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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q2 2014 Earnings Conference Call

August 6, 2014 05:00 pm ET

Executives

Adam Miller – Chief Executive Officer

Perry Wallack – Chief Financial Officer

Analysts

Brent Thill – UBS

Brendan Barnicle – Pacific Crest

Rick Sherlund – Nomura Research

Greg Dunham – Goldman Sachs

Michael Nemeroff – Credit Suisse

Justin Furby – William Blair

Raimo Lenschow – Barclays Capital

Scott Berg – Northland Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to Cornerstone OnDemand’s Q2 2014 Earnings Conference Call. (Operator instructions.) I would now like to turn the call over to Perry Wallack, Chief Financial Officer of Cornerstone OnDemand. Please go ahead, sir.

Perry Wallack

Good afternoon, everyone, and welcome to our Q2 2014 Earnings Conference Call. As always today’s call will begin with Adam providing a brief overview of our performance, and then I will review some key financial results from the quarter which ended June 30, 2014. Later we will conduct a question-and-answer session.

By now you should have received a copy of our press release with a more complete disclosure of our results, which was released after the market closed 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 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 growth, investment activity, visibility into our performance, the impact of capitalized development costs, R&D spending, professional services, and our appraisal of our competitors and our ability to compete effectively.

Words such as “expect,” “believe,” “anticipate,” “plan,” “illustrate,” “intend,” “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 materialize or any of the assumptions prove incorrect actual results could differ materially from those expressed or implied by the forward-looking statements we make.

These risks, uncertainties, assumptions as well as other information on potential factors that could affect our financial results are included in today’s press release, the “Risk Factors” section of our most recent Form 10(k) and subsequent periodic filings with the SEC.

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

Adam Miller

Thanks, Perry, and thank you to everyone joining today’s call. Q2 was a strong quarter for us driven by solid performances by multiple teams across both segments and geographies. Bookings for Q2 came in at $70.1 million, representing a year-over-year increase of 44%; and revenue came in at $61.5 million, representing a year-over-year increase of 39%.

We saw the addition of a diverse group of more than 120 clients from around the world, bringing our enterprise and midmarket client count to over 1800. New Q2 clients include eBay, Wendy’s, EPE Energy, Kohler, Public Storage, SCA in Sweden, Travelport in the UK, the City of Seattle, UCSF Medical Center, the University of York, the entire University of Colorado system, and many, many more.

I’ve spoken on past calls about the enormous market opportunity in front of us which we believe consists of approximately 400 million seats. We believe that over the years the addressability of this market has grown tremendously as organizations of all types have embraced the cloud while also increasingly viewing talent management as a strategic business initiative.

And currently, the competitive landscape with intel management has gone through massive change with the large ERPs acquiring the other leading independent vendors. We believe the significant turnover that followed in places like SuccessFactors and Taleo would transform them into starkly different businesses today. They’d become much less focused on innovation and expansion into new markets.

These dynamics have helped us grow our presence to encompass over 15 million users in 191 different countries. And yet it still feels like we’re just getting started. With a growth opportunity of over 6x without assuming any increase in market share we have invested significantly in recent years to ensure that Cornerstone is positioned for success across verticals, segments and geographies. And in Q2 a number of those investments began paying dividends for us.

Last quarter I spoke about the Strategic Accounts Team that we recently formed which targets the 150 largest organizations across the globe. In Q2 this team helped drive strong results at the top end of the market with multi-million dollar deals. This group includes a Fortune 50 healthcare company with over 100,000 employees.

In our first nearly eight-figure deal the organization turned to Cornerstone to reconcile the dozens of separate learning management systems in use by its operating entities. It came to Cornerstone seeking process standardization and simplification through the consolidation of all of these into a single system, and after implementing our LMS we will be the first enterprise-wide platform in the history of their company. This organization is another one of SAP’s largest customers, adding yet another name to the ever-growing list of SAP and Oracle clients who have chosen us to address their talent management needs.

