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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q4 2013 Earnings Conference Call

February 11, 2014 5:00 PM ET

Executives

Perry Wallack – CFO

Adam Miller – Founder and CEO

Analysts

Michael Nemeroff – Credit Suisse

Frank Robinson – Goldman Sachs

Mark Murphy – Piper Jaffray

Patrick Walravens – JMP Securities

Justin Furby – William Blair & Company

Brendan Barnicle – Pacific Crest Securities

Operator

Good day, ladies and gentlemen. And welcome to the Cornerstone OnDemand’s Fourth Quarter and Fiscal Year 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. (Operator Instructions). As a reminder this conference is being recorded.

I’d now like to turn the conference over to Perry Wallack, CFO for Cornerstone OnDemand.

Perry Wallack

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

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, product demand, projected financial results and operating metrics, product development, client retention, market or business activity, visibility into our performance, the impact of capitalized development costs, R&D spending, professional services, our appraisal of our competitors 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 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, in the Risk Factor section of our most recent Form 10-K and Form 10-Q.

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

Adam Miller

Thanks, Perry, and thank you to everyone joining us today. The fourth quarter capped another year of solid execution and record results for Cornerstone OnDemand.

Bookings for the fourth quarter came in at $84.5 million, bringing us to $231.7 million for the full year which represents over 50% growth over fiscal 2012. GAAP revenue for Q4 came in at $84.9 million, bringing us to $185.1 million for the full year, which represents 57% growth over fiscal 2012.

Clearly the momentum at Cornerstone remains strong. We added over 150 new enterprise and mid-market clients during the fourth quarter alone, bringing the size of our organically grown client base to more than 1,600 companies worldwide. New client additions in Q4 included some of the world’s leading brand such as Philip Electronics, Suburu, Papa John, Nissan Motor Company, Moet Hennessey, [Pujoe] and Moody’s to name just a few. As many of you know however industry leading top-line growth is only part of our story. A disciplined approach to spending that we learned years ago as a bootstrap junk company remains part of our DNA and we believe these results speak to that.

Operating cash flow for 2013 came in $20.6 million, representing year-over-year growth of 84% and significantly above $18 million public guidance. We also saw our full year non-GAAP net loss margin again improved as it has in each past four years, bringing us even closer to breaking even.

Our business had the good fortune of many vectors of available growth and we made strong progress across all of these dimensions last year. We saw our business expended in each of segments, verticals and geographies as well as within our installed base. Quite simply, what we do, helping organizations to recruit, train and manage their people is applicable to any group of people anywhere in the world and 2013 provided further validation of that fact.

After the acquisitions of SuccessFactors, Taleo and Kenexa many investors did assumed that this wave of consolidation would help us in the mid-market in small business segments but would hurt us up market as our competitors leverage their new parents who sell to the world’s largest companies. The reality is, we did more enterprise business last year than ever before and improved our enterprise win rates at the same time. In 2013, we added IKEA, USG Corp, [Red Care] and Dresser Rand among many others to our marquee client roster in the mid-market as expected Cornerstone emerged as a clear vendor of choice.

As many of you know, we significantly grown the mid-market team in recent years and seen tremendous successful selling to medium sized businesses. Last year we saw record sales from this segment along with a sharp rise in average selling prices, which increased by nearly 30% over 2012. To leverage this trend in 2014, we are adding a new sales team focused in the lower end of the mid-market segment. Out mid-market team will now focus on companies with between 1,000 to 5,000 employees. And our new major accounts team will focus on companies with between 4,000 and 1,000 employees. We believe this bifurcated approach will enable us to maximize conversation of the opportunities we are seeing within the segment and increase our unit volume.

In addition to the consolidation helping us compete by segment, we also witnessed an increasing ability to compete by vertical. Cornerstone’s absolute focused on talent management helped us grow our presence in many existing verticals such as financial services, retail and technology while also building a leadership position in many new verticals such as automotive, energy and consumer product and yet we feel that significant opportunity remains, healthcare, life sciences and public sector in particular offer substantial potential upside in 2014.

