8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 4, 2008

Kenexa Corporation

(Exact Name of Registrant as Specified in Charter)

Pennsylvania	000-51358	23-3024013
(State or Other Jurisdiction of Incorporation	(Commission File Number)	(IRS Employer Identification No.)

650 East Swedesford Rd Wayne, PA	19087
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (610) 971-9171

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

The information in this Current Report is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

On November 3, 2008, Kenexa Corporation, a Pennsylvania corporation (the “Company”) announced its financial results for the third quarter ended September 30, 2008 and certain other information. A copy of Kenexa’s press release and transcript announcing these financial results and certain other information is attached hereto as Exhibit 99.1 and Exhibit 99.2.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

The following exhibits are furnished with this report on Form 8-K:

99.1	Press Release, entitled “Kenexa Announces Financial Results for Third Quarter 2008”, issued by the company on November 3, 2008.
99.2	Transcript used for September 30, 2008 Financial Results conference call on November 3, 2008.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	KENEXA CORPORATION
Date: November 4, 2008	By:	/s/    Donald F. Volk
		Donald F. Volk
		Chief Financial Officer
		November 4, 2008

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release, entitled “Kenexa Announces Financial Results for Third-Quarter 2008”, issued by the company on November 3, 2008.
99.2	Transcript used for September 30, 2008 Financial Results conference call on November 3, 2008.

EX-99.1

Exhibit 99.1

Kenexa Announces Financial Results for Third Quarter 2008

WAYNE, Pa. – November 3, 2008 – Kenexa (Nasdaq: KNXA), a global provider of talent acquisition and retention solutions, today announced its operating results for the third quarter ended September 30, 2008.

For the third quarter of 2008, Kenexa reported total revenue of $54.0 million, representing an increase of 15% over the $46.8 million reported for the third quarter of 2007. Subscription revenue was $43.0 million for the third quarter of 2008, an increase of 13% compared to the third quarter of 2007, while professional services and other revenue was $11.0 million for the third quarter of 2008, an increase of 28% over the same period of 2007.

Rudy Karsan, Chief Executive Officer of Kenexa, stated, “Our third quarter results were consistent with our revised guidance issued in early September. However, over the course of the last several weeks of the quarter, the business environment deteriorated further and caused customers to pause as they evaluated how the changing economic climate would impact their business.”

Karsan added, “We have long stated that that we would do all that was possible and appropriate to protect the profitability of the company during the most challenging times. To that end we have taken action to reduce our cost structure in an effort to continue delivering solid profitability and cash flow for our shareholders. At the same time, we are positioning the Company to re-accelerate revenue growth when the economic environment improves. We believe Kenexa is well positioned to not only weather the short-term challenges imposed by current economic conditions, but also to continue building on our strong market position as a result of our differentiated value proposition, expanding suite of solutions, large global footprint and industry leading domain expertise.”

Kenexa’s income from operations, determined in accordance with generally accepted accounting principles (GAAP), was $7.5 million for the three months ended September 30, 2008, compared with $7.7 million for the corresponding period of 2007. GAAP net income was $5.4 million or $0.24 per diluted share for the quarter, compared to $7.1 million or $0.27 per diluted share for the same period of 2007.

Non-GAAP income from operations, which excludes stock-based compensation expense and amortization of intangibles associated with our acquisitions, was $10.3 million for the three months ended September 30, 2008, representing a 19% non-GAAP operating margin and an increase compared to $10.0 million in the year ago period. Non-GAAP net income was $8.2 million, or $0.36 per diluted share, for the quarter ended September 30, 2008, an increase from $0.33 in the year ago period. Results for the third quarter include a charge of approximately $100,000 related to the relocation of Kenexa’s office in India.

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

Kenexa had cash, cash equivalents and short and long-term investments of $43.9 million at September 30, 2008, a decrease from $49.3 million at the end of the prior quarter. The decrease was due to approximately $8 million used to pay contingent consideration related to previous acquisitions. The Company generated $8.7 million in positive cash from operations during the third quarter, and deferred revenue ended the quarter at $37.0 million, as compared to $38.7 million at the end of the second quarter 2008.

