Q4 2020 Cornerstone OnDemand Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to cornerstone Ondemand Q4, 2020 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your touch.
Telephone please be advised that today's conference maybe recorded should you require should you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your host VP of Finance and Investor Relations, Jason Gold Sir. Please go ahead.
Thank you very much.
Good afternoon, everyone and welcome to cornerstone <unk> fourth quarter 2020 earnings call with me today are Chief Executive Officer, Phil Saunders.
<unk> Financial Officer <unk> Shah.
In conjunction with today's call we published a presentation. That's located on the Investor Relations section of our website. Today's press release was also finished furnished to the SEC in a form 8-K.
Jason 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 Saba into our business and achievement of related cost synergies and efficiencies our strategy, our long term growth and our overall future prosper.
Thanks.
Forward looking statements involve risks uncertainties and assumptions these risks uncertainties and assumptions as well as other future factors that could cause actual results to differ materially from those contained in our forward. Looking statements are included in the risk factors section of our most recent 10-Q and 10-K as well as subsequent periodic filings with the SEC.
During the call, we will be referring to both GAAP and non-GAAP financial measures all financial figures discussed today are non-GAAP unless we state. The measure is a GAAP number the reconciliation of our GAAP to non-GAAP information is provided in the earnings press release and in the presentation.
As a backdrop I'd like to turn the call over to Phil.
Thank you, Jason and thanks, everyone for joining us today like all of you we're thrilled to be in the new year of 'twenty 'twenty, one first and foremost we're encouraged to see the developing progress of the Covid vaccine programs and are hopeful about what this new year will bring us for the well building wellbeing of our families employees customer.
<unk> and communities as we look at our business. The team here at cornerstone is excited about our execution in Q4 and the sheer momentum we feel it is given our company as we briefly get aggressively lean into 2021, our people have embraced significant change and persevered through a complex acquisition and.
<unk>, while never taking our eyes off the responsibilities, we have to our customers and our stakeholders I have to say the sheer conviction and professionalism I've witnessed year is nothing short of awesome.
Our team at me included take this personally and the numbers prove it you may recall it more measured tone from you over the past couple of earnings calls and while we have a lot of continued execution of hedge for us.
Now believe we have turned the corner and are starting to unlock the growth and earnings power of this company.
In the fourth quarter, we delivered GAAP subscription revenue of $198 million operating income of $52 million earnings per share of <unk> 64 cents and Unlevered free cash flow was $36 million. We continued on our journey towards achieving operational excellence and as a result generated significant cash flow. This enabled us to maintain.
Our commitment to accelerating our debt pay down and reducing our term loan b debt by an additional $100 million earlier this quarter.
Our strong results are the output of several factors and we believed all are quite fundamental in nature.
Our topline performance was driven by our focus on deeper engagement with our large global customer base, which drove improved expansion. While we also had good success in closing new opportunities, where we simply outperformed our competition. We see this is the essence of focusing on our wisdom folks and while there is certainly more work to do here in the coming.
Months.
Proof points from Q4 were highly encouraging.
As we've outlined for you in past earnings calls, we have continued to align our company's efforts around our core business, which at 89% of our total 2020.
Grew by nearly 6% during the past year, we expect this growth will accelerate in 2021 since our last call. We've continued to execute the drive of unique innovation, we feel we can bring to the market. While we have formalized our programs and offerings to properly serve our customers on non core solutions, our bottomline performance.
Combination with driving top line results.
We're quite proud.
We've reduced our spin adjusted with purpose and operate the business with a clear sense of ownership.
Combined these factors with a passionate team of employees and you have a winning quarter.
From an operational perspective, we've evolved our discussion from outlining for you how we proposed to run the business to now actively demonstrating it and proving that we can simultaneously integrate a large strategic acquisition and drive material business improvement.
Our responsibility is to increase our company's value and market leadership and that is borne out of customer focus efficient growth and expanded profitability, we've been executing on that responsibility.