While federal sequestration made growth in the public sector challenging in 2013, we made strong progress expanding our presence in state and local government with key wins such as Wisconsin Department of Transportation, the California franchised Tax Board, and the Maryland, State Highway Administration. And in education with key wins such as Bucknell University, Ohio Health Sciences and the Los Angeles Unified School District.

2013 was also a year in which Cornerstone underwent significant geographical expansion. Despite macro economical unsteadiness Europe throughout the year, our EMEA team performed exceptionally well. We saw success not only in our core European markets such as the UK and France but all over the region adding marquee name such as Roche in Switzerland, BBVA in Spain in Bohler IT in Sweden and Philips Electronics in Netherlands.

As we look ahead, we are seeking to replicate the success we had in Europe all over the world, including in the Asia Pacific region. In APAC we now have large anchor clients to leverage in all major markets with Nissan in Japan, BESTSELLER in China, Commonwealth Bank in Australia and Tata in India. We will continue to aggressively build out our direct sales and service teams in key geographies around the world in 2014.

In addition to the greenfield opportunity we are seeing, because of the size of our installed base today we believe that is tremendous opportunity right at home, within our client base. There are three primary drivers of this opportunity. The first driver is retention. Since it is easiest to grow your install base when you keep the clients you have. In 10 years from 2002 through 2012, we averaged annual dollar retention of approximately 95%. In 2013, while continuing to scale and further increasing our down market concentration, we typically see higher rates of attrition. We again achieved the dollar retention rate of approximately 95%. Our complete focus on client success has clearly paid dividend.

The second major driver of installed base expansion is the ability to cross sell. Today, over two-thirds of our client base has two or more products and over a third has three or more products. This strong ability to cross sell has encouraged us to get even more focused on up-selling the installed base. On January 1st, we promoted one of our top enterprise managers to run our client sales team and we have verticalized the team to enable our clients sales reps to more effectively tailor their approach to the differing needs of our clients across industries.

The third driver is the availability of additional products to sell. With over six products today and more on the way we have a broad array of tools to help our clients empower their people and that translate into a big market opportunity. If you were to take our current user account of about 14 million and assume a conservative average annual price per user of $20 for each product, that would amount to nearly $300 million software revenue opportunity per product. After adjusting that calculation, the current penetration levels of each of our products results in a combined incremental software opportunity of over $1 billion, excluding other products that we expect to release in the quarters and years to come.

Another benefit that we earned is we have cemented our leadership position within talent management is that Cornerstone become the preferred talent management vendor for many of the world’s top HR consultancies, business process outsourcers and system integrators. For example, this morning we announced our new global relationship with Deloitte. Not only is Deloitte the single large human capital management consulting practice in the world but they are also well educated on Cornerstone, making them an ideal resource for many of our large multi-national clients.

We believe relationships like this help our clients to improve the effectiveness of the talent management initiatives by pairing Cornerstone solution with a strategy plan that furthers their business goals.

To conclude, I wanted to take this opportunity to thank the incredible team here at Cornerstone for getting us to where we are today. Having achieved over 50% growth in each of our first three years as a public company we have placed ourselves amongst some of the most successful companies in the world. As proud as we are of our continued momentum and global expansion we are most proud of collective success at establishing and scaling a truly great corporate culture.

In December, Cornerstone was named one of the best places to work in Glass Doors 2014 Employee Choice Award ranking fourth on the list of all medium-sized companies. Through the continued use of our own investor retail management suite our committed to team work and client success and the global work of our foundation we strive to remain a blueprint for creating engaged and empowered organizations all over the world.

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

Perry Wallack

Thanks, Adam. Before I get to our fiscal year and fourth quarter 2013 financial results I would 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 the 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. Before we jump into the financials, I’d like to reiterate some of the comments Adam made earlier.

