Description
Filed with the SEC from Sep 13 to Sep 19:
Kenexa (KNXA)
Gamco Investors (ticker: GBL) disclosed that it owns 1,420,088 shares (5.2%); it bought the full amount from Aug. 27 through Sept. 17 at prices in a range from $45.76 to $45.95 per share.
BUSINESS OVERVIEW
Company 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 24 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.
Customers
We market our solutions primarily to organizations with more than 2,000 employees. As of December 31, 2011, we had a global customer base of approximately 8,970 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 279 companies on the Fortune 500 list published in May 2011. Our customer base includes companies that we billed for services during the period ended December 31, 2011 and does not necessarily indicate an ongoing relationship with each such customer. Our top 80 customers contributed approximately 47.7%, 52.7% and 54.9%, of our total revenue for the years ended December 31, 2011, 2010 and 2009, respectively.
For the year ended December 31, 2011, we provided our talent acquisition and employee performance management solutions on a subscription basis to approximately 8,170 customers, with an average subscription term of two years. The remainder of our customers in 2011 engaged us to provide discrete professional services and may not engage us for future services once a project is completed. No single customer accounted for more than 10% of our revenue for the year ended December 31, 2011.
We derive revenue primarily from two sources, subscription fees for our solutions and fees for discrete professional services. Subscription revenue comprised approximately 72.2%, 78.8% and 84.9% of our total revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Our customers typically purchase multi-year subscriptions and 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. For each of the years ended December 31, 2011, 2010 and 2009, our customers renewed 86%, 88% and 88%, respectively, of the aggregate value of multi-year subscription contracts up for renewal.
Company History
We are a Pennsylvania corporation. We began our operations in 1987 under predecessor companies Insurance Services, Inc., or ISI, and International Holding Company, Inc., or IHC. In December 1999, we reorganized our corporate structure by merging ISI and IHC with and into Raymond Karsan Associates, Inc., or RKA, a Pennsylvania corporation and a wholly owned subsidiary of Raymond Karsan Holdings, Inc., or RKH, a Pennsylvania corporation. Each of RKA and RKH were newly created to consolidate the businesses of ISI and IHC. In April 2000, we changed our name to TalentPoint, Inc. and we changed the name of RKA to TalentPoint Technologies, Inc. In November 2000, we changed our name to Kenexa Corporation, or Kenexa, and we changed the name of TalentPoint Technologies, Inc. to Kenexa Technology, Inc., or Kenexa Technology. Currently, Kenexa transacts business primarily through Kenexa Technology and its wholly owned subsidiaries.
Our principal executive offices are located at 650 East Swedesford Road, Second Floor, Wayne, PA 19087.
Our telephone number is (610) 971-9171 . We maintain an Internet website at http://www.kenexa.com . We are not incorporating by reference into this Annual Report on Form 10-K any material from our website. The reference to our website is an inactive textual reference to the uniform resource locator (URL) and is for your reference only.
Recent Events
On January 11, 2011, we acquired substantially all of the assets and assumed selected liabilities of Talentmine, LLC (“Talentmine”), developer of a global performance-based talent assessment and development system with real-time analytics and reports to help employers improve service quality, employee retention and business results, based in Lincoln, Nebraska, for a purchase price of approximately $3.0 million in cash. We believe the acquisition of Talentmine will provide us with valuable assessment content, intellectual property and key talent.
On February 14, 2011, we entered into a share purchase agreement with JRA Technology Ltd. (“JRA”), a leading provider of employee climate/culture and related surveys based in Auckland, New Zealand, for a purchase price of approximately 9.0 million NZD or $6.9 million in cash. We believe the acquisition of JRA will provide us with valuable retention content by broadening our solution suite and increasing our geographic reach in the middle market.
On May 25, 2011, we completed a public offering of 3,000,000 shares of our common stock at a price to the public of $27.75 per share. We also sold an additional 450,000 shares of our common stock to cover over-allotments of shares. Our net proceeds from the offering, after payment of all offering expenses and commissions, aggregated approximately $91.4 million.
On June 28, 2011, we entered into a settlement agreement with Taleo Corporation resolving all outstanding litigations between the parties. As a result, all litigations between Taleo and us have been dismissed with prejudice. The settlement agreement also includes a license of certain Kenexa intellectual property to Taleo and a license of certain Taleo intellectual property to Kenexa. A $3.0 million net cash settlement to Kenexa for all intellectual property licenses and settlement of litigations was recorded in the second quarter as a reduction to legal expenses.
In June 2011, we entered into a settlement agreement with Dorno Investment Partners, LLC and on June 30, 2011, the Court dismissed the action with prejudice.
On August 2, 2011, we entered into a share purchase agreement with The Ashbourne Group (“Ashbourne”), a supplier of HR and occupational psychology services based in London, England, for a purchase price of approximately $1.8 million in cash. We believe the acquisition of Ashbourne will provide us with valuable assessment, learning and development products based on government competencies and performance standards.
In September 2011, we entered into a settlement agreement with the Genesys Parties under which Kenexa paid approximately $1.8 million in connection with an assumed liability from Salary.com. On October 5, 2011, the Court dismissed the action with prejudice.
