Cornerstone OnDemand, Inc.
Q3 2014 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Good day ladies and gentlemen and welcome to Cornerstone OnDemand Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Perry Wallack, Chief Financial Officer. Please go ahead, sir.

[Perry Wallack:]

This is Perry Wallack, CFO of Cornerstone OnDemand and welcome to our third quarter 2014 earnings conference call. Today's call will be begin with Adam providing a brief overview of our company and our performance over the third quarter and then I will review some key financial results. 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 will be furnished with the SEC on Form 8-K. You can also access the press release and the 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. During the call, we will be referring to both GAAP and non-GAAP financial measures. A reconciliation of our GAAP to non-GAAP information is provided in the press release and on our website. All of the financial measures that we will discuss today are non-GAAP unless we state that the measure is a GAAP number. Any non-GAAP outlook we provide has not yet been reconciled with the comparable GAAP outlook. Our discussion will include forward-looking statements such as statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, customer satisfaction and retention, customer attrition rate, market or business growth, our revenue run rate, 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, our appraisal of our competitors and their products and our ability to compete effectively. Words such as expect, believe, anticipate, plan, illustrate, intend, estimate, and other similar words are also intended to identify such forward-looking statements. 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 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, the Risk Factors section of our most recent Form10-K and subsequent periodic filings with the SEC. And with that, I will turn the call over to Adam.

[Adam Miller:]

Thanks, Perry. And thank you for your participation in our third quarter earnings call. I wanted to start with the bad news. The lackluster performance of our emerging business units this year, in particular the poor performance of our public sector business unit in the third quarter, combined with the elongated implementation cycles of our largest clients, which result in delayed services revenue and the recent significant foreign exchange fluctuations have affected us going into the fourth quarter of this year and will result in a revenue shortfall for the year relative to our initial guidance. We now expect to have full-year GAAP revenue of $260 million to $263 million, which implies guidance of $72.8 million to $75.8 million for the fourth quarter. Perry will be providing more detail shortly. Now for the good news. Our core businesses, Enterprise and Mid-Market sales, both direct sales and existing client sales in the U.S. and in Europe, remain strong currently as they have been in the past and we expect will continue to be in the future. Our core teams have been having another solid year and really carried our business. This helped our third quarter revenue come in at a record $68.3 million, representing year-over-year increase of 42% and helped bookings after adjusting for the impact for foreign exchange come in at $84.2 million, representing a year-over-year increase of 35%. Our new client wins for the quarter included car rental company Enterprise Holdings, Sephora, Rackspace, Panera Bread, Level 3 Communications, Davita, Unilever, The Post, and many more. This helped take our organic business to over 1,950 clients and 16.6 million users worldwide. We expect to grow our revenue at least 30% to 35% in the foreseeable future, at minimum for the next three years, considering what we believe our core businesses alone will provide over 25% growth for the company during that time. We plan to continue to invest in the global expansion of our enterprise and mid-market sales teams and the demand for talent management in the U.S. and Europe remains as robust as ever. Since our initial public offering in 2011, the core businesses have demonstrated tremendous consistency in meeting or exceeding both quarterly and annual expectations. And 2014 has been no different. We have continued to scale our existing teams and add new teams, segments and territories throughout. Our quarter retainment rates have remained steady which we believe is indicative of the strength of the market opportunity and it’s not only about the sheer volume of available buyers but also the amount that we’re able to sell to each individual buyer, due to our improved competitive positioning and a