Cornerstone OnDemand (CSOD) Q4 2016 Results - Earnings Call Transcript

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Cornerstone OnDemand, Inc. (NASDAQ:CSOD) Q4 2016 Earnings Call February 13, 2017 5:00 PM ET

Executives

Alexandra Geller - Cornerstone OnDemand, Inc.

Adam Miller - Cornerstone OnDemand, Inc.

Brian L. Swartz - Cornerstone OnDemand, Inc.

Analysts

Jesse Hulsing - Goldman Sachs & Co.

Scott Berg - Needham & Co. LLC

Brad Sills - Bank of America Merrill Lynch

Alex J. Zukin - Piper Jaffray & Co.

Michael Nemeroff - Credit Suisse

Patrick Walravens - JMP Securities LLC

Mark R. Murphy - JPMorgan Securities LLC

Brent Bracelin - Pacific Crest Securities

Samad Samana - Stephens, Inc.

Justin A. Furby - William Blair & Co. LLC

John S. Byun - UBS Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Cornerstone OnDemand Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Alexandra Geller, Manager of Investor Relations. Please go ahead.

Alexandra Geller - Cornerstone OnDemand, Inc.

Good afternoon, everyone, and welcome to Cornerstone OnDemand fourth quarter and fiscal year 2016 earnings conference call. As always, today's call will begin with Adam Miller, Chief Executive Officer, who will provide a brief overview of our performance. And then Brian Swartz, Chief Financial Officer will review some key financial results for the quarter, which ended on December 31, 2016. Later, we will conduct a question-and-answer session.

By now, you should have received a copy of our press release, which was released after the market closed today and was furnished with the SEC on Form 8-K. You can also access the press release and related investor materials, including detailed financials on our Investor Relations website. As a reminder, today's call is being recorded and a replay will be made available following the conclusion of the call.

Our discussion will include forward-looking statements, including, but not limited to, statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, client satisfaction and retention, client attrition rate, market or business growth, our revenue run rate, investment activity in our business, visibility into our business model and results, our ability to realize potential benefits from our recent operational excellence initiatives, changes in our legal structure, spending on R&D, professional services and other aspects of our business, our appraisal of our competitors and their products, and our ability to compete effectively.

Forward-looking statements involve risks, uncertainties and assumptions. If any of the risks or uncertainties materialize or any of the assumptions prove incorrect, actual results could differ materially from those expressed in 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 and the Risk Factors section of our most recent Form 10-K and subsequent periodic filings with the SEC.

During the call, we will be referring to both GAAP and non-GAAP financial measures. All financial figures discussed today are non-GAAP, unless we state that the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website.

With that, I will turn the call over to Adam.

Adam Miller - Cornerstone OnDemand, Inc.

Thanks, Alex, and thank you to everyone for joining us today. The fourth quarter of 2016 was a strong quarter for Cornerstone. Fourth quarter billings came in at a record $156 million, representing year-over-year growth of 18% on a constant currency basis. Fourth quarter revenue reached a record $109 million, representing 20% growth on a constant currency basis. I'm also very pleased to report that 2016 marked our first year of profitability with full year net income of $6.4 million significantly exceeding our initial expectations.

In the fourth quarter, we expanded our organically grown client base to almost 3,000 enterprise and mid-market organizations from around the world. New client additions include ICA Gruppen, a Fortune 200 financial institution, WestRock, Arby's Restaurant Group, McDonald's India, Dr Pepper Snapple Group, Hong Kong's largest food and beverage corporation and restaurant chain and many more. Today, our marquee client base includes global leaders in virtually every vertical, which has helped us build a user base of 30 million people strong. We believe this represents one of the largest subscriber bases of any cloud software provider in the world.

In addition to this impressive client growth, we have also maintained industry leading levels of client satisfaction, averaging 95% dollar retention since 2002. I am very pleased to announce that we were able to continue that trend through 2016, once again achieving 95% dollar retention, excluding incremental up-sells and cross-sells for the year.

Given these metrics, it's no surprise that Cornerstone was recognized as a leader in talent management by a number of industry analysts in 2016. To list just a few of our accolades, in December, we were named the leader by The Forrester Wave in the learning and performance management for our refreshed user interface, complete support for blended learning and our analytics offering.

Also in December, the 2016 Nucleus Research Talent Management Technology Value Matrix named us the leader for the second consecutive year, noting that "Cornerstone edges out all others in usability, and is doing right things to steel itself from full-breadth players' encroaching competition." In October, the Fosway 9-Grid, Europe's premier independent HR analyst, announced we remain a strategic leader for integrated talent management and for the first time named us as a potential challenger in the Cloud HCM Fosway 9-Grid for "redefining the traditional view of HCM."

Earlier this year, we were named the leader in the IDC MarketScape: Worldwide Integrated Talent Management report for the sixth consecutive year. We're very honored to be recognized by the world's leading industry analysts and believe these reports validate our continued technological innovation, as well as our dominance in the industry.

