Cornerstone OnDemand, Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Cornerstone OnDemand’s First Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. And now, I will turn the call over to Jennifer Gianola, VP of Investor Relations for Cornerstone OnDemand.

[Jennifer Gianola:]

Good afternoon, everyone, and welcome to Cornerstone OnDemand’s First Quarter 2018 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 March 31, 2018. 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 future financial and operating performance, including our GAAP and non-GAAP guidance; business strategy; demand for our solutions; product development; client satisfaction and retention; market or business growth; investment activity in our business; visibility into our business model and results; the effect of capitalized development costs; spending on R&D; professional services and other aspects of our business; the use of proceeds from the sale of our convertible note; our appraisal of our competitors and their products; our ability to compete effectively; our ability to realize potential benefits from both our recent and ongoing operational excellence; and recurring revenue and margin improvement initiatives; changes to our corporate governance structure and our proposed strategic plans to strengthen our business. 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. Please note that we have made some changes to our disclosure, in part due to the new ASC 606 revenue recognition standard. All financial figures discussed today are on an ASC 606 basis unless we state the value is on an ASC 605 basis. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a summary of changes to the non-GAAP financial measures. With that, I will turn the call over to Adam.

[Adam Miller:]

Thanks, Jennifer, and thank you to everyone for joining us today. As you may recall, over the last few months, we outlined a five point plan to transform Cornerstone into a high-margin growth company. Today, I’m pleased to announce the progress we’ve made towards that plan as well as highlight our solid performance in the quarter. We believe our ability to deliver in the midst of this major transformation is a strong indicator that we are moving in the right direction. As previously discussed, the first point of the plan is a renewed focus on recurring revenue. To achieve that objective, we had to both exit the services delivery business and change our commission plans. In the first quarter, we began our exit from the services delivery business by having our clients contract directly with our delivery partners for onetime implementation services. Our global partner ecosystem has been asking the paperless services directly for some time as it allows them to increase their scope of work, negotiate the terms and keep all of the revenue. Since the initial announcement in November of last year, we’ve seen strong engagement from our partners around lead generation, account planning, joint marketing and integrations. In that short time, we’ve grown our partner ecosystem as well as successfully placed a number of our senior services executives into leadership roles of partner organizations, such as Deloitte and IBM, to develop their internal Cornerstone practices. We believe the strengthening of new and existing partner relationships validates our decision to exit the services delivery business, the least profitable part of our global operations, while also motivating our global partner network to refer us incremental business. At the same time, we’ve been deepening our technology partnerships with technology leaders like LinkedIn and Facebook. Regarding our sales commission plans, as of January 1, 2018, we eliminated quota credit and commissions for all nonrecurring sales, exclusively incentivizing our sales reps to grow recurring revenue. We anticipated this change could increase productivity as sales reps would use the incremental time and capacity that was formally spent selling services to focus on recurring revenue. To that end, although it’s early in our transformation, it’s worth noting that our sales rep productivity, as defined by new ARR per rep, was up 25% year-over-year in Q1. While it has only been one quarter, we are pleased with these results and believe the commission plan shift, along with our renewed focus on growing recurring sales, will help drive future revenue growth. The second point of our plan involves improving our operating margins and free cash flow. The workforce reduction of our services delivery and sales organizations announced in December 2017 was substantially completed as of March 31 and should be a significant driver of margin improvement for 2018. In Q1, we were able to grow subscription revenue despite the fact that the sales force was 10% smaller than it was in the second half of 2017. We achieved an operating margin of 10%, resulting in more than 500 basis points of improvement from the prior year. We expect to see improvement in the lower total sales and marketing expense and as a percentage of revenue as well as improved customer acquisition costs. In addition, we anticipate incremental efficiencies will be gained as part of our ongoing operational excellence program, driven by optimized budgets, strategic sourcing, further automation and process improvement initiatives. We believe these improvements will flow through to free cash flow. The third point of our plan is the development of new recurring revenue streams, including leveraging our leadership position in the learning space to enter the e-learning content market. There are two significant developments that give us confidence in our content strategy. The first is that as part of our commission plan restructuring on January 1 of this year, we incentivized the entire global sales team to sell content in contrast to the small dedicated team that sold content in the past. The second is our new content subscription offering, Cornerstone Content Anytime, which launched in Q4 2017, has received significant interest from clients and prospects. In the first quarter, our content team saw continued momentum following a strong Q4 by more than doubling the volume of wins from the prior year as well as delivering more than 140% growth in annual recurring revenue from the prior year, albeit on a relatively small scale. As we mentioned in our Financial Analyst and Investor Day in March, we have seen multiples of 3 to 10 times per user prices for Content Anytime relative to the per user pricing for learning, and we saw that trend continue throughout Q1. Although we’re still in the very early stages of our content offering, we believe content has the potential over time to become as large as our entire learning business, which was approximately $225 million in annual recurring revenue in 2017. As our learning business continues to grow, we expect content to expand alongside it. On top of content, we’ve also been successful in converting some of our nonrecurring services into recurring offerings. In Q1, we saw early wins selling client success packages and tech services as new recurring offerings, further supporting the growth of our recurring revenue into the future. The fourth point