broadening suite of products our revenue per user has risen steadily in recent years. We expect this to continue not only because organizations today better understand the value of a fully unified suite but also because they become much more sophisticated with respect to their approach to talent management. In addition, we continue to identify opportunities to increase the productivity of our existing core teams. For example, we’ve been growing our sales enablement organization to more rapidly and effectively onboard our new sales people and we continue to upscale the management of our global sales organization with both internal promotions and external recruits. Perhaps most importantly we’ve continued to see broad adoption of our expanding talent management suite. Today two-thirds of our enterprise and mid-market client base have two or more Cornerstone products, and almost 40% have three or more products. With our recent upcoming releases we expect to see even broader adoption of our connect-and-recruiting products as well as compensation and succession. Our recent Evolv acquisition which closed earlier this week further supports a continued growth to our core businesses. For some time now we’ve seen significant global demand from our enterprise clients for predictive and prescriptive analytics. Given the market demand, the opportunity to acquire Evolv was exactly the kind of investment we said we would make with our sizeable balance sheet. Evolv provides us with a best in class machine learning platform, the necessary big data infrastructure and a rare experience team of data science and analytics experts. By combining the massive dataset we’ve accumulated over the past decade with Evolv state-of-the-art predictive models and algorithms, we expect to extract unique insights for our clients. Longer term, we believe Evolv will help us accelerate our analytics roadmap and develop a number of big data solutions for our clients, including Cornerstone View, Cornerstone Insights, Cornerstone Selection and Cornerstone Recommendations, which I’ll talk about in more detail on future calls. We believe big data will be a key component of the next generation of cloud computing. And just as we were ahead of the pack on cloud computing and the consumerization of the enterprise, we want to be on the vanguard of big data in the cloud. These predictive analytics capabilities complement our existing products and further support the growth of our core businesses. All of what I just discussed substantiates my confidence in the ability of our core businesses to generate the vast majority of our annual 30% to 35% revenue growth expectations for the foreseeable future. In addition, the core business growth will be supplemented by our emerging businesses, namely Strategic Accounts, Asia-Pacific, Latin America, SMB, and public sector. While our results to date in these businesses have been at best inconsistent, we remain bullish on the long-term opportunity in each of these markets. Despite their recent underachievement these emerging businesses have all demonstrated some success. Take, for example Public Sector. In K-12 we have added clients such as the Los Angeles and San Francisco unified school districts. In HigherEd we have dozens of university clients, including the University of Southern California and the University of Miami. In state and local we have clients such as the state of Nebraska and the county of San Mateo. In federal, we have clients such as the U.S. Department of the Treasury, the Department of Housing and Urban Development, and the Department of Commerce. In the case of SMB, there are hundreds of small businesses who today use our Growth Edition product to manage their talent. Our strategic accounts team has signed numerous Global 100 organizations. And our regional teams in Asia-Pacific and Latin America have secured marquee names such as Tata Motors, The Commonwealth Bank of Australia, and one of Brazil's largest food processing companies, to say just a few. So we believe there is opportunity in all of these emerging areas, and, therefore, we remain bullish on them internally. Nonetheless, until they establish a consistency of performance that we have seen in our core businesses we are going to be particularly conservative in our forecasting of these emerging areas going forward with the assumption that they will contribute only 5 plus percent of our annual revenue growth over the next three years. If these groups underperform in 2015, then we will begin pulling back in some of these areas to further improve our margin profile. With that, I will turn it back over to Perry to discuss our financial performance in more detail.

