Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Carolyn Bass – Investor Relations

Adam Miller – President and Chief Executive Officer

Perry Wallack – Chief Financial Officer

Analysts

Brendan Barnicle – Pacific Crest

Mark Murphy – Piper Jaffray

Laura Lederman – William Blair

Patrick Walravens – JMP

Brad Sills – Barclays Capital

Scott Berg – Feltl

Michael Huang – Needham & Company

Cornerstone OnDemand, Inc. (CSOD) Q1 2011 Earnings Call May 12, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to Cornerstone OnDemand First Quarter 2011 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 call is being recorded.

I’d now like to hand the conference over to Ms. Carolyn Bass, Investor Relations for Cornerstone.

Carolyn Bass

Good afternoon, everyone, and welcome to Cornerstone OnDemand first quarter 2011 earnings conference call. I’d like to introduce Adam Miller, Chairman and CEO, and Perry Wallack, CFO.

Today’s call will begin with Adam providing a brief overview of our company and the quarter, and then Perry will review some key financial results for the first quarter. Later, we will conduct a question-and-answer session.

Management will discuss the results of our first quarter, which ended March 31, 2011. By now you should have received a copy of our press release, which was released after the market closed today and furnished with the SEC on Form-8K. 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 non-GAAP financial numbers 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 thing we cannot reliably estimate our future stock-based compensation expenses, which are dependent on our future stock price.

Our discussion will include forward-looking statements such as statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, customer satisfaction and retention, customer attrition rate, market or business growth, our revenue run rate, investment activity in our business, visibility into our business model and result, the effect of capitalized development cost, 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.

Forward-looking statements involve risk, uncertainties and assumptions. If any of the risks or uncertainties materializes or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by the forward-looking statements we make.

Words such as expect, believe, anticipate, plan, illustrate, intend, estimate and other similar words are also intended to identify such forward-looking statements. These risks, uncertainties, assumptions as well as other information on potential factors that could affect our financial results are included in our registration statement on Form S1 and other filings with the SEC.

With that I'll turn the call over to Adam.

Adam Miller

Thank you for participating in Cornerstone OnDemand’s first ever earnings call as a public company. We are excited about reaching this important milestone. Today I am pleased to report that we're off to a great start as a public company with our very strong first quarter performance.

Revenues came in at $15.7 million, representing a year-over-year increase of 63%. We also added 85 new clients bringing our total to over 560 clients. We continue to work with many of the world's top companies and organizations and best-known brands.

During the first quarter some of our new clients included Univision, MetroPCS, a major southern US hospital network, a French pharmaceutical conglomerate and for the soccer fans on the call, the Manchester City Football Club.

We are actively selling around the world. We closed new deals in the US, Canada, UK, France, Germany, the Netherlands, Sweden, Switzerland, Denmark, South Africa and Australia. We also deepened relationships with many of our existing clients including significant up sells with Advantage sales and marketing, Chico's, Trend Micro, with one of the world’s largest insurance companies and with one of the largest pharmacy chains in the United States.

As you may recall from our road show, Cornerstone is focused on empowering people with our state-of-the-art Learning and Talent Management solutions, delivered purely as software as a service.

Our solution consists of five integrated platforms: learning management, enterprise social networking, performance management, succession planning and enabling the extended enterprise. Our clients use our solution to develop employees throughout their careers, engage all employees effectively to improve business execution, to cultivate future leaders and to integrate with their external network of customers, vendors* and distributors.

We have been growing rapidly over the last several years and have enjoyed a compounded annual growth rate since 2007 of approximately 60% for bookings, which we define as revenue plus change in deferred revenue, as well as 60% for gross revenues, which exclude any charges for common stock warrants.

There was even some acceleration of this growth in 2010 with full-year bookings up 77% over 2009. Part of this growth has come from our ability to cultivate client relationships. In 2005, only 27% of Cornerstone clients were using two or more of our platforms. Today, nearly 60% are using two or more.

We also always had a company wide obsession with client success, which has helped us to achieve an average annual dollar retention rate of over 95% since 2002. This combination of growth in retention has led to one of the largest SaaS subscriber bases in the market.

Cornerstone now has over 5.2 million users in 179 countries using the solution in 25 different languages. This year Gartner named us a leader for both corporate learning systems and for employee performance management systems in their recently published Magic Quadrant. And IDC named us as a leader in the recent Talent Management MarketScape.

As you may recall on a road show we discussed our belief that Cornerstone is well positioned to benefit from multiple vectors of growth. Specifically including a rapidly growing client roster, further penetration of our installed base, wider distribution through global alliances, international expansion, penetration of the public sector in SMB space and the release of new solutions.

