Cornerstone OnDemand, Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Cornerstone OnDemand's Q2 2020 Earnings Conference Call. At this time, all participants' are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your host, Vice President of Finance and Corporate Development, Jason Gold. Sir, please go ahead.

[Jason Gold:]

Thanks very much, and good afternoon, everyone and welcome to Cornerstone's second quarter 2020 earnings call. With me today are our Chief Executive Officer, Phil Saunders; and our Chief Financial Officer, Brian Swartz; as well as our Chief Accounting Officer and Future Interim CFO, Trish Coughlin. In conjunction with today's call, we published a presentation that's located on the Investor Relations section of our website. Today's press release was furnished to the SEC in a Form 8-K. Today's discussion will include forward-looking statements, including, but not limited to, statements regarding the expected performance of our business, our future financial and operating performance, including our GAAP and non-GAAP guidance; the integration of Saba into our business and achievement of related cost synergies and efficiencies; our strategy, our long-term growth and our overall future prospects. Forward-looking statements involve risks, uncertainties and assumptions. These risks, uncertainties and assumptions, as well as other future factors that could cause actual results to differ materially from those contained in our forward-looking statements are included in our most recent 10-Q and 10-K, as well as 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 the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in the earnings press release and also in the presentation. With that as a backdrop, I'd like to turn the call over to Phil.

[Philip Seth Saunders:]