[Perry Wallack:]

Thanks, Adam. Before I get into the financial results of our third quarter of 2014, I would like to remind everyone again that the financial figures I discuss today are non-GAAP unless I state that the measure is a GAAP number. We talk about non-GAAP numbers for the following reasons. Non-GAAP financial measures exclude certain items that we believe are not good indicators of Cornerstone's current or future operating performance. For the periods we will discuss today, these items include expenses related to stock-based compensation and related employer payroll taxes, amortization of intangible assets, acquisition costs, adjustments in taxes related to acquisition adjustments, amortization of debt discount and issuance costs, and payment of premium on investments net of amortization. For periods in the past, this may also include adjustments to our revenue due to the write-down of deferred revenue related to our acquisition of Sonar Limited in April of 2012. You can find the reconciliation of GAAP to non-GAAP results in today's earnings release. Let's jump right into the numbers. Our GAAP revenue for the third quarter was $68.3 million, representing 42% growth over the prior year, coming in above the midpoint of our guidance. As we've noted on prior earnings calls and emphasized on our last call and as we saw in last quarter's revenue results, our revenue can be impacted by the timing of when consulting services are delivered to our new and existing clients by our services organization and implementation subcontractors. In the third quarter, our revenue was adversely impacted in a number of cases where we and our subcontractors inconsistently delivered consulting services or where clients delayed having us perform services. We estimate that we outsource approximately one-third of our implementations to subcontractors. In the current quarter, our services team and our subcontractors continued in their efforts to become more efficient and accelerate implementations. However, we still have challenges in this area and are making changes to address those challenges. We must reiterate, when dealing with large enterprises in U.S. and abroad, as well as the U.S. federal and state and local government entities, it can be difficult for us to control the timing of services delivery. Thus, in any given quarter, we can have several million dollars in variability in our service revenue. Larger clients often take longer to implement and we have continued to compete very well in the large enterprise market, which has increased our service delivery challenges. Also, as we continue to sell more and more modules of our software per client, as we have talked about over the past several quarters, clients often implement each module in succession. Hence, services revenue recognition takes place over a longer period of time. This is even becoming evident as we go down-market to the mid-market segment. It does seem like we are a bit of a victim of our success in both of these respects. As we have said in the past, this is principally a quarter-to-quarter timing issue, but can affect our revenue on an annual basis as is demonstrated by our guidance for the fourth quarter. Further, we'd like to provide a bit of additional detail on our revenue. Generally, over the past several years, while on a quarterly and annual basis our mix can change by a few percentage points. We estimate our software and services revenue mix runs at about 80% and 20% respectively. These are estimations and can vary in any given quarter by a few percentage points. Finally, our revenue can be impacted by fluctuations in foreign exchange rates as we have to re-value our deferred revenue from our subsidiary Cornerstone OnDemand Limited on a quarterly basis. As you all know from many of the other companies who have reported this quarter, there were large fluctuations in the exchange rates between the U.S. dollar, the British pound, the euro, and even the Australian dollar, amongst others. Please note that, as we have discussed in the past, approximately 30% of our revenue comes from outside the U.S. For the third quarter, we estimate that the revenue we recognized was immaterially impacted by fluctuations in foreign exchange rates. However, as you will see in our guidance for Q4, we expect the revenue impact to be larger in future periods based on current exchange rates. For the third quarter of 2014, total bookings which we define as gross revenue plus change in deferred revenue, were $84.2 million representing 35% year-over-year growth prior to the effective changes in foreign exchange rates. Although there was not a material negative impact on revenue in the current quarter from movements in foreign exchange rates as just discussed, there was a negative impact on our deferred revenue at September 30, 2014 of approximately $2.1 million. Taking into account the impact of foreign exchange, bookings were $82.1 million for the quarter. For the first nine months of 2014 bookings growth was 37% and 39% adjusted for the foreign currency change. Again, as we've talked about on prior calls, I remind you that our bookings can also vary on a quarterly basis depending on the nature and timing of invoicing for new clients, existing clients and renewals. There were no significant anomalies in our invoicing terms in the third quarter for new clients. The size of our client base increased from 1,505 clients as of September 30, 2013 to 1,956 clients as of September 30, 2014 representing 451 client additions. On a sequential basis, we added 130 clients. This was the greatest number of client additions in any quarter in the history of the company. In addition, our user base increased from 15.5 million users as of June 30, 2014 to more than 16.6 million users as of September 30, 2014 which represents the addition of approximately 1.1 million users during the third quarter. Our gross profit for the third quarter of 2014 was $49.9 million compared to $35.6 million in 2013, reflecting an increase of approximately $14.3 million, or 40%. As we stated in the prior quarter, we anticipate