Today, I wanted to highlight one of those vectors, specifically our widening distribution through global alliances. After years of systematic development of our channel management and alliance enablement initiatives, we’re seeing stronger results around the world. Our alliance team had an exceptional first quarter, both with regard to the establishment of new distributor relationships and the success of existing relationships.

As many of you know in 2009, we signed a reseller agreement with ADP, one of the largest business outsourcing providers in the world. Today our relationship with ADP continues to strengthen. We now have over 65 joint clients and we are poised to accelerate growth. The original agreement was with ADP's national accounts team, which covers clients with 1,000 and more employees. We have since expanded the relationship to include a referral relationship with ADP's major accounts team as well, which covers clients between 50 and 1,000 employees.

Additionally, we now work with ADP internationally as well as with TotalSource, ADP’s professional employer organization for the small businesses. We took what we have learned from enabling ADP and from the success we have had there and applied the same approach to strategic distributors around the world.

One of our best performing international distributor relationships has been Talent2 in Australia. With Talent2’s help, we have gained great traction in the Asia-Pacific region. Our clients in the region now include MacQuarrie, The Commonwealth Bank of Australia, Pandora, The University of Sydney and Canon.

Additionally, we have closed new accounts in Brazil, Japan, Malaysia and New Zealand all through existing global alliances. But just as important, the first quarter saw the establishment of three key new strategic relationships. The first in Europe, with a reseller agreement we entered into with Logica. Logica is one of the largest business and technology service companies in all of Europe. And we are extremely pleased when they selected Cornerstone to be part of their cloud solution. With four customers together already, the relationship is off to a very strong start.

We also recently signed our first major vertical reseller, SunGard Higher Education, to gain distribution into the Higher Education space. SunGard Higher Ed is the ideal reseller for the Higher Ed vertical. SunGard will OEM the Cornerstone OnDemand solution as SunGard Higher Education Talent Management. The relationship was extremely well received by SunGard Higher Ed client base when it was announced at the recent client conference. But the most significant agreement signed by the alliances team during the first quarter of this year was our global distribution agreement with our First HR outsourcing partner, one of the largest business process and IT outsourcing companies in the world.

Our alliance with them is two prong. The first prong enables us to join forces as they compete for new talent management in HR outsourcing business. The second prong demonstrates the power of a pure play SaaS solution. They recognized the compelling business case to migrate many of their existing learning outsourcing clients to Cornerstone. The migration helped the outsourcer to eliminate significant infrastructure expenses as well as the cost of maintaining customized legacy software.

At the same time, they are now able to offer their clients a state-of-the-art talent management solution. Specifically, this initial agreement includes a conversion of several clients from their legacy learning management platform to ours. All of these are marquee names, each of these clients with an average size of over 30,000 users. We expect that all of them will be live on our solution by the end of the year.

Needless to say we’re extremely excited about the future prospects of this relationship and we look forward to helping their clients maximize business impact by providing those organizations with the tools they need to empower their people in faster, high performing, highly engaged and productive work force.

While we’re talking about alliances, it’s worth noting that the billing terms for alliance deals often differ from our standard billing terms. And as you know, billings directly impact our bookings. Since any deal [ph] billings do not show up as deferred revenue during a given period. As a result, as alliances become an increasing proportion of our overall sales, our bookings in a given period may under-represent the growth of our business.

For example, the single biggest deal in the first quarter of this year had delayed billing terms, with us billing the distributor throughout the calendar year. So if strong reserve bookings work [ph] the quarter, it would have been even better had this deal been more fully reflected in our Q1 bookings.

In summary, we feel quite positive about the strong momentum of the business and our start to the year. We continue to closely groom our key accounts, we’re earning recognition from industry analysts as a leader in our space and we’re gaining further validation of our integrated learning and talent management product strategy as many of our competitors continue to consolidate.

And as Perry will discuss, this year has launched at an even faster pace for us than last year. So in addition to strong revenue and bookings growth, our year-over-year rate of growth for new business actually exceeded the pace from a year ago.

I’d now like to turn it over to Perry to review our Q1 financial performance in more detail.

Perry Wallack

Thanks, Adam, and thanks to everyone for joining us today. Before I get to our first quarter financial results, I’d like to remind you all that today’s discussion will include non-GAAP financial measures that exclude expenses related to stock-based compensation, changes in the value of preferred stock warrants, accretion related to preferred stock, amortization of debt issuance cost, amortization of intangibles. And when talking about earnings per share amounts, the shares present the capital structure reflecting the conversion of our preferred stock to common stock upon our IPO. The amounts are not presented on a pro forma basis.

