Cornerstone OnDemand, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cornerstone OnDemand's First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host Perry Wallack, Chief Financial Officer. Please go ahead.

[Perry A. Wallack:]

Good afternoon, everyone. This is Perry Wallack, CFO of Cornerstone OnDemand and welcome to our first quarter 2015 earnings conference call. As always today's call will begin with Adam providing a brief overview of our performance and then I will review some key financial results for the quarter, which ended on March 31, 2015. 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 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. 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, client satisfaction and retention, client 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, intent, estimate, will, anticipate 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, and the risk factors section of our most recent Form 10-K and subsequent periodic filings with the SEC. With that, I will turn the call over to Adam.

[Adam L. Miller:]

Thanks, Perry and thank you to everyone joining today's today. The first quarter represented a great start to the year, driven by strong performances across multiple segments and geographies. Revenue for the first quarter came in at $74 million, representing a year-over-year increase of 29% and bookings came in at $63.5 million, representing year-over-year increase of 28%. As Perry will detail later, bookings grew at 31% on a normalized constant currency basis. As our financial performance indicates, the demand environment for what we do remains extremely strong. Q1 saw the addition of new clients from around the world taking our enterprise and mid-market client count to well over 2,200. Our marquee client roster continues to get better. In the last quarter's client additions included leading organizations such as Hitachi, Princess Cruise lines, The Ohio State University, Cushman & Wakefield, Fruit of the Loom, Kuehne + Nagel and Millicom International Cellular to name a few. I want to take a moment to talk more about the demand environment and competitive landscape. We have seen multiple macro trends that drive demand for our solutions. The first is changing demographics and technology at work. Today for the first time, we have four generations in the workplace at the same time and by the end of this decade, millennials will represent more than half of the workforce. Simultaneously, advances in technology have enabled telecommuting and globalization for organizations of almost any scale. All of these changes require more sophisticated approaches to managing and engaging the modern workforce. The second trend is the massive need from reskill vast portions of the global workforce, who are ill-equipped to perform in this new world of work, whether we talk about unskilled laborers who have been replaced by robotics or automation or we consider Fortune 500 senior executives struggling to keep pace with products or technology. Today's organizations are challenged by growing disparity between their needs and the skills of their existing workforce, requiring a holistic solution for managing ongoing training programs for their employees and for their extended enterprise. And the third trend is the unique desire of all people and organizations to fully realize their potential. Around the world, managers seek to identify the potential of their employees and help them to achieve it. The primary way to do this, is again, through lifelong learning and development. As you may have noticed, there has been a significant focus on learning in the news recently, including the acquisition of lynda.com by LinkedIn, a new learning product announcements and product development by SAP, Oracle and others. All of this highlights the importance of learning in the market which we have known from inception at Cornerstone. Learning is and always has been at the core of what we do. At the end of the day, our mission at Cornerstone really revolves around helping people realize their potential. We deeply understand learning and professional development whether for employees or the extended enterprise and we have millions of hours of development and delivery to prove it. In the first quarter, we once again demonstrated through our recent client additions that we are seeing truly global demand for our products. Today, we operate in 22 countries. We've translated our enterprise solution into 42 languages and we now have users in 191 different countries. In Q4 of 2014, we produced our best quarter ever in Asia Pacific; and in the first quarter of 2015, the region did even better. What made the APAC performance in Q1 particularly encouraging, however, wasn't so much the number itself, but how we got to it. Our core sub-regions of Japan, Australia, China and India all saw a significant new business activity in the first quarter. In Japan, we secured a landmark deal with Hitachi for multiple products and over 300,000 users across the Hitachi group of companies, which includes more than 900 subsidiaries. In Australia, we had a major win with the Government of New South Wales for two of their agencies, which will significantly improve our positioning with the very large public sector over there. Other select deals include Prudential Hong Kong and Greater China and Entertainment Network in India. With a roster of clients that now includes many of the most recognizable names in the region, including Tata, Li & Fung, Nissan and Commonwealth Bank of Australia, we believe that we have established ourselves as the talent management vendor of choice in an Asia Pacific market that has suddenly become very real. As the opportunity there grows, we know that the key to sustaining momentum long-term is to ensure that we maintain the highest standards of client success. As we discussed on our last call, one of the key ways for us to continue to gain market share globally is through innovation. As talent management matures and becomes increasingly strategic to organizations all over the world, we are today interfacing with much more sophisticated buyers that are demanding more and more from us. It is this progressively steepening innovation curve that has led competition to dwindle over the years and rendered countless attempts to enter the space unsuccessful. Talent management is no longer the check the box functionality that it was years ago. Success in today's market requires focus and as our unrelenting focus on consistently delivering best-of-breed functionality that we believe will further an already widening gap between us and our competition over time. Along these lines over the past few years, we've made significant investments in areas that we believe will not only continue to differentiate Cornerstone, but ultimately redefine how organizations think about talent management. Next week at Convergence, our annual client conference, we will be sharing the results of a multi-year product initiative announcing new solution offerings that we believe will create yet another layer of differentiation for us. When we first got started more than 15 years ago, Cornerstone was a single application provider. Over time, we developed a suite of cloud applications covering the entire employee lifecycle. At Convergence, we will take the next step with the unveiling of the Cornerstone Edge Platform, which will transform Cornerstone from a cloud applications provider to a platform company, fully leveraging our global ecosystem and subscriber base of nearly 20 million users. We believe enterprise application providers of the future need to have robust componentized platform capabilities that enable clients to easily connect their employee applications and build unique applications on an open platform with easy to use tools. With the availability of our Edge Platform, including open APIs and drag and drop development tools, we can now offer full flexibility to our clients to quickly build complete solutions that fit their current business needs and easily adapt those solutions as their businesses change. The Cornerstone Edge Platform includes three core components for clients, partners and ISVs. The first is a library of APIs and tools to easily build integrations with other third-party applications. The second are development tools such as the Cornerstone app builder that allow both technical and not so technical users to easily develop unique applications leveraging Cornerstone's infrastructure and framework. And the third is a complete developer portal that enable self-provisioning, configurability, deployment and marketing of new platform applications in the Cornerstone marketplace or open exchange of ecosystem partners. These platforms and service capabilities provide tremendous flexibility for our clients and partners. For example, a client's IT team can easily build integrations to internal systems themselves with the Edge API library. A Cornerstone partner can rapidly develop an application to manage corporate health and wellness using app builder and clients can quickly select, configure, and deploy solutions built on the Edge Platform by third-party software companies through the Cornerstone marketplace. When you combine our open platform-as-a-service initiative with our state-of-the-art analytics capabilities, which we discussed on our last call, we believe Cornerstone now stands alone in the talent management market. Both Platform and Big Data analytics offer huge opportunities for Cornerstone and we are excited about beginning our second act. I will now turn it back to Perry.