that full year non-GAAP gross margins will remain in line with prior years as a result of our investments in our software, network infrastructure, and services organization as well as our use of subcontractors to perform implementations. Now let's turn to operating expenses. Sales and marketing expense was $36 million up 43% year-over-year. As a percentage of revenue sales and marketing expense was 53% compared to 52% in the same period in 2013. R&D expense was $6.6 million, up 30% year-over-year, as a percentage of revenue R&D expense was 10% in the third quarter compared to 11% in the same period in 2013. G&A expense was $7.2 million, up 13% year-over-year, as a percentage of revenue G&A expense represented 11% of revenue for the quarter compared to 13% in 2013. All of the increases in our operating expenses were due to the continued investments in all areas to support the growth of our business and were generally consistent with prior quarters. As a percentage of revenue, the operating expenses mentioned above were 73% in the third quarter compared to 76% in the same period in 2013, which represents a year-over-year improvement of approximately 300 basis points. Operating income for the third quarter was $116,000 compared to an operating loss of $1.1 million for the third quarter of 2013. This is the first quarter since we went public that we have had positive operating income. Net loss for the third quarter was $2.2 million, or a net loss of $0.04 per share based on a weighted average shares outstanding of 53.4 million shares, compared to a net loss of $1.9 million or net loss of $0.04 per share based on a weighted average shares outstanding of 51.5 million shares in the third quarter of 2013. Please note that this loss includes an unrealized loss of $1.2 million from fluctuations in foreign exchange rates, as discussed earlier. We may consider hedging some of our foreign-denominated receivables, foreign bank account balances, and/or intercompany loans in the future to reduce our variability in these amounts. With regard to cash flow, our cash flow used in operating activities was $3.4 million compared to cash provided by operating activities of $2.7 million in the third quarter of 2013. As we have communicated in the past, collections and thus DSOs fluctuate significantly during the year and are therefore best reviewed on an annual basis. Let me now turn to the balance sheet. As of September 30, 2014, our total cash, short-term investments and accounts receivable balance was approximately $314.6 million. On a GAAP basis our deferred revenue balance was $153.5 million as of September 30, 2014, compared to $139.7 million as of June 30, 2014, and $109.2 million as of September 30, 2013, representing a sequential increase of 10% and a year-over-year increase of 41% respectively. The foreign currency impact on deferred revenue at September 30, 2014, was approximately $2.1 million, as mentioned in our previous remarks related to bookings. With respect to head count, we added 65 employees during the third quarter of 2014, bringing our total head count to 1,209 employees as of September 30, 2014. This total head count number represents a sequential increase of 6% and year-over-year increase of 30%, respectively. I'd now like to discuss our outlook for the fourth quarter of 2014 and the full year of 2014, which falls under the Safe Harbor provisions for forward-looking statements outlined at the start of the call and is based on preliminary assumptions which are subject to change over time. Given our underperformance for the first nine months of the year and in particular our underperformance in Q3, we must lower our fourth quarter 2014 and hence our full-year 2014 revenue guidance. This reduction in our forecast is due to several reasons. First, we simply have not met our sales targets for our emerging business units which has already impacted bookings and will impact our Q4 revenue. Second, there is a negative revenue impact due to the movement of the foreign exchange rates. Third and most significantly, our revenue will be adversely impacted by delays in client implementations, particularly in relation to our largest clients. We expect the aggregate of these three factors to have a multi-million dollar adverse impact on our Q4 2014 revenue. Therefore, for the full year of 2014, we are lowering our previous GAAP revenue guidance from a range of $267.5 million to $270.5 million to a range of $260 million to $263 million. At the midpoint, this revised range suggests 41.3% growth over 2013. The impact on revenue from the acquisition of Evolv is not material in the fourth quarter. The above full-year guidance implies for the fourth quarter of 2014 GAAP revenues to range from $72.8 million to $75.8 million. At the midpoint this range represents 35.4% growth over the fourth quarter of 2013 GAAP revenues of $54.9 million. With respect to non-GAAP net income or loss to reflect the negative impact of the above reduction in revenue and to account for approximately $1 million in non-GAAP losses due to the acquisition of Evolv, as well as to reflect the positive impact of lower expenses than previously forecasted, we are revising our full year 2014 net loss guidance from negative $13 million to approximately negative $17 million. This implies a non-GAAP loss of $0.32 per share based on full-year weighted average share count of approximately 53.3 million shares. Turning to cash flow, as a result of our bookings performance for the first nine months of the year and to reflect the negative impact of approximately $1.5 million from our acquisition of Evolv for the full year of 2014 we are lowering our full year guidance for non-GAAP cash flows provided by operating activities from approximately $33 million to approximately $30 million. In closing, as Adam mentioned, despite the challenges we've had this year, our core business remains strong, and we expect to grow annual revenues by 30% to 35% for the foreseeable future. This implies a 2015 revenue amount of approximately $340 million to $350 million. And now, I will turn it back over to Adam.