We had another fantastic year. Year-over-year we grew bookings and GAAP revenue by 50% and 57% respectively, which demonstrates our ability to grow our business at an industry leading pace even at greater levels of scale. 2013 marks the fourth consecutive year that we have exceeded bookings in GAAP revenue growth of 50%. The average booking in revenue growth for the past four years has been 61% and 59% respectively. Even more impressive is that this top-line performance has been accomplished while improving both our non-GAAP cash flow from operations margin and non-GAAP operating margins.

With that said, let’s discuss the numbers. Our GAAP revenue for the year was $185.1 million and non-GAAP revenue was $185.3 million. Our revenue was all through the full year representing year-over-year increase of 57% on a GAAP basis. Our full year GAAP revenue was approximately at the midpoint of our guidance range of $184.5 million to $186 million.

As we’ve highlighted in the past our revenue can be dependent 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, as Adam touched on, we saw consistent execution in the large enterprise market throughout 2013. The timing of the performance of the services for these clients and the associated revenue association is sometimes difficult to perfectly predict. These clients will often delay their initial implementation timelines to meet their changing business needs, which is beyond our control.

Total bookings, which we defined as gross revenue plus change in deferred revenue were $231.7 million for the full year, representing a year-over-year increase of 50%. Year-over-year growth was principally driven by continued sales execution in our core markets in the U.S. and EMEA, growing momentum in new geographies and verticals as well as rising ASPs.

The size of our organic client base, which excludes CSB and CFS clients increased from 1,237 clients as of December 31, 2012 to 1,631 clients as of December 31, 2013. We added 151 gross clients during the quarter again excluding CSB and CFS clients, an increase of 41% sequentially over the prior quarter. Our user base increased from approximately 10.6 million users as of December 31, 2012 to more than 14 million users as of December 31, 2013, which represents the addition of approximately 3.5 million users throughout the fiscal year or 33% annual growth.

Our annual dollar retention rate for 2013 was approximately 95%, which we believe to be amongst the highest in the SaaS industry. As a reminder our annual dollar retention rate has averaged approximately 95% since 2002. We believe our ability to maintain historical retention levels as we reach greater levels of scale speaks to the stickiness of our application as well as the long-term margin profile of our customers in the business overall.

Our gross profit for fiscal year 2013 was $135.3 million, compared to $87.4 million in 2012, reflecting an increase of approximately $47.9 million or 55%. Gross margins in the fiscal year 2013 of 73% were mainly flat from fiscal year 2012. This was due to our investment in our R&D infrastructure and our services organization as well as our increased use of third-party implementation services.

Now let’s turn to our operating expenses for the full year. Sales and marketing expense was $99.1 million, representing a year-over-year increase of $29.6 million or 43%. As has been the case for the past several quarters, this increase was principally driven by increased headcount across our sales and marketing organizations, as well as increased sales commissions including several reps who hit accelerators in the fourth quarter. As a percentage of revenue, sales and marketing expense was 53% in fiscal year 2013 compared to 58% in fiscal year 2012.

On a dollar basis, R&D expense increased by $5.2 million or 38% to $19.1 million compared to $13.1 million in 2012. The increase in R&D expenses is attributable to increased headcount as we continue to investment in product development. R&D expense as a percentage of revenue was 10% for the full year 2013 compared to 12% in 2012.

G&A expense was $26.7 million, representing a year-over-year increase of $7.2 million or 37%. The increase in G&A expense can be attributed to increased headcount, legal fees, accounting and audit fees, and overhead to support the growth of the company in both domestic and international markets. As a percentage of revenue, G&A expense represented 14% of revenue for the full year compared to 16% in 2012. As a percentage of revenue, operating expenses decreased to 78% in full year 2013 compared to 86% in full year 2012, representing an improvement of approximately 800 basis points.

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

Operating loss for the full year 2013 was $9.6 million, compared to $15.5 million for the full year 2012. Non-GAAP net loss for the full year 2013 was $12.5 million, or a net loss of $0.24 per share based on a weighted average shares outstanding of 51.4 million, shares compared to a net loss of $16 million or net loss of $0.32 per share based on weighted average shares outstanding of 49.9 million shares in full year 2012.