Given that this is our first public call, I would also like to spend a moment to remind about Cornerstone’s revenue model and revenue recognition policy. First, in terms of subscriptions to our solution, our clients pay subscription fees for access to our solution for a specified period of time, typically three years. These fees are based primarily on the number of platforms sold to our clients and the number of users that have access to those platforms. We generally recognize revenue from subscriptions ratably over the term of the agreement. Typically, we bill annually for software in each of our contract. We will not always bill 100% of the first year software and consulting services upfront upon signing. The amounts not billed upfront are typically billed over the next few months to few quarters.

Second, our consulting services are derived from implementing our solution and optimizing its use and include things like application configuration, system integration, business process reengineering, change management and training services. These services are billed either on a time and material basis or a fix fee basis. These services are generally purchased as part of a subscription arrangement and are typically performed within the first several months of the arrangement.

For smaller clients, implementation times can be as short as one to three months. For larger clients, implementation times can range from four to six months. We generally recognize revenue from consulting services using the proportional performance method over the period these services are performed.

With that as a backdrop, lets review our financial performance for the quarter. I’ll begin by going though our P&L.

Revenue for the quarter was $15.7 million representing a year-over-year increase of 63% over the first quarter of 2010 and a sequential increase of 12% over the fourth quarter of 2010. This increase in revenue was driven by the continued strong growth of our customer base both in new client additions and up sells to existing clients as well as the delivery of our consulting services to support these clients.

Total bookings, which we define as revenue plus change in deferred revenue, were $14.3 million for the quarter, representing a year-over-year increase of 55%. This increase was also driven by the continued strong growth in our customer base.

As you consider our bookings one thing to remember as Adam previously mentioned is that we do not always bill a 100% of our first year of software and consulting services upfront upon signing. Some clients may receive extended billing terms on both the first year software fees and the consulting fees and some may even be billed monthly for their software.

When amounts are not billed, they are not reflected in our deferred revenue balance and as such in any given quarter, our bookings may not reflect a 100% of the first year value of new client first year software and consulting services. Therefore, this bookings metric is not a perfect proxy to assess our growth or activity for any given quarter. Such was the case in the first quarter of 2011 where certain deals including some very large ones were not 100% billed upfront.

In January, we signed a significant deal with the late billings, so they’re not fully reflected in our bookings for the quarter. Had it been billed upfront, we would have had significantly higher bookings for the quarter.

Even more noteworthy is the fact that despite the tremendous growth we experienced in 2010, our year-over-year growth rate for new client first year software and consulting services in the first quarter of 2011 significantly exceeded our year-over-year growth rate for this same metric in the first quarter of 2010. So in other words, we’ve had a strong start to the year.

Two other metrics that we track are the number of clients and the number of users served. We believe that our ability to expand our client base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors. And since our clients generally pay fees based on the number of users of our solution within their organizations, we believe that total number of users is an indicator of the growth of our business.

We ended the quarter with over 560 clients reflecting a year-over-year increase of approximately 80% and over 5.2 million subscribers. We define clients as the number of independent entities we have signed and retained at the end of a period. Note that we define users or subscribers as the number of users that are live and up and running on our solutions. Therefore, we will have instances where we have signed significant clients during the quarter with user bases that have not gone live and thus are not reflected in our subscriber count.

When considering revenue by geography, our U.S. clients accounted for approximately 70% of gross revenues while our international clients accounted for the remainder. As such, we believe we will continue to see solid opportunities to expand our business internationally.

Gross margin for the first quarter of 2011 was 71% compared to 68% in the first quarter of 2010, and gross margin based on gross revenue of 70% in the fourth quarter of 2010. The improvement in gross margin over the prior year was primarily the result of efficiencies gained by our services teams as well as the scalability of our network design and infrastructure.

Now, turning to our operating expenses. Operating expenses for the quarter, R&D expense was $2.3 million representing an increase of 13% sequentially over the fourth quarter of 2010. The increase is directly attributable to our planned hiring of developers to build out our existing solution and develop new platforms as we continue to rapidly grow the company. When we develop new software, we capitalize a small portion of our R&D cost related to the development enhancements of our solutions, which are then amortized to cost of revenue similar to what other software companies do. During the first quarter, we capitalized $705,000 of software development cost and amortized $388,000.

Sales and marketing expense was $9.8 million representing an increase of 20% sequentially. This increase was primarily driven by increased hiring particularly as it relates to our worldwide sales force as we continue to add personnel to help us meet strong demand. We also increased our marketing programs to add more customer events in the U.S. and in Europe.

G&A expense was $3.6 million representing an 18% sequential increase. The increase reflects expenses associated with the preparation for initial public offering as well as the ongoing operations of a public company in the areas of accounting, legal, and compliance.

