Cornerstone OnDemand, Inc. (NASDAQ:CSOD)
USB Global Technology Service Conference Call
November 15, 2011 2:30 p.m. ET
Perry Wallack – CFO
Unidentified Company Representative
Our next speaker is Perry Wallack, Chief Financial Officer of Cornerstone OnDemand, he’s also a founder of the company. He’s been with the company for 12 years. Prior to that time, he spent a lot of time in the auditing…
Auditing and accounting.
Unidentified Company Representative
Yes. I think he’s been [ph] responsible for building the business. Perry’s going to spend a few minutes with slides, and then we’re going to go to Q&A. So with that, Perry.
Thanks, Matt. So before I get started; forward-looking statements, I’m sure you guys have read quite a few of these. Just to review the key investment highlights, we are a leading provider of learning and talent management solutions, as you will see in a little bit. We differentiate ourselves quite significantly in the fact that we have the only organically built integrated talent management system in the industry.
Most of you probably know the market, it’s large and growing and fairly greenfield SaaS and scalability. The track record of growth that you’ll see is strong, it’s not new and it’s continuing even as we scale. And we will show you some of the multiple vectors that will continue to drive that growth.
So really, the sum of it is that in June of 2007, we had about 300,000 subscribers. And today, or as of September 30, of this year we had about 7 million. So real hyper growth.
Many of the industry analyst talking about the tipping point in talent management. From a number of clients perspective going from about 105 to about 700 clients as of September 30.
We operate in about 180 countries throughout the world, going from 10 to about 29 languages. We use distributors all over the world. You can see a couple of the financial metrics there for the last 12 month’s gross revenue, going from about 11 million to almost 70 million as of September. And then for bookings, similarly going from about 15 million to about 84 million.
So what we do, as I said before, is we have an integrated talent management solution, which includes currently right now, three clouds, soon to be four. The three current clouds, our Learning Management Cloud, our Performance Management Cloud, and then our Extended Enterprise Cloud, which is really taking our tools for learning and social networking and turning those outward to the customers, partners, and suppliers of our customers. We’ll get in to just a touch of detail in a minute about that. And then, the fourth cloud coming in the first quarter of 2012 will be the Recruiting Cloud.
How big is the market? We like to say it’s big. We’ve tried to chop it up many ways, no way is perfect. You can look at total spend in the U.S. you can look at how big guys like IDC say that the SaaS market is in 2009, and how much it’s growing. And then try to deduce the talent management percentage of that market. And you can look at what they specifically look at in talent management in 2009. And then try to apply a growth rate towards – to that number.
Currently, as I said, we have about 7 million users. Some of our competitors talk about 15 million users. We believe that the total population across the world may be approaching 400 million users.
So the enduring challenges that companies face, they’re quite simple and they’re intuitive, however the solutions that they’re using are just catching up to those challenges, which are developing talent, engaging employees, building leadership pipelines. And then once again, touching the extended enterprise of those companies. And that’s what the integrated talent management solution of Cornerstone does.
When you look at the competitive advantages that Cornerstone has versus the other players in the market, really what it boils down to is our 100% organic integrated suite. So we’ve built 100% of the suite from the ground up since day one.
What that does for us is it makes it easier to use. It makes it more scalable. It’s easier to deploy.
We sum it up in having fewer delivery models or fewer product versions, more seamless upgrades, better availability. And finally, it just looks simple. It looks like Cornerstone is Cornerstone.
So again, we’ve built 100% of the functionality from the ground up since day one. Many of our competitors have grown by acquisition. The difference is in where the software strategically fits with an organization and the way that the software penetrates an organization, you’ll see in a little bit.
So what about growth? So, first, we’re accelerating our client traction, going from just a few clients back in 2002, and the reason why I highlight that is so you understand that the roots of Cornerstone were in the large enterprise. And as you see today, growing to just over about 700 customers, we continue to sell the largest enterprises in the world.
The most recent wins with companies like Staples or we’re also in an alliance out in EMEA, companies like Nokia or Hyatt Hotels. And so, Cornerstone really does service the large enterprise and expands to the global enterprise.
About 46% of our clients currently use at least two of our clouds today. So future growth opportunities are embedded in our existing client base to upsell more modules. You can see just a sample some of our clients and their sizes here and some of the clouds that they use today.
We talked a little bit about extended enterprise, very big differentiator between us and the competitors. Basically, what happens is we take our solutions for learning management and for social networking and we go out to the partners, we go out to train for profit, for trade associations like the American Bankers Association, or we go out to temporary agencies like Kelly Services and we can service their temporary worker population.
So these are user groups that are not actually employed by the companies, but they’re outside their user population.
The market for this is very, very large and we actually don’t try to quantify it. The growth opportunity can be exponential for the footprint that we initially have inside of a customer base. The best example of that is a company like Trend Micro with around about 8,000 employees, services about 30,000 VARs or Value Added Resellers to certify them as platinum, gold and silver with our solution.
