Q2 2020 Cornerstone OnDemand Inc Earnings Call

August 10, 2020

Cornerstone the on demand Q2, 2020 earnings conference call. At this time, all participants are unable to listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference maybe recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your hosts Vice President Finance corporate development, Jason Gold Sir. Please go ahead.

Thanks, very much and good afternoon, everyone and welcome to cornerstones second quarter 2020 earnings call with me today, our Chief Executive Officer fill Saunders and our Chief Financial Officer, Brian Swartz as always our Chief accounting officer in future interim CFO Trish.

In conjunction with today's call, we published a presentation that located on the Investor Relations section of our website. Today's press release was furnished to the FCC in a form 8-K.

Today's discussion will include forward looking statements, including but not limited to statements regarding expected performance of our business, our future financial and operating performance, including our GAAP and non-GAAP guidance. The integration of saw the into our business and achievement of related cost synergies and efficiencies our strategy, our long term growth and our overall future across.

Aspects.

Forward looking statements involve risks uncertainties and assumptions these risks uncertainties and assumptions as well as other future factors that could cause actual results could differ materially from those continued our forward looking statements are included in our most recent 10-Q and 10-K as all subsequent periodic filings with the SEC.

During the call, we will be referring to both GAAP and non-GAAP financial measures all financial figures discussed today, our non-GAAP unless we seek to measure is the GAAP number the reconciliation of our GAAP to non-GAAP information is provided in the earnings press release and also in the presentation. We've got a backdrop I'd like to turn the call over to sell.

Thank you, Jason and thanks, everyone for joining the call today as many of you know I've spent the past five years deeply immersed in is critically important people development market.

And we are seriously motivated by the power of this combination of Saba and cornerstone.

Now as the new cornerstone expanding our positive impact on companies, we serve and their most critical assets are people is something that is quite parcel to me and our team.

With just roughly 60 days under my belt as the CEO I'm excited about the opportunities ahead of us.

Let me first address Brian's announced departure and take a moment to thank him for his contributions to cornerstone.

Brian has played an integral role in the success of our company over the past several years since joining in 2016.

He led efforts to improve financial discipline scaled the business and improved profitability is expertise and tenacity undoubtedly have helped us to set up for success as we embark on the next stage of our transformation.

While disappointing to see here move on we wish Brian success on his next churn.

Brian will be providing you detailed on our financial performance, we reported today, but let me offer a quick summit.

Quick commentary.

While we certainly felt headwinds related to cobot 19, we believe the company executed well over the course of the first half of 2020, as we were aggressively and successfully integrating the Sabah business and helping our expanding customer base make the transition to remote development and collaboration.

Now more than ever we believe our wider solution set delivers critical capabilities and remains well positioned to support the expanding needs of our customers and our long term revenue growth.

The second quarter, we delivered total revenue of 184 million.

Operating income of $40 million and earnings per share of 40 cents.

We focused on is seen improvement in our renewal rates as well.

Past 100 days, we've also accelerated development and innovation in an effort to deliver more strategic value to our customers I am pleased to report that we successfully integrated cluster use technology to create state of the art skills engine.

Which will provide enhanced personalization through the millions of people leveraging both cornerstone and sabal platforms for their development.

We've also been advancing our micro services capabilities to drive more seamless in the flow of work integrations with other leading applications, adding several new content and language offerings to our content anytime suite and accelerating the availability of content anytime to dishonourable customer base.

Considering the unforeseen new realities of coded and global economic environment, along with a critical activities required to successfully integrate saba.

I'm proud of our user focus our customers our execution in the quarter and our current business motions as we look forward I think and truly appreciate our employees for west bring the personal realities of a 100% work from home global operation I'm humbled by their passion for our business their care for fellow.

Teammates and our customers, which we are committed to serving and enabling through these challenging times.

Before I get into the opportunity I see your cornerstone and our plan to capitalize on it I thought I begin with some insight into my leadership it communication side.

You can expect me to communicate in a straightforward and transparent manner I will take a pragmatic approach to decisions for the business and I'm keen on leveraging the data insights and experiences of the team around that.

I'll be clear with you on my beliefs and use I'll share our strengths in opportunities and yes.

Central challenges that May lie Inflatables I'll also tell you when I don't know the answer.

We have a clear vision for where we will take this business as a market leader communication with our investors as importantly, and I along with the cornerstone team will be accountable to the targets, we set or any of the confidence of our employees customers partners and our investors is integral to the successful execution of our strategy and it's important to me.

Personally.

Some of the early meetings I've had with investors. After our last earnings call I have been quick to point out at cornerstone is a solid company and a large in dynamic market. We're here together now as we work to evolve cornerstone into truly great business. We believe there's a clear opportunity to drive cornerstones next chapter of market impact really efficient.

Scalable growth make no mistake. This is not about an iterative release, a cornerstone is about a transformation journey.

Transformative missions require solid assets awesome people and a lot of Britain focus, which we are armed with.

We see a significant opportunity to reinvigorate growth, while expanding our margins in essence, turning cornerstone into efficient growth company world proud.

As I've gotten deeper into the weeks here I've noticed areas of the business that I'd label low hanging fruit that when properly assess and address should enable us to simply performed better can't say that identive I've identified all of them yet, but I can tell you. These are now critical elements of our transformation.

First facet of our transformation plan as a focus on customer experience and equally important experiences of our customers customer. The end user we believe there's an opportunity to improve our renewal rates by focusing on the customer experience.

The customer intimacy and increasing our focus on user engagement with our applications Im confident that this because by the time I arrived at Saba and when we sold the business cornerstone retention rates improved by well over 1000 basis points.

None of this is rocket science, we need to shift our mindset and the just the way we operate to improve retention, which in turn will contribute to the two more efficient subscription revenue growth going forward as I mentioned this is beyond serving customer the buyer and ultimately includes how we engaged to 75 million consumers on our.

Offering we use our application again mindset matters, the second facet of our transformation and how we plan to dry deficient growth.

Focus what I call an hour window zones. This is something I suspect really done before at other companies. It's how many other high performing software companies operate.

We can become more efficient with our sales and marketing budgets, while leveraging our win loss data and insights to exclusively focused on the areas, which we have a highest probability of success rather than treating all dollars of opportunity. The same we will invest where we know we can win by de emphasizing our lower wind great areas, we'll put more wood behind.

No and opportunity reached arenas, which we expect will improve our blended win rate and meaningfully improve our customer acquisition costs.

Without going into too much detail, because I know our competitors off listen in on these calls and I don't feel the need to reveal our entire playbook.

We believe the newly combined cornerstone can have the most success in areas, where what we do is a must have for companies and we feel we have the people technical assets and capability to do better than anyone else. It's in areas like this where we believe the ERP companies and the smaller best of re players just.

Can't compete as well.

We think the marketing has continued to be large and growing by focusing the entire cornerstone team on these types of when zones.

I'm confident in our ability to drive efficient growth.

Third and fundamentally nature, we have a keen eye on assessing and advancing our organizational design and effectiveness. This includes analyzing items such as how decisions are made across management layers. The center of gravity for our geographic locations and how we effectively go to market.

Analyzing the motions of our teams and their engagement with our customers, we see an opportunity to drive greater efficiency, while improving customer experience. It's imperative, we increase the ownership and accountability across the entire organization, while enabling more timely decision, making in ways that benefit our customers.

As we gain clarity on the appropriate design state you'll likely see some changes here that I expect we'll drive improvements across a variety of functions, while also improving our efficiency in speed.

You'd expect we also plan to be leaning on top of infrastructure and low cost geographies to drive improved abilities to efficiently scale. This business.

The fourth pillar relates to our product vision and strategy since taking over as CEO I've spent a lot of time looking at our combined company technology assets, which are truly awful as we go forward our product strategy rises above the pros and cons of Saba versus cornerstones products that.

We are deepen the process of determining the optimal go for details, but the key objective here is that our customers will continue to be very well served will soon reveal a product strategy that we expect will enable our customers should do better meet evolving needs of people that work and drive strategic transformation for their organization launch.

During cornerstone is in the optimal position to both within and lead in the market in a phrase think disruptive innovation, we plan to leverage our combined global user and R&D resources to positively disrupt the industry, we see a world where we leverage our massive data set in combination with our AI.

Sheen learning capabilities to deliver the right experience so right user at the right time in the most hyper personalized talent, Germany. This app. This adaptive application experienced drives engagement as we know the more engager products users to secure the solution the security solution the better the retention rates.

