period,
offset by decreases in computer and equipment and purchases in other software.
Amortization expense increased due to acquired intangibles from our acquisitions
of Salary.com in October 2010, Ashbourne in August 2011, BHI in November 2011
and OutStart in February 2012. As we continue to execute on our strategies
including our 2x platform™ and continuing to develop feature enhancements, we
believe that depreciation and amortization expenses will increase in absolute
dollars and remain constant as a percentage of total revenues for the remainder
of 2012, compared to the prior year.
Income Tax Expense
For the three months ended September 30, For the nine months ended September 30,
2012 2011 Change Percent 2012 2011 Change Percent
Income tax
expense $ 1,869 $ 1,602 $ 267 16.7 % $ 2,529 $ 2,172 $ 357 16.4 %
The increase in income tax expense for the three months ended September 30, 2012
was primarily due to an increase in income in certain foreign tax jurisdictions
before tax compared to the prior period. Our tax provision for interim periods
is determined using an estimate of our annual effective tax rate and the tax
effect of discrete tax events, if any, that occur during each interim period.
The 2012 effective tax rate is higher than the 35% statutory U.S. Federal rate
primarily due to losses in domestic and foreign jurisdictions where we recorded
a valuation allowance.
Changes to deferred income taxes are generally based on management's evaluation
of our positive and negative evidence bearing upon the realizability of its
deferred tax assets and the determination that it is more likely than not that
we will realize a portion of the benefits of federal and state tax assets. In
assessing the need for a valuation allowance, management considers all available
information within each taxing jurisdiction, including past operating results,
estimates of future taxable income and the feasibility of tax planning
strategies. Any changes in management's assessment of the amount of deferred tax
assets that may be realized will result in an adjustment to its valuation
allowance with a corresponding increase or decrease to income tax expense in the
period in which such determination is made.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been from cash generated
from operations, proceeds from equity offerings, and revolving credit
facilities. In October 2010, we entered into an amended credit agreement with
PNC Bank which provides a maximum amount of $60.0 million, comprised of a $35.0
million revolving facility, including a sublimit of up to $5.0 million for
letters of credit and a sublimit of up to $2.5 million for swing loans (the
"Revolving Facility"), and a $25.0 million term facility (the "Term Facility").
We may request to increase the maximum amount available under the Revolving
Facility to $50.0 million. The amended credit agreement will terminate, and all
borrowings will become due and payable, on October 19, 2013. On August 27, 2012
we paid-off all outstanding balances under the term and revolver facilities, and
expect to terminate such facilities in connection with the closing of the
Merger.
As of September 30, 2012, we had cash and cash equivalents of $57.0 million and
short-term investments of $6.8 million. In addition, we have $34.5 million
available for borrowing under the revolving line of credit. We believe that our
current cash and cash equivalents, investments, revolving credit facility and
projected cash from operations will be sufficient to meet our liquidity needs
for at least the next twelve months.
40
--------------------------------------------------------------------------------
Cash held in foreign denominated currencies was $21.1 million, or 37.0%, of our
total cash balance as of September 30, 2012. A ten percent change in the
exchange rate of the underlying currencies would have changed our cash balances
by approximately $2.1 million.
We calculate our quarterly days sales outstanding ("DSO") as ending net accounts
receivable divided by quarterly net revenues multiplied by 90. For the quarters
ended September 30, 2012 and 2011, our DSO was 64 and 65, respectively.
Summary of changes in cash and cash equivalents by activity
For the nine months ended September 30,
2012 2011 Change Percent
Cash provided by operations $ 23,136 $ 31,442 $ (8,306) (26.4) %
Cash used in investing
activities (10,334) (97,265) 86,931 89.4 %
Cash (used in) provided by
financing activities (23,321) 71,086 (94,407) (132.8) %
Operating Activities
For the nine months ended September 30,
Change from 2011
2012 2011 to 2012
Net loss $ (8,577) $ (4,275) $ (4,302)
Non-cash charges to net income
Depreciation and amortization 32,763 24,168 8,595
Share-based compensation expense 6,710 4,593 2,117
Deferred income tax benefit (1,705) (546) (1,159)
Other non-cash charges to net income 428 1,159 (731)
Changes in assets and liabilities
Accounts receivable (10,778) (10,580) (198)
Deferred revenue 3,475 11,037 (7,562)
Other changes in assets and liabilities 820 5,886 (5,066)
Net cash provided by operations $ 23,136 $ 31,442 $ (8,306)
Net cash provided by operating activities historically has been affected by
changes in operating assets and liabilities, and net income (loss) adjusted for
add-backs of non-cash expenses items such as depreciation and amortization, and
the expense associated with share-based awards. The increase in non-cash charges
to net income during 2012 compared to the same period in 2011 is primarily due
to the amortization of intangible assets associated with our acquisitions of
Salary.com in October 2010, Ashbourne in August 2011, BHI in November 2011 and
OutStart in February 2012 and depreciation expense due to software development
projects placed in service during the period offset by decreases in computer and
equipment and purchases in other software. Additionally, share-based
compensation expense resulting from long-term incentive awards issued in the
first two quarters of 2012 combined with an overall increasing trend in our
stock price in this period contributed to the increase over the prior period.
Changes in other non-cash charges are due primarily from bad debt recoveries
offset for add-backs relating to investments.
Changes in operating assets and liabilities resulted in a net decrease of $12.8
million to operating cash flows in the nine months ended September 30,
2012 compared to the same period in 2011. Changes in account receivable balances
fluctuate from period to period, depending on the timing of sales and billing
activity, cash collections, and changes to our allowance for doubtful accounts.
Changes in deferred revenue fluctuate from the mix of subscription and other
billings combined with the timing of billings and recognition of revenue
associated with these contracts. Other assets and liabilities reflect changes in
prepaid expenses, accounts payable, accrued compensation and other accrued
liabilities and fluctuate due to timing of payments and accrual of additional
liabilities.
41
--------------------------------------------------------------------------------
Investing Activities
For the nine months ended
September 30,
2012 2011
Quorum acquisition $ (1,135) $ -
JRA acquisition - (6,732)
Talentmine acquisition - (2,950)
Ashbourne acquisition - (1,838)
OutStart acquisition (41,101) -Capitalized software and purchases of computer hardware (22,174)
(17,999)
Purchases of available-for-sale securities (1,469) (86,076)
Sales of available-for-sale securities 55,545 18,330
Net cash used in investing activities $ (10,334) $ (97,265)
Net cash used in investing activities was $10.3 million and $97.3 million for
the nine months ended September 30, 2012 and 2011, respectively. Cash used in
investing activities in the nine months ended September 30, 2012 resulted
primarily from $22.2 million in capital expenditures and software development
costs, $41.1 million to complete the acquisition of OutStart and $1.1 million
was used for the payment of the Quorum earnout, partially offset by net sales of
available-for-sale securities of $54.1 million.
Financing Activities
Net cash used in financing activities for the nine months ended September 30,
2012 totaled $23.3 million and net cash provided by financing activities for the
nine months ended September 30, 2011 totaled $71.1 million. Net cash used in
financing activities for the nine months ended September 30, 2012 resulted
primarily from net proceeds of $7.1 million from stock option exercises and
sales of our common stock issued through our employee stock purchase plan. This
was offset by net repayments of our term and revolver loans of $30.0 million and
repayments of notes payable and capital leases totaling $0.4 million.
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