Just looking at a quick case study so you can appreciate the level of up sell that is embedded in the client base. A company like Pearson going from just about 170,000 in revenue back in 2004, and approaching about 900,000 in revenue in 2010. And you can see how they’ve added different amounts of users over the years and different clouds or more functionality.
In Q2, we actually announced our first deal in the public sector in Federal. We signed a five-year $20 million blanket purchase agreement with the U.S. Treasury. That purchase agreement doesn’t guarantee that they spend that money over the five years, but we would like to think that they did their diligence in the two years that led up to the completion of the sale and that they plan on spending that money.
We’ve got clients in state and local government in Nebraska, the State of Nebraska being the most notable in states. And then moving into higher education in K to 12, with some other big names and universities.
Many of you probably know of our partnership with ADP. We believe it is the ten-ton gorilla of partnerships in integrated talent management. Partnership’s about going on about two years now. They resell all of our modules. The distribution is both at the top-end. So over 10,000 employees and currently goes down to about 1,000 employees.
They also use our solution internally to service their population of about 45,000 users, and they also use our system to service their extended enterprise population of about 200,000 users. The biggest highlight here is that, again, Cornerstone had about 710 clients as of September 30, and ADP has 550,000 total customers.
We have a very, very mature alliances program where we sell through reseller partners all over the world. We’ve taken what we’ve done with ADP and replicated that, most notably in Australia, with a reseller called Talent2. We’ve closed several of the largest financial institutions in Australia, and we’re also operating with resellers in virtually every continent and most other countries.
EMEA has been a strong point. The total client list at the end of September, about 92 clients. You can see that we’re also selling to the largest organizations over in EMEA. Barclays is our largest customer. And we had recent wins with a cellular company and with energy companies. We really sell across all verticals in all regions of the world.
So a couple of other initiatives to continue to drive growth. We have a product, our SMB product is currently in beta. It will service companies with 250 employees or less. It will be a self-serviced, sold-over-the-phone implementation.
The growth in Asia-Pacific, I highlighted. And just to highlight some of our corporate social responsibility efforts, we have a registered501(c)(3), and we give our software away for free to organizations within three areas of focus. Those are education, workforce development and disaster relief. It’s a little bit paving the way in the area of corporate social responsibility.
So let’s just look at the numbers real quick. From a financial performance, our three year CAGRs from 2007 to 2010 for revenue and bookings were roughly at 60%, about 62% for revenue and about 60% for bookings. The number for bookings by the way for 2010 was about 77%, so that number the bookings growth actually increasing as we continue to scale.
And then for year-to-date, for 2011, revenue growth of about 63% year-to-date and bookings at about 62%. I think one of the most compelling financial metrics that we like to highlight is our annual average dollar retention rate, which is running at 95% from 2002 to 2010, nearly since inception.
And one thing to highlight about our dollar retention rate is that we do not include the up-sells to our existing client base in that number.
So really this sums up the leverage that we’re already seeing in the business. What you’re looking at is our bookings or closely approximating our billings, and comparing that to our GAAP operating expenses. You can see at relatively low levels of scale, all the way back to 2009 and 2010, 2010 was the year that we only did 47 million in gross revenue. You already see the line starting to diverge. And so really, what’s happening is that our bookings, or how much we bill is already outstripping our GAAP operating expense.
So given an assumed leverage that we will get in our cost of sales, which I think everybody maybe saw a little bit of, in our third quarter numbers where our non-GAAP – our non-GAAP gross margins went to 74%, the future leverage that is to be seen in the business is clearly evident.
Finally, just looking at our target models. So we said on the road show just about six months ago that our target model was three to five years. And we expected to overachieve the time it takes to reach those target models, and to overachieve the percentages. And so as I just highlighted the gross margin for the third quarter, was already at 74%. Now let’s not get hooked on that because we need to maintain some flexibility to continue to grow our service offerings and the team, so that we can continue to scale the business. But the point is that we try to be real conservative here at Cornerstone.
For non-GAAP operating margin and unlevered free cash flow margin, target models of about 20 plus percent. So with this, I’ll take some questions. Questions out there?
I guess, just to kick off, you talk about this TAM, the 400 million users and I mean, what are the keys to getting that unlocked underneath your current model?
Yeah, so – I think the key is a few fold. Number one, it’s us continuing to sell directly in the marketplace domestically and in EMEA. That’s number one. Number two is, it’s continuing to expand our alliances and reseller networks, both domestically and around the world. And that will help penetration around the world, certainly at the large enterprise level. And then domestically, I think that going down market, that you’ll see things like our team addition product, which is, again, for 250 employees or less with the self-service implementation that the product is well suited for several distributors in the U.S.
The other thing that seems to help you is that many of the – your competitors have – or maybe new competitors that have jumped into this space and endorsed it. So in a strange way, they’ve actually reinforced how important this market is and that perhaps has also been helping you as others have given and validated the market.
SsuccessFactors, all the above. Yeah, so you know, look, I think that we try to be real conservative at Cornerstone but we take credit for where it’s due and one of the things that we were well out in front of was the Integrated Talent Management Suite. As I said, we are the only vendor to have built that suite organically from the ground up since day one. And we’ve been selling both learning and performance management and succession planning for – all the way back to 2002, 2003. So they’re not new to us. The validation that we’ve received in the marketplace by some of the competitors that have acquired to round out their integrated suite has been good.
And then you’ve got new entrants to the marketplace that are also talking somewhat about talent management, although we believe that they are more focused on an end-game of maybe just HRS and financials.
A lot of attention on Workday raising 2 billion recently, they are still private.. That’s a fairly big valuation for a private company. What do you see in terms of the go-to-market with them? Is there an opportunity here?
So, we’re a partner with Workday, we’re partnered with them. They have their own performance management offering, but we partner with them on learning. They really don’t lead, necessarily, with performance management. We don’t believe that they’re answering RFPs for integrated talent management because of their performance offering. It’s more of a piece of functionality to round out their HRS solution for their HRS customers specifically for the Oracles and the SAP replacements out there.
Unidentified Company Representative
Question in the back?
I’ve got kind of a two-part question. Have you seen a meaningful number of deals where you were excluded for lacking of a recruiting application? And just more generally, can you talk about what services like retail or restaurants that have relatively high employee turnover, you know, what solutions they’re looking for specifically and if recruiting is one of the lead elements there, higher end recruiting. Thanks.
Sure. So in regards to recruiting and RFPs, I think that we don’t have perfect data because we don’t have a recruiting system, people don’t necessarily send us the recruiting RFPs. But we do believe there are some integrated talent management deals where recruiting is part of the required functionality. So, hence the reason why we are building it and it will be released, as I said, for general availability in Q1 of 2012. We – that said, we don’t necessarily believe that recruiting is the main lead for integrated talent management RFPs. They’re more led by learning or performance.
And then to answer your question about retail solutions, I think that part of the biggest ROI that an integrated talent management solution can afford to a retail company is in onboarding. They – the retail establishments have traditionally, very, very high turnover and so if they can onboard people faster and they can get them more productive more quickly, then that can also – you gain efficiencies right there in that first period of onboarding. But then also it’s a reduction of turnover so that your long-term operating costs are improved. Probably our largest example, most recently is with Walgreens with that.
…Plateau with the acquisition SuccessFactors? What are you seeing now differently from them? Are you seeing an increased presence in the field or is it more status quo?
Yeah, so it’s still a little bit new, the acquisition is not – they haven’t fully baked it in with their product set. I imagine that will take several quarters. We do see them in the field. I can’t say we have tons of examples of where we’ve gone up against them in an integrated talent management, learning management and performance management integrated RFP for a large enterprise customer. It will come. The dynamics of that competitive situation will continue to morph over the next several quarters. I think most recently the biggest morph came when they announced that they were going to continue to support the Plateau product for a period of five years. And so we expect that to have some impact on the turnover of their client base, those legacy-installed clients.
What would you say is the easiest way to think of it as where you see it in the field? Where are they good versus where you’re positioned now?
Certainly, we see them as the number one competitor. Plateau is probably the most competitive LMS prior to the acquisition. They had a significant portion of their business that was behind the firewall. And so we did not compete with them all the time because they were in deals that we weren’t in. Our win rate against them, quite humbly was very, very good prior to the acquisition. We would win a majority of the time. So that’s how our learning offerings sort of compare.
From a performance management standpoint, SuccessFactors obviously is really focused on that, you know, has been really in the mid-market and very successful at going up market. When we compete with them, we try to say – when we compete with them, we try to say, we win probably about half the time. On any given day, their functionality may be seen as more robust for a certain client and on any given day ours will seem more robust.
But the key message right now is that, I mean, there’s enough runway for both of you if there’s two primary vendors?
We’re really not picking at each other all that much. So the consolidation in the industry has certainly helped the price points and you know, as I spoke to earlier, with us having 7 million seats, and I think SsuccessFactors is talking about 15 million seats, we believe the market is quite large at a global total of about 400 million.
Great. I think a question there?
So from – when the low cost providers exit the market, basically from a new business standpoint, it alleviates all of the, we’ll call it the end-of-quarter hysteria on a struggling vendor lowering their price, for example, in year one to zero. So that dynamic goes away and so you can really strategically sell.
I don’t think it plays that much on the renewal. I think what we’re seeing is that in most of the renewals, we’re receiving an uptick in price because the customers are gaining lots of ROI from the solution. And so, I'm not so sure if the positive impact or just a lack of impact that it has on the existing customer base and the upsells.
Great. Thanks, Perry, for your time.
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: email@example.com. Thank you!