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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q1 2013 Earnings Call

May 1, 2013 5:00 pm ET

Executives

Adam L. Miller – Founder and Chief Executive Officer

Perry A. Wallack – Chief Financial Officer

Analysts

Greg Dunham – Goldman Sachs

Mark Murphy – Piper Jaffray

Richard Sherlund – Nomura

Michael Anderson – Credit Suisse

Justin Furby – William Blair

John S. Byun – UBS Securities LLC

Michael Huang – Needham & Co.

Scott Berg – Northland Capital Markets

Operator

Please standby, we’re about to begin. Good day and welcome to the Cornerstone OnDemand’s Q1 2013 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there we will be a question-and-answer session with instructions to follow at that time. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Perry Wallack, Chief Financial Officer. Please go ahead.

Perry Wallack

Good afternoon everyone. This is Perry Wallack, CFO of Cornerstone OnDemand and welcome to our first quarter 2013 earnings conference call. Today’s call will begin with Adam providing a brief overview of our company and our performance over first quarter and then I will review some key financial results for quarter, which ended March 31, 2013. Later, we will conduct a question-and-answer session.

By now, you should have received the copy of our press release, which was released after the market close today and will be furnished with the SEC on Form 8-K. You can also access the press release and the detailed financials on our Investor Relations website. As a reminder, today’s call is being recorded and a replay will be made available following the conclusion of the call.

During the call, we will be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website. All of the financial measures that we will discuss today are non-GAAP, unless we state that the measure is a GAAP number. Any non-GAAP outlook we provide has not yet been reconciled with the comparable GAAP outlook, because, among other things, we cannot reliably estimate our future stock-based compensation expenses, which are dependent on our future stock price.

Our discussion will include forward-looking statements such as statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, customer satisfaction and retention, customer attrition rate, market or business growth, our revenue run rate, investment activity in our business, visibility into our business model and results, the effective capitalized development costs, spending on R&D, professional services and other aspects of our business, our appraisal of our competitors and their products, and our ability to compete effectively.

Words such as expect, believe, anticipate, plan, illustrate, intent, estimate and other similar words are also intended to identify such forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions. If any of the risks or uncertainties materializes or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by the forward-looking statements we make. These risks, uncertainties, assumptions as well as other information on potential factors that could affect our financial results are included in today’s press release, the Risk Factors section of our most recent Form 10-K, and subsequent periodic fillings with the SEC.

With that, I’ll turn the call over to Adam.

Adam L. Miller

Thanks Perry and thank you to everyone joining us today. The first quarter was a fantastic start to what we believe will be another year of industry leading growth at Cornerstone OnDemand. Revenues for the first quarter came in at a record $37.7 million, representing a year-over-year increase of 57% and bookings came in at $35.9, representing a year-over-year increase of 50%. Our client base saw the addition of a diverse group of the leading organizations of various sizes and for multiple industries and geographies, bringing our enterprise and midmarket client count to low over 1300 companies.

In the first quarter, we added USG Corporation, a large diversified global manufacturing company and one of the nation’s largest cable providers as well as several public sector organizations, which I will discuss in a few minutes.

While we are always proud of the many new organizations that joined the Cornerstone family each quarter, our number one priority of the company has always been and remains insuring the success of our existing clients. From 2002 through 2012, our average annual dollar retention rate was approximately 95%. Despite taking our business down market and into new parts of the world in recent years, our retention rate has remained amongst the highest in SaaS and we do not expect it to be any different in 2013.

Our combination of growth in retention has helped us to increase our user count over 11 million users in the first quarter, which represents one of the largest SaaS subscriber bases in the world. We also strengthened our relationships with many of our existing clients during the first quarter, with significant up sales to one of the largest retailers in the U.S. with BP, Liberty Mutual, Barclays, and Tata Motors to name a few.

The up-sale for the U.S. retailer which became a Cornerstone client in late 2011 is particularly noteworthy. This client initially purchased our performance and succession products. And in the first quarter, choose to add both learning and compensation. This clearly speaks to the validation of integrated talent management that we’re seeing with both new and existing clients, which we as a company have been preaching for years. What it also speaks too however is the increasing trend within our client base to purchase more products unless sooner or rather than later.

