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Cornerstone OnDemand (NASDAQ:CSOD)

Q3 2011 Earnings Call

November 7, 2011 5:00 EST

Executives

Carolyn Bass – IR

Adam Miller – Chairman, President and CEO

Perry Wallack – CFO

Analysts

Laura Lederman – William Blair & Co.

Brendan Barnicle – Pacific Crest Securities

Patrick Walravens – JMP Securities

Mark Murphy – Piper Jaffray

Scott Berg – Feltl & Co.

Michael Huang – Needham & Co.

Operator

Good day, ladies and gentlemen, and welcome to Cornerstone OnDemand's Third 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. As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to Carolyn Bass, Investor Relations for Cornerstone OnDemand.

Carolyn Bass

Good afternoon, everyone, and welcome to Cornerstone OnDemand's third 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 in the quarter, and then Perry will review some key financial results for the third quarter. Later, we will conduct a question-and-answer session.

Management will discuss the results of the third quarter, which ended September 30, 2011. By now you should have received a copy of our press release which was released after market closed today, and furnished with the SEC on the 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'll be referring to both GAAP and non-GAAP financial measures. A reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website. All of the financial measures that we will discuss today are non-GAAP unless we state that the measure is a GAAP number. Any non-GAAP outlook we provide has not yet been reconciled with the comparable GAAP outlook because, among other things, we cannot reliably estimate our future stock-based compensation expenses which are dependent on our future stock price.

Our discussion will include forward-looking statements such as statements regarding our biggest strategy, demand for our products, certain projected financial results and operating metrics, product development customer satisfaction and retention, customer attrition rate, market or business growth, our revenue run rate, investment activity in our business, visibility into our business model and results, the effective capitalized development costs, spending on R&D, professional services and other aspects of our business, our appraisal of our competitors and their products, and our ability to compete effectively.

Forward-looking statements involve risks, uncertainties and assumptions. If any of these 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 specify such forward-looking statements. These risks, uncertainties and 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 subsequent periodic filings with the SEC.

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

Adam Miller

Thanks, Carolyn, and thank you to everyone participating in Cornerstone OnDemand's third quarter earnings call. I'm pleased to report that Q3 was another strong quarter for Cornerstone.

Our revenues for the third quarter came in at $20 million, representing a year-over-year increase of 63%. We also ended the quarter with over 700 clients. Our trailing 12-month revenue growth was 65%. Bookings, which we define as gross revenue plus change in deferred revenue, came in at $24 million for the third quarter, representing a year-over-year increase of 47%. Our trailing 12-month bookings growth was 64%.

I think these numbers speak to our momentum and are testament to the strength of our core business. We continue to support many of the top organizations in the world. During the third quarter, our new client additions included Hyatt Hotels, Louis Vuitton, Sotheby's, US Airways, several branches of the US Central Banking System, a big four accounting firm, and a major multinational mobile phone and technology company. We have not seen a change in our business as a result of the global macroeconomic events.

We continue to strengthen our relationships with many of our existing clients, including significant upsells with McKesson, National Envelope, BBC, a major European industrial supply company, and one of the world's largest banking groups. The upsells with McKesson and the banking group are particularly noteworthy.

McKesson, a Fortune 15 company with over 35,000 employees started as a small extended enterprise of a very specific business unit several years ago. And in Q3, they decided to purchase our learning platform for their entire company.

The Global Banking Group, not only one of the largest financial institutions in the world but also one of the largest companies in the world, started with us a year as a learning client, and in the third quarter, made the decision to add both performance and succession for its 75,000 users.

Over the last couple of earnings calls, we've highlighted some of our new initiatives which speak to our ability to sustain our growth. We've discussed our growing global network of alliances, as well as our entry into the public sector market, and we continue to see good momentum in both those areas. We've strengthened relationships with existing distributors and continue to cultivate new reseller relationships. We now have a number of higher-ed clients sold both directly and indirectly through our distributors, and we have signed multiple task orders with the United States government against our $20 million blanket purchase agreement with the US Treasury Department that we signed in Q2.

Next quarter we will highlight additional new initiatives that are gaining traction. But this quarter, we want to highlight the continuing strength of our core business, enterprise and mid-market sales. We've been growing rapidly over the last several years and have enjoyed a compounded annual growth rate from 2007 through 2010 of approximately 60% for bookings as well as approximately 60% for gross revenues. Over the first nine months of this year, we have not only maintained but we've slightly accelerated our historical bookings and revenue growth rates.

Our enterprise sales team, which sells to companies with over 3,000 employees, continued to outperform in the third quarter, closing larger deals on average than before, as more and more companies look for comprehensive, integrated solutions to address their talent management needs.