Thank you, Jason, and thanks, everyone for joining the call today. As many of you know, I've spent the past five-years deeply immersed in this critically important people development market, and we are seriously motivated by the power of this combination of Saba and Cornerstone. Now as the new Cornerstone, expanding our positive impact on companies we serve and their most critical assets, their people is something that is quite personal to me and our team. With just roughly 60 days under my belt as the CEO, I'm excited about the opportunities ahead of us. Let me first address Brian's announced departure and take a moment to thank him for his contributions to Cornerstone. Brian has played an integral role in the success of our company over the past several years since joining in 2016. He led efforts to improve financial discipline, scale the business and improve profitability. His expertise and tenacity undoubtedly have helped us to set up success as we embark on the next stage of our transformation. While disappointing to see him move on, we wish Brian success on his next journey. Brian will be providing you details on our financial performance we reported today, but let me offer a quick commentary. While we certainly felt headwinds related to COVID-19, we believe the company executed well over the course of the first half of 2020, as we were aggressively and successfully integrating the Saba business and helping our expanding customer base make the transition to remote development and collaboration. Now more than ever, we believe our wider solution set delivers critical capabilities and remains well positioned to support the expanding needs of our customers and our long-term revenue growth. In the second quarter, we delivered total revenue of $184 million, operating income of $40 million and earnings per share of $0.40. We focused on and seen improvement in our renewal rates as well. In the past 100 days, we've also accelerated development and innovation in an effort to deliver more strategic value to our customers. I am pleased to report that we successfully integrated Clustree's technology to create state-of-the-art skills engine, which will provide enhanced personalization for the millions of people, leveraging both Cornerstone and Saba platforms' for their development. We have also been advancing our microservices capabilities to drive more seamless in the flow of work integrations with other leading applications, adding several new content and language offerings to our Content Anytime suite and accelerating the availability of Content Anytime to the Saba customer base. Considering the unforeseen new realities of COVID and the global economic environment, along with the critical activities required to successfully integrate Saba, I'm proud of our laser focus on our customers, our execution in the quarter and our current business motions as we look forward. I thank and truly appreciate our employees for weathering the personal realities of a 100% work-from-home global operation. I'm humbled by their passion for our business, their care for fellow teammates and our customers, which we are committed to serving and enabling through these challenging times. Before I get into the opportunity I see here at Cornerstone and our plan to capitalize on it, I thought I'd begin with some insight into my leadership and communication style. You can expect me to communicate in a straightforward and transparent manner. I will take a pragmatic approach to decisions for the business, and I'm keen on leveraging the data, insights and experiences of the team around me. I'll be clear with you on my beliefs and views. I'll share our strengths and opportunities, and yes, and potential challenges that may lie in front of us. I'll also tell you when I don't know the answer. We have a clear vision for where we will take this business as a market leader. Communication with our investors is important to me and I, along with the Cornerstone team, will be accountable to the targets we set, earning the confidence of our employees, customers, partners and our investors is integral to the successful execution of our strategy and important to me personally. In some of the early meetings I've had with investors after our last earnings call, I have been quick to point out that Cornerstone is a solid company in a large and dynamic market. We're here together now as we work to evolve Cornerstone into a truly great business. We believe there's a clear opportunity to drive Cornerstone's next chapter of market impact with efficient, scalable growth. Make no mistake this is not about an iterative release of Cornerstone, this is about a transformation journey. Transformative missions require solid assets, awesome people and a lot of grit and focus, which we are armed with. We see a significant opportunity to reinvigorate growth while expanding our margins, in essence, turning Cornerstone into an efficient growth company we're all proud of. As I've gotten deeper into weeds here, I've noticed areas of the business that I'd label low-hanging fruit that, when properly assessed and addressed, should enable us to simply perform better. I can't say that I have identified all of them yet, but I can tell you, these are now critical elements of our transformation. The first facet of our transformation plan is to focus on customer experience and, equally important, experiences of our customers' customer or the end user. We believe there's an opportunity to improve our renewal rates by focusing on the customer experience, improving customer intimacy and increasing our focus on user engagement with our applications. I'm confident of this because by the time I arrived at Saba and when we sold the business to Cornerstone, retention rates improved by well over 1,000 basis points. None of this is rocket science. We need to shift our mindset and adjust the way we operate to improve retention, which, in turn will contribute to more efficient subscription revenue growth going forward. As I mentioned, this is beyond serving customer as a buyer and ultimately includes how we engage with 75 million consumers on our offering we use our application. Again, mindset matters. The second facet of our transformation and how we plan to drive efficient growth is to focus what I call on our win zones. This is something I've successfully done before at other companies and it's how many other high-performing software companies operate. We can become more efficient with our sales and marketing budgets, while leveraging our win loss data and insights to exclusively focus on the areas, which we have the highest probability of success. Rather than treating all dollars of opportunity the same, we will