[Perry A. Wallack:]

Thanks, Adam. Before I get to the financial results for the quarter, I'd like to remind everyone that the financial figures I discuss today are non-GAAP, unless I 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. We talk about non-GAAP numbers for the following reasons. Non-GAAP financial measures excludes 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 will include expenses related to stock-based compensation and related employer payroll taxes, amortization of intangible assets, acquisition-related costs, adjustments in taxes related to acquisition adjustments, amortization of debt discounts and issuance costs, payments of premium on investments net of amortization, and adjustments to our revenue due to the write-down of deferred revenue related to our acquisition of Evolv. 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 result in today's earnings release. As Adam highlighted, Q1 was a strong quarter and a solid start to 2015. Our commitment to being more selective about where we spend our time and capital has already begun paying dividends. In addition to the continued success, we are seeing in our core business, we are also seeing material progress from emerging markets such as APAC, all while continuing to innovate and redefine the way organization manage their talent. Now, let's talk about the numbers. Our GAAP revenue for the first quarter of 2015 was $74 million, exceeding the midpoint of our guidance range by $1.5 million and representing a year-over-year increase of 29%. As we have stated on prior calls, our revenue mix between software and services has been roughly 80% and 20% respectively and only varies by a few percentage points on a quarterly and annual basis. The first quarter revenue mix was in line with our historical average. As is the case with many of our peers, revenue can be impacted by fluctuations in foreign exchange rates. As I've discussed in the past, approximately 30% of our revenue comes from our international business, the large majority of which still rest in EMEA. For the first quarter, the strengthening of the U.S. dollar versus foreign currencies had a slight negative impact on our revenue. Total bookings, which we define as revenue plus change in deferred revenue were $63.5 million for the first quarter, representing a year-over-year increase of 28%. There were two items in our billings in addition to fluctuations in foreign currency, which I'll detail in a moment that impacted bookings. After adjusting for all of these items, our normalized constant currency first quarter bookings were $65 million representing a year-over-year increase of 31%. So, let's look at the detail. First, like revenue due to the strengthening of the U.S. dollar versus foreign currencies, our bookings were negatively impacted by approximately $3.4 million. One can see this impact if they calculate bookings via the cash flow statement. Second, our upfront billings rates for Q1 was lower than the historical average due to a few large clients with a bit of delayed billing terms, which negatively impacted bookings by an additional $2.6 million, that totals to $6 million in negative impact to bookings. The third anomaly resulted from a single large existing client that requested that we bill them for multiple future years of their contract in Q1, which positively impacted bookings by $4.5 million. This was the same client that build upfront that we talked about in Q4. This early billing led to the increase in our long-term deferred revenue balance this quarter, which has historically gone down from Q4 to Q1. So, with $6 million in total negative impact to bookings and $4.5 million in positive impact, we have a net negative impact of $1.5 million. After adding back this $1.5 million to the reported bookings number of $63.5 million, you get to the $65 million in normalized, constant currency bookings, that I mentioned earlier, again representing a 31% year-over-year increase. We would remind everyone that we have not given constant currency amounts in the past as the impact of fluctuations in exchange rates was not material. We will assess the impact of foreign currency on a quarterly basis to determine whether such amounts require further attention. The size of our client base increased to 2,237 clients as of March 31, 2015, representing 84 net client additions for the quarter. Our user base increased to over 19.1 million users as of March 31, 2015, which represents the addition of more than one million users for the quarter. Finally, although it's early in the year, we believe we are on track to maintain our historical annual dollar retention rate of approximately 95%. Turning to margins, our gross margin for the first quarter of 2015 was 71.3% versus 71.6% in Q1 of last year and 72.6% for the full-year of 2014. The slight decrease can be attributed to an increase in spending associated with third-party subcontractors used for implementations. As mentioned on previous calls, our use of subcontractors can vary on a quarterly basis