Our non-GAAP operating loss for the full year was more than expected due to increased amount of commission in accelerators related to our strong sales execution as well as increased expenses related to the use of third-party implementation providers to perform services associated with our sales over achievement.

With regard to cash flow, cash flow from operating activities was $20.6 million for the full year 2013 compared to full year 2012 cash flows from operating activities of $11.2 million. This represents a $2.6 million overachievement of our full year guidance of $18 million and 84% year-over-year growth. This also represents a non-GAAP cash flow from operations in margins of approximately 11%.

Now turning to Q4. Our fourth quarter 2013 GAAP revenue was $54.9 million. Our fourth quarter 2013 revenue results representing year-over-year increase of 51% on a GAAP basis. Total bookings for the fourth quarter 2013 were $84.5 million compared to $56.1 million in the same period in 2012, representing a year-over-year increase of 51%. There were no material invoicing differences in the quarter versus our historical averages.

Our gross profit in the fourth quarter of 2013 was $40.4 million, compared to $26.7 million for the fourth quarter of 2012, which represents an increase of $13.8 million or 52%. Gross margin for the fourth quarter of 2013 improved over our fourth quarter 2012 gross margin of 73% coming in at approximately 74%.

In the fourth quarter of 2013 our sales and marketing expense was $28.4 million representing a year-over-year increase of $8.9 million or 46%, R&D expense in the fourth quarter of 2013 was $5.2 million compared to $3.9 million in the same period in 2012 reflecting a year-over-year increase of $1.3 million or 33%.

G&A expenses in the fourth quarter of 2013 increased by $1.2 million compared to the same period of 2012 and $6.1 million to $7.3 million. All of these increases are reflection of the growth of our business over the prior year and we anticipate making further investments across the board in 2014.

Total operating expenses in the fourth quarter of 2013 came in at $40.8 million or 74% of revenue compared to $29.5 million in the same period in 2012 or 80% of revenue. Operating loss for the fourth quarter of 2013 was $0.4 million compared to $2.8 million in the fourth quarter of 2012. Net loss for the fourth quarter of 2013 was $1.7 million or net loss of $0.03 per share based on weighted average shares outstanding of 52.2 million shares compared to a net loss of $2.9 million or net loss of $0.06 per share based on weighted average shares outstanding of 50.5 million in the fourth quarter of 2012.

With regard to cash flow, during the fourth quarter of 2013 our cash flow from operating activities was $18.8 million compared to cash flow of $14.2 million in the fourth quarter of 2012 representing 32% year-over-year growth. The improvement in collections in Q4 is evidence of our ability to maintain billing terms for new customers as well as reduce our DSOs on a go forward basis.

Let me now turn to the balance sheet. As of December 31, 2013 our total cash, accounts receivable and short term investment balance was approximately $376.7 million. As a reminder in June 2013 we issued $253 million and five year convertible notes which yielded approximately $219 million in cash net of related warrants in hedge transactions as well as underwriters, legal and accounting fees.

As of December 31, 2013 we had approximately $67.2 million in accounts receivable compared to $47.5 million as of December 31, 2012, an increase of 41% over the prior year. Our deferred revenue balance was $138.8 million as of December 31, 2013 compared to $92.3 million as of December 31, 2012 and $109.2 million as of September 30, 2013 representing a year-over-year increase of $46.6 million or 50%.

Headcount, we had 237 employees during the year and 59 employees during the fourth quarter. As of December 31, 2013 we had 987 employees worldwide. This total headcount number represents a 32% year-over-year increase and 6% sequential increase compared to the third quarter of 2013. We expect to continue this momentum in hiring in 2014.

In summary when we look at our business on both quarterly and annual basis we continue to grow at industry leading rates with annual increases of 50% for bookings and 57% for GAAP revenues. We continue to show improvement in our non-GAAP operating margin which yielded roughly 800 basis points improvement over 2012 while our non-GAAP cash flow from operations margin exceeded 11%.

