Cornerstone OnDemand, Inc.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cornerstone OnDemand Second 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 like to turn it over to Perry Wallack, Chief Financial Officer of Cornerstone OnDemand. Please go ahead.

[Perry A. Wallack:]

Good afternoon, everyone. This is Perry Wallack, CFO of Cornerstone OnDemand, and welcome to our second 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 June 30, 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, including but not limited to 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 reduction of DSOs, 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. 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 us today. Q2 was another strong quarter for Cornerstone, and I'm excited to share some of the highlights with all of you today. GAAP revenue for the second quarter came in at a record $82.6 million, representing a year-over-year increase of 34%. And bookings came in at a record $91.3 million, representing a year-over-year increase of 30%. I'd like to point out that this 30% bookings growth comes against a difficult compare from the second quarter of 2014, which saw bookings rise by 44% year-over-year. We once again saw a very diverse group of clients join us from a variety of industries and geographies in the second quarter, taking our organic client count to over 2,300. New client additions include the American Red Cross, CNO Financial, Darden Restaurants, Grupo Bimbo, Lenovo, Select Medical, and the list goes on, including another eight-figure deal for Cornerstone. Our combination of growth and industry-leading retention has helped us establish a user base that is today over 20 million strong, which is amongst the largest of any software provider in the world. Beyond adding further validation to the inevitability of cloud adoption across the IT landscape, we believe our results speak to the strength of the value proposition of best-of-breed talent management in literally every niche of the market. Leading organizations around the world continue to become more and more strategic about managing their people, and as the only remaining independent vendor singularly focused on talent management, we believe we are uniquely positioned to support this shift. In addition, as several recent acquisitions and announcements would suggest, the criticality of learning within the work force has become abundantly clear, helping to further fortify our leadership position in today's market. Much of our second quarter performance was driven by sustained execution from the core business. Our enterprise team, which sells to domestic clients with more than 5,000 employees, had a particularly strong quarter and once again demonstrated our dominance at the top end of the market. As many of you know, our business started by selling to large enterprises and all these years later, that segment remains central to our success. At the opposite end of the market, our major accounts team, which sells to domestic clients with between 400 employees and 1,000 employees, again exceeded expectations in Q2 and is poised to achieve triple-digit growth in 2015. So across the spectrum, an increasing number of organizations are choosing Cornerstone to transform the way they manage their talent. Q2 also marked the coming out party of sorts for our Latin American operation. We closed two landmark deals, Grupo Bimbo in Mexico, which is the largest bakery company in the world, and then one of Latin America's top three retailers which employs over 100,000 people. As we have observed in other geographies, regional markets tend to follow their leaders in the adoption of new technology and these wins give us two marquee names to leverage as we continue to build out our presence in Latin America. We also had a great quarter for our education and nonprofit team which closed its own landmark deal with the American Red Cross and achieved other big wins with Boston College, the University of New Mexico and the Dallas Independent School District. Both of these segments were relatively nascent in 2014 and it's great to see them both beginning to gain momentum. As you know, we've also taken a verticalized approach to healthcare and life sciences. While healthcare has been a strong vertical for us for a few years now, we have recently made tremendous strides in the life sciences vertical. Because of the substantial compliance requirements facing pharma companies, there's been resistance by some to adopt a cloud-based solution for addressing their learning, compliance and talent management needs. By devising a holistic solution for life science companies, including addressing specific product requirements and building the requisite advisory services to meet their needs, Cornerstone has become a formidable player in this market. In the past several months, we have secured deals with many of the world's top life sciences companies and in Q2 we added Novartis to that impressive client roster. We feel it is the singular focus on talent management that allows us to keep up with the constantly evolving needs of organization in virtually every vertical, segment, and geography. As more and more of today's wants become tomorrow's needs, we believe the separation between our solutions and the other offerings will become increasingly wide. As our client base keeps growing and our reach expands, we are moving into a new phase in our corporate lifecycle. We recognize the importance of operational excellence to continue to efficiently scale the business at this level. Accordingly, we have made the optimization of our internal functions a companywide focus. Leveraging best-of-breed cloud software, our global operations team is working across the company to improve the free flow of data between systems and to minimize redundancies. These efforts are also creating a greater level of business intelligence, which has already allowed us to achieve greater visibility and accuracy across our operations. Lastly, in my recent travel across EMEA and APAC, it has become abundantly clear to me that demand for what we do is truly global. Business leaders from Paris to Mumbai to Sydney are facing the same challenges that we face in the U.S. around effectively identifying high potential of talent, recruiting and developing those people and retaining and promoting them. We believe the Cornerstone platform is uniquely positioned to meet those challenges for organizations of any size, in any industry, anywhere in the world. This global demand, combined with the continued strength of our core business, the demonstrated momentum over our recent investments, and our commitment to operational excellence, drives our enthusiasm about the path ahead. With that, I'd like to turn it back over to Perry to discuss our financial performance in more detail.

