Cornerstone OnDemand's (CSOD) CEO Adam Miller on Q4 2015 Results - Earnings Call Transcript

| About: Cornerstone OnDemand, (CSOD)

Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q4 2015 Earnings Conference Call

February 10, 2016 17:00 ET

Executives

Perry Wallack - Chief Financial Officer

Adam Miller - Chief Executive Officer

Analysts

Pat Walravens - JMP Securities

Mark Murphy - JPMorgan

Scott Berg - Needham & Company

Brent Thill - UBS

Michael Nemeroff - Credit Suisse

Brad Sills - Bank of America

Trevor Upton - Pacific Crest Securities

Samad Samana - FBR Capital Markets

Justin Furby - William Blair & Company

Operator

Good day, ladies and gentlemen and welcome to the Cornerstone OnDemand Fourth Quarter and Fiscal Year 2015 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to turn the call over to your host, Mr. Perry Wallack, Chief Financial Officer of Cornerstone OnDemand. Please go ahead.

Perry Wallack

Good afternoon, everyone and this is Perry Wallack, CFO of Cornerstone OnDemand and welcome to our fourth quarter and fiscal year 2015 earnings conference call. As always, today’s call will begin with Adam providing a brief overview of our performance and then I will review some key financial results for the quarter, which ended on December 31, 2015. Later, we will conduct a question-and-answer session.

By now, you should have received a copy of our press release, which was released after the market closed today and was furnished with the SEC on 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.

Our discussion will include forward-looking statements including, but not limited to, statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, client satisfaction and retention, client attrition rate, market or business growth, our revenue run-rate, investment activity in our business, visibility into our business model and results, the reduction of DSOs, the effect of 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 the risks or uncertainties materialize or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by the forward-looking statements we make. These risks, uncertainties and assumptions as well as other information on potential factors that could affect our financial results are included in today’s press release in the Risk Factors section of our most recent Form 10-K and subsequent periodic filings with the SEC.

And with that, I will turn the call over to Adam.

Adam Miller

Thanks, Perry and thank you to everyone joining us today. The fourth quarter of 2015 was a solid quarter for Cornerstone and a great finish to the year. GAAP revenue for the fourth quarter came in at a record $95.9 million bringing us to $339.7 million for the full year or 29% year-over-year growth. For the fourth quarter, bookings came in at a record $142 million, bringing us to $400.5 million for the full year or 27% year-over-year growth. Both our revenue and bookings were significantly impacted by foreign exchange headwinds in Q4 and throughout the year. And as a result, the reported numbers understate the overall performance and actual growth of our business. Specifically, about one-third of our business is international. And in the 8 weeks between our last earnings call in November and the end of 2015, the British pound to U.S. dollar exchange rate worsened by approximately 4%. Perry will provide additional color on this during his remarks.

We added 129 new enterprise and mid-market clients in the fourth quarter taking the size of our organically grown client base to nearly 2,600 companies worldwide. Our combination of consistent growth and retention allowed us to reach nearly 24 million users in the fourth quarter, which again gives us one of the largest SaaS subscriber bases in the world.

I want to take a moment to discuss the competitive landscape. Today’s landscape consists of large ERPs, point solution providers and everything in between. Each quarter, I get asked about some new vendor that claims to be doing what we do. While that may raise concerns to those less familiar with our industry, we believe the reality is that few, if any, of those names are truly viable competitors. The history of talent management is littered with countless companies large and small who have attempted to enter the space and there is a reason why most of you on today’s call have likely never heard of any of them.

Developing the product platform that we have today is extremely hard. We have spent 16 years working with every type of company imaginable to develop the most sophisticated talent management platform in the world and we have no intentions of slowing down. Consequently, our win rates continue to improve. Our product penetration continues to rise and our retention rate is as high as it has ever been. Put simply, the competitive positioning has never been better than it is today. We believe all of the recent competitiveness noise in our space demonstrates the opportunity that remains in every area of talent management. We are the leader in the space/none and we believe we are just getting started.

But don’t take my word for it. Here are a few of the new clients we added last quarter. The world’s largest package delivery company, America’s largest insurance company, the second and fifth largest banks in the U.S. as well as the largest bank in Switzerland, the largest aerospace manufacturer in Europe, the largest auto parts manufacturer in the world, one of the largest life reinsurance companies in the world, the largest healthcare REIT in the world, the largest telephone company in Denmark and one of the largest breweries in the UK. And our up-sales for the quarter included the largest multinational pharmaceutical company in the world, the largest baking company in the world, the largest bank in Germany, the largest professional services firm in the world, the largest full service restaurant company in the world, the largest tax service provider in the world, the largest independent biotech firm in the world, and one of the largest appliance manufacturers in the world.

In Q4 and throughout 2015, we had an outstanding year at the top end of the market. These are competitive deals and Cornerstone won again and again. Our strategic accounts and enterprise teams significantly exceeded expectations resulting in numerous marquee logo additions quarter after quarter. To quantify it, in 2015, we had more 7-figure deals than we have seen in all the previous years of the company combined. And in Q4 of 2015, we closed three new 8-figure deals.