On October 27, 2011, we announced the pending transfer of our common stock listing from the NASDAQ to the New York Stock Exchange ("NYSE"), which became effective on November 9, 2011, when our Common Stock was authorized for listing and trading on the NYSE under our current ticker symbol "KNXA."
On November 14, 2011, we entered into a share purchase agreement with Batrus & Hollweg, L.C. (“BHI”), a provider of talent management solutions, particularly in the hospitality sector based in Frisco, Texas, for a purchase price of approximately $17.2 million, including cash and contingent consideration. At the date of acquisition, we accrued $5.1 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.
On February 6, 2012, we acquired substantially all of the outstanding capital stock of OutStart, Inc. (“OutStart”), a leading provider of SaaS e-learning solutions and services, based in Boston, Massachusetts, for a purchase price of approximately $46.1 million, including 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.
Customer Support
We believe that superior customer support is critical to our customers. Our Global Support Center assists our customers by answering questions and troubleshooting issues involving our solutions. Customer support is available 24 hours a day, 7 days a week by telephone and Internet from a member of our Global Support Center. Members of our customer support team receive comprehensive training and orientation to ensure that our customers receive high-quality support and service. When an issue is reported to us, our customer support personnel follow a clearly defined escalation process to ensure that mission-critical issues are resolved to the satisfaction of the customer.
We utilize our talent acquisition and employee performance management solutions to recruit and manage our customer support personnel. We believe that applying these solutions to our customer service department has resulted in a customer support group with superior skills, competencies and aptitude for customer service. As of December 31, 2011, our customer delivery and support group, including our Global Support Center, consisted of 1,637 employees. The majority of our customer support groups reside in the following locations: Massachusetts, Nebraska, Pennsylvania, Texas, Argentina, China, England, Germany, India, and Poland.
Employees
As of December 31, 2011, we had 2,744 employees, consisting of 389 employees in sales and marketing, 477 employees in development, 1,637 employees in delivery and support of our solutions and 241 employees in general and administrative positions. As of December 31, 2010, we had 1,963 employees, consisting of 315 employees in sales and marketing, 429 employees in development, 1,043 employees in delivery of our solutions and 176 employees in general and administrative positions. As of December 31, 2009, we had 1,459 employees, consisting of 243 employees in sales and marketing, 291 employees in development, 776 employees in delivery of our solutions and 149 employees in general and administrative positions. None of our employees are represented by a union. We consider our relationship with our employees to be good and have not experienced any interruptions of our operations as a result of labor disagreements.
Industry Overview
Talent acquisition is the sourcing, recruiting, screening, development and assessment of employees. Employee performance management is the systematic process by which an organization tracks, monitors and optimizes employee behavior and productivity, and evaluates performance through employee reviews, appraisals and business metrics.
Drivers of Demand for Talent Acquisition and Employee Performance Management Applications
According to the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce, the amount spent on U.S. labor in 2011 was approximately $6.6 trillion, or approximately 50.0% of the total U.S. gross domestic product. We believe that the drivers for human capital are affected by intense competition for qualified employees as a result of an aging workforce, declining tenure of employees, increased globalization and the growing service component of the U.S. economy.
Over the past two decades, many organizations have implemented software systems that systematize best practices and drive efficiency in most departments, including enterprise resource planning systems (“ERP”), customer relationship management systems and supply chain management systems. These software applications provide a wide array of benefits that both assist revenue growth and eliminate expenses. Based on our experience, however, we believe that the HR departments of many of these organizations have only implemented HR information systems, which track basic employee information for payroll and benefits purposes, or rudimentary applicant tracking systems. Although these systems provide some level of automation, they do little to increase the effectiveness of talent acquisition and employee performance management programs. We believe that few organizations have systematized best practices for talent acquisition and employee performance management or have implemented software applications to support these processes and provide HR professionals with critical analytics and metrics.
Our experience indicates that, presently, many organizations' talent acquisition functions consist of manual, paper-based processes, category software solutions addressing limited aspects of the talent acquisition equation, and ad hoc outsourcing and third-party or custom software applications with limited functionality. As a result, we believe that they suffer from the following shortcomings:
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Inefficiency . Many organizations rely on manual, paper-based processes and they cannot effectively manage the massive number of candidates presented by today's many recruiting resources, including unsolicited inquiries, internal referrals, career fairs, campus recruiting, Internet job boards and third-party referrals, among many others. As a result, they fail to identify high potential candidates or fail to process those candidates in a timely manner.
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Redundancy . Many organizations do not maintain easily searchable databases of processed candidates and they often conduct redundant searches. A candidate who did not meet the criteria for a certain position may meet the criteria for alternative or future positions. Without a centralized, automated, and easily searchable database, a candidate may be overlooked.
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Ineffectiveness . Organizations generally do not employ sophisticated screening and assessment mechanisms. As a result, most hiring decisions are at best loosely based on objective indicators of future success and fail to match high-potential candidates with roles or positions that leverage their unique abilities and experience. This lowers the probability that a new hire will succeed and negatively impacts employee productivity and satisfaction.
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Inconsistency . Many organizations screen applications and resumes based on rudimentary criteria and base hiring decisions primarily on subjective, ad hoc interviews. This process lacks consistency and objectivity. Furthermore, once hired, organizations need auditable processes to ensure that employees are on-boarded consistently, in compliance with government regulations and company procedures. Inconsistencies in these processes not only negatively impact the effectiveness of recruiting programs and subsequent employee success, but also may expose organizations to regulatory liability.
