Cornerstone OnDemand, Inc.
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

[Operator:]

Good day ladies and gentlemen, and welcome to the Cornerstone Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Mr. Jason Gold, Senior Vice President of Finance. Sir, you may begin.

[Jason Gold:]

Thank you very much and good afternoon, everyone and welcome to Cornerstone’s third quarter 2020 earnings call. With me today are our Chief Executive Officer, Phil Saunders; and our Interim Chief Financial Officer, Trish Coughlin. In conjunction with today’s call, we’ve 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.

[Phil Saunders:]

Thank you, Jason and thanks everyone for joining us today. Over the recent months, Cornerstone has experienced significant positive change. Our company continues to operate well during this bizarre new normal of COVID-19. We have continued on our path to improve the business by getting the fundamentals, right and that is by executing on our near and long-term strategy, driving better alignment of the organization and taking a more cogent operational approach, all with a critical eye on our people and our company’s culture. To be clear, our aim is to continue our focus on business improvement while actively integrating our strategic acquisition of Saba. This is an exciting time for our company. In the third quarter, we delivered total revenue of $199 million, operating income of $47 million, earnings per share of $0.51 and unlevered free cash flow of $56 million. To our operational focus in the quarter and the continued execution of our integration and synergy plan, we generated a strong cash position, which enabled us to pay down $50 million of our Term Loan B debt instrument early in the fourth quarter. You should see this as a sign of our commitment of using cash generation to rapidly delever and allow value to accrue for our stakeholders. In the context of COVID and a massive transformation, we’re pleased with these results. We experienced modest improvement in new business wins, both from some pent-up demand and from in-period active pipeline. We executed well on some large U.S. and EMEA enterprise opportunities for people development was of critical importance to their wider digital transformation initiatives.

[Trish Coughlin:]

Thanks, Phil and good afternoon, everyone. As Phil indicated, our Q3 results came in above the high end of the range we provided last quarter. Subscription revenue exceeded the high end of our guidance to higher than anticipated for an office Saba’s legacy service backlog deliver meaningful outperformance on the service line relative to our expectations. In addition, our Q3 revenue observed the $19 million headwinds due to the deferred revenue write-down relating to the Saba acquisition. The combination of stronger than guided subscription revenue and lower than planned expenses enables us surpass our operating income guidance by approximately $14 million. Our unlevered free cash flow of $56 million was positively impacted in part due to the timing of certain restructuring and integration expenses that we thought would happen in Q3, but what you now expect will occur in Q4 and early 2021. You’ll notice that our client count declined slightly quarter-over-quarter. The decline in claims is entirely attributed to return on our non-core segment. We experienced sequential growth in non-core. We are adjusting our guidance for Q4, which given the Q3 outperformance drives an increase to our full-year guidance for revenue and operating income. We expect our Q4 subscription revenue to be in the range of $188 million to $191 million, up from a range of $186 million to $189 million. We expect our total revenue to be in the range of $194 million to $197 million up from a range of $193 million to $196 million. Our Q4 revenue guidance includes the headwind of approximately $13 million due to the deferred revenue write-down. We expect our Q4 operating income to be between $35 million and $38 million, up from the $33 million implied by our prior side. It’s worth noting that nearly $1 million of Q3 revenue outperformance on the services line carried no cost of goods sold with it. So, it talks straight through to operating income. In Q4, we anticipate transitioning the majority of Saba’s remaining services backlog towards implementation partner as we transitioned Saba’s services platform to the Cornerstone model. This will having effect of increasing our cost of goods sold for addressing some of the benefit we enjoyed in Q3 as we had performed much of that service work internally. It’s also worth noting that our updated operating income guidance takes into consideration an incremental $2 million to $3 million in operating expenses through the way we recently implemented company-wide bonus program tied to renewal rates. Going forward, any bonus accrual will be amortized over the course of the full year, but since we instituted this program based in 2020, the full impact of it is being talked in Q4. Continuing on to cash flow. We now expect our full-year unlevered free cash flow to be between $110 million and $115 million, up from our previous range of $105 million to $115 million. As Phil mentioned, we took the opportunity early in Q4 to pay down $50 million in sensible on our outstanding Term Loan B. under current market conditions each $25 million principal that we pay down, should reduce our annualized interest expense by about $1 million. We are reiterating our guidance for ARR to be about flat on a year-over-year basis when compared to the 2019 pro forma Cornerstone established combined figure of $818 million. Within that, we do expect our core ARR to show growth offset by declines in our non-core. This would therefore drive subscription revenue in 2021 in the low $800 million range. Our ARR balance is determined by both new wins during the year and the ARR return. So, this points out that our renewal rates are trending up and we are cautiously optimistic about the trends we are seeing here. With that as the backdrop, I wanted to remind you that contained within our 2020 ending ARR guidance, it’s an eight figure expected churn from the U.S. Census Bureau. Recall that we pointed this out at the end of last year as the census points down, the majority of that contract is expected to churn as a result of the end of our contract term. Absent this unusual contract, we would expect growth in our ending ARR value. Although it remains early in our 2021 budgeting cycle, we are currently expecting low single-digit growth in our total ARR for this full-year of 2021 it’s growth, generally ramping through and weighted towards the back half of the year. We expect declines in our non-core ARR to be more than offset that serves in our core areas. Of course, the pace of any macroeconomic or COVID-related recovery or the duration or magnitude of any continued or deepened negative impacts from the pandemic or unknown and all these factors could impact our ending ARR number. As it relates to our cost structure, we expect to have more precise guidance to share on our next earnings call. But from a framework perspective, you should think about us being able to annualize the $65 million in cost savings that we will exit 2020 with, offset by some increases due to the annual merit cycle in Q2, a resumption travel and entertainment spending, and an increase in content royalty fees as we grow our content business. This is our cost of revenue plus operating expenses somewhere in the range of about $650 million for 2021. From a cash flow perspective, you would expect 2021 on legacy cash flow to be at least $185 million, which includes approximately $50 million in restructuring and integration costs or $235 million before consideration of these one-time costs. And as Phil said, we remain confident in our ability to achieve $1 billion in ARR and 30% unlevered free cash flow margins over time. With that, we’ll now take your questions.

