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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)

Q2 2012 Earnings Call

August 9, 2012 5:00 pm ET

Executives

Adam Miller – President and Chief Executive Officer

Perry Wallack – Chief Financial Officer

Analysts

Laura Lederman – William Blair & Company LLC

Mark R. Murphy – Piper Jaffray, Inc.

Michael B. Nemeroff – Credit Suisse

Patrick Walravens – JMP Securities

Rick G. Sherlund – Nomura Securities International, Inc.

Greg Dunham – Goldman Sachs

Marc Fuller – Needham & Co. LLC

Brendan Barnicle – Pacific Crest Securities

Scott Berg – Northland Capital Markets

Bradley Hartwell Sills – ThinkEquity LLC

Operator

Good day, ladies and gentlemen, and welcome to the Cornerstone OnDemand’s Second Quarter 2012 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. And now I’ll turn the conference over to Perry Wallack, Chief Financial Officer for Cornerstone OnDemand. Sir, the floor is yours.

Perry Wallack

Good afternoon everyone. This is Perry Wallack, CFO of Cornerstone OnDemand and welcome to our second quarter 2012 earnings conference call. Today’s call will begin with Adam providing a brief overview of our company and the second quarter, and then I will review some of the key financial results for the quarter, which ended June 30, 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 those 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 included in our most recent Form 10-Q with the SEC.

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

Adam Miller

Thanks, Perry, and thank you to everyone for participating in Cornerstone OnDemand’s second quarter earnings call. In a quarter in which many enterprise software companies stumbled, Cornerstone had one of its best quarters ever. Our business continued to performance exceptionally well in Q2 and I’m excited to share some of the highlights of the quarter with all of you today.

Revenues for the second quarter came in at $26.7 million, representing a year-over-year increase of 54%, and bookings came in at $31.5 million, representing a year-over-year increase of 51%. We are very pleased with this bookings growth, particularly given the difficult compare against our extremely strong second quarter in 2011, where our bookings grew at approximately 90% year-over-year. We also added approximately 120 new enterprise and mid-market clients during the quarter bringing the size of our organic client base to over 1,000 of the world’s leading organizations.

Our client additions in Q2 were comprised of more key names across the globe with both our domestic and EMEA sales teams continue to perform exceptionally well. New client additions during the quarter include National Instruments, (inaudible), Visa Europe, the largest security systems company in the world, the web’s premier professional social networking site and one of the largest consumer products companies in Europe and one of the largest financial institutions in Asia.

While other companies have talked about macro economic softness, we have seen no slowdown in demand for Cornerstone. Over the years, we have grown through multiple recessionary periods and in the first half of 2012, we saw some of the strongest sales pipelines in our history in our major geographic regions.

We believe this is due to our ability to provide positive business impact for our clients, helping them to improve compliance, increase employee productivity and engagement through our performance management and social collaboration tools, save training and administrative costs and enable the extended enterprise often providing a positive ROI in the first year of purchase.

As Cornerstone has continued to grow at an industry leading pace, I remain most proud of our ability to make our client successful. This is evidenced by our retention rate, which averaged approximately 95% from 2002 through 2011 and remains on pace to do the same again this year. Our combination of growth and retention help us to increase the size of our user base to over 9.4 million users in the second quarter, which represents one of the largest SaaS subscriber bases in the world.

We continue to strengthen our relationships with many of our existing clients during the quarter, with significant upsales to Barclays, Sanford Health, Western Union, a big four accounting firm, and one of the largest retail chains in the U.S. The upsale with the retailer, a Fortune 50 company is particularly noteworthy.

The retailer started leveraging our performance cloud in 2009 for both performance and succession management. And after nearly three successful years, we decided to purchase our learning cloud during the second quarter for all its approximately 250,000 employees. This is yet another example of the continued validation of integrated talent management that we’re seeing amongst our entire client base.

On past earnings calls, we’ve talked about the dramatically changing competitive landscape. On the last two calls, we discussed that given the rate of typical enterprise sales cycles, it is simply too early to evaluate the impact of the acquisitions of our two top competitors by Oracle and SAP.

I’m pleased to report that we now have seen the completion of several of those sales cycles and the verdict is in, there has clearly been a positive impact on our competitive positioning from the acquisitions, not only in the SMB and mid-market segments, but in the large enterprise segment as well.

Starting with SMB, as most of you know in early April, we completed the acquisition of Sonar6 to give ourselves the best-of-breed solution for small businesses, which we define as companies with less than 500 employees. As I discussed last quarter, one of the primary reasons we decided to buy Sonar6, while we did was to capitalize on the destruction in the market caused by those acquisitions by the ERP vendors. It was our belief then that because of the ERP vendors focus on large enterprises, it was an ideal time for us to build a stronger business for the lower end of the market to take advantage of the enormous and relatively uncapped market opportunity with SMB.

Thanks to the efforts of the Cornerstone team, the integration of Sonar6, which we subsequently re-branded as Cornerstone small business or CSB was paying us. This allowed CSB to hit the ground running and significantly exceed even our highest expectations for the quarter. With what we’ve seen over these first three months with any indication, the opportunity within the SMB segment may be larger than we’d originally anticipated.

