IPO Analysis: Cornerstone OnDemand

| About: Cornerstone OnDemand, (CSOD)
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Based in Santa Monica, California, Cornerstone OnDemand (NASDAQ:CSOD) is scheduling a $105 million IPO with a market capitalization of $464 million at the price range mid-point of $10, for Thursday, March 17.

SUMMARY & CONCLUSION -- CSOD provides solutions based on a Software as a Service model. Neither CSOD nor any of its public competitors mentioned in the S-1 filing were profitable for the December quarter.

CSOD has generated a consistent stream of operating losses, and gross margin fell to 50% for the December quarter, even though sales continued to increase. Deferred revenue grew from $9 million at 2007 year-end to $34 million at 2010 year end.

VALUATION -- Even though revenue grew 62% from 2009 to 2010 - there was good quarterly revenue growth during 2010 and clients are set up on a multi-year subscription basis - CSOD has yet to show an operating profit .

CSOD is a speculative investment in an industry where losses are common. If CSOD can generate a breakeven operating profit (loss), then the stock could substantially increase in value.

CSOD's market segment isn’t particularly hot. Companies mentioned as competitors in the S-1 filing showed a 14% on average increase in the last three months. In particular Saba Sofware (OTCPK:SABA) was up 22%, SuccessFactors (NYSE:SFSF) was up 15%, and Taleo (NASDAQ:TLEO) was up 6%

Those competitors all generated higher gross margins in the December quarter than CSOD. For the December 2010 quarter CSOD's gross margin was 50%, SABA was 64%, SPSF's was 70% and TLEO's was 66%

CSOD Valuation Metrics

BUSINESS -- Global provider of a comprehensive learning and talent management solution delivered as software-as-a-service. Solutions consists of five integrated platforms for learning management, enterprise social networking, performance management, succession planning and extended enterprise.

  • Over 480 clients, up from 105 December 31, 2007.
  • Includes multi-national corporations, large domestic enterprises, mid-market companies, state and local public sector organizations, higher education institutions and non-profit entities, such as Barclays Bank PLC (NYSE:BCS), BJC HealthCare, Flextronics International USA, Inc. (NASDAQ:FLEX), Kelly Services (NASDAQ:KELYA), Inc., Liberty Mutual Insurance Company (LMA), Pearson, Inc. (NYSE:PSO), Starwood Hotels & Resorts Worldwide, Inc. (HOT), State of Nebraska, Teach for America and Virgin Media Limited (NASDAQ:VMED).
  • Supports multiple client deployments of more than 150,000 users, including one client with more than 700,000 users.

-- CSOD generally invoices clients annually in advance for multi-year subscriptions and also in advance for any consulting services. Records amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on the balance sheet.

COMPETITION -- In the learning management systems segment, CSOD competitors include Plateau Systems, Saba Software and SumTotal Systems (SUMT). Most competitors in this segment have multiple versions of legacy software, whereas CSOD offers a single version of its Software as a Service solution.

In the employee performance management systems segment, competitors include Halogen Software, Softscape, Stepstone and SuccessFactors. These vendors are, like CSOD, largely SaaS providers

In addition, CSOD competes with talent management solutions like Jive Software and Taleo that focus on specific aspects of talent management, such as social networking or applicant tracking. Most of CSOD’s clients are seeking a broader talent management solution, but may combine the solution with a niche solution, such as one for applicant tracking.

CSOD also competes with Oracle (NYSE:ORCL) and SAP, though most of CSOD’s enterprise clients have CSOD integrate with their own implementations of those enterprise resource planning or ERP systems.

USE OF PROCEEDS -- $65 million from the sale of 7.5mm shares. Shareholders intend to sell 3mm shares -- $9.2 million to repay debt, the balance for general corporate purposes

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.