Cornerstone OnDemand's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Cornerstone OnDemand, (CSOD)

Cornerstone OnDemand (NASDAQ:CSOD)

Q1 2012 Earnings Call

May 14, 2012 5:00 p.m. ET


Adam Miller - President and CEO

Perry Wallack - CFO


Laura Lederman – William Blair

Greg Dunham – Goldman Sachs

Mark Murphy - Piper Jaffray

Rick Sherlund – Nomura

Michael Huang – Needham & Company

Scott Berg – Feltl

Brandon Barnicle – Pacific Crest Securities


Good day ladies and gentlemen, and welcome to Cornerstone OnDemand’s first quarter 2012 earnings conference call. [Operator instructions.] I’d now like to turn the conference over to Perry Wallack, CFO for Cornerstone OnDemand.

Perry Wallack

Good afternoon everyone. This is Perry Wallack, CFO of Cornerstone OnDemand, and welcome to our first quarter 2012 earnings conference call. Today’s call will begin with Adam providing a brief overview of our company and the first quarter, and then I will review some key financial results for the quarter, which ended March 31, 2012. 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 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.

During the call, we will be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website. All of the financial measures that we will discuss today are non-GAAP unless we state that the measure is a GAAP number. Any non-GAAP outlook we provide has not yet been reconciled with the comparable GAAP outlook because, among other things, we cannot reliably estimate our future stock-based compensation expenses, which are dependent on our future stock price.

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

Words such as expect, believe, anticipate, plan, illustrate, intent, estimate, and other similar words are also intended to identify such forward-looking statements. Forward-looking statements involve risks, uncertainties, and assumptions. If any of the risks or uncertainties materializes or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by the forward-looking statements we make.

These risks, uncertainties, assumptions, as well as other information on potential factors that could affect our financial results, are included in today’s press release, the risk factors section of our most recent form 10-K, and subsequent periodic filings with the SEC.

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

Adam Miller

Thanks Perry, and thank you to everyone participating in Cornerstone OnDemand’s first quarter earnings call. I am pleased to report that we continued to build upon the momentum of our business in Q1, with another very strong quarter.

On a GAAP basis, revenues for the quarter came in at $24 million, representing a year over year increase of 52%, and bookings came in at $24 million as well, representing a year over year increase of 67%.

We have added 85 new clients during the quarter, bringing the size of our global and mid-market client count to nearly 900, which is up 58% year over year. Our client additions in the first quarter were comprised of marquee names in both the private and public sectors, including Regis Corporation, the Container Store, USAID, the U.S. Small Business Association, the Denver Public Library, a multi-billion dollar global chemical company, and one of the world’s preeminent media companies. Our domestic and EMEA sales teams picked up right where they left off at the end of 2011, and finished the quarter strong.

While we are very proud of the many new clients we have added, our number one priority has always been to ensure the success of our existing clients. From 2002 through 2011, we had an average annual dollar retention rate of approximately 95%, and we believe we are on track to achieve this again in 2012. Our combination of growth and retention helped us increase the size of our user base to over 8 million users in the first quarter, which represents one of the largest SaaS subscriber bases in the world.

We also strengthened our relationships with many of our existing clients during the first quarter, with significant upsales to Pep Boys, Heidelberg Cement, Manchester Airport, one of the largest hospital operators in the world, and one of the largest clothing retailers in the world.

The upsale with Pep Boys is noteworthy because it exemplifies how our product penetration with our clients has become increasingly balanced between learning and our other clouds. Pep Boys began as a learning cloud deal in 2008, and after three successful years with us, they added succession management within the performance cloud in 2011, and in the first quarter of this year, Pep Boys further expanded the performance management footprint within their organization with additional functionality to evaluate the proficiency of new hires.

As our results demonstrate, we have not seen a disruption in our business from the recent consolidation of our market, or from the macroeconomic uncertainty in Europe and other parts of the world. I believe there was some concern among investors that the entry of ERP players into the talent management space, namely SAP and Oracle, could limit our ability to compete in the market. For several reasons, we believe this has not been the case.