of our strategic plan involves bolstering our management team to help us scale. Since November, we brought on a number of seasoned executives, including our new President of Global Field operations, Jeff Lautenbach; our first ever Chief Marketing Officer, Adrianna Burrows; our VP of Global Field Operations, Chris Wheaton; and our VP of Investor Relations, Jennifer Gianola. We also said goodbye to a number of tenured executives, including our Chief Operating Officer, Chief Sales Officer, Vice President of Sales and our General Manager of Asia Pacific. We believe that our new hires now in place gives us the right team to execute our strategic transformation. The fifth and final point of the plan involves strengthening corporate governance. As previously mentioned, long-tenured directors Mark Baker and Joe Payne will be retiring from our Board of Directors at our Annual Shareholders’ Meeting on June 14, 2018, and Hal Burlingame will retire from the board at our 2019 Annual Meeting. Following an extensive search conducted by our board’s independent Nominating and Corporate Governance Committee, leveraging input from our shareholders, the board has nominated Elisa Steele, Richard Haddrill and Marcus Ryu for election to the board at our shareholders meeting. Ms. Steele, Mr. Haddrill and Mr. Ryu will be placed on the ballot in 2018. Once elected to the board, Ms. Steel will serve as the chair of the board. We are very pleased with the progress we have made in the past six months and believe all of these changes are putting us in a better position to successfully drive continued recurring revenue growth and margin expansion. Shifting now to Q1 performance. First quarter subscription revenue came in at the high end of our range at $113 million, representing reported growth of 22% year-over-year and constant currency growth of 18% year-over-year. In addition, we continue to see improvements in profitability with $13 million in operating income or 10% operating margin for the quarter. In the first quarter, we expanded our organically grown client base to 3,280 enterprise and mid-market organizations from all over the world. New client additions include the third-largest financial institution in North America, a Fortune 100 IT company, the Belgian Department of Mobility and Public Works, Baylor Scott & White Health, Israel’s largest pharmacy chain, Schroders Investment Management Limited, the largest logistics company in Latin America, Institut Monroe SA in France, Systembolaget AB in Sweden, EnPro Industries, Jindal Steel & Power Limited in India and Arizona State University, among many more. Today, our client base includes global leaders in virtually every vertical, which has enabled us to build one of the largest subscriber bases of any software provider in the world. In Q1, we continued to grow our user base, adding nearly 800,000 net users, amounting to a total user base of 36 million subscribers. Our solid performance for the quarter was largely driven by success at the high end of the market. Led by the strategic accounts team, our largest win in the quarter came from a Fortune 20 financial institution in North America. The client purchased the Learning Suite for all of the company’s 350,000 employees organization-wide. They were previously using SumTotal to manage their learning and chose Cornerstone to shift to a modern learning solution with both an engaging learning experience and deep learning management capabilities to develop their employees while ensuring compliance with regional regulatory requirements. Another large win in the quarter came from our North American enterprise team with a Fortune 100 IT organization who purchased our full talent management suite. They have been an Oracle client but abandoned the transition from PeopleSoft to Oracle Fusion upon realizing both the implementation process and the solution were not mature enough to support their needs. They turned to Cornerstone for best-in-class support levels, robust functionality and a unified talent management suite. Our client sales team was also a strong performer for the quarter, driven by the continued shift to unified talent management. The team had its strongest first quarter to date, delivering more than 50% growth in annual recurring revenue through increased deal volume and larger average deal size relative to the prior year. We’re pleased to see our installed base continue to expand their Cornerstone footprint and believe this will generate ongoing growth of recurring revenue into the future. We also saw continued success in Europe, driven by consistent execution, including strong performances in France, Italy, the U.K., Switzerland and Sweden. Momentum with Cornerstone HR in Europe continued, appearing in more than half of all Europe -- new European deals in the first quarter. Over the past two years, European clients who purchased Cornerstone HR bought approximately double the number of product suites on average than those without Cornerstone HR. This is even more significant when viewed from a dollar perspective with the inclusion of Cornerstone HR increasing the average revenue per user among European clients by nearly 3x. We believe Cornerstone HR will drive further growth within our existing client base as well as new client wins in the European market. Lastly, I’d like to discuss our recent product developments. In January 2018, we added 50% more engineering resources to our Cornerstone Recruiting team, allowing us to accelerate our development time line and bring key new Recruiting features to market. With our May release, we believe our Recruiting solution is best-in-class, driven by enhancements to the candidate and recruiter experiences. Our increased engineering resources now allow us to innovate at an even faster pace, and we expect to drive adoption of our Recruiting Suite among new and existing clients. At just over 20% penetration, increased adoption of Recruiting is a significant opportunity for Cornerstone. To put that into perspective, if we bring our Recruiting penetration to 50%, the same penetration level as our Performance Suite, it will generate incremental annual recurring revenue of approximately $100 million. Another product we believe will continue to drive revenue growth is the learning experience platform that was unveiled at Convergence in 2017. As you know, we started in Learning, and today, Cornerstone is the dominant player in this space with more than 390 million online class registrations and more than 230 million online class completions in 2017. Cornerstone Learning today combines our deep history in learning management with a machine learning-based, personalized learning experience platform and exclusive, curated content subscription offerings. We’re the only vendor in the space to offer a holistic and modern approach to enterprise learning, and we believe it will continue to position Cornerstone ahead of its peers. I look forward to sharing many more details about our continued product innovation with clients and partners at our Convergence event on June 5 in San Diego. With that, I’d like to turn it over to Brian to discuss our first quarter financial performance and outlook in more detail.