Let's cover some other highlights of the quarter beginning with the foundation of our business our customers, namely our hyper focus on delivering the engagement and value they require to drive their own agility and business transformation.
During Q4, we continue prioritizing our customer retention efforts, which resulted in improved year over year renewal rates with a notable step up in the second half of the year.
As our customers began to see a renewed focus and commitment we experienced significant expansion of our customers leveraging the cornerstone offering and more than doubling in the use of our mobile offerings since 2019.
Our ongoing efforts of integrating curated content to drive outcomes for our customers led to a surge in business during the fourth quarter, which we believe further validates our strategy and execution.
Not only do we have the best quarter of content sales in the company's history.
We're even more excited that due to our continued investments and enhancements our customers' adoption and usage of our content offerings climb to all time highs the strategy for us is beyond merely selling content. It's about harnessing the power of data to extract insights that drive hyper personalized development engagement with our <unk>.
<unk> users.
We also saw a notable increase in our customers embracing the vision of a connected experience for their employees, where the power of combining the capabilities of our platforms reaches far beyond just Florida.
Despite all the headwinds of global macroeconomic realities, we also had meaningful improvement in our new business performance during Q4 with our deal sizes on new customers expanding materially in the period, which was fueled in part by an increase in cross sell efforts and our competitive positioning improving and the opportunities in which we compete at.
As I expect as I suspect you can tell we're excited about these results.
I'd be remiss not mentioning the realities of COVID-19 to be clear there are headwind realities that we continue to navigate due to this pandemic and while we believe what we do here at cornerstone is essential to our customers and their people, perhaps now more than half.
There's no denying the potential for ongoing tight budgets and extended sales cycles. Thus far we've navigated. These turbulent dynamic successfully and plan to continue to be quite agile as we execute our go to market motions in these unpredictable times.
Discussed over the past two earnings calls the various transformation initiatives. So I'd like to take a few minutes to update you on how we're tracking against our stated plans.
We'll start with you guessed it customer experience as you know we've made significant strides in evolving our people processes and systems related to our customer support approach, we've simplified and improved how we engage and support cases by leveraging advanced technology to enable our customers to get the answers to their questions faster and with.
More information than ever before we dialed into the heart of the challenge by not only managing Cece at customer sat scores, which have improved 10% over the past quarter to expecting dare I say it <unk> that's right unpacking why customers are dissatisfied so that we can drive improved results in the future. The team has made tremendous strides in the.
Past 90 days and we are excited about the plan continued improvements.
In 'twenty one.
Now turning to our innovation initiatives with the sheer firepower of our deep R&D organization, coupled with our experienced project management teams and process, we've been advancing the existing capabilities on the platforms our customers rely upon while delivering innovative people development experiences, we've recently announced our.
<unk> efforts with Microsoft as one of the first and leading partners in delivering learning and development literally in the flow of work via Microsoft teams by integrating both the cornerstone and Saba learning and development platforms into Microsoft teams, we expect users will be able to effortlessly discover share and engage with.
While they work without having to switch back and forth between solutions. We're really excited about with this opportunities means for our customers and look forward to sharing more about not only this integration and depth of functionality with Microsoft, but our wider commitment to enhancing the user experience over the coming months.
As we have advanced our efforts in expanding the power of our platforms for our customers and their users.
Do you have early adopter customers is already actively using and.
Benefiting from our skills graph technology five.
<unk> customers are now live with the technology and 40% more customers are staging production Rollouts in March we expect cornerstone customers will be able to benefit from this powerful new net new technology with the general availability of cornerstone skills graph.
We've also launched our innovation zone, where we are delivering innovation by a modern people first architecture in a manner that enables us to deliver advanced applications on our platforms in a uniform manner and in an accelerated timeframe to address head on the variety of questions. We've been asked previously on this important topic we are in.