[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. As Adam highlighted, we delivered another strong quarter in Q2, driven by sustained momentum in our core business, as well as meaningful improvements in our emerging markets, such as Latin America and public sector. Now more than ever, companies are turning to Cornerstone as their platform for managing talent, as we have continued to broaden and deepen our relationships with customers of all sizes, all industries and all geographies. Let's turn to the numbers. GAAP revenue for the second quarter of 2015 was $82.6 million, exceeding the high end of our guidance range by $2.1 million and representing a year-over-year increase of 34%. As we have commented previously, on an annual basis, our revenue mix between software and services has been roughly 80% and 20%, respectively. This may vary by a few percentage points on a quarterly basis. The second quarter revenue mix was in line with our historical averages. Bookings, which we define as revenue plus change in deferred revenue, were $91.3 million for the second quarter, representing a year-over-year increase of 30%. As Adam mentioned, this is being compared with a year-over-year increase of 44% in bookings in Q2 of 2014, which was significantly higher than the full year 2014 bookings growth of 36%. As we have talked about on prior calls, I'd like to remind you that our bookings can vary on a quarterly basis depending on the nature and timing of invoicing for new clients, existing clients and renewals. In the second quarter, we had a drag on bookings related to our upfront billings rate, which was lower than our two-year historical average. This is largely due to the heavy mix of enterprise deals that we closed in Q2, which typically have more billing terms than our down-market business. On the other hand, as you can see from the cash flow statement, our bookings did benefit from movements in foreign exchange rates. The net of these two would have resulted in a normalized bookings number that is materially in line with our reported number. The size of our client base increased to 2,362 clients as of June 30, 2015, representing 125 net client additions for the quarter and the largest number of client additions we have ever seen in a Q2. Our user base increased to approximately 20.5 million users as of June 30, 2015, which represents a net addition of more than 1.3 million users for the quarter. Turning to margins, our gross margin for the second quarter of 2015 was 70.3% versus 73.1% in Q2 of last year and 72.6% for the full year of 2014. The slight decrease can largely be attributed to increased head count in all of our services teams, increased spending associated with third-party subcontractors used for implementation and most notably, continued investment in our network infrastructure, primarily to support our platform and analytics initiatives. Based on these further investments, we expect our gross margins to be approximately 71% for the full year 2015, which is approximately 150 basis points lower than our estimate last quarter. Now let's turn to operating expenses. Sales and marketing represented 55.5% of revenue in the second quarter of 2015, down from 57.2% of revenue in the second quarter of 2014. R&D represented 10.4% of revenue in the second quarter of 2015, up from 9.9% of revenue in the second quarter of 2014. G&A represented 12.3% of revenue in the second quarter of 2015, down from 13.2% of revenue in the second quarter of 2014. Overall this resulted in an operating margin of negative 7.8% in the second quarter of 2015, relatively consistent with an operating margin of negative 7.2% in the second quarter of 2014. Net loss for the second quarter of 2015 was negative $8.4 million, or a net loss of $0.16 per share based on a weighted average shares outstanding of 54 million shares, compared to a net loss of $5.9 million, or a net loss of $0.11 per share based on a weighted shares outstanding of 53.2 million shares in the second quarter of 2014. Our net loss in the second quarter includes unrealized and realized losses related to foreign exchange in the amount of approximately $800,000 compared to a loss of approximately $500,000 in the second quarter of 2014 as a result of fluctuations in foreign currencies. With regards to cash flow, cash flow from operating activities in the second quarter was negative $12.7 million, compared to negative $7.8 million in the second quarter of 2014. As we mentioned last quarter, we have implemented and are refining programs to reduce DSOs on a quarterly basis and believe we are on track with our 2015 goals. Let me now turn to the balance sheet. As of June 30, 2015 our total cash, accounts receivable, and short-term and long-term investments balance was approximately $338.2 million. On a GAAP basis, our deferred revenue balance was $189.6 million as of June 30, 2015 compared to $180.9 million as of March 31, 2015 and $139.7 million as of June 30, 2014 representing a year-over-year increase of 36% and a sequential increase of 5%. With respect to head count, we added 86 employees in the second quarter of 2015. As of June 30, 2015 we had 1,511 employees. This total head count number represents a year-over-year increase of 32% and a sequential increase of 6%. We are on track with our hiring plans for the year. I'd now like to discuss our outlook for the third quarter and full-year of 2015, 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 the strength of our business this past quarter, for the full year of 2015, we are raising our previous GAAP revenue guidance range of $337.5 million to $341.5 million to $340.5 million to $343.5 million. At the midpoint, this range represents 30% growth over our 2014 GAAP revenue of $263.6 million. For the third quarter of 2015, we currently expect GAAP revenues to range from $87.5 million to $88.5 million. At the midpoint, this range represents 29% growth over the third quarter of 2014 GAAP revenues of $68.3 million. With respect to full year 2015 non-GAAP net income or loss, we are maintaining our prior guidance of a loss of approximately $16 million, which would yield a net loss margin of approximately negative 5% at the full year revenue guidance midpoint. This implies a non-GAAP loss of $0.30 per share based on full year weighted average share count of approximately 54.2 million shares. Turning to cash flow, for the full year of 2015, we are maintaining our full year guidance for non-GAAP cash flows provided by operating activities of approximately $43 million, which represents a 13% margin at the midpoint of the revenue guidance range. As in the past, we are choosing to reinvest a portion of our bookings overachievement back into the business to drive further growth in the future. In summary, the first half of 2015 was a great start to the year, and we believe we are well-positioned to build upon this momentum over the upcoming quarters. And with that, I'd like to turn it back over to Adam.