[Brian Swartz:]

Thanks, Adam, and good afternoon, everyone. As Adam just discussed, our focus in 2018 and beyond is growing recurring revenue and driving operating margin improvement. Our performance in Q1 showed good progress towards these goals. To best follow along, please note that we have included a document on our Investor Relations website called Supplemental Financial Deck that provides a summary of our guidance for your reference. In the first quarter, total revenue came in at $133 million, representing a year-over-year increase of 19% or 15% on a constant currency basis. With respect to annual recurring revenue, also known as ARR, we got off to a good start for the year. And while Q1 is typically the lightest quarter of the year due to seasonality patterns, we are pleased with the progress we have made towards our full year goals. Subscription revenue came in at the high end of our guidance range at $113 million, representing a year-over-year increase of 22% or 18% on a constant currency basis. Under 605, subscription revenue growth was 23% or 19% on a constant currency basis. Services revenue in Q1 came in at $20 million, which is more than we had expected. This is due to us intentionally driving down our services backlog as we exit the enterprise implementation business. As we transitioned our delivery approach, we chose to keep some of the deals that were mid-sales cycle on our books, consistent with our prior delivery model. This resulted in some incremental services bookings during the quarter that we did not forecast. Nonetheless, our services backlog continues to shrink. A few other key Q1 metrics. The size of our client base increased to 3,280 as of March 31, representing 30 net new client additions during the quarter. It’s important to note that although our gross client adds were the largest we’ve seen in a Q1, client churn was also elevated at the lower end of the market. Despite the higher churn at the low end of the market, we remain keenly focused on maintaining our industry-leading dollar retention rates through disciplined operating procedures around renewals and client satisfaction. We added approximately 800,000 net users during the quarter, bringing our user base to 36 million users. Finally, as a result of the headcount reduction announced in the fourth quarter, some of which took effect in Q1, we have 1,829 employees as of March 31, representing a 3% decrease from Q4 and a 2% decrease over the prior year. Our gross margin was 73% in the first quarter, representing 30 basis points of improvement from the prior year. The improvement in gross margin was driven by a higher mix of subscription revenue. As I mentioned on the last call, we had expected gross margins to be down in Q1. However, because some of the delivery team’s exits took place later in the quarter than we had forecasted, we were able to complete more projects using internal resources, which resulted in a better-than-anticipated gross margin. With respect to operating expenses for the quarter, sales and marketing reached a record low of 40% of revenue in Q1, driven largely by reduced sales headcount. To give you some perspective, just two years ago, in Q1 of 2016, sales and marketing expense was 51% of revenue or 1,100 basis points higher than it is today. Going forward, we expect incremental improvements in sales efficiency as we continue to improve our sales management processes and achieve productivity improvements. As I’ve previously mentioned at the Financial Analyst and Investor Day, in addition to margin improvement, we expect sales and marketing dollars to be down in 2018 when compared to 2017 as we optimize our customer acquisition costs. Continuing down the P&L, R&D expense was 10% of revenue, in line with the prior year. I’d like to point out that R&D expense, including capitalized software development costs for the quarter, was $20 million or 15% of revenue, also in line with the prior year. In the first quarter, G&A was 13% of revenue, in line with the prior year. We expect to see further G&A optimization over time as our operational excellence initiatives are fully implemented. Although excluded from our non-GAAP results, in connection with the headcount reduction that we announced in December, we recorded restructuring expense of $8 million in Q1, $5 million of which was stock-based compensation. These amounts are larger than originally anticipated due to certain senior executive departures. We believe our restructuring efforts are substantially complete and do not anticipate significantly more restructuring expense at this time. As a reminder, approximately $3 million of these restructuring costs will adversely impact our unlevered free cash flow in 2018. Overall, this resulted in Q1 operating income of $13 million or a 10% margin, which represents more than 2 times the prior year operating margin of 4%. This is largely driven by the 500 basis point improvement in sales and marketing as a percentage of revenue. Net income for the quarter was $9 million or $0.14 per diluted share compared to $0.08 in the prior year. It’s also worth noting that our new 2021 convertible note is not dilutive to our share count in the EPS calculation until we generate roughly $170 million in net income. With regard to cash flow, unlevered free cash flow, which we define as operating cash flow less capitalized software and capital expenditures plus cash interest expense, improved year-over-year by nearly $4 million to negative $10 million in the first quarter, representing an unlevered free cash flow margin of negative 8%. Now let’s turn to the balance sheet. We continue to maintain a well-capitalized balance sheet. As of March 31, our total cash and investments balance was approximately $639 million. Additionally, as of March 31, we had $537 million in carrying value of debt. We intend to use approximately $253 million of our cash and investments to pay off our 2013 convertible notes, which come due in July of 2018. In November of 2017, our Board of Directors authorized a $100 million share repurchase program. The program is expected to be executed through 2019 but is not specific as to when or how many shares will be purchased. In the first quarter, we repurchased approximately 423,000 shares totaling $16 million. Through last Friday, we repurchased an aggregate of 1.2 million shares at an average cost of about $36.74 for a total cash outlay of $43 million. Before we turn to our 2018 outlook, I’d like to provide an update on ASC 606, which became effective for us on January 1, 2018. We have adopted the new accounting standard using the modified retrospective method. Beginning this quarter, all financial results are reported under ASC 606 with 2018 financial results reported under ASC 605 in the footnotes included in our Form 10-Q for comparative purposes. Please note that all guidance announced today assumes ASC 606, but you can view the ASC 605 guidance for comparative purposes in our supplemental financial deck. Now let’s discuss our 2018 