Our third quarter enterprise sale to one of the world's largest consumer goods manufacturers offers a perfect example of such a company. They initially reached out to us to evaluate succession management tools, but very quickly realized the value of an integrated solution. Ultimately, this led them to purchase our entire solution. In a competitive process, their decision to go with us was principally driven by their appreciation for the organic and integrated nature of our product offering and the benefits that this supports such as a consistent user interface, a unified data model, a global support organization, and a single reporting environment. They also had confidence in our ability to continue to enhance our solution in a fast, efficient and consistent manner.

Our mid-market sales team, which sells to companies between 250 and 3,000 employees, also executed well in Q3, closing more deals than in any previous quarter. And as many sales reps that were hired on to the mid-market team earlier this year begin to reach full productivity, we expect the team’s deal volume to continue to rise in the quarters that come.

Additionally, we saw with our -- as we saw with our enterprise team, the average deal size for our mid-market team in the third quarter increased because a growing proportion of the end-market clients are signing deals for a more comprehensive solution. So, clearly, our integrated approach to talent management is resonating not only with large enterprises but with mid-market companies as well.

It's worth noting that for both the enterprise and the mid-market teams, our mix of closed deals continues to become increasingly well-diversified amongst our clouds. In the third quarter, our biggest sales were driven by performance and extended enterprise requirements. On the enterprise side, Hyatt Hotels and US Airways were both performance deals, while the big four accounting firm was an extended enterprise deal.

Similarly, with mid-market, the deal with the US Central Banking branches, the team's largest deal of the quarter, was a performance deal, while the team's second and third largest deals of the quarter were both extended enterprise deals.

And while we have been discussing new clients, one thing that should not be overlooked is our unrelenting focus on customer success. From 2002 through 2010, we achieved an annual average dollar retention rate of over 95%, and we believe we are on track to achieve this again in 2011. This combination of growth and retention has helped us increase the size of our user base to over 7 million users as of September 30, which represents one of the largest SaaS subscriber bases in the world.

The other core part of our business clearly is the continued development of a state-of-the-art learning and talent management solution. We continue to focus on innovating with the help of our clients and leading the market with a comprehensive organically developed talent management solution.

As you may know, we recently introduced a new solutions-focused, cloud bundled repackaging of our comprehensive offering. Instead of a multitude of products, this repackaging now gives us three clouds: the learning cloud, the performance cloud, and the extended enterprise cloud, with the fourth, the recruiting cloud, on the way.

We did this for three reasons. The first is that the repackaging makes our products simpler to buy for both new and existing clients. While demand for talent management continues to evolve from single siloed applications to fully integrated talent management suites, most spenders today are still selling modules and line item functionality. We are seeing growing demand for an easier way to purchase an end-to-end solution, and this is exactly what our new cloud offerings provide.

The second reason for the repackaging goes hand in hand with the first. As our product offering becomes easier for companies to buy, it also becomes easier for our sales force to sell. As you can probably imagine, trying to put a package together for a potential client when you're selling individual modules and endless SKUs of line item functionality, can get pretty challenging. For many of our peers, it's probably materially compounded by inconsistent new functionality constantly being bolted on via product acquisitions.

The cloud packaging of our 100% organically developed solution makes things significantly easier for our sales force, giving them tighter bundle to sell in a more strategic, consultative way.

The third reason has to do with our competitive position. We've always prided ourselves on staying at the forefront of the talent management industry. We were the first ones to recognize the value of maintaining an organically developed solution, delivered purely as software-as-a-service; the first ones to recognize that functional silos in the industry were merging into a new framework, now known as integrated talent management; the first ones to recognize the importance of enterprise social networking and employee collaboration within the talent management framework; and now the first ones to employ a cloud-based pricing and packaging strategy.

In early 2012, we expect to officially add recruiting to our suite of cloud product offerings. Our new recruiting cloud, like the rest of our solution, has been 100% organically developed after extensive discussions with our clients about their talent acquisition needs and after in-depth research of the market. We recognize that we are late to the recruiting party, so we wanted to build something that went beyond the current ATS systems available in the market today.

Recruiting has dramatically changed over the past few years. Leading companies are leveraging their entire workforce, not just recruiters, to source the best talent and build internal and external talent pipelines. Accordingly, we are leveraging two advantages that we have. First, since we plan to release a solution in the coming months, it's built to accommodate the way people recruit today, not the way they recruited years ago. In other words, our Recruiting Cloud is natively social. Second, the Cornerstone solution is typically deployed to all employees, not just recruiters or hiring managers.