<unk> our offerings on both Saba and cornerstone platforms via this innovation zone in a manner that delivers capabilities and integrations and an efficient scalable and expedient methodology. In fact, we plan to deliver the next generation of our learning experience platform or <unk> via this new architecture. So.
When you consider the combination of our core learning management capabilities with the forthcoming Alex P. R skills offering are expertly curated micro learning content and a career explorer.
<unk> you can see not only how our focus on the employee journey is an amazing connected experience, but also how is the premier vendor that can combine all these capabilities into a singular experience. We believe we are forming a swim lane that sets us apart from both our smaller learning only competitors and the larger ERP companies.
The progress around innovation is real and I hope you sense are.
Net.
We also discussed the concept of Winstons wind zones. Together. These particular use cases in environments, where the data proves we are simply more successful than our competition since our last discussion we formalized our specific wind zone programs and have aligned our product development and go to market teams to deliver on these initiatives were early in our motions here.
As I mentioned earlier, we've experienced increased average deal sizes and win rates in our Windsor owns two notable metrics we measure it.
In the fourth quarter, we witnessed this momentum and overall performance across each of our global regions.
And saw a notable improvement in our SMB business in select vertical teams solid progress.
Last item on our transformation Punch list is org design and efficiency to be clear. We've done what we stated we were going to do and have continued to execute on our plans.
We've successfully integrated Saba into the new cornerstone and now we're marching forward.
Highly efficient scalable company, we feel is poised for advanced growth and profitability.
I'd like to spend a moment on our ESG environmental social and corporate governance related initiatives here inside cornerstone diversity and employee wellness have always been top of mind and now are more important to us and we have recently banking I'm sorry, we have recently been recognized by comparably is one of the best companies.
For women to work in one of the best companies for walk like balances in 2020.
To take things a step further we publish our very first corporate sustainability report and launched our sustainability website to provide greater disclosure on our own environmental social and governance efforts.
As we have continued to make exciting business progress in the markets we serve.
Our teams humanitarian passion and commitment to the communities we live in remains front and center for us.
Our cornerstone cares initiative continues to expand its positive impact on usage or any individual assess essential development and training anytime and anywhere at no charge. We also remain committed to enabling nonprofit organizations to increase the preparedness and effectiveness of humanitarians around the <unk>.
World by other cornerstone Foundation.
The foundation celebrated its 10th anniversary historic year of impact on the nonprofit sector.
Over 400000 nonprofit professionals and humanitarian aid workers have signed up for its flagship free online learning and development programs and our disaster ready and nonprofit ready programs in 2020 alone learners from 195 countries enrolling over $1 3 million online courses and earned 20.
1000 professional certificates.
Starting all previous records, we're super proud of these initiatives and hope you share our passion for doing what we can to serve our global communities and our neighbors.
As you know we announced earlier this month that <unk> Shah a longtime cornerstone teammate and leader has taken on the role of Chief Financial Officer, and our company.
Something that I'm personally excited about given shrugs crisp handle on the operations of our business and the depth of market expertise he brings to the role.
I also have to say how much I appreciate trish confluence tireless effort.
Being our interim CFO for the past several months, while still leading the chief accounting officer activities.
This is beyond me just being polite. This is a sincere. Thank you to Trish for tackling multiple roles and putting up with me during the process Lastly, as we evolve our company. We've recently added two valuable a quite fitting directors and Felicia Alvaro and Nancy other Belo and I'm excited about the strategic value they bring to me.
And our team.
With that I will now turn the floor over to Sean.
Thank you Phil it's.
It's a privilege to be with all of you today on my first earnings call as cornerstone as Chief Financial Officer.
Some of you know I've been with the company for many years, both as a member of the finance team and as an operator and I look forward to bringing perspective from both experiences to the CFO role.
After witnessing the events of the past year and speaking of business leaders all over the globe while in my prior seen there's no doubt in my mind that enabling the work force to effectively learn and develop remotely has never been more critical than it is today to organizations of all sorts by taking a thoughtful and disciplined approach to capital allocation I believe cornerstone has a compelling opportunity to achieve significant.