We also continue to strengthen our distribution outside of the enterprise segment. A new global alliance with IBM, combined with the strengthening of our ADP relationship and a host of other strategic relationships, supports continued growth in public sector and in the middle market. We further expanded our global presence in 2015 with strong performances across all international teams. Our Latin American team led the way with landmark wins in Mexico, Argentina and Chile. Our EMEA and APAC teams were also strong performers during the year, with ASPs for both teams rising by more than 40%. Our international success in 2015 validates our investment in these regions and the enormous opportunity ahead for continued growth globally as organizations around the world seek to modernize their approach to managing talent.

Across all segments and geographies, we have continued to grow our average product penetration through multi-product deals by our direct sales team and up-sales to our installed base by our client sales team. Just 5 years ago, the average client used just over one product. Today, nearly 70% of our clients have two or more products and 40% have three or more. This growing footprint amongst our clients, along with a dedicated focus of our client success team, has allowed us to consistently maintain industry leading rates of retention. I am pleased to announce that our annual dollar retention for 2015 improved by 170 basis points to 95.4%. This is the highest annual dollar retention we have achieved since 2007 when we were a private company doing a little over $10 million in revenue.

Now, let’s talk about profitability. As we have discussed in our last quarterly call, we are committed to achieving full year profitability in 2016. While it requires significant margin improvement, we have been deeply analyzing all of our major expense categories and we have developed an expense plan for this year, which gets us to profitability without sacrificing the growth opportunity that remains in front of us. We have identified several opportunities to drive leverage in our business model. And we anticipate margin improvement related to better gross margins, lower relative G&A expense and most notably, a reduction in our relative sales and marketing expense. We intend to accomplish this through a reduction in services outsourcing, increased business automation and improved sales efficiency.

In addition to the immediate leverage we believe possible, which will take us to profitability this year, we expect to continue to increase profitability beyond 2016 and with it, our free cash flow, as we bring our sales and marketing expense in line with our peers, who have it closer to 40% of revenue. Our finance team, with support from our operations team is and will be focused on continuing to increase operating margins to drive incremental profitability and cash flow while maintaining our revenue growth trajectory.

As we help organizations around the world better manage their talent every day through our software, we have always prided ourselves on having a truly unique work environment for our own employees. I am pleased to announce that Cornerstone was recently named as one of Fortune’s ten best places to work in the large technology company category, making us the first technology company headquartered in Los Angeles to receive this award. We also received other similar awards in 2015, including those from the Los Angeles Business Journal, who named Cornerstone one of the best places to work in Los Angeles and Outside Magazine, who ranked cornerstone on the publication’s list of the 100 best places to work.

One of the reasons we became such a great place to work was because of the culture we created from day one. As you all know, Perry has been my partner from the beginning and has been instrumental in building the great business we have today. Perry, it’s been an amazing ride together and we are announcing your retirement on this call. We have talked about this for some time now and we have already kicked off a search for your replacement. I know that this is something you have wanted to do for your family and I respect it very much. You have been an incredible asset and advocate for Cornerstone. I appreciate all you have done and your commitment to support the company and ensure a smooth transition this year.

With that, I would like to turn it back over to Perry to discuss our financial performance in more detail.

Perry Wallack

Thanks Adam. As you said, it’s been a great ride with you at Cornerstone for the last 16 years. But before we go into detail of my retirement, let’s talk about the numbers. I would like to remind everyone that the financial figures I discuss today are non-GAAP, unless I state that the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website. As Adam highlighted, we are very pleased with our performance in Q4 and for the full year. Significant wins at the top end of the market and success internationally continue to drive growth in what we believe to be a $31 billion talent management market.

Now let’s turn to the numbers. Bookings, which we define as revenue plus change in deferred revenue, were $142 million for the fourth quarter representing a year-over-year increase of 24%. As is the case with many of our peers, foreign exchange negatively impacted our bookings in Q4. This impact was approximately $2.1 million, which can be seen on the cash flow statement. If you adjust for this item, the normalized bookings for the quarter were $144.1 million, representing 26% year-over-year growth. Bookings for the full year were $400.5 million, representing a year-over-year increase of 27%. Foreign exchange negatively impacted bookings for the full year by $4 million, which can again be seen on the cash flow statement. If you adjust for this item, normalized bookings for the year were $404.5 million, representing 28% year-over-year growth.

GAAP revenue for the fourth quarter of 2015 was $95.9 million, representing a year-over-year increase of 26%. GAAP revenue for the full year was $339.7 million, representing a year-over-year increase of 29%. Our non-GAAP revenue for the full year was approximately $962,000 higher than our GAAP revenue, due to the original write-down of $1.9 million to reduce the balance of deferred revenue related to assumed client contracts acquired from Evolv.

As Adam discussed and as we have talked about on past calls, our business has continued to grow internationally. In 2015, more than 32% of total revenue came from our international business. Given this concentration of international revenue, our total revenue can be materially impacted by movements in foreign exchange rates. From the date of our last earnings call through December 31, 2015, the GBP devalued against the U.S. dollar by approximately 4%. This unusually significant movement in our international functional currency over just eight weeks negatively impacted revenue for the fourth quarter relative to our initial expectations.

