Cornerstone's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 4.13 | About: Cornerstone OnDemand, (CSOD)

Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q3 2013 Results Earnings Call

November 4, 2013 5:00 PM ET

Executives

Perry Wallack - Chief Financial Officer

Adam Miller - President and CEO

Analysts

Michael Nemeroff - Credit Suisse

Mark Murphy - Piper Jaffray

Rick Sherlund - Nomura

Brendan Barnicle - Pacific Crest Securities

Greg Dunham - Goldman Sachs

Patrick Walravens - JMP Securities

Justin Furby - William Blair & Company

Michael Long - Needham & Company

Operator

Please standby. Good day, ladies and gentlemen. And welcome to the Cornerstone OnDemand’s Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Mr. Perry Wallack, CFO for Cornerstone OnDemand. Please go ahead, sir.

Perry Wallack

Good afternoon, everyone. This Perry Wallack, CFO of Cornerstone OnDemand and welcome to our third quarter 2013 earnings conference call. Today’s call will begin with Adam providing a brief overview of our company and our performance over the third quarter and then I will review some key financial results. 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.

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 materialized or any of the assumptions proved 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.

And with that, I will turn the call over to Adam.

Adam Miller

Thanks, Perry, and thank you to everyone joining us today. Q3 was an exceptional quarter for Cornerstone OnDemand and a continuation of what has been another truly outstanding year of growth for the company.

Revenues for the third quarter came in at a record $48.3 million, representing a year-over-year increase of 57% and bookings came in at a record $62.4 million, representing a year-over-year increase of 46%.

I would like to remind everyone that this 46% bookings growth comes against a very difficult compare from the third quarter of 2012, which saw bookings rise by 78% year-over-year.

If you were to normalize the Q3 2012 bookings growth to adjust for the contribution from Federal and other anomalies, the year-over-year increase in third quarter bookings this year would have again been 16%. So clearly the momentum of our business has remained very strong.

Much of our third quarter performance was driven by continued strong execution from our core business. Our direct sales teams both domestically and in EMEA helped us to add a number of marquee names to our client roster in the third quarter, including Dresser-Rand, W.R. Grace, SBA Communications, Roche, Reckitt Benckiser, France Telecom, a premier global consultancy and one of the largest manufacturing companies in Europe. The consistency with which our core business has performed over the years has helped us to achieve a dominant position with the largest companies in the world.

Today, Cornerstone clients include the top three global food and beverage companies, five of the top six domestic hospitality and leisure companies, six of the top 10 global pharmaceutical companies, four of the top seven global investment banks, and the list goes on.

As the talent management industry continues to mature, we are seeing that organizations are increasingly demanding the best of breed solution in the market. While there was a time when simply checking the proverbial talent management box from the company’s ERP provider was sufficient, we believe today’s market demands much more.

Cornerstone's absolute focus on talent management from our software to our services to our people has become a key differentiator allowing us to offer superior product and service. This has translated into continued success in head-to-head deals against Oracle and SAP in recent quarters; and as talent management buyers continue to get more knowledgeable and sophisticated, we believe this trend will become even more pronounced in the years to come.

Today, our international business contributes approximately 30% of our total revenue and almost all of that comes from Europe. Our EMEA team has done a great job of selling to Europe’s top companies, some of which I mentioned earlier and the list has continued to grow.

We are now working with many of the top companies in Europe enterprise-wide and in every major vertical, including Air Liquide, Barclays, British Petroleum, Carlsberg, HeidelbergCement, Jaguar Land Rover, Louis Vuitton, Manchester Airport, Sanofi, Skandia Life and many more. Our EMEA team has also been extremely successful in cultivating client relationships in building off of the initial sale.

Our top up sales each quarter had consistently included European clients and Q3 was no different, with RSA Insurance, two of Europe’s top three financial services companies and one of the world’s largest oil and gas companies all part of that group.

Even with all of this success, we believe significant opportunity remains, with pockets of Europe largely unpenetrated and the Middle East and Africa remaining almost entirely greenfield.

We believe we have a clear opportunity to replicate the success we’ve had in Europe around the world. Most notably, we believe additional opportunity to expand our global distribution capabilities exist in both the Asia-Pacific region and in Latin America. Throughout this year, we have been investing and building out our direct sales and service operation in APAC.

With our multinational deployments over the years, we have over 1 million users in Asia-Pacific and a growing partner ecosystem. We already have anchor accounts in Japan, India, China, Australia and New Zealand.