<unk> growth in the coming years, while also continuing to drive annual improvements in both operating and free cash flow margins now.
Now, let's turn to the fourth quarter.
As Phil mentioned, we had a strong quarter across all financial metrics.
Our of $840 million was up two 8% year over year on a pro forma basis aided by approximately $14 million of FX related benefits as.
As we have noted in the past our Northstar for this business as our core product are our since we have several noncore products theyre declining.
Our core product are ours grew by five 7% year over year to $751 million.
Q4, GAAP subscription revenue came in at $198 million benefiting from very good new air linearity during Q4 as well as some catch up revenue related to a customer in the global ecommerce retail category, whose user count increased significantly as a result of the pandemic and exceeded their contractual thresholds are.
Our Q4 services revenue was also strong we continued to burn down the Saba professional services backlog at a rapid clip and we're able to perform more of this work using internal resources than anticipated, which aided both our gross and operating margins.
Our total customer count fell sequentially by 72 customers from 6229% to 6157, however, excluding churn from our noncore product customer base. We saw an increase in the number of customers last quarter similar to what happened in Q3.
Moving down the income statement, we delivered operating income of $52 million during Q4, resulting in a 25% operating margin. This outperformance is the output of strong sustained operational discipline and a multitude of operational efficiency improvement initiatives, we've been working on.
We also saw strong billings and collections are in Q4, which enabled us to deliver $36 million in unlevered free cash flow.
Given our strong cash position, we are committed to delevering expeditiously, but prudently and initial proof point is the early pay down of $100 million of principal on our outstanding term loan B instrument that Phil mentioned earlier, which was finalized just this week and will save us approximately $4 million in annual interest expense.
I would also note that the call protection on our term loan b instrument expires towards the end of April and we are looking at all available options to optimize our capital structure based on the current state of the debt markets.
As you review our filings you will notice that we have moved away from defining annual dollar retention on a gross basis and we'll be defining it going forward on a net basis inclusive of all incremental sales to customers during the year give.
Given our combination with Saba. We also took the opportunity to make this calculation more comprehensive by including customers of all products within our portfolio.
Although the metric declined on a year over year basis. The decline was predominantly driven by the following three factors one the anticipated churn at the recruiting deal we had with the U S Census Bureau, which was a one year deal signed in 2019 to support the completion of between 20 census to churn from a onetime concessions provided to customers to really impact.
<unk> by the pandemic and three churn in our noncore product customer base with that said our core product renewal rates. Excluding unusual one time items, such as U S census, or pandemic related concessions demonstrated an improvement on a year over year basis.
Let's now turn to our guidance we.
We expect our 2021 ending air are to be in a range of 868 million to $878 million to get there. We are expecting accelerating are our growth across our core products to bring our year over year growth near or just into the high single digits.
We expect our 2021 full year GAAP subscription revenue to be in the range of 825 million to $835 million, which.
For a headwind of approximately $6 million, resulting from the purchase accounting treatment of the south acquisition.
For Q1, we expect GAAP subscription revenue between $198 million and $200 million, which accounts for a headwind of approximately $5 million due to the same purchase accounting treatment.
As you look at the Q4 to Q1 change in subscription revenue implied by this guidance range I'd like to remind you of the Q4 catch up revenue from our E commerce retail customer, which impacts the sequential optics.
As many of you may recall last quarter, we communicated an anticipated expense envelope for 2021, including both cost of sales and operating expenses of $650 million.
As a result of our ongoing operational efficiency initiatives, we expect to reduce our 2021 expense envelope from $650 million to $645 million net of some incremental investments in growth initiatives that we've elected to make.
As a result, we expect our 2021 full year non-GAAP operating income to be in the range of 205 million to $212 million, which at the midpoint of $208 $5 million would result in an operating margin of $24 five per cent for.