Firstly, effective talent management has become a strategic priority for organizations around the world, across market sectors and segments. Consequently, we believe that many organizations would rather have an innovative, best-of-breed solution than have the latest offering from their legacy ERP provider.

Second, in the enterprise segment, according to a recent CedarCrestone survey, just 35% of Oracle clients use Taleo, and just 40% of SAP clients use SuccessFactors. In fact, many Oracle and SAP clients have been using solutions from their recently acquired competitor. We believe that the confusion in the marketplace has created a real opportunity for Cornerstone.

Thirdly, outside the enterprise segment, we believe that the market opportunity has widened for us given the historical lack of success ERP players have had in selling down market. The continued growth of our mid-market team, combined with our recent acquisition of Sonar6, a leading player in talent management solutions for small businesses, has helped position Cornerstone well in both of those segments.

Finally, we believe that the entry of the ERPs has also positioned Cornerstone extremely favorably with the global alliance ecosystem. This resulted in yet another solid quarter for our alliances team. As we just announced this morning, we renewed our relationship with ADP after three very successful years, extending our reseller agreement through 2017.

In addition, Talent2 continues to help us extend our reach in Asia-Pacific, and SunGard Higher Education, recently rebranded as Ellucian, continues to help us deepen our penetration in higher ed. Also, our alliance with Workday continues to gain momentum, with our rapidly growing sales teams jointly selling accounts literally around the world. We have completed a productized integration with Workday, and have a growing roster of joint clients.

So while our major competitors commit their time and energy to integrating themselves into their new parents, our team has maintained an unrelenting focus on our core business and on our clients. As a result, Cornerstone has continued to thrive.

We have also continued to innovate. As many of you know, on March 29 we formally launched our recruiting cloud, making Cornerstone the first pure cloud provider of an organically developed, end-to-end talent management solution. When we embarked on this initiative, we wanted to create a solution that would be truly differentiated, and we believe we have done just that.

While there are a number of ATS, or applicant tracking system, incumbents in today’s market, most of these solutions were built over a decade ago, and as a result are designed for the way people used to recruit, before the rise of social networks. In today’s world, organizations of all sizes are harnessing the power of social recruiting to more effectively source and select candidates.

The Cornerstone recruiting cloud is natively social. It has been specifically designed to allow organizations to leverage the power of social recruiting. These capabilities are extended via Cornerstone’s ecosystem of strategic alliances, and the recruiting cloud is able to integrate with the leading social networking sites such as Facebook and LinkedIn.

In addition, while most ATS systems are deployed to recruiters and hiring managers only, the Cornerstone solution is typically deployed to all employees in an organization. This enables our clients to use a recruiting cloud to leverage the social networks of all employees to recruit talent, more effectively promote employee referral programs, and seamlessly consider both external and internal candidates for open positions.

Also in the first quarter, we launched the Cornerstone volunteer management system, a solution that allows corporations and nonprofit organizations to match volunteers with the opportunities that are most relevant to them. As corporate social responsibility and community involvement continue to become increasingly important to organizations and their employees, the Cornerstone OnDemand Foundation’s work with the nonprofit community and our dialogue with Cornerstone clients helped us to recognize the need for a solution that allows for more effective management of volunteer programs. Our volunteer management solution helps users track each volunteer’s pertinent skills, align capabilities and experience to the particular needs of a volunteer opportunity, and assign volunteers to relevant positions based on compatibility, timing, and desire.

While volunteer management doesn’t necessarily fall within the traditional talent management continuum, we believe it now will. Volunteerism is something that Cornerstone has always encouraged of its employees, and it is our hope and belief that our volunteer management solution will help to significantly enhance the effectiveness of volunteers in communities around the world.

In the last few quarters, we have more than doubled our client count. As a result, the continued expansion of our product suite creates significant incremental upsell opportunity to grow our business. So not only do the new products expand our market opportunity with new clients, but they also drive incremental opportunity within our growing installed base.