While we've continued to dominate the learning software market, we've also been rapidly innovating in this area to further capture the enormous global market opportunity in learning. Swift advances in technology and globalization have created the need to continuously upskill the modern workforce around the world. In the past year alone, Cornerstone delivered half a billion training sessions worldwide, adding to the massive amount of data about training and development we have collected over the past decade.

In upcoming calls, we will discuss how we will leverage this data to further build upon our leading market position in learning. In addition to the learning opportunity, we have now clearly seen an opportunity to further expand our addressable market with the expansion of our human capital management solution.

As we'd outlined on prior calls, we believe the global market opportunity for cloud-based human capital management solutions is approximately 400 million seats. Of those 400 million seats, we believe the Cornerstone HR product could be a viable solution for many of the 300 million seats that comprise the enterprise and mid-market segments. We believe this equates to a total available market opportunity of over $12 billion.

A significant portion of that market is largely untapped. Based on the 2016 Sierra-Cedar HR Systems Survey, over two-thirds of the cloud HRIS market is greenfield, which means those organizations don't have a core HR solution in place or are using a legacy on-premise system to manage their people data.

We are focusing on a subset of this population who are not able to bear the very high cost of ripping and replacing their current solutions with a global core HR solution. And we have already seen that our unique value proposition of modernizing their legacy core HR infrastructure at a competitive cost with a rapid deployment timeline is quite appealing to that market segment.

In addition to adding another product to our human capital management suite, we believe Cornerstone HR will enhance our ability to sell our existing talent management products. Over our history, there have been multiple times when a perceived gap in our product offering in one area limited sales of another area.

For example, before we offered our recruiting suite, there were times when we were blocked from competing in talent management opportunities that included recruiting despite a relative strength in learning and performance. Once we released our recruiting suite, we actually increased the number of learning and performance deals we won, because we gained more access to opportunities. And we expect a similar uplift in talent management deal flow, now that we have released Cornerstone HR.

Despite the accolades we received last year and the strength of our offerings, we had some missteps in 2016, most notably in the mid-market and in Europe. I'd like to take a moment to provide an update on both those areas. As you know, in November, we consolidated our national and major accounts efforts into a single mid-market sales team. We believe this change was the least disruptive way to optimally staff our sales force for this segment and expect several benefits from the consolidation.

Most notably, we now have more tenured reps on the mid-market team with full year quotas. The reps have larger territories, which enables a better mix of large and small deals. We have a stronger management layer and we have more effective demand generation for the segment through direct marketing and alliances.

Moving on to Europe, as we have discussed, we were significantly impacted by Brexit. While the first half of the year was strong for us in EMEA, we saw a major slowdown in the second half of the year resulting from Brexit. In addition to the currency impact and a general pause in decision-making, Brexit created heightened data security concerns for our clients and prospects given our European data centers are in the UK.

I'm pleased to announce that we have decided to directly address those concerns by opening two new data centers in Frankfurt and Paris in early 2018. Our expectation is that our European operations will stabilize in 2017. And, overall, we remain very bullish about the long-term opportunity for us in this region of the world.

One of the achievements from last year that we are most proud of is the fact that we produced non-GAAP net income for the first time in the company's history. This was the result of wins across many of our operational excellence initiatives, including achieving significant improvement in sales and marketing efficiency, largely driven by the optimization of our sales head count across various teams as well as commission planned changes, automating a significant portion of our accounting processes. As a result, for the first time ever, we will keep the finance teams' head count flat in 2017 even with the continued growth of our business. Creating a strategic sourcing department, and in December, launching level zero support, our integrated self-service support tool to clients across the globe, which we expect will result in quicker response times while also freeing up Cornerstone support and service resources.

One of the operational excellence projects that I'm most excited about is program accelerate, our expedited implementation delivery initiative. In 2016, we successfully piloted this program with a small group of U.S.-based enterprise and mid-market clients and achieved a 50% reduction in implementation duration and a 25% reduction in hours worked. While we made great strides across a number of different initiatives in 2016, we believe we have significant opportunity to further improve margins as these initiatives scale in 2017 and beyond. We expect to deploy both level zero support and program accelerate globally this year. And we'll continue to use our resources more efficiently through improved strategic sourcing, increased business automation, and improved sales productivity.

I'd now like to turn it over to Brian to discuss our financial performance in more detail.

Brian L. Swartz - Cornerstone OnDemand, Inc.

Thank you, Adam, and good afternoon, everyone. As Adam highlighted, we are very pleased with our performance in Q4. In the fourth quarter, billings came in at $156 million, which represents a year-over-year increase of 10% on a reported basis and 18% on a constant currency basis. This was largely driven by better than anticipated renewals during the quarter, particularly in the EMEA region.

For the full year, billings were $453 million, a 13% increase over the prior year on a reported basis and 20% on a constant currency basis. Despite some of the challenges we faced in the second half of the year, we are pleased with our achievement of full year 20% constant currency billings growth.

In the fourth quarter, revenue came in at our guidance midpoint of $109 million, a year-over-year increase of 14% or 20% on a constant currency basis. The split between subscription and services revenue was 82% and 18% respectively.