As a result of our recent enterprise and strategic accounts sales, today Cornerstone holds a dominant market position amongst the world’s leading companies in numerous verticals, including food and beverage, hospitality, pharmaceuticals and financial services amongst many others. These organizations recognize that even small improvements in areas such as employee engagement and retention can translate into millions of dollars saved. And the strong value proposition has led HR executives and companies ranging from AB InBev and BMW, to McKesson to Walgreen’s and Xerox to demand the market’s best-of-breed solution.

On the other end of the spectrum a sizable portion of the 400 million seat market opportunity rests amongst businesses with between 400 and 1000 employees, what we define as major accounts. In Q1 we chose to bifurcate our Midmarket Team to better address the rising demand we are seeing in this segment. We saw strong growth in the lower midmarket with major accounts during Q1 and expect business from that segment to continue to grow as that team ramps and further scales in the second half of the year.

While the changes we made to our sales organization in Q1 may have impacted us initially, we firmly believed that they would quickly pay dividends. In Q2 we brought 123 new clients compared to 72 new clients in Q1, representing a 71% sequential growth rate.

As many of you know, we’ve also recently invested heavily in the build-out of our international operations. In the Asia-Pacific region our team began to gain momentum in Q2 with new client additions, including Genpact of India, HSH Management in China, Siam Cement Group in Thailand, and ResMed in Australia to name just a few.

Additionally, while our EMEA business has historically been highly concentrated in the UK and France, in the first half of 2014 we successfully diversified our presence throughout the region with key client additions in Sweden, Belgium, Germany, Italy, Norway, Spain and Portugal.

With the ongoing maturation of the talent management market in APAC as well as the opportunity we are seeing all over Europe we believe the current 30% international concentration of our business should increase in years to come.

So while our business becomes increasingly diversified the momentum at Cornerstone has continued, as evidenced by the 41% growth in bookings year-to-date. We have continued to see a trend amongst organizations of all sizes towards a single unified solution to manage their talent.

In the large enterprise segment for example, our average number of products per client has risen to nearly three products. As the data suggests, the benefits of an organically built talent management suite are becoming increasingly important to buyers, and this has contributed to larger deal sizes and accelerated growth in our revenue per user.

As all of this has gone on to drive the continued growth of the business we have not lost sight of what has been our key business tenet since inception – client success. While we spend much time thinking about opportunities to expand our footprint we spend even more time contemplating ways to ensure that our clients are getting the most of the talent management solution from Cornerstone.

These efforts are spearheaded by our Global Client Success Team, which has been strengthened by the growth of our Business Consulting and Solution Architecture Teams that bring product knowledge and best practices to the table to help our clients create tailored processes to address their specific talent management challenges.

As a result, even with our increasing diversification we believe we are on track to achieve 95% dollar retention for the twelfth consecutive year in 2014, which as a reminder excludes any and all upsales.

With that I’ll now 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 for the quarter I’d like to remind everyone again that the financial figures I discuss today are non-GAAP unless I state that the measure is a GAAP number. As was the case in prior periods we talk about non-GAAP financial measures because they 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 and taxes related to acquisition adjustments, 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.

As Adam said, we had a very good quarter. Q2 bookings and GAAP revenue grew at 44% and 39% respectively on a year-over-year basis. Q2 saw the largest number of seven-figure deals with respect to total contract value we’ve ever seen as well as the signing of our largest initial deal since inception. We believe these are just some of the data points indicating the momentum of the business.

As has been the case for the past several years, this growth has continued as we’ve scaled thanks to our position as the dominant player in talent management and the strong demand we have seen for our products based on the vast addressable market for our solutions amongst organizations of all sizes and industries worldwide.

Our GAAP revenue for Q2 2014 was $61.5 million, representing a year-over-year increase of 39% over GAAP revenue for Q2 2013 of $44.3 million. As we’ve noted on prior earnings calls, our revenue can be impacted by the timing of when consulting services are delivered to our new and existing clients by our services organization and implementation subcontractors.