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High cost and inflexibility . As a result of their inflexibility and absence of a variable cost structure, organizations must either maintain larger HR departments or purchase a greater supply of third-party services in order to accomplish their recruiting and on-boarding goals, significantly increasing the costs of their talent acquisition programs.
Similarly, we believe that many organizations have neither automated nor applied best practices to employee performance management. In our experience, most organizations’ employee performance management processes consist of annual performance reviews and informal mentoring programs. We believe that effective employee performance management starts from the moment an offer of employment is made and requires a consistent, systematized process that identifies employee strengths, weaknesses and issues in a timely manner, continually aligns employee goals with the evolving goals of the organization, monitors opportunities for internal advancement and enables management to analyze employee data over time to optimize development. We believe that the absence of effective employee performance management systems and processes has the following negative implications:
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Failure to retain and develop top performers . The absence of systems and processes to ensure the fulfillment, motivation and internal mobility of key employees negatively impacts an organization's ability to retain and develop its top performing employees. Management may not have the opportunity to rectify problems with valued employees before they depart from the organization without a system and processes to highlight these issues. Reducing employee turnover can have a material, positive impact on an organization’s expenses and bottom line. Increasing employee engagement can have a material impact on the top line.
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Failure to optimize productivity . Maximum productivity is obtained when employees believe their roles match their evolving skill sets, find their jobs challenging and have confidence in their upward mobility. The absence of strong employee performance management systems contributes to the failure to accomplish these goals, and even if organizations succeed in retaining employees, they may not be able to maintain maximum productivity from their employees.
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Failure to remove poor performers . An employee who does not fulfill his or her role effectively may have a continuing negative impact on an organization. To the extent that a poor performer has managerial responsibility, this negative impact on the organization increases materially. Without systems that identify poor performers, organizations may not be able to address weaknesses within their human capital in a timely manner.
We believe that the failure to employ sophisticated systems in their talent acquisition and employee performance management processes inhibits organizations from leveraging valuable data generated through these functions. This can negatively impact organizations in several ways, including the failure both to identify overall trends that could improve the efficiency and effectiveness of its processes and to quickly identify problems that could lead to employee turnover.
Our Solutions
We are a leading provider of integrated talent management solutions. Our solutions enable organizations to implement systematic talent acquisition and management practices including compensation strategies that ensure the efficient, effective and consistent hiring, on-boarding and development of qualified and talented individuals. Our solutions also provide employee performance management systems that help to ensure that organizations retain and optimize the performance of qualified individuals, identify employees who fail to perform, and identify successors for critical positions. In addition, our solutions help organizations manage learning and assessment opportunities and events to develop employees for both current and desired future jobs. Finally, our solutions enable customers to determine its workforce’s engagement level, and diagnose where changes in behavior (for individual employees, managers and senior leaders) or HR programs will improve organizational performance and business outcomes.
Our solutions are built around a suite of easily configurable software applications that automate and support leading talent management practices. We believe that by delivering our products via SaaS, we materially reduce the costs and risks associated with traditional enterprise software application implementations. We also believe that implementing feature-rich and scalable, highly configurable, talent acquisition and employee performance management solutions that meet organizations’ specific needs requires a combination of software, operational excellence, services and domain-specific knowledge and expertise. Accordingly, we complement our software applications with consulting services, outsourcing services, hosting operations, data security and proprietary content. Together, these components form solutions that enable our customers to improve the quality of their hiring programs, increase employee productivity and retention, design tailored compensation philosophies, enhance employee learning and development, increase employee engagement, and make their integrated talent management programs more cost-effective.
CEO BACKGROUND
Troy A. Kanter , 38, joined us in 1997 and has served as our President, Human Capital Management since 2003. From 1997 to 2003, Mr. Kanter served as our Executive Vice President—Sales and Business Development. From 1997 to 1999, he managed our HCM Consulting, Retention Services operations. From 1995 to 1997, Mr. Kanter was the president of Human Resources Innovations, Inc., a company he co-founded that provided employee survey research and consulting and which we acquired in 1997. From 1990 to 1994, Mr. Kanter was employed by The Gallup Organization, a provider of research, survey and HCM services, most recently serving as its vice president of client services. Mr. Kanter received a B.A. in Corporate Communications from Doane College.
Renee B. Booth , 57, has served since 1999 as the President of Leadership Solutions, Inc., a boutique human resources consulting firm specializing in leadership assessments selection, development and motivation. Ms. Booth received a B.A. in Psychology from the University of Maryland and a M.S. and Ph.D. in Industrial/Organizational Psychology from Pennsylvannia State University.
Elliot H. Clark , 44, joined us in 1991 and has served as a member of our board of directors and our Secretary and Treasurer since 1997 and as our Chief Operating Officer since 1999. From 1992 to 1999, Mr. Clark served as general manager of our talent acquisition division. Prior to his employment with us, Mr. Clark served as a sales manager for a regional HR recruiting and consulting firm. Mr. Clark received a B.S. in Economics from the Wharton School of Finance and Commerce of the University of Pennsylvania with a major in human resources. Mr. Clark's legal name is Eliot H. Chack, but he uses for business purposes and is known in the industry as Elliot H. Clark.