Other Third Quarter and Recent Business Highlights

• More than “40” “preferred partner” customers were added during the quarter (defined as customers that spend more than $50,000 annually).

• The average annual revenue from the Company’s top 80 customers was greater than $1.4 million, consistent with the level at the end of the prior quarter.

• Announced that Kenexa has been awarded one of the Human Resource Executive^® magazine’s 2008 Top HR Product of the Year Awards for its industry-leading product, SimSJT™: Customer Service.

• Announced the release of a learning management system, Kenexa Learning Management (KLM), which further expands Kenexa’s global talent management offerings and enables customers to rely on the company as a single source of recruiting, onboarding, assessment, learning, performance, career development, succession planning and employee lifecycle survey solutions.

Business Outlook

Based on information as of today, November 3, 2008, the Company is issuing guidance for the fourth quarter and full year 2008 as follows:

Fourth Quarter 2008: The Company expects revenue to be $45.0 million to $47.0 million, non-GAAP operating income to be $6.3 million to $7.0 million. Assuming a 22% effective tax rate for reporting purposes and 22.6 million shares outstanding, Kenexa expects its non-GAAP net income per diluted share to be $0.22 to $0.25.

Full Year 2008: The Company expects total revenue to be $203.6 million to $205.6 million, non-GAAP operating income to be $36.6 million to $37.3 million. Assuming a 22% effective tax rate and 22.9 million shares outstanding, Kenexa expects its non-GAAP diluted earnings per share to be $1.29 to $1.32. Full year 2008 results include a non-recurring expense associated with the opening of a new office location in India in the first quarter that is being recognized over 2008.

Fourth quarter and full year 2008 non-GAAP guidance excludes the impact of restructuring charges associated with a 12% reduction in workforce. The Company currently estimates the related restructuring charge will be in the range of $2.0 million to $2.5 million, which is expected to be recognized during the fourth quarter of 2008.

Conference Call Information

Kenexa will host a conference call today, November 3, 2008, at 5:00 pm (Eastern Time) to discuss the Company’s financial results. To access this call, dial 888-663-2241 (domestic) or 913-312-0949 (international). A replay of this conference call will be available through November 10, 2008, at 888-203-1112 (domestic) or 719-457-0820 (international). The replay passcode is 8766493. A live webcast of this conference call will be available on the “Investor Relations” page of the Company’s Web site, (www.kenexa.com) and a replay will be archived on the Web site as well.

Forward-Looking Statements

This press release includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained in this press release that are not historical facts and statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” or words of similar meaning. These statements may 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 those set forth under the caption “Risk Factors” in Kenexa’s most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission and as revised or supplemented by Kenexa’s quarterly reports on Form 10-Q. Actual results may differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors, Kenexa’s ability to implement business and acquisition strategies or to complete or integrate acquisitions. Kenexa does not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures. Kenexa believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Kenexa’s financial condition and results of operations. The Company’s management uses these non-GAAP results to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the Company’s Board of Directors. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with other companies in the Company’s industry, many of which present similar non-GAAP financial measures to investors.

Management of the Company does not consider such non-GAAP measures in isolation or as an alternative to such measures determined in accordance with GAAP. The principal limitation of such non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures.

In order to compensate for these limitations, management of the Company presents its non-GAAP financial measures in connection with its GAAP results. Kenexa urges investors and potential investors in the Company’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the Company’s business.

Kenexa presents the following non-GAAP financial measures in this press release: non-GAAP income from operations before income taxes and interest income or expense; non-GAAP net income; non-GAAP sales and marketing expense; non-GAAP general and administrative expense; non-GAAP research and development expense; non-GAAP net income per diluted earnings per share; and non-GAAP effective tax as described below. The Company’s non-GAAP financial measures exclude stock-based compensation and amortization of acquired intangible assets related to the Company’s acquisitions.

Stock-based compensation. Stock-based compensation consists of expenses for stock options and stock awards that the Company began recording in accordance with SFAS 123(R) during the first quarter of 2006. Stock-based compensation was $1.3 million for the three months ended September 30, 2008 and $1.2 million for the three months ended September 30, 2007. Stock-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 over the estimated useful lives of such assets. Amortization of acquired intangible assets was $1.5 million for the three months ended September 30, 2008, and $1.0 million for the three months ended September 30, 2007, respectively. 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.