For the full year, revenue was $423 million, a year-over-year increase of 25% or 29% on a constant currency basis. The split between subscription and services revenue for 2016 was consistent with recent years at 80% and 20% respectively. A few other key Q4 metrics. The size of the client base increased to 2,918 as of December 31 representing 113 net client additions during the quarter. And our user base increased to nearly 30 million users representing more than 2.2 million net user additions during the quarter. Finally, we added 35 employees bringing us to 1,823 employees at the end of the quarter, which represents an 11% increase over the prior year.

Our annual dollar retention rate for 2016 was 95.1%, in line with our historical rates, and what we believe to be amongst the highest in the SaaS industry. As we continue to scale our business in 2016, our ability to maintain industry-leading retention was a key driver of our improved profitability during the year. It's important to note that our reported annual dollar retention rate does not include incremental up-sells and cross-sells beyond the original baseline of the existing client base. Including these incremental sales, our net dollar retention rate is greater than 105%. In addition to retaining our clients, this demonstrates that we have also been successful at finding new ways to expand our footprint within our installed base.

Our gross margin in Q4 was 71.3% down 110 basis points year-over-year. Gross margin for the full year was 71.2% down 50 basis points year-over-year. The slightly lower margins were due to a higher percentage of outsourced services. As I've noted on past calls, due largely to the success at the top end of the market in recent years, we have experienced a higher percentage of new sales as services.

With respect to operating expenses for the quarter, we again demonstrated improved efficiency with sales and marketing expense in the fourth quarter. Sales and marketing expense was 47% of revenue during the quarter, down 500 basis points year-over-year. This continued to be largely driven by the optimization of our sales head count across various teams, as well as the impact of a commission planned changes we made earlier in the year.

R&D expense was flat year-over-year at 9% of revenue. G&A expense was 14% of revenue or 300 basis points more than the prior year, principally as a result of the reallocation of resources as cost category and incremental spend to support our operational excellence initiatives, which we expect to result in future margin improvement.

Overall, this resulted in an operating margin of 1.5% for the quarter, which represents 130 basis point improvement from our Q4 2015 operating margin of 0.2%. For the full year, our operating margin improved 620 basis points to 1.8%, principally driven by a 700 basis point improvement in sales and marketing versus 2015.

Driven by the improved leverage in our operating expenses, I am pleased to report that we once again came in substantially ahead of our profitability expectations. Net income for the quarter was roughly breakeven compared to a net loss of $1.2 million or negative $0.02 per share in the prior year. For the full year, net income was approximately $6.4 million or $0.11 per diluted share, significantly above our guidance of $2.5 million.

During the year, we recorded net income tax expense of $1.2 million, principally related to our international operations. For U.S. income tax purposes, we expect our deferred tax assets to allow us to offset any tax liabilities related to domestic earnings for the foreseeable future. For 2017, we expect income tax expense to be slightly larger than 2016 as we continue to grow our international business.

With regard to cash flow, free cash flow which we define as operating cash flow, less capitalized software and capital expenditures, was $27 million in the fourth quarter compared to $49 million in the prior year. As a reminder, our free cash flow results were impacted by certain working capital adjustments that I discussed on the last call. For the full year, free cash flow was $13 million or $3 million above our guidance of $10 million.

Now, let's turn to the balance sheet. We continue to maintain a well-capitalized balance sheet. As of December 31, our total cash and investments balance was more than $343 million. Additionally, as of December 31, we had $238 million in carrying value of long-term debt. Our deferred revenue balance was $282 million as of December 31 compared to $252 million in the prior year. This represents a year-over-year increase of 12%.

In 2016, our total capital expenditures were $6.2 million or about 1% of revenue, which is low relative to our historical average of 4% to 5% of revenue. For 2017, we estimate that our capital expenditures will increase to 2% of revenue, as we continue to make improvements to our data infrastructure to support our client growth. We do not expect to incur any significant CapEx in 2017 related to our new European data centers as most of those expenditures will take place in 2018.

Before turning to our 2017 outlook, I'd like to provide some accounting updates. Some of you may already be aware of the new revenue recognition standard, ASC 606, which will become effective for us on January 1, 2018. We have elected to adopt this standard using the modified retrospective method, which means we will be reporting our 2018 financial results under ASC 606 and we'll also disclose our 2018 results under our current revenue recognition standard in the footnotes for comparative purposes. We will provide additional detail related to ASC 606 on future earnings calls.

I also want to update you on our foreign structure. As our international business has continued to grow, our exposure to foreign exchange volatility has also grown. As many of you are aware, the majority of our foreign denominated client contracts to date have been recorded through a British pound denominated subsidiary. With Brexit last year, we learned how this sort of concentrated FX exposure creates a risk and volatility in some of our reported financial metrics such as revenue and billings.

To help mitigate this prospectively, we recently created two additional international contracting subsidiaries, one denominated in euros and the other denominated in U.S. dollars. While we would still remain subject to foreign currency risk, they'll be less tied to a single currency than it was in the past, which we expect should help reduce the magnitude of the FX exposure for those reported financial metrics in the years to come.

