Can Cornerstone OnDemand IPO Attract Investors?

| About: Cornerstone OnDemand, (CSOD)

With its web-based learning and talent management platform, Cornerstone OnDemand has been helping Fortune 100 customers maximize employee productivity since 2001 and targets a significantly underpenetrated software market. Cornerstone OnDemand plans to sell 10.5 million shares at a range of $9 to $11 per share. Existing shareholders are selling 3 million shares, representing 29% of the expected IPO proceeds. Goldman Sachs (NYSE:GS) and Barclays Capital (NYSE:BCS) are the lead underwriters on the deal, which is on the IPO calendar for the week of March 14.


Founded in 1999, Cornerstone OnDemand (NASDAQ:CSOD) provides a comprehensive software-as-a-service (SaaS) platform consisting of five integrated modules for learning management, performance management, enterprise social networking, succession planning and extended enterprise (e.g. vendor/distributor approval, trade association training programs). The company has 481 clients representing 4.92 million users across 164 countries and 23 languages. Clients include multinational corporations and large domestic enterprises (Barclays, Microsoft, ADP, Pearson), as well as mid-market companies, public sector organizations, higher education institutions and non-profit entities. In fiscal 2010, Cornerstone OnDemand had revenue of $47 million and an operating loss of $10 million; however, cash flow from operations turned slightly positive thanks to strong bookings, which grew 77% y/y to $61 million. Management believes the subscription model can eventually support 20% cash operating margins, which is consistent with those of other on-demand software vendors.

Key Issues

The company expects operating losses to continue due to heavy investments in sales & marketing (currently 60% of sales). Its bookings are highly seasonal and back-end loaded; most agreements are signed in the 4Q and a significant portion in December of each year. Talent management competitors SuccessFactors and Taleo are significantly larger (each has more than $200 million in sales), allowing them to spend more on sales and R&D and to potentially become more aggressive on price. Finally, because Cornerstone sells its solution on a per-seat basis, growth may be adversely impacted by headcount freezes or reductions at client organizations.

Cornerstone IPO in Demand?

While Cornerstone remains a small and unprofitable player and will face increasing competition from larger software vendors, its accelerating bookings ramp and new client adds have the company poised to grow faster than its on-demand talent management peers. A sticky, blue-chip client base provides validation for its platform, and its subscription-based model should help cash flows scale ahead of other profitability metrics. Further, recent trading momentum among on-demand software stocks should make this an intriguing small cap story for growth-hungry investors.

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