Now I would like to discuss our outlook for 2014 which falls under the safe harbor provisions outlined at the start of the call and is based on preliminary assumptions which are subject to change over time. For the full year 2014 we are currently expecting GAAP revenue in the range of $267 million to $270 million. At the midpoint the range suggests 45% growth over 2013 GAAP revenue of $185.1 million.

For the first quarter of 2014, we currently expect GAAP revenue between $56.5 million and $57.5 million suggesting 51% growth over first quarter of 2013 GAAP revenue of $37.7 million at the midpoint. With respect to non-GAAP net income or loss we currently expect a loss for the full year 2014 of approximately $13 million. This implies a non-GAAP net loss per share $0.24 per share based on a full year weighted average share count of approximately 53.3 million shares. This also implies in net loss margin of less than 5% in full year 2014, an improvement of approximately 200 basis points over full year 2013.

Turning to cash flow, for the full year 2014 we are anticipating non-GAAP cash provided by operating activities of approximately $33 million. We recognize the importance of continuing to grow cash flow to support our bond holders and generate sufficient cash flows to satisfy our convertible debt obligations.

As we have done in the past based upon our strong sales execution and the market opportunity we are choosing to reinvest more of our top line over achievement back in the business in order to drive even more growth.

In conclusion, the momentum of our business clearly has not slowed down. Not only were we able to maintain industry leading growth at much greater scale but we did so while also maintaining our 95% retention rate improving our non-GAAP operating margins and significantly increasing our non-GAAP cash flow from operations.

With that I would like to turn it back over to Adam.

Adam Miller

Thanks, Perry and thank you to everyone participating in today’s call. I especially want to thank our clients, partners and the entire Cornerstone team for their support in making Cornerstone a leading innovator, helping organizations to empower their people around the world. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Michael Nemeroff from Credit Suisse.

Michael Nemeroff – Credit Suisse

Hey guys thanks for taking my questions and congratulations on a good quarter and year.

Adam Miller

Thank you.

Michael Nemeroff – Credit Suisse

Adam I just want to understand the competitive environment and whether you guys are progressing on new product implementations for customers that have never used and ACM product before or are you seeing and how you are seeing the uptick in replacement of some of the competitive solutions that have been acquired by larger vendors?

Adam Miller

Well as you know for years we have particularly in the enterprise segment we have been doing replacements of the on-premise competitors and that has continued. In fact the momentum has increased on that. Within the mid-market and certainly the SMB segment it’s more greenfield and so this is typically the first system made for them but the enterprise it’s almost always replacement.

Michael Nemeroff – Credit Suisse

And then the second question is on the services sounded like you had to use more third party implementation team this quarter. I was just wondering if you are planning on increasing the number of implementation teams or if that is just for overflow and you are kind of happy with the current size of the implementation team program.

Adam Miller

Yeah so we think of the company’s as a three leg stool, with sales and marketing in one leg, service and support the other and technology in the third and we have tried to keep the company in balance over time because we over perform throughout the year and that again from a sales perspective in the fourth quarter we simply had to outsource more because we staffed to the mean, which is the expected average throughout the year.

We have some spikes in sales throughout the year at the end of each quarter and at the end of the year and as a result because we over achieved we had to outsourced more than we expected during the period.

Michael Nemeroff – Credit Suisse

That’s great. Thanks very much for taking my question.

Adam Miller

Thank you.

Operator

The next question comes from Greg Dunham from Goldman Sachs.

Frank Robinson – Goldman Sachs

Yes, Frank Robinson here for Greg. Thanks for taking my question. I want to hit on ASPs, I am not sure whether I missed you quantify whether it was up year-over-year but if you could quantify that it would be great and also kind of what drove the lift and whether your ASP guidance expects some kind of uptick over 2014 as well?

Adam Miller

So, we saw average selling price go up between 25% and 30% through the year across the broad within mid-market in particular it was up about 30%, and that was driven both from the lack of discounting as we had fewer competitors in this space, there is less price pressure and we are able to hold the list price rather than discounting as much. The second is increased products per sale, so we are selling more products with each of the initial sell and that also resulted in higher ASPs.