depending on the timing, size and geography of implementations. For the full-year, we expect our gross margins to remain materially in line with the prior-year at approximately 72% to 73%. Now, let's turn to our operating expenses. Sales and marketing represented 55.4% of revenue in the first quarter of 2015, up from 54.7% of revenue in the first quarter of 2014. R&D represented 11.5% of revenue in the first quarter of 2015, up from 10.6% of revenue in the first quarter of 2014. The increase in R&D expense can be attributed to investment in our Big Data and Platform initiatives. G&A represented 12.2% of revenue in the first quarter of 2015, down from 13.3% of revenue in the first quarter of 2014. As a percentage of revenue, total operating expenses were 79.1% in the first quarter of 2015 compared to 78.6% in the first quarter of 2014. Accordingly, there have been no material shifts in the relative level of investments we have made across these areas. In addition, for the full-year of 2015, we expect operating expenses in total to improve from the full-year of 2014 amount of 76.5%. To finish on the P&L, net loss for the quarter of 2015 was $9.3 million or a net loss of $0.17 per share based on weighted average shares outstanding of 53.9 million shares compared to a net loss of $5.1 million or net loss of $0.10 per share based on weighted average shares of 52.7 million shares in the first quarter of 2014. Our net loss in the first quarter included unrealized and realized losses related to foreign exchange in the amount of $2.4 million compared to a loss of just $71,000 in the first quarter of 2014. This is due to the larger fluctuations in foreign currencies that we saw during the first quarter of 2015. With regards to cash flow, cash flow from operating activities for the first quarter was negative $1.8 million compared to $0.2 million in the first quarter of 2014. As we've communicated in the past, collections on those DSOs fluctuate throughout the year significantly and that they're best analyzed on an annual basis. That said, we have implemented and will continue to refine programs to increase collections and reduce DSOs on a quarterly basis working toward reducing the seasonality of our cash flows. Let me now turn to the balance sheet; as of March 31, 2015, our total cash, accounts receivable and short-term and long-term investments balance was approximately $335.1 million. On a GAAP basis, our deferred revenue balance was $180.9 million as of March 31, 2015 compared to $191.3 million as of December 31, 2014 and $131.1 million as of March 31, 2014, representing a year-over-year increase of 38% and a sequential decrease of 5.5%. It should be noted that we experienced a decrease in deferred revenue as well as accounts receivable and deferred commissions in Q1 of each year, as a result of the seasonality of our business. The decreases in the first quarter of 2015 are all in line with the decreases in the prior-year. With respect to head count, we added 64 employees in the first quarter of 2015. As of March 31, 2015, we had 1,425 employees. This total head count number represents a year-over-year increase of 32% and a sequential increase of 5%, respectively. I'd now like to discuss our outlook for the second quarter and full-year 2015, which fall into the Safe Harbor provisions outlined at the start of the call and are based on preliminary assumptions, which are subject to change over time. Given the strong first quarter execution and despite the adverse impact of foreign exchange, we are raising our previously communicated full-year 2015 GAAP revenue guidance from a range of $336 million to $341 million to a range of $337.5 million to $341.5 million. The midpoint of this revised range represents 29% growth over our full-year of 2014 GAAP revenue of $263.6 million. For the second quarter of 2015, we currently expect GAAP revenue to range from $79.5 million to $80.5 million. The midpoint of this range represents 30% growth over the second quarter of 2014 GAAP revenue of $61.5 million. With respect to full-year 2015 non-GAAP net income or loss, we are maintaining our previously communicated guidance of a loss of approximately $16 million for the full-year of 2015. This implies a non-GAAP loss per share of approximately $0.30 per share based on weighted average shares outstanding of 54.2 million shares outstanding. This also implies a net loss margin of approximately 4.7% for the full-year 2015, an improvement of approximately 170 basis points over full-year 2014. Turning to cash flow, for the full-year of 2015, we are maintaining our previously communicated guidance of positive non-GAAP cash flows provided by operating activities of approximately $43 million, which represents a 12.7% margin at the midpoint of the revenue guidance range. As we have done in the past, we may selectively reinvest a portion of our top line overachievement back into the business to take advantage of the market opportunity and drive further growth. And with that, I'd like to turn it back over to Adam.

[Adam L. Miller:]

Thanks, Perry and thank you to everyone joining the call. I want to also especially thank the Cornerstone team around the world for all of their great work leading up to Convergence, our global client conference taking place next week in Los Angeles. We've great lineup for the event and during the event we'll share our vision on how Platform and Big Data will revolutionize, how organizations manage their talent. We hope to see you there or online at cornerstoneconversion.com. We will now take your questions.

[Operator:]

Thank you. Our first question comes from Brent Thill with UBS. Your line is open.

[Brent J. Thill:]

Thanks. Adam, you mentioned that some of the new analytics capabilities that are coming, I'm curious just, when you think about being part of the quarter or providing incremental pricing on top of the quarter, how you're thinking about approaching that with your clients?

[Adam L. Miller:]

Yeah, we view it as entirely incremental. The core reporting capabilities are already available. It's embedded into the rest of the products. So, standard reporting, custom reporting and dashboards are all a free service, so any Big Data analytics are incremental to that, so Cornerstone Insights, Cornerstone View and ultimately Cornerstone Planning will all be incremental products with incremental premium pricing.

[Brent J. Thill:]

Okay. And last year, obviously, there were a number of moving pieces as it relates to the go-to-market. And I think everyone wanted to just hear a little bit about what happened in Q1, in terms of your territory assignments, it doesn't sound like there were a lot of changes or a lot of pending changes, but you had mentioned that there were some investments in different countries like Japan and South America that you weren't really seeing a lot of yield quite yet, but it sounds like in Japan you're starting to see that now play out, maybe if you can just walk through a little bit about, a little overview of the distribution and also about where you're putting more investments and maybe where you're starting to pull back a little bit?

[Adam L. Miller:]

Thanks, great question. As I said at the beginning of the year, we are making no major changes to any of our core sales teams. So, there has been incremental growth across all the teams, but there have been no major management changes or structural changes to those teams, which is very different than a year ago. So, none of those transformations occurred this year. The reason we made the changes in 2014 was so that we would be built to last and be able to continue to grow the team this year and next year, which is exactly what happened. In addition, we said we were going to focus our efforts on the emerging areas that we thought had the most potential upside and we specifically named Asia Pacific as one of those and we're seeing very good progress in Asia Pacific, not just in Japan, but also in China, India and Australia. I think there are some other areas as well that are doing fine and we'll talk about that probably in our next call.

[Brent J. Thill:]

All right. Thank you.

[Operator:]

Our next question comes from Rick Sherlund with Nomura. Your line is open.

[Rick Sherlund:]

Yeah. Thanks. Two questions. First, any particularly large deals in the quarter?

[Adam L. Miller:]

Yes, we had a number of seven figure deals. There were no eight figure deals this quarter, but we had a number of seven figure deals with some very well-known names.

[Rick Sherlund:]

And the pipeline going forward for the seven or eight figure deals?

[Adam L. Miller:]

It is solid.

[Rick Sherlund:]

Okay.

[Adam L. Miller:]

So, I think you'll see a lot of activity over the rest of this year.

[Rick Sherlund:]

Okay, I want to go back over the billings numbers, so there was first item was an FX impact of $3.4 million, is that – most of that would be the revenue or the deferred revenue impact?

[Perry A. Wallack:]

Yeah, that's the deferred revenue impact, that's correct.

[Rick Sherlund:]

Okay. And then, there was something about billings rate for Q1 being less than average. What was that? Can you repeat that?

[Perry A. Wallack:]

Yeah. Sure, that was the $2.6 million drag that was on bookings due to a little bit worse than normal billing terms in our new customers. Usually, we give color on what the average billing term or the average amount build upfront is for the new customers closed in the quarter and it was a little less than our historical average in Q1, that was really due to a couple of new large clients that have less than average billing terms. So, we haven't had that anomaly, I guess, I think it's maybe once, since we've been public. So, this is the first time we've been felt a need to give color on it.

[Rick Sherlund:]

And what would drive that?

[Perry A. Wallack:]

Oftentimes, there is just a couple of large clients that they shy away from our standard average upfront amount that we like to bill with the contract. It could be budgetary reasons, they could between cycles with replacing a vendor and so they just want to spread their billing terms out for various...

[Rick Sherlund:]

Right.

[Perry A. Wallack:]

...reasons like that.

[Rick Sherlund:]

Okay. And then you had $4.5 million of – that was one contract where you were able to bill upfront for multiple years, is that right?

[Perry A. Wallack:]

That's correct.

[Rick Sherlund:]

Okay. And the FX impact going forward, what is the total effect that you're expecting that to have in your full-year guidance?

[Perry A. Wallack:]

Yeah. So, as I said in the prepared remarks, we raised despite an adverse impact on foreign exchange. So, if someone tried to quantify that, what we would say is number one, we don't disclose the exchange rates we forecast with; but number two is, if you look at the $3.4 million impact that we had on our bookings not all of that is going to be recognized in 2015. So, maybe if you said $2 million or $2.5 million would be recognized in 2015, you could add that to our $1 million raise and infer that, that would be like a constant currency amount.

[Rick Sherlund:]

All right. Okay. Thank you.

[Adam L. Miller:]

Sure.

[Operator:]

Our next question comes from Michael Nemeroff with Credit Suisse. Your line is open. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Hey, guys. Thanks for taking my questions. Adam, last quarter you talked a lot about upsell into the existing base of new modules. I was wondering, if you could maybe give us an update on how that's going or maybe some – anything quantitative around that?

[Adam L. Miller:]

Yes, I mean, the last number I gave is that 70% of our clients have two or more products, about 40% have three or more products, those numbers have held even as the installed base continues to grow and we are continuing to staff up our client sales teams around the world. So, that strategy and the potential there continue to remain very strong. Our penetration rates are going up across products and we still see an over $1 billion upsell opportunity across all products across the client base and that does not include the new products that we're announcing at Convergence including all of these Big Data analytics products. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) And Adam, I know that there has been a lot of speculation about some of your partners specifically Workday coming into the learning management market, I think they were asked about it, curious are you still getting into large deals with Workday, is that still an active partnership at that level?

[Adam L. Miller:]

Yeah, I mean, the way I would describe it as I have before is this is a field level relationship. So, our sales people match with their sales people around the world and depending on the particular region, deal and scope of that deal, we will partner together and this is true at many deals happening right now. But, I'll also mention that as a percentage of our total pipeline, Workday represents also 1%. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) All right. That's helpful. And then, Perry, just to clarify, did you say that currency for your guide in this quarter was an additional headwind on top of the headwind that you had mentioned last quarter.

[Perry A. Wallack:]

Yes, that's correct. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Okay. So, currency moved against you again this quarter, even more than what you guided to originally last quarter.

[Perry A. Wallack:]

Yeah, that's absolutely correct, what you can see in the $3.4 million drag that we talked about on our bookings. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Okay. Great. Thanks for taking my questions.

[Adam L. Miller:]

Sure.

[Operator:]

The next question comes from Raimo Lenschow with Barclays. Your line is open.

[Raimo Lenschow:]

Thanks for taking my question. Can you talk a little bit about a price per cheap seat changes that we're expecting from the new (35

[Adam L. Miller:]

Yeah. So, the analytics products get priced the same as our other products, but they are at the premium side of the range, so they are at the upper end of our per seat pricing; by contrast, the Platform is priced as a percentage of software, so depending on how much software the client has acquired, the price will be a percentage of that total bill.

[Raimo Lenschow:]

And if you think about the Platform then, how far are you in the development process there, I'm thinking about is there going to be like an app store, you need obviously a lot of tools that you need to provide et cetera, so where are you in that process?

[Adam L. Miller:]

We're very far along. We're going to be demonstrating the app builder at Convergence next week and the marketplace is already up and running. We view it as four separate products. We've been working on this for over three years. This is not a new initiative. This is just something we haven't talked about, until it was ready for primetime.

[Raimo Lenschow:]

Perfect. That's very helpful. Thank you.

[Operator:]

Our next question comes from Mark Murphy with JPMorgan. Your line is open.

[Pinjalim Bora:]

Hey guys, thank you. This is Pinjalim for Mark and congrats on the good billings number here. I wanted to ask about the Platform again, correct me, if I'm wrong, but are customers able to build apps on it and put it in the marketplace or the marketplace is actually open to only partners and customers can just use those apps made by partners? And secondly, is there any change in the go-to-market model for the Platform?

[Adam L. Miller:]

Yeah. So, the go-to-market model is the same. We're using our same global sales force to promote the Platform. We already have a number of clients set up to be beta users of the Cornerstone Edge Platform and both partners and clients can create applications and any applications made can be published to the marketplace, if people so choose. If your client developing a proprietary application for your own company, you would not put it on the marketplace, you'd just deploy it in your own portal.

[Pinjalim Bora:]

Well. Okay, got it. Perry, can we get some more color on the Hitachi deal in terms of how big was it? Or I mean is that included in the current billings or portion of it is included, any more color there? And can you update us on your plan for your quota carrying reps for the year, if you have disclosed that before?

[Adam L. Miller:]

I'll just take that one. So, the Hitachi deal was a seven figure deal. It's a global deal. It's our first, not our first, it's actually our second big client in Japan. And I think represents us entering large customers in Japan that become the basis of a much bigger opportunity there. With regard to billings that have the normal billings that we see across our client base, so nothing unusual there and we don't typically give specifics about our quota carrying reps other than to say we have continued to grow our global sales force.

[Pinjalim Bora:]

Okay. And Adam, lastly, on the competitive front, I guess, I should ask one question on that, after Saba has been private, but from the field, we still hear that Saba is still coming up in a competitive landscape, any color there? What do you think about it? Do you think it's going to decline from here or any color is great? Thanks a lot.

[Adam L. Miller:]

So, I've been in this space for a long time. And we've seen a number of competitors get acquired throughout the years and we've seen the same story carryout either immediately or over time, which is the key people leave the organization, the competitiveness and the innovation in the organization decline. And as I've said before, I view us having a more favorable competitive landscape not a less favorable one going forward.

[Pinjalim Bora:]

Thank you.

[Operator:]

Our next question comes from Brendan Barnicle with Pacific Crest Securities. Your line is open.

[Brendan John Barnicle:]

Thanks so much. Perry, maybe you can help me with the gross margins, I'm having hard time getting to that 71.3% that you had, I mean, I'm looking at the press release at 67%, I'm adding back the stock-based comp and I get more or like something just under 68%, is there some I'm missing here?

[Perry A. Wallack:]

Let me just take a look. I believe that it's in the press release. And let us – why don't we skip this question for a minute.

[Brendan John Barnicle:]

Yeah, yeah, sure absolutely. Other one, Perry is on hedging strategy, I know we've talked about that the last couple of quarters.

[Perry A. Wallack:]

Sure.

[Brendan John Barnicle:]

And wonder if you guys had any update since we're kind of dealing with currency again, it looks like we may for at least a while here?

[Perry A. Wallack:]

Yeah, sure. So, we've been evaluating hedging programs, we've been engaged with third parties that specialize in this. Most of the loss that we had this quarter, the $2.4 million was unrealized losses on foreign exchange about $1.9 million of it. You will see that detail when we file our Q. That really comes from marking to market intercompany loans and our cash balances and our air balances that are in our subsidiaries. And when you look at hedging, we are just constantly evaluating it on a quarterly basis to figure out what the right time or the right way to do it is. I think that overall, we're also looking at managing our intercompany loans and managing our international cash balances a little more optimally for the remainder of the year.

[Brendan John Barnicle:]

Got it. And then, Adam as you think about the Platform and I know you've talked about this previously, where do you think we'll see the most common apps or the apps will be deployed in your Platform that are going to get that sort of most traction with customers?

[Adam L. Miller:]

I mean, the early indications are obviously HR-related applications, so things like health and wellness, part time off, other types of applications that people want to do. We have clients, for example, we have one very large Swiss client that has ED applications (42

[Brendan John Barnicle:]

Okay. And is the Platform also built on dot net and does that give you sort of some special work-on relationships with Azure?

[Adam L. Miller:]

Yeah. So, the Platform's built in dot net is not really related to Azure and we have created our own coding language as part of the framework that we build to make it very easy for somebody to build an application, they don't necessary need to be a full-fledged developer. A business analyst or somebody's in this skill range would have the ability to create an application with the tools we have in the coding language we've developed.

[Brendan John Barnicle:]

Great. Thanks guys. Look forward to seeing you next week.

[Perry A. Wallack:]

Sure. And then Brendan just a follow-up on your gross margin question, I think you'll find that the detailed reconciliation of that 71% is in the press release and you maybe just missing the amortization of the intangibles on the stock-based compensation. So, it's all in the press release at 71%.

[Brendan John Barnicle:]

Great. I'll take another look.

[Adam L. Miller:]

Thanks.

[Operator:]

Our next question comes from Justin Furby with William Blair & Company. Your line is open.

[Justin A. Furby:]

Hey guys. Thanks for taking my questions. Perry, first off just housekeeping, did you say that year-over-year revenue headwind from FX?

[Perry A. Wallack:]

No, we didn't really give a detail on that. When we talk about exchange rates and the impact on the current quarter revenue, what we would say is that about 30% of our revenue comes from outside the U.S. and about 90%-plus of that comes from Europe and Australia, which are the most impactful currencies. And so, if you took say a 4% movement on a weighted average basis in the exchange rates and multiply that by let's just call it 27%, which is roughly 90% of that 30% of our revenue, that's foreign. You could probably estimate the approximate impact.

[Justin A. Furby:]

Okay. And just to be clear, when you gave your billings number, usually companies – a lot of times will not just look at the deferred sequential headwind, but also the year-on-year revenue headwind to get to sort of adjusted or currency adjusted, it sounds like you only made the deferred adjustments. So, in theory the year-over-year FX growth rate is actually a little bit higher than the 31%, is that fair?

[Perry A. Wallack:]

Yeah. That's exactly correct.

[Justin A. Furby:]

Okay. So, is that a couple of points maybe that you would add back or...?

[Perry A. Wallack:]

We haven't really disclosed the detail, but suffice to say, there is an additional headwind.

[Justin A. Furby:]

Okay. Fair enough. On the pricing side, Adam in Q1 it's still really early since the Saba take-out, but we've been hearing last year about them being sort of dumb on price in certain deals and I'm wondering if that dynamic has changed at all, if you look at deals in Q1 versus Q4 and sort of a like-for-like basis, did you see any firming up of pricing?