outlook, which has been developed using the best information we have as of today. Our guidance has been impacted by currency headwinds resulting from the strengthening of the U.S. dollar relative to the British pound and euro since we last issued guidance on our Q4 earnings call. Specifically, the U.S. dollar strengthened approximately 3%, resulting in a headwind of roughly $3 million to revenue for the full year. Our guidance assumes a U.S. dollar to British pound exchange ratio of US$1.36 to £1, down from US$1.4 at the time of our last earnings call, and a U.S. dollar to euro exchange rate of US$1.20 to €1, down from US$1.24 at the time of our last earnings call. If the U.S. dollar will further change by 5%, the impact is approximately $7 million to ARR and $5 million to revenue. As I mentioned earlier, I encourage you to reference our Supplemental Financial Deck as I discuss the following guidance. For the second quarter of 2018, we expect total revenue in the range of $127 million to $129 million and subscription revenue in the range of $111 million to $113 million. At the midpoint of $112 million for subscription revenue, this represents approximately 16% growth and 14% constant currency growth. On ASC 605 basis, these growth rates are approximately 1 point higher at 17% and 15%, respectively. Also, it’s worth noting that Q1 subscription revenue was positively impacted by a onetime adjustment related to the completion and resolution of enhancement of about $1 million. This adjustment as well as currency headwinds will impact the sequential growth in Q2 relative to Q1. Regarding full year revenue guidance, we are raising our currency-adjusted guidance to a range of $506 million to $514 million, which increases the midpoint for total revenue by $8 million. On a reported basis, those numbers are impacted by $3 million of currency headwinds, resulting in an increase in the midpoint of $5 million for an expected reported range of $503 million to $511 million. We are raising our currency-adjusted full year subscription revenue guidance to a range of $456 million to $464 million, which increases the midpoint for subscription revenue by $2 million. On a reported basis, those numbers are also impacted by $3 million of currency headwinds, resulting in a reduction in the midpoint of $1 million for an expected reported range of $453 million to $461 million. At the subscription revenue midpoint of $457 million, this represents approximately 15% growth and 13% constant currency growth. On an ASC 605 basis, these growth rates are approximately 2 points higher at 17% and 15%, respectively. I would like to remind you that total revenue guidance reflects our best estimate of the pace at which services revenue will roll off to our partners. Roughly one third of our services business is related to technical integration projects. We will keep most of these projects and convert as much as we can into recurring revenue streams. We expect the remaining 2/3 of the services business to transition to our diverse ecosystem of service partners over the next several quarters. We currently believe services revenue will be down roughly 20% in the second quarter and 40% for the full year, both on a year-over-year basis. The pace of the roll-off could be meaningfully faster or slower, which would impact our total revenue but not our subscription revenue. We are raising the low end of our ARR guide from $475 million to $477 million to a revised guidance range of $477 million to $495 million, which increases the midpoint by $1 million. This represents approximately 11% reported growth over 2017 ARR of $439 million. As I’ve previously mentioned, we will only disclose this metric for the full year as it’s best viewed on an annual basis given the seasonality of our business. Moving on to profitability. We are raising the 2018 operating income guidance range of $52 million to $62 million to a range of $54 million to $62 million, resulting in an operating margin of 11% to 12%. Note that the pace at which services revenue rolls off should have very little impact on our dollars of operating profit but will impact operating margin. For Q2, we expect operating income to be down in the low single digits from Q1 of 2018 operating income of $13 million. It’s worth noting that our annual Convergence conference takes place in Q2, which causes a seasonal increase in marketing expenses. We expect Q2 to be the low point of our 2018 quarterly operating margin and then to experience a steady but steep ramp through the second half of 2018 as our services revenue declines more significantly. Regarding cash flow, for the full year 2018, we are raising our unlevered free cash flow guidance range of $50 million to $60 million to a range of $52 million to $60 million, which excludes $14 million of cash interest expense. Assuming services revenue is down by 40% by the end of 2018, this amounts to unlevered free cash flow margins of 10% to 12%. As discussed at the financial Analyst and Investor Day, there are two significant items impacting the 2018 cash flow that should be highlighted. The first is CapEx associated with our new Paris and Frankfurt data centers impacting the margin by about 1 percentage point. The second is the working capital impact of exiting the services business, which should impact the margin by 3 percentage points. In the future, we do not expect this roughly four point hit to free cash flow to reoccur. With respect to Q2, we expect unlevered free cash flow to be down slightly from Q1 due to cash payments associated with our European data centers. This does not impact our European data center timing, and we expect to bring those data centers online in Q2 of this year. With respect to long-term margin targets, as we discussed at the Financial Analyst and Investor Day, we believe the changes in our business will result in achieving the Rule of 40, which we define as the sum of annual revenue growth and unlevered free cash flow margin by 2020. As you can see in our Supplemental Financial Deck, although there are various scenarios that can get us there, assuming we maintain moderate top line growth of 10% to 20% subscription revenue growth, we believe we can generate roughly $150 million in unlevered free cash flow or approximately $2 per diluted share by 2020. Finally, I’d like to announce that we plan to attend several upcoming investor conferences this quarter, including the Jefferies 2018 Global Technology Conference, the Needham Emerging Technology Conference and the JPMorgan Global Technology, Media and Communications Conference. We will also be marketing in Toronto, New York, Boston, Chicago and Minneapolis. If you’d like to participate in any of those meetings, please reach out to our Investor Relations team. In summary, we are pleased with our first quarter performance. Although we are still early in the transformation, we are pleased with the progress we have made to date and believe this sets us up for a solid 2018. With that, I’ll turn it back to Adam.