Moving on to mid-market, our mid-market sales team which sells the company’s of between 503,000 employees was equally impressive in Q2, closing more deals than they have in any previous quarter in the company's history. There a number of factors that contributed to the strong performance.

The mid-market team is seeing significant growth in head count over the past year, so some of this volume can certainly be attributed to be added personnel. We are also seeing more and more first-time buyers across sectors and geographies with the level of FAS adoption within mid-market continues to increase.

Additionally, the increasing number of second time buyers, that are coming to Cornerstone for more sophisticated management solution after recognizing the value that it can add to their organizations, but we actually believe that the biggest driver of the mid-market team's recent performance was simply higher win rates due to our improved competitive positioning. While our competitors continue to spend significant efforts to integrate themselves into their ERP parents and become part of a broader product offering geared towards large enterprises, we remain singularly focused on providing organization to all sizes with the best-of-breed integrated talent management solution. And its risk focused that we believe many of our new mid-market clients would sight as one of our key differentiators.

While we expect them to be any to more effectively compete in the SMB and mid-market segments as a result of recent consolidation, our performance during the second quarter showed us that Cornerstone’s competitive positioning has improved with large enterprises as well. We believe this is principally driven by the fact that effective talent management is now a priority for organizations all over the world.

Collin’s scarcity effects companies of all sizes and become commonplace across all industries and geographies. Companies today are seeking an innovative best-of-breed solution for their employees rather than simply settling for the latest offering from their ERP vendor. Consequently Cornerstone is not only being invited to compete the opportunities with organization that use Oracle and SAP is our very ERP vendor.

We were winning those opportunities. A wide European consumer products company that I mentioned earlier which employs over 300,000 people worldwide is a perfect example of such a deal. This company has been a top SAP account from years and also a top success active account with performance management. So when they first reach out to us to discuss our earning and extended enterprise clouds, unsure if was work on time. It seemed like they would simply go with the Plato’s blast SuccessFactors/SAP solution. And as we entered into discussions with them, nobody realized that they weren’t concerned about what is the most convenient or cheapest option for them, but they wanted the best solution for their organization and they ultimately decided their best solution was Cornerstone.

We continue to see more and more Oracle and SAP clients following at similar line of thinking. The large enterprises’ talent management solutions represent a mere fraction of the overall budget. And yet the reality is that these solutions have the potential to generate massive amounts of ROI for their organizations, [Savi] HR executives and CIOs recognized this, and are therefore unwilling to sacrifice superior technology for the immaterial cost savings that the ERP vendor solutions may offer.

The second quarter also saw continue to take our Recruiting Cloud to best-of-breed standards. During our recent spring release, we introduced improved job order integration; enhance social recruiting capabilities and effective career site management. We also further expanded the solutions level of integration with both Facebook and LinkedIn.

With the additional functionality we plan to add in the next two releases, we believe our Recruiting Cloud will be best-of-breed by the end of this year. We believe this timing could be more perfect to adjust the strong level of dissatisfaction currently being felt by clients of many of the traditional recruiting vendors.

One of the reasons we’re still bullish about recruiting is our proven ability to cross sell and to upsell. Today, about 60% of our client based used our Performance Cloud and over 85% use our Learning Cloud. Many of you know in response to the opportunity that we saw historically, we doubled our sales force in the last year.

Based on what we see today, we're continuing to aggressively grow our sales teams over the next year. For example, during the second quarter, we formally committed to building at our direct sales and service operations in the Asia Pacific region, by promoting Frank Ricciardi, a Cornerstone executive for over seven years to become our General Manager of Asia-Pacific. Frank will be responsible for establishing a direct operation in India, Australia, China and Japan.

Until now we have relied on the alliance of the ecosystem, to help us to sell the company's in the Asia-Pacific region, and we feel these alliances have been very successful. We believe the region remains, right with the tremendous demand of pre-filled opportunity across market sectors and segments and we expect flight in the TV builds out to help us to capture some of that. In summary, we've seen a positive impact from the acquisitions of our primary competitors in all segments SMB, mid-market and large enterprise.

Cornerstone's momentum continued unabated, through the first half of 2012 and we're investing and expanding our worldwide sales coverage, to meet global demand while remaining fully committed to the success of our clients.

With that, I'd like to turn it back over to Perry, to detail some of the financial highlights during the quarter.

Perry Wallack

Thanks, Adam. Before I get to the financial results of second quarter 2012, I'd like to remind you all that financial figures I discuss today are non-GAAP, unless I state that the measure is a GAAP number. We're talking about non-GAAP numbers for three reasons. Firstly, our non-GAAP revenue for the quarter is our GAAP revenue, plus $719,000 in estimated revenues we did not recognize on a GAAP basis for Sonar Limited, which we acquired on April 5, 2012. This adjustment is the Q2 2012 portion of the adjustment to reduce the deferred revenue balance by $1.6 million for the client contracts acquired from Sonar Limited upon our acquisition due to purchase accounting rules.