Now let's discuss our 2017 outlook which has been developed based on the best information we have as of today. Please note that all guidance assumes a U.S. dollar to British pound exchange rate of $1.25 to £1. We are expecting full year 2017 revenue in the range of $475 million to $485 million. At the midpoint of $480 million, this represents approximately 13% growth and 17% constant currency growth over the 2016 revenue of $423 million.

If the British pound were to change by 5%, the approximate impact on our full year revenue would be about $7 million. For the first quarter of 2017, we expect revenue between $109 million and $111 million. At the midpoint, this represents approximately 11% growth and 16% constant currency growth over the first quarter of 2016 revenue of $99 million.

Regarding billings, we expect full year 2017 billings growth in the low-to-mid teens. This guidance assumes continued strength from our U.S. enterprise and global client sales teams, stabilization in EMEA new client sales, strong growth from our emerging international teams, and modest growth expectations for our U.S mid-market team.

In the first quarter, we expect billings seasonality to be about 16% of the full year, which aligns with what we have seen in the last several years with the exception of last year. With respect to profitability, we remain committed to continued improvements in profitability and expect a full year operating margin of 5% to 6% and full year net income margin of 4% to 5%.

Consistent with prior years, we expect to have an operating loss in the first quarter, primarily due to the seasonality of our business and the timing of marketing investments to drive future growth. As a reminder, for EPS purposes, our share count increases to approximately 61 million in quarters in which we report a profit. Please note that going forward to align with the manner in which we discuss our long-term margin expectations, we will only provide guidance on operating margin and no longer guide to net income.

Regarding cash flow, for the full year 2017, we expect a free cash flow margin of 6% to 7%. With respect to the 2018 margin targets we outlined last spring, we remain committed to achieving operating margins of at least 10% and our guidance for 2017 has us on a trajectory to achieve that level of profitability and hopefully exceed it.

With respect to free cash flow margin of at least 16%, due in part to the working capital changes we made at the end of 2016, we now anticipate that we will meet or exceed this number in 2019. This is simply a function of the timing of cash flow generation, as our profitability targets have remained on plan.

We have clearly made strides towards improving the margin profile of our business and expect to further build upon that in the year to come. At the same time, we are very excited about the market opportunity available to us across all of our segments, verticals and geographies and look forward to continuing to grow what is already one of the largest recurring revenue bases in the world.

With that, I'll turn it back over to Adam.

Adam Miller - Cornerstone OnDemand, Inc.

Thanks, Brian. Given the tremendous market opportunity in learning and human capital management, combined with our leading market position, we remain bullish about our future. We see clear opportunities to continue increasing profitability as we drive operational excellence. And given our focus on helping people around the world to realize their potential, we are also proud to have been recognized by Fortune Magazine as one of 2016's Best Large Workplaces in Technology.

We will now take your questions.

Question-and-Answer Session

Operator

Certainly. Our first question comes from the line of Jesse Hulsing from Goldman Sachs. Your question please.

Jesse Hulsing - Goldman Sachs & Co.

Yeah. Thank you for taking my question. Adam, billings came in above expectations. First, can you give us a sense of if there were deals that slipped out of the third quarter and helped growth in the fourth quarter? And I guess, second, on a go forward basis, do you feel some of the disruption that you had last quarter around Brexit and around the mid-market sales reorg are firmly behind you?

Adam Miller - Cornerstone OnDemand, Inc.

Sure. So, with regard to slippages, I would say every quarter we have certain deals that slip. But there was nothing unusual about what happened in the third quarter going into the fourth quarter, just business as usual. We also had, I think, started to see a better consistency out of EMEA. And we expect to see decent recovery out of EMEA this year, especially with the announcement of both data centers. Mid-market, as we've said before, we've just lowered our expectations. So, we do expect some modest growth, but more importantly our expectations which translates to our guidance assumes lower growth for that business overall in mid-market.

Jesse Hulsing - Goldman Sachs & Co.

Great. Thank you, Adam.

Operator

Thank you. Our next question comes from the line of Scott Berg from Needham. Your question please. You may have your phone on mute.

Scott Berg - Needham & Co. LLC

My apologies there. Adam and Brian, congrats on a good quarter. I guess my question here would be, Adam, on the big deal environment. If I guess, if we look back in 2015 you guys made some noise in the big deal environment which is characterized as kind of eight figure or greater deals on a total contract value. Just wanted to see if you can comment on what you're seeing there both in the quarter and as you enter 2015 (sic) [2017]. Is this still a segment that remains pretty flush for you guys or has there been any changes?

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. So, in the fourth quarter we did not have any eight figure deals, but it's worth mentioning that we had our second largest quarter ever in terms of the number of seven figure deals. So we were doing a lot of big deals not just the enormous ones.

Having said that, we still think there's a very big opportunity in strategic accounts, and there are many big logos still out there for the taking. And we continued to be bullish on that team and the pipeline looks good for this year.