For Q1, we expect our operating income to be between $44 million and $46 million.
We expect our 2021 full year Unlevered free cash flow to be in the range of 195 million to $205 million, which at the midpoint of $200 million would result in an unlevered free cash flow margin of 23 five per cent.
As a reminder, this guidance accounts for an assumed $50 million in nonrecurring onetime cash outflows for restructuring and integration activities related to the south acquisition.
Said differently, if we were to exclude the one time cash outflows that we have assumed for acquisition related restructuring and integration work, our pro forma unlevered free cash flow expectation will be $50 million higher than the issued guidance.
So as you think about Unlevered free cash flow in 2022, we feel you should start with pro forma 2021, Unlevered free cash flow that excludes the $50 million in one time cash outflows and expect natural growth against that number as the business continues to scale.
Given our strong progress and current trajectory, we believe what we previously referred to as midterm targets of 1 billion, an IRR unlevered free cash flow margins that exceed 30% are now very much in sight.
We've issued an updated IR deck on our website and which you'll find slides that may provide additional perspective on our business strategy and financial performance.
Before turning the call back over to the operator I want to take a moment to express my gratitude to Trish, Jason and the rest of our finance team per so graciously balancing the onboarding of a new CFO with an extremely demanding stretch of work. These past few weeks my transition has been seamless due to the above and beyond efforts of this group and I can't thank them enough.
As a reminder to ask a question you will need to press star one on your telephone once again Thats star wanting your touch tone telephone to ask a question to withdraw your question press the pound key please stay.
By while we compile the Q&A roster.
Our first question comes from the line of Scott Berg of Needham Your line is open.
I feel I'm sure I congrats on a very good quarter and strike I'd like to say welcome to the group, but I guess welcome back is probably a better comments.
Thank you Scott I appreciate it.
I guess a couple from me Suraj.
Let's start with your very last comment first about the confidence in our $1 billion.
Level.
Unlevered free cash flow margin, obviously, the $1 billion target probably Zen site at some point in the next couple of years, given the kind of a growth rate that you guys have outlined here, but 30% Unlevered free cash flow margin talk about kind of where you are with the guidance here in 'twenty one.
The pushes and pulls to get us there over the next couple of years.
Sure well Scot I mean on a pro forma basis. If you were to add back the $50 million in one time restructuring and integration expenses that I talked about to our guidance, which at the midpoint is $200 million you would get very close to 30%. This year and so we expect that as we continue to scale the business, we're going to be able to get to 30%.
<unk> or more in the very near future next year or the year. After so we're very well positioned for that obviously based on where we are on a pro forma basis. This year and so as the business just keeps scaling we will we will get there soon.
Got it helpful and then felt.
<unk> fell from a follow up perspective in Europe restricted remarks, you talked about kind of the demand environment and theres still some headwinds.
Out there today I guess, if you look at the product set out there or are you seeing headwinds, possibly higher.
Or is it maybe certain modules because you did talk about a good bookings quarter for the CCA solution out there.
If you had a crystal ball I know, it's probably early to see some of those headwinds may be subsiding through the end of the year on the demand cycle or is this something that you think can persist for a while thank you.
Hey, Scott Thanks for the question and thanks for joining.
I made that comment in the earnings script, because I thought it was important to be balanced I mean, I think we all can witness and saw the strong performance in Q4, and while I believe what we do is really essential and we're seeing that demand. We're also seeing the conflicting challenges of budgets being really tight.
For obvious reasons for a sales cycle, starting and stopping due to the pandemic and so I would say that by and large we're seeing a net sum gain but I wanted to balance that message Scott because we're in a pandemic and I don't have a magic eight ball about what it all will happen I do think that as we get through the vaccine program and other.
The one that will ease, but it would be hard to leave that out which is why I included it Scott.
Great I'll pass.
Thanks for taking my questions.
Yeah.
Thank you. Our next question comes from the line of Raimo, let Michelle.
Barclays. Your line is open.
Congrats from me as well on a great Q4 and to Rocco could to connect again.
Let's start with first question for Phil.
And now that you have like how did like a year kind of operating kind of at the combined entity. What are you seeing in terms of competitive dynamic.
Just kind of the ERP players et cetera.
Initially everyone is kind of going through kind of throw a thought around but like the.
What are you seeing now in terms of the fact that customer engagement et cetera.
Everything is settled down and then I have to follow up from those rock bass.
Sure I don't let the time go too fast it's only been nine months operating but thank you for the compliment back from the back end of the government.
Say that from a competitive perspective, we continue to see the same motions of our large ERP competitors that we have for me now almost six years plus in the business. So I think that does continue I think it will continue.
And I frankly don't think it's going to go away anytime soon so I think we will be living with that I would say that obviously as cornerstone and Saba together, we see.
A better opportunity and how we compete with them in terms of our Arsenal of.
Capabilities and so it's early to sell to say, but I'm not any more thoughtful or worried about big ERP competition in fact, I would say that.
Given COVID-19 and given the importance of company's transformations and Theyre People's transformation.
I think people are looking for technologies that are literally the best that can coexist with their existing solutions and ERP payroll and other so.
I don't really sense any further competition than we have in the past and I don't expect that to change markedly going forward.
Okay, perfect and then direct.
You mentioned, you're kind of moving over from Cros to net on the retention numbers did you I don't know if I missed it in the presentation, but can you talk a little bit about the levels that we are at and what are puts and takes we need to think about there. Thank.
Thank you.
Yeah, So raimo we.
We were above on a combined basis above 100% in 2019, we dipped to below 100% on net retention basis in 2020. The reasons for that were mostly one time again I mentioned the U S census Bureau, which was a significant deal that impacted our net retention number the churn from onetime concessions that we provided to customers.
<unk> that were impacted by the pandemic also had a pretty significant impact on our net retention number as did churn in our noncore product customer base, we expect net number to improve as some of these one time items that we experienced in 2020 are lifted in 2021 and beyond and we continue to grow the business and focus on the product areas that we have.
The most success with.
Okay perfect.
But you didn't do it right did you do some math around the core.
Core would have been like.
I would assume that's about.
At $100, but I'm not quite sure.
Yes, the core renewal rate improved year over year. So the of the available to renew clients that we had in 2020, we had an improvement in the renewal rate of our core products. That's great to hear thank you.
Thank you. Our next question comes from the line of Rishi Deloria of D. A Davidson your question. Please.
Hey, guys. Thanks, so much for taking my questions and looking forward to working with you.
Wanted to start maybe with the outlook for operating margins next year can you give us a sense, how youre thinking about the sustainability of some of the cost savings that you got during the pandemic, including effectively having zero TNT and maybe what your assumptions are.
Baked into Opex for next year are and then I've got a follow up.
Yes, absolutely.
Obviously, we do expect travel to return at some point during the year. So we have modeled that into our operating expense guidance for the year, our operating margin guidance for the year.
We do also believe there are additional opportunities for us to optimize our spend from a real estate perspective. So that's something that we'll be spending some time on this year and there are still additional opportunities for us within our overall expense portfolio for us to realize.
Spence improvements and so generally we are we are being conservative in assuming that some of the.
Covid related benefit that we got last year, particularly in relation to travel is going to return to kind of more of a normal state and we won't have as much benefit as this year as we did last year. This year, but we also have in addition to that some additional areas that we believe will realize some incremental expense savings from.
Alright, great. That's helpful. And then I wanted to circle back to the new disclosure on MLR that the net retention rate number.
You talked a talk about how absent a few one time factors churn actually improved relative to last year, how is it how long expansions.
On that side of equation has been trending and how did that fare during 2020, and maybe how should we be thinking about expansions going forward from here. Thanks.