For the fourth quarter, the software and services mix was in line with historical averages. As I have mentioned on past calls, historically for the full year, the software and services revenue mix reverts to approximately 80% and 20%, respectively. This was the case again in 2015. Please note that we expect to disclose the split between software and service revenue beginning on our next earnings call, which we will discuss the first quarter of 2015. The size of our client base increased to 2,595 clients as of December 31, 2015, representing 129 net client additions for the quarter. Our user base increased to more than 23.8 million users as of December 31, 2015, which represents the addition of more than 1.6 million users during the fourth quarter and 5.7 million users during the full year. We were most pleased to see our annual dollar retention rate for 2015 increase by 1.7% to 95.4%, which we believe to be amongst the highest in the SaaS industry. We believe our ability to not only maintain, but grow our industry leading retention, especially as we reach greater levels of scale, speaks to the stickiness of our solution. This metric, which does not include the up-sells to our existing customer base, cannot be over emphasized when talking about the future margin profile of the business.

Turning to margins, our gross margin for the fourth quarter of 2015 was 72%. Gross margin for the full year was 72%, in line with our expectations for the full year. Our margins are influenced by the amount of outsourced implementations our partners perform. Based on our current expectations of the amount of implementations our partners will perform in 2016, we expect gross margins to be at least 73%.

Now let’s turn to our operating expenses, sales and marketing represented 52% of revenue in the fourth quarter of 2015 down 200 basis points from 54% of revenue in the fourth quarter of 2014. R&D represented 9% of revenue in the fourth quarter of 2015, also down 200 basis points from 11% of revenue in the fourth quarter of 2014. G&A represented 11% of revenue in the fourth quarter of 2015, in line with the fourth quarter of 2014. Overall, this resulted in an operating margin of 0.4% in the fourth quarter of 2015, significantly higher than our negative 2.6% operating margin in the fourth quarter of 2014.

As we indicated last quarter, we intend to achieve non-GAAP profitability for the full year 2016. Operating expenses are the key driver to leveraging our model and this improvement in Q4 is indicative of our commitment to operational excellence. Net loss for the fourth quarter of 2015 was $1 million or a net loss of $0.02 per share based on weighted average shares outstanding of 54.6 million shares compared to a net loss of $3.9 million or net loss of $0.07 per share based on weighted average shares outstanding of 53.7 million shares in the fourth quarter of 2014. For the full year 2015, net loss was $21.2 million or a net loss of $0.39 per share based on weighted average shares outstanding of 54.2 million shares compared to a net loss of $17 million or net loss of $0.32 per share based on weighted average shares outstanding of 53.3 million shares for the full year of 2014. This represents a net loss margin of negative 6.2%, which improved from negative 6.4% in 2014.

During the year, we recorded a net income tax expense of $1.2 million, principally related to our international operations. For income tax purposes in the U.S., we continue to expect our net operating losses to offset any domestic earnings for the foreseeable future. For 2016, we expect income tax expense to be roughly in line with 2015 at approximately $1.5 million. Our net loss in 2015 included unrealized and realized losses on foreign exchange in the amount of $3.3 million compared to a net loss of $2.4 million in 2014. As you have heard on calls of our peers, this is due to the larger fluctuations in foreign currencies in 2015.

With regards to cash flow, cash flow from operating activities in the fourth quarter was $52.8 million compared to $44.4 million in the fourth quarter of 2014. Cash flow from operating activities for the full year was $45 million compared to full year cash flow from operating activities of $33.3 million in 2014. This represents a $2 million overachievement of our full year guidance of $43 million as well as a cash flow from operations margin of 13.2% compared to 12.6% margin in 2014. As we mentioned last quarter, we have implemented in our refining programs to reduce DSOs on a quarterly basis. Our average DSO in 2015 was 76 days as compared to 84 days in 2014.

Let me now turn to the balance sheet. As of December 31, 2015, our total cash accounts receivable and short-term and long-term investments balance was approximately $413.5 million. On a GAAP basis, our deferred revenue balance exceeded our expectations at $252.1 million as of December 31, 2015 compared to $206 million as of September 30, 2015 and $191.3 million as of December 31, 2014, representing a year-over-year increase of 32% and a sequential increase of 22%. In 2015, our total CapEx was $15.6 million or 5% of revenue. For 2016, we estimate CapEx will be approximately $13 million or approximately 3% of revenue. This decrease will principally be driven by leverage from technology and infrastructure investments made in 2014 and 2015 as well as more conservative spending on leasehold improvements.

With respect to headcount, we have 39 employees in the fourth quarter of 2015. As of December 31, 2015, we had 1,645 employees. This total headcount number represents a year-over-year increase of 21% and a sequential increase of 2%. Given that incremental headcount is a key driver of expense growth for the business, we have carefully planned our workforce for 2016 to leverage efficiencies we have gained over the last year to drive profitability. We are on track with our hiring plans for 2016 and we expect to hire approximately 200 people across the company this year.