Research and development (“R&D”) credits and the related consulting fees incurred to identify those credits. R&D credits relate to R&D activities performed from 2003 to 2005, and reduce the Company’s tax expense. These tax credits totaling $0.8 million were claimed in the Company’s third quarter tax filing and are reflected in the Company’s September 30, 2007 financial statements. The R&D tax credit is excluded from the Company’s non-GAAP financial measures in the current quarter because of the one-time nature of the look-back adjustment. The related consulting fees totaling $0.1 million, incurred to identify the R&D tax credits were also excluded from the Company’s non-GAAP financial measures in the current quarter for the same reason cited above.

Each of non-GAAP sales and marketing expense, non-GAAP general and administrative expense, non-GAAP research and development expense, and estimated non-GAAP effective tax rate are each components necessary to calculate non-GAAP income from operations before income taxes and interest income, non-GAAP net income from operations and non-GAAP diluted earnings per share and are calculated by adjusting the corresponding GAAP measure for the applicable period by the applicable portion of stock-based compensation and amortization of acquired intangible assets.

About Kenexa

Kenexa (NASDAQ:KNXA) is a global leader in building the world’s greatest workforces using a combination of software, employee research science and business process optimization. Kenexa’s global solutions include applicant tracking, onboarding, recruitment process outsourcing, employment branding, skills and behavioral assessments, structured interviews, performance management, multi-rater feedback surveys, employee engagement surveys and HR Analytics. Kenexa is headquartered in Wayne, PA. (outside Philadelphia). Additional information about Kenexa and its global products and services can be accessed at www.kenexa.com.

Note to Editors: Kenexa is a registered trademark of Kenexa Corporation. Other product or service names mentioned herein remain the property of their respective owners.

# # #

Contact

MEDIA CONTACT:
	Sarah Teten Kenexa (800) 391-9557 sarah.teten@kenexa.com	Jeanne Achille The Devon Group (732) 224-1000, ext. 11 jeanne@devonpr.com
INVESTOR CONTACT:
	Kori Doherty ICR (617) 956-6730 kdoherty@icrinc.com

Kenexa Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Revenue:
Subscription	$	43,031	$	38,233	$	125,855	$	109,929
Other Revenue		10,995		8,564		32,819		24,249
Total revenue		54,026		46,797		158,674		134,178
Cost of revenue		16,461		13,705		46,739		37,737
Gross profit		37,565		33,092		111,935		96,441
Operating expenses:
Sales and marketing		10,298		8,816		31,175		26,140
General and administrative		12,649		9,625		37,487		29,063
Research and development		3,756		4,717		12,605		13,337
Depreciation and amortization		3,337		2,269		8,766		5,175
Total operating expenses		30,040		25,427		90,033		73,715
Income from operations		7,525		7,665		21,902		22,726
Interest income		255		1,072		1,216		2,169
Income from operations before income taxes		7,780		8,737		23,118		24,895
Income tax expense		2,356		1,660		6,955		7,310
Net income	$	5,424	$	7,077	$	16,163	$	17,585
Basic net income per share	$	0.24	$	0.28	$	0.71	$	0.70
Weighted average shares used to compute net income per share - basic		22,551,225		25,455,504		22,852,499		24,948,592
Diluted net income per share	$	0.24	$	0.27	$	0.70	$	0.69
Weighted average shares used to compute net income per share - diluted		22,788,468		25,846,605		23,084,524		25,362,312