invest where we know we can win. By deemphasizing our lower win rate areas, we'll put more wood behind the arrow and opportunity to reach arenas, which we expect will improve our blended win rate and meaningfully improve our customer acquisition costs. Without going into too much detail because I know our competitors often listen in on these calls, and I don't feel the need to reveal our entire playbook, we believe the newly combined Cornerstone can have the most success in areas where what we do is a must-have for companies. And we feel we have the people, technical assets and capabilities to do better than anyone else. It's in areas like this where we believe the ERP companies and the smaller best-of-breed players just can't compete as well. We think the market size continues to be large and growing. And by focusing the entire Cornerstone team on these types of win zones, I'm confident in our ability to drive efficient growth. Third, and fundamental in nature, we have a keen eye on assessing and advancing our organizational design and effectiveness. This includes analyzing items such as how decisions are made across management layers, the center of gravity for our geographic locations and how we effectively go-to-market. By analyzing the motions of our teams and their engagement with our customers, we see an opportunity to drive greater efficiency while improving the customer experience. It's imperative we increase the ownership and accountability across the entire organization, while enabling more timely decision-making in ways that benefit our customers. As we gain clarity on the appropriate design state, you will likely see some changes here that I expect will drive improvements across a variety of functions, while also improving our efficiency and speed. And as you'd expect, we also plan to be leaning on Saba's infrastructure in low-cost geographies to drive improved abilities, to efficiently scale this business. The fourth pillar relates to our product vision and strategy. Since taking over as CEO, I've spent a lot of time looking at our combined company's technology, assets, which are truly awesome. As we -forward, our product strategy rises above the pros and cons of Saba versus Cornerstone's product stacks. We are deep in the process of determining the optimal go-forward details. But the key objective here is that all our customers will continue to be very well served. We'll soon reveal our product strategy that we expect will enable our customers to do better meet the evolving needs of people at work and drive strategic transformation for their organization, while ensuring Cornerstone is in the optimal position to both win and lead in the market. And a phrase, think disruptive innovation, we plan to leverage our combined global user and R&D resources to positively disrupt the industry. We see a world where we leverage our massive data set, in combination with our AI, machine learning capabilities to deliver the right experience to the right user at the right time, in the most hyper-personalized talent journey. This adaptive application experience drives engagement. As we know, the more engaged product users to secure the solution. The secure the solution, the better the retention rates, which contribute to stronger revenue growth, which then provides cash flow that can be reinvested to make the product even stickier. You can see the positive flywheel here. And we plan to pursue this aggressively. A couple of quick points of reference, as I mentioned, we've already completed the engineering effort for the Cornerstone Content Anytime offering to be seamlessly integrated with Saba Cloud. So our teams are now actively introducing and cross-selling our content solution this month, something I see as a significant opportunity. We're also leveraging the data science-backed skills hedging we acquired, from Clustree into our platforms, both Cornerstone and Saba. We've advanced our design thinking and development of the learning experience offerings in a manner that we believe is unique and compelling. We expect our approach to innovating around the learning experience will go beyond simply meeting the competition. I see that as yet another large area for delivering more value and cross-selling opportunities to the entire client base of 75 million in consumers. Tying all of this together and it is a lucid and pragmatic financial threat. As you've seen in our disclosures, Saba pro forma cash flow margins were meaningfully better than Cornerstone's. The purpose of the Saba acquisition was not to just tack the Saba financials on to the Cornerstone financials, and extract some cost synergies. If that's all we do, then we believe we will have missed, a much larger opportunity in hand. Instead our plan is to leverage the philosophies and business processes, that I've seen drive higher margins and higher growth and apply this tool right here, at Cornerstone. That, in my mind, is a critical element of what success looks like. Let's talk industry focus for a moment. The good news is that, we believe the market environment has some tailwinds. The fundamentals of what we do are strategic and essential. Even in periods when discretionary purchases are curtailed, companies are dealing with undeniable realities that we believe only we can serve. Every company is in digital transformation mode. Employees are in need of upskilling and reskilling to rise to the new challenges. Employers can't identify critical talent fast enough. And the list goes on. In today's world where the realities are working from home drive a need for remote development, as compared to live, in-person management engagement in classroom training, we see Cornerstone as uniquely positioned to be a critical enabler in how the employee and the company transformation journey unfolds. Proof points like what we have seen from our expansive usage in the Saba Meeting application and mobile experiences on our platforms gives us confidence in this view. In a market we believe is underserved and growing, we feel the realities of today's environment also favour those vendors with scale. And today, our base of roughly 6,000, unique customers, 75 million consumers leads our industry. This is really exciting, both for our internal teams, as they realize there are more resources, more data and more ability to deliver on our product vision. But also for our customers who see the benefits. And the flywheel of success I mentioned before that our scale can bring. In support of it, I'd point out that, in July, we saw several large prospective deals return to our active pipeline, both for new and existing customers, particularly within critical segments such as federal government and