Our innovation is not limited to product development. We continue to innovate in our service offerings to ensure the success of our clients. In addition, we recognize opportunity in global markets where we operate, where we find innovative ways to expand our footprint to service clients of all sizes and all geographies.

A few months ago, we recognized a disruption in the small business segment being caused by the acquisition of our primary competitors by the ERP companies, and our ability the capitalize on that disruption. We also recognized that because our solution is focused on meeting the needs of larger corporations, it was not the ideal fit for the needs of the small business market. So we came up with a way to solve the problem: find the most innovative talent management company in the small business segment, and make them part of the Cornerstone family.

On April 5, we closed our acquisition of Sonar Limited, which does business as Sonar6. The company offers a state-of-the-art SMB solution for managing performance. With a highly intuitive graphical interface and extensive configurability, Sonar6 has gained significant traction with small businesses across geographies and verticals. Sonar6 also mastered the marketing model for the SMB segment, minimizing the cost of sale and allowing it to predict the relationship between marketing investment and sales with a high degree of accuracy.

Combined, we now have over 1,250 clients globally across all market segments we serve, from global enterprise to mid to large enterprise, to now small business. As part of the deal, we also gained an innovative product development team, a creative marketing team, and overall, a very cool company that fits perfectly with Cornerstone’s culture. With their team and the Sonar6 solution, we expect to grow our presence within the SMB segment for many years to come.

We have frequently cited 400 million seats as our estimate of the size of the total addressable market in talent management, and we believe the SMB segment comprises at least 100 million of these seats. So clearly we believe the opportunity with Sonar6 is large.

It is important to note that the Sonar acquisition does not in any way compromise the organic nature of our solution. Sonar6, which is in the process of being rebranded as Cornerstone Small Business, or CSB, will be sold exclusively to clients with less than 500 employees, while our existing solution will continue to be sold by our middle market and enterprise sales teams to all clients of 500 or more employees. The CSB product will not be integrated with the Cornerstone solution.

So in summary, we are extremely pleased with our first quarter and our continued innovation, which we will discuss further in the coming quarters as we continue to push the envelope with our state-of-the-art talent management solution. We continue to sign and grow marquee accounts, and as our bookings demonstrate, the momentum of our business has not slowed down. The expansion of our products and services allows us to grow our addressable market with new and existing clients alike.

Of course, this is once again a testament to the tremendous efforts of the incredible team here at Cornerstone, our commitment to our clients’ success, and our strong focus on providing a holistic talent management solution empowering people across the entire employee lifecycle.

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

Perry Wallack

Thanks Adam. Before I get to the financial results of our first quarter of 2012, I’d like to remind you that all of the non-revenue financial figures I will discuss today are non-GAAP, unless I state that the measure is a GAAP number. When we discuss revenues, these are GAAP results. Non-GAAP financial measures exclude certain items that we believe are not good indicators of Cornerstone’s current or future operating performance.

In periods we will discuss today, these items included expenses related to stock based compensation and related employer payroll taxes, amortization of debt discount and issuance costs, and acquisition-related costs.

Also, during the first quarter of 2011, in addition to the items I just mentioned, we had changes in the value of preferred stock warrants and accretion related to preferred stock and amounts related to early retirement of debt.

As Adam said, we had a terrific quarter. The business is growing rapidly. Revenues and billings continue to grow, cash flows and gross margins are improving year over year, and investments in growth continue in order to support global demand for our solution.

So with that said, let’s discuss our first quarter results. I will begin by going through our income statement. As Adam mentioned, revenue for the quarter was $24 million, representing a year over year increase of 52% and a sequential increase of 7% over the fourth quarter of 2011.

Total bookings, which we define as gross revenue plus change in deferred revenue, was $24 million for the quarter, representing a $9.6 million increase, or a 67% increase, over the first quarter of 2011.