[Adam L. Miller:]

Thanks, Perry, and thank you to everyone with us today. I want to especially thank our growing global team for their dedicated work to help people around the world to realize their potential. We will now take your questions.

[Operator:]

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

[Brent John Thill:]

Thanks. Adam, maybe if you could just talk a little bit about – if you could talk a little bit about the large deals in the quarter, and you mentioned the eight-figure deal, and how you're thinking about that pipeline as you go into the back half. And for Perry, just if you could talk about the flow-through of those transactions throughout the year, that'd be helpful.

[Adam L. Miller:]

Yeah, so we are seeing a really strong enterprise pipeline, and in particular, I think over the last 12 months or 15 months, we've demonstrated our ability to do very large deals working with the largest companies in the world, around the world. So these deals, as you know, have taken place, not just in the U.S., but internationally as well. So we're feeling very good about our ability to compete at that level and we've demonstrated an ability to win deals that are eight figures and many that are in the high-seven figures, and we see a continued ability to do that going forward as well.

[Brent John Thill:]

And, Adam, I know it's early with the new platform development capabilities and analytics, but it seems like you're taking this to a different strategic level, your ability to interact with the end buyer. Can you just comment about perhaps how this is – early stages kind of changed the conversation and realize that again, it's still early in terms of that formation?