When dealing with large enterprises in the US and abroad as well as US federal and state and local government entities it can be difficult for us to control the timing of services delivery. In addition, sales during Q2 were unusually back-weighted, leading to less-than-anticipated software and services revenue recognized from new client sales in that quarter. In combination this led to increased variability of the amount of revenue recognized in the quarter. This is simply a period-to-period timing issue.

Customer demand has continued to be strong as reflected by our Q2 bookings results. Total bookings, which we define as gross revenue plus change in deferred revenue, was $70.1 million for Q2, representing a 44% year-over-year increase over Q2 2013 bookings of $48.9 million. As you think about our bookings growth, I’d like to remind you yet again that our bookings can vary on a quarterly basis depending on the nature and timing of invoicing for new clients, existing clients, and renewals.

It is worth noting that in the current quarter our upfront billings rate for new deals, while materially in line with prior quarters, was a bit lower than our average historical upfront billings rates – inferring that if normalized to historicals, billings would have actually been a bit higher in the quarter.

The size of our client base increased from 1411 clients as of June 30, 2013, to 1826 clients as of June 30, 2014, representing 415 client additions and 29% year-over-year growth. On a sequential basis we added 123 clients since Q1 2014, representing the most significant Q2 client increase since inception. This was our third greatest number of client additions in any quarter in the history of the company. As a reminder, we exclude clients of Growth Addition and clients of Cornerstone for Salesforce, or CFS, from our client count figures.

Our user base increased from approximately 12.3 million users as of June 30, 2013, to over 15.5 million as of June 30, 2014, representing a year-over-year increase of 27%. Sequentially we added approximately 1 million new users during the quarter.

Our gross profit for Q2 2014 was $45 million compared to $32 million in 2013, reflecting an increase of approximately $12.9 million or 40%. Our gross margin for Q2 was 73% versus Q2 2013 gross margin of 72%. As a reminder, we do not expect to always have sequential improvements in our gross margins from quarter to quarter. We continue to use third parties to assist in meeting our increased client demand which impacts our gross margins. As we’ve stated in the prior quarter we anticipate that full-year non-GAAP gross margins will remain in line with prior years.

Now let’s turn to our operating expenses. Sales and marketing expense was $35.2 million in Q2 2014, representing 57% of revenue, versus $24.2 million in Q2 2013 or 55% of revenue. This represents a year-over-year increase of $11.0 million or 45% which was principally driven by increased headcount, commission expense, and marketing programs across both our sales and marketing organizations as well as some period expenses related to our Convergence client conference.

R&D expense was $6.1 million in Q2 2014 representing 10% of revenue, versus $4.8 million in Q2 2013 representing 11% of revenue. G&A expense for Q2 2014 was $8.l million, representing 13% of revenue, versus $6.0 million in Q2 2013 which represented 14% of revenue. There were no significant changes from prior quarters in the composition of our G&A expenses.

As a percentage of revenue, total operating expenses were 80% in Q2 versus 79% in Q2 2013. Operating loss for Q2 was $4.4 million, representing an operating margin of negative 7% compared to $3 million in 2013, which also represented an operating margin of negative 7%.

As we continue to invest in our growth strategy we do not expect to always have sequential improvements in operating margins from quarter to quarter. However, as we have indicated in the past, operating expenses are the key driver to leverage in our model. We believe that our operating margins on an annual basis will continue to expand provided we maintain discipline in our operations and continue to see top line revenue growth.

Net loss for Q2 was negative $5.9 million or a net loss of $0.11 per share, yielding a net loss margin of negative 10% compared to a net loss of $3.5 million or net loss of $0.07 per share yielding a net loss margin of negative 8% in Q2 2013.

With regard to cash flow, our cash flow from operating activities was negative $7.8 million compared to negative $1.4 million in Q2 2013. As we have communicated in the past collections and DSOs fluctuate significantly during the year and are therefore best annualized on an annual basis.

Let me now turn to the balance sheet. As of June 30, 2014, our total cash, accounts receivable and short-term investments balance was approximately $310.9 million. Our deferred revenue balance was $139.7 million as of June 30, 2014, compared to $95.0 million as of June 30, 2013, and $131.1 million as of March 31, 2014, representing a year-over-year increase of 47% and a sequential increase of 7%.