[Adam L. Miller:]

It's too hard to tell, I mean our ASPs generally are stronger and our revenue per user continues to climb. But, I wouldn't compare the volume of deals in Q1 to Q4, so it's too early to tell. Also...

[Justin A. Furby:]

Okay.

[Adam L. Miller:]

...in Q1, we're probably already in motion before the Saba take-out, so it won't have its full impact until the second half of the year.

[Justin A. Furby:]

Okay. That's fair. And then, on the rep productivity side, any color in terms of what you're seeing there year-over-year and the sales and marketing number as a percentage seems to be relatively constant over the last several quarters, despite some of the deceleration. So, what are you seeing and when do you think you'll start to see some of the leverage show up in that line, but I don't know if the guidance implies much at all for fiscal 2015?

[Adam L. Miller:]

Yeah, I think there is upside in the numbers. We think rep productivity has been strong and has continued opportunities for improvement. A good example of that is obviously, rep productivity in APAC last year was very low and APAC productivity over the last six months has been pretty solid. So, we're going to see that in more of our markets. We're also being more explicit in our investment strategy making sure that we're investing in proven areas and holding off on investment areas that still needs to be proven out.

[Justin A. Furby:]

Okay. Great. And then last question.

[Adam L. Miller:]

(47

[Justin A. Furby:]

Okay. And one more, is there any change to the 30% to 35% framework for the core business plus a little bit of assumption on the emerging side, if you look out over next few years?

[Adam L. Miller:]

Now, for the next year or so, I think if you go further out, international is going to be a bigger part of our business.

[Justin A. Furby:]

Okay. Great. Thanks, guys.

[Adam L. Miller:]

Thank you.

[Operator:]

Our next question comes from Samad Samana with FBR Capital Markets. Your line is open.

[Samad S. Samana:]

Hi, thanks for taking my questions. I wanted to dig a little deeper into what's going on in the APAC region. It seems you're seeing greater momentum there, could you give us some color on whether sales cycles there are different than in your core markets, how pricing compares and whether there's a more direct deals or partner led deals?

[Adam L. Miller:]

No, these are all direct. It varies tremendously by region, obviously the pricing in Japan is markedly different than the pricing in India, but rep productivity is fairly similar, time to close a deal is fairly similar, you do have in some of the markets like India and China more negotiation happening post-selection than you do in other markets, but I would say, it's relatively similar and we've been talking a lot about Asia. I don't want to rule out the success we're having in Europe. We continue to see a very strong opportunity in Europe across all markets we've grown that team very significantly over the last 18 months. And I expect there to be good returns on that investment over the remainder of the year.

[Samad S. Samana:]

And then one follow-up, as you think about where you want to invest in sales capacity, where do you see the greatest need, is it in APAC, is it in EMEA or just largely across the board?

[Adam L. Miller:]

Yeah, I'd say it's pretty dispersed. We're looking at building all of our teams. Again, we're not overinvesting in markets that we're not confident about yet. So, we're being pretty cautious about those markets. By contrast in markets where we feel like we're doing well, we've invested fairly heavily. So, again in Europe in some of our vertical market opportunities like healthcare and down market particularly in the mid-market we're seeing a lot of opportunities. So, we're growing all of those teams again because of the changes we've made in 2014, the management, infrastructure, and the structure of the organization is right and ready. And so, it gives us really good ability to consistently grow these teams now for the foreseeable future.

[Samad S. Samana:]

And last question from me, does the company have or plan on building out a data center in the APAC region?

[Adam L. Miller:]

At some point, yes.

[Samad S. Samana:]

Okay. Thanks for taking my questions.

[Operator:]

Our next question comes from Alex Zukin with Stephens. Your line is open.

[Alex J. Zukin:]

Hey, guys thanks for taking my question. Adam, I wanted to ask you kind of a two-part question on the competitive environment. Part one just on the effect on sales cycles, if any from kind of the newer initiatives out of work on SAP on learning side and then anything to make out of kind of the potential for Workday to launch a product around, maybe freezing the market for some buyers that you're seeing out there or is that just something you're not seeing?

[Adam L. Miller:]

I mean I could address them both at once, which is to say that none of the announcements over the last several months have had any impact on the overall market. And the broad assumption is that all of these companies will have a learning system. We are the best-of-breed solution in the market. We dominate the learning management market globally. And as we will unveil at Cornerstone next week, we continue to aggressively innovate in that area.

[Alex J. Zukin:]

That's helpful.

[Adam L. Miller:]

As (51

[Alex J. Zukin:]

Understood. And then just one follow-up, are you seeing any push from clients in the industry to kind of address the broader HR spectrum, you're seeing some alliances in the marketplace between certain vendors. I'm just wondering what your take on that is in the marketplace?