Due to our increasing operations in international locations, a higher proportion of our expense is exposed to variation in foreign exchange rates. During the first quarter, approximately 25% of our expenses were in currencies other than U.S. dollar. This resulted in a net foreign exchange gain for the quarter of $231,000. As we continue to expand our international footprint, we expect even more of our expenses to be incurred in currencies other than the U.S. dollar.

As Adam discussed, our relationship with ADP is strong. Nonetheless, we’re currently in discussions with ADP regarding the achievement of their year two sales target prorated to the month of the IPO and the associated issuance of common stock warrants.

As of today, we believe ADP has not achieved a minimum target term warrants, and as such there has been no charge to revenue in the first quarter of 2011. ADP contends that they have met the minimum target and discussions are ongoing.

If it is determined that ADP did achieve the minimum target, the company will be obligated to issue a warrant to purchase approximately 443,000 shares of common stock at an exercised price of $0.53 per share and the record the amount at the Black-Scholes value as a reduction of revenue on the date the warrant is issued. The Black-Scholes value of the warrant based on the company's common stock price at March 31, 2011 was $7.9 million and is subject to change as the price of our common stock changes.

Turning to our loss from operations. Our GAAP loss from operations for the first quarter of 2011 was $4.6 million compared to a GAAP loss from operations of $2.2 million in the first quarter of 2010 and a GAAP loss from operations of $6.3 million in the fourth quarter of 2010.

On a GAAP basis, net loss for the first quarter of 2011 was $47.6 million as compared to a net loss of $3.8 million for the first quarter of 2010. This GAAP loss for the first quarter of 2011 was primarily impacted by the non-cash charge for the change in fair value of our preferred stock warrants in the amount of $42.6 million. As our preferred stock and associated warrants were converted into common stock and common stock warrants upon our IPO, we will no longer have these charges.

Non-GAAP net loss for the first quarter of 2011 was $3.7 million or negative $0.26 per share as compared to a non-GAAP net loss of $2.4 million or negative $0.28 per share for the first quarter of 2010. One important thing to note is that in the non-GAAP net loss per share calculation, the weighted average common shares outstanding reflects the conversion of preferred stock into common stock that occurred in mid-March of 2011 as part of our IPO. We have not made any pro forma adjustments to the weighted average number of shares in our calculations.

Let me now turn to the balance sheet. We closed the quarter with over $91 million in cash and cash equivalents. This includes approximately $90.5 million in net proceeds from our IPO. We paid off 100% of our debt in the first quarter of 2011 in the amount of approximately $9.1 million. Our total cash and accounts receivable at March 31, 2011 was approximately $106 million.

Given our revenue recognition model and the flow of deferred revenue we do not use the traditional DSO calculation as an internal metric. We mange the cash collection bills, the number of days bills are outstanding and write-offs and all of these metrics were well within our ranges for the first quarter. Our deferred revenue balance was $32.4 million at the end of the first quarter, representing a year-over-year increase of 70%.

Moving on to cash flow. During the first quarter, we generated $1.4 million in cash flow from operations as compared to $1.5 million during the comparable period a year ago and $5.1 million in the fourth quarter of 2010. We are pleased with the strong operating cash flow performance in the quarter given our high growth rates.

It should be noted that because our business is seasonal, we typically experience net cash inflows in the first and fourth quarters of each year and net cash outflows in the second and third quarters of each year. Unlevered free cash flow for the quarter was about $989,000.

Unlevered free cash flow differs from cash flow from operations due to adjustments for purchases of property, plant and equipment, capitalized software costs and cash paid for interest. Please note that all of our non-GAAP calculations can be found on our website.

With respect to headcount, we increased the headcount by 48 employees during the quarter and as of the end of the first quarter had 375 employees in total. This total headcount number represents a 56% year-over-year increase and a 15% sequential increase.

Now I’d like to discuss our forward-looking guidance, 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 second quarter of 2011, we are projecting revenue of $16 million. For the full year 2011, we are projecting revenue in the range of $71 million to $72 million. This reflects our strong first quarter performance and the continued momentum that we are seeing in our business.

With respect to non-GAAP net income or loss, we are projecting a loss for the full year 2011 between $11 million and $12 million. The range implies a non-GAAP earnings per share range of negative $0.28 to negative $0.30 per share based on a full year weighted average share count of approximately 39.5 million shares. For the full year 2011, we expect unlevered free cash flow to be between negative $4 million and negative $5 million.

We are very proud of our first quarter performance and look forward to building upon the strong momentum over the remainder of the year. And with that, I’d like to turn it back over to Adam.

Adam Miller

Thanks, Perry.