Which contributes to stronger revenue growth instead provides cash flow that can be reinvested to make the product. Even stickier you can see the positive flywheel here and we plan to pursue this aggressively.

A couple quick point of reference as I mentioned, we've already completed the engineering effort for the cornerstone content anytime offering to be seamlessly integrated with cyber cloud. So our teams are now actively introducing and cross selling our content solutions. This month something IP as a significant opportunity. We're also leveraging the data science back skill.

Sales engine, we acquired clustering into our platforms, all cornerstone and Todd.

In advance our design thinking in development the learning experience offerings in a matter that we believe is unique and compelling we expect our approach to innovating around the learning experience will go beyond simply meeting the competition I see that is yet another large area for delivering more value and cross selling opportunity to the entire client base of 75.

In consumers.

Tying all this together there is a lucid and pragmatic financial threat as you've seen in our disclosures Saba pro forma cash flow margins were meaningfully better than cornerstones. The purpose of the Saab acquisition was not to just Tac samba financials onto the cornerstone financials and extract some cost synergies. If that's all we do that weve.

We will have missed a much larger opportunity in hand, instead, our plan is to leverage the philosophies and business processes that I've seen drive higher barges in higher growth and apply these two right here at cornerstone.

That in my mind is a critical element of what success looks like.

Let's talk industry focus for among the good news is that we believe the market environment has some tailwinds, we the fundamentals of what we do our strategic and essential even in periods when discretionary purchases of retail companies are dealing with undeniable realities, we believe only we conserve.

Every company is in digital transformation mode employees are in need of Upskilling get re skilling to rise to the new challenges employers can identify critical talent fast enough and all this goes on.

In today's world, where the realities are working from home driving need for remote development as compared to live in person management engagement and classroom training. We see cornerstone is uniquely positioned to be a critical enabler and how the employee and the company transformation journey unfolds.

Points like what we have seen from our expansive usage in the south the meeting application and mobile experiences on our platforms gives us confidence in this view.

In a market, we believe is underserved and growing we feel the realities of today's environment also favour those vendors with scale and today out base of roughly 6000 unique customers 75 million consumers leads our industry.

This is really exciting both for our internal teams as they realize there are more resources more data and more ability to deliver our product vision, but also for our customers who see the benefits and the flywheel success I mentioned before that our scale can brand.

In support a bit I point out that in July we saw several large prospective deals return to our active pipeline, both for new and existing customers, particularly within critical segments, such as federal government and healthcare the owner is on us to bring these across the finish line in the second half 2020, but they are.

Because of a why we took incrementally better about the business I am here I am hearing directly from HR leaders at our prospective and existing customers about accelerating digital transformation. Although there are differences in the pace of recovery were seen by industry.

We're now expecting to close some of the deals that had the privilege previously frozen due to them and then pandemic.

Turning to our synergies when we first announced the transaction, we discussed 35 million in cost synergies, we expected to take out of the combined entity.

On the last quarterly call, we upped that number to 50 million and said that you come out as we exited this year. We've made tremendous progress as we are driving the integration and the team is trying to continue identifying additional areas for efficiency to that end. The team has spent the majority of its time, thus far focusing on efficiency.

As in areas, where we had the most obvious areas of overlap as report our companies together.

We've recently turning their attention to other synergistic areas and as a result, we're increasing our target for 2020 exit run rate synergies to 65 million.

Again, we take our commitment seriously and I am keenly focused on driving as much efficiency as we can in pursuit of profitable growth.

Perfect that you will hold me to this number and I expect to meet or exceed your expectations overtime.

With all that said the impacts of the current environment can be ignored coated had an impact on new business. During the first half and while we have seen some improvement in our business environment Theres still some uncertainty out there our business is reasonably back half weighted and as the new CEO I feel we'd be illogical during a pandemic to apply our historical close rate.

Probabilities to our second half pipeline to commit to those numbers, although I am cautiously optimistic and as I mentioned earlier that we've seen some improvements already in our new renewal rates I also want to be careful and thoughtful on this point.

We spent the last two months hosting virtual customer road shows and engaging with our customer base to provide clarity on our company and product plans, while also preparing them and our internal teams for the significant cross sell opportunities. We believe our ahead I am encouraged and excited by the than Im also taking a rational and pragmatic approach as to the time.

For when these tangible results materialized.

The situation were confronted with and customer decision delays are indeed real to recover we're taking this reality into consideration as we evolve our customer engagement engagement motions in order to alleviate some of these elements im sorry headwinds.

When thinking about 2020 full year combined numbers, we are taking into account our new framework.

We have a core business thats around 700 million in HR are on a combined pro forma basis, and 100 million dollar business that contains products. We are no longer actively selling to new accounts, while we are growing our or in the core strategic area. We succeed we expect that growth in 2020 will be offset by decline in our non core.

Business without as a backdrop I think it would be sensible to plan for our year end 2020 air are to be about flat when compared with 2019, ending pro forma EMR of 818 million.

We are planning our cost structure, and where we allocate our time and investments. So that we can best positioned ourselves deliver our bottom line extension commitments, regardless of how that order environment shakes out over the quarters ahead.

Taking all these items together I feel very good about our ability to rebound not only compete but to win to overtime. Our plan is to Reaccelerate cornerstones course core subscription revenue growth rate to a level that is at least in line with the market. So we plan of course to shoot for higher with the realities of cobot, it's difficult to commit to a time.

From here, but sites to spice it to say I'm in a hurry and this is a huge priority for us.

I'd now spoken for longer than you probably expected, but before I turn things over to Brian to discuss details of our financials I wanted to mentioned a couple of other things that are relevant and important to me and the border cornerstone team.

First we made some executive level changes in our in alignment with our focus and the company's wider transformation and in particular, our attention on evolving customer experience.

This afternoon, we announced carry Williams has been put in charge of customer support and services and we will report directly to me.

And our interim dramatically and positively transformed the same areas at Saba and is armed and ready to drive that success with the team here at cornerstone. We've also announced that Teresa D'amato has been named our chief of staff Teresa drove the transformation efforts at Saba, an entire companies and is well underway here at cornerstone.

I'd also like to cover our focus on diversity equity and inclusion for the longest cornerstone has been around in a company that has always embrace these items and deferring points of view.

We created a new leadership role committed to this important ever and I'm excited to announce we brought on onboard and experience in season professional to lead this charge.

Sales and organizations around the world stay safe and healthy.

Their awareness around important social topics and grow their skills, yes, even if they weren't customers already part of our existing ecosystem.

I've always had a strong commitment to public service through our cornerstone foundation for our motto had been primarily business to non profit.

We launched cornerstone carriers as a way to reach anyone and everyone to expand our mission to the Florida community and the world since the launch over 130000 people have engaged with cornerstone carriers. We've continued to support the added content around K 12, virtual learning for teachers unconscious bias courses and building.

Interviewing skills for job seekers.

I couldn't be personally prouder of the team for they've accomplished here if you haven't checked it out yet I strongly encourage you to do so confined the linked to cornerstone cares on our public website.

With that I'll gladly turn the call over to Brian Brian.

Thanks, Phil I'd like to start off by thanking you for very high end were about my departure I'm, leaving cornerstone to pursue an opportunity a larger private company for a variety of personal reasons. This is that that best fit for me at the time.

With that said, we truly a difficult decision because I've enormous confidence in the direction to fill and the rest of the team are taking cornerstone and their ability to execute on the opportunity that lies ahead I know that I'm, leaving you in good hands and with a very bright future.

They bittersweet last earnings call for me.

Now turning to the financial.

July 1st we filed an okay with fathers historical financial result in accordance with FCC rules and regulations.

Based on our preliminary purchase accounting work deferred revenue was written down at the acquisition date by approximately $56 million.

Expect about $50 million about him out impact, our 2020 revenues and the balance to impact 2021.

Accordingly.

Overall near term financial result, and related growth plans will be affected by this adjustment.

We are provided more detail on that in our Q2 investor presentation, which is posted on our website.

Furthermore, with respect to the thought of historical financial result, it's worth noting that numbers might be a big tricky to analyze from thought that had some deferred revenue write downs of are all related to the halogen.

Acquisition.

So in my mind, the clearest indicator a solid historical growth isn't in our disclosure we provided on the last call and our again, providing this quarter, which we showed that solvent total LSR grew 2% in 2019.

That comprise 22% growth in public cloud and move up 9% decline and power space and a 23% decline in the migration businesses.

On May 22nd we also completed the syndication of our term lumpy consortium of lenders the cash interest rate on the loan at LIBOR, plus 425, and with issue than a 2.5% discount.