Over the past nine months we have established our APAC management infrastructure, hired global and regional sales reps throughout Asia-Pacific, and built out a dedicated services team to bring our consultative implementation model and relevant insights across the unique and varied APAC regions to focus on client success for our new APAC clients. Having learned from the experience of growing our business in EMEA, we understand the right balance of patience and drive to exceed our growth in the region.

We also have invested in building out our Latin American operations in 2013. Earlier this year we hired an experienced sales leader from one of our global competitors to head our Latin America sales team and over the past few quarters have added seasoned sales professionals and territory experts to cover each region. We have seen some earlier momentum in Latin America and we look forward to building upon as we move into 2014.

As our EMEA, APAC and Latin American businesses continue to develop, we believe our international business could ultimately comprise 50% of our total revenues or more. Of course, our desire to increase our global distribution capabilities is driven by the greenfield opportunity presented to Cornerstone with what we believe is over 400 million potential seats globally in our addressable market. Our footprint has been growing with existing and new clients alike and we believe significant opportunity remains.

Today, I want to highlight another area of significant opportunity for us, the ability to further penetrate our installed base. We now have nearly 13 million users with an average of two products each.

What many of you may not realize is that we actually have six products and multiple product add-ons across our clouds, as well as our extended enterprise solution, which is not limited to an organization employee count and can generate much more revenue than any individual solution a client purchases for internal use.

So conservatively, we believe there is at least a 3x opportunity for revenue growth for us within our existing installed base alone. Meaning, we could conceivably exceed $500 million in revenue without capturing a single additional seat of the nearly 350 million seats that remain within our total addressable market.

We believe the value of integrated talent management is becoming more and more evident to organizations of all sizes and the data supports this. For the first nine months of 2013, our average selling prices are up by nearly 30% for the enterprise and mid-market sales teams.

In conjunction with this, product penetration levels across the board have also risen each quarter. In fact, the penetration of our recruiting product nearly doubled in the third quarter alone.

In addition to our ability to grow revenue through the sale of multiple products, which is an opportunity we believe will continue to expand as we add new products to our suite, another potential driver of growth for us is the absolute price per seat for a single product.

When you consider our total addressable market, it is important to remember that our business today is as concentrated as it likely ever will be within the large enterprise segment and that the further down market we go, the higher the prices per seat.

As you all know, over the past couple of years we have made a concerted effort to move down market and grow our presence within the mid-market and SMB segments, where the price points for each individual product are generally two to four times what they are for large enterprises.

So going forward, we expect to generate more revenue per user not only because we are becoming more and more successful at selling multiple products, but also because we expect the percentage of our mid-market and SMB users to grow from where it is today, with the higher associated price points.

As Cornerstone has achieved industry-leading growth quarter after quarter, we have remained most focused on ensuring the success of our clients. This is evidenced by our dollar retention rate, which has averaged 95% for the last 10 years and we believe it is on pace to be amongst the highest in SaaS again in 2013.

Our combination of growth and retention helped us increase the size of our user base to nearly 13 million users in the third quarter, which continues to represent one of the largest SaaS subscriber bases in the world.

With the continued strength of our core business, our ongoing investments in new growth initiatives and commitment to the success of our clients, along with the significant remaining market opportunity, both with our existing clients and new companies of all sizes across the globe, I’m very excited about the path ahead.

I’d now like to turn it back over to Perry to discuss our financial performance in more detail.

Perry Wallack

Thanks, Adam. Before I get to the financial results of our third 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. We talk about non-GAAP numbers for the following reasons.

Non-GAAP financial measures exclude certain items that we believe are not good indicators of Cornerstone’s current or future operating performance. For the periods we will discuss today, these items include expenses related to stock-based compensation and related employer payroll taxes, amortization of intangible assets, acquisition costs, adjustments in taxes related to acquisition adjustments and amortization of debt discount and issuance costs and payments of premium on investments net of amortization.

For periods in past, this may also include adjustments to our revenue due to the write-down of deferred revenue related to our acquisition of Sonar Limited in April of 2012. You can find the reconciliation of GAAP to non-GAAP results in today’s earnings release.

As Adam said, we had a very good quarter. Third quarter GAAP revenue and bookings grew at 57% and 46%, respectively, on a year-over-year basis. GAAP revenue and bookings for the first nine months of 2013 grew at 60% and 50%, respectively, compared to the same period in the prior year. Our GAAP revenue for the third quarter was $48.3 million coming in around the high-end of our guidance.