While in the past it would often take years for us to grow our penetration within an account. We are increasingly doing this today within the first 12 to 18 months of the initial sale. We believe we’re seeing this in part due to a number of organizational changes that we elected to make with respect to how accounts are managed, but also because of the strength of our product and its ability to drive impact within an organization almost immediately. As our results demonstrate, the momentum at Cornerstone continues unabated. Yet, we believe we have addressed a mere fraction of the total market available to us.

I would like to provide some detail on how we view this enormous opportunity. Firstly, as we’ve stated before due to the growing breadth of our talent management suite, including our recruiting and extended enterprise clouds combined with our strong historical retention rates and our proven ability to up-sell and cross-sell, we believe we can grow our revenue over 400% with no new additions to our client roster. In addition, per user pricing for each individual product is rising. As I discussed on the last earnings call, talent management is maturing as an industry and increasingly becoming a strategic business initiative. What this means is that organizations today understands better than ever, why they need a talent management solution and how we can drive business impact. Therefore, justifying higher price points.

The Cornerstone specifically, our focus on innovation and delivering a unified best of breed solution is allowing us to consistently charge a premium for our products vis-à-vis the competition. Additionally as you all know, we’ve made a strong first push down market in recent years where pricing is often 2 to 4 times that of an enterprise client.

Average selling price for the total amount that each individual client contracts for is also increasing. This speaks not only to rising pricing for each individual product but also to our growing success with selling more than one product to each client. In the past, I’ve offered the color that more than 50% of our clients use products from two or more clouds and this percentage is increasing each quarter. But it’s sometimes missed however is that while we talk about four clouds where actually multiple products within each cloud. For example, our performance cloud alone houses three different products, performance management, succession management and compensation management modules.

Lastly up-sales to our extended enterprise cloud can be non-linear, a modestly sized midmarket client and have enormous extended enterprise of partners, resellers and customers. While we’ve gotten better in up selling and cross selling products to our client based to drive business impact and empower the workforces, significant opportunity remains. The second reason is that we’re clearly still in the early innings of addressing the global talent management opportunity. We believe that there are 400 million potential global suites for our software. This number represents our estimation of the size of the global workforce excluding small businesses with less than 10 employees.

If we assume 25% of those seats either don’t accept software-as-a-service or too difficult to reach that would give us an addressable market of 300 million seats. Today, we estimate that the entire industry has approximately 50 million seats and we able to 11 million of those seats that means that we can naturally grow 600% with no change in our pricing, no change in the rates of upsell and no change in our market share.

And the third reason is while we have over 20% market share today based on these metrics, with over 10 million out of 15 million seats that comprise the current market, we believe that we can continue to gain market share. Today, we’re the dominate talent management player. The only independent enterprise class best-of-breed player left in the market. Not long ago, we had one of the smallest market shares in the industry and today, we’re on track to soon have the largest.

Of course, continuing to capture the 300 million addressable seats will require us to further increase our distribution internationally, as well as to do small business in public sector markets. In our recent call, we talked about CSB or Cornerstone Small Business and our growing operations there. We plan to discuss our international expansion on the future call, but today, I’d like to focus on the public sector. The technology adoption curve for public sector is historically following behind that of the private sector, but we’ve seen no difference in our space. Over the past several quarters, however, the adoption rate of talent management solutions has driven significantly with government and educational instructions as they seek to address many of the same challenges with their human capital that corporation states.

Over a year ago, we began making significant investment in growing our public sector teams in anticipation of what we’re seeing today. While some of our competitors have exclusively hired sales professionals from the corporate world, we chose to build our team with individuals from the public sector, who have a deep understanding of the talent-related [pinpoints] faced by the government and education entities they are selling to. This approach is already paying big dividends for us. On previous calls, I touched on our growing success in the federal vertical with key wins such as the U.S. treasury, the small business administration and the Department of Housing and Urban Development. But we think of public sector as four verticals, not one namely federal, state local, higher ed and case well and we’re gaining strong traction in all four.

The first quarter saw as we achieved significant wins in the state and local market with the Wisconsin Department of Transportation, the Idaho Transportation Department, the State of Maryland highway administration and UMass Memorial Health Care system all coming on board as new clients.