They fly in our investor deck that detailed out the cash and noncash interest expense for both our term loan b and our convertible bond.

As we have started the path we expect our primary use of cash going forward will be the repayment of debt and our plan is to rapidly de lever.

Now turning to our Q2 results, we posted total revenue of $184 million, which included a purchase accounting reduction of $19 million related to the Salva acquisition.

We also had a 4.3 million dollar benefit to our Q2 subscription revenue as a result of recognizing onetime revenue from a large customer.

We do not expect us to repeat in Q3 and beyond.

On the operating expense side as you might expect our expenses were meaningfully lower than our original budget, primarily due to the impact of Covance, but also as we adjusted our cost structure to appropriately respond to our operating environment.

On a standalone basis.

Cornerstone did.

Total operating margin improvement, even before the onetime revenue I just mentioned.

Our unlevered free cash flow in Q2 was $15 million and includes approximately $18 million of cash used for restructuring and acquisition related items.

We ended the quarter with approximately $180 million in total liquidity and our net leverage ratio improved quarter over quarter due to improvements in profitability.

Looking forward to Q3.

We expect total revenue in the range of $187 million to $189 million.

Subscription revenue between 181 and $183 million.

Q4, our total.

Hi, good revenue range of $193 million to $196 million with subscription revenue between 186 at 189 million dollar.

These amounts take into consideration deferred revenue write down related to purchase accounting of approximately $19 million in Q3 and $30 million in Q4.

This I mean, our full year 2020 total revenue would be in the range of $715 million to $720 million.

Subscription revenue between 689 $694 million.

We expect our full year 2020 operating in up to be in a range of $129 million to $133 million.

Both of these amounts taken consideration deferred revenue write down of approximately $50 million related to purchase.

We expect our unlevered free cash flow to be in a range of $105 million to $115 million.

These amounts include approximately $60 million, a nonrecurring restructuring and acquisition related costs.

Yes, I understand that this includes our best estimate of the timing of certain onetime call, but depending on the paper, which were able to tackle. These integration projects. Some of these cost could conceivably moved 2021 instead of point 20.

We're currently planning for incremental $40 million of these costs 2021 for a total of 100 million dollar.

Also to help you with your model, we expect our guidance for second half operating income of roughly $66 million at the midpoint to be fairly consistent between Q3 and Q4.

It's still the Scott due to the impact of Kogut, we expect 2028 or maybe about flat when compared with our 2019 ending pro forma combined we are on $880 million.

Given the nature of how our subscription business work.

The impact of the Saab acquisition currency fluctuation and purchase accounting, we would expect a corresponding impact on subscription revenue in 2021.

It's important to note that we expect growth from our strategic core business, which will be offset by decline our migration.

As Phil mentioned earlier.

Turning to 2021 profitability.

When you take new account the timing of the $65 million of synergies Phil mentioned earlier, and you normalize for inorganic growth and any other nonrecurring deal related items, we would expect our 2021 operating income and cash flows to show meaningful improvement over our 2020 figures.

As we focus on driving enhanced profitability, while also pursuing our ambitious growth initiatives.

With that we will now take your questions.

Thank you.

To ask a question. Please press star one on your Thats, Tom telephone again Thats Star one on your touched on telephones ask a question to withdraw your question press the pound key.

San Manuel we compile the culinary roster.

Our first question comes from the line ratios.

Lauria of D.A. Davidson your question please.

Hi, guys. Thanks, so much for taking my questions and Brian really enjoyed working with deal that is.

And you're definitely going to be modest.

First one of the can maybe dig a little bit into the increase in synergy expectations. This year.

Raising kind of your expectation by about 15 million. Some Q you lost gave as guidance, maybe directionally can you help us understand where on the incremental.

Synergies coming from.

I'm, just kind of how to think about the sustainability of some of those synergies Cmos, we haven't called Allomap storm beyond and then I've got a follow up.

I think I'll start with that one thanks for the question as we mentioned.

Earlier on our last call in on this one.

The initial focus was on the overt overlapping areas. So for instance, the best again will be two sales reps in the same territory type of model.

So of course that addressed our 35 to 50 million dollar.

Number as we look at and looked at further efficiencies in the business just getting our arms around the business more closely there are other areas of overlap that were not as overt clearly areas of efficient.

Efficiency that we could it we could touch without the impact of growth and so is fairly evident and now something that we have confirmed and now maybe part of our synergy plan. So it's clearly insight and will be completed as we exit 2020.

Okay, great that that's helpful and on the Investor presentation, you breakout Sop as our last year I believe this is a little bit definitely then then they'll slice you gave us last time and Thats not the case I apologize, but maybe can you.

Yes will help us understand kind of the three different component right. When we talk about learning and recruiting and what you call core here versus performance versus migration Walt.

What we're kind of the pieces that lag.

Form into migration being down year over year learning of recruiting being up on.

Sorry, if I look at Saba analog on Standalone to the extent, but we can you just indicative of comps the direction that we'd expect Saba air are to continue or is also another way to think about it. Thanks.

Let me I'm sorry.

To that.

Yes, absolutely crazy as Brian I'll take that fit so just for clarity I think you're referring to slide 12 of the deck. The numbers haven't changed the grouping have slightly and let me explain it just give a little color. So sabas year end 2019, a our was 243 million as you can see on that chart.

Only Saba had referred to there.

Core a our as both the green flies in the light Orange slice I guess, it is which included both learning recruiting and performance.

Roughly $200 million and then there was migration of about 44 million. So we had grouped together learning and performance and recruiting all in core performance. They are 63 million is primarily the talent base business, which is I believe we talked about in the last call.

Saab ahead.

Effectively stopped selling out to new customers at least obviously is a very large installed customer base and those those customers are very important to us and we continue to work with them.

Very closely we have elected just to separate the performance twice the talent say slice. So you can see the actual growth of learning and recruiting.

Which is the thought of cloud platform and primarily with math.

Separate and apart from performance migration, so thats interest or regrouping out it really it's not a they're not different numbers.

Okay. That's very helpful. Thank you saw style appreciate them on bus versus that.

Okay.

Thank you. My next question comes on line of Scott Berg of Needham Your question. Please.

Hi, filling Brian Thanks for taking my questions today, and Brian I would also echo the sentiment stuff on for years.

But I guess, so let's talk about the current state of the business you talked about some quote unquote coded headwinds to the business.

Would you consider that to be business why it are there specific modules that might be seeing a larger impact than others.

Hey, Scott how are you.

We stated a general issue I mean, the bottom line is this is a situation with colder that frankly I don't think anyone on this call is ever seen I certainly Evan.

My sense is that overall, we're finding those headwinds to impact new business, specifically, new business and upsell business.

So I wouldn't say any one particular area that we're feeling it I think overall, we're seeing budgets and on hold and curtail we do see that opening up a bit as we mentioned on the call, but I would say, it's not in one particular area.

Got it lymphoma follow perspective, as you look out a couple of years, you talked about reinvigorating growth.

You know the start of course on last couple of years has been heavy on the content side, I guess, where do you see that growth coming from over the next two to three years relative to the recent product strategy.

I think as it relates to growth. We list, we're really excited about content and I know that my predecessor, and Adam was very excited about it I think it was a really good reason I mean, there is this is not just about reselling some content and try and you to acute upsell content is integral to People's development and challenge earnings.

So we're really excited about it but overall, we see growth in our core capabilities of what we do across the platforms and so we're excited about that resurgence of growth that that growth will come from more of our core more of our expanded capabilities and yes. It will include content.

Got it and if I may sorry, one last one here for me as your guidance here in the second half. Both Q3 in Q4 suggests you being able to successfully put some of your professional services the partners.

At least some of the historical cyber services I guess, what are you hearing from partners with regards to the integration of the two company. Thank you.

No I think it's a bit of it to be candid Scott, it's a bit of a moving target I think early on there was probably just nervousness because sabal was predominately a direct services company with some partners.

I will tell you that I'm really proud of the team here, obviously cornerstone had some experiences and moving the delivery capabilities to the quote unquote channel partners a lot of these folks already knew Saba. Many of them are already partners of Saba. So was really about getting the details correct worrying about the things that could go wrong to make sure we were.

Covered on them and I feel really comfortable that we've handled that properly.

Partners are comfortable with it and ultimately in how we execute so I think you should hold us accountable to it.

Great. Thanks again.

Thank you. My next question comes from Chris Merwin of Goldman Sachs.

Please go ahead.

Hi, This is Kevin on for Chris Thanks for taking my question.

Brian can you can expand on the nature of the onetime revenue benefit that was recognized during during the quarter.