As we have talked about in the past, our revenue can be dependent on among other things, the timing of when consulting services are delivered to our clients by both our services organization and third-party implementation partners.

In addition, when we close for a large customer, often the largest companies in the world and government entities such as the Federal government, implementations can sometimes take several quarters. In these cases, we have delays in the amount of revenue that is recognized and when it is recognized can result in a more disproportionate recognition than a typical customer.

Total bookings, which we defined as gross revenue plus change in deferred revenue were $62.4 million for the third quarter again representing a 46% year-over-year increase over third quarter 2012 bookings of $42.7 million. We would note that this is being compared with the prior year comp of 78% bookings growth in Q3 of 2012.

Again, as we have talked about on prior calls, I remind you that our bookings can vary on a quarterly basis depending on the nature and timing of invoicing for new clients, existing clients and renewals. There were no significant anomalies in our invoicing turns in the third quarter.

The size of our client base, excluding CSB and CFS clients increased from 1,112 clients as of September 30, 2012 to 1,505 clients as of September 30, 2013 representing 393 client additions and 35% year-over-year growth. On a sequential basis versus the second quarter of 2013, we added 94 clients during the quarter, again excluding CSB and CFS clients.

Our execution in the large enterprise market consistent with the second quarter has remained extremely robust. As Adam mentioned, ASPs have been increasing during the year and we saw that trend continue in the third quarter.

In addition, our user base increased from 12.3 million users as of June 30, 2013 to approaching 13 million users as of September 30, 2013, which represents the addition of approximately 600,000 users during the third quarter or 5% sequential growth.

Our gross profit for the third quarter of 2013 was $35.6 million, compared to $22.7 million in 2012, reflecting an increase of approximately $12.9 million or 57%.

Our gross margin for the third quarter of 2013 was 73.7%, which reflects the year-over-year improvement of approximately 100 basis points compared to the third quarter of 2012 gross margin of 72.7%. As a reminder, we continue to invest in our software, network infrastructure and services organization to support our growth and the success of our clients.

As we have previously communicated, our use of third parties to perform implementations is increasing. The timing of these investments and use of third parties can affect our margins on a quarter-to-quarter basis. For the full year 2013, we continue to expect our gross margins will nominally improve over 2012 gross margins.

Now, let’s turn to operating expenses. Sales and marketing expense was $25.2 million, representing a year-over-year increase of $7.7 million or 44%. As has been the case for the past several quarters, the 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 52%, compared to 56% in the same period in 2012.

R&D expense was $5.1 million, representing a year-over-year increase of $1.3 million or 33%. The increase in R&D expense can be attributed to increased headcount related to our continued investment in product development. As a percentage of revenue, R&D expense was 11% in the third quarter compared to 12% in the same period in 2012.

G&A expense was $6.4 million, representing a year-over-year increase of $1.4 million or 29%. The increase in G&A expense can be attributed to increased headcount, accounting and audit 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 13% revenue for the quarter compared to 16% in 2012. As a percentage of revenue, the operating expenses mentioned above were 76% in the third quarter compared to 84% in the same period in 2012, which represents a year-over-year improvement of approximately 830 basis points.

As we pointed out last quarter, we believe that this operating margin improvement when combined with our industry-leading revenue and bookings growth continues to speak to the strength in our overall business model and our ability to have a high margin, high growth business over the long-term.

Operating loss for the third quarter was $1.1 million, compared to an operating loss of $3.6 billion for the third quarter 2012. This represents an operating margin of negative 2.2%. We are pleased with the improvement we have made in operating loss and believe it is indicative of the path of the business toward future profitability. We know that this improvement in operating margin was achieved with a 57% revenue growth in the quarter.

Net loss for the third quarter was $1.9 million, or a net loss of $0.04 per share based on a weighted average shares outstanding of 51.5 million, shares compared to a net loss of $3.6 million or net loss of $0.07 per share based on weighted average shares outstanding of 50.2 million shares in the third quarter of 2012.

With regard to cash flow, our cash flow from operating activities was positive $2.7 million, compared to negative $844,000 in the third quarter of 2012. As we have communicated in the past, collections and DSOs fluctuate significantly during the year and are therefore best reviewed on an annual basis.

Let me now turn to the balance sheet. As of September 30, 2013, our total cash, short-term investments, and accounts receivable balance was approximately $287.3 million. As a reminder, in June of 2013, we issued $253 million in five-year convertible notes, which yielded approximately $220 million in cash, net of related warrant and hedge transactions as well as underwriters, legal, and accounting fees. During the third quarter of 2013, we purchased $201 million in short-term and long-term investments.