While in the past, we would see one state and local win every quarter or two, we’ve clearly begun to see much greater volume of deals in this area. In higher education, the build out of our direct sales team combined with our strong relationship with Lucien has resulted in a rapidly growing roster of university clients. We now have over a dozen university clients and believe we can accelerate the growth of our higher ed client roster over the remainder of this year.

Lastly, we are seeing significant traction in the segment year-and-year to me personally. K-12, we all know that public education in the U.S. is not kept pace with global standards and I personally believe that talent management best practices can have a profound impact on the quality of education for our children. The Cornerstone OnDemand Foundation has done some significant work in this area, partnering which Teach for America, KIPP, Green Dot public schools, New Leaders for New Schools and many other top educational non-profits.

More recently, our public sector team has been working on building a holistic solution for some of the nation’s top school districts to address issues around teacher engagement, teacher professional development and overall performance management.

I am pleased to report that in the first quarter of this year, Cornerstone closed the Los Angeles Unified School District, the second largest public school system in the United States. With current moment in all four segments, we look forward to continued success in the public sector in the quarters to come.

In conclusion, I would like to thank the incredible team here at Cornerstone for getting us off to such a strong start in 2013. We’re looking forward to seeing our clients and many of you at our upcoming Convergence Annual Client Conference in San Diego on June 3 through June 5.

And with that I’d like to turn it back to Perry to discuss our financial performance in more detail.

Perry A. Wallack

Thanks, Adam. Before I get to the financial results of our first quarter of 2013, I’d like to remind everyone again that the financial figures I discuss today are non-GAAP, unless I state that the measure is a GAAP number. As was the case in prior periods, we talk about non-GAAP numbers for two reasons. First, our non-GAAP revenue for the first quarter of 2013 is our GAAP revenue, plus a $133,000 in revenues we did not recognize during the quarter on a GAAP basis for Sonar Limited.

Again, this amount is the first quarter 2013 portion of the adjustment to reduce the deferred revenue balance by $1.6 million for the client contracts acquired from Sonar Limited upon our acquisition due to purchase accounting rules. Second, non-GAAP financial measures exclude certain items that we believe are not good indicators of Cornerstone’s current or future operating performance. In the periods we will discuss today, these items include expense related to stock-based compensation and related employer payroll taxes, amortization of intangible assets, acquisition costs, adjustments and taxes related to acquisition adjustments and amortization of debt discount and issuance costs. You can find the reconciliation of GAAP to non-GAAP results in today’s earnings release.

As Adam said, we had a terrific start to the year. I think the theme overall for the start of the year is really more of the same, posting high double digit growth in both revenue and bookings, while scaling the business, improving operating margin significantly. First quarter revenue and bookings saw a year-over-year growth of 57% and 50% respectively. We believe this demonstrates our continued ability to scale our business and meet global demand for our solutions, while supporting investing in and managing our operations in an efficient manner. Our GAAP revenue for the first quarter was $37.7 million and non-GAAP revenue was $37.8 million, which reflects the add-back of the $133,000 million related to the write-down of the Sonar6 deferred revenue. Our revenue results for the first quarter represent a year-over-year increase of 57% on both a GAAP and non-GAAP basis.

Total bookings, which we define as gross revenue plus change in deferred revenue, were $35.9 million for the first quarter, representing a year-over-year increase of 50% over the first quarter of 2012 bookings of $24 million. It’s important to remember that we had a great Q1 2012, when bookings growth was up 67% over Q1 2011. Against this tough comparable, we feel the current quarter bookings growth of 50% is even more indicative of our strong sales execution.

Bookings growth was principally driven by continued sales execution in our core markets, as well as growing momentum in new markets, such as the public sector and education markets that Adam alluded to earlier. Our client base excluding our CSB clients increased from 891 clients as of March 31, 2012 to 1317 clients as of March 31, 2013, representing 426 client additions and 48% year-over-year growth. We added 105 clients in the quarter excluding CSB customers.

As you think about our bookings growth, I’d like to remind you that our bookings can vary on a quarterly basis depending on the nature and timing of invoicing. In the first quarter of 2013, there were no material invoicing differences in the quarter versus our historical averages. As the further remainder, our seasonality trend has historically seen a greater number of client sales in Q3 and Q4 compared to Q1 and Q2.