healthcare. The onus is on us to bring these across the finish line in the second half of 2020, but they are indicative of why we feel incrementally better about the business. I am hearing directly from HR leaders at our prospective and existing customers about accelerating through digital transformation. Although there are differences in the pace of recovery we're seeing by industry, we're now expecting to close some of the deals that had been previously frozen due to the pandemic. Turning to our synergies. When we first announced the transaction, we discussed $35 million in cost synergies, we expected to take out as a combined entity. On the last quarterly call, we upped that number to $50 million and said that we would come out as we exited this year. We've made tremendous progress as we're driving the integration, and the team is primed to continue identifying additional areas for efficiency. To that end, the team has spent the majority of its time, thus far, focusing on efficiencies in areas where we had the most obvious areas of overlap as we brought our companies together. We've recently turned their attention to other synergistic areas. And as a result, we're increasing our target for 2020 exit run rate synergies to $65 million. Again, we take our commitment seriously, and I am keenly focused on driving as much efficiency as we can in pursuit of profitable growth. I expect that you will hold me to this number, and I expect to meet or exceed your expectations over time. With all that said, the impacts of the current environment can't be ignored. COVID had an impact on new business during the first half. And while we have seen some improvement in our business environment, there's still some uncertainty out there. Our business is reasonably back-half weighted, and as the new CEO, I feel it'd be illogical during a pandemic to apply our historical close rate probabilities to our second half pipeline and commit to those numbers. Although I am cautiously optimistic, and as I mentioned earlier, that we have seen some improvements already in our renewal rates, I also want to be careful and thoughtful on this point. We spent the last two months hosting virtual customer road shows and engaging with our customer base to provide clarity on our company and product plans, while also preparing them and our internal teams for the significant cross-sell opportunities we believe are ahead. I'm encouraged and excited by these, but I'm also taking a rational and pragmatic approach as to the timing for when these tangible results materialize. The situation we're confronted with and customer decision delays are indeed real due to COVID. We're taking this reality into consideration as we evolve our customer engagement motions in order to alleviate some of these headwinds. When thinking about 2020 full year combined numbers, we are taking into account our new framework. We have a core business that's around $700 million in ARR on a combined pro forma basis and $100 million business that contains products we are no longer actively selling to new accounts. While we are growing our ARR in core strategic area, we expect that growth in 2020 will be offset by a decline in our non-core business. With that as a backdrop, I think it would be sensible to plan for our year-end 2020 ARR to be about flat when compared with 2019 ending pro forma ARR of $818 million. We are planning our cost structure and where we allocate our time and investments so that we can best position ourselves to deliver on our bottom line expansion commitments regardless of how the broader environment shakes out over the quarters ahead. Taking all these items together, I feel very good about our ability to rebound and not only compete, but to win. So over time, our plan is to reaccelerate Cornerstone's core subscription revenue growth rate to a level that is at least in line with the market but we plan, of course, to shoot for higher. With the realities of COVID, it's difficult to commit to a timeframe here but suffice it to say, I'm in a hurry, and this is a huge priority for us. I've now spoken for longer than you probably expected. But before I turn things over to Brian to discuss the details of our financials, I wanted to mention a couple of other things that are relevant and important to me and the broader Cornerstone team. First, we've made some executive level changes in alignment with our focus and the company's wider transformation, and in particular, our attention on evolving customer experience. This afternoon, we announced Karen Williams has been put in charge of Customer Support and Services and will report directly to me. Karen, dramatically and positively transformed these same areas at Saba and is armed and ready to drive that success with the team here in Cornerstone. We've also announced that Theresa Damato has been named our Chief of Staff. Theresa drove the transformation efforts at Saba and entire companies and is well underway here at Cornerstone. I'd also like to cover our focus on diversity, equity and inclusion. As long as Cornerstone has been around and a company that has always embraced these items and different points of view, we've created a new leadership role committed to this important endeavor, and I'm excited to announce we brought on board an experienced and seasoned professional to lead this charge. As part of our commitment to, dare I say, human kind, we're personally proud of what we're doing with Cornerstone Cares, our free online learning and development platform with awesome and timely content. As our company adjusted to the realities of life under COVID, we really felt we needed to take action and do everything we could do to help individuals and organizations around the world stay safe and healthy, improve their awareness around important social topics and grow their skills. Yes, even if they weren't customers who are already part of our existing ecosystem, we've always had a strong commitment to public service through our Cornerstone Foundation, but our model had been primarily business to non-profit. We launched Cornerstone Cares as a way to reach anyone and everyone to expand our mission to the broader community and the world. Since the launch, over 130,000 people have engaged with Cornerstone Cares. We've continued to support them through added content around K-12 virtual learning for teachers, unconscious bias courses and building interviewing skills for job seekers. I couldn't be personally prouder of the team for what they've accomplished here. If you haven't checked it out yet, I strongly encourage you to do so. You can find the link to Cornerstone Cares on our public website. With that, I'll gladly turn the call over to Brian. Brian?