[Adam L. Miller:]

Yeah. That's exactly right. I think we're now on our third phase of evolution. So we started life as a single applications company. We then moved to become a suite of applications company. And today, we are now a platform company, and that message is resonating very well. We have a well-baked Big Data strategy that is being executed very well. In addition, as you know, we've introduced the Edge platform which provides for openness and extensibility and in effect, we've future-proofed our applications. So that message and that positioning is resonating very well in the market and I think is giving further comfort to these very large clients that we are the right choice for them and we're able to meet their needs, not just today, but into the future.

[Brent John Thill:]

Thank you.

[Operator:]

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

[Brendan John Barnicle:]

Thanks so much. Adam, great job on Latin America and the public sector. One of the other areas you talked about that have been sort of a struggle with Asia-Pac and in your comments, you mentioned as you traveled across Asia that you saw more demand. Any changes or improvements on execution in that portion of the business?

[Adam L. Miller:]

Yeah. I mean we talked about APAC last quarter, which is why we didn't bring it up again this quarter, but we're seeing really good penetration and momentum around the world. So we're now seeing success not only in Europe, but also throughout APAC and in Latin America. So our global strategy is coming to fruition now and we're seeing the ability to sell truly around the world. The application today is in 42 languages. The system is in use in 191 countries and we have direct sales and service operations now in dozens of countries, which has given us the ability to really service these markets in a way that we simply couldn't even 18 months ago and while we had challenges last year in getting these new initiatives off the ground, those investments are now starting to have real returns.

[Brendan John Barnicle:]

So just to summarize, the areas last year you identified were Latin America, Asia-Pac, public sector, and I think was it SMB? And it sounds like you've talked about certainly three of those. Is the fourth one also – should we assume that's taken care of as well?

[Adam L. Miller:]

Well, the fourth one we said wasn't going to be impactful this year either way, and that remains true. I think SMB is more of a 2016 story for us. We'll probably talk about it a little bit next quarter. In addition, the fifth one was strategic accounts and obviously, you've seen now over the last few quarters we've been able to secure the largest companies in the world and that's continued, including in Q2.

[Brendan John Barnicle:]

Terrific. And then just lastly, you mentioned with the Novartis deal, the verticalization that folks are looking for; are you having to develop more verticalized products as you go forward in these larger, more strategic accounts?

[Adam L. Miller:]

Absolutely. So life sciences is a great example of that. In life sciences, there's an FDA requirement called CFR 21 Part 11 that requires validation of environments. There was a lot of resistance to cloud computing in life sciences. Obviously Viva has done very well in that space, but what we're talking about impacts a manufacturer of pharmaceuticals and we've shown an agility to meet the needs of those specific markets, which gives us a real competitive advantage. So we've done extremely well in life sciences over the last few quarters. We've similarly done well in healthcare over the last few years and we're seeing the ability to also compete in other markets, like as I mentioned, in the earlier comments, education, and nonprofits. So each of those markets have some nuances in regard to how you position, in regard to the kind of content and messaging required, but also with regard to the product features themselves and we've had the ability to innovate and tailor our solutions to give a holistic solution for those individual markets, and that's given us real competitive advantage in those spaces.

[Brendan John Barnicle:]

Terrific. Thanks a lot, guys.

[Adam L. Miller:]

Thank you.

[Operator:]

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

[Harris Reid Heyer:]

Hey, guys, this is Harry Heyer on for Raimo. Thanks for taking the question. I was hoping you might be able to dig a little bit more into how – a little bit more into customer reception of the analytics product. And it seems, honestly, digging more into this emerging business unit, a theme that a couple of other guys have asked about already, it just seems like a very dramatic tone reversal from even, call it, six months ago. So I was hoping maybe you could provide a little bit more color on what specifically you've seen from customers on a product acceptance front that has – it just seems like not that long ago, you were discounting them very, very heavily and now it's a source of strength. So just any more color around that would really be helpful.

[Adam L. Miller:]

Yeah, I wouldn't call this a tone reversal. What I would say is that, as we indicated previously, we made a number of different investments over the last 18 months and some of those investments required a gestation period to start to have returns. We are now seeing momentum almost across the board from those investments. We talked last quarter about our strength in APAC. We talked, obviously, earlier today about our success in Latin America. We've shown over the last few quarters the ability to sell to the largest companies in the world and we've had a pretty run in education and nonprofits. So we're seeing good success in many of these areas and I think we've proven out that not on a quarterly basis, but on an annual and certainly on a medium-term basis, these investments made a lot of sense and will continue to make sense in the future.