Secondly, let me discuss revenues as it relates to the same period in 2011, revenues are based on gross revenues, which excludes the impact of the non-cash revenue reduction of $2.5 million related to a common stock warrant issued to ADP in the period. Thirdly, 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 include expenses related to stock-based compensation and related employer payroll taxes, amortization of intangible assets, acquisition related costs, adjustments and taxes related to acquisition adjustments and amortization of debt discount and issuance costs.

As Adam said, we had a terrific quarter. Revenues and bookings continue to grow significantly and gross margins continue to improve year-over-year and investments and growth continue in order to support global demand for our solution.

So with that said, let’s discuss our second quarter results. I will begin by going through our income statement. As Adam mentioned, GAAP revenue for the quarter was $26.7 million. Non-GAAP revenue was $27.4 million, which reflects the $719,000 write-down previously mentioned. Our revenue results for the second quarter of 2012 represent a year-over-year increase of 54% on a GAAP basis when excluding the common stock warrant charge from Q2 2011 and 58% on a non-GAAP basis. This increase is mainly related to the increase in our client base, which increased by 55% year-over-year from 646 clients as of June 30, 2011 to 1,001 clients at June 30, 2012 excluding CSB clients.

Total bookings, which we define as gross revenue plus change in deferred revenue was $31.5 million for the quarter, representing a $10.7 million increase or 51% increase over the same quarter of 2011. Our billing terms in Q2 were roughly inline with historical averages. 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, and revenues from existing customers.

As we have highlighted on many of these calls in the past, we do not perfectly determine the timing of deliver of services to our large clients unless there is often from variability in our bookings and revenues quarter-to-quarter. And it’s also worth noting that Sonar Limited, re-branded as Cornerstone Small Business or CSB only represented approximately $1 million of our total $31.5 million in bookings in Q2 2012, and approximately $400,000 of our total GAAP revenue of $26.7 million from Q2 2012. These metrics will not be tracked separately on a go forward basis, as we look at our business and solutions on a consolidated basis.

Domestic revenue represented 69% of revenue, while international revenue represented remaining the 31% for the second quarter of 2012, compared to domestic revenue accounting 72% in the second quarter of 2011 and 70% for the immediately preceding 2012 quarter.

Our business continued to execute and expand globally including in Europe. We see no slowdown in business in Europe despite the macro economic environment. We believe that we will continue to see additional opportunities to expand our business in Asia/Pacific as Adam alluded to previously.

Gross margin for the second quarter of 2012 was 74%, which was consistent with the immediately preceding quarter, and improved by 2.2% from 72% from the second quarter of 2011. As we have said in prior quarters, we believe we will continue to increase gross margins on an annual basis.

however, we do not expect to always have sequential improvements or consistency in gross margins from quarter-to-quarter. We plan to 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 $16.8 million, representing a year-over-year increase of $6.2 million or 58%. As a percentage of revenue, sales and marketing expense was 61% in the second quarter of 2012 consistent with the second quarter of 2011 and a decrease from 66% in the previous quarter of 2012.

Our rate of growth of marketing spent relative to our sales growth can vary from quarter-to-quarter. the increase of $6.2 million over the prior-year is principally a result of more headcount across our entire sales and marketing organization, as well as higher sales commissions as a result of increased sales. On a sequential basis, sales and marketing expenses increased by $1 million or 6.6%. similarly this increase was mainly due to increased headcount and sales commissions.

R&D expense was $3.2 million, representing a year-over-year increase of $1 million compared to that same period in 2011. The year-over-year increase was mainly due to the increased headcount. as a percentage of revenue, R&D expenses represent 12% of revenue compared to 13% in the same period in 2011 and 12% on a sequential quarter basis.

G&A expense was $4.5 million representing a year-over-year increase of $1.4 million when compared to the same period in 2011. The increase in G&A expense was mainly attributable to increased headcount, legal and accounting and professional fees associated with expanding into new geographic regions and stock implementation costs, and increased over head to support the growth of the company overall. As a percentage of revenue G&A expense represented 16% of revenue compared to 18% in the same quarter of 2011 and 17% on a sequential quarter basis.

Operating loss for the second quarter of 2012 was $4.1 million, compared to $3.4 million in the second quarter of 2011 and $4.9 million in the sequential quarter. Net loss for the second quarter of 2012 was $4.7 million, or negative $0.09 per share, based on weighted average shares outstanding of 49.8 million shares, compared to a net loss of $3.4 million, or negative $0.07 per share, based on weighted average shares outstanding of 47.8 million shares in the second quarter of 2011.

With regard to cash flow, during the second quarter of 2012, our cash used in operating activities was $5.3 million compared to cash used of $5 million in the second of 2011 and cash inflows of $3.2 million in the first quarter of 2012. We would like to reiterate the seasonality of our business. Historically, we have generally experienced increased invoicing in the third and fourth quarters of each year due to higher acquisitions of new clients and the timing of the annual billings for existing clients and increased client renewals during these quarters.