[Brian L. Swartz:]

Thanks, Phil. I'd like to start off by thanking you for the very kind words about my departure. I'm leaving Cornerstone to pursue an opportunity at a larger private company and for a variety of personal reasons, this was the best fit for me at this time. With that said, it was truly a difficult decision, because I have enormous confidence in the direction that Phil and the rest of the team are taking Cornerstone and their ability to execute on the opportunity that lies ahead. I know that, I'm leaving you in good hands and with a very bright future. This is a bittersweet last earnings call for me. Now turning to the financials. On July 1, we've filed an 8-K/A with Saba's historical financial results in accordance with SEC rules and regulations. Based on our preliminary purchase accounting work, deferred revenue was written down at the acquisition date by approximately $56 million. We expect about $50 million of that amount to impact our 2020 revenues and the balance to impact 2021. Accordingly, our overall near-term financial results and related growth trends will be affected by this adjustment. We have provided some more detail on this in our Q2 investor presentation, which is posted on our website. Furthermore, with respect to Saba's historical financial results, it's worth noting that the numbers might be a bit tricky to analyze since Saba has some deferred revenue write-downs of their own related to the Halogen and Lumesse acquisitions. So in my mind, the clearest indicator of Saba's historical growth is in the ARR disclosure that we provided on the last call and are again providing this quarter in which we showed that Saba's total ARR grew 2% in 2019. That comprised 22% growth in Saba growth in Saba Cloud and Lumesse, a 9% decline in TalentSpace and a 23% decline in the migration businesses. On May 22, we also completed the syndication of our Term Loan B to a consortium of lenders. The cash interest rate on the loan is LIBOR plus 4.25, and it was issued at a 2.5% discount. There is a slide in our investor deck that details out the cash and non-cash interest expense for both our Term Loan B our term loan B and our convertible bond. As we have said in the past, we expect our primary use of cash going forward will be the repayment of debt, and our plan is to rapidly delever. Now turning to our Q2 results. We posted total revenue of $184 million, which included a purchase accounting reduction of $19 million related to the Saba acquisition. We also had a $4.3 million benefit to our Q2 subscription revenue as a result of recognizing one-time revenue from a large customer. We do not expect this to repeat in Q3 and beyond. beyond. On the operating expense side, as you might expect, our expenses were meaningfully lower than our original budget, primarily due to the impact of COVID, but also as we adjusted our cost structure to appropriately respond to our operating environment. On a stand-alone basis, Cornerstone did see meaningful operating margin improvement even before the one-time revenue I just mentioned. Our unlevered free cash flow in Q2 was $15 million and includes approximately $18 million of cash used for restructuring and acquisition-related items. We ended the quarter with approximately $180 million in total liquidity, and our net leverage ratio improved quarter-over-quarter due to improvements in profitability. Looking forward to Q3, we expect total revenue in the range of $187 million to $189 million, with subscription revenue between $181 million and $183 million. For Q4, our total expected revenue is a range of $193 million to $196 million, with subscription revenue between $186 million and $189 million. These amounts take into consideration a deferred revenue write-down related to purchase accounting of approximately $19 million in Q3 and $13 million in Q4. This would mean our full year 2020 total revenue will be in the range of $715 million to $720 million, with subscription revenue between $689 million and $694 million. We expect our full year 2020 operating income to be in a range of $129 million to $133 million. Both of these amounts take into consideration a deferred revenue write-down of approximately $50 million related to purchase accounting. We expect our unlevered free cash flow to be in a range of $105 million to $115 million. These amounts include approximately $60 million of non-recurring restructuring and acquisition-related costs. Please understand that this includes our best estimate of the timing of certain one-time costs. But depending on the pace at which we're able to tackle these integration projects, some of these costs could conceivably move to 2021 instead of 2020. We're currently planning for an incremental $40 million of these costs in 2021 for a total of $100 million. Also, to help you with your models, we expect our guidance for second half operating income of roughly $66 million at the midpoint to be fairly consistent between Q3 and Q4. As Phil discussed, due to the impact of COVID, we expect 2020 ARR to be about flat when compared with our 2019 ending pro forma combined ARR of $818 million. Given the nature of how our subscription business works, excluding the impact of the Saba acquisition, currency fluctuation and purchase accounting, we would expect a corresponding impact on subscription revenue in 2021. It's important to note that we expect growth from our strategic core business which will be offset by decline in our migration businesses, as Phil mentioned earlier. Turning to 2021 profitability. When you take into account the timing of the $65 million of synergies, Phil mentioned earlier and you normalize for inorganic growth and any other non-recurring deal-related items, we would expect our 2021 operating income and cash flows to show meaningful improvement over our 2020 figures as we focus on driving enhanced profitability, while also pursuing our ambitious growth initiatives. With that, we will now take your questions.