Joseph A. Konen , 58, has been a member of our board of directors since 2000. Mr. Konen, who is now retired, has held a number of executive positions, most recently serving from 1994 to 1999 as the president and chief operating officer of Ameritrade Holding Corporation, a provider of brokerage services. Mr. Konen received a B.A. in Economics and an M.B.A. in Finance and Management from Indiana University at Bloomington.
Richard J. Pinola , 60, was elected to our board of directors in 2005. From 1992 to 2004, Mr. Pinola served as the chairman and chief executive officer of Right Management Consultants, a human resources consulting firm. From 1989 to 1991, Mr. Pinola served as the chief operating officer of Penn Mutual Life Insurance Company. Mr. Pinola also serves as a director of K-Tron International, Inc., a manufacturer of material handling equipment and systems, Bankrate, Inc., an Internet financial services provider, and Nobel Learning Communities, Inc., a for-profit provider of education and educational services. Mr. Pinola received a B.S. in Accounting from King's College.
Barry M. Abelson , 59, has been a member of our board of directors since 2000. Since 1992, Mr. Abelson has been a partner in the law firm of Pepper Hamilton LLP, which has provided legal services to us since 1997. Mr. Abelson received an A.B. in Sociology from Dartmouth College and a J.D. from the University of Pennsylvania Law School.
Nooruddin (Rudy) S. Karsan , 48, co-founded our predecessor company in 1987 and has served as the Chairman of our board of directors since 1997 and as our Chief Executive Officer since 1991. Prior to that, Mr. Karsan headed Marketing Actuarial for the Mercantile & General Insurance Company in Toronto, Canada. Mr. Karsan received a B Math in Actuarial Science from the University of Waterloo. Mr. Karsan holds the designation of Fellow of the Society of Actuaries.
John A. Nies , 37, has been a member of our board of directors since 2002. Mr. Nies has served as a principal of Sage River Partners, LLC, private equity investment firm, since January 2005. From 2002 to January 2005, Mr. Nies served as a principal of Maplegate Holdings, LLC, a private equity firm. From 2001 to 2002, Mr. Nies worked for Parthenon Capital, Inc., a private equity investment firm, most recently serving as managing director, operations, a position in which he was responsible for post-transaction performance of portfolio companies. From 1991 to 2001, Mr. Nies worked for The Parthenon Group, a management consulting firm. Mr. Nies received an A.B. in Economics from Dartmouth College and an M.B.A. from Harvard Business School.
Bill L. Erickson has served as the Vice Chairman of our board of directors since 1997. From 1997 to 2004, Mr. Erickson also served as our Executive Vice President. From 1995 to 1997, Mr. Erickson was chief executive officer of Human Resource Innovations, Inc., a provider of employee survey research and consulting services of which he co-founded and which we acquired in 1997. Prior to his tenure with Human Resources Innovations, Inc., Mr. Erickson was employed by The Gallup Organization, a provider of research, survey and HCM services, most recently serving as executive vice president of its management research division. Mr. Erickson received a B.A. in Psychology from the University of Nebraska at Lincoln.
John C. Rutherford has served as a member of our board of directors since 1999. Mr. Rutherford is a founder and Managing Partner of Parthenon Capital, Inc., a private equity investment firm formed in 1998 and an affiliate of two of our shareholders, Parthenon Investors, L.P. and PCIP Investors. Mr. Rutherford is also a co-founder and former Chairman of The Parthenon Group, a strategic advisory consulting and investment firm. Prior to founding The Parthenon Group in 1991, Mr. Rutherford served as a Director of Bain & Company. He has over 25 years experience as a management consultant and private equity investor. Mr. Rutherford received a B.E. from the University of Canterbury, an M.S. in Computer Science from the University of Connecticut and an M.B.A. from Harvard Business School. Mr. Rutherford currently serves as a member of our board of directors as a representative, and is an affiliate, of Parthenon Investors, L.P. and PCIP Investors. See "Certain Relationships and Related Party Transactions."
Director Compensation
We pay each member of our board of directors, other than those who are our employees or employees or partners of our affiliates, an annual retainer of $15,000 for service on our board of directors. The chair of each of our compensation committee and our nominating and corporate governance committee receives an additional annual fee of $2,500, while each other member of those committees receives an annual fee of $1,250 for each committee upon which the member serves. In addition, the chair of our audit committee receives an additional annual fee of $5,000 and each other member of our audit committee receives an additional annual fee of $2,500.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 24 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. For the years ended December 31, 2011 and 2010, subscription revenue represented approximately 72.2% and 78.8% of our total revenue, respectively. Our customers typically purchase multi-year subscriptions. During the years ended December 31, 2011 and 2010, our customers renewed approximately 86% and 88%, respectively, of the aggregate value of multi-year subscriptions for our on-demand talent acquisition and performance management solution contracts subject to renewal. 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 market our solutions primarily to organizations with more than 2,000 employees. As of December 31, 2011, we had a global customer base of approximately 8,970 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 279 companies on the Fortune 500 list published in May 2011. Our customer base includes companies that we billed for services during the year ended December 31, 2011 and does not necessarily indicate an ongoing relationship with each such customer. Our top 80 customers contributed approximately $134.9 million and $103.5 million, or 47.7%, and 52.7%, of our total revenue for the years ended December 31, 2011 and 2010, respectively.