[Adam Miller:]

Thanks, Perry. In summary, I'd like to reiterate what I said at the start of the call. We acknowledge that 2014 has been less than perfect, but this year has taught our team a tremendous amount about what it takes to be a successful public company over the long term. I believe these learnings will pay dividends to our organization and our shareholders over time. And when you look at the big picture, the Cornerstone success story continues. We have a phenomenal business that is growing rapidly, with a fantastic global team, an expanded world-class product suite, a marquee client base, a tremendous amount of opportunity ahead in our core business, and even more potential upside in areas that are just beginning to emerge. We will now take your questions.

[Operator:]

(Operator Instructions). The first question comes from Greg Dunham from Goldman Sachs.

[Greg Dunham:]

My question. I guess first off, I appreciate you guys quantifying the different impacts to the business from a bookings, FX and a services implementation dynamic. But when you look at the 7 million reduction in the annual guidance, can you help quantify how much of that is services? Is that the majority of the change or is it more balanced?

[Perry Wallack:]

Yes. Sure, Greg. This is Perry. Yeah, as I said in the prepared remarks, it is primarily due to services. The foreign exchange piece of it is probably going to fall out at somewhere between $0.5 million and $1 million for the fourth quarter. And the underperformance of our emerging business units and, obviously the underperformance from a bookings perspective in Q3 and what we expect in Q4, contributes another couple million dollars, and the remainder is due to the services delays.

[Greg Dunham:]

And then quickly just so I have the math right, accounts and currency growth in billings was 35%? Is that correct when you adjust? When you do the 34.2?

[Perry Wallack:]

Yes, that's correct. $84.2 million at 35% year-over-year.

[Greg Dunham:]

And you reiterated that you see -- you guys as a 30% to 35% revenue grower for the next couple of years. But how should we think about margins going forward? Typically, when a SaaS company slows down growth, you start to see more leverage. How should we think about that when you look out to ’15 and ‘16?

[Perry Wallack:]

So, it's a little bit early for us to guide on those kinds of numbers. What we would say is directionally we’ve always been improving margins. This year you're going to see our gross margins remain flat and partially due to the acquisition of Evolv you'll see the operating margins just improve a little bit or stay flat. But, directionally, on cash flow, we always make improvements and it is our intention to be driving toward profitability. As we get through our sales planning and figure out where we want to start to invest for 2015, we'll look to solidify those improvements.

[Operator:]

The next question comes from Brent Thill from UBS.

[Brent Thill:]

Adam, I just want to understand clients delaying their implementations. Are they slowing things down because they're focusing on other priorities? Are they -- just can you help us understand what dynamics at play there?

[Adam Miller:]

The real issue here is that as we delve deeper into larger client sales, including a couple that we have done this past year which are multi-million dollar deals that have big implementation components to them, the project teams on the other side often are dictating the timing of the implementation. And in one case, the largest deal we did this year, this project chain was slow to start. They had a change in personnel during the process and the result is a shift in the go-live timing by at least a quarter, if not two quarters. And that has a major impact on our ability to recognize the revenue associated with that service delivery. And that's typical unfortunately for the largest clients out there. And as we do more big deals we are going to see delays as a result we've become more conservative going forward in the way we're forecasting revenue associated with those kinds of deals. It's worth mentioning that our standard deals still operate at exactly the same levels they've always operated at and in fact in some cases we've speeded it up, we've sped it up. So we have opportunities, I think to continue to speed up the implementation times for our smaller clients and get more consistent in how we're forecasting the opportunities for the larger clients, and that's why you see us getting more conservative in our future guidance.

[Brent Thill:]

So that comes back, and that feeds into my second question. Obviously, this year has been really uneven relative to what you guys had expected and given to the street. But to come out and say 30% to 35% growth for the next several years, considering what has happened, I think there's a disconnect that investors will have with that versus the last three quarters. Is that just because the book business you see right now is just going to come back in terms of you see a visibility of that book business and some of these delayed contracts start to kick back in and that gives you confidence in that statement?

[Adam Miller:]

Yes. I want to be really specific about this because I think this is the most important point of the call. We are not expecting a sudden uptick in business that is not what we're forecasting here. What we have seen and what we try to bring to light during this call is our core business has been extremely consistent over many years, including this year. Those teams have hit their numbers all year long and that is the reason we still have 40% plus revenue growth, 35% plus bookings growth. And we think that core group will continue to perform at minimum over the next three years. Why three? Because that's the furthest out we can see right now, it could continue way beyond that. What we see as being totally inconsistent is the emerging businesses, the new markets that we're in where we don't have a consistent track record. We have times of brilliance, but not consistency throughout the year. And so, what we have done on a go-forward basis is dramatically reduced the expectations for those business units, but kept the same well proven expectations around our core businesses. And that's why you see us setting the guidance at 30% to 35% over the next couple of years. It's very consistent with our historical business.

[Operator:]

The next question comes from Michael Nemeroff from Credit Suisse.

[Michael Nemeroff:]

Just two really. One is, given the lowered expectations, are you planning to make any changes to the sales structure or the organization or management in the areas of the business that haven't performed well over the last couple of quarters?

[Adam Miller:]

Yes, and we already have.

[Michael Nemeroff:]

And those changes took effect in Q3? Did you anticipate that those were going to become some sort of a disruption over the next couple of quarters?