Our gross profit for first quarter of 2013 was $27.3 million, compared to $17.7 million in 2012, reflecting an increase of $9.6 million, or 54%. Our gross margin for the first quarter of 2013 was 72.2%. As a remainder, we believe we will continue to improve gross margins on an annual basis. However, as we have stated previously, we do not expect to always have sequential improvements in our gross margin from quarter-to-quarter. In addition to investments in our software, network infrastructure and our implementation and service organization to support our growth, we will continue to leverage third-parties to perform implementation and that impacts our gross margins within quarters.

Now let’s turn to our operating expenses. Sales and marketing expense was $21.3 million, representing a year-over-year increase of $5.6 million or 36%. This increase was principally driven by increased headcount across our sales and marketing organizations, as well as increased sales commissions. As a percentage of revenue, sales and marketing expense was 56%, compared to 66% in the same period in 2012.

On a dollar basis, R&D expense increased by $1.1 million or 39%, compared to the same period in 2012. The increase in R&D expense is attributable to increased headcount due to continued investments in product development. R&D expense as a percentage of revenue was 11% in the first quarter, compared to 12% in the same period in 2012.

G&A expense was $7 million, representing a year-over-year increase of $3 million or 75%. The increase in G&A expense can be attributed to increased headcount, legal fees, accounting fees, audit fees, first year’s Sarbanes-Oxley audit and consulting fees and increased overhead to support the growth of the company in both domestic and international markets.

As a percentage of revenue, G&A expense represented 18.5% of revenue for the quarter, compared to 16.7% in 2012. As a percentage of revenue, operating expenses were 86% in the first quarter of 2013, compared to 94% in the same period in 2012, an improvement in operating margins of 870 basis points.

Operating loss for the first quarter of 2013 was $5.1 million, compared to $4.9 million in first quarter of 2012. Net loss for the first quarter of 2013 was $5.3 million or net loss of $0.10 per share based on a weighted average shares outstanding of 50.8 million shares, compared to a net loss of $4.9 million or net loss of $0.10 per share based on a weighted average shares outstanding of 49.9 million shares in the first quarter of 2012.

With regards to cash flow, our cash flow from operating activities was $536,000 compared to $3.2 million in the first quarter of 2012. As we have communicated in the past, collections and DSOs fluctuate throughout the year significantly and that are best analyzed on an annual basis.

Let me now turn to the balance sheet. As of March 31, 2013, our total cash and accounts receivable balance was approximately $113.4 million. Our total cash and cash equivalents were $76.2 million as of March 31, 2013. At March 31, 2013, we had approximately $37.2 million in accounts receivable compared to $47.5 million at December 31, 2012, which is a further reflection on our seasonality previously mentioned and is apparent in prior years.

On a GAAP basis, our deferred revenue balance was $90.5 million as of March 31, 2013, compared to $92.3 million as of December 31, 2012 and $55.8 million as of March 31, 2012, representing a year-over-year increase of $34.7 million or 62%. Again, as you see in our account receivable we’d like to remind you that we typically experience a reduction in deferred revenue from Q4 to Q1 due to the seasonality of our business.

In summary, I’d like to reiterate how pleased we are with our strong start to the year. 57% growth in revenues, 50% growth in bookings and 48% growth in our client base all while maintaining discipline in our cost structure and continuing on the path to profitability.

I’d now like to discuss our outlook for the second quarter of 2013 and for the full-year of 2013, which falls under the Safe Harbor provisions for forward-looking statements outlined at the start of the call and is based on preliminary assumptions, which are subject to change over time.

Given the strength in our business, this past quarter, for the full the year 2013, we are raising our previous GAAP revenue guidance from a range of $179 million to $182 million to a range of $181 million to $183 million. At the midpoint, this revised range suggests 54% growth over 2012 GAAP revenue of $117.9 million.

For the second quarter of 2013, we currently expect GAAP revenues to range from $41.5 million to $42.5 million. At the midpoint, this range represents 57% growth over the second quarter of 2013 GAAP revenues of 26.7%. With respect to non-GAAP net income or loss, we are maintaining our prior guidance as previously communicated a loss for the full-year of 2013 of approximately $9 million. This implies a non-GAAP earnings per share of negative $0.18 per share based on a full-year weighted average share count of approximately 51.3 million shares.