With respect to headcount we added 63 employees during Q2 2014, bringing our total headcount to 1144 employees as of June 30. This total headcount number represents a year-over-year increase of 30% and a sequential increase of 6% respectively.

I’d now like to discuss our outlook for Q3 and full-year 2014 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.

For the reasons I previously elaborated on during my comments on our current quarter revenue which can cause variability in our revenue results from quarter to quarter, for the full year of 2014 we are maintaining our previous GAAP revenue guidance range of $267.5 million to $270.5 million. At the midpoint this range suggests 45% growth over 2013 GAAP revenue of $185.1 million.

For Q3 2014 we currently expect GAAP revenues to range from $67 million to $69 million. At the midpoint this range represents 41% growth over Q3 2013 GAAP revenues of $48.3 million.

With respect to full-year 2014 non-GAAP net income or loss, we are maintaining our prior guidance of a loss of approximately $13 million which would yield a net loss margin of 5% at the full-year revenue guidance midpoint. This implies a non-GAAP loss of $0.24 per share based on full-year weighted average share count of approximately 53.3 million shares.

Turning to cash flow, for the full year of 2014 we are maintaining our full-year guidance for non-GAAP cash flows provided by operating activities of approximately $33 million, which represents a 12% margin at the midpoint of the revenue guidance range. As in the past we are choosing to reinvest a portion of our bookings overachievement back into the business to drive further growth in the future.

The momentum of the business has remained strong, highlighted by increasing numbers of new client wins, increasing numbers of clients buying multiple products, and increasing numbers of large deals. We had a very successful first half of 2014 with year-to-date bookings growth of 41% and believe we are on track for another solid year.

With that I’d like to turn it back over to Adam.

Adam Miller

Thanks, Perry. As our international business segment and vertical diversification increases, we’ve continued to expand our global team. I want to thank the Cornerstone team around the world for their ongoing commitment to the success of the company and the success of our clients. We will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions.) The first question comes from Brent Thill from UBS.

Brent Thill – UBS

Thanks, good afternoon. Perry, on the guidance I think everyone’s curious given the magnitude of the bookings in Q2 that you would imply that that services build would start to take hold, and it sounded like you had a much stronger quarter on the new customer signings. So I guess there’s perhaps a disconnect on the guidance relative to what you’ve booked and I’m just curious if you could just explain that. I think it’s all in the services but is there anything else that is causing you any caution as it relates to the guide on anything else in the core business?

Perry Wallack

No, there’s absolutely nothing. Look, what we’ve communicated on I think nearly every call or every call since we’ve been public is that our revenue can vary based on the timing of when our services are implemented. And as we’ve talked about on previous calls we’re closing a lot of really, really big deals. We work with the federal government, we work with state and local governments and sometimes it is just not that easy to predict the timing of those services. We’re working more and more with third-party implementation partners and so controlling them and controlling their timing is just more difficult and it’s just, you know, causing some variability. And I would say there’s absolutely no change in anything that we’re doing in the business.

Brent Thill – UBS

Okay. And just a quick follow-up for Adam on the large deal, it sounds like that was the biggest deal you’ve ever had. Can you just give us a perspective, I know they’re not going to just start falling because that one closed, but your perspective on what this does now on your pipeline – what you’re seeing in the strategic accounts business now with this one underneath your belt?

Adam Miller

Yeah, I mean in many ways this validates our entire strategic accounts strategy. It was the largest initial deal we’ve ever done, it’s almost an eight-figure deal, and that is the whole point of creating a separate Strategic Accounts Team. So I think it bodes very well for that initiative and for the opportunities ahead with that team in particular.

Brent Thill – UBS

Thanks.

Operator

The next question comes from Brendan Barnicle from Pacific Crest.

Brendan Barnicle – Pacific Crest

Thanks. Perry, I wanted to follow up on your comment about the 12% cash flow margins. As we think further out how should we think about those cash flow margins changing and building as we look out to next year and beyond?

