Cornerstone OnDemand, Inc.
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good afternoon. My name is Latiff, and I will be your conference operator today. At this time, I'd like to welcome everyone to Cornerstone OnDemand's First Quarter 2019 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 follow at that time. As a reminder, this conference may be recorded. I'll now turn the call over to Jason Gold, Vice President of Finance and Corporate Development.

[Jason Gold:]

[Adam Miller:]

Thanks, Jason, and good afternoon, everyone. In Q1, we continued the momentum that we saw during 2018. I'm incredibly proud of our team for what they've accomplished and how they have thrive through this transition, which they have done while we have simultaneously increased the size of our competitive mode.

[Brian Swartz:]

Thank you, Adam, and good afternoon, everyone. Since we provided a very thorough overview of the quarter and our updated guidance in the Shareholder Letter, I'm going to keep my remarks brief. As you can see, we had a very healthy first quarter and chose to raise the midpoint of our ARR, revenue, operating margin and unlevered free cash flow guidance. We had a solid Q1. We feel good about our performance and we are confident in the direction of our business. A few other key highlights, in Q1, subscription revenue was $131 million, representing 16% year-over-year growth and 18% on a constant currency basis. Non-GAAP operating income was nearly $20 million, representing a 14% operating margin, and an improvement of 430 basis points over the prior year. I'd like to point out that the amount we've raised, the full-year revenue guidance by was only slightly more than the amount we exceeded the midpoint of our Q1 guidance. While the dollar value, we're talking about a relatively immaterial. And nevertheless tackle this head on to avoid any questions or confusion. And so I'd like to take a minute to explain some of the mechanics. In any given quarter, we can have up to about 1% of our subscription revenue that may not recur. It's made up of various components as sometimes we see and sometimes do not. To help you understand this and why it can cause our sequential growth rates to very? I want to provide a bit more color. We do not generally include these items in our guidance. Let me give you two different examples of where we might have a hard to predict favorable adjustment to revenue. The first is when we withhold the recognition of revenue, until certain software features are released. Where not particular feature is ultimately delivered, we can have a favorable revenue adjustment to record revenue that we previously withheld. The second is when we true up a client for prior periods in which they had more users on the system than our contract stipulated. In both of these instances, you can see how we would recognize revenue in that period, but wouldn't be appropriate to flow that through the remainder of the year in the same way that a traditional new ARR out performance flow through. I hope that provides a bit more context about how we forecast revenue.

[Operator:]

Thank you, sir. Our first question comes from the line of Scott Berg of Needham & Company. Your question, please.

[Josh Reilly:]

Hey, guys. This is Josh on for Scott. Congrats on the strong quarter. Starting off with the Content Solution, what are you seeing in terms of pricing on content? Are you still seeing a three times to four times uplift versus traditional Learning deal?

[Adam Miller:]

Yeah. The pricing is varying tremendously based on A, the subscription, B the industry, C the geography and D, maybe most importantly the size of the clients. So, because we sell into all those different segments, we do see a lot of variability and it is very different depending on the competitive environment in a particular deal. So pricing is still all over the place, like we said before, we're seeing ranges from 3x to 10x and that continues. Now, the good news is the $25 billion market for online training content is super fragmented. So is fragmented as the Learning businesses on the platform side, the content side is much more fragmented. And that gives us a lot of opportunity in every one of these segments. And we feel very strongly that we'll be able to achieve that $250 million market opportunity within our install base today.

[Josh Reilly:]

Okay, great and then one more, Q1 subscription revenues obviously look great. Can you comment on large enterprise deal pipeline or traction in Q1? And are you seeing sales cycles within normal ranges or are there any deals that are moving between quarters is more than normal?

[Adam Miller:]

Yeah, so there were no mega deals in Q1. We do see a decent pipeline of deals for 2019 and beyond. We're seeing activity up market, all the way up market. And that's good for our strategic accounts team and for our large enterprise group. We expect those deals to happen, but they are very difficult to predict exactly when. And so, we are very conservative in our guidance about those deals, given the difficulty in assessing the timing of when they might close.