As a result we have also experienced increase in all of the client payments during the fourth and first quarters of each year. Conversely we experienced relatively lower levels of billings in the first and second quarter of each year and thus client receipts in the second and third quarters are lower relative to the other quarters. These terms are sometimes not exact due to the higher rate of annual growth of our business and very invoicing and payment terms associated with our client contracts.

Let me now turn to the balance sheet, our total cash and cash equivalents were $67 million at June 30, 2012 compared to $87.2 million at March 31, 2012 and $85.4 at December 31, 2011. The decrease in our cash balance was mainly attributed to the use of cash, an amount of $4.4 million for the acquisition of Sonar Limited on April 5, during this quarter.

At June 30, 2012, we had approximately $32.8 million in accounts receivable compared to $25.1 million at March 31, 2012, and $34.1 million at December 31, 2011.

In addition our working capital, current assets, less current liabilities excluding deferred revenue was $92.1 million compared to $112.1 at December 31, 2011 and $106.3 million at March 31, 2012, this decrease was mainly driven by cash used for the acquisition of Sonar Limited in April of 2012.

Our deferred revenue balance was $60.7 million at June 30, 2012 compared to $55.8 million dollars at March 31, 2012 and $35.9 million at June 30, 2011, a year-over-year increase of 24.7 million or 69% and a sequential increase of $4.8 million or 8.6%.

With respect to head count, we added a net of 241 employees from June 30, 2011 to June 30, 2012, an increase of nearly 59%. As compare to our head count as of March 31, 2012, we added a net of 91 employees, an increase of 16%. As of June 30, 2012 our total worldwide head count was 651 employees, this includes approximately 38 employees through the acquisition of Sonar Limited.

In terms of non-financial metrics we track, our number of clients and number of users served. We ended the quarter with 1,001 clients and approximately 9.4 million subscribers excluding our CSB clients, reflecting year-over-year increases of approximately 55% and 57% respectively.

We added 123 clients for the second quarter of 2012 compared to 89 in the second quarter of ‘11, and 99 in the first quarter of 2012. The number of clients and users includes contracted clients and active users for any combination of our full integrated clouds, consisting of recruiting, learning, performance and extended enterprise as of the end of the period.

In summary, we believe we had a great second quarter in first half of 2012 as evidenced by our year-over-year growth rates, 54% growth in GAAP revenues and 51% growth in bookings. In addition, we achieved this growth while full integrating our recent acquisition into our company. We improved our gross profit by $7.9 million and the gross margin by 224 basis points over the prior year.

Now, I’d like to discuss our outlook for the third quarter of 2012 and the full year of 2012, which falls under the Safe Harbor provisions, the forward-looking statements outlined at the start of the call. And it’s 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 $114.5 million to $116.5 million, to a range of $115.5 million to $117.5 million. At the midpoint, this revised range suggests 54% growth over 2011 gross revenue of $75.5 million.

Please note that we detailed on our Q1 call, that $1.5 million of the increasing revenue guidance of $2.5 million was specifically due to Sonar Limited. Thus, we are increasing our full-year guidance this quarter by a $1 million due to our organic growth. For the third quarter of 2012, we currently expect revenues to range from $29.5 million to $30 million. At the midpoint, this range represents 49% growth over the third quarter of 2011 revenues of $20 million.

With respect to non-GAAP net income or loss, we are maintaining our previous guidance and currently expect a loss for the full year 2012 between $13 million and $15 million. This range implies the 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.

Turning to cash flow, for the full year 2012, we are also maintaining our previous guidance for non-GAAP cash provided by operating activities of approximately $7.5 million. As we have indicated in the past, based upon our strong execution, we are choosing to continue to reinvest some of our top line overachievement back end of the business in order to drive further growth.

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

Adam Miller

Thanks, Perry. As we discussed, even as we continue to scale improve our service offerings and further enhance our state-of-the-art solution, we continue to see our opportunity grow. I want to thank our entire global team for their outstanding performance in the first half of the year, I want to particularly recognize our CSB and finance teams for the [payloads] and rapid integration of Sonar6, and I want to thank all of you who are participating. We will now take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first questioner in queue is Laura Lederman with William Blair. Please go ahead, your line is open.

Laura Lederman – William Blair & Company LLC

Yes, thank you so much for taking my questions. Great quarter, I appreciate it. Given released on quarter and bookings especially given the very tough comparison, I was wondering with the pipeline looks like going into Q3, and also what is the ratability look like in the quarter, was it back end loaded, not back end loaded, how did it feel as you move through the second quarter?

Adam Miller

So, when I would say is that similar to last quarter, where we said there were a couple of deals that had slipped, and made the second quarter a little bit easier. The same thing actually occurred in Q2, bringing some of that business into Q3. So, we feel confident about our guidance than where we are. and of course, there [are lawyers] sitting in the room.

Laura Lederman – William Blair & Company LLC

And the ratability; was there any difference than usual Q2 in terms of when the business came in?

Adam Miller

What do you mean by ratability?

Laura Lederman – William Blair & Company LLC

Came in…

Adam Miller

You mean (inaudible).