[Adam Miller:]

Thanks, Brian, and thank you to everyone who joined us today. As we discussed, over the last two quarters, Cornerstone has undergone a significant amount of change. We believe this change has made us stronger, more focused and better positioned for growth. We intend to continue to dominate the learning market, extend our leadership in talent management and solidify our position as a global human capital management player. We will now take your questions.

[Operator:]

[Operator Instructions] Our first question comes in the line of Brad Sills from Bank of America Merrill Lynch.

[Bradley Sills:]

Just one on the content business. It sounds like some good early traction there and some good pipelines. Are there any verticals or categories within that, that you’d call out where you’re seeing some traction relative to others?

[Adam Miller:]

So right now, we’ve been selling the Content Anytime base subscription, and that is really applicable to any organization in the world. It could be any vertical, non-profits, governments, universities and the like. Overtime, we will have incremental subscription offerings that are vertically specific. So we are focused on health care and education as two specific categories. We’re also working on one specific to manufacturing. And we will, overtime, be building out certain functionally specific subscription offerings as well for things like sales and IT. So these subscriptions will be very specific. We also have a package today for the Content Anytime international edition, which is focused on our European clients, offering courses in French, German, Spanish and other languages as well.

[Bradley Sills:]

And then one more if I may, please, on Cornerstone HR. I know the primary focus has been in Europe there with that solution. Is there anything precluding you from potentially going after business in the U.S.? Maybe it’s just the makeup of accounts in Europe. Maybe you could explain a little bit as to why you’re seeing that business perform in Europe.