We would like to highlight that our year over year bookings growth in Q3 of 2011 was 47%, and in Q4 of 2011, it was 58%. Hence, our bookings growth accelerated in the current quarter over the last two quarters. We would like to note that there were no significant deals that were billed up front during the quarter to cause an anomaly in our bookings.

As a reminder, our expected billing terms for direct sale customers is that we bill 100% of the services and 100% of the first year software up front upon signing, and the future-year software fees are billed annually throughout the remaining term of the agreement. Our typical agreement has a term of three years. Our billing terms in Q1 were roughly in line with historical averages.

Our revenue concentration by geography for the first quarter of 2012 remained fairly consistent with the first quarter of 2011, with domestic revenue representing 70% of total revenue and international revenue accounting for the remaining 30%. This is consistent with prior quarters, and we believe that we will continue to see additional opportunities to expand our business globally.

Gross margin for the first quarter of 2012 was 73.5%, which is comparable to gross margins for the fourth quarter of 2011 of 73.4%. When compared to the same quarter of 2011, gross margins improved by 2.3% from 71.2%.

As we have said in prior quarters, we believe we will continue to improve gross margins on an annual basis. However, we do not expect to always have sequential improvements in gross margins from quarter to quarter. We will continue to invest in our software, network infrastructure, and our implementation and service organization to support our growth, which may affect our gross margin in future periods.

Now let’s turn to our operating expenses for the quarter. Sales and marketing expense was $15.7 million, representing a year over year increase of $6.1 million, or 63.2%. As a percentage of revenue, sales and marketing expenses increased to 65.5% in the first quarter of 2012 from 61.2% in the first quarter of 2011.

This increase is principally a result of more headcount across our entire sales and marketing organization, as well as higher sales commissions. When compared to the fourth quarter of 2011, sales and marketing expenses increased by $2.8 million, or 21.6%. Similarly, this increase was mainly due to increased headcount and sales commissions.

R&D expense was $2.9 million, representing a year over year increase of just $732,000, compared to the same period in 2011. The year over year increase is mainly due to increased headcount. As a percentage of revenue, R&D expenses represented 12.2% of revenue, compared to 14% in the same period in 2011.

G&A expense was $4 million, representing a year over year increase of $972,000, when compared to the same period in 2011. The increase in G&A expense during the first quarter of 2012 was mainly attributable to increased headcount in order to support our status as a public company, increased professional fees associated with operating as a public company, and increased professional fees associated with expanding into new geographic regions. As a percentage of revenue, G&A expense represented 16.7% of revenue, compared to 19.2% in the same quarter of 2011.

Operating loss for the first quarter of 2012 was $5 million, compared to $3.7 million in the first quarter of 2011. Net loss for the first quarter of 2012 was $4.9 million, or negative $0.10 per share, based on weighted average shares outstanding of 49.4 million shares, compared to $3.7 million, or negative $0.26 per share, based on weighted average shares outstanding of 14.5 million shares in the first quarter of 2011.

With regard to cash flow, during the first quarter of 2012, our cash inflows from operations were $3.2 million, compared to $1.4 million in the first quarter of 2011 and $4.9 million in the fourth quarter of 2011. We would like to reiterate the seasonality of our business, where we typically close a larger number of client agreements in Q3 and Q4 of each year, and thus collect greater amounts of cash in Q4 and in Q1 of each year.

Let me now turn to the balance sheet. Our total cash and cash equivalents were $87.2 million at March 31, 2012, compared to $85.4 million at December 31, 2011. At March 31, 2012, we had approximately $25.1 million in accounts receivable compared to $34.1 million at December 31, 2011, further reflecting the seasonality of our business.

In addition, our working capital - current assets less current liabilities, excluding deferred revenue - was $106.3 million, compared to $112.1 million at December 31, 2011. This decrease was mainly driven by a decrease in accounts receivable balances, mainly due to higher collections and lower levels of billings in Q1 of 2012 as compared to the immediately preceding quarter, again due to the seasonality of our business.