Kenexa Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30, 2008			December 31, 2007
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	19,498		$	38,032
Short-term investments		6,597			58,423
Accounts receivable, net of allowance for doubtful accounts of $1,791 and $761		37,439			31,893
Unbilled receivables		8,573			2,423
Income tax receivable		—			2,008
Deferred income taxes		3,432			2,399
Prepaid expenses and other current assets		4,030			3,356
Total current assets		79,569			138,534
Long-term investments		17,820			—
Property and equipment, net of accumulated depreciation		27,571			17,620
Software, net of accumulated amortization		3,157			1,557
Goodwill		191,104			173,502
Intangible assets, net of accumulated amortization		14,920			10,134
Deferred financing costs, net of accumulated amortization		439			663
Other assets		8,986			5,879
Total assets	$	343,566		$	347,889
Liabilities and Shareholders’ equity
Current liabilities
Accounts payable	$	7,259		$	5,812
Notes payable, current		40			49
Commissions payable		961			1,025
Accrued compensation and benefits		6,117			8,363
Other accrued liabilities		6,502			6,298
Deferred revenue		36,996			35,076
Capital lease obligations		187			140
Total current liabilities		58,062			56,763
Capital lease obligations, less current portion		121			94
Notes payable, less current portion		49			73
Deferred income taxes		8,006			3,246
Other noncurrent liabilities		74			65
Total liabilities		66,312			60,241
Commitments and Contingencies
Shareholders’ equity
Preferred stock, par value $0.01; 100,000 shares authorized; no shares issued or outstanding		—			—
Class A common stock, $0.01 par value; 100,000,000 shares authorized; 22,559,891 and 24,032,446 and shares issued, respectively		225			240
Additional paid-in capital		268,408			291,942
Accumulated other comprehensive (loss) income		(1,601	)		1,407
Retained earnings / Accumulated deficit		10,222			(5,941	)
Total shareholders’ equity		277,254			287,648
Total liabilities and shareholders’ equity	$	343,566		$	347,889

Non-GAAP income from operations and net income excludes stock-based compensation and amortization of intangibles:

	Three Months Ended September 30,
	2008			2007
	(unaudited)			(unaudited)
Non-GAAP income from operations reconciliation:
Income from operations	$	7,525		$	7,665
Add back:
Stock-based compensation expense		1,256			1,175
One time consulting fee related to R&D credit carryback		—			122
Amortization of intangibles associated with acquisitions		1,526			1,022
Non-GAAP income from operations	$	10,307		$	9,984
Non-GAAP income from operations as a percentage of revenue		19	%		21	%
Weighted average shares used to compute net income per share - basic		22,551,225			25,455,504
Dilutive effect of options and restricted stock units		237,243			391,101
Weighted average shares used to compute net income per share - diluted		22,788,468			25,846,605
Net income	$	5,424		$	7,077
Add back:
Stock-based compensation expense		1,256			1,175
One time consulting fee related to R&D credit carryback		—			122
Amortization of intangibles associated with acquisitions		1,526			1,022
Less: One time benefit of R&D carryback		—			(822	)
Non-GAAP net income	$	8,206		$	8,574
Non-GAAP net income per diluted share	$	0.36		$	0.33
Non-GAAP tax rate calculation
Income from operations after interest income and before income taxes		7,780			8,737
Add back:
Stock-based compensation expense		1,256			1,175
One time consulting fee related to R&D credit carryback		—			122
Amortization of intangibles associated with acquisitions		1,526			1,022
Non-GAAP Income from operations before income taxes		10,562			11,056
Income tax expense on operations		2,356			1,660
Plus one time tax benefit of R&D tax credit		—			822
Non-GAAP tax rate		22	%		23	%
Other Non-GAAP measures referenced on earnings call excludes stock based compensation:
Gross profit	$	37,565		$	33,092
Add: stock-based compensation expense		96			91
Non-GAAP gross profit	$	37,661		$	33,183
Sales and marketing	$	10,298		$	8,816
Less: stock-based compensation expense		(68	)		(326	)
Non-GAAP sales and marketing	$	10,230		$	8,490
General and administrative	$	12,649		$	9,625
Less: One time consulting fee related to R&D credit carryback		—			(122	)
Less: stock-based compensation expense		(985	)		(578	)
Non-GAAP general and administrative	$	11,664		$	8,925
Research and development	$	3,756		$	4,717
Less: stock-based compensation expense		(107	)		(180	)
Non-GAAP research and development	$	3,649		$	4,537