Scott Berg - Needham & Co. LLC

Great. And if can slide one follow-up in, Brian, on the G&A line, your G&A has grown throughout the year. And you kind of talked to a little bit about what some of those additional inputs are. Is there any reason to think that we don't get some leverage from that next year, because it grew I think 45% 46% in the fourth quarter year-over-year, which was a pretty large growth number given the revenue growth side?

Brian L. Swartz - Cornerstone OnDemand, Inc.

No, there's no reason why you shouldn't see that, Scott. We do expect to get leverage in that line item in both 2017 and beyond.

Scott Berg - Needham & Co. LLC

Got it. That's all I have. Thanks for taking my questions.

Adam Miller - Cornerstone OnDemand, Inc.

Thank you.

Operator

Our next comes from the line of Brad Sills from Bank of America Merrill Lynch. Your question please.

Brad Sills - Bank of America Merrill Lynch

Hey, guys. Thanks for taking my question. Adam, one for you please on core HR link. You sound pretty bullish on that for this year. Can you describe a little bit please what you saw in 2017 (sic) [2016] in terms of early adoption, departmental replacements perhaps in some of the larger accounts? Where are you seeing displacement? Who you may be displacing there? And what's changed about 2018 (sic) [2017]? Is it just kind of more maturity, better developed pipeline heading into 2018 (sic) [2017] for core HR?

Adam Miller - Cornerstone OnDemand, Inc.

Yes. I'll answer that based on 2016 and 2017 instead of 2017 and 2018.

Brad Sills - Bank of America Merrill Lynch

Yeah. I'm sorry. Sorry, that's what I mean, my bad.

Adam Miller - Cornerstone OnDemand, Inc.

But within Cornerstone HR specifically, in 2016, we've had dozens of wins around Cornerstone HR. We're seeing a pretty robust pipeline. But it's important to mention that our view of Cornerstone HR is very specific. We don't see us going head-to-head with the traditional core HR players for centralized global replacements.

We really view this as an alternative to either doing nothing or ripping and replacing your legacy core HR system with a single global system. And so the opportunities we've seen most notably are around what we call the hub model, where Cornerstone HR is used on top of typically multiple existing core HR and payroll systems as a single point of information and reporting. And that's been a very effective approach. That's allowed us to mature the product, and continue to serve our client base.

Our view is the best situations are when an account really wants to lead with talent management, but has some HR administrative needs, we can meet those requirements. Let them keep, in many cases, keep their existing core HR infrastructure, their existing integrations and yet get the benefit of modern architecture, a modern user interface, real-time reporting data visualization, predictive analytics, and the like with the full Cornerstone HCM solution.

Brad Sills - Bank of America Merrill Lynch

Great. Thanks. Then one more, if I may, please on sales productivity. Given your target for low mid-teens growth for billings, call it mid high for constant currency. At that level of growth, do you feel like there's a need for more hiring, you feel like you can – or is there more productivity you can get out of your existing folks that you have in sales? Thank you.

Adam Miller - Cornerstone OnDemand, Inc.

So we think there's opportunity for increased productivity. We've rebalanced our head count. So we took head count from low-performing teams and moved them to high-performing teams. This simultaneously improved sales efficiency and produces better growth.

Brian L. Swartz - Cornerstone OnDemand, Inc.

The one thing I would add is that we do have more people today than we had a year ago. And so we have more kind of quota carrying reps, quota capacity out there today than we did a year ago. So you've seen substantial improvements on the financial side, but it's not at the simple result of just cutting a lot of people out in the field. In fact, it's just the opposite. Like I said, we have more than we did a year ago.

Brad Sills - Bank of America Merrill Lynch

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Alex Zukin from Piper Jaffray. Your question please.

Alex J. Zukin - Piper Jaffray & Co.

Hey guys, congrats on a good quarter. Maybe first one, has anything changed in the way that you're managing deals with respect to profitability or discounting or levels that you're willing to go to kind of get deals?

Adam Miller - Cornerstone OnDemand, Inc.

Well, I would say specifically in the mid-market going into 2017, we recognized the need because of a combination of low cost competition and start-up competition combined with, in some cases, the larger players giving away some of the solution. There has been pricing pressure specifically in the mid-market and so we have updated going into 2017, our pricing and packaging for the mid-market. And we think it'll be very effective given the dynamics of the market now.

Alex J. Zukin - Piper Jaffray & Co.

Got it. And then maybe Brian one for you, last quarter you mentioned you saw, I think, some increased payment terms given to clients at the end of the quarter, which resulted in some payment collections being pushed into 2017. How should we think about the timing and the magnitude of that impact?

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah. We did not – I mean, those – we will collect those that happened at the end of the third quarter, obviously then we'll collect within terms or normal DSOs in terms of normal collections. We did not see that continue or persist throughout Q4. In fact, just the opposite, it kind of returned to historical levels in terms of level of payment terms we give clients.

Alex J. Zukin - Piper Jaffray & Co.

Got it. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Michael Nemeroff from Credit Suisse. Your question please.