Perry Wallack

Yeah, sure. So at this point we’re not going to be giving any guidance for 2015 but what I would point to is our historical trends with that metric and also with our non-GAAP net loss. And historically what we’ve done is we’ve improved upon the prior year metrics incrementally. So I think in 2013 we had close to $21 million in non-GAAP cash flow from operations; this year the guide is at $33 million. And what we would at this point say is that we would expect all of those trends to continue.

Brendan Barnicle – Pacific Crest

Great. And then Adam, Asia-Pacific was one of the strong reasons that you called out. I know when we were at the Analysts Day you mentioned that you were sort of deemphasizing some of the spend there or rolling it out a little more slowly. Has this changed given the success you had in Q2 or did you end up not going through with that change in terms of strategy?

Adam Miller

Yeah, I’d say we’ve always been very disciplined about how we spend money and we typically will follow spending after success. And now that we’re seeing some momentum there we’re going to reengage in our investment strategy there. So we’re growing our teams in India, Australia/New Zealand, China and Japan, and we’re seeing real activity in all regions.

Brendan Barnicle – Pacific Crest

Great, and then just lastly on that big, eight-figure deal – how long does a deal like that take to close?

Adam Miller

You know, that’s an interesting question. As you know we do many, many seven-figure deals and they vary tremendously in the duration it takes for a deal to happen. This one I would say was on the shorter side of that spectrum in the scheme of things. I mean obviously this is a full-on enterprise deal so you’re talking nine to twelve months but when a deal gets this large the client tends to have their act together and has made a lot of decisions, and has firm deadlines and a clear process; and we followed into that process and that timeline. And we’re seeing something similar happen in other deals like it.

Brendan Barnicle – Pacific Crest

Great, thanks a lot.

Adam Miller

Thank you.

Operator

The next question comes from Rick Sherlund from Nomura.

Rick Sherlund – Nomura Research

Thanks. Adam, I wonder if you can just remind us on the revenue rec side, so this particularly large deal on the quarter, we’ve been told they’re out looking for implementation partners right now. The revenue recognition begins when, and second if you could just kind of talk a little bit about the pipeline going forward in terms of number of additional deals that might be of that magnitude – and what is this saying about the number of non-big deals in the pipeline, how is that holding up?

Adam Miller

Yeah, let me answer the second question first and then I’m going to hand it over to Perry to talk about the revenue recognition. With regard to the activity that we’re seeing at large, while we have done some very large deals and we did a number of large deals this past quarter, and we’ve seen that consistently growing out over the last several quarters, we also had the largest number of units we’ve had in a long time and I believe the third largest net increase in units in the history of the company over the last quarter. So I don’t want to say that. You’re setting up an exclusive choice and that’s not what we’re seeing. We’re seeing the ability to both grow our overall business in terms of the number of accounts that we’re bringing on and the ability to go further upmarket and do even larger deals than we’ve done in the past. Perry?

Perry Wallack

Yeah, sure. So Rick, our rev rec, not speaking specifically on a deal-by-deal case, is that we recognize the services of our deals as we perform them, and we recognize the software smoothly over the course or life of the deal. I don’t want to comment exactly on the rev rec for a specific deal but 90% plus, 95% plus of our deals are recognized in that manner.

Rick Sherlund – Nomura Research

But the rev rec begins when you sign the contract for the software piece?

Perry Wallack

That’s correct – software is recognized smoothly over the life of the deal and services is recognized as we perform those services.

Rick Sherlund – Nomura Research

Okay. And the composition of the pipeline going forward, other deals of this magnitude we might look forward to in Q3 or Q4?

Adam Miller

Yeah, I mean as I say every quarter our attorneys say I can’t answer that question. Like I said, we are seeing real opportunity in the strategic accounts segment and we continue to be very bullish about that segment overall.

Rick Sherlund – Nomura Research

Thank you.

Perry Wallack

Thank you.

Operator

(Operator instructions.) The next question comes from Greg Dunham of Goldman Sachs.

