Kenexa (KNXA)

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 clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 overall revenue begins to decline, we expect our cost of revenue to decline proportionately, subject to pricing pressure related to economic conditions and slightly influenced by the mix of services and software.

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Table of Contents

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 clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 overall revenue begins to decline, we expect our cost of revenue to decline proportionately, subject to pricing pressure related to economic conditions and slightly influenced by the mix of services and software.

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Table of Contents

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 clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 overall revenue begins to decline, we expect our cost of revenue to decline proportionately, subject to pricing pressure related to economic conditions and slightly influenced by the mix of services and software.

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Table of Contents

Cost of Revenue

Cost of Revenue

Cost of Revenue

Cost of Revenue

Cost of revenue increased by $19.2 million or 60.6% to $50.9 million for the year ended December 31, 2007 from $31.7 million for the year ended December 31, 2006. As a percentage of revenue, cost of revenue remained approximately the same at 28.0% for the year ended December 31, 2007 compared to 28.3% for the year ended December 31, 2006. The increase in the cost of revenue was primarily due to increased salaries, overhead, direct costs and other expense of $10.8 million, $1.7 million, $5.3 million and $1.4 million, respectively, associated with our increased revenue. Our increased salaries were due in part to the addition of 19 employees from our acquisitions in 2006 and 2007.

Cost of Revenue

Cost of revenue increased by $19.2 million or 60.6% to $50.9 million for the year ended December 31, 2007 from $31.7 million for the year ended December 31, 2006. As a percentage of revenue, cost of revenue remained approximately the same at 28.0% for the year ended December 31, 2007 compared to 28.3% for the year ended December 31, 2006. The increase in the cost of revenue was primarily due to increased salaries, overhead, direct costs and other expense of $10.8 million, $1.7 million, $5.3 million and $1.4 million, respectively, associated with our increased revenue. Our increased salaries were due in part to the addition of 19 employees from our acquisitions in 2006 and 2007.

Cost of Revenue

Cost of revenue increased by $19.2 million or 60.6% to $50.9 million for the year ended December 31, 2007 from $31.7 million for the year ended December 31, 2006. As a percentage of revenue, cost of revenue remained approximately the same at 28.0% for the year ended December 31, 2007 compared to 28.3% for the year ended December 31, 2006. The increase in the cost of revenue was primarily due to increased salaries, overhead, direct costs and other expense of $10.8 million, $1.7 million, $5.3 million and $1.4 million, respectively, associated with our increased revenue. Our increased salaries were due in part to the addition of 19 employees from our acquisitions in 2006 and 2007.

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 clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to increase.

Cost of Revenue

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client base. Since 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. For the remainder of the year, as our business contracts in response to the macroeconomic environment, we expect personnel costs associated with the delivery of our solutions to decrease and to fall within a range of approximately 26% to 32% of revenue.

Cost of revenue increased by $2.8 million or 20.1% to $16.5 million and $9.0 million or 23.9% to $46.7 million during the three and nine month period ended September 30, 2008, respectively, compared to the same periods in 2007. As a percentage of revenue cost of revenue increased by 1.2% to 30.5% and 1.3% to 29.5% for the three and nine months ended September 30, 2008, compared to the same periods in 2007. The $2.8 million and $9.0 million increases during the three and nine month period ended September 30, 2008, respectively, were due in part by the addition of 195 employees, primarily brought on by our recent acquisitions which contributed approximately $1.8 million and $6.3 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. Additionally, other consulting and external services needed to support our customer’s requirements added approximately $0.4 million and $1.7 million to the increase for the three and nine months ended September 30, 2008, respectively.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client base. Since 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 32% of revenue.

Cost of revenue increased by $4.6 million or 36.3% to $17.2 million and $6.2 million or 26.0% to $30.3 million during the three and six month period ended June 30, 2008, respectively, compared to the same periods in 2007. As a percentage of revenue, cost of revenue increased by 2.5% to 30.4% and 1.4% to 28.9% for the three and six months ended June 30, 2008, compared to the same periods in 2007. The $4.6 million and $6.2 million increases during the three and six month period ended June 30, 2008, respectively, were due in part by the addition of 195 employees, primarily brought on by our recent acquisitions which contributed approximately $2.8 million and $4.4 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. Additionally, other consulting and external services needed to support our customer’s requirements added approximately $1.8 million to the increase for the three and six months ended June 30, 2008.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenue.

Cost of revenue increased by $1.7 million or 15% to $13.1 million for the three months ended March 31, 2008 compared to the same period in 2007. The addition of 195 employees, primarily brought on by our recent acquisitions contributed approximately $1.6 million to the cost of revenue increase for the three months ended March 31, 2008 compared to the prior year. Additionally, other consulting and external services needed to support our customer’s requirements added approximately $0.1 million to the increase during the quarter ended March 31, 2008. As a percentage of revenue, cost of revenue remained the same at approximately 27% for the three months ended March 31, 2008 and 2007.

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 clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to increase.