Michael Nemeroff - Credit Suisse

Hey guys, thanks for taking my questions and nice billings this quarter. Adam, what steps, if any, other than improving the company's performance have you undertaken to enhance shareholder value and can we get your most recent thinking on keeping Cornerstone an independent vendor versus looking at alternative options? And then also in your prepared remarks, you mentioned – did you have any measurable data regarding the uptick in opportunities when you released the recruiting product to draw the parallel about the release of the core HR product, and how you're thinking about the competitive landscape, namely, Workday? Thanks very much.

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. So in terms of shareholder value, the board is continuously meeting about maximizing shareholder value, something we've always done and continue to do. We had a board meeting as recently as last week.

With regard to the CHR opportunity, we are seeing decent uptick in the initial launch of the product. Like I said, couple of dozen deals and many, many opportunities specifically focused on that sub-segment I discussed. And we think in much the same way that when we launched Recruiting, it enabled us to stay longer in talent management opportunities that included either learning or performance or both. We're seeing the addition of Cornerstone HR enable us to stay into full suite talent management deals, including learning, performance and recruiting.

Michael Nemeroff - Credit Suisse

Thanks for the answers.

Adam Miller - Cornerstone OnDemand, Inc.

Thank you.

Operator

Thank you. Our next question comes from the line of Patrick Walravens from JMP Securities. Your question please.

Patrick Walravens - JMP Securities LLC

Great. Thank you. Hey, Adam, what's the opportunity from sort of a machine learning AI point of view with all of that data you have? And what are the challenges, like I'm guessing permissions is one of the challenges, but would love to hear your thoughts there?

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. So the challenges were both legal and technical, I think we've overcome those over the last couple of years. The opportunity is to take that data and turn it into things that are actionable. So the first thing we did is create a suite of analytics tools, as you know Cornerstone View, Cornerstone Insights, Cornerstone Planning, all of which leverage that dataset to enable our clients to take action on their data, to better visualize the data, to make predictions off the data, to plan based on the data.

More recently, what we've been focused on is embedding some of those insights into the product itself. So in much the same way that you don't separately report in Netflix to get a recommendation for the next thing to watch, in Cornerstone, you won't have to run a report to get recommendations on the next training to take. Similarly, we're seeing opportunities around career pathing, recruiting selection, there's opportunities within performance management and most notably because of the dataset we have, in many aspects of learning and development. And so we are getting more aggressive in what we're doing there. And at our Convergence event in June, we're going to be releasing what we believe is the next generation of learning systems leveraging big data.

Patrick Walravens - JMP Securities LLC

Okay. Cool. Thank you. Brian, how much are these data centers are going to cost?

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah, Pat. We think it'll be about $5 million for both of them, both the one in Frankfurt and Paris. And again, I would expect most of those expenditures to happen in 2018.

Patrick Walravens - JMP Securities LLC

Okay. Thank you.

Adam Miller - Cornerstone OnDemand, Inc.

In total, not each.

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah.

Operator

Thank you. Our next question comes from the line of Mark Murphy from JPMorgan. Your question please.

Mark R. Murphy - JPMorgan Securities LLC

Yes. Thank you, Brian. Any thoughts on how to model stock-based comp expense for 2017 or in terms of new RSU issuance, maybe which way you think that would trend this year?

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah. I mean, I would expect it to kind of go up in line with growth in revenue. So I think we had about $55 million give or take in 2016. We're in the low teens as a percentage of revenue, which is, I think, probably on the lower end of many of our peers. I think in the same ballpark as a percentage of revenue next year makes the most sense. And there is some judgment obviously involved with those numbers obviously and so it can move around a little bit, but in general I think that's a good assumption.

Mark R. Murphy - JPMorgan Securities LLC

Okay. And then I wanted to follow-up as well on – there was an earlier question on head count growth, but just to try to get a little more fine-grained. In terms of head count growth for 2017, you grew 11% in 2016. Do you think that that'll be faster or slower growth this year?

Adam Miller - Cornerstone OnDemand, Inc.

It'll be slightly less. We also see a lot of opportunity as we've done over the last couple of months of reallocating head count from, like I said, lower performing teams to higher performing teams on the sales and marketing front. We're also seeing opportunity to add development capacity given the product initiatives that we have and the opportunities we're seeing in the market.

Mark R. Murphy - JPMorgan Securities LLC

Thank you. The final question I wanted to ask you is just how would you characterize the pricing dynamic in the industry today? I think you had commented on that a bit from a mid-market perspective. But when – I'm trying to understand. So the spread between your user growth is about 26% and then the billings growth at least in terms of the guidance is, call it, somewhere in the teens. To what extent is that tied to the move upmarket where you would have – presumably you would have more volume discounts that would be very natural as opposed to, I guess, any pressure that you might have seen in terms of like for like deal sizes due to competitive factors or any other factors?

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. I would say specifically the lack of performance in mid-market has resulted in a disconnect between client count growth and user count growth, as well as a reduction or a seemingly reduction in ARPU. But, in fact, if you look at the enterprise segment, we've seen an increase in ASP. And that's due in part to the way we're bundling together products as we sell into that segment.

Brian L. Swartz - Cornerstone OnDemand, Inc.