Laura Lederman – William Blair & Company LLC

Yes. In other words month one, month two versus month three, when the business came into that and look like a normal Q2?

Adam Miller

Yeah, it was a little bit better than Q1, which was very back-end weighted. Q2 was more typical.

Laura Lederman – William Blair & Company LLC

Another question from me, and then I’ll pass it on, which is European business, any signs of any slowing there, any higher level of approvals needed, and I guess related question to that is the deals that’s set from Q1 into Q2 and Q2 to Q3, do you think that’s economic or just kind of normal?

Adam Miller

Yeah. So the deals that is set or deals that were externally large, and so those tend to have more prolonged procurement processes. And we go back and forth, so that’s fairly typical, I would say about those deals. it was nothing related to the macroeconomic environment causing those delays. And with regard to Europe in particular, we are seeing no slowdown in our business in Europe. As you know, we’ve done extremely well over four different recessions and our product tends to save our clients’ money upfront, and often helps improve compliance as well. Therefore it works just as well in a recessionary environment as it does in a more robust economic environment.

Laura Lederman – William Blair & Company LLC

Thanks a lot. I’ll just come back to another queue.

Adam Miller

Thank you.

Perry Wallack

Thank you.

Operator

Thank you. Our next questioner in queue is Mark Murphy with Piper Jaffray. Please go ahead, your line is open.

Mark R. Murphy – Piper Jaffray, Inc.

Yes, thank you. Congrats on the strength. Adam, I wanted to ask you how you would assess the receptivity of customers to your vision of recruiting a Talent acquisition, in terms of how it’s unique being natively social, is that something that’s automatically resonating or is this something that maybe takes a few demos for people who watch on just because it’s new and different?

Adam Miller

So, I would say, it very much depends on the audience. So if we’re talking to industry people for example, analysts or media, or second or third time buyers, it resonates immediately. With regard to what resonates in general about our recruiting cloud. I would say less sophisticated audiences really resonate with the fact that was integrated with the rest of the suite. So, whether that’s existing clients, understanding how it ties into what they’re already doing with us or it’s new prospects looking at an overall talent management suite, it’s the integration that really attract them.

Mark R. Murphy – Piper Jaffray, Inc.

So if you look at the flow of the increase or maybe RFPs that you're getting from customers and prospects, if you think about that in recent months and I know the product essentially is in totally [GA], but how is that being split across maybe the recruiting product versus everything else, I mean is the recruiting 5%, 10%, 15% of the increase that you’re getting?

Adam Miller

Well, let me be really specific, we used to exclude deals we qualify ourselves out, if recruiting was the major component in the deal. So for example, if a company was looking for talent management system, but in important part of that talent management system was recruiting, and in particular, if they wanted to roll out recruiting in the beginning of the implementation, we would opt out of the deal, we would just walk away. And that is no longer true.

So we will stay in all of those deals now. It has resulted in an increase in the number of our bets, it's also resulted early on in a pretty big increase in RFPs that were responding too that do include recruiting. We're still not really going after standalone recruiting deals, although I won’t say we’re never doing that, because some of the reps are pursuing recruiting only deals right now. And obviously if it was a client, they already had purchased something other than recruiting. So I won't consider that as a stand-alone deal, because they already have learning or performance or succession or collaboration today.

Mark R. Murphy – Piper Jaffray, Inc.

Got it. Okay, one last one. Adam, I wanted to ask you a high level kind of workforce in demographic drivers’ question. We have been hearing that the concept of development people kind of becoming an elevated focus, just because you have the shortage of skilled labor that’s out there in the market externally. And that at the same time, you have this younger generation of workers; they want to be developed almost as much as they want to be compensated these days. I wanted to ask you, is that something that’s tangible to you and may be have you thought about the duration of those trends? Is there kind of a multi-year window where those high level drivers are accelerated?

Adam Miller

Yes, Mark, you know that sometimes we talk about things before other people understand what we are talking about and this is one of those topics were we’ve been preaching this for a while, the inevitable retirement of the baby boomers, the lack of skilled workers or experienced workers in the work force, combined with the rise of the Millennials and there likelihood of having seven careers in their life time, thus carrying a lot more about career development and career pathing about any individual position.

Those things are coming to bare, people are now widely talking about it, you can read the harbor business review any month and probably fine articles about talent management, its in the business process all the time now and certain industries are starting to become acutely aware of the baby boomer retirement, all of which cause you to have to do two things.

Number one, you have to train more junior people to be able to handle more senior responsibility earlier in their career, because again you don’t have enough people to back fill – those senior people retiring. And number two, you need to be able to retain your Millennials who have a propensity to switch career. So you want them to be able to be developed in switch careers in their job or in their cooperation rather than leading to move to another organization. And so both of those things tide back to development as you know that’s definitely a sweet spot for Cornerstone. So as people start thinking more holistically about talent management including the need to continuously develop employees that plays really well into our strength.

Mark R. Murphy – Piper Jaffray, Inc.

Thank you.

Operator

Thank you, sir. Our next questioner in queue is Michael Nemeroff with Credit Suisse. Please go ahead. Your line is open, your questions please.