Yes, we had a lot of a larger customers effectively had we had basically.

Our usage over to drilling for them for the current period added required kind of a cumulative catch up of subscription revenue that benefited Q2 as I mentioned by about 4.3 billion dollar. So I only called that out so that when you look sequentially from Q2 to Q3 based on the guidance, even with Saba up there there is a slight.

Time, good guy so to speak into Q2 numbers that that will R&D going forward.

Great that makes sense and then.

Could you talk about maybe content traction during the quarter relative to pre cobot expectations.

I I know you called out cross selling and was impacted but just trying to get a sense of how the pipeline is shaping up for the back half the year.

You want me to grab that Brian.

Yes sure.

So our cornerstone content anytime offering for sure without any doubt when you look at the pipeline pipeline.

The pipeline is improving for sure as well as.

Our second half.

Views already we believe we'll see an uptick so we're excited about content business again, I want to be clear not as a separate content business, but as an integral part of our solution in the motions of as we talk about Talen journeys and so I think as result of that mindset, we're seeing CCMA our offering.

A constant a content anywhere offering to be becoming something thats part of the sales motions and as a result pipelines are increasing and the conversion rates look really good so far.

Great. Thank you.

Thank you our next question.

Comes from Siti Panigrahi of Mizuho. Please go ahead.

Thanks for taking my question.

So.

Just you're discussing with five our customer possibly that could you share. What's the feedback we have got cut from them or are you expecting them to sometime uptick.

Mr platform anytime soon and also what sort of cross sell opportunity do you see.

We're really pleased by the feedback we've received from customers as you would imagine as and as you heard me say on my opening comments. We proactively spent the first two months of me in the CEO will have actively engaging with both cornerstone and former sabal customers.

And the cyber customers when they are now educated on our roadmap on our plans for the year ahead are feeling comfortable and I believe I would say cautiously excited about what's ahead for the new combined cornerstone with their sabal Thompson.

In terms of the cross sell opportunity I mentioned that in the first 60 days as I've been in the role in the for 100 days of our companies coming together, we have already designed in an integrated seamlessly to cornerstone content anytime capability right inside the sabal offerings that release is coming out in this month and we have already.

Yeah.

Begun selling it frankly, taking orders for it so.

Very exciting opportunity again, it's I don't want to over high for this but we are optimistic about the opportunity at hand in our wide customer base.

Thanks of our color and Brian in terms of renewal rates are you expecting any kind of.

Headwinds.

From some of your largest customer on there I can you guys talked about sets us on few other so are you expecting anything.

This year.

Yes, so I'd say its Brian.

Actually our renewal rates have trended slightly better than we had expected early on here, we are working with certain customers in terms of.

Certain payment schedules, some deferred payments, which are impacting some working capital but ultimately.

The environment, we're operating in what coded providing a bit of a tailwind on I mean on rate basis, which obviously pleased about and we haven't seen any major economic reductions as a result.

Customers operating or customers that are mid contract the habit some timing impacts around one that this cash flows will come in.

No no structural.

Economic impact so we're going we're feeling good about our renewal rate.

Thank you.

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

Oh, Thanks for taking my question this pendulum sitting in for Mark.

And welcome Phil let Brian Great working with you at now best wishes.

I want to start with just the coven impact that you're talking about maybe can you talk about the trajectory of those headwinds through through Q2 and into Q3, because I think you said you had seen some green shoots in April So how do you transit meet you did kind of down ticking.

Uptick in now again.

Well I didn't specifically mentioned green shoots in April I said that we are seeing green shoots in the business and we are cautiously optimistic about that meaning that between opportunities in the pipeline that war I would call frozen or garment have become active number one and number two there has been some pit.

Demand as a result of a.

Several months.

Slowdown due to cold and in terms of any and all this is corporate transactions for enterprise software applications and so those green shoots as I mentioned, we're seeing globally, but also in a couple of very specific areas like federal government as well as healthcare and other essential areas and so we're excited by that we see.

The opportunities there to convert those opportunities in the second out and so were mildly excited about that but it is coded and it is appendix. So we're being thoughtful about both school to get there.

Understood.

Thank you for that and Brian on the Twentytwenty subscription revenue.

Guidance I was just doing some rough math and maybe my math is completely off here, but if I look on a pro forma basis, assuming 2019, intuited Sabas 22 million.

Subscription revenue the Twentytwenty subscription revenue growth seems like is a decline of 4%.

Even after adjusting to the write down of 50 million.

When sabas and cornerstone they are kind of do I believe 10% of 2% last.

End of 2019. So can you help me reconcile that me what is it maybe there's just a little bit of conservatism in the numbers, but.

Well as and we're always going to try to to exceed our guidance and our outlook.

So I don't know exactly what numbers are using but if you take cornerstones 19 numbers and you grow them at some rate again, you can't you don't have the exact percentage growth rate you have Q1.

Part of Q2, we condition the implied numbers Saba had about 260 million hours of revenue last year, obviously, we do not get the full benefit of that so whether it's a 12 through some hair cut off about today, obviously, there's some element in there that precisely pin down by we closed the acquisition on April 22nd and then you take off the differ.

Revenue number you get fairly close or should get fairly close in a ballpark number of what we're guiding to for the full year. So.

Whether it's down to 4% are up two or 4% again, we're not being as high salary guard, but we don't that's our current guidance that we are always like to exceed that we have a strong candidly that will obviously go through the benefit some revenue in Q4 in the full year.

Understood. Thank you.

Okay.

Thank you again to ask a question. Please press star wanting a touchstone telephone again that star one when you put strong telephone to ask a question.

Our next question comes from the lineup Alex Zukin of RBC capital markets. Your question. Please.

Yes, Hi, this is Scott on for out.

I'm curious if you can elaborate on your focus on wind down.

Where do you think the strength of the cornerstone inside of products that are today in terms of geography or customers died and how should we think about the areas of the go to market strategy that maybe you're doubling down on burst deemphasize. Thanks.

Thanks, guys. Appreciate the question kind of figured someone was asking that question.

I want to be currently here since it's part of our playbook Anders competitors listening, but let me give you a couple of examples I should make sense I mean, there our mission critical compliance and safety enterprise customers that enterprise customers are contending with and it's something that frankly, we do deeper and wider than anyone else we.

The enterprise customers that are global with multiple ERP and nature a system.

Systems, and an environment that obviously is a multifaceted one where we are a critical system in that multiple ERP HRS environment and so.

The third item I would give you as an example, and it's a little bit more soft, but in reality truly matters and that is customers and prospects are actively discussing in planning at the C level and board level.

And how they're planning to do this transformation that in front of them.

The reality is the challenges the scarce commodity and what we do matters more than ever and those customers want to talk to cornerstone.

Those are examples of wind zones that frankly that we think we can go deeper and wider than anyone that will give us higher when rates those are rarely generic responses on this open call, but hopefully gives you some insights.

Completely understand and that makes sense, maybe just a quick follow up I know there's been a few questions about coded you. How that's impacting you I'm curious that like the product level are you seeing any differences in kind of willingness to buy learning versus recruiting verse content versus performance or any other areas that type of portfolio in the current environment.

Yes, I think Scott at Needham asked this question earlier about is there a particular area that's getting more impacted in others I would say overall on a business of our side of the size of roughly 820 million. We don't see any one particular area, but if you had to dial even double clinical one particular area across town of course talent acquisition Endo recruiting.

It is an area that you would feel.

So thats an area that of course, we people more in our percentage of our business. It's it's not overall impacting in terms of a dramatic impact, but it's something that of course, we feel I think there are other areas. However that customers are seeing increased usage now we don't have a uses based model like we have a per employee model, but usage is absolutely increasing across.

It's not just content or other aspects of our platform where.

The work from home transformation requires what we do and so there's a balance there and we're excited about the fact that theres actually more usage and stickiness on our platform.

Great. So for me Thanks, taking my question.

Thank you. Our next question comes on line of Pat Walravens of JMP Securities. Your line is open.

Hi, This is John for Pat. Thank you because you are question just wanted to ask about the competitive landscape and if there's many changes I know a couple of quarters ago, you'd called out symbol funny private companies just wanted to see if there's any of the uptick there any additional color. Thank you.

Thanks, John for the question and I think it's a fair question right. The competition is is in a similar situation. We are right anyone that says differences is probably not being completely sincere there are fueling headwinds or some business impact, but I think for space. The competition is largely remain the same there are big ERP players.

That are continuing to do what they're doing and there are what I would call best of breed players.