So as we’ve said our solid results for the quarter demonstrate that we are continuing to experience momentum that we’ve seen over the last four years. Our distribution is strengthening globally with key alliances. Our mid-market and enterprise sales teams are growing. Our international teams are growing. Our client base continues to grow rapidly. And we continue investing our products, gaining market share at the same time that certain of our competitors are merging in what we view as an attempt to duplicate our organically developed integrated learning and talent management solution.

Thank you again for joining us. And we’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brendan Barnicle from Pacific Crest.

Brendan Barnicle – Pacific Crest

Thanks, guys. Perry, I don't know if I missed it, was there a Q2 non-GAAP EPS guidance, which you’re going to provide?

Perry Wallack

No, we have not given that guidance. We’ve only given the full year guidance.

Brendan Barnicle – Pacific Crest

Okay. And then on the new customers, you mentioned that 80% growth, maybe it was 85 you had in the quarter. How many do you have as new customers in the year ago quarter?

Perry Wallack

Yeah. Unfortunately, I don't have the delta on the Q1 of last year right in front of me. But what I can tell you is we ended with 310 customers at March 31 of 2010.

Brendan Barnicle – Pacific Crest

Right. On the ADP that additional expense is that contemplated in this guidance of $7.9 million. And I guess can we just get some clarity on that? Is that a reduction of revenue that’s contemplated in that guidance? Is that something that you envisioned pro-forming out? Does that -- or is that going to be an expense item?

Perry Wallack

So, guidance for the year is based on gross revenue.

Brendan Barnicle – Pacific Crest

Okay.

Perry Wallack

And we will only be talking about gross revenue going forward. So if there are any reductions that we do incur for charges against revenue for common stock warrants, we’ll always take those out and talk about gross revenue.

Brendan Barnicle – Pacific Crest

Perfect, okay. And then just lastly, on the billings on this impact from moving more of the business to the channel, is there any common theme to that? You mentioned a lot of different scenarios where people have monthly bills, they have annual bills. Can you give us a sense of may be the magnitude of that potential impact on a quarterly basis going forward to billings, is it something that can be 10% impact to billings or higher, just give us a little more sizing around how that may work?

Adam Miller

Yeah, sure. So basically, as we continue to expand our alliances operations, we have less control over the way that we bill them, because we are subject to the billing terms that they bill their clients with. And so we don’t have a perfect visibility on that, because we don’t obviously have visibility into the way that all of these different partners are going to be billing their customers.

But what I would say is that, number one, the seasonality of the business due to some of these very, very large outsourcing partners will continue. And then number two is the trend will continue where we do not have perfect visibility in the billings.

Brendan Barnicle – Pacific Crest

Okay, great. Thanks guys.

Operator

Thank you. Our next question comes from Mark Murphy from Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes, thank you. Adam, I’m wondering if we can get a little more detailed perspective on the competitive landscape here just with the disappearance of Plateau, how does that affect your opportunity either positively or negatively and what kind of activity are you seeing from some of those legacy Plateau customers?

Adam Miller

Sure. As many of you know, we predicted several months ago that Plateau would be acquired by SuccessFactors. And we said that when that occurred, it would be good for our business.

And we believe this for three reasons. Number one, it validates our positioning in the marketplace. Number two, it highlights the importance of learning as a component of the talent management suite, which we’ve organically developed over the years.

And number three, I believe that it puts the merged company into a somewhat difficult quandary in that many of Plateau’s clients were on-premise deployments, in fact, most of their 350 clients were deployed on-premise. And they will be forced either to deal with a hybrid operation both on-premise and SaaS based deployments or they will force those clients to move to the SaaS based solution at which time I think it creates an opportunity for us in the marketplace.

The other thing it does is it creates a wider ability to do incremental alliances and has positioned us well in opportunities where we were already competing with Plateau. It’s worth mentioning that we know this was not their first choice in terms of LMS acquisition and Plateau was the company that’s been a competitor for a long time. We’re very comfortable competing against them. And we believe that it will be even easier to compete against them as a merged entity.

Mark Murphy – Piper Jaffray

Thank you. And Perry, I was wondering if you could comment at all on the customer adoption of modules. I think in the past, occasionally you had given a metric on percentage of customers that were using two or more of the platforms and I’m just interested if that changed in one direction or the other in Q1?

Perry Wallack

Yeah, sure. So we haven't seen any real change from our previous verbiage around that which is really that roughly about two-thirds little less use at least two of our modules, some use more. And then, on the new sales side what we say is that roughly about the same thing a little less than a third are purchasing at least two modules.

Mark Murphy – Piper Jaffray

Okay, great. And then one last one, Perry, just also to try to get a little more clarity, you indicated that you had some of the deferred billings and maybe some monthly billings in Q1. I guess I'm just wondering, if you try to adjust out all the bookings to strip out any of the noise around whether it’s contract duration or deferred billings or monthly billings, and if you try to annualize it, is there any way you can take a swag at what was the growth rate overall of like a clean adjusted bookings number in Q1?