Our deferred revenue balance was $55.8 million at March 31, 2012, compared to $55.9 million at December 31, 2011 and $32.4 million at March 31, 2011, a year over year increase of $23.4 million, or 72%. Again, we’d like to remind you that we typically experience a reduction in deferred revenue from Q4 to Q1, due to the seasonality of our business.

With respect to headcount, we added 185 employees from March 31, 2011 through March 31, 2012, an increase of nearly 50%. As compared to our headcount as of December 31, 2011, we added 53 employees, an increase of 10%. As of March 31, 2012, our total worldwide headcount was 560 employees.

Two of the nonfinancial metrics we track are number of clients and number of users served. We ended the year with 891 clients and approximately 8.2 million subscribers, reflecting year over year increases of approximately 59% and 57% respectively. We added 99 clients in the first quarter versus 119 in the prior quarter.

Finally, As a reminder, we closed our acquisition of Sonar6 on April 5, 2012, thus none of the above results include amounts from Sonar6.

In summary, we believe we had a great start to 2012, as evidenced by our year over year growth rates - 52% growth in revenues, 67% growth in bookings, and 129% growth in cash flows from operations. In addition, we achieved this growth while our gross margin improved from 71% to 74%, and our net loss per share improved from negative $0.26 to negative $0.10 per share over the same quarter in the prior year.

Now, I’d like to discuss our outlook for Q2 2012 and the full year of 2012, 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.

Given the strength in our business this past quarter, for the full year of 2012 we are raising our previous revenue guidance from a range of $112 million to $114 million to a range of $114.5 million to $116.5 million. At the midpoint, this revised range suggests 53% growth over 2011 gross revenue of $75.5 million.

Specifically, we are increasing our full year guidance by $2.5 million. This increase is driven by $1.5 million in revenues expected from the acquisition of Sonar6 and $1 million attributable to revenues expected from our organic growth. Note that the Sonar6 revenues would have been materially higher as a standalone entity, but because of GAAP purchase accounting rules, we expect to write off a majority of their deferred revenue balance.

For the second quarter of 2012, we currently expect revenues to range from $26 million to $26.5 million. At the midpoint, this range represents 51% growth over the second quarter of 2011 revenues of $17.4 million. It’s worth noting that in Q2 of 2011 we achieved 90% bookings growth year over year, primarily due to outstanding new customer sales, but also due to a higher level of services billings from existing customers.

It is important to remember that the timing of delivery of service projects is often under the control of our large, global enterprise customers and this can affect the amount of service billings we achieve in any given period. As such, Q2 of 2012 represents something of a tough comparison from a year over year single quarter bookings perspective.

With respect to non-GAAP net income or loss, we currently expect a loss for the full year 2012 between $13 million and $15 million. This range implies a non-GAAP earnings per share range of negative $0.26 to negative $0.30 per share, based on a full year weighted average share count of approximately 50 million shares.

Please note that this updated non-GAAP net loss outlook for 2012 takes into account the impact of the expected $1 million increase in revenue attributable to our organic growth as well as the negative impact of approximately $2 million on non-GAAP net loss expected from the acquisition of Sonar6. Again, we’d like to note that this net loss results from the expected writedown of the majority of the Sonar6 deferred revenue.

Lastly, turning to cash flow, for the full year 2012, due to our expectation that the Sonar6 acquisition will be approximately neutral with respect to non-GAAP cash flow from operations, we are maintaining our previous guidance for non-GAAP cash flow from operations of approximately $7.5 million.

In conclusion, like last year, our first quarter marked a solid start to the year, and we look forward to continued momentum. With that, I’d like to turn it back over to Adam.

Adam Miller

Thanks Perry. As our results demonstrated, our momentum has not abated. We believe the disruption caused by the recent consolidation in our market has actually widened our window of opportunity, and we are capitalizing on that opportunity with our sales, marketing, and technology investments.

I want to take this opportunity to thank the global Cornerstone team for their vision, teamwork, and dedication to our clients’ success. And thank you all for listening. We will now take your questions.