[Brian Swartz:]

Yeah, Josh, it's Brian. Just add a little more color in terms of more specificity in terms of what we -- how we think about the guidance specifically. We obviously expect those teams at some level of success from a win rate perspective. But as Adam said, it is hard to predict those deals and particularly the timing of those deals, so it doesn't assume, we don't assume none in the full-year outlook, but we assume some level of success for that team

[Josh Reilly:]

Okay. Great, thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of Chris Merwin of Goldman Sachs. Your line is open.

[Kevin Kumar:]

Hi, this is Kevin on for Chris. Thanks for taking my questions. You had noted, strong win rates in Europe during the quarter, can you talk a little bit about that? Has anything changed in terms of the competitive environment in the region? And then also how did Cornerstone HR do during that quarter?

[Adam Miller:]

Yeah. So no real change in the competitive landscape, it remains very stable. In terms of Cornerstone HR, we still see very strong progress in Europe in particular. But we are selling it internationally all over the world. And we have very good penetration rates outside the U.S. as you know we are not selling it in the U.S. and probably won't in 2019, but may consider that next year certainly by 2021.

[Kevin Kumar:]

Great, thank you.

[Operator:]

Thank you. Next question comes from the line of Alex Zukin of Piper Jeffrey. Your line is open.

[Alex Zukin:]

Hey! Guys, thanks for taking my question, maybe just one or two for Adam, I guess, maybe first on, can you talk about the performance of the recruiting product in the quarter, in the pipeline, is it paying off from new sales perspective this year. And kind of the traction you're expecting from the balance of the year?

[Adam Miller:]

Yeah. So recruiting is doing well. We're seeing good recruiting sales globally across multiple industries. As you know, we've made some significant investments over the last couple of years, on the engineering side. Related to recruiting, those are starting to pay off. And we've made some investments on the sales and marketing front, around recruiting. And I think those are still to come. So you're going to see that over the next few months. But we are feeling good about the pipeline in recruiting. And we feel very good about the changing competitive landscape, particularly in recruiting. We're seeing some real weakness among the legacy incumbents. And that's going to create opportunity for the newer players like us in the recruiting field. So feeling good about it.

[Alex Zukin:]

And then on learning, can you maybe speak to a little bit the most successful selling tactics that you're seeing work from a -- not learning at all, the content perspective. In terms of the synergies, there's the -- are the buyers the same? What the attach rates look like in new deals? Are you seeing more success on existing customers when they renew -- when it's a time for renewal conversation, just a little bit of context and maybe kind of how we should think about it on that progress to 250?

[Adam Miller:]

Yes, we definitely see more success selling into the installed base than indirect sales and that makes sense, right, until the learning system is up and running. Pushing the content through when it's less urgent. Once you have a system in place and you're thinking about how do I optimize the content and the training, that's going to be deployed to my employee base, you do think a lot about what your opportunities and options are in the content field. What we are offering through the Content Anytime subscription is very compelling. So we are seeing the ability to do this with our existing clients. It is not necessarily upon renewal, a lot of them are doing it mid cycle. It's just, after learning has been deployed and remember some of our clients will deploy recruiting or performance before they deploy learning, and so the timing of the content deal typically is after they've deployed learning. Now, the other reality here is, there is in fact less friction for both us and clients. It is typically the same buyer, certainly the same buyer of the learning system. And from a contractual perspective or if you think about procurement, it's literally a one page addendum, so it is very, very easy for the client. There's not a new security review, you don't need to get the procurement team involved. You don't need a big legal review. It's just simple and relatively painless. And we believe, the content offering will continue to get more and more compelling as our curation and content provider universe continues to expand. So not only do we have the global content to leverage, and we're working on a localization strategy of that global content, to use it outside the U.S., but you think about the incremental providers out there. I told you, there's a very long tail of content providers around the world. We're able, because of our scale and distribution, to attract and distribute content from virtually anybody and that's giving us a real opportunity here in different markets, in different geographies and in different industries to be the preferred provider. The last point, I'll make is that our machine learning, as we have more and more data from the content being consumed, our machine learning gets better and better. So the personalization keeps improving. So there is a virtual cycle up here in the Content business.

[Alex Zukin:]

Just one maybe quick one, just to sneak in and -- just a question on the federal vertical pipeline opportunity traction, do you see any impact from the shutdown, push deals into this quarter? And just a general update on that vertical would be helpful.