Perry Wallack

Yes. So what we’re really looking at talking about there is probably the first year contract value. And so we don't really give guidance on that. But as we said on the call, the color that we are giving is that the growth rate that we experienced for first year software and services that we had in the first quarter of 2011 was higher than what we had in the first quarter of 2010 and it was higher than what we had in the fourth quarter of 2010 over those prior years.

Adam Miller

So our growth has actually accelerated.

Mark Murphy – Piper Jaffray

Okay. So you feel that the simplest assessment to bottom-line it is that the growth – the adjusted growth accelerated here in Q1.

Adam Miller

Yes.

Perry Wallack

That's correct.

Mark Murphy – Piper Jaffray

All right. Thank you very much.

Perry Wallack

And just to highlight two prior questions. A year-ago we had 30 new clients, in Q1 this year we have 85. And we also – it's about two-thirds of the client base of new sales that are buying two or more of our five platforms.

Mark Murphy – Piper Jaffray

Thank you.

Operator

Thank you. Our next question comes from Laura Lederman from William Blair.

Laura Lederman – William Blair

Thank you for taking my questions and congratulations on such a great quarter out of the box.

Adam Miller

Thank you.

Laura Lederman – William Blair

Few questions. One is if you look at the 85 customers signed this quarter versus the 30 singed a year ago, is the ASP larger, smaller, so just get a sense of kind of the content within the customers that are being added in terms of their size?

Adam Miller

So across-the-board the ASP has gone down, our mid-market operation has definitely picked up steam. And as we continue to build out that mid-market sales force both directly and indirectly, we are seeing we’ve added more clients, but we continue to sell to large and mid-market companies alike. And so when you look at the large enterprise, the ASP has actually gone up, but when you look at the overall average, it’s gone down because we have a higher number of mid-market clients.

Laura Lederman – William Blair

That’s helpful. Talking about the HRO partner, which products does it include today and where do you see that going forward? And also to the customers that already have been identified they are going to move off of the platform of that HRO vendor to your platform, what in general are those customers moving off of?

Adam Miller

So they are moving off of a competitive LMS platform, a learning management platform. We are – and it’s an on-premise deployment of that legacy platform. They are moving to our SaaS based learning platform. And to your prior question, there is significant up sell opportunity. So we are in talks with those same companies about extending beyond learning to include performance, succession, and social networking. And we have the ability to go beyond the initial set of clients that have been identified for migration. So there is upside really from two directions, one with regard to additional clients that could be migrated, the second with regard to net new business and actually the third, with regard to up sell of incremental platforms.

Laura Lederman – William Blair

Switching to another question, there is so much content in the call, I’m going to parse through what wasn’t already answered, but if you look at the higher ed market, who would you compete in learning management and higher ed, I mean is it only for learning management or is it also for your other others modules as well?

Adam Miller

So higher ed, there is actually opportunities far beyond learning management. In fact we see a lot of interest in higher ed around succession and extended enterprise. So for example, a university that’s building out a corporate education program and it’s doing executive education for corporations, we see that as a big extended enterprise opportunity. There is obviously the opportunity to train the people within the university, but also doing performance management, succession management particularly with regard to the ageing populations of some of those universities. We do not compete just to be clear with a company like Blackboard who really is targeting the students. We’re really focused on the faculty and staff of those universities and there is not significant competition in that segment. And I would argue that SunGard Higher Ed is probably the dominant player in that space and we view them as the ideal partner in that market and will really set the bar for us with regard to verticalized partnerships.

Laura Lederman – William Blair

Was SunGard selling an old proprietary on-premise product into that base that you are replacing or?

Perry Wallack

No, they do not have a similar partnership in that case.

Laura Lederman – William Blair

Okay. Final question for me, any commentary at all on which platforms were strongest of the five in the quarter and anything you’re willing to share at this point?

Adam Miller

It was pretty evenly distributed. We are really selling two or more of these platforms most of the time, and we’re seeing opportunities from all angles. Larger companies tend to be interested in things like succession and learning; smaller companies tend to be more interested in performance management and within that compensation. And then we’re seeing lots of opportunities around the extended enterprise particularly with regard to non-profits trade associations and technology companies.

Laura Lederman – William Blair

Thank you so much and congratulations.

Adam Miller

Thank you.

Operator

Thank you. Our next question comes from Patrick Walravens from JMP.

Patrick Walravens – JMP

Great. Thank you. Congratulations on the quarter and on the new retail and OEM deals, that’s actually I’d love to focus on a little bit. What is it, Adam, about Cornerstone that makes it more partner-friendly than the competition? I mean is it architectural, is it cultural or is it something else?