Greg Dunham – Goldman Sachs

Hi, yes, thanks for taking my question. You made a number of changes to the sales organization earlier this year as you scale the business, and that caused obviously a headwind in Q1 in terms of bookings. Clearly with some of the strategic account deals that you’ve talked about and the number of deals on the lower end side you’re seeing an improvement, but the question is, is that still a headwind for you or is that already a tailwind to the business? Or is that more on the come?

Adam Miller

So Greg, honestly it depends on the specific sales team that we’re talking about. We have seen the changes already take effect in some segments or on some of our sales teams. In others I believe we’re not going to see the full impact until the second half of the year. So I’m not going to say we haven’t already seen some of the benefit, we have particularly when we think about midmarket and major accounts, but there is still opportunity in the second half of the year particularly around things like client sales that have not taken full effect because they have longer sales cycles. So you make the change in Q1, you’re not going to see it in Q2 – you’ll see it later in the year. So we’re very pleased with the changes we made and the impact we think it’s going to have overall.

Greg Dunham – Goldman Sachs

Makes sense. And one last one: federal was a great sector for you two years ago; last year it was a little bit more challenging. What are the expectations going into the federal spending kind of season this year?

Adam Miller

Yeah, so I’ve been pretty consistent about this. I think the jury is still out until we get thorough another year. Two years ago it was great; last year it was horrendous, and this year I think the jury is still out on what happens. This is the big selling season going into Q3 and I’ll tell you next quarter. [laughter]

Greg Dunham – Goldman Sachs

Alright, thanks guys.

Operator

The next question comes from Michael Nemeroff from Credit Suisse.

Michael Nemeroff – Credit Suisse

Hey guys, I’m sorry I joined late to the call, I was on a couple other calls this evening. But looking at the billings for the quarter were strong and I understand that maybe some services were a little bit delayed, can you just give us… I know you don’t guide to billings but are you expecting a meaningful acceleration in the second half in terms of new business signings?

Perry Wallack

So Mike, look, we don’t guide to billings or bookings, you know that. Adam’s given a few comments on the momentum of the business that we’ve seen for the first half of this year and we try to leave everything right where that is without commenting on pipelines or expectations for the second half.

Adam Miller

Yeah, I will tell you that several teams are still scaling and we see the pipeline as being very strong and growing globally. We’re seeing our distribution continue to increase internationally and we’re continuing to expand the size of our teams in all segments. So there’s opportunity on all fronts. We’re going to see some of that in the second half of this year; we’ll see some of that going into next year. And we’re very bullish on the overall opportunity. As you know, the competitive landscape is completely changed. We are in a very strong position in the industry and we’re seeing a lot of greenfield opportunity ahead. We still have as an industry the ability to grow at least six times and we’re seeing that ourselves in our own business.

Michael Nemeroff – Credit Suisse

That’s helpful, Adam. And then just on the services side of the business I don’t know if you broke this out but what percent of the revenue is services currently and do you expect that to change meaningfully over time? That is, as potentially some of these deals get larger are you looking to offload more of those services to third parties and help you there?

Adam Miller

Yeah, so we as you know don’t break out service revenue but I can tell you that as we continue to grow services as a percentage of our overall business will continue to go down. One thing that impacted the variability of Q2 that’s worth mentioning is seasonality. We had a difference, a change in seasonality in Q2 than we’ve seen in other quarters, particularly since going public where a large percentage of the deals – not only the big deals, really across the board – happened at the very end of the quarter. And going back to Rick’s question about revenue rec if deals happen at the end of the quarter versus earlier in the quarter you get very little recognition of the revenue in that quarter. And that’s what we saw in Q2 and that was different from what we had seen prior to Q2.

Michael Nemeroff – Credit Suisse

Okay, thanks for taking my questions.

Operator

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

Justin Furby – William Blair

Hey guys, thanks. Perry, could you clarify the duration comments you made in your prepared remarks? I think you said you had a headwind on the durations and [revs] to bookings. Can you just give us a sense on the magnitude there? On a normalized basis would it have been 45%, 50%? What’s a better way to think of it in terms of duration?