Michael B. Nemeroff – Credit Suisse

Hey, guys. Thanks for taking my questions, nice quarter.

Adam Miller

Thank you.

Michael B. Nemeroff – Credit Suisse

I’d like to talk about maybe the partnership and the alliance revenue in the quarter. A couple of quarters ago, I think you’d mentioned Adam that it represented about 25% of the business or new bookings. I was wondering if you could maybe give us an update or quantify as it was in Q2, and then also if you could talk specifically about the partnerships you have with Workday and NADP and whether the deal sizes that you’re getting from them are consistent or growing.

Adam Miller

Sure. So, I think historically we had talked about 15% in the past moving to 20% more recently. And then with our long-term, we could get up to potentially 25% of our sales being indirect. We’re not moving from that. We think has we continue to increase distribution globally, and this is not a U.S. phenomenon. This is really a global phenomenon that we will be able to move up that the overall scale of indirect sales.

With regard to our existing partners, we see different partners going through different life cycles almost the same way that a client will go through a client life cycle. The partners go through a life cycle. We have some new partners that are just now getting fully up to speed and just now starting to produce. So, I would consider partners like Lucian in that budget, which used to be SunGard after a merge with Datatel that’s focused on the higher Ed market.

We have some partnerships in Europe and Latin America that are very early stage, that are just getting up to speed. We have partnerships there in Asia-Pac that are sort of early stage other than Talent 2, but Talent 2 recently did a go-private transaction, and so there's been some change in activity there, but that will pick back up now, that they’ve been through that transaction.

With regard to ADP, as you know, we've been expanding our reach within ADP; today we work with really all aspects of ADP from national accounts to majors all the way down to total source. And we are seeing continued good pipeline growth in repeatable business from that, despite the fact that they’ve built their our own product or acquired part of their own product, and we suspect that we will continue at that level what we don't necessarily expect the double growth from there. And then lastly with regard to Workday, it's a really joint selling arrangement, we sell together, we have a very strong and growing sales force, they have a very strong sales force, and we teamed our sales forces together, and its been very effective in the field. So we have a lot of activity going on there as well.

Michael B. Nemeroff – Credit Suisse

Thanks, Adam.

Operator

Yes sir our next questioner in queue is Pat Walravens with JMP. Please go ahead, your line is open.

Patrick Walravens – JMP Securities

Thank you very much. So the demand environment sounds terrific for you guys. What is the constraint on growth is it sales capacity, is it service capacity, and how fast can you grow whatever that capability is?

Adam Miller

Really I think the constraint is our ability to effectively recruit non-Board people, it goes back to talent management at the end of day, how quickly can we build out our sales and service capability, we want to do those and think, you don't want to get the sales teams far ahead of your services capability. At the same time you want to make sure you're hiring strong sales people, you have the right infrastructure in place and you have time to sufficiently on-board them.

So we’re doing all those things. We’ve been consistently hiring. we will probably continue to consistently hire in both sales and services and may even accelerate that, not on a relative basis, but on an absolute basis as the teams grow, we have a greater ability to handle bigger throughput with regard to hiring and on-boarding people. We also because of the consolidation in this space obviously have been opportunistic about bringing on people from our former competitors, who don’t want to work for large ERP company. And so we have been able to be very disappointed about getting the top talent from those organizations, bringing them over in some ways, that is zero-sum game. so we’re taking some of the best people and putting them on our side instead of their side, all of which will result in continued long-term growth.

Patrick Walravens – JMP Securities

I mean just sort of try to put a marker out there. Is it possible to double sales capacity again over the next 12 months or is that too much?

Adam Miller

It is possible.

Patrick Walravens – JMP Securities

Yeah, okay. Thank you.

Operator

Thank you. Our next questioner in queue is Rick Sherlund with Nomura. Please go ahead, your line is open.

Rick G. Sherlund – Nomura Securities International, Inc.

Yeah, thanks. I’m curious on the ERP side, work on SAP if you can just share anecdotally what you’re seeing out in the field or I understand that they’re focusing on integrating, but what are the other salespeople doing, are they just be focused, what you’re saying?

Adam Miller

We have two very different approaches as you know from Oracle and SAP. Oracle has followed their typical model and so Taleo was all but disappeared inside of Oracle and is now operating as just a subunit or I would say just functionally within Oracle. So we’re seeing them less often now, and we’ve seen a lot of their people leave right away. By contrast, SAP has kept SuccessFactors a separate business unit, but because of the Ariba acquisition, and because of the move of the HCM team into the SuccessFactors organization. So the former HCM team from SAP moving into the SuccessFactors organization. You do have a lot of overlap of personnel. we have a lot of people with similar jobs being merged together. and so I think there is some uncertainty about what’s going to happen next. There also obviously is a lot of integration work going on.

And I believe a real deep focus or deep focusing from what we consider core talent management. And so that’s given us the opportunity to continue to enhance our solutions, and get ahead of the curve, so whereas six months ago, I think the products were fairly similar. I think we are now left that work in the road and will start to see big differences in the products as well as in the service offerings.