Turning to cash flow for the full-year of 2013, we are maintaining our prior guidance as previously communicated of positive non-GAAP cash flows provided by operating activities of approximately $18 million. As was the case in the prior year, we are choosing to continue to reinvest a portion of our top line overachievement back into the business to drive further growth in the future.

In conclusion, our first quarter marked a strong start to the year. And with that, I’d like to turn it back over to Adam.

Adam L. Miller

Thanks Perry. I would like to thank our global team for the great work and our clients and partners for the ongoing support and partnership.

With that we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Greg Dunham of Goldman Sachs.

Greg Dunham – Goldman Sachs

Yes, thanks for taking my question, another 50% bookings quarters and acceleration from Q4, you highlighted in Q4 that in December that you saw some weakness towards the end of the quarter really due to timing application and I guess what may be some people want is ready for us does Easter came at the end of Q1. How does the quarter progressed from a linearity perspective for you this time around?

Adam L. Miller

We were able to bringing the deals that it got flipped last quarter, so we did close the deals that we said close from last quarter and then with regard to this quarter, we did have our more typical late quarter seasonality where more the deals close towards the very end of the quarter, which is unfortunately typical for us.

Greg Dunham – Goldman Sachs

Now that make sense and I guess any commentary and in terms of the user count and the customer count was high but also in terms of this ASP and deals, what do you see in from pricing dynamic and the large deal activity. Thank you.

Adam L. Miller

So we are definitely seeing an increase in ASPs, we are seeing that both with regard to that the price per module or individual product within the cloud, as well as the price for each individual client and that’s due to our ability to sell more product in more of the suite in the initial deal. So both things are driving our pricing and ASP in particular.

Greg Dunham – Goldman Sachs

Great. Thanks guys.

Adam L. Miller

Thanks, Greg.

Operator

And we will take our next question from Mark Murphy of Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes. Thank you. Adam, your bookings growth accelerated against a tougher comparison and you’re showing about 10 points of margin improvement year-over-year. So it’s – you’re in sort of an area in terms of the growth and a leverage combination. And I’m just wondering do you have any inclination to hire incrementally, any more aggressively or invested any differently on that basis?

Adam L. Miller

So, we are doing that and you’ll notice in Perry’s comment, he talked about the fact that tour cash flow targets are not changing even though we’re beating revenue. And part of the reason for that is we want to reinvest the overachievement back into the business, so to foster continued growth. But what we’re not doing is we are not changing our commentary around our path to profitability. We think we are in a very clear path to profitability and even with the acceleration in hiring, because of the overachievement, we in effect, can afford it and it doesn’t impact our long-term profitability objectives.

Mark Murphy – Piper Jaffray

And then, I wanted to ask you as well, Adam, what do you think is the appetite for customers to bite off some big chunks of your recruiting product after the major release comes out? I think you have one coming out in another month or two. And within that, are you seeing any standalone recruiting opportunities, or is it – do you think it’s generally all going to be some add-on transactions.

Adam L. Miller

Joe, I’ll tell you that out of the gate we’re seeing many more full suite deals and we expected, meaning recruiting, learning, and performance all at once upfront and we’re seeing that both in the enterprise and in the middle market. With regard to recruiting on a standalone basis, we’ve been pretty consistent without this. We believe starting in the second half of this year; we will be competitive on a standalone basis in recruiting. And we are waiting for our June release, our spring release, which will get us to the level of competitiveness that we need and then the release is beyond that take us further and further away from the competition, I’m sorry ahead of the competition.

Mark Murphy – Piper Jaffray

Got it, got it, one last one Adam. How would you characterize the deal pipeline in aggregate here as you enter Q2, just given the strong trends that you described? I am wondering how the pipeline measures up versus your expectations maybe in terms of just overall visibility, coverage ratio, so on and so forth?

Adam L. Miller

Well, the attorneys' never like when I talk about pipelines, but I will say that we are very comfortable with where our pipelines are now, especially relative to last year or the year before, both in terms of in absolute basis, as well on a relative basis.