Mark, it's Brian. One other thing to keep in mind if you look at any discrete period quarterly or for that matter even annually – and I know you know this. But the revenue in any given year is kind of a function of the sales and retention in prior years. So our user counts are based on when our portals or users or clients actually go live. And it can take three months to six months to implement a client. Hopefully that will decrease. That's our plan with our program accelerate that Adam talked about in the script. So there are going to be a little bit of a timing disconnect when you're looking at revenue growth in any given period and specifically user count growth in the same respective period quarterly or annually. So it's just something to keep in mind as you think about the business.

Mark R. Murphy - JPMorgan Securities LLC

Okay. Understood. Thank you for taking my questions.

Adam Miller - Cornerstone OnDemand, Inc.

Thank you.

Operator

Thank you. Our next question comes from the line of Brent Bracelin from Pacific Crest Securities. Your question, please.

Brent Bracelin - Pacific Crest Securities

Thank you. I had a follow-up on the mid-market. I get that you're taking down expectations as it relates to kind of pricing pressure and competition. I was hoping you could frame maybe the mid-market opportunity. What does it represent as a percentage of bookings today and how important is it to reaccelerate growth as you think about this organic growth rate this quarter of FX adjusted 15%, 16%?

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. So mid-market is about 10% of the number. And we are being conservative in our expectations about mid-market. There is definitely upside in those numbers. If we see better than expected performance, which is possible given the stability of the team, the improvement in the management layer, the bigger territory opportunity for each individual rep, combined with better tenure of the reps overall, creates definitely an atmosphere with the opportunity for significant upside in that segment. Having said that, we're being cognizant of the results we've had over the last couple of years in mid-market and so we're being muted in our expectations.

Brent Bracelin - Pacific Crest Securities

Fair enough. And would there be ever a moment where you'd just decide to abandon your mid-market efforts? What would it take? And given the customer acquisition costs, kind of the go-to-market, how competitive that environment is? Is this still – you'd give it a couple more years or what are you looking at for proof points of success that would suggest this is a viable opportunity for you?

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. There's no way we would write it off. We have those proof points. We have hundreds and hundreds of mid-market clients. We have a successful client base and we've seen very good retention in that segment. So the opportunity for us is just to go back to how we were selling in that segment before. If you look at our segment-based sales results going back to the beginning of this decade, you'll notice that we had very good growth in 2010, 2011, 2012, 2013. Even 2014, when we restructured the team, we saw a downturn in productivity. And we expect this remerging of that mid-market operation, putting major accounts and national accounts together, to bring us back to the results we were seeing before. And that leads to very good profitability in that segment combined with excellent growth opportunity in that segment. So we have no plans of writing it off.

Brent Bracelin - Pacific Crest Securities

Very helpful color. Thank you.

Operator

Thank you. Our next question comes from the line of Samad Samana from Stephens, Inc. Your question, please.

Samad Samana - Stephens, Inc.

Hi, congrats on a good quarter and thanks for taking my questions. So I think, Brian, I heard you mention that billings benefited from better than expected renewals. Can you maybe give us some color on how ACV from new customers grew in the quarter compared to the overall billings growth level and then I have a follow-up?

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah. I mean, the – so the billings obviously came in stronger in Q4 than we had talked about on our last call. It was really just driven as a function of the level of renewals that we expected would come out of the business, principally out of EMEA. Obviously going in on our last call, given some of the headwinds we were facing in EMEA and broader EMEA, specifically the UK, we're obviously, appropriately conservative. So those renewal rates came in stronger than we had expected. In terms of new client sales, sales were obviously down year-over-year, hence the lower numbers, and in part due to some of the challenges we talked about on the last call, principally Brexit and the related impacts to the UK and Continental Europe. And obviously the mid-market was down year-over-year. So I don't know if that – gives you a little bit of color Samad, but it gives you a little bit of a picture of what we saw in the new client logo front, new client ACV front.

Samad Samana - Stephens, Inc.

That's helpful. And then, can you give us an idea – this is your first year at the company giving full year guidance, can you give us an idea of the level of visibility and comfort you have in the 2017 guidance? And I know you weren't there to give 2016 guidance, but maybe by comparison, how aggressive or how conservative it is relative to when the company provided guidance last year as well?

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah. I mean, it's hard to comment on what the company did last year, because I wasn't there a year ago. But what I will tell you is, and it's consistent with what I've said in the last few quarters that we've spoken, I've gotten to know many of the investors. I think it's important to be as transparent and give you our best view into the future as we can. At the same time, I want to exceed expectations or guidance more frequently than we miss it for a lack of a better word or just hit it. So it's a balancing act of not providing numbers that are so low that you can easily beat them, but also very transparent. So listen, we need to execute on our plan. We feel good about that. We feel good about our opportunities and the size of our pipelines and require a strong sales execution and execution on all the other operational initiatives that we need to achieve to drive both the top line and the bottom line. And we're going to do our very best to do that and exceed the numbers that I've given you here today.

Samad Samana - Stephens, Inc.

Great, thanks. That's very helpful color.