Looking to get a piece and or share of the wall and so I would say the competitive landscape is largely the same beyond some moves and changes here in there, but largely the same and frankly is upon us to go execute better than they are.

Thank you.

Thank you at this time I'd like to turn the call back over to Phil Sanders for closing remarks, Sir.

Yes.

Well, thanks, very much for passing it back to me and folks thanks for joining us on this call today, Thanks for giving me a little bit more time than I would normally date would appreciate that as you could tell we're really excited about the business here and we're also optimistic but very much in a cautious matter, giving code I look forward to chatting with you one on one.

And look forward to seem in virtual.

Investor meetings, and thank you very much for your time and attention.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

[music].

Ladies and gentlemen, thank you for standing by and welcome to cornerstone Ondemand skewed to 2020 earnings conference call.

This time, all participants are enabled listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that todays conference maybe recorded if you require any further assistance. Please press star zero I would now like to handle the conference over to your old Vice President of.

Got it some corporate development, Jason Gold Sir Please go ahead.

Thanks very much.

Good afternoon, everyone and welcome to cornerstones second quarter 2020 earnings call with me today, our Chief Executive Officer Saunders.

Chief Financial Officer, Brian Swartz is always our chief accounting officer future interim CFO Trish.

In conjunction with today's call, we published a presentation that located on the Investor Relations section of our website. Today's press release was furnished to the FTC in a form 8-K.

Discussion will include forward looking statements, including but not limited to statements regarding the expected performance of our business, our future financial and operating performance, including our GAAP and non-GAAP guidance. The integration of saw the into our business in achievement related cost synergies and efficiencies our strategy or long term growth and our overall future prospects.

Forward looking statements involve risks uncertainties and assumptions these risks uncertainties and assumptions as well as other ensure factors that could cause actual results could differ materially from those continued our forward looking statements are included in our most recent 10-Q 10-K is all subsequent periodic filings with the essence of.

During the call, we will be referring to both GAAP and non-GAAP financial measures all financial figures discussed today, our non-GAAP unless we state the measure if the gap number the reconciliation of our GAAP to non-GAAP information is provided in the earnings press release and also in the presentation. We've got it backdrop I'd like to turn the call over there so.

Thank you, Jason and thanks, everyone for joining the call today as many of you know I've spent the past five years deeply immersed in this critically important people development market.

We are seriously motivated by the power of this combination of Saab and cornerstone.

Now is the new cornerstone.

And hitting our positive impact on companies, we serve and their most critical assets are people is something that is quite parcel to me and our team.

Just roughly 60 days under my belt at the CEO I'm excited about the opportunities ahead of us.

The first address Brian's announced departure and take a moment to thank him for his contributions to cornerstone.

Brian has played an integral role in the success of our company over the past several years since joining in 2016.

<unk> efforts to improve financial discipline scaled the business and improved profitability is expertise and tenacity undoubtedly have helped us to set up for success as we embark on the next stage of our transformation.

While disappointing to see here move on we wish Brian success on his next churn.

Well I will be providing you detailed on our financial performance, we bought reported today, but let me offer a quick summit a quick commentary.

While we certainly felt headwinds related to covert 19, we believe the company executed well over the course or the first half of 2020, I believe we're aggressively and successfully integrating the Sabah business and helping our expanding customer base make the transition to remote development in collaboration now more did.

However, we believe our wider solution set liberals critical capabilities and remains well positioned support the expanding needs of our customers and our long term revenue growth in the second quarter. We delivered total revenue of 184 million.

Operating income of 40 million an earnings per share of 40 cents.

We've focused on is seen improvement in our renewal rates as well.

Ask 100 days, we've also accelerated development and innovation in an effort to deliver more strategic value to our customers I am pleased to report that we successfully integrated cluster use technology to create state of the art skills engine.

Which will provide enhanced personalization to the millions of people leveraging both cornerstone and sabal platforms for development.

Considering the unforeseen new realities of coded and the global economic environment, along with a critical activities required to successfully integrate saba.

I'm proud of our laser focus our customers our execution in the quarter and our current business motions as we look forward I think and truly appreciate our employees for wet spring to personal realities of a 100% work from home global operation I'm humbled by their passion for our business their care for fellow.

Teammates and our customers, which we are committed to serving and enabling through these challenging times.

Before I get into the opportunity you guys your cornerstone and our plan to capitalize on it I thought I begin with some insight into my leadership and communication side.

You can expect me to communicate in a straightforward and transparent manner I will take a pragmatic approach to decisions with the business and I'm keen on leveraging the data insights and experiences of the team around that.

I'll be clear with you on my beliefs, and you I'll share our strengths in opportunities and yes.

Financial challenges that May lie in five.

I'll also tell you when I don't know the answer.

Got a clear vision for where we will take this business as a market leader communication with our investors is important to me and I along with the cornerstone team will be accountable to the targets, we set or any of the confidence of our employees customers partners and our investors is integral to the successful execution of our strategy and it's important to me.

Personally.

Some of the early meetings I've had with investors after our last earnings call I've been quick to point out at cornerstone is a solid company and a large and dynamic market.

Your together now as we work to evolve cornerstone into truly great business. We believe there's a clear opportunity to drive cornerstones next chapter of market impact will be efficient scalable growth make no mistake. This is not about an eight or release of cornerstone.

It's about a transformation journey transformative missions require solid assets awesome people and a lot of Britain focus, which we're armed with <unk>.

We see a significant opportunity to reinvigorate growth, while expanding our margins in essence, turning cornerstone into efficient growth company portal proud.

As I've gotten deeper into the weeds here I've noticed areas of the business that I label low hanging fruit that wouldn't properly assess and address should enable us to simply performed better can't say that that I have identified all of them yet, but I can tell you. If these are now critical elements of our transformation.

First facet of our transformation plan is to focus on customer experience and equally important experiences our customers customer.

End user we believe there's an opportunity to improve by renewal rates by focusing on the customer experience.

Customer intimacy and increasing our focus on user engagement with our applications I'm confident that this because by the time I arrived at Saba and when we sold the business cornerstone retention rates improved by well over 1000 basis points.

None of this is rocket science, we need to shift our mindset and the just the way we operate to improve retention, which in turn will contribute to the two more efficient subscription revenue growth going forward as I mentioned this is beyond serving the customer the buyer and ultimately includes how we engage the 75 million consumers on our.

Offering we use our application again mindset matters, the second facet of our transformation and how we plan to drive efficient growth so focus what I call on our when zones.

Just helping I suspect we done before in other companies, it's how many other high performing software companies operate.

We can become more efficient with our sales and marketing budgets, while leveraging our win loss data and insights exclusively focused on the areas, which we have a highest probability of success rather than treating all dollars of opportunity. The same we will invest where we know we can win by de emphasizing our lower wind radar is we'll put more with the idea.

In opportunity reach arenas, which we expect will improve our blended win rate and meaningfully improve our customer acquisition costs.

Without going into too much detail, because I know our competitors off listen in on these calls and I don't feel the need to reveal our entire playbook. We believe the newly combined cornerstone can have the most success in areas, where what we do is a must have for competence. We feel we have the people technical assets.

And capability to do better than anyone else. It's in areas like this where we believe the ERP companies and the smaller best of breed players.

I can't compete as well.

We paid democratize continues to be large and growing by focusing the entire cornerstone team on these types of when zones.

I'm confident in our ability to drive efficient growth.

Analyze even motions of our teams and their engaging their customers, we see an opportunity to drive greater efficiency, while improving customer experience. It's imperative, we increased the ownership and accountability across the entire organization.

Enabling more timely decision, making in ways that benefit our customers.

As we gain clarity on the part we design state you'll likely see some changes here, but I expect we'll drive improvements across a variety of functions, while also improving our efficiency and speed.

You'd expect we also plan to be leaning on top of infrastructure and low cost geographies to drive improved abilities to efficiently scale. This business.

Fourth pillar relates to our product vision and strategy.

Taking over as CEO I've spent a lot of time looking at our combined company technology assets, which are truly also as we go forward our product strategy rises above the pros and cons of Saba versus cornerstones products.

Your deepened the process of determining the optimal go forward details, but the key objective here is that or customers will continue to be very well served will soon reveal a product strategy that we expect will enable our customers should you better meet the evolving needs of people that work and drive strategic transformation for their organization Wally.

I'm showing cornerstone is in the optimal position to both Wayne and lead in the market.

The phrase think disruptive innovation.

And to leverage our combined global user and R&D resources to positively disrupt the industry, we see a world where we leverage our massive data set in combination with our AI machine learning capabilities to deliver the right experience. So right user at the right time in the most hyper personalized talent journey.

This out this adopted application experienced drive engagement as we know the more engage a products users to secure the solution to secure the solution the better the retention rates, which contributes to stronger revenue growth.

Provides cash flow that can be reinvested to make the product even stickier you can see the positive flywheel here and we plan to pursue this aggressively.

A couple quick point of reference as I mentioned, we've already completed the engineering effort for the cornerstone cockpit anytime offering to be seamlessly integrated with cyber cloud. So our teams are now actively introducing and cross selling our content solutions. This month something I see is a significant opportunity. We're also leveraging the data science back skills.

When we acquired clustering into our platforms, all cornerstone and Todd we advanced our design thinking in development. The learning experience offerings in a matter that we believe is unique and compelling we expect our approach to innovating around the learning experience will go beyond simply meeting the competition.

That is yet another large area for delivering more value and cross selling opportunities you mean tired client base of 75 million consumers.

Hi, all this together there is a lucid and pragmatic financial threat and if you've seen in our disclosures Saba pro forma cash flow margins were meaningfully better than cornerstones. The purpose of the Saab acquisition was not to just Tac Saba financials onto the cornerstone financials and extract some cost synergies. If that's all we do that we believe.

If we will have missed a much larger opportunity in hand.

Instead, our plan is to leverage the philosophies and business processes that I've seen drive higher barges in higher growth and apply these two right here at cornerstone.

I didn't my mind is a critical element of what success looks like.

Let's talk industry focus were among the good news that we believe the market environment has some tailwinds.

Fundamentals of what we do our strategic and essential.

Even in periods when discretionary purchases Patel companies are dealing with undeniable realities, we believe only to serve.

Every company is in digital transformation mode employees are in need of Upskilling at least killing to rise to the new challenges employers can identify critical talent fast enough and all this goes off.

Today's world, where the realities are working from home driving need for remote development as compared to live in person management engagement in class and training. We see cornerstone is uniquely positioned to be a critical enabler and how the employee and the company transformation journey unfolds.

Points like what we have seen from our expansive usage in the south the meeting application and mobile experiences on our platforms gives us confidence in this view.

In a market, we believe is underserved and growing we feel the realities of today's environment also favorite those vendors with scale and today out base of roughly 6000 unique customers 75 million consumers needs our industry.

In support of it I point out that in July we saw several large prospective deals return to our active pipeline, both from new and existing customers, particularly within critical segments, such as federal government and health care. The owner is on us to bring these across the finish line in the second half 2020, but they are.

It could have a why we took incrementally better about the business I'm here I am hearing directly from HR leaders at our prospective and existing customers about accelerating digital transformation. Although there are differences in the pace of recovery, we're seeing by industry.

We're now expecting to close some of the deals that had the privilege previously frozen due to them and then the pandemic.

Turning to our synergies when we first announced the transaction, we discussed 35 million and cost synergies, we expected to take out at the combined entity.

On the last quarterly call, we upped that number to 50 million and said that come out as we exited this year. We've made tremendous progress as we are driving the integration and the team is trying to continue identifying additional areas for efficiency to that end. The team has spent the majority of its time, thus far focusing on efficiency.

Yes in areas, where we had the most obvious areas of overlap as report our companies together.

Recently, turning their attention to other synergistic areas and as a result, we're increasing our target for 2020 exit run rate synergies to 65 million.

Can we take our commitment seriously and I am keenly focus on driving as much efficiency as we can in pursuit of profitable growth.

I expect that you will hold me to this number and I expect to meet or exceed your expectations overtime.

With all that said the impacts of the current environment can you.

Hope it had an impact on new business during the first out and while we have seen some improvement in our business environment. There's still some uncertainty out there our business is reasonably back half weighted and as new CEO I feel we be illogical during a pandemic to apply our historical close rate probabilities to our second half pipeline commit to those numbers.

Although I'm cautiously optimistic and as I mentioned earlier that we've seen some improvements already in our new renewal rates.

I also wanted to be careful and thoughtful on this point.

We spent the last two months hosting virtual customer road shows and engaging with our customer base to provide clarity on our company and product plans, while also preparing them and our internal teams with a significant cross sell opportunities. We believe our ahead I'm encouraged and excited by the but I'm also taking a rational and pragmatic approach as to the time.

Well when these tangible results materialize.

The situation were confronted with and customer decision delays R&D real due to code or taking this reality into consideration as we evolve our customer engagement engagement motions in order to alleviate some of these elements I'm sorry headwinds.

When thinking about 20 Twentys full year combined numbers, we are taking into account our new framework.

We have a core business that's around 700 million in HR are on a combined pro forma basis.

800 million dollar business that contains products, we're no longer actively selling to new accounts, while we are growing our air or in the core strategic area reached six we expect that growth in 2020 will be offset by decline in our non core business. We've got as a backdrop I think it would be sensible to plan for our year end 2020 air or.

To be about flat when compared with 2019, ending pro forma a our our of 818 million.

We are planning our cost structure, and where we allocate our time and investments. So that we can best position ourselves deliver our bottom line extension commitments, regardless of how the border environment shakes out over the quarters ahead.

Taking all these items together I feel very good about our ability to rebound not only compete to wed to overtime. Our plan is to Reaccelerate cornerstones course core subscription revenue growth rate to a level that is at least in line with the market. So we plan of course to shoot for higher with the realities of covert it's difficult to commit to a tie.

From here, but suffice it to say I'm in a hurry and this is a huge priority for us.

Now spoken for longer than you probably expected before I turn things over to Brian to discuss details of our financials I wanted to mentioned a couple of other things that are relevant and important to me and the border cornerstone team first we've made some executive level changes in our in alignment with our focus and the company's wider transformation.

And in particular, our attention on evolving customer experience.

This afternoon, we announced carried Williams has been put in charge of customer support and services and we will report directly to that.

He said drove the transformation efforts at Saba and in prior companies and is well underway here at cornerstone.

I'd also like to cover our focus on diversity equity and inclusion for the longest cornerstone has been around that accompany there's always embrace these items and deferring points of view.

We've created a new leadership role committed to this important to ever and Im excited to announce we brought on onboard and experience and seasoned professional to lead this charge.

As part of our commitment to Dare I say humankind. We're personally proud of what we're doing with cornerstone carriers are free online learning developer platform with awesome and timely content as our company adjusted to the realities of life on their Kogut, we really felt we needed to take action and do everything we could do that.

Sales and organizations around the world stay safe and healthy.

Their awareness around important social topics and grow their skills, yes, even if they weren't customers already part of our existing ecosystem.

I've always had a strong commitment to public service through our cornerstone foundation, but our motto had been primarily business to non profit.

We launched cornerstone carriers as a way to reach anyone and everyone to expand our mission to the Florida community and the world since the launch over 130000 people have engaged with cornerstone cars Weve continued to support the added content around K 12, virtual learning for teachers unconscious bias courses and building.

Interviewing skills for job seekers.

I couldn't be personally prouder of the team what they've accomplished here if you haven't checked it out yet I strongly encourage you to do so confined to linked to cornerstone cares on our public web site.

With that I'll gladly turn the call over to Brian Brian.

Thanks, Bill I'd like to start off by thanking you for the very kind were about my departure I'm, leaving cornerstone to pursue an opportunity and a larger private company and for a variety of personal reasons. This is that that best fit for me at the time.

With that said, we truly a difficult decision because I've enormous confidence in the direction the fill and the rest of the team are taking cornerstone and their ability to execute on the opportunity that lies ahead I know that I've, leaving you in good hands and with a very bright future.

They bittersweet last earnings call for me.

Now turning to the financial.

July 1st we filed an 8-K along with all those historical financial result in accordance with FCC rules and regulations.

Based on our preliminary purchase accounting work deferred revenue was written down at the acquisition date by approximately $56 million, we expect about $50 million about them out impact our 2020 revenues and the balance the impact 2021.

Accordingly.

Overall near term financial result, and related growth plans will be affected by this adjustment.

We have provided more detail on that in our Q2 investor presentation, which is posted on our website.

Furthermore, with respect to the up to solve this historical financial result, it's worth noting that the numbers might be a big tricky to analyze and saw that had some deferred revenue write downs of are all related to the halogen.

Acquisition.

So in my mind, the clearest indicator of solve as historical growth isn't in our disclosure that we provided on the last call and our again, providing this quarter, which we showed that solve a total ARR grew 2% in 2019.

That comprise 22% growth solid cloud and move up 9% decline in power space and a 23% decline in the migration businesses.