[Adam Miller:]

Yes. The shutdown really did not have an impact on the pipeline or any of the deals that were in progress. We continue to see strong performance out of our public sector teams generally in the federal team specifically. And there are continued up-sell opportunities in the existing accounts that we have, and we are far along on new opportunities within the federal government.

[Alex Zukin:]

Okay. Thank you, guys.

[Adam Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Brad Sills, Bank of America Merrill Lynch. Your line is open.

[Brad Sills:]

Great. Thanks, guys. I wanted to ask, Adam, a little bit more color on the comments you made earlier that the content business is providing a catalyst for the rest of your suite. Are you seeing content lead some of these deals and then bringing in learning or is it primarily selling content into the base that's kind of driving that business?

[Adam Miller:]

Well, I think it's the next generation of the strategy we've had for a long time which is that we lead with learning. And then attached to that deal, the other suites. So in some cases, it's learning and performance, that's about 50% of the time. In other cases, it's learning performance in recruiting and then in Europe periodically more and more often, we're seeing warning performance recruiting and HR. What content does is it makes us even more differentiated in the learning space, makes the opportunity even more compelling. And when you think about things like on-boarding for recruiting, it provides us the opportunity to not only give them a platform for managing on-boarding, but actually gives them a lot of relevant content to make the on-boarding experience more impactful and more effective. It also gives us competitive differentiation, not only on direct sales, but even within the client base. So, when you think about renewals, when you think about upsell opportunities, content provides catalyst to go back to the client, get the meeting, talk about what our offerings are and sell more products.

[Brad Sills:]

That's great. Thanks, Adam. And you've seen nice leverage here on sales and marketing. Can you just remind us kind of where you are in those efforts, where has been the focus this year and going forward? Where are some other areas you can continue to drive good sales productivity, sales and marketing leverage? Thank you.

[Adam Miller:]

So, as you know, we had tremendous improvement in sales and marketing productivity last year. We have now lapped some of that productivity gains. So you're not going to see the same gains this year. That doesn't mean that there is not incremental opportunities both in sales and marketing. I am particularly focused on the opportunities this year from a marketing perspective. I think there's much more we can do to get higher returns from our marketing spend, and improve some of our positioning and awareness in the market. In addition, our reps are now very targeted. We've been very surgical about where we add reps, and even thoughtful about when reps are inside and when they are in the field. So as you guys might know, at the beginning of this year, we merged our mid-market and enterprise team. So, we now just have the enterprise team for upper mid-market and we moved what we consider a lower mid-markets to sub 1,000 employees down to our SMB Group, which is an inside sales operation and so we got some leverage there as well, which also increases productivity and improves cap ratios further.

[Brad Sills:]

Great. Thanks, Adam.

[Adam Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Justin Furby of William Blair. Your line is open.

[Justin Furby:]

Hey guys, thanks for taking the questions nice quarter. Brian, maybe just a housekeeping item for you to start and I apologize if you said this already, but what was the growth in this quarter when you net out the one-time items, the constant currency growth?

[Brian Swartz:]

Yeah, so about -- maybe another way of saying -- answering the question, Justin. About 80% or so of the beef off of our midpoint was related to kind of these not one-time items, but non-recurring items, I'll call it. So take the midpoint of the prior guidance, which was effectively -- if you take the midpoint of the prior guidance on subs revenue, which is $128.5 million, roughly 20% off the beef from that perspective was related to kind of outperformance there.

[Justin Furby:]

Okay, got it. And then just, Adam, I'm just curious on the pricing side of the market, if you kind of the go back three years ago, five years ago, whatever time horizon, you want to go back, what are you seeing on that is the core LMS from a per seat basis? And I know it varies tremendously by the size of the engagement, but just what are the overall trends you're seeing there? And then what are you seeing on renewals in terms of like-for-like renewal on the per seat pricing? Thanks.