Kenexa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities
Net Income from operations	$	16,163		$	17,585
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,766			5,175
Non-cash interest expense		—			22
Share-based compensation expense		4,430			2,959
Excess tax benefits from share-based payment arrangements		(192	)		(1,353	)
Amortization of deferred financing costs		224			659
Bad debt expense		146			180
Deferred income taxes (benefit)		1,213			(942	)
Changes in assets and liabilities
Accounts and unbilled receivables		(2,558	)		(1,273	)
Prepaid expenses and other current assets		(462	)		7
Income taxes receivable					—
Other long-term assets		(2,659	)		(372	)
Accounts payable		584			403
Accrued compensation and other accrued liabilities		(2,424	)		(1,368	)
Commissions payable		(64	)		(457	)
Deferred revenue		1,919			1,888
Other liabilities		8			(112	)
Net cash provided by operations		25,094			23,001
Cash flows from investing activities
Purchases of property and equipment		(16,609	)		(7,360	)
Purchases of available-for-sale securities		(25,195	)		(81,737	)
Sales of available-for-sale securities		57,931			—
Acquisitions, net of cash acquired		(29,747	)		(11,406	)
Net cash deposited in escrow for acquisitions		(80	)		(1,610	)
Net cash used in investing activities		(13,700	)		(102,113	)
Cash flows from financing activities
Net repayments under line of credit agreement		—			(65,000	)
Repayments of notes payable		(33	)		(324	)
Proceeds from common stock issued through Employee Stock Purchase Plan		255			159
Repurchase of common shares		(29,842	)		—
Excess tax benefits from share-based payment arrangements		192			1,353
Net Proceeds from public offering		—			130,398
Deferred financing costs		—			(102	)
Net Proceeds from option exercises		366			1,555
Repayment of capital lease obligations		(174	)		(170	)
Net cash (used in) provided by financing activities		(29,236	)		67,869
Effect of exchange rate changes on cash and cash equivalents		(692	)		882
Net decrease in cash and cash equivalents		(18,534	)		(10,361	)
Cash and cash equivalents at beginning of year		38,032			42,502
Cash and cash equivalents at end of period:	$	19,498		$	32,141
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	138		$	740
Income taxes	$	2,987		$	3,948
Noncash investing and financing activities
Capital Leases	$	260		$	19
Stock issuance for acquisition	$	—		$	3,824
Stock issuance for earn out	$	1,050		$	650

EX-99.2

Exhibit 99.2

November 3, 2008

Don Volk - Kenexa - CFO

Thank you, (operator). 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 third quarter 2008 results and provide guidance for the fourth quarter and full-year 2008, then we will 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 concern, 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 actual 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 express written consent of Kenexa. We may refer to certain non-GAAP financial measures of 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 with the press release issued earlier today. Our website is located at www.kenexa.com.

I will now turn the call over to Rudy Karsan. Rudy?

Rudy Karsan - Kenexa - CEO

Thanks, Don, and thanks to all of you for joining us on the call to review our third quarter results. Back on September 10^th, we revised our revenue and profitability outlook for the quarter and the full year 2008 based on two factors – the increasingly difficult macroeconomic environment and the strengthening of the US dollar, which negatively impacts our reported revenue given the fact that international operations have been the fastest growing component to our revenue.

Our results for the quarter were consistent with our revised outlook, however, the business environment deteriorated even worse than expected as turmoil in the financial markets during the last few weeks of the quarter created a situation in which customers paused to evaluate the status of the global economy and markets. While we see a segment of customers moving ahead with new deals and strategic projects, the level of scrutiny placed on any and all investments is at the highest level we have seen in our years being in business

We have said in the past that we believed the talent management market would face strong headwinds if the unemployment rate were to reach 5%. We have not only passed that level, but there are now fears that the unemployment rate may reach the upper single digit range in the quarters ahead.

Our business is clearly feeling the impact of the macroeconomic environment and the short-term slowdown in the talent management market. That said, our business has a solid foundation and we remain well positioned for the long-term. We have significant critical

Page 1 of 6

November 3, 2008

mass, a global presence, strong balance sheet and a business model that enables us to generate significant profitability and cash flow. We are staying true to a commitment we have reiterated many times – namely, that in the most difficult of times we would make the tough decisions to continue delivering profitability and cash flow to ensure the long-term health of Kenexa.