Adam Miller

That's a great question. I think it's probably three different things. So the first is, we really built out our partner enablement capabilities. So to us partnerships are much more than about channel management, it's also about partner enablement. This is partially what we sell and what we do with our clients, so we’ve gotten pretty good at it. And we developed this with organizations like ADP, really honing our ability to enable the partner to sell and service our products.

The second is, we structured these relationships properly so that there is very good alignment between what the partner is trying to achieve, whether it's increasing their penetration in a particular marketplace or doing something defensively against other competitors or expanding their ability to sell either products or services. We are very well aligned with what they’re trying to do.

And the third, I believe, is cultural. We very much have a culture focused on client success and I think that’s extended itself to include partner success and you will see that at our client conference next week for example where we’re having a partner summit in addition to our client conference and you see that in the relationships we have with those partners. And all of that in combination has led to probably a better than average performance around the alliances relative to other SaaS companies out there.

Patrick Walravens – JMP

Great. And then just sort of cutting to the chase on ADP, I think the two questions investors will in the end have are how much revenue did ADP contribute in Q1 or anyway you want to answer that. And how much risk really does this warrant dispute augurs for the overall [ph] relationship?

Adam Miller

So ADP contributed right around 10% of bookings that we’ve been talking about on the road show as well and that’s continued and we suggested that that would continue throughout the year and maybe into the future around that 10% average.

With regard to the dispute, I can tell you that the dispute this time around is extremely technical, it’s a very technical legal issue that puts them either just under or just over the target. And so both sides are very aware that this is a technical issue, it has nothing to do with the strength of the relationship. And just by way of example literally today we have a large contingent of ADP-iers in our office getting enabled on how to better sell and service Cornerstone. So we have very good relationships with ADP.

Patrick Walravens – JMP

Great, thank you.

Operator

Thank you. Our next question comes from Brad Sills from Barclays Capital.

Brad Sills – Barclays Capital

Just a question on the new customer wins, can you just comment a little bit, a little bit of color on where they are coming from, are these competitive displacements, are they greenfield?

Adam Miller

And again, I would segment that in accordance with market, so in the mid-market they tend to be mostly greenfields.

Brad Sills – Barclays Capital

Okay.

Adam Miller

We’re seeing opportunities primarily in the performance management area, but really tend to start there and then expand to include multiple platforms. And then in the larger enterprise on the learning side they still tend to be replacement deals of on-premise solutions and on the performance front they tend to be more greenfield opportunities.

Brad Sills – Barclays Capital

Got it, thanks.

Adam Miller

Almost all of the deals are competitive and our win rate remains very strong.

Brad Sills – Barclays Capital

Okay, great, thanks. And then on the up sell, you talked about strength there. Can you just give a little color on seat expansions versus up sell to adding new modules?

Perry Wallack

So virtually all of our deployments are enterprise wide. So we tend not to have significant up sells related to incremental seats unless a client makes an acquisition or for some reason grows the business significantly.

Brad Sills – Barclays Capital

Okay.

Perry Wallack

What we tend to see is most of the up sells are incremental platforms, clients buying additional functionality. And as we discussed on the roadshow, we see that this tends to happen over time. The more mature the client gets the more likely they are to buy incremental functionality.

Brad Sills – Barclays Capital

Okay, great. And then maybe just a comment on where are you seeing strength in the different modules and new deals versus up sell. Are there certain module services that you’re seeing, some of your more mature customers migrating to versus some that you are seeing with new wins?

Perry Wallack

Yeah, so we're seeing Comp now being sold quite a bit with performance and we're seeing Connect being sold quite a bit with learning. And that could be either a new sale that includes both or it could be an up sell in the case of Comp to a client that already had performance or in the case of Connect to a client that already had learning. We’ve also had a pretty strong effort on selling the extended enterprise platform, and we’ve gotten very good at that as well. So that will include not only trade associations and non-profits but also any of our clients that have a broad base of either clients that need to be engaged or trained or strong referral or reseller network that needs to be either certified or enabled.

Brad Sills – Barclays Capital

Got it. Okay. That’s helpful. Thanks very much.

Operator

Thank you. And our next question comes from Scott Berg from Feltl and Company.

Scott Berg – Feltl

Hi, Adam and Perry, very nice quarter. Couple of questions. First of all, Perry, did you give color on quarter bearing sales reps and sorry if I missed it?

Perry Wallack

No, we don't give color on number of reps. What we do give color on is for our total employee base. Roughly one third of the organization will work in sales and marketing, and those people are obviously all not quarter carrying reps. And that in addition to that for the past roughly about a year from mid-last year to mid-this year, we plan on doubling the size of our sales force. And we are on track with that – with those hires in that metric.