Background
We commenced operations in 1987 as a provider of recruiting services to a wide variety of industries. In 1993, we offered our first automated talent acquisition system and by 1997 we had expanded our business to provide employee research, employee performance management technology and consulting services. In late 1997, responding to a growing demand from our customers, we began to provide comprehensive human capital management services integrated with on-demand software. Between 1994 and 1998, we acquired 15 businesses that collectively enabled us to offer comprehensive Human Capital Management (“HCM”) services integrated with on-demand technology.
Recent Events
On January 11, 2011, we acquired substantially all of the assets and assumed selected liabilities of Talentmine, LLC (“Talentmine”), developer of a global performance-based talent assessment and development system with real-time analytics and reports to help employers improve service quality, employee retention and business results, based in Lincoln, Nebraska, for a purchase price of approximately $3.0 million in cash. We believe the acquisition of Talentmine will provide us with valuable assessment content, intellectual property and key talent.
On February 14, 2011, we entered into a share purchase agreement with JRA Technology Ltd. (“JRA”), a leading provider of employee climate/culture and related surveys based in Auckland, New Zealand, for a purchase price of approximately 9.0 million NZD or $6.9 million in cash. We believe the acquisition of JRA will provide us with valuable retention content to broaden our solution suite and increasing our geographic reach in the middle market.
On May 25, 2011, we completed a public offering of 3,000,000 shares of our common stock at a price to the public of $27.75 per share. We also sold an additional 450,000 shares of our common stock to cover over-allotments of shares. Our net proceeds from the offering, after payment of all offering expenses and commissions, aggregated approximately $91.4 million.
On June 28, 2011, we entered into a settlement agreement with Taleo Corporation resolving all outstanding litigations between the parties. As a result, all litigation between Taleo and us has been dismissed with prejudice. The settlement agreement also includes a license of certain Kenexa intellectual property to Taleo and a license of certain Taleo intellectual property to Kenexa. A $3.0 million net cash settlement in favor of Kenexa for all intellectual property licenses and settlement of litigations was recorded in the second quarter as a reduction to legal expenses.
In June 2011, we entered into a settlement agreement with Dorno Investment Partners, LLC and on June 30, 2011, the Court dismissed the action with prejudice.
On August 2, 2011, we entered into a share purchase agreement with The Ashbourne Group (“Ashbourne”), a supplier of HR and occupational psychology services based in London, England, for a purchase price of approximately $1.8 million in cash. We believe the acquisition of Ashbourne will provide us with valuable assessment, learning and development products based on government competencies and performance standards.
In September 2011, we entered into a settlement agreement with the Genesys Parties whereby Kenexa paid approximately $1.8 million in connection with an assumed liability from Salary.com. On October 5, 2011, the Court dismissed the action with prejudice.
On October 27, 2011, we announced the pending transfer of our common stock listing from the NASDAQ to the New York Stock Exchange ("NYSE"), and on November 9, 2011, our Common Stock was authorized for listing and began trading on the NYSE under its current ticker symbol "KNXA."
On November 14, 2011, we entered into a share purchase agreement with Batrus & Hollweg, L.C. (“BHI”), a provider of talent management solutions, particularly in the hospitality sector based in Frisco, Texas, for a purchase price of approximately $17.2 million, including cash and contingent consideration. At the date of acquisition, we accrued $5.1 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.
On February 6, 2012, we acquired substantially all of the outstanding capital stock of OutStart, Inc. (“OutStart”), a leading provider of SaaS e-learning solutions and services, based in Boston, Massachusetts, for a purchase price of approximately $46.1 million, including 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.
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 subscription 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 with access to such applications. Accordingly, subscription fees are generally greater for larger organizations and for those that subscribe for 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.
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 December 31, 2011, deferred revenue increased by $12.7 million or 16.8% to $88.8 million from $76.1 million at December 31, 2010. The increase in deferred revenue is a result of the increase in bookings and billings for our products, content and services and an increase in sales of multiple arrangements.
For the years ended December 31, 2011 and 2010, our customers renewed approximately 86% and 88%, respectively, of the aggregate value of multi-year subscriptions for our on-demand talent acquisition and performance management solution contracts up for renewal for each of those periods. We expect the overall renewal rate to improve to our historical renewal rate in the 90% range that we regularly achieved during pre-recessionary periods.
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, as described in greater detail below under “Critical Accounting Policies and Estimates.”
Revenue by geographic region
For the year ended December 31, 2011, approximately 73.5% of our total revenue was derived from sales in the United States. Foreign revenue that we generated from customers in the United Kingdom, Germany, China and Canada represented approximately 8.8%, 2.0%, 3.3% and 2.6% of our total revenue, respectively. Revenue from other countries amounted to an aggregate of 9.8% of our total revenue. Other than the countries listed, no other country represented more than 2.0% of our total revenue for the year ended December 31, 2011. For the year ended December 31, 2011, the percentage of revenue derived from sales in the United States was relatively flat 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, and we recognize revenue from our subscription agreements ratably over the terms of the agreements.