So we’re continuing to build out our internal ability to service our clients, and supplement the kind of service offerings that they get to make sure that they have a positive experience. By contrast, I think the ERP guys are working with their third-party partners and in some cases, moving to low-cost providers to provision that service offering. So you end up with a big difference over time, not just in the solution itself, but also in the service offering.

Rick G. Sherlund – Nomura Securities International, Inc.

Okay. and then billings numbers, you had a really tough compare this quarter. is there anything in terms of the composition of your pipeline in terms of maybe mix of business, particularly large deals, anything that we should consider as we estimate billings curve for next quarter?

Adam Miller

Yeah, I mean I’d say two things there. One, I don’t think there was anything unusual about the quarter. We’re seeing really strong performance from not just the enterprise team, but also the mid-market team. As we’ve mentioned previously that the CSB part of our business is still small. So, I wouldn’t focus too much on that right now with regard to the overall numbers.

But what I would say is that if you were to normalize last year’s numbers instead of 90% growth for the quarter. You look at our more typical 60% billings growth, then this quarter would resulted in 80% bookings growth approximately. So, we’re talking about a pretty strong quarter. And I don’t want to understate that.

Rick G. Sherlund – Nomura Securities International, Inc.

To extrapolate that to Q3 then?

Adam Miller

Well, I don’t want to get carried away.

Rick G. Sherlund – Nomura Securities International, Inc.

Thank you.

Operator

Thank you. Our next questioner in queue is Greg Dunham with Goldman Sachs. Please go ahead. Your line is open.

Greg Dunham – Goldman Sachs

Hi, thanks for taking my question. One more billings question, given that the timing of the capacity, how is that you’ve made looking back or I was expecting this year to be actually more back-end loaded. So, the strength in 2Q kind of surprise me, do you think that the capacity that came on contributed early or was this just upside driven by existing sales people?

Adam Miller

It was both. I think our win rates have improved. But at the same time I would say, we are getting better at on boarding our people, and I talk about in some previous calls. One of the things that we’ve been focused on over the last 18 months has been our ability to effectively on board new salespeople considering how quickly we’ve been ramping the sales team. We thought that was a really important metric to track, and we are doing well on that front, particularly with regard to mid-market salespeople. So I believe it's a combination, it's the ability to have more productivity early particularly in the mid-market from new reps, as well as, just an ability to win more in bigger deals on the enterprise front.

Greg Dunham – Goldman Sachs

Okay. And one quick follow-up to Perry. Did FX impact the revenue number at all in the outlook?

Perry Wallack

Well, if you look at the financials what you’ll see is in our other income or expense is about $420,000 loss. That was mostly due to unrealized losses on marking-to-market anything from receivables, to bank accounts or even in the inter company loan. So we have very, very little realized loss, and then what I would point out is for year-to-date it's little less than $200,000.

Greg Dunham – Goldman Sachs

Okay. Thank you.

Adam Miller

We don't expect it to vary from that pattern for the rest of the year.

Greg Dunham – Goldman Sachs

All right. Thank you.

Operator

Thank you sir. Our next questioner in queue is Michael Huang with Needham. Please go ahead your line is open.

Marc Fuller – Needham & Co. LLC

Hi guys it’s actually Marc Fuller on for Michael Huang. Just quick questions kind of on going forward, you mentioned few of the new growth areas like recruiting, SMB, Asia-Pacific, what you kind of most excited about, and what do you think we kind of a strongest contributors as you kind of exit point well in the 2013?

Adam Miller

I’ve been pretty consistent about this, I think my favorite remains public sector as the growth engine, we're seeing a lot of opportunity in federal, state and local, and then you also have higher end K-12. So we think there's a lot of opportunity there, but really what is driving our growth is the fact that we have all of these different growth engines all hitting at once. So we’ve expanded our enterprise team, we’re also expanding globally with both in Asia-Pac as well as continued expansion throughout EMEA. Our mid-market team continues to grow, we built out an SMB team, our distribution channels keep strengthening, and I think relatively soon we should be able to talk about more strength there. and so we’re seeing the ability to really sell across-the-board in all these different channels, and that’s what’s really not just driving the growth, but enabling us to sustain growth.

Marc Fuller – Needham & Co. LLC

Well, thank you, Adam.

Operator

Thank you, sir. Our next questioner in queue is Brendan Barnicle with Pacific Crest. Please go ahead, your line is open.

Brendan Barnicle – Pacific Crest Securities

Thanks, guys. Adam, I was wondering now as you’ve got recruiting and you’ve got to fairly complete HR suite put together. what’s the next logical app area, please try to expand into, is there another part of HR or is there an adjacent area that makes sense to start thinking about?