On May 20 Saga, we also completed the syndication of our term lumpy consortium of lenders to cash interest rate on the loan is LIBOR plus 425.

She is that a 2.5% discount.

They fly in our investor deck that detailed out the caf and non cash interest expense for both our term loan b and our convertible bond.

As we've done in the path, we expect a primary use of cash going forward will be the repayment of debt and our plan is to rapidly de lever.

Now turning to our Q2 results we post the total revenue of $184 million, which included a purchase accounting reduction of $19 million related to the saw the acquisition.

Also had a 4.3 million dollar benefit to our Q2 subscription revenue as a result of recognizing onetime revenue from a large customer.

We do not expect us to repeat in Q3 and beyond.

On the operating expense side as you might expect our expenses were lower.

Lower than our original budget, primarily due to the impacts of coven, but also as we adjusted our cost structure to appropriately respond to our operating environment.

Standalone basis cornerstone did meaningful operating margin improvement even before the onetime revenue I just mentioned.

Our unlevered free cash flow in Q2 was $15 million and includes approximately $18 million of cash used for restructuring and acquisition related items.

We ended the quarter with approximately $180 million total liquidity.

Net leverage ratio improved quarter over quarter due to improvements in profitability.

Looking forward to Q3.

We expect total revenue in the range of $187 million to $189 million.

Subscription revenue between 181 at a $183 million.

For our total.

Hi, good revenue range of $193 million to $196 million with subscription revenue between 180.

$189 million.

These amounts take into consideration deferred revenue write down related to purchase accounting of approximately $19 million in Q3 and $13 million in Q4.

Yes, I mean, our full year 2020 total revenue would be in the range of $715 million to $720 million, we subscription revenue between 689 $694 million.

We expect our full year 2020 operating in up to be in a range of $129 million to $133 million.

Both of these amounts taking consideration deferred revenue write down of approximately $50 million related to purchase accounting.

We expect our unlevered free cash flow to be in a range of $105 million to $115 million.

These amounts include approximately $60 million of nonrecurring restructuring and acquisition related costs.

Yes, I understand that this includes our best estimate of the timing of certain onetime call, but depending on the pace at which were able to topple. These integration projects. Some of these cost could conceivably move to 2021 instead of 2020.

We're currently planning for incremental $40 million of these costs 2021 for a total of 100 million dollar.

Also to help you with your model, we expect our guidance for second half operating income of roughly $66 million at the midpoint to be fairly consistent between Q3 and Q4.

It's still the Scott due to the impact of co that we expect 2028 or thinking about flat when compared with our 29 ending pro forma combined they are of $818 million.

Given the nature of how our subscription business work really impact of the saw the acquisition currency fluctuations and purchase accounting, we would expect a corresponding impact on subscription revenue in 2021.

It's important to note that we expect growth from our strategic core business, which will be offset by decline our migration.

As Phil mentioned earlier.

Turning to 2021 profitability.

When you take new account the timing of the $65 million synergies Phil mentioned earlier.

Normalized for inorganic growth and any other nonrecurring deal related items, we would expect our 2021 operating income and cash flows to show room for improvement over our 2020 figures as we focus on driving enhanced profitability, while also personally our ambition.

Growth initiatives.

With that we'll now take your questions.

Thank you.

Sounds good question. Please press star one on your Touchstone telephone again that star one on your touched on telephone to ask a question to withdraw your question press the pound cake.

Please stand by while we compile the culinary roster.

Our first question comes from the line of reissue.

Lauria of D.A. Davidson your question please.

Hi, guys. Thanks, so much for taking my questions and Brian really enjoyed working with you over this.

And you're definitely going to be lost.

Just wanted to come maybe dig a little bit into the increase in synergy expectation this year.

Raising kind of your expectation by about 15 million to Las gave as guidance maybe drops you can you help us understand where on the incremental.

Synergies coming from.

I'm, just kind of how to think about the sustainability of some of those synergies humans, we haven't called club store and beyond that I've got a follow up.

I think I'll start with that one thanks for the question as we mentioned.

Earlier on our last call and on this one.

The initial focus was on the overt overlapping areas. So for instance.

Thats a cap will be two sales reps in the same territory type of model.

Of course that address our 35 to 50 million dollar.

Efficiency that we could it we could touch without the impact of growth and so is fairly evident and now something that we have confirmed and now made part of our synergy plan. So it's clearly at site and we will be completed as we exit 2020.

Okay, great that that's helpful on.

And then on the Investor presentation, you breakout sorry.

Our last year I believe this is a little bit definitely then then they'll slice you gave us last time and Thats not the case I apologize, but maybe can you.

I will help us understand kind of the three different components right. When we talk about learning, including now what you call core here versus performance versus migration Walt.

What we're proud of the pieces that led.

To supplement some migration, leading down year over year learning or putting being off I'm not.

Saba, if we look at Saba error on Standalone to the extent, but we can you just indicative of comp the direction and while we expect Saba air are to continue or is there another way to think about it. Thanks.

Let me I mean, you answer that.

Absolutely ratio as Brian I'll take that fit so just for clarity I think you're referring to slide 12 of the deck. The numbers haven't changed the grouping have slightly and let me explain it just give a little color. So sabas yearend 2019. They are was 243 million as you can see on that chart previously Saab I had referred to there.

For a our as both the Green Fleiss, then the light Orange slice I guess it is which included both learning recruiting and performance of roughly $200 million and then there was migration of about 44 million. So we had group together learning and performance in recruiting all in core performance they are $63 million primary.

Finally, the talent base business, which is I believe we talked about in the last call.

Saab ahead.

Effectively stop selling out to new customers at least obviously is a very large installed customer base and those those customers are very important Austin, we continue to work with them very very closely we have elected just to separate the performance twice the talent space life. So you can see the actual growth of learning and recruiting.

Which is the thought of cloud platform and primarily to mass.

Separate and apart from performance migration, so thats interest or regrouping out it really it's not a they're not different numbers.

Okay. That's really helpful. Thank you so monetize appraisal on best wishes on.

Thank you.

Thank you. Our next question comes on line of Scott Berg with Needham Your question. Please.

Hi, filling Brian Thanks for taking my questions today, and Brian I would also echo the sentiment spent a fun for years.

But I guess, so let's talk about the current state of the business you talked about some quote unquote co bid headwinds to the business.

Would you consider that to be business wide are there specific modules that might be seeing a larger impact than others.

Hey, Scott how are you.

I would say just a general issue I mean, the bottom line is this is a situation with coakley that frankly, I don't think anyone on this call is ever seen I certainly Ivan.

And my sense is that overall, we're finding those headwinds to impact new business, specifically, new business and up sell business.

So I wouldn't say any one particular area that we're feeling it. It's I think overall, we're seeing budgets and on hold Anchorage out we do see that opening up a bit as we mentioned on the call, but I would say, it's not in one particular area.

Got it then from a follow up perspective as you look out a couple of years, you talked about reinvigorating growth.

You know the story of course on the last couple of years has been heavy on the content side, I guess, where do you see that growth coming from over the next two to three years relative to the recent product strategy.

I think as it relates to growth I mean look we're really excited about content and I know that my predecessor, and Adam was very excited about it I think it was a really good reason I mean, there is this is not just about reselling some content in trying to you to acute upsell content is integral to People's development and challenge.

Yes, so we're really excited about it but overall, we see growth in our core capabilities of what we do across the platforms and so we're excited about that resurgence of growth that that growth will come from more of our core more of our expanded capabilities and yes. It will include content.

Got it and if I may sorry, one last one here permitting is your guidance here in the second half. Both Q3 in Q4 suggests you've been able to successfully covert somebody professional services the partners.

At least some of the historical Sabah services I guess, what are you hearing from partners with regards to the integration of the two companies with you.

No I think it's a bit about to be candid Scott, it's a bit of a moving target I think early on there was probably just nervousness because sabal was predominately a direct services company with some partners.

I will tell you that I'm really proud of the team here, obviously cornerstone heads and experienced isn't moving their delivery capabilities to the quote unquote channel partners a lot of these folks already knew Saba. Many of them are already partners of Saba. So it was really about getting the details correct.

Worrying about the things that could go wrong to make sure we recovered on them and I feel really comfortable.

Handled that properly you all partners are comfortable with it and ultimately in how we execute so I think you should hold us accountable to it.

Great. Thanks again.

[laughter].

Thank you. My next question comes from Chris Merwin <unk> of Goldman Sachs. Please go ahead.

Hi, This is Kevin on for Chris Thanks for taking my question.