[Adam Miller:]

No. Those changes took effect in Q3 and Q4. And it is business as usual. The core teams by contrast have had no changes, only growth. And that growth continues.

[Michael Nemeroff:]

And building on the previous question, could you maybe give us a sense of the booked but not billed backlog to demonstrate the strength in the core business bookings that you're really expecting investors’ to believe that you have signed, but are struggling on the timing of the implementations?

[Adam Miller:]

Yes. I can answer that pretty quickly. You could see it in our cash flow, I mean a lot of these deals that are paying upfront, they're just not receiving -- they're not completing the service work in a timely basis and as a result the revenue recognition for those services gets dragged out, but it doesn't go away. They've already paid for it it's already underway. These are large implementation teams on both sides often with third parties involved. So it's simply a matter of timing, it's not a matter of whether or not it's going to happen.

[Michael Nemeroff:]

But if I look at that the cash flow statement, the cash flow has actually been pretty negative. I know that you focused on the Q4 number, but the cash flow looks pretty negative over the last two quarters?

[Perry Wallack:]

Yes. Just to add to what Adam said the point is that you know we don't focus on cash flow for the first three quarters of the year and that we bring it all in, in Q4. And so when you look at our cash flow performance and our estimate for the full year that's where you see that we're really continuing to bill the clients at a pretty healthy clip.

[Operator:]

The next question comes from Michael Huang from Needham.

[Michael Huang:]

Just to follow up on a couple of those previous questions. So I think in your prepared remarks you had talked about perhaps in the changes that you were making to help either accelerate implementation times -- I know that you've taken some expectation out, but was wondering if you could walk through maybe some of the actions that you could take to help drive some shorter implementation cycles. Obviously, some of that's in the control of your clients, but was wondering if there's anything that you guys can do to help shorten that up a little bit?

[Adam Miller:]

So certainly down market, we are growing our mid-market operations. We have many more clients today down-market and that will smooth out our service delivery over time, as it becomes a larger percentage of total service revenues. With regard to speeding up implementations down-market, we introduced something called 1, 2, 3 LIVE, which allows for three-week implementation cycles, which is much shorter than our average 109 days. We also are working on processes to put into place up-market for the largest clients to rectify what we call client project readiness, which is the client's availability to complete a project or to get it done on a timely basis. So, it should be noted that it is not delays on our side. We have the resources. We have the processes. We have the teams in place to get these projects done. We also have third-party implementation partners operating in some of these cases. So we have the resource availability. What we're driving to is more efficiency both on the client side and on the partner front. And in both cases, we have enablement teams and new processes going into place to speed up the client readiness to do these initiatives. The other aspect of that is the amount of work that the client needs to do. And so as we take on more and more of that work from the clients, not only does it potentially drive more revenue but it speeds up the project overall.

[Michael Huang:]

And when you look at the emerging areas and maybe drilling into that a little bit, were there any of these areas that stood out to you as being more challenging than the others? I mean, obviously you are talking abroad array of different areas. In those areas that maybe stood out to you, like what would you attribute the challenges to?

[Adam Miller:]

I mean, the primary issue in the third quarter and the primary impact on the fourth quarter, without a doubt is public sector. And that has been the most challenged group. In fact, you could allocate virtually the entire miss to public sector. And we've been making changes in that organization already. And I think we have the right solutions for the market. It's a matter of getting the right people in place to make sure that we have an effective process to bring in those deals. And we've been doing a lot of work on that front and we'll continue to do even more going forward.

[Michael Huang:]

Do you attribute it more to sales execution issues as opposed to something that is out of your control?

[Adam Miller:]

Well, I think it's a combination of -- the federal space being predominantly -- just government spending in this particular area. We have not seen a lot of it, it's not that we're losing deals, there is just no deals happening in our space. By contrast, on some of the other teams it could be in some cases sales execution. So it's a mix if I look at public sector at large and we're taking action on all those things. We've also, on a go forward basis, again dramatically reduced our expectations around these areas into the future, which does, obviously, particularly two, three years out, provide significant potential upside. But right now, we're not comfortable forecasting significantly those business units.

[Operator:]

The next question comes from Justin Furby from William Blair.