As a result, we're able to leverage the social networks of all employees, more effectively promote talent communities and employee referral programs which often are the best source of candidates, and seamlessly consider external and internal candidates for open positions. We are already seeing significant demand from both existing and prospective clients for the recruiting cloud, especially those that are leveraging two or more of our learning performance and extended enterprise clouds.

In addition, we plan to release our volunteer management system, part of our extended enterprise cloud early next year. It has been developed in response to the need for more effective management of volunteers, demonstrated by our nonprofit education and corporate clients. A recent Deloitte study found that organizations that effectively leverage volunteers are up to twice as impactful as their peers.

The solution will allow for skills-based volunteer management which will enable nonprofits to leverage the full capabilities and expertise of their volunteers, as compared to the typical generic volunteer opportunities that we all see, in order to help dramatically increase the efficiency of community service organizations. We're the only vendor in the talent management market to offer this type of functionality.

In summary, despite the current macroeconomic uncertainty, our execution in our core markets had never been better, which is evidenced by our year-to-date growth in bookings and new clients. We remain focused on the success of our clients as well as the development of new areas of our business. At the same time, we continue to innovate working with our clients to refine our organically-developed solution to meet the evolving talent management needs of leading organizations around the world.

I'd now like to turn it over to Perry to review our Q3 financial performance in more detail.

Perry Wallack

Thanks, Adam, and thanks everyone for joining us today.

Before I get to our third quarter financial results, I'd like to remind you that all the non-revenue financial figures I will discuss today are non-GAAP unless I state that the measure's a GAAP number. Revenue numbers are of course GAAP numbers, and as always, you can find a reconciliation of GAAP to non-GAAP results in today's press release.

Non-GAAP financial measures exclude common stock warrant charges, changes in the value of preferred stock warrants, accretion related to preferred stock, things related to early retirement of debt, expenses related to stock-based compensation and related employer payroll taxes, amortization of debt discount and issuance costs, as well as expenses incurred related to the secondary offering, which we would do in early August.

So with that said, let's discuss our third quarter results. I will begin by going through our income statement. As Adam mentioned, gross revenue for the quarter was $20 million, representing a year-over-year increase of 63% over the third quarter of 2010 and a sequential increase of 15% over the second quarter of 2011. Our revenue results were $1.5 million or 8.1% higher than our third quarter revenue guidance of $18.5 million.

We exceeded revenue guidance for the quarter principally for two reasons. Number one, our consulting team outperformed forecast for service delivery. And number two, we had higher than anticipated revenue related to subscriptions to our software from a greater than anticipated level of sales based on client contracts entered into in the current quarter.

It is important to note, as we have said in prior earnings calls, that we do not have visibility to precisely forecast when clients wish to deploy and the rate at which our services are performed.

Gross revenue increased 15% over the second quarter of 2011. Recall in Q2 2011, there was a $2.5 million reduction of gross revenue as a result of the issuance of common stock warrants to ADP. There were no similar reductions of revenue recorded in the third quarter of 2011 as ADP is no longer eligible to earn warrants under the agreement.

Total bookings which we defined as gross revenue plus change in deferred revenue was $24 million for the quarter, representing a year-over-year increase of 47% and a sequential increase of 15% over the second quarter. This growth reflects our strong third quarter performance as well as the continued momentum that we are seeing in our business.

As discussed on our previous earnings calls, two of the non-financial metrics that we like to track are number of clients and number of users served. We ended the quarter with 710 clients and approximately 7.2 million subscribers, reflecting year-over-year increases of approximately 72% and 64%, respectively, and increases compared to Q2 of 2011 of 10% and 19%, respectively. We define clients as the number of independent entities that have entered into a contract at the end of the period, and we define users or subscribers as the number of users that are live and up and running on our solution. Therefore, we will have instances where significant clients have signed a contract during the quarter with user bases that have not gone live and thus are not reflected in our subscriber count.

Our revenue concentration by geography for the third quarter of 2011 remained consistent with the second quarter of 2011. Our US clients accounted for 72% of gross revenues in both the third and second quarters of 2011 while our international clients accounted for the remaining 28%. By comparison, in the third quarter of 2010, US clients accounted for 70% of gross revenues while international clients accounted for the remaining 30%.

Gross margin for the third quarter of 2011 was 73.6%, an increase of 5.2% when compared to 68.4% gross margin for the third quarter of 2010, and an increase of 1.8% when compared to 71.8% for the second quarter of 2011. The improvement in gross margins was principally due to increased services revenue for the quarter and our realization of economies of scale in our consulting services and network infrastructure as we have emphasized continuous improvement in processes for delivering client implementation and support programs.