[Operator:]

Thank you. [Operator Instruction] Our first question comes from the line of Rishi Jaluria of D.A. Davidson. Your question please.

[Rishi N. Jaluria:]

Hey, guys. Thanks so much for taking my questions, and Brian really enjoyed working with you over this time, and you're definitely going to be missed. First, wanted to maybe dig a little bit into the increase in synergy expectations this year, raising kind of your expectation by about $15 million since you last gave us guidance. Maybe directionally, can you help us understand where are these incremental synergies coming from, and just kind of how to think about the sustainability of some of those synergies as we head into next year and beyond? And then I've got a follow-up.

[Philip Seth Saunders:]

I think I'll start with that one. Thanks for the question. As we mentioned earlier on in our last call and on this one, the initial focus was on the overlapping areas. So for instance, the best example would be two sales reps in the same territory type of model. And so, of course, that addressed our $35 million to $50 million number. As we looked at further efficiencies in the business, just getting our arms around the business more closely, there are other areas of overlap that were not as overt, but clearly, areas of efficiency that we could touch without the impact of growth. And so it was fairly evident and now something that we have confirmed and now made part of our synergy plan. So it's clearly in sight and will be completed as we exit 2020.

[Rishi N. Jaluria:]

Okay. Great. That's helpful. And then on the investor presentation, you break out sub as ARR last year. I believe this is a little bit different than the slice you gave us last time. And if that's not the case, I apologize. But maybe can you help us understand kind of the three different components right when we talk about learning and recruiting and what you call core here versus performance versus migration, what were kind of the pieces that led to performance and migration being down year-over-year and learning and recruiting being up? And then if Saba – if you look at Saba ARR on standalone to the extent that we can, is this indicative of kind of the direction that we'd expect Saba ARR to continue? Or is there another way to think about it? Thanks.

[Philip Seth Saunders:]

Let me ask Brian to answer that?

[Brian L. Swartz:]

Yes. Absolutely. Rishi, it's Brian. I'll take that. So just for clarity, I think you're referring to slide 12 of the deck. The numbers haven't changed, the groupings have slightly, and let me explain and just give a little color. So Saba's year-end 2019 ARR was $243 million, as you can see on that chart. Previously, Saba had referred to their core ARR as both the green slice and the light orange slice, I guess it is, which included both learning, recruiting and performance of roughly $200 million, and then there was migration of about $44 million. So we had grouped together learning and performance and recruiting all in core. The performance ARR of $63 million is primarily the TalentSpace business, which as I believe we talked about in the last call, Saba had effectively stopped selling that to new customers, at least. Obviously, it's a very large installed customer base, and those customers are very important to us, and we continue to work with them very, very closely. We have elected just to separate the performance slice, the TalentSpace slice. So you can see the actual growth of learning and recruiting, which is the Saba Cloud platform, and primarily Lumesse, separate and apart from performance with migration. So that's – it's just a regrouping of it, Rishi. It's not a – they're not different numbers.

[Rishi N. Jaluria:]

Okay. That's really helpful. Thank you so much, guys. Appreciate it, and best wishes, Brian.

[Brian L. Swartz:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Scott Berg of Needham. Your question please.

[Scott Berg:]

Excellent Brian. Thanks for taking my questions today and Brian I would also echo the sentiments. It's been a fun four years. I guess, Phil, let's talk about the current state of the business. You talked about some "COVID headwinds" to the business. Would you consider that to be business wide? Or are there specific modules that might be seeing a larger impact than others?

[Philip Seth Saunders:]

Hey, Scott, how are you? I would say, it's a general issue. I mean the bottom line is this is a situation with COVID that, frankly, I don't think anyone on this call has ever seen. I certainly haven't. And my sense is that overall, we're finding those headwinds to impact new business, specifically new business and upsell business. So I wouldn't say it's any one particular area that we're feeling it. It's – I think, overall, we're seeing budgets on hold and curtailed. We do see that opening up a bit, as we mentioned on the call. But I would say it's not in one particular area.

[Scott Berg:]

Got it. And then from a follow-up perspective. As you look out a couple of years, you talked about reinvigorating growth. The story of Cornerstone in the last couple of years has been heavy on the content side. I guess where do you see that growth coming from over the next two to three years relative to the recent product strategy?

[Philip Seth Saunders:]

I think as it relates to growth – I mean, listen, we're really excited about content. And I know that, my predecessor, and Adam was very excited about it, I think it was a really good reason. I mean, there's – this is not just about reselling some content and trying to upsell. Content is integral to people's development and talent journeys. So we're really excited about it. But overall, we see growth in our core capabilities of what we do across the platforms. And so we're excited about that resurgence of growth. That growth will come from more of our core, more of our expanded capabilities. And yes, it will include content.