To that end, we recently took action to reduce our workforce by approximately 11 to 12% in an effort to align our cost structure for the lower revenue run rate we expect to see in the fourth quarter. This was a difficult decision, but we are in a difficult macroeconomic environment. Importantly, these cuts will not slow our product delivery commitments or development plans, and our service delivery and customer support efforts will continue to receive the highest level of commitment and focus as this is an area that is core to our company, our culture, our value and our competitive differentiation.

It is uncertain when the business environment will improve, but we are managing our business with the view that the macro environment will remain challenging throughout 2009. We will continue to monitor the health of the global economy in order to drive investment decisions across our business, as well as to take appropriate actions to balance delivering profitability and cash flow for our shareholders with ensuring that we are well positioned to drive long-term growth.

If we look at the details of our business, the core ATS piece is clearly holding in the best on a relative basis at the moment. More deals are making it through the funnel in this area, and customers are continuing to renew at a high rate. We estimate that the ATS related component to our business was up on a quarter-to-quarter basis during the third quarter. It is also worth pointing out that we believe our competitive win rates, while already high, have improved noticeably in this area over the course of the past several quarters. We believe the primary driver to this has been our investment in R&D, in particular relative to the significant enhancements of our BrassRing offering – which we believe is now clearly the best-of-breed offering for the high-end of the market place.

In the past we have shared with you that the RPO segment of our business, given the structure of the engagements, was most exposed to a slowdown in the global hiring and economic trends. To this point, more than 25% of our RPO clients have frozen hiring, and there is a chance that number could climb. This obviously reduces our revenue that is tied directly to the number of employees we hire.

To provide increased data on our RPO business, revenues in 2Q were approximately $18.5 million and we currently expect to do around $12 million in RPO revenue during the fourth quarter. As we have discussed before, our RPO revenue is not 100% services-based, it also includes software and content to a degree. We expect to continue providing our specific RPO revenue on a quarterly basis, at least as long as the economic environment remains challenging and uncertain.

It is also important to reiterate the key reasons that we remain firmly committed to this business, in spite of the short-term decline in revenue. First, our overall profitability is enhanced by our RPO business; second, it provides Kenexa with domain expertise that no other talent management software company has; third, in many cases, we are able to bundle our software and content into the overall relationship; and finally, this brings significant value to our customers.

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November 3, 2008

Kenexa appreciates that the revenue associated with this business can be more variable than a pure subscription model, however, we firmly believe the ultimate winners in the talent management space will deliver not only software and content, but there will be a requirement to have services expertise and an outsourced offering available to customers. As such, we will continue to invest in this business and aggressively pursue new customer relationships.

The final area of our business that I would point out relates to our content and surveys. In this case, we have seen a segment of customers delay implementations and projects to the extent possible, but on the other hand we continue to see a high level of interest in our solutions and we are signing up new customers – which is evidenced in part by the healthy overall number of new preferred partner customers that we added in the quarter..

Turning to some of the key metrics that we normally report. We added over 40 preferred partner customers during the quarter. This compares to over 50 preferred partner customers added last quarter, and over 40 preferred partner customers added during the year ago period. The sequential decline reflects the slowdown in decisions that I referred to at the beginning of my remarks, but it also shows that there are still a good number of deals moving forward.

On the talent acquisition side of our business, we closed business with customers such as CIBC, Immet Mining, Kone, GMAC, Kohl’s, Autotrader.com and Transglobal. As it relates to our employee retention solutions, we closed business with customers such as Health Plus Michigan, South Florida Water, Rich Products and Community Transit. Our growing customer base provides Kenexa with a growing opportunity to expand our relationships over time.

Our P-cubed metric, which measures the average annual revenue contribution of our top 80 customers, was over $1.4 million during the third quarter, which was consistent with last quarter’s level and up from $1.1 million during the year ago quarter. While we expect a flattening of this figure during the current environment, the value that Kenexa brings to customers is reflected by the fact our P-cubed metric has seen a CAGR of 40% over the course of the last 5 years. As Kenexa demonstrates value, we see customers expanding their commitment to Kenexa as their strategic talent management vendor.

When the economic environment does stabilize, and it will…..and improve, as it will…..we continue to believe that Kenexa will be a primary beneficiary. We believe that optimizing talent management processes are considered a top long-term strategic priority for a growing number of companies and while short-term uncertainty has created strong headwinds, long-term demand drivers are not going to change any time soon – aging of the workforce, declining tenure, globalization, skill shortages and employee mobility just to name a few.