I’d now like to discuss our outlook for the first quarter and full year of 2016, which falls under the Safe Harbor provisions for forward-looking statements outlined at the start of the call and is based on preliminary assumptions which are subject to change over time. We are currently expecting full year 2016 GAAP revenue in the range of $425 million to $433 million. At the midpoint of $429 million, this range represents 26.3% growth over our 2015 GAAP revenue of $339.7 million. For the first quarter of 2016, we currently expect GAAP revenue between $95 million to $96.5 million. At the midpoint, this range represents 29.5% growth over the first quarter of 2015 GAAP revenues of $74 million. Due to the seasonality of our business and the timing of service revenues, our total revenue in the first quarter of any given year can be lower than the fourth quarter of the previous year as was the case last year.

In setting this guidance, we have taken into account the approximately 6% devaluation of the British pound against the U.S. dollar from the date we reported third quarter earnings through yesterday. Again, given that our international revenue already comprises over 32% of total revenue, this movement had a material impact on our revenue outlook. With respect to full year 2016 non-GAAP net income, we remain committed to profitability and expect non-GAAP net income to be approximately $1 million. As Adam touched on earlier, we anticipate margin improvement versus 2015 through lower cost of sales; lower relative G&A expense; and most notably, lower relative sales and marketing expense. Specifically, we intend to lower cost of sales by at least 1%, lower G&A expense by 1% to 2% and lower sales and marketing expense by 3% to 4%.

Given the seasonality of our business, we expect to dramatically improve profitability each quarter beginning with a significant net loss in Q1 and ending the year with a significant profit in Q4. Our guidance implies a non-GAAP profit of $0.02 per share based on fully diluted average share count of approximately 61 million shares. Please note that while the company is in a loss position, the weighted average shares outstanding are approximately 55 million shares.

Turning to cash flow, for the full year of 2016, as our businesses become more mature, we will now be guiding to non-GAAP free cash flow instead of non-GAAP cash flow from operations. We are anticipating non-GAAP free cash flow of approximately $47.5 million, which represents approximately an 11% margin at the midpoint of the revenue guidance range. This is in comparison to 2015 full year non-GAAP free cash flow of $29.3 million or a margin of 8.6%.

In summary, overall, we believe 2015 was a great year for Cornerstone. Every year, we have consistently produced high growth while improving cash flow margins and marching towards non-GAAP profitability. We look forward to delivering on that profitability goal for the first time in 2016, which will mark the next evolution of our company.

Before moving on to Q&A, I want to [Technical Difficulty]. I want to thank Adam for everything we have done together since 1999. Co-founding a SaaS company and growing it to nearly $500 million in sales is a dream come true, so few entrepreneurs reach the level of achievement that we have together. My service as the CFO of Cornerstone from the first day on November 8, 1999, until now including the last 5 years as a public company, has been a phenomenal experience that I could not have achieved without a great number of mentors, advisers and supporters. I especially want to thank Cornerstone’s Board of Directors, Paul Holland and Jim McGeever. I want to thank everyone at Cornerstone who has dedicated themselves to our mission and success. I have been touched by so many over the years. I especially want to thank all of the great talent in the Cornerstone finance department that continues to work tirelessly on behalf of the company. We have climbed several mountains together. And I am confident you will continue to achieve new heights. Finally, I want to thank my wife and children and my parents for all their support in ways that cannot be described.

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

Adam Miller

Thanks, Perry. The strong finish to 2015 has set us up well this year. I want to thank our global Cornerstone team for another great year. Before we take any questions, I just want to come back and just say, Perry, thank you so much for your huge contribution to our success over the last 16 years. I really cannot overstate what you have done for the company and you should know that with this retirement, you are leaving an incredible legacy. And personally, I want to thank you for your efforts, your counsel and your friendship over the years.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Pat Walravens with JMP Securities. Your line is open.

Pat Walravens

Great, thank you. First of all, Perry, congratulations on your 16-year run that’s really remarkable and enjoy the time off.

Perry Wallack

Thank you.

Pat Walravens

Adam, congratulations on a strong quarter. I like the free cash flow guidance a lot. I think people are going to be a little disappointed by the revenue guidance. And so I guess the first question I would ask is are you seeing any signs that the macroeconomic concerns people have are causing customers to slow or delay spending and is that something that you baked into the guidance for the year?

Adam Miller

No, not at all, I mean we really guided based on two things. One, we want to be conservative. Obviously, the market is a very jittery these days. Our multiples, along with everybody else’s have compressed. And as a result, we thought we should be conservative going into the year. And number two, we have been beat up multiple times by foreign exchange. As you know, about a third of our business is already international and that percentage continues to increase. So we wanted to be extremely conservative about FX going into 2016 and for the full year.

Pat Walravens

Okay, great. And then secondly, just broader, can you give us an update on your platform as a service solution and whether that’s something that’s going to kick off a product cycle for you guys this year?

Adam Miller

Yes. So we are very focused on the Edge integration center. So there are two components of Edge. One is the ability to open the platform, which is integration center. The other is the ability to extend the platform, which is the app builder. With after talking to lots of clients about Edge, it is very clear that the immediate focus is opening the platform, make it easier to integrate Cornerstone into other products from other vendors. This is something that will speed up development for us because we often spend time working on integrations that will now be in the hands of our clients and our partners. They will be able to do the integrations themselves. It also lowers our costs associated with integration of services, because almost every deal we do will have anywhere from one to five integrations as part of that deal. We do the services work for that. The Edge integration center is going to allow us to automate all that service work. So we are very focused on integration center and we will be showing it in May convergence.