On a GAAP basis, our deferred revenue balance was $109.2 million as of September 30, 2013, compared to $95 million as of June 30, 2013 and $72.6 million as of September 30, 2012, representing a sequential increase of 15% and a year-over-year increase of 50% respectively.

With respect to headcount, we added 47 employees during the third quarter of 2013, bringing our total headcount to 928 employees as of September 30, 2013. This total headcount number represents a sequential increase of 5% and a year-over-year increase of 32% respectively.

I would now like to discuss our outlook for the fourth 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 execution in our business this past quarter, for the full year of 2013 we are raising our previous GAAP revenue guidance from a range of $183.5 million to $185.5 million, to a range of $184.5 million to $186 million. At the midpoint, this revised range suggests 57% growth over 2012 GAAP revenue of $117.9 million. The above full year guidance implies for fourth quarter of 2013 GAAP revenues to range from $54.2 million to $55.7 million.

At the midpoint, this range represents 51% growth over the fourth quarter of 2012 GAAP revenues of $36.4 million. With respect to non-GAAP net income or loss, we are maintaining our prior full year 2013 net loss guidance of approximately $11 million. This implies a non-GAAP loss of $0.21 per share based on full year weighted average share count of approximately 51.4 million shares.

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

And with that, I would like to turn it back over to Adam.

Adam Miller

Thanks, Perry. I wanted to thank our clients for their partnership and collaborations, as we continue to deepen and expand our state-of-the-art learning in talent management suite. I also especially want to thank our global Cornerstone team for their dedication and execution and I look forward to continuing to build upon our ongoing momentum and success.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Michael Nemeroff with Credit Suisse.

Michael Nemeroff - Credit Suisse

Hey, guys. Congratulations on a nice quarter.

Adam Miller

Thank you.

Perry Wallack

Thank you.

Michael Nemeroff - Credit Suisse

Just kind of curious about how the replacement cycle is going. Are you replacing a lot of Oracle and SAP these days from some of the acquired vendors?

Adam Miller

Not so much. We’re doing a little bit of Oracle, specifically around the recruiting cloud. I would say we are also starting to see full suite deals where they are considering replacing everything and that could include a mix of the SAP and Oracle. As you know, because it could have both Taleo and SuccessFactors in the account, and they’re considering a single vendor for all talent management, but I would say for the most part, these are either net new deals or replacements of legacy systems.

Michael Nemeroff - Credit Suisse

That’s great. And then if I may, one other one. You mentioned Adam, before that if you didn’t sign another new seat you could turn revenue 3x. I was just wondering, specifically what kind of programs or what are you targeting going forward that gives you the confidence that you can drive more upsell into the existing base? Thanks.

Adam Miller

So we’ve very consistently have been able to upsell our client base since the beginning of the company. As you know, over 60% of our clients have two or more of our clouds, and we have a clear ability to cross-sell our products. What has changed is really two things, one, the suite has grown, so we have more products that we can sell into the client base relative to even a couple of years ago.

And two, I think we have a better team going into next year that’s able to leverage the campaigns we have on the net new client side to start to more aggressively upsell our installed base. And if I were to add a third thing, I would say our service model leveraging our client success managers has opened up opportunities within the installed base that we might not have seen without having that level of service on the ground. I would say overall…

Michael Nemeroff - Credit Suisse

Thanks very much for taking my question.

Adam Miller

…integrated talent management is becoming more and more important to companies generally, and we see that built broadly in new sales and on a micro level within our installed base.

Michael Nemeroff - Credit Suisse

Thanks Adam.

Operator

And we’ll hear next from Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you. I will add my congratulations as well. Adam, exiting Q2 I believe you had said that there could be downside risk to the Federal business here in Q3. Just curious, how did that segment ultimately play out versus your expectations or maybe public sector in general?

Adam Miller

Well, I don’t know if you turned on the news during the last quarter. But as you know, the Federal government was not performing as well as they had in the past, to put it nicely. So, we I think met our expectations of what would happen in Federal which was very little. But overall, public sector has been performing fairly well. And specifically, what I would say is that the downturn that we’ve seen in the Federal government, which I think is not limited to Cornerstone.

This is the macro problem I think in the U.S. It has been offset by the success we’ve had in state and local, K-12 and higher-ed, to offset the downturn we’ve seen. So that’s been helpful. Another way to put it is, had we even had a normalized year with Federal, we would have had even higher upside than we’ve had so far this year which has been very strong already.