[Justin Furby:]

I just wanted to follow up on the 30% to 35% growth. I guess, I appreciate the comments around the next three years and you feel like you have visibility there, but I just wanted to get a little more comfort there. I mean, the numbers are getting bigger. It seems like, if anything the competitive landscape isn’t getting any easier. And I just wanted to kind of drill into that again. And then, Adam, separately, you talked about sort of your 5% assumption in terms of what you're baking in for the other end markets. What does that look like if you look at it sort of through this year and then last year? What did it previously look like in terms of contribution to growth at those other areas?

[Adam Miller:]

I mean, to answer the second part of the question first, remember some of these are brand new. So the contribution of those teams was relatively insignificant. Take Latin America or Asia-Pacific, those teams essentially didn't exist and therefore weren't being compared against anything. Just our expectations about what those teams could do haven't worked out and they haven't materialized. So we don't see those groups going away we just see a longer time horizon for them to hit what we think could be meaningful numbers for the business. If you look at public sector, we obviously saw a big drop-off in federal business over the last couple of years relative to three years ago. If you look at some of the other groups, just not as much growth as we anticipated. By contrast our core business has been operating very successfully, and I'm talking about enterprise and mid-market sales both in the U.S. and Europe, and including both new client sales and existing client sales. And those teams have operated quarter in and quarter out for many years now, including all of this year, and we see the forecast, we see the pipelines for those teams. We understand the competitive dynamics very well for those teams. And we understand where we've invested from sales force expansion in each of those different groups. We understand what our productivity metrics are moving towards and we see our ASPs rising and our per-user revenue rising for those groups. All of those are positive signs. All of those indicate no slowdown in that business at all. And we translate to specifically 25% growth over the next couple of years -- 25% plus growth over the next three years just for those groups. And keep in mind, the Evolv acquisition ties in perfectly to our core business, in particular the enterprise business, both in the U.S. and in Europe. We are seeing really significant demand from our client base for predictive and prescriptive analytics. And that acquisition and the products we will generate through the combination only further increases our confidence in the ability of the core teams to keep growing.

[Justin Furby:]

So maybe just what will be helpful is if you kind of look at last year, and 50% or so bookings growth versus high 30%s year-to-date, what's the delta there? How much is it from these other areas? How much is the core business just slowing because it's getting bigger? How can you reconcile growth last year versus year-to-date growth?

[Adam Miller:]

We don't really slice it out like that, but most of it is because of the lack of incremental business that we had anticipated happening from these emerging groups. So whether it's growth in public sector or APAC or SMB or strategic accounts, we just haven't had the level of growth that we were anticipating. If we had it, our growth rate would easily be in the mid-40s at this point, and there'd be no question about what's happening this year.

[Justin Furby:]

And then, just quickly, Perry, on the guidance, I felt like the commentary on implementation, in terms of being more conservative, sounded very similar to last quarter. So can you quantify what's different from last quarter in terms of how you're hair-cutting it or what you are doing? And then, just operationally, what exactly are you doing there to give yourself -- and maybe you covered it, but I missed it, what operationally on the services side are you doing to feel good about what's embedded in the guidance?

[Perry Wallack:]

Yes. So what I would say is, I think we did a fairly good job last quarter at predicting our services revenue, that's why we came in sort of at the midpoint of our guide. I think that what we are doing differently is we're looking more quarters out and we're saying to ourselves, what's in the pipeline? How big are the projects? What are the odds that they get delayed? And as Adam talked about just looking at client project readiness, so if and when those projects do get delayed, how do we get resources working on other projects that can fill the time or fill that void? And so, we're starting to do that multiple quarters out now.

[Justin Furby:]

And then just one real quick one if I can. I feel like this is the quarter where you have the opportunity to really level set, particularly Q4. In terms of booking is there really a base case framework for bookings? I know you certainly don't guide to it, but it seems like kind of an opportunity to do that, just to give a low base case. What should we be thinking about for bookings as we look into Q4?

[Perry Wallack:]

So Justin, we just do not guide to bookings. So we can't comment on that.

[Operator:]

Your next question comes from Brendan Barnicle from Pacific Crest Securities.

[Brendan Barnicle:]

Guys, can you give us an updated breakdown on the clients that are on recruiting versus on learning at this point?

[Adam Miller:]

Yes, same basic numbers about 85% on learning, 60 plus percent on performance, and between 10% and 15%, approaching 15% on recruiting. The other big change we've seen is that we now have close to 40% of our clients on three or more products, which is a pretty significant change. And I think its further evidence of the success of our core business.