Cost of Revenue

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

Cost of revenue increased by $5.3 million or 63.3% and $16.3 million or 76.2% for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006 to $13.7 million and $37.7 million, respectively. As a percentage of revenue, cost of revenue decreased by 1.0% to 29.2% for the three months ended September 30, 2007, compared to the same periods in 2006, and was relatively the same for the nine months ended September 30, 2007 and the prior year at approximately 28%. The addition of 165 employees as a result of our recent acquisitions contributed approximately $3.2 million and $10.4 million to the cost of revenue increase for the three and nine months ended September 30, 2007 respectively versus the prior year. Additionally, other consulting and external services needed to support our customer’s requirements added approximately $2.1 million and $5.9 million to the increase for the three and nine months ended September 30, 2007, respectively versus the prior year.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

Cost of revenue increased by $5.9 million or 88.8% and $11.0 million or 84.5% for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006 to $12.6 million and $24.0 million, respectively. As a percentage of revenue, cost of revenue increased by 1.0% to 27.9% for the three months ended June 30, 2007, compared to the same periods in 2006, and was relatively the same for the six months ended June 30, 2007 and the prior year at approximately 27%.  The addition of 215 employees brought on by our recent acquisitions contributed approximately $3.6 million to the cost of revenue increase for the three months ended June 30, 2007 versus the prior year.  Additionally, other consulting and external services needed to support our customer’s requirements added approximately $2.3 million to the increase during the quarter ended June 30, 2007

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

Cost of revenue increased by $5.1 million or 80% to $11.4 million for the three months ended March 31, 2007 compared to the same period in 2006. The addition of 113 employees, brought on by our recent acquisitions contributed approximately $3.0 million to the cost of revenue increase for the three months ended March 31, 2007 versus the prior year.  Additionally, other consulting and external services needed to support our customer’s requirements added approximately $1.9 million to the increase during the quarter ended March 31, 2007.  As a percentage of revenue, cost of revenue decreased 0.5% for the three months ended March 31, 2007 compared to the same period in 2006.  The decrease in cost of revenue as a percentage of revenue was mostly due to an increase in revenue with minimal corresponding costs.

Cost of Revenue

Cost of revenue for the quarters presented has fluctuated based on the mix of sales between subscription revenue and other revenue. Cost of revenue was highest as a percentage of total revenue for the three months ended September 30, 2006. This was caused by the mix of sales included in other revenue in that quarter. Included in other revenue are reimbursed expenses which have no margin and

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subcontractor pass through expenses which has minimal mark up. An increase or decrease in these components as a percentage of sales can have an impact on the cost of revenue.

Cost of Revenue

Cost of application services consists primarily of hosting operations and the direct labor to process resumes. Cost of professional services consists primarily of the employee related expenses required to provide the services.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

 Cost of revenue increased by $3.5 million or 70.1% and $7.8 million or 57.6% to $8.4 million and $21.4 million for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005. As a percentage of revenue, cost of revenue increased by 1.4% to 30.0% for the three months ended September 30, 2006 and remained approximately the same at 28.3% for the nine months ended September 30, 2006 compared to the same periods in 2005.  While the adoption of SFAS 123-R added approximately $0.1 million or 0.5% to our cost of revenue as a percentage of revenue, for the quarter ended September 30, 2006, the increase in cost of revenue as a percentage of revenue, after adjusting for non-cash compensation associated with the adoption of SFAS 123R, was mostly due to an increase in consulting salaries.

Cost of Revenue

Our cost of revenue consists primarily of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

 Cost of revenue increased by $2.1 million or 45.1% and $4.4 million or 50.5% for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005 to $6.7 million and $13.0 million, respectively. As a percentage of revenue cost of revenue decreased by 1.7% and 1.2% to 27.0% and 27.3% for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005.   While the adoption of SFAS 123-R added approximately $0.1 million to our cost of revenue and 0.5% cost of revenue as a percentage of revenue, respectively, for the quarter ended June 30, 2006, the decrease in cost of revenue as a percentage of revenue, after adjusting for non-cash compensation associated with the adoption of SFAS 123R, was mostly due to an increase in revenue with minimal corresponding costs.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

Cost of revenue increased by $2.3 million or 57% to $6.4 million for the three months ended March 31, 2006 compared to the same period in 2005. The increase in cost of revenue in absolute dollars was primarily due to our increased revenue. Cost of revenue decreased 0.7% as a percentage of revenue for the three months ended March 31, 2006 compared to the same period in 2005. While the adoption of SFAS 123-R added approximately $0.1 million or 0.5% to our cost of revenue and cost of revenue as a percentage of revenue, respectively, for the quarter ended March 31, 2006, the decrease in cost of revenue as a percentage of revenue, after adjusting for non-cash compensation associated with the adoption of SFAS 123R, was mostly due to an increase in revenue with minimal corresponding costs.

Cost of Revenue

        Cost of revenue for the quarters presented has fluctuated based on the mix of sales between subscription revenue and other revenue. Cost of revenue was highest as a percentage of total revenue for the three months ended September 30, 2004. This was caused by the mix of sales included in other revenue in that quarter. In particular, sales of perpetual licenses can have a meaningful impact on cost of revenue.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.

Cost of revenue increased by $1.4 million or 41% and $5.1 million or 59% to $4.9 million and $13.6 million for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. As a percentage of revenue cost of revenue increased by 3% to 28.6% for the nine months ended September 30, 2005, compared to the same periods in 2004. The increase in the cost of revenue was primarily due to our increased revenue. The increase in the cost of revenue as a percentage of revenue was caused by a change in the mix of our sales, specifically by an increase in consulting revenues, which have more costs as a percentage of revenues than our subscription based revenues.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel costs, overhead allocated based on headcount 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 client 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 business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to increase and to remain at approximately 28% of revenues.

Cost of revenue increased by $1.9 million or 68.0% and $3.6 million or 71.8% to $4.6 million and $8.7 million for the three and six months ended June 30, 2005, respectively compared to the same periods in 2004. As a percentage of revenue cost of revenue increased by 4.7% and 5.0% to 28.7% and 28.5% for the three and six months ended June 30, 2005, respectively compared to the same periods in 2004. The increase in the cost of revenue was primarily due to our increased revenue. The increase in the cost of revenue as a percentage of revenue was caused by a change in the mix of our sales, specifically by an increase in consulting revenues, which have more costs as a percentage of revenues than our subscription based revenues.