We believe we will continue to improve gross margins on an annual basis due to efficiencies gained by our consulting and services teams as well as the scalability of our network infrastructure. However, in the near term, we do not expect to always have sequential improvements in gross margins from quarter to quarter. We will continue to invest in our software, network infrastructure and our implementation service organizations to support our growth as needed.

Now let's turn to our operating expenses for the quarter. Sales and marketing expense was $11.2 million, representing a sequential increase of approximately $570,000 or 5% from the second quarter of 2011. For example, employee-related costs increased by $400,000 and sales commissions increased by approximately $275,000 in the third quarter of 2011 when compared to the second quarter of this year.

When compared to the same period in 2010, sales and marketing expense increased by $4.3 million or 63%. This was mainly due to increased employee-related costs of $2.2 million and increased sales commissions of $870,000. The current quarter increase was principally driven by additional headcount, particularly as it relates to our worldwide sales force, as we continue to add personnel to help us meet strong demand.

R&D expense was $2.5 million, representing a sequential increase of $290,000 or 13% from the second quarter of 2011, an year-over-year increase of $1.2 million or 83% compared to the same period in 2010. Both the sequential and year-over-year increases were mainly due to increased payroll due to increased headcount as we scaled the business, and third-party consulting services for services like foreign language translation.

G&A expense was $2.9 million, representing a sequential decrease of approximately $150,000 or negative 5% as compared to the second quarter of 2011, and a year-over-year increase of $570,000 or 24% when compared to the same period in 2010. The increase as compared to the same period in 2010 was mainly attributable to increased headcount in order to support the overall growth of the company and status as a public company.

Operating expenses as a percentage of revenue decreased overall from the second quarter of 2011, mainly due to our revenue growing at a higher rate than the increase in our operating expenses. For example, as a percentage of revenue, sales and marketing expenses decreased by 5% from 61% in the second quarter of 2011 to 56% in the third quarter of 2011, and general and administrative expenses decreased by 3% from 18% in the second quarter of 2011 to 15% in the third quarter of 2011.

We would like to emphasize that operating expenses may fluctuate from period to period based on the timing of our investments and related expenses associated with increased headcount in order to support our continued growth.

Operating loss for the third quarter of 2011 was $1.9 million compared to a loss of $3.5 million for the second quarter of 2011, and a loss of $3.7 million for the first quarter of 2011. The sequential decrease in net loss compared to the second and first quarters of 2011 is mainly due to the higher rate of growth in our revenue, which was 15% from Q2 to Q3, compared to the increase in our operating expenses which was 4% from Q2 to Q3.

Again, we may continue to see fluctuations in our results from operations period to period based on the timing of our investments in our sales force, marketing programs, R&D projects and G&A expenses to support our continued growth.

Non-GAAP net loss for the third quarter of 2011 was $2.7 million or negative $0.06 per share based on a weighted average shares outstanding of 48 million shares, as compared to a non-GAAP net loss of $3.4 million or negative $0.07 per share based on a weighted average shares outstanding of 47.8 million shares for the second quarter of 2011.

Let me now turn to the balance sheet. Our total cash and marketable securities were over $81 million at September 30, 2011 as compared to $82.7 million at the end of the second quarter of 2011. At the end of the third quarter of 2011, we had approximately $23 million in accounts receivable compared to $20 million at the end of the second quarter 2011. In addition, our working capital, current assets less current liabilities, excluding deferred revenue, was $98.3 million at the end of the third quarter of 2011 compared to $97.7 million at the end of the preceding quarter.

Our deferred revenue balance was $39.9 million at the end of the third quarter, an increase of 11% over a balance of $35.9 million at the end of the second quarter of 2011, and an increase of 70% over a balance of $23.5 million at the end of the third quarter of 2010. This reflects the growth and visibility of revenue in the business.

Now, moving on to cash flow. During the third quarter, our cash inflows from operations were $600,000 as compared to cash outflows of $2.3 million during the comparable period in 2010. As was the case in Q2 of 2011, we are pleased with the cash flow performance in the quarter given our high growth rates and seasonality.

It should be noted that, because our business is seasonal, we typically have experienced 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. However, during the third quarter of 2011, we experienced net cash inflows of $600,000 which were principally attributable to our reduced net loss and improved collections, amongst other factors.

Unlevered free cash flow for the quarter was negative $300,000. Unlevered free cash flow differs from cash flow from operations due to adjustments for purchases of PP&E capitalized software costs and cash paid for interest.

With respect to headcount, we added 46 employees during the quarter and had 456 employees as of September 30. This total headcount number represents a 57% year-over-year increase and 11% sequential increase compared to the second quarter of 2011.