Question-and-Answer Session


[Operator instructions.] We’ll take our first question from Laura Lederman from William Blair. Please go ahead Laura.

Laura Lederman – William Blair

I’d like to start with multi-product, or multi-pillar deals, and if you look at the quarter what percentage of them were multi-platform. And kind of a similar question, if you could talk about upsell as a percentage of bookings, just to give us a sense of the opportunity that you expanded on in terms of selling into the installed base.

Adam Miller

In terms of the sale of multiple clouds - so we talked about the four clouds, learning, performance, extended enterprise, and now recruiting - I would say that we continue have at least two clouds in 50% of our deals. Some of them see three, some see even four now. But we’re seeing multiple products being sold in each of our deals, at least 50% of the time.

With regard to the shift, or the split, between upsale and new client acquisition, I would say it’s been consistent with our historical track record. Nothing of note as it relates to upsale versus new client acquisition.

Laura Lederman – William Blair

I realize that the acquisitions of Taleo and SuccessFactors happened relatively recently, but what are you hearing from customers, and do you think you’ve won more business than you would have because of that? And I realize the stories might be anecdotal, but they might prove interesting to us.

Adam Miller

My quick answer would be not yet, meaning just now as the market’s starting to absorb the news, and as you know, in the large enterprise segment, these are long sales cycles, so that news is starting to hit in current sales cycles. So I think over this quarter and next quarter, I’ll be able to give you a clearer answer.

But the news has definitely reached the field, and we are seeing a lot of opportunity now in the market, in particular in the large enterprise space. It was really a three-horse race prior to SAP and Oracle coming into the market, and what we see today is that it’s a two-horse race. If it’s an Oracle client, it’s either us or Oracle, i.e. Taleo, and if it’s an SAP client, it’s us or SuccessFactors. It’s no longer a three-horse race.


We’ll take our next question from Greg Dunham from Goldman Sachs. Please go ahead Greg.

Greg Dunham – Goldman Sachs

First question is on pricing. I know you guys rolled out the new bundles earlier this year. There was some pricing dynamics. But one of the bear fears out there is that there’s pricing pressure in the market, because there’s the perception of tougher competition. Can you just address that concern first? And then a follow up question is on the pace of hiring. When you look at the hiring that you did, kind of a 10% sequential increase, was that in line with your expectations?

Adam Miller

Let me take the second one first. We are hiring exactly on plan. We hire roughly the same number of people every month, and we’ve been doing that consistently over the past several months. And we are exactly on plan from that perspective.

With regard to pricing, as we mentioned on an earlier call, pricing’s actually improved in the market, and that’s very specific. Prior to Oracle and SAP getting into the space, we had a round of consolidation of the low-cost competitors. They were the ones that most often would start the price wars, and those guys getting taken out of the market has actually improved pricing overall, for all the vendors in the space, including us.

Greg Dunham – Goldman Sachs

How has the composition of hiring evolved over the past six months in terms of what type of profile of person are you guys hiring?

Adam Miller

Well, as you can imagine, we’re seeing a lot of talent being freed up from our prior competitors because of the consolidation, which has raised the bar, I think. The other is while there’s a lot of unemployment, there absolutely is a shortage of skilled labor. But if you’re on a winning team, because of the success we’ve had in the marketplace, we’re able to attract very good talent. And I would say the quality of our sales teams and service teams and technology teams has continued to improve over time because of that. So success breeds success in many ways.


And we’ll take our next question from Mark Murphy from Piper Jaffray. Please go ahead Mark.

Mark Murphy - Piper Jaffray

I wanted to ask you about the trajectory of our sales headcount. You had noted earlier that you’re trying to roughly double it year over year by June of this year. Any preliminary sense on how it could trend beyond that, maybe through June of 2013? Presumably maybe you have the luxury here of being able to digest and assimilate some of those hires more than previous years, but I’m wondering how you’re looking at it.