Yes, I mean, so the expansions in relation to our core product base, where were strong in 2020 content drove a nice piece of that I mean, obviously, we had a lot of success in 2020 with selling content and that was the piece of that but generally we have just done a better job as Phil talked about during his prepared remarks, selling a combined value prop.
Our position so.
We continue to have good success within our client sales organization, a cornerstone in terms of both Upselling and cross selling our clients and we definitely saw some success with that in 2020, we expect that to continue.
Alright wonderful thank you.
Thank you. Our next question comes from Pat Wall Ravens of JMP Securities. Please go ahead.
Oh, great. Thank you actually have one for each of you. So maybe I'll go with you first can you just help us understand why it is that the learning budgets at your customers and prospects.
Didn't benefit more from Covid, because there's just there's a sense among some investors a wait a minute if everyone's.
At home you can't train them in person in distance learning seems like it should be a beneficiary.
I think hey, Pat first of all how are you just saying.
Thank you.
And hope you're well.
Listen when we we have the benefit of working with HR and learning developed professionals that have a variety budgets across the talent or or people perspective, everything from onboarding to succession to recruiting to learning.
Performance management and so on.
So when you dial into any one of those specific arenas of people development. The answer would be different on your particular point about learning short learning budgets were alive and well in 2020, but if you would ask any LNG buyer persona inside of our customers a lot of that money was going to.
Providing content and by the way content was one of the areas that we've already mentioned, but put out content. Aside a lot of attention was going to providing the content for people.
As well as other engagement and development capability. So it goes beyond learning, but budgets that we serve but yes, specifically learning had a was not getting cut in 2020, I would not say, it's serge either.
Okay.
And then shrug.
Congratulations so.
You bet and Theyre 11 years.
That's great. Congratulations so like you've been there 11 years right you went back and looked at your Linkedin I can't believe it's been that long. So what do you think are the most important differences for investors to understand.
Between the business today.
<unk> is the CEO and the combination with Saba versus.
What it was like before.
Yeah, It's a good question.
Pat.
There are a number of things that have changed I mean, mostly I think the changes are a result of scale and Phil's got his own philosophy, Brad operate the business and so the way I would sort of characterize how we're different today is we're very focused on objective data driven decision, making right. So we are.
Big business now we've got a lot of data and we're leveraging that data to make decisions. Every single day every decision that we make is based on the data that our business has which again there is a lot of secondarily focus is it is a big price.
Priority for all of US Phil has talked about it in the context of wind zones, but focus is just really really important as we try to optimally run the business.
Mize, our ability to effectively allocate capital right. So we're picking the things that we're good at and we're picking the things that we're not good at and we're investing in the former and investing less we're not investing in the latter.
And then I would say we're also while we've sort of become a lot more disciplined as we've transitioned over the years to the scale that we have reached I think we still are very much <unk>.
Focus on continuing to invest in growth, where it makes sense for us to invest right, we're maintaining accountability across our team for these investments. So every investment that we make requires a very strong business case, but we are still looking for growth. There is an incredible opportunity that we believe we have in our space in the years to come and we're looking for every chance we can get to see it.
Net opportunity, but we wanted to do so prudently and with the right business case and accountability aligned with that.
Alright, great. Thank you both.
Thank you. Our next question comes from Chris Merwin of Goldman Sachs. Your question. Please.
Hi, This is Kevin on for Chris Thanks for taking my question.
Phil can you talk a bit about the demand environment internationally I know there was some softness in Japan last quarter anything to call out in terms of adoption trends across the different geos.
Yeah sure Kevin glad to I did make mention of it but I sort of genericize. It so sorry about that.
The answer is across all Geos, So North America.
EMEA EMEA and APAC.
<unk> saw surges and high achievement, we saw Japan have a nice bounce.
Bounce back in a strong year end finish.
So I would say.
As well as our vertical teams that we have vertical teams in our federal sector, our higher Ed.
Our state and local governments across our health care verticals across all of our verticals we saw a surge.