Scott Berg – Feltl

Okay, great. And then probably a question here for Adam. How would you characterize sales cycles in this space right now? I mean how big a change relative to maybe the fourth quarter or the first quarter of last year?

Adam Miller

Relative to the fourth quarter of last year, they are fairly consistent. I would say relative to a year ago and certainly relative to 18 months ago. They are starting to compress again. We did see some expansion in the sales cycle during the bottom of the recession and that seems to be compressing once again. So mid-market sales cycles are between two and five months and enterprise sales cycle are probably still between five and nine months.

Scott Berg – Feltl

Great. What do you think is compressing those sales cycles, is it small budgetary, lenient to this year, more budget dollars or is it just more demand in the market, and customers are more readily trying to adopt and implement these products?

Adam Miller

So I would say that what’s really occurred is that we’ve gone back to the way it was prior to the recession. During the recession you definitely saw more layers of approval required to get things done. And so not just the sales cycle but also the procurement cycle or the contracting cycle took much longer than it had prior to the recession, it's now gone back to the pre-recession timelines.

Scott Berg – Feltl

Okay, great. And then my last question I guess is on anything else in the general markets about talent management apps right now that you think kind of should require comment on whether it’s how customers are demanding products, or what’s changing the customer preferences or pretty much standard versus 2010?

Adam Miller

Yeah, great question. We definitely see a maturation of the market with regard to the buyers. Buyers have become more sophisticated in part because many of them are now second or third time buyers and in part because it’s just more information about talent management readily available. And as a result we’re seeing more and more requests for the full suite. People are definitely moving from siloed solutions to full suite solutions, and we're seeing that over and over again. Even deals that start out as a silo deal for example with only performance management, they quickly expand to include succession, learning and social networking and we are seeing that over and over again in the market.

Scott Berg – Feltl

All right, very good. That’s all I have. Thank you much.

Adam Miller

Thank you.

Perry Wallack

Thank you.

Operator

Thank you. We have time for one more question. And our final question for today comes from Michael Huang from Needham & Company.

Michael Huang – Needham & Company

Thanks very much. Just to follow-up on that question, so to the – as related to the comment on how important core HR in recruiting are to the talent field or talent management suite and interview, are you getting less out of that, any significant large opportunities as a result of not having core HR in your product arena?

Adam Miller

So core HR tends to be completely distinct from talent management opportunities that are out there. We are not missing out on opportunities in talent management, because of core HR. We view that very much as a distinct market and we have some partners that are very active in that market. We sell together in those cases. where we do see the focus is on the expansion of the talent management continuum. And because of the move towards the suite, we do see opportunity to continue to build out our platforms to continue to build out our solution and to continue to add functionality. So we are laser focused on talent management in providing a solution for the entire employee lifecycle.

Michael Huang – Needham & Company

Okay. And with respect to product roadmap, I think you’ve made some mention to recruiting in the past, can you update us on how that stands and at what point in time we should start seeing a product commercially available there?

Adam Miller

So we are continuing our approach of organic development and recruiting is part of that talent management continuum. So we are in the process of building out a solution there as well as enhancing our solutions particularly in the areas of compensation in the extended enterprise. We’ve made major upgrades to both those platforms to deal with the complexities that are required by many of our multinational clients. And we continue to enhance the overall product suite. So we will continue to do that. As you know, we do four major releases a year. We’ve been doing that now for over a decade and we will continue to operate at that level.

Michael Huang – Needham & Company

Okay. And just to clarify in terms of your new customer accounts, does that include ADP contribution or is that net of that?

Adam Miller

It does include 15 new clients that were jointly sold with ADP.

Michael Huang – Needham & Company

Okay. And last question just with respect to the upcoming customer conference, could you please provide some color around maybe the number of attendees, how does that compare with last year? What ultimately can be the key takeaway from that event? Thanks.

Adam Miller

So we’ll have roughly 500 people attending the conference. It is up significantly from a year ago. We also have very good traction from the analyst community, particularly the industry analysts, who will be speaking at the conference and overall, we’re feeling very good about not just the attendance of the conference, but also the number of partners attending and the sponsorship of the conference, which was far in excess of what we had even a year ago.

Michael Huang – Needham & Company

Awesome, great. Thanks.

Adam Miller

Thank you.

Operator

Thank you. This concludes our question-and-answer session for today. I’d now like to turn the conference back over for any closing remarks.

Adam Miller

I want to thank you all for attending and for participating in our first ever conference call as a public company. And we look forward to speaking again next quarter, if not sooner. Thank you.

Perry Wallack

Thanks, everybody.

Operator

Ladies and gentleman, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cornerstone OnDemand's CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts