Cornerstone OnDemand (NASDAQ:CSOD)
Barclays Capital 2011 Global Technology Conference
December 7, 2011 4:30 p.m. ET
Perry Wallack - Chief Financial Officer
Welcome to our first session in the afternoon. I’m really delighted to have Perry here as the CFO from Cornerstone. I had to rewrite half of my questions over the weekend thanks to SAP and Success Factors. Oh, and by the way, for those of you who don’t know me, [unintelligible]. I just initiated coverage this week. I proudly present a report on the stock. One of our stocks we really like is Cornerstone. Starting then with the team’s questions, so what’s your take on SAP, SuccessFactors, and how scared are you? You look pretty relaxed here.
There are a lot of thoughts that we have. I will caveat with it has been a whopping 48 hours, or two business days - I guess it’s the third business day since this happened - and so the overarching theme is that this thing will change and it will morph, and we have to sort of reassess and reevaluate in each one of those stages.
Our initial thoughts are that this was probably a great move for SAP. They got themselves a premier marquee name that is a SaaS vendor, previous to at least the acquisition by Plateau. The ability for them to leverage that brand in their customer base is probably a big focus of what they want to do initially. I think when we look at what the effects will be in the short run, I don’t think we fool ourselves that their alignment with SAP, especially in places like Europe where SAP has a significant footprint - it will slow us down a little bit inside of those customers.
I think that outside of SAP customers, obviously the competitive landscape has tremendously improved for us because we really will have only one main competitor over there, which is StepStone. And then in the US, I think it’s similar. I’m not so sure that the US is maybe as polarized in vendor specificity as in Europe. So I would think that for the most part, a US SAP vendor is probably going to take a hard look at SuccessFactors.
There will be some, obviously, questions as that acquisition is consumed by SAP. And looking at the effects of the acquisition of Plateau and then the last acquisition they just did of the recruiting company, what that will mean to their ability to execute and integrate and retain talent. All of the issues around acquisitions and integration. You don’t need to hear that from me. It’s true for all of history.
So I think that in non-SAP customers in the US, so take an Oracle customer for example, I think that we should see a definite uplift there. And I think that you’ll find that the indications that we’ve received are that initially the customers, they don’t want to necessarily deal with that uncertainty and they actually don’t want to align themselves as an Oracle customer with necessarily an SAP vendor.
So net-net, I think that it is a positive for us, and the way that we like to also talk about it is just looking the the market overall and how large the market really is. We’ve recently been talking about 400 million seats. I think SuccessFactors has been talking about 450 million seats. Currently we have, as of September 30, about 7 million seats. They’re at about 15 million. Taleo’s got several million. So it’s very, very early in the game. There’s a huge, huge opportunity out there for all of us.
In that respect, in terms of how you think about sustainability of business models, etc. in that space, talk us through your big advantages that you grew organically while SuccessFactors, Plateau now, they need to integrate that. That wasn’t a full SaaS business. How much of an advantage do you really think it is now, but also then longer term?
The statement that we make, which we believe to be perfectly correct, is that we are the only integrated talent management system that is 100% SaaS in the world. So we have built 100% of the suite from ground up since inception, about five feet from my office in Santa Monica. We’ve never offshored anything, never outsourced anything. We’ve never bought anything. So it’s all our own code base.
And what that does it is allows us the seamless integration of all of these different features and functions between the different clouds and platforms. It’s just much easier for us. It’s easier for the user. The user has a unified interface. The admin has a single admin interface to do things like determine rights and roles and security permissions.
There are integrations between the different platforms that are possible when you have everything in a single code base that aren’t possible when you have them in two different code bases. For example, possibly dynamically generating a curriculum in a learning management system based on a certain competency assessment and a skills gap that is evidenced.
So from a customer support model, we offer one single line of communication between us and the customer. We recently had a global customer that just purchased our software that said that the big differentiator for them was with Cornerstone they had sort of one throat to choke and they had one support organization to deal with, one implementation organization to deal with. They didn’t have two, one being performance management, the other being, possibly, learning management.
So going forward, what I think that allows us to do is really just focus on our products and our customers. And so we’re not distracted with things like a consolidation of different products and/or consolidation within vendors. And we can really spend our time really efficiently developing our products with our customers hand-in-hand to build the number-one integrated talent management system in the world.
And then obviously you’ve pointed out in various speeches since you’ve become public about your profitably, or path toward profitability, and the ability to kind of get much quicker to higher margins compared to your peer given that the organic background is out there. Do you think now, given that the market has changed with the acquisition of SuccessFactors, do you think you kind of want to spend more on some marketing because you want to run faster and grab more of the market while there’s some uncertainty out there? Are you still on the same path as before because nothing changed there?
The way that we view our growth and our messaging publicly on growth has been that we doubled the size of our sales force from about mid of last year to mid of this year, and we will double it again approximately from mid of this year to mid of next year.
Now, that doubling won’t perfectly linear to what it was in the prior year. In other words, we may not grow so quickly in enterprise sales and more maybe down market and maybe grow more in Europe or in other regions, be it Asia-Pacific.
And so we grow as fast as and efficiently as we know how to. And so we don’t look at our growth trajectories and our margins from a standpoint of we just want to hire this many reps. We know how big the organization can get, how quickly it can onboard and enable that talent. And so their activities don’t necessarily influence what we do internally and what our growth plans are.
And following on from your statements, you’ve been growing at a very, very high rate, 50-60%, and there’s been a lot of of questions, how sustainable is that. Can you maybe talk a little bit about the lessons you’ve learned the last few years in terms of how to scale a business and what procedures you put in place to be able to continue at that high rate?
Sure. I think first and foremost what you have to realize is that SaaS is a business model, but it’s an organizational structure. And so being 100% SaaS has allowed us to really fine-tune and hone all of the different disciplines inside an organization that require you to sell, implement, and service clients.
And so our efforts really are focused around enablement of internal resources to sell, enablement of third-party resellers. We announced the deal earlier in the year with a large HR outsourcing company. I think people are pretty aware of our extensive partner ecosystem. And so honing those products and procedures which help our partners efficiently scale and enable themselves is where we concentrate.
Secondly, the efforts to do that on an internal basis are much more efficient because we only have one type of product that we’re selling and servicing. And so if it’s salespeople or if it’s implementation people or if it’s customer support people, that’s where we really focus to become more efficient.
An interesting question I had is you raised money through the IPO, but you’re not planning to do any acquisitions any time soon it sounds. Can you just talk about what the IPO, getting the extra money, meant for you in terms of growth and the spending of the business?
Certainly the IPO was so that we could shore up our balance sheet and really convince our large corporate customers that we weren’t going anywhere. So now we have roughly $100 million in cash and A/R in the bank and we’ve been selling to large companies for years and years and years, nearly 10 years. But when you’re selling against two public companies, SuccessFactors and Taleo, the balance sheet was hurting us, the corporate viability, financial viability issues. And so the IPO solved all of that.
Everybody’s probably pretty familiar with our growth rates and our trajectory, and the analyst models and where they have us from a cash flow perspective and it’s evident from those models that we didn’t really need to go public to satisfy our business plan. The margin profile of the business, it funds itself.
Really when we look at our company today, being the only 100% organically built suite, that is a competitive advantage for the reasons that we’ve discussed. Our acquisition strategy will not compromise that. Our acquisition strategy will be focused around acquiring customers, going into different verticals or even different geographies.
We will be very, very thoughtful and very, very slow in the way that we acquire so that if we are acquiring a product it will be something that we’re not going to necessarily integrate into our system, because we don’t want to make the same mistake as some of our other competitors, but we will either recode that or we’ll turn it off, and we will have that existing functionality already in our system.
Talk a little bit about the partner strategy, because that’s one of the areas where I thought you were very different and with ADP, some very interesting [unintelligible] that could help you to scale. How did you go about setting it out and structuring it the right way? I know you’ve done a lot of that internationally as well.
We sell through partners really all over the world. We have very large partners in EMEA. We have a very, very large partner down in Asia-Pacific. And what we did was, ADP was sort of the first of these on a domestic basis, and we took that model and we sort of started to replicate it. And really when we look at how a partner needs to execute on our business model, it’s really, again, not to belabor the point, it’s about enablement.
It’s about teaching that partner how to do really what we do, as well as we do it. And so it’s not enough just to sign the paper and then sort of give them the keys. What you have to do is you have to sort of teach them how to drive the car, at all different stages. We teach them how to sell. We teach them how to implement, and then we teach them how to service.
We have dedicated people that are in enablement in our alliances team that will focus on those efforts. And so we won’t just sign a partner up and let them try to just run with it. We’ll take them along on the first several customers and make sure that they’re doing it appropriately.
Talking about on the partnership side, interestingly enough this morning Workday presented and they mentioned you as one of their good partners. Just talk us maybe through a little bit about your product vision, because on the one hand it does make sense, because Workday’s more in the finance and HR information system space. On the other hand, everyone is expanding. Maybe you can talk a little bit about your recruiting push as well. But where do you see your end markets seeing a hard stop in terms of decision, what I want to do, this is what I don’t want to do. And where do you see other vendors that might, at a moment, not play with you, or play against you?
We are a partner with Workday. We have closed a few deals with them to date. We believe that the continuum of integrated talent management includes recruiting, learning management, performance management, and something that we do a little different than everybody else, extended enterprise.
We don’t necessarily believe that HRIS is part of the integrated talent management continuum. We’ve been selling to the world’s largest corporations for well over 10 years, and we’ve been tying into those HRIS systems for that long. The HRIS system is a back-end system of record. It’s not a front-facing tool like the talent management system is.
And in fact, recently Josh Bersin from Bersin & Associates did a study, and many customers actually don’t want the talent management system tied in with HRIS, because then they’re sort of tied to the upgrade path of the HRIS for their talent management.
With these front-facing tools, they really want it much more frequently. There’s two different buyers. This is IT, this is HR. The IT buyer doesn’t necessarily want it to change. There’s a lot of governance issues, and it’s just for big companies, it’s clunky and it’s a distraction. But this stuff, because it’s front-facing, they want it as quickly as you can serve it up.
How far do you want to go? Can you elaborate on that?
We’re not interested in the HRIS piece of this. We’re coming out with recruiting in Q1. I think that Taleo’s obviously the vendor that started in recruiting and has a huge footprint here, a very, very strategic footprint. We believe that we’ve waited the longest to build recruiting, and as a result, may have big differentiators in the social nature of our systems.
So recently, a la companies liked LinkedIn, recruiting has taken a very, very social twist, or a social change. And so the entire organization and approach of our recruiting system will be from a social standpoint. In addition to that, where we really differentiate is because we have a full footprint inside an organization with learning management and performance management - we sit on the desktop of every employee - there are certain things that we can do with recruiting that other vendors who don’t have performance management and learning, who don’t sit on the desktop of every employee, can’t do.
Those are things like internal recruiting from those employee bases or even going into their networks outside of the organization - their LinkedIns and their Facebooks. You’ll see it at the end of Q1 from us. It’s a Q1 release for general availability, and we’re excited about it.
At the moment, you still, from a headcount perspective, are a relatively small company. Talk us through how to understand the Cornerstone story slightly better. How were you able to kind of build that step domain knowledge, first in learning and then in performance management, so quickly? And how did you achieve that level of maturity in terms of the domain knowledge and offering over the last few years?
There is a little bit of an anomaly in the investment community, that they believe that we really were a learning-focused vendor. And in actuality, we really started off in both learning and performance. We did a little more learning, but the focus of the company was really initially in three very, very large organizations.
It was myself and Adam Miller, our CEO, and Steven Seymour, and what our approach was to get in front of very, very large organizations that had never really seen SaaS - they had never seen software that could be updated as quickly as something over the web - and prove to them that we could build these tools that were well ahead of the ERP legacy tools, and give them - at that point we were probably releasing every two weeks.
The company really grew out of the ability to sit strategically with very, very large organizations. Our first three clients had 63,000 users, 40,000 users, and 28,000. Two of them have since gone away due to bankruptcy, but one of them is still a customer today, running about 11 years.
What we would do is we would go and sit with their strategic buyer - and that was the VP or SVP of HR, and even at the project manager level - and we would gather the requirements. We would ensure we were vetting very well what best practices were between the different companies and make sure that if somebody wanted something very, very specific, that we would question whether or not it was best practice, figure out if maybe we needed to do a little co-funded development. But either way, if we built the functionality, we would make it part of the suite and available to every single one of our customers.
And so that philosophy we started in 2000 and 2001 and as you see we have a little over 700 customers today. When you do that with hundreds and hundreds of very, very large customers, where you wind up is with a system that has just really robust, fully scalable global functionality. And so we were committed to that mission from day one, and that’s really the way we stand today, still committed to that mission. And we are still building our products and our tools with our customers in that fashion today.
One of the early focus point from an industry vertical perspective was financial services, etc. What do you think, looking now, where are your development efforts in terms of going deeper into certain verticals? Thinking about government here as well.
There are definitely different functionalities that are required for different verticals, whether that’s things like pharma with CFR21 Part 11, or certain compliance tools. I think that healthcare and pharma is probably one that we go deep with. I think that in government there’s certain compliance initiatives that are required.
There’s a different functionality requirement as we go into things like higher ed. SunGard is our premier partner there. They own a majority of that market. The financial services vertical is very, very focused on compliance. Retail is very focused on onboarding. So each vertical is a little bit different. I think that you’ll see that we’re going to not tackle just any single one vertical, but several at the same time.
If you think about the market, you remember up until last Friday it was a three-horse race. It was you as the fast-growing organic one, and then there were the big guys trying to stay big before scaling up. How do you think that market will change now over the next few quarters? There’s obviously the risk that someone like an Oracle will do something. Do you think that there’s someone else, the smaller companies, that could now have an entry into this market as SuccessFactors and SAP gets destructed? Or is it going to be like Taleo and Cornerstone. If Oracle takes one of you out then the other one needs to stretch ahead?
We saw this as a three-horse race with SuccessFactors and Taleo. We’ve talked a little bit earlier about what it looks like for vendors that get consumed by very, very large software companies, and we can just look at history to understand what exactly happens inside of those organizations when it comes to innovation, roadmap, employee retention, just the whole thing. It just becomes a little more difficult.
We see the market as very, very wide open now for us, because of the organic nature of our suite, and we’re the only company that has that. We don’t believe there’s any other company that can come up to that spot. Now, respectfully, we’re still at a lower level of scale than those other guys, and so we’ve got a lot of growing to do, and those rates, like you said, have us in the analyst models at about 60% this year. So we are growing very rapidly, and we’re doing that with margins.
I think that, again, what I would do is I would take a step back and I would not necessarily focus on whether there’s one winner. Because even when we start to granularly talk about who will compete for which accounts and how, in a SuccessFactors SAP world, or in a world with Oracle and another vendor, what we want to look at is the total size of this market and what the opportunity is.
And it’s very, very large. Again, we’re thinking 400-450 million seats. It’s not even maybe in the first inning, with us with 7 million, SuccessFactors with 15 million. So outside of all of that granular analysis and the analytics around how everybody will play together, we believe the market is large enough for at least two very large companies.
If there’s no questions from the floor, Perry, thank you very much. I know we have plenty of one-on-ones to kind of talk through the story today, so it keeps you busy. Thank you.
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