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 interface designers, architects, product managers, project managers, technical sales engineers 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 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® with increased functionality, module touch points, and performance. Future modules on the 2x platform include Kenexa 2x Assess™, Kenexa 2x Compensation™, and others as well as a leveraged use of Kenexa’s rich set of content. 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.
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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 24 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 six months ended June 30, 2012, subscription revenue represented approximately 72% of our total revenue. Our customers typically purchase multi-year subscriptions and during the three and six months ended June 30, 2012 our customers renewed approximately 88% 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 six months ended June 30, 2012 and does not necessarily indicate an ongoing relationship with each such customer. Our top 80 customers contributed approximately $41.2 million and $78.5 million, or approximately 48% of our total revenue for the three and six months ended June 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.
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.
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 six months ended June 30, 2012 our customers renewed approximately 88% 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 June 30, 2012, deferred revenue increased by $7.6 million, or 8.6%, to $96.4 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.
Revenue by geographic region
For the six months ended June 30, 2012, approximately 72.4% 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 9.7%, 3.4% and 2.5% of our total revenue, respectively. Revenue from other countries amounted to an aggregate of 12.0% of our total revenue. Other than the countries listed, no other country represented more than 2.0% of our total revenue for the six months ended June 30, 2012. The percentage of revenue derived from sales in the United States for the six months ended June 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® with increased functionality, module touch points, and performance. Newly introduced modules on the 2x platform include Kenexa 2x Assess™ and Kenexa 2x Compensation™. 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.
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 six months ended June 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.
CONF CALL
Don Volk - CFO
Thank you, Doug. 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 fourth quarter and full year 2009 results and provide guidance for the first 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 will now turn the call over to Rudy Karsan. Rudy?
Rudy Karsan - CEO
Thanks, Don and thanks to all of you for joining us on the call to review our fourth quarter results, which were consistent with our expectations and further reinforced our view that Kenexa's financial performance has reached a point of stability.
Our subscription revenue is consistent with levels throughout 2009, deferred revenue growth was strong and the company continued to generate solid cash flows from operations. We believe that Kenexa has weathered the worst of the economic storm and entering 2010, we believe the company is positioned to return to year-over-year growth.
From a longer-term perspective, we believe that Kenexa's market position differentiated end-to-end value proposition and business model will enable Kenexa to return to even higher growth levels combined with a return to operating margin levels previously delivered.
Taking a look at our results for the quarter, total revenue came in at $39.1 million, down sequentially from $40.3 million and within the general range of $39 million to $40 million that Kenexa has delivered throughout 2009. Subscription revenue of $33.3 million was up slightly on a sequential basis and was also consistent with levels delivered throughout 2009.
Non-GAAP operating income was $3.3 million consistent with our guidance and down from last quarter, due primarily to the decrease in our other revenue. Deferred revenue was $50 million, an increase of $5.8 million sequentially and 29% on a year-over-year basis.
Finally, we generated approximately $13 million in cash flows from operations. From a high-level perspective, our view on the marketplace is largely similar to that we have shared on recent calls. We have seen a slight improvement in the sales environment each quarter, but from a general perspective the level of scrutiny on both IT and HR budgets remains high. There continues to be growing optimism that the economy is stabilizing with improvement expected during 2010, which is aligned with our expectations but current data points continue to be somewhat choppy.
As an example, on January 7th, the President of the St. Louis Federal Reserve Bank commented that the labor market in the U.S. is improving and the economy was close to the point when the unemployment rate would start to fall. The very next day a report came out saying the lack of confidence in the economic recovery led employers to cut 85,000 net jobs in December and that the underemployment rate, which includes discouragement in part-time workers, that would prefer full-time employment rose to 17.3% in December, as compared to 17.2% in November, which is just below the highest levels on record dating back to over 15 years.
More recently, the ASA staffing index suggests that the five-month winning streak for temp employment might not continue in January. The monthly fall in the ASA index is larger than any of the positive seasonal adjustments that have been recorded for temp employment since the CLS started publishing the series in 1991.
Last quarter, we discussed the fact that our Kenexa Research Institute performs a statistical analysis that results in what we call the employee confidence index, a metric that we have tracked for a couple of years now. We have found the employment confidence index to be highly correlated to multiple economic and business performance outcomes, including consumer confidence in GDP growth.
For the fourth quarter, the global employee index score of 98 was up slightly from 97.9 in the third quarter, while the index reported an increase of approximately 4 percentage points from the first quarter of 2009 to the fourth quarter.
In addition, the 12 largest economies reported an increase in Employee Confidence Index scores during the full year 2009 with the exception of Japan. We believe the trend line in Kenexa's Employee Confidence Index, including the most recent data points being slightly higher is a positive indicator for improved economic and organizational performance during 2010.
We believe the primary factor that will impact spending levels for HR software and particularly service is the unemployment rate, while optimism is growing related to the economy, the unemployment rate is not expected to stabilize until somewhat around the midpoint of 2010. As we have stated in the past, our view is that Kenexa will face headwinds until the unemployment rate stabilizes. Consistent with this view, we look to the first quarter, we believe, it is appropriate for us to maintain the stable quarterly revenue guidance range that we have targeted in recent quarters.