Mark Murphy – Piper Jaffray

Thank you very much.

Adam L. Miller

Thank you.

Operator

And we will take our next question from Rick Sherlund of Nomura.

Richard Sherlund – Nomura

Thanks. First for Adam on the dynamics and the competition with Taleo and success factors. Can you kind of update us on what you might have seen in terms of any change in competitive dynamics in the markets?

Adam L. Miller

Yeah, we’re seeing less and less of Taleo. It’s been almost fully absorbed into Oracle, and by that I mean most of the people from the former Taleo organization of the left and have gone on to other organizations, often outside the industry.

SAP or specifically SuccessFactors still remains competitive and is still operating on a relatively independent basis, but we believe at some point that will change as their force to integrate audit because of the incremental acquisition in SAP mix were just a demand to the industry in what they’re doing. So in both cases they’ve been certainly distracted and we have been hard at work on all roadmap on the growth of our distribution capability and I think Convergence, our user conference in June, people are going to see the very tangible advances we’ve made across the product line.

Richard Sherlund – Nomura

Okay and we’ve heard about user interface improvement, is there anything else you can elaborate on in terms of the improvements on the products side?

Adam L. Miller

Yeah, user interface improvements probably be understanding it, we are doing a full overhaul of our user experience and we spend a lot of time thinking about the consumerization of the enterprise and what that means in our industry and for us in particular and we are launching a much more streamlined experience for end users, which we think will drive engagement and further adoption of the solution.

Richard Sherlund – Nomura

Okay, and Perry, just a question for you on G&A, it was about a million (inaudible) than we thought you mentioned there were increased levels, has that been a sustainable level that we saw in Q1?

Perry A. Wallack

No, we should see leverage in G&A throughout the remaining quarters of the year. When we look at total G&A for the full year, we should see at least the point or two of leverage over the prior year. So, Q1 a little bit of an anomaly.

Richard Sherlund – Nomura

And cash flow – the receivables actually look fine to me, it was more of an anomalous things where your accrued expenses are less than we thought, prepaids are more than we thought. I would think that’s all stuff that kind of washes out in the next quarter.

Adam L. Miller

Yeah, that’s right. I mean, we had – if you recall, we had just little bit of a change in our commission plan that we implemented in Q4, and so you’ll see a little bit of anomalies in those things running through the financials until Q4 of this year, when we’ve got four steady quarters of it.

Richard Sherlund – Nomura

Great. Okay, thank you.

Operator

And we will take our next question from Michael Nemeroff with Credit Suisse.

Michael Anderson – Credit Suisse

Hi, this is Mike Anderson on behalf of Michael, thanks for taking our questions. First one is just, can you just give us an update on how the small business is progressing with you guys and your small business segment?

Perry A. Wallack

Yeah. So, we’ll tell you, last quarter, or specifically in Q4, it started to show a little more than what we would have liked. In Q4, it corrected back to the levels of growth we want to see and we are now seeing very good productivity across the Board on our small business sales team and we’re going to continue to expand the size of that team.

Michael Anderson – Credit Suisse

Okay, great. And just, can you also give us an update on how the launch of Cornerstone for Salesforce went in the quarter, seeing it’s still relatively new product?

Perry A. Wallack

Yeah. So, it’s real to be new from the perspective of when we officially launched it, but the product has been around for a little bit now and we are close to 70 clients today for that product in growing. It is also moving up the ranks in the Force.com world and it is now one of the top applications in the app exchange environment, and we are continuing to move off and starting to work more closely with Salesforce, and we need to make sure that we continue to dominate that side of the Force.com world, specifically in earnings.

Michael Anderson – Credit Suisse

Great, thanks for taking my questions and nice quarter.

Perry A. Wallack

Thank you.

Adam L. Miller

Thank you.

Operator

And we will take our next question from Justin Furby of William Blair.

Justin Furby – William Blair

Hey guys, thanks for taking my question and congrats on the quarter. Adam, I was hoping you might be able to walk through a little bit of the dynamics that you’re seeing and how the large enterprise and mid-market might differentiate both from a competitive standpoint? And then which one is growing faster and where do you plan to add more sales capacity going forward between those two markets?