Frank Robinson – Goldman Sachs

Okay. And are you expecting some kind of – some kind of uptick next year as well?

Adam Miller

Well, I am not going to forecast that’s going to up another 30% but we have seen on a year-over-year basis a very consistent increase in the average revenue per user and we do expect that to continue as we add more product and expand our suite.

Frank Robinson – Goldman Sachs

Thanks for taking my questions.

Adam Miller

Thank you.

Operator

The next question comes from Mark Murphy from Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes, thank you very much. I’ll add my congratulation. Adam I wanted to ask you the global strategic relationship with Deloitte. Obviously, that is a huge HR consulting practice and I am wondering if you can provide any more details on some of the contractual parts of this. For example, any thoughts on how significant the revenue potential from this relative to some of your other partnerships with ADP, [Huerte] or SVS and others? And then also, do you have any feel for how many employees Deloitte will dedicate to go into its Cornerstone practice?

Adam Miller

Yes. Good question. So Mark, as you know we have strong line with regard to what kind of resale we expect to get going forward from our partners, so as we continue to build out direct sales force, we think the indirect resale channel will shrink proportionately. However, we are doing many more referral and teaming arrangements and Deloitte is a good example of that where we will leverage our ecosystem partners like Deloitte to help us penetrate and expand on enterprise deals that we are working on around the world.

So this is a global deal. We are working with Deloitte in Europe in Asia and in States and they are helping us for penetrating accounts and to better service the account overall. The partnerships like these are critical to our ability to growing and they are building a practice around Cornerstone, they are building it within capital consulting practice. As you might know Deloitte is the only big consulting firm to have human capital as one of its dedicated pillars and so they are the largest HR consultancy in the world. As a result, have very good relationships with the kind of that we sell to around the world.

Mark Murphy – Piper Jaffray

So Adam, just given how closely Deloitte has already been working with Workday, is it fair to think of this as their way of recommending companies to use Workday for co-HR and to use Cornerstone in conjunction with that for the talent management or – am I reading too much into that and it’s clearly their recognition of the kind of market dominance that the Cornerstone don’t has built here irrespective of anything else going on?

Adam Miller

The way I think about it is similar to the Taleo deal where they are effectively picking the winners, and clearly we have become the winner in our space and as a result we are seeing the opportunity to partner with the best companies out there.

Mark Murphy – Piper Jaffray

Yes. Okay. And then Perry, I wanted to ask you as well. You have moved down market in the last couple of years but you maintained this 95% retention rate and I guess I am wondering do you think that the did you get there by the enterprise retention rate actually increasing above 95% or have you somehow corrected the code on kind of producing a down market retention rate that’s also coming in at 95%?

Perry Wallack

So we don’t break out the mix exactly, Mark. What I can tell you is, we have had churn in the lower end of the market and mid-market and that’s been historically the same percentage or proportion of our retention in the past as it is today. So basically mix has not changed. We will continue to see excellent retention in the larger enterprise and as we become more mature with our services offerings, we will probably see the retention in the mid-market go up a little bit, but basically no real change.

Mark Murphy – Piper Jaffray

Okay. And then Adam I want to ask you one last one on the topic of SuccessFactors. Have you seen any indications of any kind of organizational destabilization over there in recent months? For example, I guess now that the calendar has turned over, are you seeing any greater volume of SuccessFactors resumes out there or are there any other potential signs of fall out subsequent to a large departure?

Adam Miller

Mark, as you know, since May I have been predicting the demise of that organization coming in March and I stand by that and I have many more data points to back that up now. But I suspect you will see a mass exodus happening from the former SuccessFactors entity come late February throughout March.

Mark Murphy – Piper Jaffray

Thank you very much.

Operator

(Operator Instructions). The next question comes from Pat Walravens from JMP Securities.