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 full year 2011, we are raising gross revenue guidance from our previous guidance of $72 million to $73 million to the range of $74 million to $74.5 million. At the midpoint, the new range suggests 59.3% growth over 2010 gross revenue of $46.6 million. The updated full-year gross revenue guidance translates to a fourth quarter gross revenue range of $20.9 million to $21.4 million. At the midpoint, this range represents increases of 50.7% year over year and 5.6% sequentially.

We'd like to reiterate that during this period of accelerated growth, we are reinvesting some of the incremental profits and cash flows resulting from our first nine months of the year performance back into the business. In addition, we are maintaining the flexibility to make further investments during the fourth quarter of 2011. Accordingly, with respect to non-GAAP net income or loss, we are maintaining our projected loss for this full year 2011 of between negative $11 million and $12 million. The range implies a non-GAAP EPS range of negative $0.28 to negative $0.30 per share based on a full-year weighted average share count of approximately 39.8 million shares.

In addition, we are also maintaining our guidance for unlevered free cash flow. For the full year 2011, we expect unlevered free cash flow to be between negative $4 million and negative $5 million.

In closing, we are very pleased with our performance during the third quarter as well as for the first nine months of this year.

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

Adam Miller

Thanks, Perry.

With our bookings keeping pace with our historical growth rates, we continue to see the strength of our core businesses. In addition, we are seeing early success in several of our new initiatives, combined with our focus on client success and the continued innovation of our organically developed talent management solution, we look forward to the opportunities ahead.

I would like to thank the global Cornerstone team for their commitment to our company, our clients, and our mission.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions)

Our first question comes from Laura Lederman of William Blair. Your line is now open.

Laura Lederman – William Blair & Co.

I just wondered, can you talk about any changes in the competitive environment, especially since SuccessFactors –

Perry Wallack

Laura, we're having a very hard time hearing you. Is it possible you could use a handset?

Laura Lederman – William Blair & Co.

Let me see. It'll probably hang…

Adam Miller

Laura, I heard your question.

Laura Lederman – William Blair & Co.

Okay. Thank you.

And then the follow-up would be an update on ADP deal and the relationship with them.

Adam Miller

Sure. So, as you know, over the last couple of years, and in particular, over the last year, we've seen major shifts in the competitive landscape. In particular, there's been very significant consolidation of our competitor base, and we have seen that as a positive sign for our business. It's resulted in less competition. It's also resulted in less pricing pressure. Most of the low-cost competitors in the space have been taken out, and the net result is an easier ability to hold effective pricing.

As you saw, we did increase our average deal size over the quarter. I think that was due to a combination of selling more of our suite, combined with less pricing pressure. And then with regard to ADP, I would say our relationship has never been stronger. We're seeing a lot of momentum from the national accounts relationship that we have, which is selling to companies over 1,000 employees.

We have been expanding our relationship with a major accounts team which on the ADP side sells to 50 to 1,000 employees, and that is becoming a national relationship for us. Both of those are increasing our traction on the sales side. And because we now have a few quarters under our belts, we're seeing better provisioning of services on both sides as it relates to ADP accounts. So we're seeing overall improvements in the relationship both from a sales and a services perspective.

Laura Lederman – William Blair & Co.

A follow-up question, can you talk about percentage of deals that are multi-element or percentage of the business that's not LMS, or whatever you're willing to share in terms of looking at the business by product?

Adam Miller

Sure. Well, we used to talk about things with regard to the five different platforms or pillars that we used to talk about. We're now catching things in terms of the four clouds. And when we rebundled things into the four clouds: recruiting, learning, performance and extended enterprise, we obviously had some cannibalization. And so, today, we're seeing 46% of our client base with two or more of our clouds.

Now, that's notable because, obviously, none of them have the recruiting cloud. So that means almost half our client base has two-thirds essentially of our current product set. And we've seen a real ability to cross-promote and cross-sell and upsell our installed base, as well as to cross-sell upfront. And I think that really speaks to an overall demand in the marketplace for integrated talent management.

Laura Lederman – William Blair & Co.

Thank you so much.

Adam Miller

Thank you.

Operator

Thank you. Our next question comes from Brendan Barnicle of Pacific Crest Securities. Your line is open.

Brendan Barnicle – Pacific Crest Securities

Thanks so much, guys. This may follow a little bit up on what Laura was asking, but in the prepared comments, you mentioned an increase in ASP both in the enterprise side and SMB side. I was wondering if you could give us any more color on maybe the size of that ASP lift you were seeing, or maybe what the primary drivers were behind that ASP. If you could give us any more granularity around that, that'd be helpful.