[Adam Miller:]

Yeah, so let me answer the two parts in order. So from a competitive standpoint, I think it's been very stable over the last few years. As you know, several years ago, there were major downward pressure on pricing from both sub and sum total as well as from SAP and Oracle, that is abated somewhat I think it's -- maybe it's because it's become the new normal, but it hasn't changed much in the last several years, in the last three years. With regard to our pricing in the way we think about both direct sales and renewals, we made changes to our pricing at the beginning of 2018. Those have stayed intact that has served us very well. So our pricing is more in line with the market, but we are the premium provider. So we are not the low cost provider by any stretch. We maintained premium price points and we will continue to do that because we have the better solution. On renewal, we have moved away from trying to negotiate price uplifts once every three years and it moved to annual price escalators, what we call the innovation index, which takes into account the fact that we're doing four major releases a year. And so in the course of a typical three-year relationship, the clients had 12 major releases. And we're finding that to be much, much easier to negotiate and we had really good attach for the innovation index, which means we are seeing an annual increase in pricing across the client base.

[Justin Furby:]

Okay, that's helpful. And then just real quickly, the content business, how does it do in the quarter versus expectations? And just can you remind us the type of growth, you're expecting from an ARR perspective this year? Thanks.

[Adam Miller:]

Yes. So, obviously, content growth is fully baked into our numbers. We are still seeing strong double-digit growth in the content business and we think, it will continue to be a meaningful opportunity for us and this year will be a high-single digit percent of total ARR -- of exit ARR for 2019.

[Justin Furby:]

Okay, great. Thanks, guys.

[Operator:]

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

[Unidentified Participant:]

Hey, thank you. This is Benjamin. Nice quarter, seeing on behalf of Mark. Adam, you clearly have a great position in the market in learning element and now content, obviously makes it even differentiated. As you look ahead, what has to go right into the business for the subscription revenue growth to curve up maybe well into 20% range, or is it just a matter of execution, and what part would do you think content will play for that growth curve to go up?

[Adam Miller:]

Yeah. So, I'm going to answer this, two different ways. So just mathematically, the way we get our subscription revenue to extend over 20% is by executing on the content opportunity in front of us. It is a very clear opportunity. This is baked into our numbers in our assumptions. We've been relatively conservative about it. When you think about the scale of the opportunity, both from our installed base and from the wider market at large, there’s nothing stopping us from going outside our installed base. So we think a lot of that is just pulls down to execution. In terms of learning in general, what I will tell you is that we have a real macro tailwind available to us now. I go to conferences, I speak to CEOs, I read the same articles that you guys read, and the skills divide has become very real. The need for organizations to continuously train their employee base has become a very real thing, and is no longer something that we're trying to evangelize. This is now a top of mind for CEOs around the world, people understand the technology is transforming not only every business, but every job and that people need to be continuously trained. So that puts us in an amazing position as the number one corporate learning solution in the world.

[Unidentified Participant:]

Understood. And secondly on retention rate, I know you don't really update on retention quarterly, but qualitatively, could you talk about the retention rate overall? Are you seeing any change in gross renewal dollars or, has it been consistent to what you have seen in the end of 2018?

[Brian Swartz:]

I will make some comments and maybe Adam wants to as well. As you mentioned, we only disclose that once a year, and generally don't comment it quarterly. What I can tell you is obviously renewals are critical to our business, and we are super-focused on client satisfaction and always raising the bar in that regard. It's obviously from just a financial point of view, that caps to maintain existing clients or to up-sell existing clients are much better than that for new logos and acquiring logos are still a lot of new logos we can acquire, but we are super-focused on client satisfaction and continuously raising the bar in that regard.

[Adam Miller:]

Just as part of that, we have made significant investments to complete, what I really consider the last phase of our services transformation, which is really bolstering our global support operations. We've increased the size of the team. We've reorganized the team. Brought in new leadership to operate on a global basis, and continue to focus on a world-class client experience for all of our accounts.

[Unidentified Participant:]

Understood, I will go back in the queue. Thanks.

[Operator:]

Thank you. Our next question comes from Raimo Lenschow of Barclays. Your line is open.

[Raimo Lenschow:]

Hey, thanks for taking my question, and congrats on a great Q1. And can you talk a little bit about Adam, the different areas of content that where you said that you see. They're kind of more or less successful in the offering at the moment. Does that make sense to kind of specializing some of them or push certain areas more than others? Thanks for that. Thank you.