Patrick Walravens – JMP Securities

Great. Thank you and congratulation to you guys. Adam at the beginning of your remarks you talked about some changes in the way you are segmenting the sales force in terms of where you have cut-off. Can you just talk about what drove that and what are some of the key benefits from making those changes?

Adam Miller

So we are seeing a lot of opportunities down market particularly with the Taleo moving Oracle and SuccessFactors moving SAP. There was less focus from our competitors on the lower mid-market and our mid-market reps because they had a pretty broad range of companies they were selling were as expected selling to the higher-end of that range. That’s one of the reasons ASPs were going up and it’s one of the reasons that we performed extremely well without significant increases in unit volume.

But we see that there is still a significant opportunity down market. So we decided to segment the mid-market team into upper and lower mid-market. We are calling the upper mid-market team our mid-market team and we are calling the lower mid-market team major accounts, and we see a lot of opportunity in both segments. We also continued to build out our SMB team which is selling all the way down the markets for us.

Patrick Walravens – JMP Securities

Great. Thank you.

Operator

The next question comes from Justin Furby from William Blair & Company.

Justin Furby – William Blair & Company

Hi, guys. Thanks for taking my question. Alan I want to go back to kind of your market sizing. I think you mentioned if I didn’t mistake you $20 per seat per product. And I guess if that’s true the way you are sizing it, how do you get there from sort of the current pricing today which I think sort of implies low teen and that’s more on the blended basis?

Adam Miller

Yes. So again as we go further down market, we have the opportunity to increase pricing per seat. We have seen that very clearly over the last two years, the further down market we go, the higher the price point is, it’s often 2x to 4x, what we are receiving from the large enterprise segment, and we think as we continue to smooth out our sales between the upper and lower ends of the market spectrum we are going to price points continue to revolve.

Take those numbers and you apply that you get size of our existing client base excluding the expanded enterprise and you end up with fairly large numbers. The expanded enterprise of course provide large opportunity because in those cases you are not limited to number of employees of the client but rather their expanded enterprise customers, partners, resellers, contractors and alike, which often is a multiple of the size of the organization internally and we end up with a higher pricing.

In addition to that, overtime we will continue to add products, with more products we add more per seat.

Justin Furby – William Blair & Company

Okay, great. And then in 2013 you guys were really consistent each quarter on the billing side anywhere from mid-40 to mid-50, I guess as we look forward in 2014, I realize you can’t guide for that but give me all the opportunities both in your based and outside of it, is there anything that tells you can’t maintain that type of rate in 2014?

Adam Miller

As you might be aware I don’t like to answer questions like that. What I can tell you is our momentum is strong, our sales teams are growing at the same pace that they have been growing over the last couple of years and the pipelines continue to grow in line with the sales teams.

Justin Furby – William Blair & Company

Okay. That’s fair. And then Perry quickly on the services organization, can you remind us how big that is today and if I heard you right it sounded like for Q4 what prevented you from outperforming guidance on the revenue side was a mix of just of implementation and consulting services versus plan and that it sounds like some larger deals that are delayed. Is that right and then if it is what’s kind of the sizing of the services today as relates to the overall business?

Perry Wallack

Yeah. As you know we don’t breakout the relative percentage of services versus software. What I can tell you is that as Adam has told you we staff internally so we can meet the mean requirement for implementations and we use partners to flex to the peak. Often times those partners take time to and as much as we have lots of large enterprise clients that those partners are working on, it can take a little bit longer to ramp.

In addition when you have executed very, very well on the large enterprise market, we have to understand that those implementations, number one they just take more time, they happen over several quarters. And in addition very, very large clients often change the timeframe on us which is as I said on the call out of our control. And so as their business needs change they often will delay the timing of the implementation. And so what all of that adds up to is very, very difficult method to predict exactly when the services revenues is going to come in.

Justin Furby – William Blair & Company

Okay great. Thanks guys.

Operator

The next question comes from Brendan Barnicle from Pacific Crest.