Adam Miller

Yeah, it was – again, it was specifically our enterprise and our mid-market teams. SMB is a separate team for us, which is under 250 employees. And we're seeing a lift of, as much as 30% in terms of the average deal size for both teams. And again, it's driven by a combination of increased sale of the overall solution, so, more of the suite being sold, as well as greater ability to hold our effective pricing because there's less competition. And in particular, there's less low-cost competitors out there, or fewer low-cost competitors out there.

Brendan Barnicle – Pacific Crest Securities

And then, Adam, could you give us a little update on what the hiring environment is like? I mean, you guys are trying to do a fair amount of it right now. How was it in the market in terms of finding the talent that you're looking for on the sales side?

Adam Miller

Yeah, great question. Obviously I watch the news, I read the press, and all you hear about is the unemployment rate and the fact that the unemployment rate is not really improving. At the same time, I will tell you that the hiring environment is very tight for skilled labor. And so I think what we're starting to see is a bifurcation of the workforce, and I believe that this is a secular trend. It's going to persist, and you're going to see I believe long-term unemployment for unskilled labor and a very tight labor market for highly skilled labor. And we're seeing that ourselves.

This is in sharp contrast to what we had seen, for example, at the end of 2008 when not only was the unemployment rate going up, but it was affecting all types of employees. Now we're seeing extreme competition in hiring skilled labor. Nonetheless, we've been able to rapidly grow our headcount. It's also worth mentioning that we have a very strong employee retention rate and, year to date, for us, it's been over 98% if you exclude involuntary turnover.

Brendan Barnicle – Pacific Crest Securities

Great. And then lastly, Perry, on interest expense, looked like, if you can remind me again what it was that made us go negative -- sort of net negative in the quarter. And is that something we should be modeling going forward, or it should be back at sort of what we saw in Q1 and Q2?

Perry Wallack

Yeah. No. It was just an anomaly in the current quarter. We have significant balance in the bank for interest income. We earn probably a little less than 1%.

I think the anomaly really that happened in the third quarter was, if you look at the other net, it was about $643,000 negative, and that was due to some mark-to-market on foreign exchange for some inter-company loans. So, the year-to-date number on that is just about a loss of $220,000. So, again, immaterial and no change for modeling.

Brendan Barnicle – Pacific Crest Securities

Okay, great. Thank you very much guys.

Adam Miller

Thank you.

Operator

Thank you. Our next question comes from Patrick Walravens from JMP. Your line is open.

Patrick Walravens – JMP Securities

Great. Thank you. I guess I have two questions on the competition. The first one is, can you just tell us how we should think about the ADP Vantage product which I guess they've introduced at the low end? And then the broader one, Adam, which is probably for you, is how do we think about the interplay between companies that have got a strong HRIS system and talent management? Thank you.

Adam Miller

Sure. So, on the first question, with regard to Vantage, like I said, the relationship with ADP continues to strengthen. We expect to be in the next rev of Vantage. We'll be the learning system within Vantage, and over time, may do even more the functionality.

Vantage right now is really meant to handle multi platform deals for ADP. So, the buyers of Vantage are people who are buying more than one solution from ADP, so, a combination of payroll, benefits, talent and outsourcing. And so, on the talent side, they do have some basic functionality in there. But the real driver are companies that are purchasing a combination of payroll benefits and some of the other services that they offer.

So, we don't view it as competitive. The same team that's selling Vantage is selling Cornerstone. And like I said, we're seeing an increase in the amount of deal activity with regard to the Cornerstone solutions, so what they call ADP talent management, which is powered by Cornerstone.

With regard to the HRIS system, I assume you're talking about Workday in particular. And as you might have noted, we have a good relationship with Workday. We entered into a partnership agreement that we formalized over the past quarter. And in cases where Workday is supplying the HRIS system, we'll be brought in to provide learning management. And we are bringing Workday in as well where it makes sense, where we have clients that need a new HRIS system, we’ll at times bring in Workday or ADP or some of our other partners depending on what the situation is.

And so, we don't view them as competition at all. In fact, we have very good relationship with Workday. And as you know, all of our enterprise clients are using an HRIS system of some sort, I would say, 70% in the US use Oracle and 70% in Europe are using SAP, and we sit side by side with those applications in virtually all of our enterprise accounts.

Patrick Walravens – JMP Securities

Great. Thank you.

Operator

Thank you. Our next question comes from Mark Murphy of Piper Jaffray. Your line is open.

Mark Murphy – Piper Jaffray

Hey, Perry, how many new task orders were signed in Q3 relating to the treasury? And also, how many were billed? Can you tell us the dollar amount billed in Q3 versus in Q2?

Perry Wallack

Yes. So we don't -- we're not giving specific guidance on the dollar amount. There were two more task orders that were billed. I wouldn't say it was anything grossly material. So, if you're looking at reasons why the bookings did something or even revenue, that was not one of the reasons.