Adam Miller

I would say a couple of things. the number one, we think there’s a lot of gaps in what we’re doing. so we’re trying to fill in our gaps, our strategy we talk about the acronym SMART, it’s really about social. so making sure, what we’re doing is user centric with social elements not just social recruiting, but social performance, social learning and of course, social collaboration, mobile, so as more and more mobile devices are in the hands of people at the workforce. we think it’s really important to have a very deep mobile strategy and mobile execution. analytics, today we have over 9 million subscribers. we’re starting to collect a very significant amount of data. and so there is a big data play here, and the ability to keep driving analytics as part of our overall solution. Recruiting, which we've obviously rolled out, we're also going to be strengthening our on-boarding functionality to go with recruiting. And lastly, the overall technology we believe, we need to stay on the cutting edge of what’s out there, and we need to make sure that we're really building a true engine architecture, leveraging, web services technology leveraging all the latest and greatest tools to ensure that we’re staying up-to-date in our technology, and make it easier for people to access our platform and expand upon our platform.

Brendan Barnicle – Pacific Crest Securities

Following up on that technology innovation keeping your analytics advances, are you using the tools from some of the newer big data platforms for your analytics or what are you baking around with design.

Adam Miller

So we’re in the design phase of that, we’re looking all the latest technologies to determine our next move with regard to big data. To date we've been leveraging the Sequel Technologies, Microsoft...

Brendan Barnicle – Pacific Crest Securities

Great. And then on the pricing front, have you noticed any changes that all, I know you’ve mentioned SuccessFactors and Taleo earlier, but are you noticing any change in pricing, and I ask it two ways, one in terms of sort of a new core business and then two in terms of upsell/crosssell?

Adam Miller

Yeah, so with regard to the core business, we've talked, I think two calls ago about the change in pricing and that’s remained fairly constant. We’re not seeing those price wars any more. They just have gone away, the low-cost competitors out of the space, and we're seeing just much more rational competition today. With regard to the ability to upsell as the products have gotten stronger, it's been easier and easier to crosssell and upsell, and so that's why today you see over 60% of our clients using performance and succession. We’re seeing the ability to sell the extended enterprise capabilities, collaboration capabilities and as we continue to strengthen these products, it just means greater ability to upsell.

Brendan Barnicle – Pacific Crest Securities

Great, thanks guys.

Operator

Thank you, sir. Our next questioner in queue is Scott Berg with Northland Capital. Please go ahead, your line is open. Scott Berg, your line is open. Please check your mute button.

Scott Berg – Northland Capital Markets

How is that, better? Sorry about that. Hey, Adam and Perry, congratulations on a great quarter. I got quick one since most have undertaken. Can you give any other additional color on the CSB deal flow in the quarter? I know you give comps obviously on the core products, but just looking to I guess colorize some comments on this first initial quarters of sales?

Adam Miller

Yeah, I would say just overall retention is better than we expected. So, we were looking at historical retention, obviously SMB doesn’t have the same kind of retention rates we’ve traditionally have which is over 95%. And it’s better than expected with regard to their history. The other is we’ve had more deal flow. We were able to grow the sales team pretty aggressively right away, and not have any drop in productivity. So, that’s pretty impressive as well.

We’re also seeing the ability to renew the one year deals as three year deals getting them more consistent with the way we do business and that also leads to more long-term success. So overall, we’re very excited about what we’ve seen. And we’re continuing to improve that product as well. We’re continuing to increase our marketing spend there and continuing to build out the sales force there. So, we’re very bullish about CSB today.

Scott Berg – Northland Capital Markets

Great, that’s all I have. Thank you.

Operator

Thank you, sir. And we do have time for one final question. Our final questioner comes from Brad Sills with ThinkEquity. Please go ahead your line is now open.

Bradley Hartwell Sills – ThinkEquity LLC

Hey guys, just a question please on where you are seeing the most impact from the competitive disruption, the deals that are leading with learning our performance or even recruiting.

Adam Miller

That’s a hard question to answer because I would say it’s actually all three, obviously the learning deals, we were all made the dominant player this just makes us more dominant and so it’s been very helpful for learning deals, where we’ve been surprised on the learning is the fact that we’re able to saw learning even in cases, where they are already using the ERP vendor, and already using that the acquisition either Taleo or Success Factors for either recruiting or performance management, so we’re able to penetrate even the accounts that we shouldn’t theoretically have been able to penetrate and win those deals, after learning side, with regard to performance, we had a lot of strength in the mid-market, and obviously in the SMB space around performance, so that continuous to be very strong and the change was really when our low cost competitors got taken out, not with the most recent acquisitions and then with regard to recruiting, it is fairly obvious that the disruption of Taleo, who is a dominant player recruiting timed with all launch of the recruiting cloud just worked down really well for us, and so we are seeing the ability to sell into our existing clients as well as two new prospects recruiting as really as now, and so we’re very positive about that as well.

Bradley Hartwell Sills – ThinkEquity LLC

Got it, thanks Adam.

Operator

Thank you, that does conclude our time for questions, I’d now like to turn the program back over to management for any additional or closing remarks

Adam Miller

Thank you all for participating. As we said, we’re very positive about the quarter that we just had and we’re feeling good about the business overall. the change in the competitive landscape clearly has benefitted Cornerstone and we think that will continue into the future. Thank you very much.

Perry Wallack

Thanks everybody.

Operator

Thank you, gentlemen. Again, ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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