[Scott Berg:]

Got it. And if I may, sorry, one last one here for me is your guidance here in the second half, both Q3 and Q4, suggests you've been able to successfully pivot most some of professional services to partners, at least some of the historical Saba services. I guess, what are you hearing from partners with regards to the integration of the two companies? Thank you.

[Philip Seth Saunders:]

I think it's a bit of – to be candid, Scott, it's a bit of a moving target. I think early on, there was probably just nervousness because Saba was predominantly a direct services company with some partners. I will tell you that, I'm really proud of the team here. Obviously, Cornerstone has some experiences in moving their delivery capabilities to the "channel partners." A lot of these folks already knew Saba. Many of them were already partners of Saba. So it was really about getting the details correct, worrying about the things that could go wrong to make sure we recovered on them. And I feel really comfortable that we've handled that properly. I feel our partners are comfortable with it. And ultimately, it's in how we execute. So I think you should hold us accountable to it.

[Scott Berg:]

Great. Thanks again.

[Operator:]

Thank you. Our next question comes from Chris Merwin of Goldman Sachs. Please go ahead.

[Kevin Kumar:]

Hi. This is Kevin on for Chris. Thanks for taking my question. Brian, can you expand on the nature of the onetime revenue benefit that was recognized during the quarter?

[Brian L. Swartz:]

Yeah. We had a – one of our larger customers effectively had – we had basically a usage over billing for them for the current period, and it required kind of a cumulative catch-up of subscription revenue that benefited Q2, as I mentioned, by about $4.3 million. So I only called that out so that when you look sequentially from Q2 to Q3, based on the guidance, even with Saba, there is a slight onetime good guy, so to speak, in the Q2 numbers that will not keep going forward.

[Kevin Kumar:]

Great. That makes sense. And then could you talk about maybe content traction during the quarter relative to the pre-COVID expectations? I know you had called out cross-selling was impacted, but just trying to get a sense of how the pipeline is shaping up for the back half of the year?

[Philip Seth Saunders:]

Do you want me to grab that, Brian?

[Brian L. Swartz:]

Yeah. Sure.

[Philip Seth Saunders:]

Yeah. Sure. So our Cornerstone Content Anytime offering, for sure, without any doubt when you look at the pipeline, the pipeline is improving, for sure, as well as our second half views already, we believe we'll see an uptick. So we're excited about the content business. Again, I want to be clear, not as a separate content business, but as an integral part of our solution in the motions of, as we talk about talent journeys. And so I think as a result of that mindset, we're seeing CCA, our offering, our content anywhere offering, to be becoming something that's part of the sales motion. And as a result, pipelines are increasing, and the conversion rates look really good so far.

[Kevin Kumar:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Siti Panigrahi of Mizuho. Please go ahead.

[Siti Panigrahi:]

Thanks for taking my question. Phil, just your discussion with Saba customer after this acquisition, what sort of feedback have you got from them? Are you expecting them to sometime uptick Cornerstone platform anytime soon? And also, what sort of cross-sell opportunity do you see?

[Philip Seth Saunders:]

We're really pleased by the feedback we've received from customers. As you would imagine and as you heard me say on my opening comments, we proactively spent the first two months of me in the CEO role of actively engaging with both Cornerstone and former Saba customers. And the Saba customers, when they are now educated on our road map, on our plans for the year ahead, are feeling comfortable. And I believe, I would say, cautiously excited about what's ahead for the new combined Cornerstone with their Saba platform. In terms of the cross-sell opportunity, I mentioned that in the first 60 days since I've been in the role and the first 100 days of our companies coming together, we have already designed in and integrated seamlessly the Cornerstone Content Anytime capability and right inside the Saba offerings. That release is coming out in this month, and we've already begun selling it and frankly taking orders for it. So a very exciting opportunity. Again, it's – I don't want to overhype this, but we are optimistic about the opportunity at hand in our wide customer base.

[Siti Panigrahi:]

Thanks for that color. And Brian, in terms of renewal rates, are you expecting any kind of headwinds from some of your large customer earlier? I think you guys talked about sensors and a few others. So are you expecting anything this year?