[Brendan Barnicle:]

So that leads into my second question, which is despite the bookings weakness, you did notice that when you had uptick in the ARPU, per user and per client, is that all being driven by this product mix or is there some other things with pricing or anything else that are going on? Any more color you can give us on that?

[Adam Miller:]

Well, I think it is a combination of three things. It's the product mix, we're selling more products and the products have higher price points. We have less competitive pressure to drop prices. And, as we go further down market we have higher price points per user, generally, just at the retail level.

[Brendan Barnicle:]

And following up on that competitive wins, you're saying you have less competition now. We did pick up more sort of competitiveness around one or two deals. What is happening on the competitive win rate this quarter?

[Adam Miller:]

Oh, I think it's been very consistent, particularly in the core businesses. It's been very consistent over the last two years, I would say. The landscape is the same. There's no new competitors. We've seen a drop-off in some of the competitors, like Taleo. And we have the same partnerships that we've had before, like with Workday and with ADP and we continue to operate well in all those markets.

[Brendan Barnicle:]

And then, lastly, I'm assuming you would have called it out if you had any, but any deals -- any eight-figure deals this quarter?

[Adam Miller:]

No eight figure, but we did have one good strategic accounts deal in Q3, Unilever.

[Operator:]

Your final question comes from Rick Sherlund from Nomura.

[Rick Sherlund:]

You guys had mentioned last quarter that business closed late in the quarter, it was kind of anomalous. Was that -- did that prove out to be just an anomaly or did you see some of that this quarter as well?

[Adam Miller:]

No. That was an anomaly. We did not see that in Q3.

[Rick Sherlund:]

And the implementation delays, I understand, but the billings growth is decelerating which doesn't seem to kind of point to implementation delays as much. You mentioned that the emerging areas haven't given you what you had hoped for, but that still doesn't explain why the billings growth is slowing down. So, I guess, I'm still kind of puzzled as to, why has the billings growth decelerated as much as it has?

[Adam Miller:]

I mean, essentially you have the tale of two businesses at this point. You have a core business that continues to operate well and grow at basically the same rates it's been growing at for a little while now. And you have the emerging businesses that just have not been performing in aggregate. And so, you end up with the core business still growing the way it was and the other business which was supposed to be incremental to that, not showing up. And so the billings are below expectations. But that doesn't mean that there’s anything wrong with the business overall. It just means that the newer businesses have not yet taken hold. What we've done for our part, is accept the skepticism and ourselves lower expectations over the next couple of years for those emerging businesses, while still maintaining high expectations for the continuously performing core businesses. And the net result is lower but consistent expectations over the next three years.

[Rick Sherlund:]

Adam, the stock is now selling at about four times revenues, which is pretty unusual for a SaaS company. And even if you grow 25% or 30% it's a lot faster than a lot of these companies that have been taken out taken out at 6 times to 8 times or 10 times revenue. So 6 times to 8 times revenues is up 50% to 100% from where the stock is today. Wouldn't it make sense to consider strategic alternatives at this point?

[Adam Miller:]

Rick, that's a good question. I think you can look at the bare case on the stock and the two points I would make are there's a take-out value that is implicit in the value of the company. There also is an expectation that if we are not growing we would significantly improve our margins which are already pretty good. We had obviously operating profit this quarter. We have for the year decent cash flow from operations around 12% cash flow margins. So, if the business were to continue to slow then we would ramp up those margins. And you're talking about a business with significant cash flow and profitability, which would ascribe a certain implicit valuation as well. We believe we can keep growing this 30% to 35% range, if not higher, and we continue to invest to make sure that happens. We also are continuously as Perry mentioned before improving both our cash flow and our operating margins over time. This has been true now for the last four years. And I think there is tremendous runway in this business, tremendous runway. We are seeing an insatiable appetite for cloud computing around the world. We're seeing a real understanding in the market for talent management solutions and the strategic value of empowering your people. And we believe we have the best team and the best product suite and the best market opportunity to capture that. And that's why we wake up every day to do the work that we do.

[Rick Sherlund:]

Thanks.

[Adam Miller:]

Sometimes it just takes time.

[Operator:]

I am showing no further questions. I would now like to turn the call back over to Adam Miller for closing remarks.

[Adam Miller:]

Thank you for everyone participating today on our earnings call, and thank you to the Cornerstone global team for all the great work they do day in and day out. Thanks, everyone.

[Operator:]

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.