[Adam Miller:]

Yes. So the content opportunity varies a little bit by industry and by geography. Clearly, the number one seller in the content world is compliance training. It's mandatory; every employee needs to take it. So, in our base, that would be 40-plus million people that need to take compliance training. That's a very big market, as you can imagine, but the price points are going to be lower because it goes out to every single person. In Europe, as you know Raimo, there's a very strong desire to enable the employee basis there for digital transformation. And so digital fluency is a really hot topic there, making sure people understand not only their jobs changing, but the way they interact with customers, the way they go-to-market, the way they operate is going to be strongly influenced by software today and so digital fluency really big topic there. When you get into markets like healthcare, there are very job-specific requirements in the training area. So, this both has to do with continuing education requirements and the joint commission, but also how those organizations want to develop their people and ensure their confidence. And so you get into very industry-specific training around patient care and the like, and there is obviously for companies like ours, real focus on things like sales and marketing. And so when you get into organizations that are selling to other businesses, there is a real desire to have a world-class sales and marketing training to make sure that you have proper sales enablement as contrasted to modern compliance. Those tend to have higher price points; people are willing to spend more on their salespeople that obviously is demonstrated by what they spend on CRM systems per person. And the idea of spending a little bit more to enable a salesperson to be more effective is money well spent in most companies' eyes. So, we're seeing different opportunities in different segments in different markets. Language requirements are very important in Europe and in Latin America. So, making sure that people have not only the proper subject matter, but also the subject matter in the local language is very important, also very difficult for these companies to do by themselves, particularly, if the multinationals, because it's very difficult to curate high quality training across multiple subject areas and across multiple languages that's mobile-ready and modern. So, we're uniquely positioned to help organizations in this and that's why we're so bullish about this opportunity.

[Raimo Lenschow:]

Perfect, very clear. Congrats, again.

[Adam Miller:]

Thank you.

[Operator:]

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

[Patrick Walravens:]

Great. Thank you and congratulations to you guys.

[Adam Miller:]

Thanks Pat.

[Patrick Walravens:]

So, Adam, it seems like a lot of the pieces of the strategic transformation are starting to work and so I'm wondering where are you spending your time these days, what do you personally most focused on.

[Adam Miller:]

I would think about three or four different areas. So, number one content, content business is a start-up for us. I love start-ups. So, I'm helping Josh Schwede and others manage that organization along with Jeff. Number two is client success. We know the importance of retention rates and renewals and the upsell opportunity within our install base. So making sure that this service transformation is fully complete is really important and the phase, we're on is really global product support, and so making sure we land that well, just like we did with service delivery. And then the third piece is, working with our partners. So making sure that we're getting the most out of the partner ecosystem that we've built, which helps not just the sales force, but it helps our clients as well. I think making sure that the partners are properly enabled, making sure we're going to market together and not independently, all help build the business for the long-term. And the last is recruiting. I think there is a clear opportunity in recruiting. We've made investments there, obviously, work popping amongst them and we think there's a big upsell opportunity there. Then the last one, I'll touch on is marketing. I still think we have a lot of room to run in marketing. We are despite being known in certain circles, our brand awareness is definitely limited, especially relative to our ERP competition. And so better brand awareness, better positioning, stronger messaging, all helps us in every respect to the business. That's how I spend my time.

[Patrick Walravens:]

That's great. If I can drill down just a little bit on the last one. So what should we expect to see from you guys from a marketing point of view, we haven't really seen before?

[Adam Miller:]

I mean, I think you're going to see some changes in marketing. You're going to see some tighter positioning in messaging. You're going to see us doing things to drive awareness in areas like recruiting and HR, spending more time with the analysts not the Wall Street analysts, but the industry analysts to drive awareness of what we do and the strength we have in those areas. You'll also be seeing a new website that's coming out around the time Convergence, and a lot of this positioning will be released at Convergence, which is at the beginning of June, which is our Annual Client Conference as you know.

[Patrick Walravens:]

Yes, yes. Awesome. All right. Thank you.

[Adam Miller:]

Thank you.

[Operator:]

Thank you. At this time, I'd like to turn the call back over to our CEO, Adam Miller, for any closing remarks. Sir?

[Adam Miller:]

Thank you everyone for your participation. Hopefully, everybody likes the new format we've taken and the information available. We'd love your feedback on the information we're putting out. And I want to once again thank the global team for the amazing work they do to help over 40 million people around the world to realize their potential. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.