As I went over in the prepared remarks, the reason for the overachievement was really due to two things. It was just generally that the business was signing a little more in advance in the quarter than our typical inner quarter seasonality, that and our services teams over-performing beyond the forecast.

Mark Murphy – Piper Jaffray

Okay. And then, Adam, industry-wide, there seems to be a little more talk of learning leading some of the talent management transactions, and yet when we talk with your partners, sometimes they're actually really saying the opposite for Cornerstone. In other words, that you have performance and compensation starting to lead the deals. I guess I'm just wondering which of those assessments do you think is more accurate from your perspective.

Adam Miller

To be honest, it's neither. I would say what we're seeing more and more often in the market is a demand for integrated talent management, which includes elements of both learning and performance. And as you know, we're particularly well-suited for those types of situations. We have a leading learning management system combined with extended enterprise functionality as well as a complete performance management suite, including performance, compensation and succession management.

So, we're in a very good position in those cases. And one of the reasons we're building out the Recruiting Cloud is because we're seeing that demand extend beyond the employee base to include candidates pre-hire.

Mark Murphy – Piper Jaffray

Okay. So, Adam, then when you think about that in terms of displacement in the marketplace, SuccessFactors is trying to integrate Plateau, Taleo is struggling with Learn.com, and it seems like a lot of the legacy vendors have plenty of integration issues as well.

I guess I'm wondering what kind of impact that's having on your value prop as the only 100% organic platform. And is there a customer displacement that's actually coming from these competitors tangibly that you feel like you're able to capitalize on?

Adam Miller

Absolutely. So, with regard to the legacy platforms, those were delivered as on-premise solutions, particularly on the learning side, we are seeing lots of opportunity. Most of our enterprise learning business are replacements of existing legacy products. And that's true both for the older software vendors in the space as well as the newer acquisitions, where integration is not as easy as it might appear.

We are also seeing ongoing demand for a complete solution, so, more and more of our clients are asking for a broader solution set, whether that's in the initial deal or over time. And that obviously plays well to our strengths because we built the entire suite ourselves. So it's a common code base, a common data architecture, common reporting and interface, which makes it much easier to use, and leads to much higher levels of engagement.

Mark Murphy – Piper Jaffray

Okay, great. And then one final one, in terms of your quota-carrying sales headcount, I think you had said as of the end of Q2 that it had doubled year over year. Is there any early look at the business plan in terms of how you think that could trend either coming out of 2011 or at the midpoint of 2012? And is there a need or an opportunity to continue to grow it along that trend line, or should we be expecting you to moderate that as maybe you'd be trying to digest and ramp some of those hires?

Adam Miller

Yes. So we are seeing a lot of success in our ability to hire and onboard quality sales personnel. And so we're going to continue that ramp that we've had over the past year and a half. So, as you mentioned, from July to June of last year, we effectively doubled the sales force, and looking at that same time period, midyear to midyear, we're going to try to do something similar again.

It will not be linear across the various sales teams that we have in place, but in aggregate you'll see a significant growth of our overall sales force, including into new geographies.

Mark Murphy – Piper Jaffray

And remind me, Adam, because I think that's -- it's impressive and encouraging that you're doing that, have you ever disclosed anything in terms of the numbers of those reps, or is there anything that you provide in terms of that aggregate sales and marketing headcount?

Adam Miller

We don't. We said that about a third of the company is in sales and marketing.

Mark Murphy – Piper Jaffray

All right. Thank you very much.

Adam Miller

Thank you.

Perry Wallack

Thank you.

Operator

Thank you. Our next question comes from Scott Berg of Feltl & Co. Your line is open.

Scott Berg – Feltl & Co.

Hi, Adam and Perry. Nice quarter. I apologize if you can't hear me, I'm sitting in Grand Central Boulevard [ph].

First question is, can you talk about the health of your customers -- the visibility or clarity that you have into maybe 2012 budgets right now? Are you seeing any sort of change in demand or outlook or maybe appetite for purchase (inaudible)?

Adam Miller

Sure. We have not seen any real change to the macro environment. We're seeing consistent uptick in the platform over time, and we haven't seen any change in the ramp that we historically have seen. But we're also seeing very good retention. So, as you know, we've had about 95% retention on a dollar-weighted basis since 2001, and we believe we'll maintain that kind of retention rate throughout this year as well.

It's also worth noting that our pipelines and our forecasts are both up, both in absolute terms and in relative terms with regard to our internal targets.

Scott Berg – Feltl & Co.

