Kenexa Announces Financial Results for Third Quarter 2012

Kenexa Announces Financial Results for Third Quarter 2012

WAYNE, Pa.--(BUSINESS WIRE)--Nov. 8, 2012--Kenexa (NYSE: KNXA), a global provider of business solutions for human resources, today announced operating results for the third quarter, ended September 30, 2012.

For the third quarter of 2012, Kenexa reported total GAAP revenue of $90.7 million. Non-GAAP revenue, which eliminates the GAAP adjustment to deferred revenue resulting from certain acquisitions, was $92.1 million for the third quarter of 2012, an increase of 19% compared to $77.2 million for the third quarter of 2011. Within total non-GAAP revenue, subscription revenue was $65.5 million for the third quarter of 2012, an increase of 19% compared with $55.0 million in the third quarter of 2011. Professional services and other revenue was $26.6 million for the third quarter of 2012, an increase of 20% compared to $22.2 million for the third quarter of 2011.

Non-GAAP income from operations, which excludes share-based compensation expense, amortization of acquired intangibles, the purchase accounting impact of deferred revenue and acquisition related fees, was $12.1 million for the three months ended September 30, 2012. This represented a 13% non-GAAP operating margin and an increase of 46% compared to non-GAAP income from operations of $8.3 million for the three months ended September 30, 2011.

Non-GAAP net income available to common shareholders, which excludes the items listed above and includes a tax adjustment on the non-GAAP items, was $9.5 million for the three months ended September 30, 2012, compared to $6.3 million for the three months ended September 30, 2011. Non-GAAP net income available to common shareholders was $0.33 per diluted share for the third quarter of 2012, an increase of 43% compared to $0.23 per diluted share for the third quarter of 2011.

Kenexa’s loss from operations for the three months ended September 30, 2012, determined in accordance with GAAP, was $2.1 million, compared to an income from operations of $1.4 million for the same period of 2011. GAAP net loss allocable to common shareholders was approximately $4.2 million, or ($0.15) per basic and diluted shares for the three months ended September 30, 2012, compared to net loss of ($3.1) million, or ($0.12) per basic and diluted share, in the same period of 2011.

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 investments of $63.9 million at September 30, 2012, compared to $89.7 million at the end of the prior quarter. The Company generated $4.2 million in cash from operations for the third quarter and used $6.6 million associated with capital expenditures and capitalized investments and $27.5 million to repay debt. Deferred revenue was $96.9 million at September 30, 2012, an increase of 11% from September 30, 2011.

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 contain, among other things, guidance as to future revenue and earnings, operations, expected benefits from acquisitions, 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 pendency and consummation of our proposed acquisition by IBM, as well as those risks 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. 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 judgment 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.

We have not provided a reconciliation of forward-looking non-GAAP financial measures to the directly comparable GAAP measures because, due primarily to variability and difficulty in making accurate forecasts and projections, not all of the information necessary for a quantitative reconciliation is available to us without unreasonable efforts.

Kenexa presents the following non-GAAP financial measures in this press release: non-GAAP revenue; non-GAAP income from operations; non-GAAP net income allocable to common shareholders’; non-GAAP gross profit; and non-GAAP net income per diluted share as described below.

The Company’s non-GAAP financial measures reflect the following adjustments to GAAP financial measures:

Non-GAAP revenue. Non-GAAP revenue consists of GAAP revenue and the effect of the write down of the deferred revenue associated with purchase accounting for certain acquisitions. This effect is added back to GAAP revenue because the Company believes its inclusion provides a more accurate depiction of total revenue.

Share-based compensation expense. Share-based compensation expense consists of expenses for stock options and stock awards in accordance with ASC 718. Share-based compensation expenses are excluded in the Company’s non-GAAP financial measures because share-based compensation amounts are difficult to forecast. This is due in part to the magnitude of the charges which 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 this 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 which are amortized over the estimated useful lives of such assets. 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.

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.

Accretion of variable interest entity. In accordance with ASC 810, Variable Interest Entities, the Chinese joint venture is subject to periodic adjustment in its value. The accretion of the variable interest entity is excluded in the 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.

Non-GAAP tax. Non-GAAP estimated tax adjustment is applied to the non-GAAP net income for purposes of determining the non-GAAP income allocable to common shareholders. The Company believes including this adjustment is important to determine non-GAAP income allocable to common shareholders since it depicts a more meaningful measure of the Company’s non-GAAP results.