[Adam L. Miller:]

Yeah, I mean, I assume, you're referring to the IBM/SAP alliance that was announced. The reality is, IBM integration services, has been integrating Brassring and Kenexa for many years now. They have done the same thing with SAP's products for many years now. These are not really new initiatives they're just new press releases. So, I don't see any major difference in the market from that perspective. I will say as we've grown and we've become one of the largest cloud computing companies in the world and the dominant player in talent management. We now have alliances with all the Tier 1 system integrators as well. And so, in many ways, it neutralizes that as a threat in the market and allows us to compete at a level playing field.

[Alex J. Zukin:]

Got it. Thanks guys.

[Operator:]

Our next question comes from Pat Walravens with JMP Securities. Your line is open.

[Pat D. Walravens:]

Great. Thank you. So, a tactical question for Perry and then a bigger picture one for Adam. Perry, can you tell us roughly what percentage of revenue services were in Q1 and how that compared to Q4, because I seem to remember last quarter, you called it out being a bit different?

[Perry A. Wallack:]

Yeah. Sure. I mean, as I said in the prepared remarks, we usually run roughly about 80-20 and this quarter was no different, it was a little bit higher on the software side; whereas in Q4, it was a little bit lower on the software side. So, it never varies by more than let's just call at 1% to 2.5% on each line item per quarter.

[Pat D. Walravens:]

Okay. That's not very much. And then, Adam I'd love to hear your thoughts about how the cloud market might be changing particularly with all the commentary that we've been seeing about how the giants like Microsoft and Google might be looking at acquiring the leader in the space salesforce.com, what do you see is going on there?

[Adam L. Miller:]

I think there is a widespread recognition at this point that cloud is the future of software and all software companies will be cloud computing companies. So, what we're starting to see is they're not that many companies with the scale that are left in the cloud computing marketplace, especially given the acquisitions by SAP, Oracle; and in fact, Salesforce over the last few years. So, every major tech company is going to need some presence in cloud computing to survive over the long-term. The other transformation that we're seeing is all big cloud companies will also become Big Data companies. So, we're doing it so is everybody else. It's part of the benefit of being a cloud computing company, which is that you have access to an enormous amount of data, which then can be analyzed through machine learning and ultimately monetize, which is what we're now doing. So, we have the advantage of being one of the few cloud computing companies in the world at scale. We continue to grow aggressively at this point, over 19 million users and we see opportunity to continue to expand all over the world. There is no geography or vertical that were kept out of it at this point.

[Pat D. Walravens:]

Thank you. And maybe if I could follow-up on that, as you enter into the platform-as-a-service space, it seems like that might bring you more into competition, with people who you normally wouldn't like Salesforce who obviously got a really good platform-as-a-service offering, how do you see that playing out?

[Adam L. Miller:]

Yeah, I don't really view it as competitive with force.com, I think people are using force.com aggressively. We use force.com internally for a lot of our applications, a lot of our services. We obviously also have the Cornerstone for Salesforce application. By the same token, I believe that the large enterprise software companies need to become platform companies or also will not be able to survive. So, you have to be a cloud company, you have to be a Big Data company and you have to be a platform company. We are now all three. And I think with our subscriber base, with our scale and our ecosystem, are in excellent position to continue to succeed in the future.

[Pat D. Walravens:]

Great. Thanks guys.

[Operator:]

Our last question comes from Brad Sills with Bank of America. Your line is open.

[Bradley Sills:]

Hey guys, thanks for taking my question. A question on what you're seeing with regard to new customer wins and the different components of the stack. Are you seeing certain combinations with learnings, whether it's learnings plus succession and compensation that you're seeing more momentum and recently maybe just a little bit of color on kind of where the combinations of the different modules. How that looks today versus where it was a couple of years ago? And then are there certain modules that you're seeing some momentum and that could potentially become increasing contributors to that cross sell.

[Adam L. Miller:]

Yeah, learning has always been and remains a strong asset for us. But, we're seeing every combination of products being sold into the market today; on average, we're seeing two or three products being bought upfront and what's notable is that we're starting to see more and more full suite deals, not just in the mid-market, but even amongst the largest accounts in the world.

[Bradley Sills:]

Okay. Okay. Great. And then just a question on the different sales forces or different sales organizations, enterprise versus mid-market, did you see any strength in one versus the other this quarter given the refocus on both of those?

[Adam L. Miller:]

No, they're both performing, I mean, enterprise has been the core sweet spot of our business for a long time and remains at. So, we saw very good traction in the enterprise market. At the same time, we're seeing good uptick in volume in the mid-market both in the U.S. and in Europe.

[Bradley Sills:]

Okay. Great. Thanks, Adam.

[Adam L. Miller:]

Thank you.

[Operator:]

This ends our Q&A session for today. I'll turn it back to Adam Miller, Chief Executive Officer for closing remarks.

[Adam L. Miller:]

Thank you all for your participation and your questions. And we look forward to seeing many of you at Convergence next week. Thank you.

[Operator:]

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.