[Harris Reid Heyer:]

Great. Thanks.

[Operator:]

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

[Patrick D. Walravens:]

Oh, great. Thank you, and congratulations to you guys.

[Adam L. Miller:]

Thank you.

[Patrick D. Walravens:]

Hey, Adam, on Cornerstone Edge, investors, I think, are pretty familiar with Force.com and how that helped Salesforce really dominate CRM. How is Edge similar and how is it different?

[Adam L. Miller:]

Well, I think it's very similar in the fact that it allows us to open and extend the platform. It allows our clients to begin to integrate easily with other solutions. It allows our clients to extend functionality in certain areas, and like Force.com, it allows third-party developers to build applications on our infrastructure, leveraging our ecosystem. So in all those ways, it's very similar. I think the primary difference is we have the benefit of hindsight, so we understand where they ran into challenges along the way. We understand where there might have been architectural decisions at the beginning that needed to be changed later on, and we're able to learn from those mistakes, but maybe most importantly, we're starting with a base of 20 million users. And our products, as you know, impact every employee in an organization, so there's a wider breadth of potential applications that can be both built upon and integrated with Edge.

[Patrick D. Walravens:]

That's helpful. Thanks. And is it generally available at this point? When did it go GA?

[Adam L. Miller:]

So it's in beta right now.

[Patrick D. Walravens:]

Can you tell me...

[Adam L. Miller:]

It'll go into GA early next year.

[Patrick D. Walravens:]

Okay. Thank you.

[Operator:]

Our next question comes from Michael Nemeroff with Credit Suisse. Your line is open. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks for taking my questions. Sorry, I joined a little bit late. So, Adam, I'm just kind of curious, we've seen a lot of HCM vendors recently doing well that lead with payroll, and they seem to be taking some share in the market and growing pretty fast, companies like Paycom and Paylocity. I'm just curious, is payroll something that you would consider building or adding to the portfolio in the future, because I get the sense the partnership with – partnership outside of the one with ADP with some of these smaller payroll-centric vendors might be an issue since they're trying so hard to get into the HCM market. I'm just kind of curious what your thoughts are on that?

[Adam L. Miller:]

Yeah. So specifically those companies have done very well in what we would consider the SMB space, which is really sub-500 employees; in some cases, very low in the SMB space, so what some people call the VSB space, very small business. We are very comfortable with the relationships we have in the payroll community. As you know, we work with many of the largest payroll companies in the world. Many of them are clients. We have a very tight relationship, as you know, with ADP, which is the largest payroll company in the world. We have regional payroll relationships, and we think it makes sense to continue the kind of collaboration that we have with those companies. Having said that, we will also collaborate in the SMB space, so as we'll talk about more in the future, as we build out growth addition and bring higher level of focus to our SMB operations, we will also leverage the relationships we have in the payroll world to piggyback on the success that those companies are having in the small business space. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) That's helpful, Adam. If I may, a follow-up for Perry; Perry, just looking out a couple of quarters and you have couple of large prepayments in Q4 and Q1, I'm just curious how you're planning to fill those holes? Are those going to be filled with large contracts that you see that are coming down the pipe that could close in Q4/Q1? Or were you just going to – you think you're just going to grow right through it?

[Adam L. Miller:]

Michael, let me take that one first. We are doing a lot of very large deals. That one was an anomaly. We are very transparent about billing terms. That one was clearly exceptional in its upfront payment, but many of these large deals also have delayed billing terms, and they tend to offset each other over time. As we have more of these large deals which not only have transpired but also are in the pipeline, we believe you'll have a net effect between delayed billings and where there's been some upfront payment. As you know, there's really been just one major case where there was a significant upfront payment at the end of last year and the beginning of this year. That will definitely be offset by significant unbilled backlog that we have going into next year and beyond. Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks for taking my questions.