While it is clear that our general tone on the business environment, like our customers, is cautious right now, we are very bullish on Kenexa’s position within the market. At our analyst day on September 10^th we noted that the size of our pipeline in the “verbal win” selection stage was at an all-time high. This continues to be the case. We are confident that we will close on many of these deals and a growing number of other opportunities when the economic environment improves and companies increasingly move forward with new projects. Kenexa is highly differentiated by our business model that combines software, content and services – and we continue to enhance our market position.

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November 3, 2008

On the product front. Kenexa continues to invest heavily in our products, which was evidenced by our being recognized as one of the market leaders in the area of e-Recruitment software by the Gartner Group last quarter. During the third quarter, our SimsSJT solution earned one of Human Resource Executive Magazine’s 2008 Top HR Product of the year awards. In addition, we continue to expand the scope of our value proposition, most recently with the introduction of Kenexa Learning Management solution. Kenexa is the only talent management vendor that can serve as a single source of recruiting, onboarding, assessment, learning, performance management, career development, succession planning and employee lifecycle survey solutions.

In summary, we believe Kenexa is well positioned to not only weather this storm, but to also continue building on our strong market position as a result of our differentiated value proposition, expanding suite of solutions, large global footprint and industry leading domain expertise. Talent management is a good long-term market, and we are a market leader.

I will now turn it over to Don, to review our third quarter results and fourth quarter outlook in more detail.

Don Volk - Kenexa - CFO

Thanks, Rudy. Let me begin by reviewing our results for the third quarter, starting with the P&L. Total revenue for the third quarter was $54.0 million, in-line with our revised guidance of $54 to $56 million. Total revenue increased 15% on a year-over-year basis, while it decreased 4% on a sequential basis.

From a geographic perspective, our revenue mix of domestic vs. international revenue was consistent with the previous quarter at 74%/26%. The sequential decline in international revenue was driven primarily by the strengthening of the US dollar.

Within total revenue subscription revenue was $43.0 million, representing growth of 13% on a year-over-year basis and a decrease of 2% sequentially. Subscription revenue was 80% of total revenue, which is at the high-end of our targeted mix of the high 70% to 80% range.

In the spirit of providing extra data relative to our RPO business, we will further share RPO’s contribution to our subscription revenue. RPO represented approximately $9 million of our subscription revenue in the third quarter – keeping in mind that RPO engagements also include our technology solutions in many cases.

Our clients typically purchase multi-year subscriptions with an average length of approximately two years. During the third quarter, our renewal rates declined from our typical 90-plus percent range to the high-80 percent range. The decline in renewal rates was predominantly related to a renewal that was delayed for a couple of months. To be clear, based on our discussions, we firmly believe this client will ultimately renew their relationship with Kenexa.

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The remaining $11 million of our total revenue in the third quarter came from other and professional services, which increased 28% over last year but declined 14% compared to the second quarter of 2008. The sequential decrease in our “Other” revenue was driven by two primary factors: first, a slowdown in our consulting revenue; and second, a slowdown in hiring leading to reduced success fees with our RPO customers. Both of these are a side effects of the more challenging economic environment.

Turning to profitability, we will be providing non-GAAP measures for each third quarter 2008 expense category, which excludes stock-based compensation charges associated with the implementation of FAS 123(R) and amortization of intangibles associated with previous acquisitions. All comparisons will be using the non-GAAP current period results.

Non-GAAP gross margin was 70% in the quarter, consistent with the level in the second quarter and compared to 71% in the year ago quarter.

Non-GAAP sales and marketing expense came in at $10.2 million, or 19% of revenue, consistent with the level of the second quarter and up slightly from 18% in the prior year quarter.

Non-GAAP R&D expense came in at $3.6 million, or 7% of revenue, which is consistent with our long-term target of 6 to 9%, and comparable to 7% last quarter but down from 10% in the year ago quarter. Of note, the sequential decline in reported R&D spend was driven by the US dollar – Rupee exchange rate, as a significant portion of our R&D is executed in our low cost, offshore location.