[Adam Miller:]

Yes, it’s very intentional. We are not selling it in the U.S. We’re intentionally focused on our European clients. And the reason is that use cases for that product are slightly different depending on the geography and depending on the type of business. We decided to be very disciplined here and focus our efforts on what is clearly a high-demand use case for our European clients, which typically involve a client that’s a multinational with many different HRIS systems in use, often several different payroll systems in use. We serve, essentially, as the hub across all those systems, allowing a client to very easily get data on their employee base, on trends, on headcount but also be able to administer the employee records and allow for a modern approach to employee and manager self-service. So we’ve been very focused on that use case. We want to make sure we nail that. And when we’re done, ultimately, we could bring it back to the U.S.

[Operator:]

[Operator Instructions] Our next question comes from the line of Scott Berg from Needham. Your question please.

[Scott Berg:]

I guess a multipart question on your Q1 bookings and how it relates to your Q2 guidance is your enterprise commentary, very strong, kind of in line with what we saw in the quarter. But churn was a little higher. It sounds like downmarket. Trying to reconcile that with subscription revenues that even when you exclude the $1 million impact, you’re only up a very nominal level from a historical kind of view. I guess what’s the impact there? Trying to get to that million dollar number that’s not as high as historical. I don’t know if churn was a little bit more than expected. And then going forward, do you see that churn on the low market moderating from the Q1 level? Or should that be expected at least in the short term?

[Brian Swartz:]

Yes, Scott. It’s Brian. So a couple of things because there’s a lot in there. So let me just try to clarify a few things. On the unit count churn, as I mentioned in our prepared remarks, during the quarter, we actually had the largest Q1 of new client additions, gross new client additions that we ever had. We did have elevated churn. And specifically, that churn is in the lower end of the market. So the average the ARR for those clients is significantly below the average for our entire client population. It was the lower end of the market, number one. With respect to the subscription revenue guide, I think you captured most of it. There’s obviously a lot of puts and takes. In Q1, we did have some true-ups for roughly about $1 million related to enhancement completion and delivery, as I mentioned in my remarks. The other thing impacting Q2 on a sequential basis, although it’s a smaller piece, but it is something to consider, is some of the incremental currency headwinds. So all of those things lead us to guide the Q2 to the numbers that I disclosed or that we disclosed today on the call, which were the 111 million to 113 million for subscription revenue in Q2. So we’ll obviously look to exceeded those and hope to, depending on how bookings trend during the quarter themselves. So hopefully that helps answer your question.

[Operator:]

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

[Justin Furby:]

Just a follow-up on Scott’s question. When you look at -- I think, Brian, you said you had 25% better ARR per rep. Is that right year-on-year? Was that the number you gave out?

[Brian Swartz:]

Yes, Adam had mentioned that in his remarks. It was 25% year-over-year in Q1.

[Justin Furby:]

So if you look at that and you say your sales team is 10% or something smaller, it implies that your bookings was something in line with your full year, sort of low double-digit growth. Is that the right math? And if it is, just kind of trying to reconcile that with all the big -- it seems like a big enterprise quarter. I guess anything we’re missing in terms of what you see on the mid-market side and then anything else to call out? And then I got just one quick follow-up.

[Brian Swartz:]

Yes. So Justin, I think -- well, first of all, we’ve guided to the full year of the ARR number, which incorporates new bookings. And obviously, it incorporates all aspects, some other things to go into ARR. And I actually spent quite a bit of time at the Analyst Day talking about that, things like churn and everything else. So we’re not going to comment on quarterly ARR specifically and quantify that number. What we can tell you is that our bookings and new business in Q1 were ahead of what we had expected internally. And as a result of that, we’ve raised the midpoint of the ARR guide for the full year by $1 million. So outside of that, we’re just not going to comment further in terms of billings and other metrics that we look at. We are focused and we’re entirely running the business today focused on new ARR growth and everything that goes around that and not managing to a quarterly billings or quarterly specific number around bookings.

[Justin Furby:]

And then, Adam, the content side, do you see that -- it actually -- so it increases your deal sizes. But what do you think it does in terms of win rates? Do you see any evidence that it actually improves your positioning with some of the other players out there?

[Adam Miller:]

Yes, we actually believe that the addition of content enables us to provide a holistic solution for learning for our clients, and that has proven to be not only in demand, but it actually increases our win rates. So yes.

[Operator:]

Our next question comes from the line of Michael Nemeroff from Credit Suisse.