[Operator:]

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

[Alex J. Zukin:]

Hey, guys. Congratulations on a great quarter. I wanted to ask you about the attach rates that you're seeing for some of the other modules, like recruiting. Are you seeing an uptick there? And what's driving it? And then just, Perry, I wanted to ask you to maybe dig in a little bit to the gross margin guidance for the rest of the year; what's kind of driving that?

[Adam L. Miller:]

Yeah, so today, over 70% of our client base has two or more products. Over 40% have three or more products. And so we're seeing good attachment of all products. We have a particular focus now on recruiting and onboarding because we've done so well in the areas of Learning and Performance, we think the attachment of recruiting and onboarding furthers our penetration and stickiness in those accounts and are consistently looking to bolster the unified talent solution. In addition, I think all of the investments we're making around analytics further the strength of that message because the analytics solutions obviously are even more powerful, the more of the platform you're using. And so to the extent you're using not one or two, but five or six or seven of the products, you get much better capability from the analytics tools around visualization, predictive analytics and ultimately, work force planning.

[Perry A. Wallack:]

Yeah. Thanks, Adam. Alex, to answer your question about the gross margin guidance, what we've seen this year so far is that we've been adding head count in all of our services teams, really just as scheduled. We've had a little bit of an increased spending associated with the third-party subcontractors that we use for our implementations. And we did make a very, very heavy investment this year in our network infrastructure, which is primarily to support the platform and the analytics initiatives that Adam's been talking about. When you look at it just in net, the sum total difference between the prior year and the current year, it's probably no more than about 100 bps. But as we initially thought it was going to be up a couple of points, we felt like we needed to just let everybody know where we would be coming in versus that prior-quarter guide. So just about 100 basis points at most, less than last year and roughly the way we're viewing it is due to some investments that are really period costs for this year.

[Alex J. Zukin:]

Got it. It sounds like that could modulate back up as we look out.

[Perry A. Wallack:]

That's correct.

[Alex J. Zukin:]

Thanks, guys.

[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. First, Perry, on the full year guidance, that net margin guidance suggests that OpEx in absolute dollars will only see small increases in the back half of the year. Is this because the company feels comfortable with where you are in head count? Or how should we think about the ramp in expenses in sales and marketing and R&D for the back half of the year?

[Perry A. Wallack:]

Yeah. So I'll let Adam speak to the ramp in the head count when it comes to sales and marketing. I think overall, what we're looking at is that we have front-loaded more of our expenses for the first half of the year. And yes, you are correct that it does imply that for the second half of the year that does ratchet down a bit to that full year net loss. The last thing that I would add to it is foreign exchange can still move around. So far this year, we've obviously had a net negative impact. Obviously, we could have some of that turn around in the second half of the year potentially. Adam, you want to add to that?

[Adam L. Miller:]

Yeah. I mean, with regard to staffing in general, we are exactly on track to our head count plan for the year which will continue to have investment through the latter half of the year. In addition, we are seeing very good demand around the world. And so we remain very bullish about our ability to continue to expand our sales teams globally.

[Samad S. Samana:]

Great. And then one follow-up, if I could. So at the beginning of this year the company somewhat reallocated where it was going to focus its investments, more in its core markets where there's better visibility. With APAC and Latin America starting to see better signs and public sector as well, how are you thinking about that investment framework for growth for the back half of the year and as you start to think about 2016?

[Adam L. Miller:]

So we think about it the way you might think about an investment portfolio. We are taking a very conservative approach to allocating our investments across all these different initiatives to ensure that we have a balanced approach to growth in areas where we know we will have return, combined with growth in areas where we think there's potentially significant upside.

[Samad S. Samana:]

Great. Thanks for taking my questions, and nice quarter.

[Adam L. Miller:]

Thank you.

[Perry A. Wallack:]

Thank you.

[Operator:]

Our next question comes from Scott Berg with Needham & Company. Your line is open.

[Scott Berg:]

Hi, Adam and Perry. I would certainly echo the congrats on the really strong quarter.

[Adam L. Miller:]

Thank you.