Pat Walravens

Great. Thank you.

Adam Miller

Thank you.

Operator

Our next question comes from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy

Yes. Thank you. Perry, congratulations. There has truly never been a dull moment and it’s been very inspirational, I am sure your family is terrified by this, but – and I don’t know if they can handle it, can they handle it, but I really do wish you all the best.

Perry Wallack

Thank you very much. And I would say terrified and excited. And the only thing that I would add is Adam and I have been talking about this for a while. It’s obviously been a phenomenal, phenomenal run. He and I have kicked off a search to really find a world-class CFO with a tremendous amount of experience and scale. I am going to be here as long as necessary to ensure a smooth transition and someone who is world-class takes over the reins. So we are feeling really, really positive and excited about the upcoming year. And like I have said, it’s been a great 16 years.

Mark Murphy

Well, that’s great to hear and thank you for filling us in on that plan. So I wanted to start with this. I noticed that if we ignore the noise of the long-term deferred and instead look at the short-term billings that, that actually accelerated to 30% growth. And so it’s remarkably consistent with the trajectory a year ago and so it’s actually the – it’s the strongest Q4 sequentially in terms of billings growth that you have had in the last 4 years for a Q4 and so I guess I am just wondering, part A of this, from your perspective, was it – was there an unusual sort of explosion of the larger deals just based upon the logos – excuse me, not the logos but the characterizations of the clients that you added and also, does that short-term billings growth help give you confidence in your growth targets for 2016?

Adam Miller

Yes. I will answer both of those. The second question, the answer is definitely yes. It sets us up very well for 2016. And with regard to the scale of the deals we were doing, just to put this in perspective, we did as many million dollar-plus deals for this first year contract value in 2015 than in all previous years combined. So since the inception of the company which as you know is 16 years ago. We also did more deals over $500,000 in 2015 than in the first 12 years of the company, so more than we did in the last decade. So the transaction volume and scale has gone up dramatically and we saw that very clearly in the fourth quarter.

Mark Murphy

Okay, great. I wanted to ask you just as a follow-up. I noticed it looks like you obtained FedRAMP status very recently and if I have interpreted that correctly, you had already won some business within the federal government I think years ago, I think before you had that authorization. So I am just wondering does this change the opportunity set materially or could you just speak more broadly to your federal government opportunity?

Adam Miller

Yes. So we have done fairly well on the services side in federal. We have maintained all of our clients. We have full implementations of all of our clients are all referenceable, and we have a very nice federal client base. But as you know, we have not sold much new in federal over the last couple of years. FedRAMP definitely opens the door for us. We got authorization last week. And we are the only ones in this space that are now FedRAMP certified and that is a big deal to federal agencies. So that puts us in the driver seat now going into this year. And I am hopeful that we will see a change in trajectory now in federal government sales. We have changed out the leadership of that team and we think we are well positioned now going into this year.

Mark Murphy

One last one, if I may. I wanted to just ask you, Perry, the other question in my mind. When you look back at 2015, is there any way you can characterize the overall impact of anything that changed in terms of billings, so I think you could have deferred billings, you could have billings with a shorter than usual duration, I think you – conceivably, you could have ramp deals just where the project occurs and faces and so the billings might come in smaller chunks over time. So I am just trying to understand, is the success with the larger transactions caused anything different in terms of the optics – of the billings optics in 2015?

Perry Wallack

Yes. Sure. So great question, as you said the very, very large deals do not have necessarily the level of upfront billings than the rest of our business. And so what happens as a result of those deals is that we do have delayed billings or what we say around here is we have some in the tank, if you will. And when you look at the average billing term in the fourth quarter and you compare that to the weighted average over the past 3 years, it was slightly less than the last 3 years. And so if you normalize for that, it would have added a couple of extra points to bookings growth.

Mark Murphy

Thank you very much.

Perry Wallack

Thank you.

Operator

Our next question comes from Scott Berg with Needham & Company. Your line is open.

Scott Berg

Hey Adam and Perry. Thanks for taking the questions and first of all, congrats on a fantastic quarter. And Perry, I know you will be missed on these calls very much by all the participants. So good luck on the retirement, and we certainly wish you well.

Perry Wallack

Thank you.

Scott Berg

A couple of quick ones for me, Adam, as you talk about the large deal environments, this is something you have been talking about for a couple of quarters or the expectations of improvements on a year-over-year basis, can you maybe talk about the impact of partners that they maybe having on the larger deals that are coming into the – into the company today or is it really more driven by your direct sales force?

Adam Miller

I think at some of both, so we have scaled up our sales teams at the enterprise level and our strategic accounts team. We have very tenured seasoned reps in those segments. And we have experienced now working with these very large companies. So that gives us an advantage in these deals. But without a doubt, the work we have done over the last 2 years with top tier system integrators has definitely helped us in these large accounts. In some cases, it neutralizes the playing field. In other cases, it actually gives us an advantage. As you know, we now have [Technical Difficulty] partnerships with Accenture and Hewitt and most recently, IBM as well as with Deloitte and Ernst & Young, so we are working with all the major Tier 1 partners and that has made a difference in our ability to sell off market. And it is a little bit of a chicken-and-egg situation. Part of the reason we have gotten these strategic relationships is because of the success we have had up-market. We are working with their platinum accounts. And as a result, they need to be working with Cornerstone. Of course, once they are working with Cornerstone, it makes it easier to get more of those very large deals.