Mark Murphy - Piper Jaffray

Yeah. Yeah. Okay. So, Adam, as a follow-up, in our due diligence sessions we have heard some commentary that you’re benefiting from the rounding out of the clouds, so including learning performance, compensation, recruiting and so on and so fourth. And I think in a way it reminds us a bit of Salesforce.com’s evolution and they ultimately began to disclose the percentage of new bookings that were non-SFA or non-sales force automation. Just to try to demonstrate that it’s a multi-cloud story, I think that’s why they did that. Is there anyway you could begin to estimate your non-learning new bookings mix?

Adam Miller

Yeah. I mean, as we’ve said before, learning is stated about 85% penetration across the installed base but everything else has increased. So not all of our clients have learning, many of our clients have more than one cloud. So if you just do the arithmetic, there is significant growth in the non-learning business across the board. I would also tell you that we are seeing a significant acceleration in penetration of the recruiting cloud. So we almost doubled our recruiting cloud penetration in about one quarter.

Mark Murphy - Piper Jaffray

Okay. Okay. The last topic I wanted to get into, Perry, I think you had mentioned ASP is up about 30% year-over-year. I’m just trying to understand, to what extent is that a mixed shift? We could look at it and say well, it’s more SMB with kind of naturally higher pricing, and maybe to what extent is it just the same profile of deals you were doing a year ago, but with less discounting off of list prices? And I guess if it’s the latter, what is causing that?

Perry Wallack

Yeah. So, we -- let me do this, let me answer it first and then, Adam loves to talk about this. First off, we don’t really break out the contribution in the waiting, if you will, between those two things. We are, as we’ve stated in the past, for the first nine months of this year, seeing the ASP go up for both of those reasons, right.

It’s less discounting and it’s selling every customer more and more modules, okay. The mix of deals that we’re seeing is changing a little bit. We’re starting to go down market more, but our execution in enterprise, especially in this last quarter as Adam mentioned was phenomenal. And so with that, I’ll give Adam the opportunity to also embellish.

Adam Miller

Yeah. So, as we’ve said before what we see generally is just higher effective pricing. We have not raised our list prices. We just discount less. I think part of that, is our brand has grown and our credibility has grown. Part of that is what’s competition in the space and part of it is a desire for an integrated suite.

So, we get the benefit, both of higher effective pricing in those deals as well as the ability to sell multiple modules in the deal. And to your other point, obviously, as we go further down market, and more of our businesses from the mid-market and the SMB segments, we’re seeing just higher prices per seat in general. In some cases, it’s two to four times of pricing that we see in the enterprise.

Mark Murphy - Piper Jaffray

Great. Thank you very much for taking my questions.

Adam Miller

Thank you.

Perry Wallack

Thank you.

Operator

We’ll move next to Rick Sherlund with Nomura.

Rick Sherlund - Nomura

Thanks, guys, good quarter. I’m wondering in response to one of the previous questions if the fed business that you mentioned, it was kind of not as good as that would have been otherwise if some of that got pushed out and you expected to close that in Q4. So, if maybe there are some catch up you would anticipate in? Also and you mentioned about new products and new growth initiatives, I’m wondering if you could elaborate a bit on what you are referring to there and what you are spending R&D on now.

Adam Miller

So with regard to Federal, I would say that we are seeing significant pent-up demand that’s growing larger over time. I do not expect that to unleash in the fourth quarter. I don’t know if it will happen in 2014 or 2015. Congress still does not have any resolution around sequestration, so we simply don’t know.

With regard to R&D spending, we have been investing very heavily in our new product initiatives. As you know, we rolled out the recruiting cloud. We’re working on an on-boarding module right now. We’ve been enhancing all of our products, learning, performance, succession, compensation, as well as the extended enterprise.

And we are seeing the ability to go deeper with a better user experience than we’ve been able to -- than our competitors are simply able to because of all the integration work they’re doing right now. Our focus has been on social, on mobile and on video around all of our application areas and we’re seeing very good receptivity in the market for all of our product strategies.

Rick Sherlund - Nomura

Thank you.

Operator

And Brendan Barnicle with Pacific Crest Securities has our next question.

Brendan Barnicle - Pacific Crest Securities

Thanks so much. Adam, I want to follow a little bit up on the government thing again, but more generally on, sort of, what you guys saw around the demand side in October generally. Did you see any change in demand trends as things may have loosened up around the Federal government or on Europe or anything more broadly?