[Operator:]

And our first question is from Rishi Jalaria of D.A. Davidson. Your question please.

[Hannah Rudoff:]

Hi, guys. this is Hannah Rudoff on for Rishi today. Thanks for taking my questions. First question for you, Phil, I was just wondering if you could talk about if there’s been any unexpected points of friction and integration you’ve seen so far?

[Phil Saunders:]

Hi, how are you? So, no unexpected friction points, I think it’s the normal gravity of putting two companies together. As you can probably imagine, it’s not the easiest thing to do from a work-from-home COVID environment, but I would say overall, the teams have worked very, very well together. Our values and goals are aligned and I think we’re doing quite well. So, to answer your question specifically, no. No unexpected friction points.

[Hannah Rudoff:]

Great. And then could you talk about Cornerstone Convergence and how pipeline was coming out of that event?

[Phil Saunders:]

Sure. I mean, our Convergence event, which I suspect everyone on this call knows was virtual and it was virtual for the obvious reasons. We were debating whether we should have it at all or not, because we were frankly thoughtful of a platform that could withstand the volume of people. As I mentioned, we had over 10,000 active attendees in various breakouts and rooms. We have a good chunk, I don’t know the exact number to be candid, but it was in the low thousands of folks that were not customers. So prospects, which we’re encouraged by, which obviously feed into our MQL for our marketing leads, and so between our existing customers’ engagement and opportunities to talk to them about new things we’re doing, as well as new opportunities, I feel really good that it was a good use of time and obviously, efficient spend.

[Hannah Rudoff:]

Great. And then just last question. How much upside potential is there from an improving COVID environment?

[Phil Saunders:]

Yes. that’s a really tricky question, and I feel like I knew the question was going to come. I think what I see in the COVID environment is actually not necessarily an uptick of ARR, because of COVID. What I see is increased usage. I see the needs for what we do going up on our platforms, whether be our mobile platforms, our integrated virtual meetings, our integrated content and related amount of learning. So, the sheer amount of usage is going up, which bodes well for things like customer retention and the potential for more seats and different capabilities to be adopted. So, I want to be cautious on “over-pressing the benefits” of the COVID environment, but I will say that we’re definitely seeing the increased usage of our platform in this environment.

[Hannah Rudoff:]

Great. Thank you.

[Phil Saunders:]

You’re welcome.

[Operator:]

At this time, I’m showing no further questions in the queue. I’d like to turn the call back to Phil Saunders for closing remarks.

[Phil Saunders:]

Thanks very much and thanks everyone for joining the call. I wish everyone a safe and careful travels if you are traveling and we’re – as you could tell pretty excited about our business and the things we’re doing here, and we look forward to chatting with you again, next quarter. Thanks very much everyone.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. you may now disconnect. Good day.