Perry A. Wallack

So you want to seek a recipe to how we do grow. Here is what I’ll tell you. We are seeing good growth in both markets. We’re seeing ASPs increase in both segments. We are seeing competition differ in the two segments, they always have, but it’s become more different. In the enterprise segment, we’re clearly competing now with SAP and Oracle. The primary difference which I’ve talked about on prior calls is that whereas in the past we competed full with success factors and Taleo and every individual deal.

Now, we’re competing often with one or the other. If it’s an SAP shop, we’re obviously competing with them. If it’s an Oracle shop, we’re competing with Oracle Taleo, but they are not showing up at each others incumbent counts. And so our competition at the deal levels has been cut effectively by 50% and that’s helped us to increase our win rates.

In the mid market space, it’s been more dramatic. As you all know when you go to down market particularly in the small end of mid-market we’re in the SMB space. Oracle and SAP do not pull well. And we are not seeing them competing in that segment anymore, not really as effectively at least. So there is much less competition there we’re also leveraging more distributors and we’re seeing a lot of opportunity but in both cases, we are seeing the same positioning of the company which is best-of-breed versus ERP suite and we believe we are now the only enterprise class best-of-breed player in the market everybody else we compete with is a general, we are the only talent management specialist and that is giving us a real advantage in the marketplace.

Justin Furby – William Blair

Okay and then when you look on the product side obviously you got a big build-out on the recruiting side and you mentioned some of the UI overhauls, what I guess outside those things, what’s the next logical thing that the customers are asking for and then separately I know your position has always been on the HRIS side to more stay away from that and integrate but do you – how often do you go into deals where that ends up costing you, will there ever be a change down the road where you might look to build that functionality yourself?

Perry A. Wallack

No. Let me answer the second question first because of our partnerships, we’re not really excluded from those deals, we’re just going in with partners on those deals, but for example it works.

Justin Furby – William Blair

Okay.

Perry A. Wallack

In the case of the former question we’ll talk about this a lot more on our next call which will been a focus on the product but I will say that we see a lot of opportunity and what I call actionable social networking and so we are – we launching Connect at our client conference in June and will talk a lot more about that at our next call, but we are really trying to capture the benefits of social networking as it relates to do any things like project and managing teams and collaborating with other people and development for the purposes of development, so that is really the next area for us.

Justin Furby – William Blair

Great. And then just one last one, on the – you mentioned the greater inventories in multi- clouds deals, if you look at the deals specific to this quarter, can you give us any specifics around what percentage – 50% of you entire installed base has two or more clouds. What does the deals look like in Q1, is it a much larger number than the 50%?

Adam L. Miller

Yes, it is higher. I don't have the exact number, it is higher than 50%. So what's happening is that number is trending up across the installed base both because we're upselling older accounts, accounts that have been with us for a longer period of time, who may have only had one cloud when they first purchased Cornerstone and we are continuing to drive new sales that are cross sold with multiple products. And more of the new sales, more than 50% of the new sales included two or more clouds. And as I said before, we are seeing more and more often people buying the entire suite upfront.

Justin Furby – William Blair

Awesome, thanks, guys. Great quarter.

Adam L. Miller

Thank you.

Operator

And we will taker our next question from Brent Thill with UBS.

John S. Byun – UBS Securities LLC

Hi, this is John Byun for Brent Thill. Could you give a little bit of color around the international markets and give us the mix if you can and then also (inaudible) if you could provide a headcount that would be great. Thank you.

Adam L. Miller

So we don't give our headcount number specifically, but what I will tell you is that internationals represent about 30% of revenue in similar number of incremental sales, similar percentage. We think that number will increase. We are just now starting to expand our operations into Asia Pacific and Latin America, both of which, we think will drive incremental growth on top of what we're already seeing in EMEA. So we think that 30% will continue to increase. Within EMEA, most of that revenue obviously coming from Europe and within Europe, it’s relatively split between the U.K., the Nordics, Central Europe and Southern Europe. So it is fairly diversified throughout Europe, it’s not concentrated in anyone area.

John S. Byun – UBS Securities LLC

Thank you.

Operator

And we will take our next question from Michael Huang, Needham & Co.

Michael Huang - Needham & Co.