Adam Miller

My lawyer said I’m not allowed to answer that question. But I will tell you that generally we see no change in Federal. All you need to do is pick up a newspaper and you would know that there’s no real change going on there right now.

With regard to Europe, as we said, earlier today we’re seeing great momentum in Europe. Our business there has not slowed down at all. Over the last couple of years despite the entire macro environment, all of the issues that have happened, in particular, in southern Europe, we’ve seen a very consistent ability to sell throughout the entire European market place.

Brendan Barnicle - Pacific Crest Securities

Great. And then last quarter, you in particular had highlighted new Connect in universal profile products. I was wondering if you had any additional color on what you saw of those new products this quarter?

Adam Miller

Yes, so Connect, it’s still early. About 25% of our client base use Connect. Most of them are still on the older version. We have the second phase of that project that’s coming out in January. And we expect a lot of our clients to convert in Q1 and Q2 of next year.

With regard to the universal profile, it had very good adoption and it has become the centerpiece of our application going forward. In effect, those projects Connect in the universal profile have been the centerpiece of the consumerization of the enterprise project that we’ve been doing for a while now, which has to do with making the interface much easier to use, much more modern in look and feel and extremely streamlined across all the different areas of functionality that we have in the system.

The universal profile is a great example of a single place where a user has access to information about recruiting, learning, compensation, performance, succession metrics, and all other aspects of the system all in a single place. So it’s improved the adoption rate of all of our other products because it really is reinforcing this idea that holistic talent management is essential for corporation to be successful.

Brendan Barnicle - Pacific Crest Securities

Great. Then the last one for me, and we touched on it a little bit in the earlier question, as the number one question I get from investors is, you guys have been a nice beneficiary of the industry consolidation. And so how long can we expect that benefit to continue?

Adam Miller

Yes, Brendan, I’ve answered this question at investor conferences before. I think, as soon as the consolidation occurred, which is now several quarters ago, there was the assumption that we would do very well for one or two quarters. This has now been going on for six or seven quarters. And we’ve seen no slowdown. In fact, I don’t believe this is a cyclical change. I believe these are permanent changes.

We are seeing most of the intellectual horsepower behind Taleo now having left Oracle. And we believe the same thing will happen and has started to occur with SuccessFactors at SAP. So we think the impact of consolidation will only improve from here particularly with regard to SAP and then that will not recover. Meaning, these are permanent changes that are happening.

Brendan Barnicle - Pacific Crest Securities

Great. Thanks, Adam.

Adam Miller

Thank you.

Operator

And from Goldman Sachs, we have Greg Dunham.

Greg Dunham - Goldman Sachs

Hi. Yes, thanks for taking my question. I wanted to just clarify the ASP increase of 30%. Is that related to new business bookings? Is that fair?

Perry Wallack

Yes.

Adam Miller

Yeah.

Greg Dunham - Goldman Sachs

Okay. And then, to dig in, I know you’re not going to quantify the impact in terms of just effective pricing and cross-sell, but you did highlight the client success managers and then they clearly are having an impact in terms of cross-sell. Is there any way to get more aggressive and to do things a little bit differently as you look out to next year? Do you want to formalize the process of cross-sell a little more? Any changes that we should expect?

Adam Miller

Yes. There will definitely be changes going into next year. I think we’ll talk about them more specifically on our next call. But we have many plans underfoot for the organization of that team and how to accelerate our growth in the installed base.

Greg Dunham - Goldman Sachs

Okay. Great. Last question for me and then Brendan asked that the consolidation question, the other question that we get often is you do hear noise from Workday, ADP and others that may or may not have been as competitive with you historically. Can you comment on how that PR actually is impacting the business and your thoughts on competing with them going forward? Thank you.

Adam Miller

Yes. I mean, all of those companies are partners of ours. So there is a lot of commentary out there. The reality is we are jointly selling with Workday. We are aggressively selling with ADP and with others. There are obviously overlaps in some cases with the product suites with other products that these partners might have.

But the reality is that we’re in a world of competition that it will only increase in the cloud space not decrease. And we believe that our entire focus on talent management in our level of specialization makes us the best-of-breed solution in this market. We think this is a very large market and we’re staying right here.

So we think we have a very significant competitive advantage against any other player in talent management, particularly as the space continues to mature. We’ve had second and third time buyers who want an integrated solution, who understand the benefits of holistic talent management and want the best-of-breed solution for their people.