Scott Berg

Great. I guess when you look at the large deal success in the fourth quarter, how would you characterize your pipelines going into the first half of ‘16? I think, there is a little some concern on did you pull the entire pipeline to make for a great quarter or is this something that’s going to be sustainable going into next year?

Perry Wallack

No. I have said this on the prior call. My view is that the largest companies in the world are themselves like a vertical. So, in the same way we have done very well in verticals like life sciences and healthcare and banking, we also are now doing very well in vertical of the largest companies in the world. And that’s given us the ability to sell more of them, we have referenceable accounts, we have anchored clients and we have the ability to sell around the world. As you have heard me say earlier, we are not just doing this in the U.S. This is a global opportunity for us and we are winning these very large accounts all throughout the world and that will continue.

Scott Berg

Great. And one last quick one for me, on the analytics opportunity, you are now a solid year into the above acquisition. We continue to hear a lot of demand right now for analytics around different HR applications and the Evolv or the influx products from Evolv certainly are generating some interest. Can you talk about how that application is or that product is playing out in the market today relative to your expectations from the release earlier this year?

Perry Wallack

Yes. So, what we have been doing with Evolv since the acquisition, which was a year ago, is focus on building out not a product, but a suite of products. The coming out party is in May at Convergence and we will be releasing three brand new products: Cornerstone View, which is data visualization software; Cornerstone Insights, which is a predictive analytics tool; and Cornerstone Planning, which is a full workforce planning system. All three of those are getting released next quarter and will be generally available starting at our client conference in May.

Scott Berg

Great. That’s all I have. Thanks for taking my questions and congrats again.

Perry Wallack

Thank you.

Operator

Our next question comes from Brent Thill with UBS. Your line is open.

Brent Thill

Thanks. Adam, I just wanted to go to the customer number and net new customers down almost 35% year-over-year from the fourth quarter. And I just think it speaks to what’s going on with the sales productivity that issue that you have talked about historically. Can you bring us up to speed? And were you happy with that number? Is this now just tilting to larger contracts? So that number is really – maybe it doesn’t look as bad on paper as we think when you look at just the number. Can you just help reconcile that?

Adam Miller

Yes. So year-over-year, we are down 15% in terms of net new client adds and that’s the result of two different factors. So, the first is obviously our focus going up-market has been true, not only in enterprise and strategic accounts, but also in every segment. So, even in the mid-market, we have been working on bigger deals. And as a result, you get more dollars, you get higher ASPs, but you sacrifice some of the units. It’s just the reality of how it works. Having said that, we are not seeing the productivity out of some of our mid-market teams that we would like to see and so we expect some improvement going into 2016 in those areas. So, specifically, major accounts, national accounts, there is opportunity to drive incremental units. It’s part of why we did a global agreement with ADP, it’s part of why we are working on other deals related to partners addressing that mid-market segment, because we think it is a very big opportunity for us. And we are doing well with the larger deals in those segments. We just want to supplement that with units as well. In an ideal world, you get both. You get both the larger ASPs, the bigger deals, the multi-product deals and the units and that’s really what we are focused on at this point.

Brent Thill

Okay. And Perry, there have been a lot of questions from your investors to me just as it relates to the guidance for ‘16, I am just curious if you could highlight what FX impact you put in there? Is there – I think Adam mentioned that you have been a little more conservative. The last two quarters, you have obviously missed the revenue guidance range. So, I was just trying to understand, is there something that’s changing the methodology what you give to Wall Street now going forward relative to what’s happened in the guidance for the last two quarters?

Perry Wallack

Yes, absolutely. I mean, when you look at the exchange rates from the end of the year until now, it’s been the GDP in the U.S. dollar, there has been a decline of about 6% to 7%. And when you look at our entire revenue base for 2016 and approximately a third of that is foreign and in the functional currency of our UK sub. When you do that math, it’s north of probably $6 million, $7 million, $8 million, that’s the impact. So, we have taken that into account and feel pretty conservative about our guidance.

Brent Thill

Okay. But Adam, you are not pulling back from your aspirations of 30% growth?

Adam Miller

No, I am not. I mean, that is the objective. People are worried about what our annualized bookings would be this year. As you can see, we had strong bookings for the full year and that heats us up well we are going into next year. I mean, what Perry just talked about, we are being very conservative. And if you look specifically at the change in the foreign exchange rates from November 5 when we did our last earnings call, until today, there is a massive drop in that exchange rate as the dollar strengthened. And so if you just recalculate the same expectation from last earnings call to today, you will see that it has a major impact on what the revenue guidance would be. So, it’s entirely attributed to that piece. And we don’t think foreign exchange impacts the performance of our work reflects the performance of our business. Our business is doing extremely well and the change in foreign exchange is not reflective of the performance of the company overall and that’s what we are really trying to articulate here.