Brian L. Swartz - Cornerstone OnDemand, Inc.

You're welcome.

Operator

Thank you. Our next question comes from the line of Justin Furby from William Blair & Company. Your question please.

Justin A. Furby - William Blair & Co. LLC

Thanks, guys, and congrats. Brian, I guess to start, can you give a sense when you look at your billings guidance for 2017 in terms of what you're assuming for the U.S. enterprise market. Are you in sort of the 25% range or sort of the growth that you talked about last year at your Analyst Day? I'm just trying to sort of get a sense for the impact from mid-market and international, and I've got a quick follow-up? Thanks.

Brian L. Swartz - Cornerstone OnDemand, Inc.

Yeah. I mean to give you some – I mean I can't quantify it for you, Justin, but what I can give you is some qualitative commentary, which I hope is helpful. And we had very strong years in 2016 both out of our U.S. enterprise and our global client sales teams or I say global, I mean both the U.S. client sales team which is account sales, account management, as well as our EMEA client sales team, so, those reps that support our existing clients. We had very strong growth in 2016 out of those teams. We expect that to continue into 2017.

With respect to EMEA new client sales, I expect that to stabilize and grow again next year. So, obviously we had a lot of challenges in the back half of 2016 related to Brexit. We've now, as of today, announced our new data centers. We think that will add – free-up some of the headwinds and actually provide hopefully quite a bit of tailwinds for that business to perform very well on the new client sales front.

We have strong growth from some of our emerging markets which individually are much smaller, but our APJ and LatAm markets very, very critical markets for us to achieve our long-term goals and we expect strong growth out of those teams. Modest expectations in the U.S. mid-market, as Adam talked about, even though we weren't super excited about that market opportunity long-term in light of the performance the last couple of years, I'd assume modest expectations in the outlook.

And then strong growth from our kind of public sector and other education-related teams in the U.S. We feel pretty good about their opportunity here in 2017. So, hope that gives you a little bit of color, at least qualitatively, in terms of expectations for this year.

Justin A. Furby - William Blair & Co. LLC

Yeah. No, that's helpful. And then, I guess if you look at the guidance for Q1, I think it implies negative billings growth. And just to be clear on your renewal comment, were you suggesting, Brian, that the renewals were better than you expected, meaning deals that came in out of Q1 into Q4 or meaning you thought deals were at risk and you ended up renewing them? I'm just trying to understand the Q1 guidance.

And then just more for Adam, in terms of sales and marketing, it seems like you're probably still going to be spending mid-40% of revenue next year and yet growth is now teens growth. It just feels like, relative to most of the peers, that's a lot higher and I guess, I'm wondering if you think that's a function of the market or if it's something that's company-specific that still can be addressed? Thanks.

Brian L. Swartz - Cornerstone OnDemand, Inc.

So, yeah, so let me answer your question. So in terms of Q4, it was not early renewal. So it was the latter of what you said, which is simply that, when we were looking at Q4 and the number of renewals that should've come in, that we expected to come in, that came in better than we expected. It was not early renewals from Q4 – Q1 rather that were pulled into Q4.

In terms of the Q1 guidance, I think your number is correct. If you take the math that I gave on the call, low-to-mid teens growth off of our $453 million billings number from 2016 and 16% of that would imply Q1 is down a little bit. Do keep in mind Q1 last year was a very strong quarter for us and we talked about that last year. So that's a function of simply a comp issue in year-over-year. So I think that – hopefully, I answered your questions on the guidance. I'll hand it over to Adam.

Justin A. Furby - William Blair & Co. LLC

Yeah. Thanks.

Adam Miller - Cornerstone OnDemand, Inc.

Yeah. And, in term of sales and marketing expense we think there's still opportunity to reduce the sales and marketing expense as a percent of revenue, particularly as we get more efficiency out of the teams. Simultaneously, we don't expect to stay in the low-to-mid-teens. We expect our numbers to be significantly higher than that from a growth perspective over time. And, so we think those two will balance out to a number that makes perfect sense to everybody.

Justin A. Furby - William Blair & Co. LLC

Got it. Thank you.

Operator

Thank you. And our final question for today comes from the line of John Byun from UBS. Your question please.

John S. Byun - UBS Securities LLC

Hi. Thank you. I just had a question on the UK and European data centers, and given those will not be up until early next year, are there still any hesitation that you see or that you expect for the rest of the year or based on the announcement, that all of those concerns will be addressed?

Adam Miller - Cornerstone OnDemand, Inc.

No. So, I spent some time with the European team and they are confident that the announcement today of those data centers, with the specificity of having data centers both in Germany and France, will mitigate the issue fully.

John S. Byun - UBS Securities LLC

Thank you.

Operator

Thank you. And, this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Adam Miller, Founder and CEO. Please go ahead.

Adam Miller - Cornerstone OnDemand, Inc.

Thank you all for the questions and the attention. And we look forward to seeing you all soon. Thank you.

Operator

Thank you ladies and gentlemen, for your participation in the today's conference. This does conclude the program. You may now disconnect. Good day.

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