Greg Dunham - Goldman Sachs

Okay. Thanks.

Operator

And Patrick Walravens with JMP Securities has our next question.

Patrick Walravens - JMP Securities

Great. Thank you and congratulations to you guys. Is there -- are there any thoughts you can share with us that help us think about 2014 growth? I know you haven’t guided but is there anything you can share?

Adam Miller

Well, as you know we’ve had a significant investment over the last year in both APAC and in Latin America. We believe there is significant international opportunities for the business today. We’re still running about approximately 30% international in terms of both sales and revenue. We think that number can grow in the near-to-medium term based simply on expanded distribution around the world.

So we’re putting people on the ground throughout Latin America, throughout Asia-Pacific. We are significantly expanding our teams throughout EMEA. And we believe there’s opportunity from that perspective. We also think, as I mentioned before, with the growth of the product suite and the adoption we’re now seeing around products like the recruiting cloud, that we have a lot of upsell opportunity within the installed base.

And we continue to push the segmentation. So we’re going further down market and continuing to look at how to expand globally our SMB operations as well as going for the up market around strategic accounts. We’re doing that globally as well. So we see this as a truly global business opportunity. We now have about 13 million users in 190 countries using the system in 41 languages. We see a lot of opportunity to keep extending around the world.

Patrick Walravens - JMP Securities

Okay. And then Adam, are you -- I think when we go to Dreamforce this year we’ll see that sales force has been putting a lot of effort into really improving its mobile solution. Are you happy with where your mobile solution is, and if not, what you need to do there?

Adam Miller

Great question. I would say we got a late start to mobile. On the one hand that’s discouraging, on the other hand, a lot of people change their mobile strategy about 18 months ago and went from mobile web to native applications. We -- because we started late, started native. We have now a fully dedicated mobile team, building a complete mobile suite for iOS and for Android, so native applications.

And we have already rolled out recruiting applications around each of our cloud. So learning on mobile, performance on mobile, recruiting on mobile and like recruiting, we get the advantage of starting a little bit late and understanding how the world has changed, understanding what is and is not important, our strategy is not to replicate the entire suite on a mobile device, but rather to capture the benefits of having something in your hands or in your pockets and be able to leverage extendable functionality around that.

So whether we’re talking about taking training through a mobile device either online or offline or we’re talking about interacting with applicants, approving requisitions or moving applicants through the process around recruiting, or actually doing social connecting internally in an organization or managing parts of the performance process all through mobile devices, all of that is now underway. Much of that is released but we have a very aggressive roadmap around mobile over the next 12 months to supplement what we’ve already done.

Patrick Walravens - JMP Securities

Great. Thanks for taking my questions.

Adam Miller

Thank you.

Operator

We’ll go next to Justin Furby with William Blair & Company.

Justin Furby - William Blair & Company

Hey, guys. Thanks for taking my questions. Adam, I guess, first for you. I was -- there’s been a bit more discussion out there from some of the third-party industry analysts talking about how core HRIS is becoming a bigger influencer in terms of HR tech spend, your numbers continue to disprove that theory.

So I guess, I was hoping you could sort of contrast that idea with what you’re seeing in the market. And I guess is there ever a time where you guys hit a certain revenue scale when you potentially change your mind and consider kind of entering in that core HRIS market?

Adam Miller

Yes. What I would say is that the market demand for integrated talent management is very real. We’re seeing that around the world. Like we’ve said before, we think there’s 400 million potential seats for what we do and there’s 350 million that are greenfield. So we’re seeing a lot of opportunity out there, specifically within talent management.

Our view around HRIS is really twofold. One, all of our top partners have core HRs as part of what they do and we don’t want to go head-to-head with them around that. We think it’s much more beneficial to us to be working with them right now.

And number two, we believe a lot of the large enterprise installed base is already comfortable with an existing core HR system. So we have focused instead on integrating with those systems.

We have done literally thousands of integrations with Oracle, SAP, old versions of Oracle, specifically PeopleSoft, ADP, Workday, Lawson, Ceridian, you name it and that has allowed us to view the entire world as an open opportunity, instead of limiting ourselves to a particular subset of that market. And we believe this further plays into our specialist versus generalist argument. And it’s a big reason for our success that we’ve been very specialized on talent management.

Justin Furby - William Blair & Company

Okay. So you’re not seeing yourself in deals where that tends to be a big differentiator. I mean, how often are you in a deal where you get sort of [DQ] it because of not having that as an option?