Perry Wallack

Yeah, sure, so it would have been maybe a point or two points. It’s not as I said, they were materially in line with our historical averages but it was a bit lower so it’s maybe a point or two.

Justin Furby – William Blair

A point or two of a headwind that you faced because you billed for less upfront?

Perry Wallack

That’s right.

Justin Furby – William Blair

Okay. And then just to be clear, the big deal, the eight-figure deal that you called out, I’m assuming that hit your Q2, at least the first year of that hit your Q2 billing?

Perry Wallack

Look, I don’t want to comment on the specific billings of any one specific deal. As we talked about, the total billings for the quarter were materially in line with prior quarters. For new sales, the amount of billings that we had upfront were a bit lower than our historical averages and if we normalize that to our historicals in total it would have been a point or two higher.

Justin Furby – William Blair

Okay. Okay, great. And then I didn’t quite follow, Adam, your comments on the seasonality. Why do you think it happened where it was backend loaded and I think the one concern is well, what did pricing look like if you’re doing a bunch of deals in the last few days of the quarter? So any comments there would be helpful.

Adam Miller

Yeah, so just on that last point, we are not changing our pricing to get the deal in at the end of the quarter. We are not running the business that way; it’s not a healthy way to run a company. And I have heard from other CEOs that they experienced the same thing in Q2. I can’t explain it, I really cannot. In particular this Q2 had a Monday close, meaning the last day of the quarter was a Monday, so you would think conceptually all deals that were going to happen that quarter would be done by the Friday. That wasn’t true for us and for many other companies that I’m aware of. I will tell you also that that was an anomaly, so I have not seen that before and it doesn’t seem like that’s continuing. We’re not expecting it to continue.

Justin Furby – William Blair

Okay. Okay, fair enough. And then Perry, are you changing the way you’re guiding revenue for Q3 and for the back half of the year just based on what you saw on the consulting side or I guess how are you looking at your guidance? And it does feel like if you look at the back half of the year just given kind of the magnitude for Q2 that it’s obviously effectively a raise for the second half of the year in revenue. So just kind of walk us through that I guess.

Perry Wallack

Yeah, sure. I mean look, what we want to do is obviously we want to beat and raise, so what you’ve seen is for Q3 we’ve widened the range a little bit so we’ve got a $2 million range for Q3. And we’ve held our guidance for the full year because we have closed a lot of very, very large deals. And while we can estimate to some level of accuracy the timing of those implementations you can’t perfectly forecast it. And so I guess what I would say is we’re getting back to our old ways and it always pays to beat and raise.

Justin Furby – William Blair

Okay, great. And then one last one if I can, in terms of, Adam, it sounds like the upsell business within the existing base, I think you made a comment that those are longer sales cycles. I guess I would assume they would be shorter – you already have the relationships there. So maybe why would those be longer sales cycles?

Adam Miller

That’s a great question. So historically they’ve been relatively short and they continue to be relatively short based on historical norms. What I’ve been talking about as the upside in the second half of the year is this shift from a farming model to a hunting model, and in the hunting model it does take more time to close the larger opportunities. So we are already seeing that that team is back to its historical norms. Our expectation with the reorganization of the Client Sales Team is that they will exceed historical norms, and that will take some time.

Justin Furby – William Blair

Okay great, thanks guys. I appreciate it.

Perry Wallack

Thank you.

Operator

Our next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow – Barclays Capital

Hey, great, thanks for taking my question. A quick question first, Perry, for you, just following on here on the revenue outlook for the second half. So if you do the math in Q3 you talk about 41.0% growth and to get to the full-year midpoint, Q4 is 49.5% growth. So are we kind of thinking, well I guess you want to be conservative but it seems to be some big acceleration in Q4 coming – any kind of idea of how that’s going to happen? And then a question for Adam is can you talk a little bit about, if you think about the eight-figure deal, what’s kind of the attach of the different products there? So has that kind of driven a large deal because of the number of users or is that because you are achieving bigger attach rates of all the different product components? Thank you.