Adam Miller

Yes, we’ve been aggressively growing our sales teams over the last three years, and we will continue to do that into the future. We haven’t made our final plans yet as it relates to 2013, but I will tell you that we’ve had good success not just acquiring sales talent but also onboarding them and ensuring that they’re productive. And we’ll continue to do that around the world. As we said last year, the growth by team is not consistent. So we will hire more on one team than another. But if you look at it holistically, we’re continuing to aggressively build out our sales force globally.

Mark Murphy - Piper Jaffray

And Perry, you had mentioned that in Q2 you basically had the toughest comp imaginable for billings year over year. And we’ve known that’s coming for a while. But is there any way you could help us understand what would you think of as a normal Q2 sequential seasonality for billings, based on what you’re seeing in the current climate?

Perry Wallack

My canned response is that we don’t give guidance on bookings. That said, I think that when you try to look at previous years, and you look at seasonality, between quarters, and you look at relative bookings growth between quarters, you can probably expect things that are in range of those historical seasonalities.

Mark Murphy - Piper Jaffray

And then finally, Adam, I wanted to ask you, philosophically, where do you stand on the longer-term evolution of the HR software market, just in terms of what customers prefer. And what I’m specifically getting at is I guess the concept of integrated core HR, plus talent management. In other words, what people perceive to be the Workday model, versus running best-of-breed for talent management and best-of-breed for core HR. Do you think that those are going to be distinct and separate? Or do you think that the lines are going to blur over time?

Adam Miller

Well, I think it depends on the needs of the particular client. Obviously, Workday is focused on unified HCM and performance management, and we’re taking a holistic approach to talent management, including learning and recruiting in the extended enterprise. These are different approaches. That’s allowed us to partner with Workday, and it’s allowed both of us to compete effectively against both Oracle and SAP. And I think we’ll be able to continue to do that over time.


We’ll take our next question from Rick Sherlund from Nomura. Please go ahead Rick.

Rick Sherlund – Nomura

I wondered if you could just give us a little granularity on the bookings quarter. Revenues were about in line with the Street, but the bookings were quite a bit better. Was there anything in the mix of the bookings number? I think I heard you say there was no change in terms, that it was similar? And certainly the long term was actually less, so that was encouraging as well. Any change in the mix of billings, service versus product, or any other insight you can give us on that?

Adam Miller

Like I said in the prepared remarks, there were really no anomalies. There were no large deals that were billed multiyear or up front, or anything like that. And the historical averages of the amounts billed up front were pretty consistent in the quarter. And the mix of revenue across the different teams, whether that was direct sales in the U.S., alliances, ADP, Europe, federal government, that was all roughly the same as our historical mixes.

Rick Sherlund – Nomura

And any insight you can give us on enterprise spending? There seems to be controversy out there after Cisco’s comments about enterprise spending weakening. Have you seen any evidence of that? It’s certainly not evident in your billings number, but I’m curious, anecdotally, what your observation might be.

Adam Miller

We’ve seen no evidence there. What we have seen is a clear shift to the cloud. So organizations that were selling legacy software or hardware are having a more difficult time than some of the cloud providers. And I think we’re specifically seeing a shift to talent management being strategic. We’re having higher level conversations in the organizations. The initiatives have become global instead of departmental. And we are seeing a continuous and very clear demand and preference for buying the solution in the cloud instead of buying something that’s on-premise.

So we’ve not seen any slowdown in our business, and even more particularly we’ve seen no slowdown in Europe either, where I think the market would assume there would be a slowdown. We’re seeing very strong demand throughout EMEA, both in the near term and longer term.

Rick Sherlund – Nomura

And the acquisition of Sonar6, oftentimes companies on non-GAAP numbers exclude the writedown of deferreds in calculating the non-GAAP numbers. It sounds like that’s not your intent? You’re just going to leave that out? Is that correct?

Perry Wallack

Yeah, that’s our intent.


And we’ll take our next question from Michael Huang from Needham. Please go ahead Michael.