But Brian can you can expand on the nature of the onetime revenue benefit that was recognized during during the quarter.

Yes, we had a one of our Roger customers effectively had we had basically a usage over billing for them for the current period added required kind of a cumulative catch up.

Option revenue that benefited Q2 as I mentioned by about 4.3 billion dollar. So I only called that out so that when you look sequentially from Q to Q3 based on the guidance, even with Saba up there there is a slight onetime good guy so to speak and acute your numbers that that will not repeat going forward.

Great that make sense and then.

Could you talk about maybe content traction during the quarter relative to pre cobot expectations.

I know you had called out cross selling and was impacted but just trying to get a sense of how the pipeline is shaping up for the back half there.

You want me to grab that Brian.

Sure.

So our cornerstone content anytime offering for sure without any doubt when you look at the pipeline pipeline.

Pipeline is improving for sure as well as.

Our second half.

Views already we believe we'll see an uptick so we're excited about.

Content business again, I want to be clear not as a separate content business, but as an integral part of our solution in the motions of as we talk about talent journeys and so I think as a result of that mindset, we're seeing CCMA, our offering a constant a content anywhere offering to be becoming something that.

Part of the sales motions and as a result pipelines are increasing and the conversion rates look really good so far.

Great. Thank you.

Thank you our next question.

Comes from Siti Panigrahi of Mizuho.

Please go ahead.

Oh, Thanks for taking my question.

Phil.

This system will solve our customer no, possibly that could you share what's the feedback we've got caught some then oh, you're expecting them to sometimes uptick.

Mr platform anytime soon and also what sort of cross sell opportunity do you see.

You know, we're really pleased by the feedback we receive from customers as you would imagine as and as you heard me say on my opening comments. We proactively spent the first two months of me into CEO will have actively engaging with both cornerstone and former Sabah customers.

In terms of the cross sell opportunity I mentioned that in the first 60 days since I've been in the role in the first hundred days of our companies coming together, we have already designed in and integrated seamlessly the cornerstone content anytime capability right inside the sabal offerings that release is coming out in this month and we have already.

We have begun selling it frankly taken orders for it so.

Very exciting opportunity again, it's I don't want to over hyped. This but we are optimistic about the opportunity at hand in our wide customer base.

Cost of our color and Brian in terms of renewal rates are you expecting any kind of.

Hey brand saw from some of your largest customer Amir I thought we were going to talk about sets us on few other so are you expecting anything.

This year.

Yes, so I'd say its Brian.

Actually our renewal rates have trended slightly better than we had expected early on here, we are working with certain customers in terms of.

Certain payment schedules, some deferred payments, which are impacting some working capital but ultimately.

The the environment, we're operating in what coded providing a bit of a tailwind on a renewal rate basis, which which we're obviously pleased about and we haven't seen any major economic reductions as a result.

Customers operating or customers that are mid contract the habit some timing impacts around one that this cash flows will come in.

No no structural.

You know economic impact so we're feeling we're feeling good about our renewal rate.

Thank you.

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

Oh, Thanks for taking my question this pendulum sitting in for Mark.

And welcome fill and Brian Great working with you and now species.

I want to start with just the coven impact that you're talking about maybe can you talk about the trajectory of those headwinds through.

Q2 and into Q3, because I think you said you had seen some green shoots in April so how to transit made you did kind of downtick and kind of Upticking now again.

Well I think you specifically mentioned green shoots in April I said that we are seeing green shoots in the business and we are cautiously optimistic about that meaning that between.

Opportunities in the pipeline that will I would call frozen or garment have become active number one and number two there has been some pent up demand as a result of a.

Several months.

The opportunities there to convert those opportunities in the second out and so were widely excited about that but it is coded and it is a pandemic. So we're being thoughtful about boastful to get there.

Understood.

Thank you for that and Brian on the Twentytwenty subscription revenue.

Guidance I was just doing some rough math and maybe my math is completely off here, but if I look on a pro forma basis, assuming 2019 intruded stabbers totaled 2 million.

Subscription revenue the Twentytwenty subscription revenue growth seems like because the decline of 4%.

Even after adjusting to the write down of 50 million.

While the sabas and cornerstone they are kind of do I believe 10% of 2% last.

End of 2019. So can you help me reconcile what is it maybe there's just a little bit of conservatism in the numbers, but.

Well as it were always try to to exceed our guidance and our outlook.

So I don't know exactly what numbers are using but if you take cornerstones 19 numbers and you grow them at some rate again, you can you don't have the exact percentage growth rate you have Q1.

Part of Q2, where you can do some implied numbers.

But I had about $260 million of revenue last year, obviously, we do not get the full benefit of that so whether it's a 12 through some hair cut off about today, obviously, there's some element in there that you can precisely pin down by we closed the acquisition on April 22nd and then you take off the deferred revenue number you've got the fairly close or should get fairly close.

The ballpark number of what we're guiding to for the full year. So.

Whether it's down to 4% are up two or 4% again, we're not being nice I regard, but we felt that that's our current guidance and we are always like to exceed that you have a strong capability that will obviously go through the benefit some revenue in Q4 of the full year.

Understood. Thank you.

Okay.

Thank you again to ask a question. Please press star wanting a touchstone telephony them at Star one when you touched on telephone to ask a question.

Our next question comes from the lineup Alex Zukin of RBC capital markets. Your question. Please.

Yes, Hi, this is Scott on for out Bill I'm curious if you can elaborate on your focus on wind down.

Thanks, guys. Appreciate the question kind of figured someone was asking that question listen I want to be carefully here since it's part of our playbook and theres competitors listening.

Let me give you a couple of examples I should make sense I mean, there our mission critical compliance and safety enterprise customers.

That enterprise customers are contending with and it's something that frankly, we do deeper and wider than anyone else, we had to enterprise customers at our global with multiple ERP and HR a system.

Systems.

And it's an environment that obviously is a multifaceted one where we are a critical system in that multiple ERP HRS environment and so.

The third item I would give you as an example, and it's a little bit more soft, but in reality truly matters and that is customers and prospects.

Actively discussing in planning at the C level and board level.

And how they're planning to do this transformation that's in front of them.

The reality is the talent is the scarce commodity and what we do matters more than ever and those customers want to talk to cornerstone.

Completely understand and that makes sense, maybe just a quick follow up I know there's been a few questions about covidien, how that's impacting you I'm curious that like the product level or are you seeing any differences in kind of willingness to buy learning burress recruiting burst content versus performance or any other areas that type of portfolio in the current environment.

Yes, I think Scott at Needham asked this question earlier about is there a particular area that's getting more impacted in others I would say overall on a business of our side of the size of roughly 820 million. We don't see any one particular area, but if you had to dial even double critical one particular area across town of course talent acquisition and over.

Crude is an area that you would feel.

So thats an area that of course, we feel more now percentage of our business. It's it's not overall impacting in terms of a dramatic impact, but it's something that of course, we feel I think there are other areas. However that customers are seeing increased usage now we don't have a uses based model right. We have a per employee model, but usage is absolutely increasing across.

It's not just content or other aspects of our platform where.

The work from home transformation requires what we do and so theres a balance there and we're excited about the fact that theres actually more usage and stickiness on our platform.

Great. So for me thanks, taking my questions.

Thank you. Our next question comes in Atlanta, Pat Walravens of JMP Securities. Your line is open.

Hi, This is John for Pat. Thank you for taking our question just one last month, the competitive landscape and if there's many changes I know a couple of quarters ago, you'd called out symbol funny private companies just wanted to see if there's any of the uptick there any additional color. Thank you.

Thanks, John for the question and I think it's a fair question might the competition is is in a similar situation. We are all right anyone that says differences is probably not being completely sincere there are fueling headwinds or some business impact, but I think for space. A competition is largely remained the same there are big ERP players.

That are continuing to do what theyre doing and there are what I would call best of breed players.

Looking to get a piece endorse share of the wall and so I would say the competitive landscape is largely the same beyond some moves and changes here and there, but largely the same and frankly is upon us to go execute better than they are.

Thank you.

Thank you at this time I like to turn the call back over to Phil Sanders for closing remarks, Sir.

Yes.

Well, thanks, very much for passing it back to me and folks thanks for joining us on this call today. Thanks for giving you a bit more time than I would normally take really appreciate that as you can tell we're really excited about the business here and we're also optimistic but very much in a cautious matter, giving cobot I look forward to chatting with you want out.

Look forward to seeing in virtual.

Investor meetings, and thank you very much for your time and attention.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

Q2 2020 Cornerstone OnDemand Inc Earnings Call

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