Non-GAAP G&A expenses were approximately $11.7 million or 22% of revenue, which is an increase from 21% in the previous quarter and 19% in the prior year quarter. During the quarter, our G&A expense included approximately $100,000 in charges related to our Indian office move to Vizag. As previously discussed these one-time moving charges are being recognized throughout the year of 2008. We do not expect to incur these charges in 2009.

Our non-GAAP income from operations was $10.3 million for the third quarter, consistent with our revised guidance of $10.3 to $10.6 million and representing a 19% non-GAAP operating margin. During the third quarter our non-GAAP tax rate for reporting purposes was 22%, resulting in non-GAAP net income of $8.2 million. Based on 22.8 million shares outstanding, non-GAAP diluted earnings per share were $0.36, consistent with our revised guidance and an increase from $0.33 in the year ago quarter.

Turning to our results on a GAAP basis, which include $1.3 million related to the allocation of stock-based compensation, and $1.5 million related to the amortization of intangibles associated with previous acquisitions, the following were expense levels determined in accordance with GAAP: Cost of revenue $16.5 million; sales and marketing $10.3 million; R&D $3.8 million; and G&A $12.7 million. For the third quarter our GAAP income from operations was $7.5 million. Net income applicable to common shareholders was $5.4 million, resulting in GAAP diluted EPS of $0.24.

A reconciliation of GAAP to non-GAAP expenses and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.

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Kenexa had cash, cash equivalents and short and long term investments of $43.9 million at September 30, 2008, a decrease of $5.4 million from the end of the prior quarter. The decrease in cash was due to approximately $8 million used to pay contingent consideration associated with prior period acquisitions. During the quarter, the Company generated $8.7 million in positive cash from operations, and used approximately $5 million associated with capital expenditures.

Accounts receivable DSOs were 65 days at the end of the quarter compared to 65 days at the end of the prior quarter and 60 days at the end of the year-ago quarter.

Our deferred revenue at the end of the quarter was $37 million, down from $38.7 million at the end of the prior quarter and up from $35.1 million entering the year.

I’d now like to turn to guidance for the full year and the fourth quarter of 2008. For the fourth quarter of 2008 we expect the following. Revenue to be $45 million to $47 million. We currently estimate that our fourth quarter subscription revenue will be flat to slightly down with the just reported quarter, with the sequential decline being driven primarily by our “other” revenue. It is also worth nothing that within the sequential decline, approximately $3 million is due solely to adverse movements in Fx based on recent exchange rates.

To put in perspective the decline in our total revenue run rate from approximately $56 million in 2Q to $46 million at the mid-point of our guidance in 4Q. Approximately $3 million relates to the adverse impact of the strengthening US dollar on our reported revenue, with approximately $6 to 7 million due to the slowdown of our RPO revenue. This also shows how the technology solutions component to our business has been relatively resilient during the economic downturn.

With the completion of our headcount reduction, we currently expect to deliver a 14 to 15% non-GAAP operating margin at our targeted revenue level – which translates to non-GAAP operating income of approximately $6.3 million to $7.0 million. Assuming a 22% tax rate for reporting purposes and 22.6 million shares outstanding, we expect our diluted non-GAAP earnings per share to be $0.22 to $0.25.

Our full year 2008 outlook, based on our just reported third quarter results and fourth quarter guidance, is total revenue of $203.6 million to $205.6 million. Non-GAAP operating income of $36.6 million to $37.3 million. Assuming a 22% tax rate for reporting purposes, and 22.9 million shares outstanding, we expect our diluted non-GAAP EPS to be $1.29 to $1.32. As a reminder, our full-year 2008 guidance includes a one-time charge related to the opening of our new office space in India, which we have incurred throughout the year.

Of note, our fourth quarter and full year 2008 non-GAAP guidance excludes the impact of restructuring charges associated with the previously mentioned headcount reduction. We currently estimate that the restructuring charge will be in the range of $2.0 million to $2.5 million.

In summary, we have taken action to put Kenexa in position to continue delivering solid profitability and cash flow during this very challenging economic time period. We will continue to manage with this focus. The macro environment will eventually improve, and we believe Kenexa will emerge with an even stronger market position.

We’d now like to turn it over to the operator to begin the Q&A session. Operator?

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