Brendan Barnicle – Pacific Crest Securities

Thanks so much guys. Adam following up on the services question. We have seen a lot of companies in last year at least that start to re-ingest their business implementation strategies because they couldn’t find their capacity to do their implementations and that has unforeseen effect on companies. Do you guys foresee any sort of strategic change that way for you this year and I guess it follows up certainly probably to Perry’s comment about the kind of unpredictability around some of the services piece or is there going to be a bigger range in your guidance now to account for something like that?

Adam Miller

No not at all in fact we have the same strategy for many years. We outsourced about a third of our service projects, because we are staffing for the mean and not for the peaks. We have peaks at the end of the quarter which means from an implementation standpoint, you have peaks at the beginning of following quarter each quarter and we now have partners and employees that can scale with us. Aperio and TribeHR are both good examples of that who are scaling with us not just domestically but around the world and we are working in lock step with them to ensure that we have the right capacity overtime and so we are not changing our practice of law.

We do think we’ll be able to smooth out some of our service revenue and some of our service project management through projects like our 123Live initiative which takes our mid-market service projects and does them much more rapidly through the focused program when the clients comes on site and we’ll do those deployment typically in three to four weeks instead of in two to three months which is obviously extremely rapid for an enterprise implementation and extremely effective for many different reasons from our standpoint.

Brendan Barnicle – Pacific Crest Securities

And so….

Adam Miller

Would you like that to better our service operation?

Brendan Barnicle – Pacific Crest Securities

And also there is no change in the way you are thinking about guidance to how you are incorporating the guidance?

Adam Miller

Not at all.

Brendan Barnicle – Pacific Crest Securities

Great. And I just want that to be clear I think it’s pretty clear from the call, but have you moved down market and continue to make more of a move down market it sounds like ASPs won’t be impacted by that change?

Adam Miller

No if anything ASP will go up.

Brendan Barnicle – Pacific Crest Securities

Perfect. Great. Thanks guys.

Adam Miller

Thank you.

Operator

Our final question comes from Brent Thill from UBS.

Unidentified Analyst

Hi, this is John on behalf of Brent Thill. I just had two questions. One on if you can give an update on recruiting traction with clients? And then second it tends to be at least from SAP and Oracles from their point it seems to be increase in intensity and just wonder whether you have seen anything out of that? Thank you.

Adam Miller

I am sorry Brent, increasing what?

Unidentified Analyst

A lot more intensity around their efforts to pursue clients.

Adam Miller

Yes I think the reason there is more intensity is because we are beating them over and over again in their deals in their backyards and so they become extremely aware of course now even at the parent company level. What we’re seeing is the ability to keep selling around the world we’re growing our sales team not just down market but also I should mention up market. We’re seeing a real ability not just to sell to the mid-market in SMB firms but also to sell to largest enterprises out there, we have built out strategic downstreams that allow us to go further up market than we have traditionally and we are seeing a very strong win rate even at the highest of the markets.

We have mentioned some of those names on this call and on other calls like BP and Roche and many others, we are seeing that our approach as a specialist against the world of generalists in talent management has been very well accepted by the market and is allowing us to continue to win in all segments, in all geographies.

Unidentified Analyst

And any update on I think the customer traction with the recruiting product?

Adam Miller

Yeah. So recruiting has been growing very well, we recently launched our high volume recruiting capabilities so that we’re able to sell to our retail clients as well as our other industry clients. And we’re seeing good uptick in all segments in recruiting. So we’ve been able to sell it to large enterprises, small enterprises, the mid-market and the lower mid-market and we are selling in all geographies. So we’ve been selling domestically, we’ve sold in Europe, in Asia and we think there is opportunities to keep building that out. The predominance of sales have been for new clients and we have seen it both in and full suite and in standalone recruiting deals. I suspect in 2014, you are going to see us do a lot more business with our existing clients in recruiting as their contracts come up with some of their existing vendors like Taleo and Kenexa.

Unidentified Analyst

Thank you.

Operator

There are no further questions, I would now like to turn the call back over to Adam Miller, CEO for closing remarks.

Adam Miller

Thank you all for your participation and we look forward to another strong year. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day.

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