Our expectation of stability in our business in 2009 played out as expected as evidenced by the fact that our subscription revenue and total revenue in the fourth quarter of the year were just about comparable levels in the first quarter of the year. At the same time, the slight quarter-to-quarter improvement in the sales environment that we've witnessed is evidenced in part by the solid growth in our deferred revenue.
We expect this growth combined with further improvement in the sales environment, as the unemployment rate stabilizes to meet the growth in our quarterly revenue run rate over the course of 2010. This would also position Kenexa to return to full-year growth during 2000 as well with the potential for further accelerated revenue growth longer-term as HR departments have greater access to IT budget dollars to invest in strategic projects.
A couple of quarters ago, we announced, we were beginning to increase our investments in sales and marketing, which at the time included the re-branding of Kenexa to put further focus on our unique end-to-end HR solution value proposition. We plan to further increase our investments in sales and marketing to gain market share, as the spending environment is expected to improve during 2010.
We see a growing number of large global organizations evaluating vendors based and 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.
Within our end-to-end product suite, the area that has enjoyed growth throughout the economic downturn and where customer and industry analyst response continues to be overwhelmingly positive is our talent acquisition solutions and in particular our Kenexa Recruiter BrassRing or KRB offering, which is a global recruiting solution.
During the fourth quarter, we announced that Gartner positioned Kenexa in the leader's quadrant after e-Recruitment software vendor evaluation, which is based on the completeness of our vision in the talent acquisition segment of the market combined with our leading ability to execute.
KRB is a robust solution for global organization and it reaches top talent in 25 different languages and supports 27 dialects and locales. Customers are responding very favorably to our leading reporting capabilities, redesigned user interface and integrated hourly and high volume hiring capabilities.
We are winning head-to-head evaluations with the largest global organizations based on the strength of our technology and even more so when customers are taking a strategic view of talent management and evaluating vendors based on domain expertise, content, services, as well as software. During the fourth quarter, we added customers such as AOL, MasterCard, Dow Corning, Royal Bank of Scotland, Kaplan Learning, University of Pennsylvania Working School, and Carnegie Mellon.
In total, we added over 30 preferred partner customers during the fourth quarter, which was up from the over 20 level in recent quarters. Even more interesting than simply the number of preferred partner additions is the fact that a growing number of these are multi-element deals with over $100,000 in annual spend, while their business environment was challenging during 2009. We won more strategic deals with large global organizations than in any year in Kenexa's history, which is very encouraging from a long-term perspective.
You asked if our business faces the greatest headwinds, as a result of the challenging economy and jobs market is a services related component. We expect the consulting portion of our business to remain choppy during the first half of 2010 with improvement beginning in the second half of the year. Our customers continue to tell us that they plan on moving forward with our differentiated and high-value strategic services when the economic environment improves and they have greater access to resources.
The final component for our business that I will touch on is our Recruitment Process Outsourcing or RPO. During the fourth quarter, our RPO revenue came in at just under $9 million in revenue, which was down slightly from the third quarter but taken selectively represents approximately nine months of fairly stable performance. Feedback in the marketplace relative to our RPO offering remains to be positive. In fact, during the fourth quarter, Berson & Associates, a leading research and advisory firm in the talent management market, recognized Kenexa is not only widely recognized, as a leading talent management technology provider, but we also have a strong commitment to services.
As we look at our RPO business, it is important to keep in mind the manner in which RPO contracts are structured and were increasingly restructured during the depths of the economic downturn, while each contract is individually negotiated, these are typically multi-year contracts and the customers often elect to have the annual minimum spend decrease in each year of the contract. If this is the structure, it also means that there is a greater variable component in each subsequent year of the contract. We refer to this variable component as our success fees and these are based on the number of employees that are hired.
Our variable success fees have obviously been relatively low during the weak jobs market of the past couple of years, and we continue to have measured expectations for the first half of 2010, while we have already experienced the downside of the most cyclical nature of our RPO business, which is over 20% of our total revenue, we are encouraged that we have found a level of stability and we expect our RPO related revenues to rebound as the economy improves. The unemployment rate stabilizes and improved hiring drives increased success fees.
A common metric that we share which includes RPO, along with other consulting services and technology solutions is our PQ metric, which measures the average annual revenue contribution of our top 80 customers. This metric came in at over 1 million during the fourth quarter, which is consistent with recent quarters.
So, from a summary perspective, we faced the most challenging business environment in the history of the company during 2009. There are a number of positives to take from this year. We continue to deliver solid cash from operations, which is over 20% of the percentage of our revenue.
Our deferred revenue grew by 29% on a year-over-year basis. Our subscription revenue and total revenue is stable from start to finish. Our renewal rates improved from the 70% range at the start of the year to the 80% range exiting the year. We were successful in Kenexa's re-branding. Our technology solutions, particularly in the area of talent acquisition continued to grow and the strength of the market position was validated by industry analysts and numerous high profile wins. And our RPO business stabilized in the final nine months of the year and is positioned to benefit from an expected improvement in the economy and jobs market in the second half of 2010.
We expect consistent performance to start the New Year improving performance of 2010 plays out and we'll remain optimistic about Kenexa's position in the market and our business prospects from a 12-month to 18-month perspective.
With that, let me turn it over to Don to review our financials in more detail. Don?