[Brian L. Swartz:]

Yeah, Siti. It's Brian. Actually, our renewal rates have trended slightly better than we had expected earlier in the year. We are working with certain customers in terms of certain payment schedules, some deferred payments, which are impacting some working capital. But ultimately, the environment we're operating in with COVID is providing a bit of a tailwind on a renewal rate basis, which (41

[Siti Panigrahi:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mark Murphy of JPMorgan. Your line is open.

[Pinjalim Bora:]

Oh, thanks for taking my questions. This is Pinjalim sitting in for Mark. And welcome, Phil and Brian, great working with you and best wishes. I want to start with just the COVID impact that you're talking about. Maybe can you talk about the trajectory of those headwinds through Q2 and into Q3? Because I think you said you had seen some green shoots in April. So how did it trend in May, June? Did it kind of downtick and kind of uptick now again?

[Philip Seth Saunders:]

Well, I didn't specifically mention green shoots in April. I said that we are seeing green shoots in the business, and we are cautiously optimistic about that, meaning that between opportunities in the pipeline that where I would call frozen or dormant have become active, number one. And number two there has been some pent-up demand as a result of a several month slowdown due to COVID in terms of any and all business corporate transactions for enterprise software applications. And so those green shoots, as I mentioned, we're seeing globally but also in a couple of very specific areas like federal government as well as healthcare and other essential areas. And so we're excited by that. We see opportunities there to convert those opportunities in the second half. And so we're mildly excited about that, but it is COVID, and it is a pandemic. So we're being thoughtful about (43

[Pinjalim Bora:]

Understood. Thank you for that. And Brian, on the 2020 subscription revenue guidance, I was just doing some rough math, and maybe my math is completely off here. But if I look on a pro forma basis, assuming 2019 included Saba's $32 million subscription revenue, the 2020 subscription revenue growth seems like there is a decline of 4% even after adjusting the DR write-down of $50 million, while Saba's and Cornerstone's ARR kind of grew, I believe, 10% and 2% last – end of 2019, right? So can you help me reconcile, I mean, what is – it maybe there is just a little bit of conservatism in the number as well.

[Brian L. Swartz:]

Well, we're always going to strive to exceed our guidance and our outlook. So I don't know exactly what numbers you're using. But if you take Cornerstone's 2019 numbers and you grow them at some rate, again, you don't have the exact percentage growth rate, you have Q1 and part of Q2 where you can do some implied numbers. Saba had about $260 million of revenue last year. Obviously, we do not get the full benefit of that. So whether it's 8/12th (45

[Pinjalim Bora:]

Understood. Thank you.

[Brian L. Swartz:]

Thank you.

[Operator:]

Thank you. [Operator Instruction] Our next question comes from the line of Alex Zukin of RBC Capital Markets. Your question please.

[Unknown Speaker:]

Yes. This is Scott (45

[Philip Seth Saunders:]

Thanks, Scott (46

[Unknown Speaker:]

Completely understand, and that makes sense. And maybe just a quick follow-up. I know there's been a few questions about COVID and how that's impacting you. So I'm curious at like the product level, are you seeing any differences in kind of willingness to buy learning versus recruiting versus content versus performance or any other areas of the product portfolio in the current environment?

[Philip Seth Saunders:]

Yeah. I think, Scott (48

[Unknown Speaker:]

Great. That's all for me. Thanks for taking my question.

[Operator:]

Thank you. Our next question comes from the line of Pat Walravens of JMP Securities. Your line is open.

[Unknown Speaker:]

Hi. This is Joe (49

[Philip Seth Saunders:]

Thanks Joe (49

[Unknown Speaker:]

Thank you.

[Operator:]

Thank you. At this time, I'd like to turn the call back over to Phil Saunders for closing remarks. Sir?

[Philip Seth Saunders:]

Well, thanks very much for passing it back to me. And folks, thanks for joining us on this call today, and thanks for giving me a little bit more time than I would normally take. We appreciate that. As you can tell, we're really excited about the business here, and we're also optimistic but very much in a cautious matter giving COVID. I look forward to chatting with you one-on-one. We look forward to seeing you in virtual investor meetings, and thank you very much for your time and attention.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.