Thanks very much. Just a couple of quick ones for you guys. So in terms of the partnership with Workday, I was wondering if you would comment on how that relationship is trending. I don’t know if you can characterize or qualify whether or not number of wins that you guys are selling jointly is picking up and growing, that would be helpful. And then more of a higher level one, as you think about the partner ecosystem, I was wondering if I could get you to comment on which partner you saw would be more important for you guys longer-term, Workday or Saleforce, which partnership has more upside of the longer-term? Thanks.

Adam L. Miller

Yeah, once you get into a very long philosophical debate about partners in general, what I will say is that specifically, our partner’s strategy is one of avoiding concentration. So in much of a same way, that as a company we saw it very early on to avoid customer concentration, having too much of our revenue being associated with a single coin. We are actively avoiding partner concentration. So we’re making sure that not too much of our sales revenue is coming from any one or group of partners. And therefore, our strategy is one of diversification and we continue to do that. We are seeing a continued good relationship with Workday.

On a relative basis, I think it’s been relatively consistent, but on in absolute basis, the numbers are going up. And I think that trend will continue as both of us continue to increase distribution globally. We’re the interesting things of that relationship or aspects of that relationship is that it’s not limited to the U.S. It is very much a global relationship. We are very complimentary sales teams around the world and we’re building opportunities to sell our products globally. For example, Cornerstone is in news today in 189 countries and in over 40 languages. So we’re seeing real opportunity to sell around the world and I think you’re going to see more and more of that from the other major cloud providers.

Michael Huang - Needham & Co.

Got you. Now, I think in one of the earlier answers to the question, you alluded to improving sales productivity around the small business and I guess that would be the Sonar product. So I was wondering what’s actually driving that. Like what’s helping you kind of derive the productivity and the sales activity there? Thanks

Perry A. Wallack

Well, I think it’s taking time for the Cornerstone sales philosophy and process to get embedded into the company we have acquired, but it is now happened. And I’d say, as a business, Cornerstone has been very good at sales enablement. It’s one of the things we proud of ourselves on. On-boarding sales reps being very efficient about how we train to manage our sales teams and we’ve taken that same discipline and applied it to the small business teams, which is now resulted in very consistent performance across the boards.

Michael Huang - Needham & Co.

Great, thanks so much.

Operator

And we will take our next question from Scott Berg of Northland Capital Markets.

Scott Berg – Northland Capital Markets

Hi, Adam and Perry, very good quarter here, congrats. I have two questions, I guess, the first one is combined question. Adam, can you talk about the demand for which products your state and local customers, or maybe government and education as a whole are currently seeking return of their disproportion between maybe learning and something the performance or successionary let’s say?

Adam L. Miller

Yeah. I would say, it’s one area where recruiting is very important, those real demand for recruiting in the public sector, particularly at the state and local level as well as in Higher Ed. In [Q 2012] it’s been more about learning in the federal government, it’s been about performance and succession and in state and local, it’s been a combination of, I would say, all areas.

It depends on the size of the deal or the area whether you’re talking about the state level, the county level, or the city level, or even a specific municipality, it will vary as to whether it’s about succession, or performance, or learning, or recruiting, but all of those would play. And in Higher Ed, it’s also been a combination, I would say, predominantly of learning and recruiting.

Scott Berg – Northland Capital Markets

Great. And then my last question is, it’s a competitive question, but SumTotal, obviously one of the legacy elements that is in the space with the large install base has went on a huge hiring the sales people over the last six months, especially for company that didn’t seem to be aggressive at all in terms of new sales since their acquisition. Are you seeing them at all in terms of new deals or seeing them more competitively at all?

Adam L. Miller

No. I’d say they are probably more down market, we do not, it would be nice, we do not view them as a major competitive threat. Let me put it carefully that way.

Scott Berg – Northland Capital Markets

Great. That’s all I have. I’ll jump in the queue. Thanks and congrats guys.

Adam L. Miller

Thank you.

Operator

And this does conclude today’s question-and-answer session. At this time I will turn the call back to Adam Miller for closing remarks.

Adam L. Miller

Great, I want to thank you all for your participation and we look forward to continued success. Thank you all.

Operator

And this does conclude today’s conference call. Once again we would like to thank everyone for your participation and have a wonderful day.

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