[Scott Berg:]

A couple of questions from me. One following up on the last gentleman's question is, Adam, how are you seeing the sustainability of the Latin America and public sector opportunities over maybe the near to medium term? And I ask the question because you've had some kind of starts and stops in those segments historically.

[Adam L. Miller:]

Yeah. So the jury is still out on government within public sector but we are seeing really good momentum in education. And I think that is not a one-time event, we're seeing consistent momentum there, and consistent growth. Latin America, there weren't starts and stops; this is the start, and so we think there's plenty of room for upside. We are just now starting to get momentum. We are just now starting to build out pipeline, teams, capability, brand awareness and ultimately, reference accounts that will allow us to continue to grow throughout the region. Scott, as you know, we have a very particular strategy as we enter into a new geography, we want to be conservative about our opening in the market. We focus on developing relationships with marquee accounts and then leverage those marquee clients to expand in the region. And that's exactly what we've done here in Latin America. I think it took longer than some people might have liked, but in the scheme of things, it actually didn't take that long and now we're seeing real return in that market. And we'll continue to grow and expand in the region.

[Scott Berg:]

Okay. And I guess a question on the overall sales efforts; you obviously went through some reorganization in your teams last year that we've all talked about a couple of times. And while your results were really strong in this quarter and certainly over the first half this year, would you characterize the sales team as hitting the productivity levels that you're expecting or is there still some opportunities to improve the strong execution that we've seen recently?

[Adam L. Miller:]

I think they're in line with some historical averages at this point, but we believe that there's room for upside, absolutely. We can grow productivity, particularly as we enter new markets, and some of our newer teams still have room for upside. Absolutely.

[Scott Berg:]

Great. That's all I have. Thanks for taking my questions.

[Adam L. Miller:]

Thank you.

[Operator:]

Our next question comes from Brad Sills with Bank of America Merrill Lynch. Your line is open.

[Brad Sills:]

Hey, guys. Thanks for taking my question. Congratulations on a very nice quarter.

[Adam L. Miller:]

Thank you.

[Brad Sills:]

I just, Adam, had a question for you, please, on analytics insights. I know it's limited view here since it's been out but can you give us, provide just a little bit of color on how the installed base or even new accounts are receiving insights at this point in the lifecycle of the offering?

[Adam L. Miller:]

Yeah. I mean, it's working as we expected, which is the primary attraction is the high end of the market. Our largest enterprises obviously have the most data and potentially the most to gain from predictive analytics, and so we've seen very good interest from that segment of the market. They're the ones that were very involved. In fact we sold out of our beta. We wanted to keep it capped, and it's had very good momentum there. We also believe that it's helped us in our overall positioning. So both platform and Big Data in selling to large enterprise are things that people care about and give them comfort about our ability to serve them not just today but into the future. And as you can imagine, if you are a Global 100 company, when you're making a purchase decision, you're doing it not for even the first term of the contract; you're assuming you're making a decade long commitment, if not longer and therefore having the ability to service our needs not just today, but into the future is incredibly important and we've now proven an ability to do that.

[Brad Sills:]

Got it. Great. And you provided us some nice color on the larger accounts. Could you provide a little bit also on the midmarket? How did that organization fare this quarter and where do you feel you are there? Is there – as you guys gain more success up market, is there potential de-emphasis on the midmarket or is that not the right way to think about it?

[Adam L. Miller:]

No. I wouldn't think about it that way. I mean I absolutely view this as a portfolio approach and so midmarket is a very big market opportunity for us. As you know, we divided midmarket into what I would consider upper and lower midmarket, and we think there's significant opportunity there. We are bolstering our partnerships in that segment. We are building out further capability in that segment and continuing to grow our sales teams in that segment, and I believe there's plenty of room for continued growth over the long-term in that market.

[Brad Sills:]

Great...

[Adam L. Miller:]

Also it is important to recognize that the enterprise wins help us in the midmarket because these are the best known brands in each of these verticals and so the success we've had in meeting the needs of these largest clients are also what these smaller companies aspire to be like, and therefore our solutions are very attractive to them and obviously prove that we could scale to meet the needs of these smaller businesses that are less complex than these global multinationals with bigger needs and bigger requirements.