Brent Thill

Great, thank you.

Operator

Our next question comes from Michael Nemeroff with Credit Suisse. Your line is open.

Michael Nemeroff

Hey, guys. Thanks for taking my questions. Perry just won’t be the same without you. That’s all I am going to say.

Perry Wallack

Thank you.

Michael Nemeroff

I just have a question. If I can put my pessimistic hat on and just assume 90 days from now, the macro-economy doesn’t go as swimmingly as I think, Adam, you think it is going to go. Would you be willing to readjust the profitability targets for the year and not chase the growth and let a little bit more fall to the bottom line and since just stop the spending as much to chase that 30% bogey?

Adam Miller

Yes. So, the short answer is yes. I do want to highlight the fact that we are talking about a 7 point improvement, 700 basis points improvement in operating margin to get to what we are guiding, which is $1 million in non-GAAP net profit. So, we are putting a lot of things in place to drive operational efficiency, whether that is business automation to gain leverage in G&A or it’s more efficient implementation services and lower outsourcing of service work to drive cost of sales down or most importantly everything we are doing on the sell-side to improve our sales and marketing expense as a percent of revenue. All of those things bring us to profitability. To the extent we slowdown more, we will raise that number even more. So, we will have even greater improvement. And again, we are being conservative in everything we are talking about today. So, there is even upside in margins and specifically in free cash flow for the year.

Michael Nemeroff

Thanks. That’s helpful. And then on the revamped small business product, I was just wondering maybe you can give us an update on where that stands now and what we should expect from that on the contribution side in 2016?

Adam Miller

Yes. So the product came out in November, on schedule and it looks amazing. Anybody could download it and play with it, its Growth Edition is available on the website. There is a free trial available. And it is mobile-ready and it’s self-configurable. It can be deployed in three hours and is game-changing for that sector. Its contribution for this year is still assumed to be relatively small as we ramp up. We are ramping up partnerships for Growth Edition. We are ramping up our sales team for Growth Edition. And as a result, we don’t have high expectations for that this year, but I think over time, it will become a meaningful contributor to the business. And we view it as addressing 25% of the available market globally. So it’s an important play for us.

Michael Nemeroff

The large contracts that you signed this year can you give us a sense who was the incumbent that you took business away most from in 2015?

Adam Miller

Yes. I mean as you know, our number one competitor without a doubt is SAP. And most of the largest deals, we either replace SAP or one of their legacy products or we beat SAP head to head in the finals.

Michael Nemeroff

Great. Thanks very much guys.

Adam Miller

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Brad Sills from Bank of America. Your line is open.

Brad Sills

Hey guys. Thanks for taking my question. Just one on the sales and marketing efficiency leverage that you are expecting this year, can you describe a little bit the initiatives underway to generate that, is it just better productivity in the mid-market, larger deal sizes in the large enterprise and then any discussion on kind of hiring plans there as well?

Adam Miller

Yes. So I would describe it as a four point plan to achieving more efficiency in sales and marketing. So the first is obviously driving greater productivity of the sales force that we have generally and that is done through better on-boarding and enablement and training of the sales people as well as hiring and retention of the sales teams that we have. The second is around the sales compensation plans. So we have realigned our commission plans to provide potentially more upfront cash for the reps, which does impact cash flow, that’s already in the numbers that we described. But by the same token, it lowers our annual expense related to those commissions, which have gone up over the last couple of years. And we will get more leverage each year after this year as those plans go fully in effect. Remember, our commission plan, our multi-year plan and so they have a 3-year impact over the course of the next 3 years. We will see increasing leverage as the old plan phases out and the new plan takes over entirely. The third piece there is better allocation of headcount. So our incremental headcount is being better applied based on the productivity of the teams. And so for example, as we just talked about, we are adding less to mid-market and much more to enterprise, where we are seeing really strong success. Lastly, all of the expenses associated with sales are being more tightly controlled, whether we are talking about T&E or incremental support and services or overall marketing expense related to how we are selling. All that being closely analyzed to make sure we are driving efficiency.

Brad Sills

Got it.

Adam Miller

This is not a theoretical exercise. These are very specific initiatives and plans that are being put into effect, many of which have already been put into effect for this year.

Brad Sills

Great. Thanks for the color.

Adam Miller

Thank you.

Operator

Our next question comes from Brendan Barnicle with Pacific Crest Securities. Your line is open.

Trevor Upton

Hi, this is Trevor Upton on for Brendan. Thanks so much, guys. The billings have been stronger than expected in the last couple of quarters, while revenue has been a bit weaker, last quarter there was the eight figure deal that slipped into Q4, is there anything with these larger deals that are causing implementation delays or anything like that?

Adam Miller

No. I mean, as we have talked about on prior calls, the large deals do create more variability in the service revenue. And in particular, you had a two-pronged [indiscernible] relates to specifically the timing of the implementation, not just how long it takes, but when it starts and when milestones are achieved. Because with these very large deals, you have multiple parties involved, it’s not just us and the client, it’s often teams of people on the client side as well as many third party consultants working on behalf of or with the client. So you end up with different timelines than you would have in a typical enterprise deal. In addition to that, the accounting rules with these larger deals sometimes cause a reallocation of anticipated service revenue to software revenue as part of the overall accounting rules and that results in a lengthening of the recognition period for that service revenue. So instead of it being recognized over a relatively short period of time, it gets amortized over the life of the agreement.