Michael Huang – Needham & Company

In the case of the joint customers, and opportunities with Workday, are more of these customers going to Cornerstone for performance, or Workday for performance? And could you provide some color around that?

Adam Miller

In most of the deals now, where Workday had already been there, and they brought us in as a learning solution, it will be Workday performance and Cornerstone learning, specifically.

Michael Huang – Needham & Company

And just another question around the strength of billings. Obviously very impressive. Just wanted to get your view on how much of that was driven by improvements in sales productivity versus driven by the fact that you’ve been ramping distribution so aggressively.

Adam Miller

It’s probably more the ramp. We are seeing some improvements in productivity, particularly as it relates to the overall pipeline development. So I think you’re going to see more of that in future quarters. But generally there were no anomalies this quarter. As Perry mentioned, there were no disproportionately sized deals. There was nothing unusual that happened in the quarter. And in fact, if anything, we had some notably significantly sized deals that did not close in the quarter. They closed after the quarter end. So you still had the bookings growth.

Michael Huang – Needham & Company

And last question, just on the new recruiting product. In terms of some of the early opportunities you’re seeing there, are they with new customers? Existing customers? And enterprise, or mid-market?

Adam Miller

So the beta program we did was with existing clients. We are now selling it generally, and so we are selling recruiting in some of the new deals. And we’re continuing to upsell it to the installed base. I think we’ll see more installed base sales in initially, and over time it will probably shift to new sales, new clients.

Michael Huang – Needham & Company

And any particular flavor with respect to large enterprise or mid-market around interest in recruiting?

Adam Miller

No, what’s interesting is we’ve seen it across the board. So we have some global enterprises, we have some mid-market companies, we have some nonprofits, and for-profits in a variety of different vertical sectors. There is no consistency about who’s buying recruiting. I think what we have seen as being consistent is those that are buying more of the suites - so our clients that are already using learning and performance and the extended enterprise are more likely to also purchase recruiting, at least up front.


And our next question is from Scott Berg from Feltl. Please go ahead Scott.

Scott Berg – Feltl

I only have one question, and it’s around ASPs in the quarter. It looks like your net new customer adds were essentially flat year over year, 85 to 86 by my count. But your billings came in really strong. Is that a reflection of general ASPs being stronger year over year? Or is it more customer mix, more larger customers than relatively smaller customers?

Adam Miller

I think you see a little bit of the reflection of less pricing competition. So the pricing has improved, as I mentioned earlier. The other is we have a very well-diversified quarter. I think we had performance across all teams and all segments. And so we don’t see any real anomalies from our standard pricing other than overall the tide has risen, and we’re seeing good performance across the board. So it wasn’t over-weighted in any one particular segment, and the same is true as we look ahead at the pipeline. So we’re feeling good about where we are right now.


And we’ll take our next question coming from Brandon Barnicle from Pacific Crest Securities. Please go ahead.

Brandon Barnicle – Pacific Crest Securities

Adam, I just wanted to follow up on the recruiting question, and specifically whether you guys have been able to pick up any new sales talent out of the consolidation that’s gone on in the sector.

Adam Miller

Yes. It’s primarily sales people and service people. We’re not really looking for product development or technology, or administrative functions. But we have been picking up specifically sales talent and service talent. Delivery people.

Brandon Barnicle – Pacific Crest Securities

And I just wanted to follow up on your comments about the macro. Specifically, some folks have been concerned about financial service weakness. You guys have pretty good exposure there. Have you seen anything on that side?

Adam Miller

Nothing at all. We continue to sell. In fact, it remains one of our best sectors, and we’ve seen both upsale and new client acquisition from our financial services clients. Part of that, keep in mind, is that one of the benefits of Cornerstone is cost savings. And so we typically see that the more the system is used, the more a company can save. And that’s helped us in macroeconomic uncertain times.


Now I would like to turn the conference back to Adam Miller for concluding remarks.

Adam Miller

Thank you all for participating, and we look forward to speaking to you again next quarter.

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