Adam Miller

Yeah, so in terms of the strategic account deals it’s a combination of a couple of different things. So one is the size of the deals are just obviously naturally larger – these are bigger companies. Secondly, the complexity or the value that the client is getting out of the deal is larger because they tend to have a more complex heterogeneous environment that we’re walking into, and when we reconcile that environment we’re giving them very significant cost savings. And thirdly there is upside with some of these larger deals to make them multi-module deals, and as we’ve mentioned earlier we’ve seen a move in the large enterprise from about two products on average to much closer to three products on average in the initial deal. So we are seeing greater ability to sell more product to the larger clients upfront.

Raimo Lenschow – Barclays Capital

Okay. Perry, anything?

Perry Wallack

Yeah, sure. So what I would say is that if you look historically there is a trend in our revenue where we do recognize a little bit more revenue in Q4. There’s lots of clients that like to get things live before the 1st of the year or get them live earlier in the quarter so that they can start running processes by the end of the year. So we do sometimes see a spike in those service revenues in Q4, and look, our guide is I guess reflective of that seasonality in our business and reflective of this timing issue that we have on our services that we perform for our large enterprise customers in the federal government.

Raimo Lenschow – Barclays Capital

Perfect, thank you.

Perry Wallack

Sure.

Operator

Our final question comes from Scott Berg from Northland Capital.

Scott Berg – Northland Capital Markets

Hey Adam and Perry, congratulations on a good quarter.

Perry Wallack

Thank you.

Scott Berg – Northland Capital Markets

Two quick ones from me. First of all, Adam, on the bifurcation of the Midmarket Sales Team you seem to be pleased with the progress to date. But can you give us a sense of how far along you are in the progress of that transition? Are they at full capacity running as you would expect them to on a long-term basis today or are we still a quarter or two out from that?

Adam Miller

Yeah, so I would say they are not yet at full capacity. They are ramping up to that and the ramp has been maybe even a little faster than we expected. I think part of that is due to some of the promotions we made, putting experienced managers in place and letting them build out their teams. Secondly we are not done building those teams, so those teams will continue to get significantly larger over time. So when you talk about the medium-term opportunity they’re not even close to what they could be.

Scott Berg – Northland Capital Markets

Okay, great. Then my last question is on the international business which is strong, and you talked about a growing business in APAC. Are you seeing any differences in what customers are buying in those geographies? And I ask because their adoption rates tend to lag North America by several years and the products they tend to buy are a little bit different. I’m just curious to know if you’re seeing any true differences there or is it in line with the rest of your markets?

Adam Miller

That is the common perception, that the other markets lag the US markets. What I’ve found is that at least for Cornerstone, the European market is actually ahead of the North American market. They are earlier adopters of full-suite purchases. They are more avid users of integrated talent management; they better understand the process and I would say in general are a little bit more mature. Now that can be explained by the fact that a lot of these organizations are multinationals built by acquisition, so even at relatively small scale they have somewhat complex infrastructure requirements and complexity in terms of how they manage their people.

Our tools are very good at managing that complexity, and so we are starting to see the US think the same way that the Europeans have been thinking for a couple of years and that’s creating a lot of opportunity for us. APAC is definitely still behind that curve. They’re still thinking about it one product at a time, but we are seeing faster adoption of cloud computing there – I think in part brought upon by the work done by some of our cloud brethren out there. And we’re seeing greater ability to do larger deals in some of these geographies, because as you know some of the companies are able to grow to a much larger scale than they might be able to in the US. So you have many more employees in the average company in APAC than you would often in North America, both of which create a lot of opportunity for us.

Scott Berg – Northland Capital Markets

Great, that’s all I have. Thanks for taking my questions.

Adam Miller

Thank you.

Operator

I would now like to turn the call back over to Adam Miller, CEO, for closing remarks.

Adam Miller

Thank you all for your questions and your participation, and thank you again to the Cornerstone team for another great quarter. Thanks, everyone.

Operator

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

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Source: Cornerstone OnDemand (CSOD) CEO Adam Miller on Q2 2014 Results - Earnings Call Transcript
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