Okay, great. And then one question I guess on the quarter deal metrics. It looks like you had a net customer add of 55 by my count, and that would be a lower number than last two quarters. Not seeing any sort of seasonality over the last couple of years in your business, any sort of decline in the second or third quarter, anything to read into that in terms of maybe the kind of the deals that made up that number, maybe more or less on the enterprise side versus the mid-market side? I'm just trying to think about how we should view that I guess lower number versus the second quarter.

Adam Miller

Yeah. It was 64 versus about 84 in the prior quarter, and I would say it was made up of more larger deals. So you're going to at times see bigger deals tend to replace more smaller deals. And that's what happened this quarter. So, in terms of absolute dollar amounts, the numbers were fairly consistent. The composition of the deals look slightly different. But it was still a very strong quarter, 64 deals for us is a very good quarter in terms of number of units.

Scott Berg – Feltl & Co.

Okay, great. Then one final question for I guess Perry. What's the true run rate of -- how should we think about maybe capital expenditures going forward? They've bounced a lot -- around a lot the last couple of quarters. I'm just trying to get a sense of how we should model that kind of from a general basis at least going into fourth quarter, next year?

Perry Wallack

Yeah. So they will come in sort of an irregular pattern. We don't necessarily expand our network infrastructure on a perfect sequential quarterly basis. They can be affected even more so by the build-out of a new data center. For example, for 2012 we're looking at doing something in Asia Pacific. So, my guess is that going into next year, we will have a clearer picture of when we're going to do certain very, very large-scale builds, and we'll give some more clarity on that in the future.

Scott Berg – Feltl & Co.

Great. That's all I have. Thank you much. Nice quarter.

Adam Miller

Thanks.

Operator

Thank you. And I show we have four minutes left for one final caller. We will go to Michael Huang of Needham & Co. Your line is open.

Michael Huang – Needham & Co.

Thanks very much. Just a couple of quick questions for you guys.

First of all, I believe you unveiled your soon-to-be-launched Recruiting Cloud at HR Tech. I was wondering what type of early feedback that you’ve got from this and what type of sales activity do you anticipate out of the gate when it's launched in Q1?

Adam Miller

Yes. So, our early feedback has been very positive both from clients and partners. We have a few prospects that are signing up for it without actually seeing the full product. And the reason is they found it very compelling to buy the recruiting system to the extent they're using everything else. So if they're already looking for an integrated talent management solution and they're buying all aspects of the learning and performance clouds, then they see recruiting as a natural fit. And irrespective of the end-state of the product, they feel like it fits well with our overall framework.

We're also seeing our existing client base with some strong demand. So, I suspect out of the gate in Q1 or Q2 of next year, you'll see some uptick in revenue due to the Recruiting Cloud, and you'll see it really more take effect in the second half of next year when the sales teams and the products are fully ramped up.

Michael Huang – Needham & Co.

Okay. And would you expect that early activity, would that be the enterprise base or with some of the SMB organizations?

Adam Miller

We're seeing it both with enterprise and mid-market. I would say the demand, and this is a little bit of a surprise to us, is more on the enterprise side. We're seeing more demand from our enterprise clients.

Michael Huang – Needham & Co.

Great, okay. And then final question, just from like a global system integrator standpoint, I know that one of your competitors appear to be benefiting from its investments in core HR which seems to be drumming up some SI interest. Now, how do you stand within the global SIs like [Deloitte] and Accenture, and how important are they to your business? Thanks.

Adam Miller

So, to date, we've done the implementation work ourselves, so the system integrators were not that impactful, particularly because our implementations are so fast. We'll typically do an implementation, our average is about 109 days for an implementation, including all-sized enterprises. And that often is not enough to entice a system integrator.

Having said that, as system integrators recognize that their lives have to change in a cloud-based world, we're seeing lots of interests from the major integrators. And I suspect you'll hear us talk about some alliances over the next couple of quarters that correspond to that part of the ecosystem.

Michael Huang – Needham & Co.

One last question for you, Perry. So, just in terms of your new bookings, how is that generally split between kind of upsell contribution and contribution from new customers? And are you seeing any meaningful changes here in trend?

Perry Wallack

No, for the third quarter, there was no meaningful difference between upsells versus new client contracts. We did have a couple, as we said in the prepared remarks, a couple of existing client upsells that were rather large. But on the whole for the first nine months of the year, everything is trending at the normal percentages.

Michael Huang – Needham & Co.

Great. Thanks very much.

Operator

Thank you. And I'd like to return the program to our presenters for any concluding remarks.

Adam Miller

We'd like to thank everyone for their participation, and look forward to speaking to you again soon.

Perry Wallack

Thank you very much.

Operator

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program, and you may now disconnect.

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