[Michael Nemeroff:]

Nice to see you guys back up on the horse, especially on a seasonal Q1. Adam, the number of new customers, I know that it was explained away that the net number of new customers are a little bit lower than what you were looking for. Could you just tell us what’s going on in that mid-market or low-end churn that caused the spike there? And then how should we think about, following on the last question, as you’re selling more content, I assume, into the customer base? Are you guys willing, maybe Brian, to give us some metrics on ARPU or some kind of an ARPU uplift that you’re seeing with customers over time?

[Adam Miller:]

Yes, I’ll take the first part of the question. Brian will take the second part. With regard to the churn, you might remember that approximately 3 years ago was the top end of our mid-market activity back then. And over the last 3 years, we’ve been quite challenged in that space in mid-market. But 3 years ago, we had quite a strong performance, and those are the clients that are up for renewal now. So we see a significant number of accounts up for renewal. Many of these are extremely small. These are what we consider our Tier 5 clients. These are the smallest of the clients that we have. And as you can imagine in that segment, you have more M&A. You have more financial stress, and you have more turnover than you do in the enterprise segment. And as a result, we’ve seen outsized churn in Q1. I don’t suspect that will continue for a long time, but our renewal base is growing both in terms of units and dollars. And renewals is something that we’re very focused on in this year, the entire client experience, ensuring that we’re giving world-class support and service to our clients. And despite the services 2.0 model, where we do the implementation work through our partners, we are still providing optimization services to our clients, ongoing support, community management, ongoing training and development for our clients, all of which is meant to allow for a great client experience. And so that’s something Jeff and I are very focused on this year, and we’re going to make sure we are focused on bringing this renewal base.

[Brian Swartz:]

And then, Mike, with respect to your second question on content and some metrics to that, I think over time, that’s something we will certainly evaluate more. We try to give or at least frame the content opportunity as we see it today. Adam did that in his prepared remarks today. We also talked about it at the Investor Day. The ARPUs relative to our existing learning clients are in the 3 to 10x range. So they’re pretty significant. And we believe, over time, a substantial part of our learning clients, theoretically all of our learning clients, could use some form of content from us or some package. So it starts to get into ARPU versus attach rate and how big can it be. We believe that can be as much as $225 million of ARR over time. And then I think in terms of progress as we go along that journey, we’ll watch -- it’s still early innings of the business, right. It’s a relatively small force, but we will look at that closely and see what it makes sense to provide you so you can monitor our performance and watch our progress over time. It’s just a little bit too early to definitively what is the -- determine definitively what’s the right metrics. So we’ll talk more about that in the coming quarters.

[Operator:]

[Operator Instructions] Our next question comes from the line of Pat Walravens from JMP Securities. Your question please.

[Matt Spencer:]

This is Matt Spencer on for Pat. How would you characterize the potential competitive threat from Amazon, who is rumored to be considering the service for companies to show training content to their employees?

[Adam Miller:]

So we do not view that as a significant competitive threat. We’re in talks with Amazon. Amazon is a client of ours. We use Amazon Web Services, and Amazon is focused on the infrastructure layer around content. As you can imagine, to the extent they’re able to fill their pipes up with more video-based content, it requires incremental storage and incremental bandwidth. That’s very good for AWS. So you see them actively looking for opportunities that drive lots of video. So training is one of those areas. I think you’ll see them do corporate collaboration as well, similar concept, driving more video-based content. And we will -- we intend to work with them as they build out that infrastructure layer.

[Operator:]

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

[Scott Wilson:]

This is Scott on for Alex. Maybe two questions for me. First, kind of keen on that churn thing that you talked about. Obviously, it impacted your gross customer add. Your user adds also looked a little seasonally light. So I’m curious if you would be towards that kind of north of 1 million user adds that you’ve seen over the next couple of years in your 1Q period.

[Adam Miller:]

Yes. So just to correct that, our net adds were lower. Gross adds were actually quite strong for the quarter. So net new sales were quite strong. It’s the offset of that churn at the low end of the client base that brought down the net client add number. And with regard to user accounts, as we’ve said many times before, our user accounts are -- and our user adds are based specifically on when a client goes live. So they tend to be somewhat seasonal. They don’t -- they’re not perfectly correlated to when we do the sales. They are associated with when the client actually goes live, and that does vary. So there’s nothing extraordinary about the adds. We’re now up to 36 million subscribers and are very happy with that subscriber count.

[Scott Wilson:]

And then maybe pivoting a little bit. Your Content Anytime solution obviously sounds like it’s early, but you’re seeing a lot of momentum. Just curious -- and if you think about sales cycle for that, I mean, obviously, it’s 3 to 10x your core product. Does that lend itself to any kind of increased seasonality? Should we think of that as more of a 4Q heavy sales? Just out of curiosity.