Don Volk - CFO
Thanks, Rudy. Let me begin by reviewing our results for the fourth quarter, starting with the P&L. Total revenue for the fourth quarter was $39.1 million, consistent with our guidance of $38 million to $40 million. Subscription revenue was $33.3 million, a slight sequential increase and representing 85% of our fourth quarter total revenue.
Our services and other revenue came in at $5.7 million, down sequentially and representing the remaining 15% of our fourth 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 7723, consistent with the previous quarter. Movements in currency rates did not have a material impact on our geographic mix during the quarter. From a detailed perspective, RPO represented approximately $6 million of our subscription revenue and approximately $9 million of our total revenue in the fourth quarter, which is generally consistent with the third quarter.
Our clients typically purchase multi-year subscriptions with an average length of approximately two years. During the fourth quarter, overall renewal rates for our suite of solutions crossed the 80% level, which is an improvement from the over 70% level in previous quarters during 2009. We continue to expect renewal rates to improve to the 90% range from a long-term perspective, as the business environment improves.
Turning to profitability, we will be providing non-GAAP measures for each fourth quarter 2009 expense category, which exclude $1.3 million of share based compensation charges associated with FAS 123R and $1.3 million of amortization of acquired intangibles. All comparisons will be using the non-GAAP current period results.
Non-GAAP gross margin was 67.2% was flat on a year-over-year and sequential basis. From an operating expense perspective, total non-GAAP operating expenses of $23 million were essentially flat on a sequential basis and were down from $24 million in the year ago quarter. This led to non-GAAP income from operations of $3.3 million, consistent with our guidance and representing an 8.5% non-GAAP operating margin. As Rudy mentioned, the sequential decline in non-GAAP operating income was primarily related to the sequential decline in our other revenue, which is the variable component of our revenue. Non-GAAP EPS was $0.13, consistent with our guidance range for the quarter.
Turning to our results on a GAAP basis, the following were expense level determined in accordance with GAAP. Cost of revenue $12.9 million, sales and marketing $9.2 million, R&D $2.2 million and G&A $9.8 million. For the fourth quarter, GAAP income from operations is $788,000. Net income applicable to common shareholders is $294,000, resulting in GAAP net income per share of $0.01. 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 $58.8 million at December 31st, 2009, an increase from $50.2 million at the end of the prior quarter. Cash from operations were approximately $13 million during the fourth quarter, leading to full year cash from operations of $35.5 million.
As we have discussed in the past, cash from operations can vary on a quarter-to-quarter basis due to many timing factors. In addition to being on the positive side of some of this natural variability during the fourth quarter, there were several customers who elected to pay for more of their subscription up front due to calendar yearend activities on their part.
Accounts Receivable DSO were 62 days at the end of the quarter compared to 66 days at the end of last quarter and our deferred revenue at the end of the quarter was $50 million, up $5.8 million from the end of the third quarter and up 29% from the end of the fourth quarter of 2008.
And now, I'd like to turn to guidance, starting with our thoughts for the full year 2010. Assuming stabilization in the unemployment rate in the mid-part of the year and a slightly improved business environment in the second half of the year, we are currently expecting revenue to be in the range of $160 million to $168 million. From a profitability perspective, we are currently expecting full year 2010 non-GAAP operating income to be $14.5 million to $18.5 million. This would represent a non-GAAP operating margin of approximately 9% to 11%.
We are confident that our business will return to our target model of below 20% non-GAAP operating margins over time. However, we have previously shared that the path of expanding margins may not be comparable to the last time we achieved our target model. We are increasing investments in sales and marketing to gain market share, as the macro environment improves.
In addition, we expect our 2010 non-GAAP operating margin to be depressed by approximately 250 basis points, as a result of litigation expenses related to the patent lawsuit that we are pursuing. This is consistent with our expectations last quarter and we believe this course of action is in the best interest of Kenexa. Assuming an effective tax rate for reporting purposes of approximately 20% and approximately 23 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.52 to $0.66 for the full year 2010.
Turning to the first quarter of 2010, we are targeting revenue in the range of $38 million to $40 million, which is consistent with the quarterly revenue guidance range provided in recent quarters, as well as our commentary that we expect our business to be stable until the employment rate stabilizes.
In addition, due to the multi-element nature of many of our larger customer wins, we do not expect them to translate to recognized revenue until the mid-part of 2010. We are targeting non-GAAP operating income to be $2.2 million to $2.6 million in the first quarter. As compared to the fourth quarter of 2009, there is increased payroll related expense at the start of the New Year and as I just mentioned, we plan to make increased investments in sales and marketing.
As it relates to legal expenses, we expect Q1 legal expenses to be in line with the levels realized in the fourth quarter, which is consistent with our initial commentary on this topic. Assuming a 20% effective tax rate for reporting purposes and 23 million shares outstanding, we expect non-GAAP net income per diluted share to be $0.08 to $0.09 for the first quarter.
In summary, we are encouraged by the continued stability in our financial results combined with solid growth in our deferred revenue and strong cash flow performance. We believe Kenexa is well positioned to return to growth during 2010 and for enhance revenue growth and margin expansion from a long-term perspective and following improvement at the macro level.
We now like to turn it over to the operator to begin the Q&A session. Doug?
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Fund Letters