[Brad Sills:]

Got it. Great.

[Adam L. Miller:]

So we don't view it as an exclusive opportunity. We view it very much as a symbiotic relationship between those teams and we're seeing good growth in both segments.

[Brad Sills:]

That's great. Thanks, Adam.

[Operator:]

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

[Justin A. Furby:]

Thanks, guys. Adam, I wanted to start on the pricing dynamics this quarter. I'm just curious whether you've noticed any evidence of some of the other players, Saba or the like, that are starting to get a bit maybe more firm on pricing and deal cycles? And also I would like an update in terms of the cross-sell efforts and what that looked like in Q2, with that team, was there any noticeable improvement there?

[Adam L. Miller:]

Yeah, I'll take the second one first with regard to cross-sell. We're still in line with our historical averages. We think that is, as we've discussed before, an opportunity for future upside and we put teams in place to specifically address potential up-sell for our largest accounts. We've taken a dedicated approach to cross-selling, up-selling the biggest accounts that we have and given the success we've had with large enterprise, there are many of those accounts in our client roster. With regard to the competitive environment, I'm not sure what do you mean by Saba firming up its pricing, but that would be news to me. We've continued to see our competitors very aggressively try to compete with us on price, but as our solutions become more specifically relevant to individual markets and verticals, we are having an increasing ability to hold our price points and we think there's some upside there, as you know, relative to other SaaS verticals, so companies operating in other application areas outside of talent management; the talent management market has significant under-pricing relative to the rest of the cloud computing world, and so I think the long term, there is plenty of upside from pricing specifically.

[Justin A. Furby:]

Got it. And there's – I want to go back to the public markets. There's been some chatter about from some of the partners around federal, particularly as it's potentially opening back up. I guess, can you give any update there? Remind us when you go back a few years ago, what was that as a percentage of your business? And could it return to something like again this year in theory?

[Adam L. Miller:]

Yeah, a few years ago, it was probably 5%-plus of our incremental sales. And I think it absolutely could be that into the future, even as we expand more internationally and domestic revenue becomes a smaller percentage of total revenue. But it remains to be seen when that timing will be. So I can't tell you it's going to be this year that it's back up at 5%, but I do believe over the long term, there is a very big opportunity there and in federal in particular, we have advanced our FedRAMP status ahead of all of our competitors, and that puts us in a very nice position over the long term.

[Justin A. Furby:]

Got it. Thanks, Adam. And then, Perry, just quickly on cash flow, we haven't seen it this low since IPO and I'm just wondering if it's solely DSO driven or if there's anything else there? And then on the sales and marketing side as an expense it hasn't really come down as a percentage of revenue, I'm wondering why that is and whether you think that happens in the second half of the year or when you start to see leverage there? Thanks.

[Perry A. Wallack:]

Yeah, sure. So on the cash flow front, what I would just say is that we, as I gave in the prepared remarks, are sticking to our guide for the full year, and so it's just really timing. What I would also add is that we've talked about some of the operational changes that we've made in the business and smoothing out cash flow, and we were pretty pleased with the impact that those had in the second quarter. So versus our internal targets for cash flow, we were very, very pleased. As you know, we don't give cash flow guidance on a quarterly basis, and so it's best looked at still on an annual basis. While we are making progress in smoothing that out throughout the year, I would just continue to focus for the short term on the full year number.

[Adam L. Miller:]

And just on sales and marketing in particular, I would tell you that we often do our sales hiring in the first half of the year, and so you don't see the productivity of those reps until the latter part of the year, so that does have an impact of margin throughout the course of the year.

[Justin A. Furby:]

Okay, great. Thanks, guys.

[Operator:]

This ends the Q&A session for today. I will turn it back to Adam Miller, CEO, for closing remarks. Go ahead.

[Adam L. Miller:]

Thank you, all, for joining the call, and we appreciate your participation. We'll speak to you again next quarter. Thank you.

[Operator:]

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