Adam Miller

Almost never, because if that was the case we would bring in one of our partners.

Justin Furby - William Blair & Company

Okay. Okay. And then on analytics market, that seem to be sort of a trending topic at HR Tech. I’m just curious if you could sort of grade yourself in that market versus your competitors and then maybe talk a bit about your plans there going forward?

Adam Miller

Yes, so we think about analytics as really three different markets, maybe four. The first is standard reporting, the kinds of reports you would get out of a system that any end-user could leverage. We are very strong there. We’ve have been doing that from day one. Custom reporting, which is allowing a client to build any number of custom reports. This is something we’ve been doing for a long time. We have continued to invest in this area. Our products have gotten stronger and stronger in this area and I think we’ll continue to evolve.

The third is predictive analytics. This is really leveraging the big data that we have and is something that we’re working on going forward. And the fourth is really leveraging that big data to do more things around functionality but something we also do, it’s part and parcel with how we do recruiting, how we do succession, how we do the extended enterprise. And we believe there’s more products and services we could offer over time leveraging the data that we have.

Justin Furby - William Blair & Company

Okay. And then one more, if I could, in terms of the -- you mentioned video is one of your focus points. There has been some discussion around these online courses at the -- in the higher end market. Do you think, longer term, does that potentially become a competitor to you and how are you positioning yourself in that space?

Adam Miller

No. I mean, we view books, we view universities that the consumer plays out there all as content providers. We are working with all of the top e-learning providers in the world, and continue to expand our library as there are new forms of content out there. We just believe that most of the proprietary content built by corporations for their own internal use will shift from web-based or flash-based content to more video-based content. And so we’ve been evolving our system to be able to better handle that type of engagement with the employees.

Justin Furby - William Blair & Company

Okay, great. Thanks very much.

Operator

And it looks like we have time for one more question. That will be from Michael Long with Needham & Company.

Michael Long - Needham & Company

Thanks very much. Just a couple of questions for you guys. In terms of the lower end of the market, I’m wondering if you can talk about Sonar6 now that’s performing relative to the expectations. And could you share an update on how your partnership is going with Salesforce probably via the Cornerstone for Salesforce was unveiled earlier. I wanted to get an update on that?

Adam Miller

Yes. The Cornerstone for Salesforce is going well. You’re going to see that. To enforce, we have a significant number of joint clients now with Salesforce including Salesforce itself and continue to expand our market opportunity there. We believe that is a very strong solution for managing sales effectiveness programs, or sales training programs and we think there’s a significant opportunity also within our own installed base for that solution.

With regards to Sonar6 which today is Cornerstone Small Business or CSB, we’ve seen good growth in that group. We think there is a lot of incremental opportunity there as well. We think we can grow it globally. We’ve now put a team in place in EMEA, we’re growing with team in APAC. We are significantly expanding a team in U.S. We have folded it into our sales management organization and believe we can significantly extend our opportunity there, both through a growing direct sales team and through indirect channel partners.

Michael Long - Needham & Company

Great. And then, last question please. I wonder if you can comment on the NetSuite acquisition of TribeHR, do that surprise you? Do that suggest more competition at the lower end of the market and where do you play, I just wanted to get your perspective on that. Thanks.

Perry Wallack

No. It didn’t surprise us. We don’t view it as particularly competitive. And they are operating in a really different segment than we are. We view it as a logical evolution of the financials market where we’re seeing a lot of competition now amongst the providers of financial tools and a lot of them are expanding into HR as well, particularly in core HR, tying core HR and financials together. So we don’t view that as competitive and that has not impacted us at all.

Michael Long - Needham & Company

Great. Thanks so much.

Perry Wallack

It’s also worth mentioning that the volume opportunity in SMB is so large. There are literally millions and millions of accounts globally that any acquisition by anybody in the SMB space would be of little consequence to the market opportunities for CSP. It’s just such an enormous greenfield opportunity right now.

Michael Long - Needham & Company

Makes sense. Thanks guys.

Perry Wallack

Thank you.

Adam Miller

Thank you.

Operator

And gentlemen, at this time I’ll turn things back to you for closing remarks.

Adam Miller

Thank you all for your participation. And we look forward to speak to you on our next call. Thank you, everyone.

Operator

Again that will conclude today’s conference. We thank you all for joining us.

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Cornerstone OnDemand (CSOD): Q3 EPS of -$0.04 misses by $0.01.

Revenue of $48.27M (+57% Y/Y) in-line. (PR)