Trevor Upton

Okay. And has any of that been a surprise and kind of an impacting in the reported results versus the guidance?

Adam Miller

The main impact on Q4, without a doubt, is foreign exchange.

Trevor Upton

Okay. And then if I can ask a quick follow-up with the sales and marketing growing to 40% of revenue over time, should that be linear, kind of the 300 basis points or so basis points a year?

Adam Miller

No. I would expect we would be able to do it faster than that.

Trevor Upton

Okay, great. Thank you.

Operator

Our next question comes from Samad Samana with FBR Capital Markets. Your line is open.

Samad Samana

Hi. Thanks for taking my question. So I wanted a follow-up on the formulation of guidance, so there is going to be a lot of change. It sounds like with some in sales and then with Perry retiring. Congrats on that, Perry, by the way. But there will be a new CFO. As you think about how you have evaluated the funnel for 2016, how comfortable do you feel that even with all of these changes that are anticipated that you have baked in enough conservatism, could you comment on that?

Adam Miller

You mean just with the sales funnel in general, the pipeline?

Samad Samana

Yes. I mean with the guidance, there is going to be a lot of changes in the company both in sales and at the CFO level I guess I am curious how you still have as much confidence in guidance given the last couple of quarters?

Adam Miller

Yes. So with regards to sales, I would not say there is a significant amount of change. In fact, we are extremely stable with regards to our sales force. Management is fully intact. The teams are all in place. We are not adding significant numbers of new teams this year. And that gives us tremendous stability throughout the sales organization. So I – while we are being more careful in how we are allocating expenses in sales, that does not mean that there is significant transformation or change within the teams that we have today. And then with regard to the finance team, I can let Perry add to this as well. But Perry obviously have been my partner from the beginning and so we will remain friends, remain partners. But as it relates to the finance organization, we have a large finance organization with extremely talented professionals all the way up and down the chain, and that is firmly intact.

Samad Samana

Great. And then one follow-up, so someone touched earlier on the number of net new customers and how that was down a little bit. As you think about 2016 and beyond, how do you think about the growth framework contribution from up selling into the installed base versus adding new customers across the spectrum?

Adam Miller

We have not forecasted any significant change in what our up-sell rates are relative to the installed base. However, as we said before, we believe there is significant upside in that area. And we have increased the size of those teams because we believe there is tremendous opportunity within the client base. This is particularly true given the growth in our product footprint. So over the last couple of years, including what is coming out in May, we have essentially doubled the product footprint that we have at Cornerstone and that gives us tremendous up-sell capability in the installed base.

Samad Samana

Great. Thanks for taking my questions and congrats again Perry on retirement.

Perry Wallack

Thank you.

Operator

Our last question comes from Justin Furby with William Blair & Company. Your line is open.

Justin Furby

Thanks guys. Perry, congrats brother. I wanted to ask a couple of questions. First on the guidance, I want to make sure I understood that, Adam, did you say for fiscal ‘16 that on a constant currency basis, you are guiding to 30% growth meaning that the currency is the entire delta or did I miss that?

Adam Miller

No, no, no. We are trying to maintain the growth trajectory that we have had. We have been able to do it now for a couple of years and we will continue to move in that trajectory. We are obviously being conservative. And on a constant currency basis, we have been very close to 30% and we have been and we will be.

Justin Furby

Got it. That’s helpful. And then on the mid-market, I was just curious can you give us a sense for how big that is I forget. I know it’s not as simple as that you’ve got teams like the federal, IRI etcetera, but rough numbers as a percentage of your business, what is mid-market and can you give any sort of feel for directionally? This is like you have got two very diverging growth rates within enterprise and mid-market. Can you talk about some of the things there or how you think about ‘16 in terms of those two business units? Thanks.

Adam Miller

Yes. Well, first, I would say as a percentage of total revenue, it’s declined as we have become more international. So, as our teams in APAC and Latin America and EMEA continue to expand, the total contribution of the Americas and the U.S. in particular goes down. Secondarily, as we have continued to grow in the large enterprise and strategic accounts and down-market, you also have a shrinking of total contribution by mid-market. Having said all that, we still think there is a very large mid-market opportunity. That’s why we have both the major accounts team for lower mid-market and a national accounts team for upper mid-market to focus on those opportunities. We think there is the potential to increase unit volume over time and we have seen a significant increase in overall ASPs across the board in the business. In fact, our ASPs globally have gone up by 25% in the last year.

Justin Furby

Got it. So, what is it, is it a 25%, is it a third, is it way less than that? Directionally, I’m really just curious what the mid-market is as a percentage?

Adam Miller

Probably around 20%.

Justin Furby

Got it. Thank you very much, guys. Appreciate it.

Operator

This ends our Q&A session for today. I will turn it back over to Adam Miller for closing remarks.

Adam Miller

Thank you all for your participation and we look forward to following up soon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s program. This concludes the program. You may all disconnect.

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