[Adam Miller:]

Yes, honestly, it’s probably too early to know. What I would say is that it does seem to be correlated with our learning business, but a lot of the sales we’re doing are to existing clients. So it attaches with net new learning deals, but we’re also able to sell Content Anytime to existing clients. So it’s too early to tell exactly what the seasonality is going to be.

[Operator:]

Our next question comes from the line of Mark Murphy from JP Morgan.

[Pinjalim Bora:]

This is Pinjalim sitting in for Mark. Adam, I had a question on competition essentially. Some of our checks have said that Saba has basically vanished from enterprise deals and SumTotal is apparently struggling, which obviously puts Cornerstone in an extremely strong competitive position. Have you thought about what is the opportunity -- incremental opportunities there that you can actually gain if that dynamic is true overtime? And the second part of that is there seems to be some kind of distraction versus some learning experience platforms like Degreed, EdCast and others. I know you already have a solution, but are you seeing any kind of increased sales cycle because of the smaller players?

[Adam Miller:]

Yes, I would say that the two questions are somewhat related. So the investments we’ve made over the last couple of years around the learning experience platform has -- in addition to the investment we’ve made in the content arena, have allowed us to create a very unique, highly competitive learning solution that’s holistic for our clients. And that has allowed us to thwart off the potential encroachment from the startups like Degreed, Pathgather and EdCast while at the same time continue to take share from the legacy providers like Saba and SumTotal. So it puts us in a very good position. We think it provides competitive differentiation against the larger ERP players as well and is one of the reasons our business continues to grow at a decent clip.

[Pinjalim Bora:]

Okay. And any thoughts on the incremental -- I mean, is there a refresh cycle that’s coming up for the Saba or SumTotal clients that near term could actually help Cornerstone?

[Adam Miller:]

I think it would be somewhat misleading to imply that what’s happening now is much different than what’s happened over the past several years. As I’ve said many times before, Saba has been almost like a villain in one of those zombie movies. It just keeps coming back, and we’ve seen that happen for multiple years. In fact, it was probably 9 months ago when people were asking me are we afraid of Saba because they have such a resurgence. And so I give the same answer every time. They come and go. The same thing could be said about SumTotal at this point. And so I think we’re seeing a point in time in the market. It wouldn’t surprise me if two or three calls from now, people ask me if we’re worried about Saba or SumTotal. It’s just the nature of this business. It’s a highly fragmented market. While we have very good market share now, we think that market share can continue to grow given the overall fragmentation globally in our market space.

[Pinjalim Bora:]

Understood. And if I can squeeze one more. Could you talk about the dollar retention rate? I know you don’t give a quarterly number, but what is the goal for the year? And are you on track towards that?

[Brian Swartz:]

Yes. So we disclose a dollar-based retention only once a year. We actually only calculate it once a year. We look it once a year. We obviously manage renewals at a different metric internally from an operational point of view in terms of how we manage our renewable base. But dollar-based retention, we did disclose at the end of last year. I would expect us to do that clearly this year. It’s something we’ve done every year. But we don’t comment with respect to the forecast of where that might come out at the end of the year. So we’ll continue to focus on it and focus on the renewable base and driving and ensuring we’re taking care of all of our clients in all segments and talk about it in the coming quarters.

[Operator:]

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

[Jesse Hulsing:]

We’re one quarter in to the services offload, Adam. I’m just wondering, are you starting to see an uptick in partner influence, I guess, in your first quarter of new business? And then as you look into the pipeline for the full year, are you seeing more partner-driven deals versus maybe where you were a year ago at this time?

[Adam Miller:]

Yes, I would say it’s still very early days in what we’re going to be able to do with our partners. We’re seeing very good receptivity. I personally had very high-level conversations with all of our major partners, and we’re seeing lots of intent on the partner side and lots of willingness to work together, to co-market, to do account planning together, all of which will drive incremental pipeline and help improve win rates. So we’re feeling very good about the setup with the partner ecosystem. Having said all that, it’s still very early days. These tend to be relatively long sales cycles at the higher end of the market, and so I would not expect any immediate return from that. But it is quite positive, and the partners have also been very positive about accepting the work. It’s one of the reasons we were able to burn off the backlog faster than expected. And we believe we have set up the right partnerships and the right practices. We are extremely encouraged by the fact that our most strategic partners have taken our prior Cornerstone service employees and moved them to create their practices or grow their practices, all of which speaks to their desire to build a meaningful business with Cornerstone, and that creates a lot of opportunity for us into the future.

[Operator:]

This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Adam Miller for any further remarks.

[Adam Miller:]

Thanks to everyone joining us today. As always, I especially want to thank our global team for all of their great work during this transition to help 36 million people around the world to realize their potential. We look forward to seeing you at the upcoming investor conferences and at Cornerstone Convergence in June in San Diego. Thank you.

[Operator:]

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