And we're seeing benefits to sales cycles from the combination with top right. There just the sales cycles are performing well across all geos. So I would say that to answer your question Kevin.
Across all areas.
As well as verticals, including our SMB team a strong performance in the queue from the fourth quarter.
Great. Thanks, a lot.
Again, ladies and gentlemen to ask a question. Please press star one on your Touchtone telephone again Thats Star one when you touched on telephone to ask a question.
Our next question comes from the line of Mark Murphy from Jpmorgan. Please go ahead.
Hi, Good afternoon. This is Matt Coss on behalf of Mark Murphy.
Phil can you talk about some other changes your new Chief product officer is making in terms of streamlining R&D teams are reallocating resources or investing in other areas.
Then one for sure Rob I think.
You mentioned some of the subscription revenue outperformance was due to a customer adding more seats and subsequently catching up.
How much did this contribute to the outperformance just kind of looking for.
Couple of hundred thousand dollars or something more significant.
I'll go first thanks, Matt for the question and it's a good question, we have a new chief product officer that you I know youre aware of.
<unk> has been very very active and frankly incredibly aligned with.
With R&D I would say that one of the benefits that we are seeing is more than anything is of course some of the items at schwab. After the covered how we think about allocating capital and investments leveraging data to make proper decisions, having business plans and business cases. So those are all very very clear, but more than all of that.
And that is also just the sheer alignment between our various functions. So when we have products aligned with strategy and then go to market team aligned with product and R&D building what product want this sounds sort of.
Fundamental stuff and it is but not every company gets it right and I would say that we're not perfect. There yet, but we've made tremendous tremendous progress in driving that alignment and making data driven decisions that we think are going to serve kind of the.
Traditional let's make our existing products better while we innovate so I feel really good about the progress over the last 100 days.
Yeah and in relation to the.
The Q4 catch up revenue from the E Commerce retail customer. It was it was several million dollars that was was material.
The contract structure for that customer is a bit unusual where we don't actually like we do with most customers.
All of them for users as they go or as they Adam over the course of the year of their contract specifically has us.
Billing them for all users that are added over the course of a given year at the end of the year and and that's why it hit us in Q4.
But we don't have other contract structures like that so it's really a onetime thing.
Thank you very much.
Thank you our next question comes from.
Keith Bachman BMO your line is open.
Hi, Thank you very much and congratulations on the strong results I had two questions. If I could the first is core AOR growth youre guiding to high single digits for 'twenty one.
A is there an inorganic piece to that or what's the organic piece to that and then b more importantly, what's the key drivers there in terms of the.
The AOR growth.
Yes.
Could you talk a little bit about new logos is that part of that or is most of it driven by cross sell upsell.
Keith I'll take a quick stab at it and if I don't cover proper from scirocco jump in.
To your point on Kore are yes, we are absolutely driving to single digit growth single digit growth and it's a 100% organic so theres no nothing non inorganic in that number.
And second point is when we look at overall core <unk> growth.
Foundational we start with obviously customer retention alright, that's our house. So we want to make sure that that's why you hear so much about customer experience support and retention and renewals because that's obviously a big part of our base is an $800 million plus business.
Then in terms of making sure we do a good job of once theyre happy providing them capabilities to expand both cross sell and upsell. So more users more capabilities and yes last but definitely not least is driving new business growth with new logos with a very very clear focus on our Windsor. So it really is the cash.
Combination of those three things.
Keith and I will pass it over to show obviously, if he has any other thoughts share now let me generally covered it bill I think the only thing I would say Keith is that we are expecting as I mentioned in my my script, we're expecting accelerating growth from our core core product base and so that is going to be a primary driver for us to to get to the number that we're expecting to this year.
Okay, well shrug my follow up probably relates to you a little bit you're generating are anticipated to generate meaningful free cash flow.
Even.
With the inclusion of the $50 million, how would you anticipate the balance sheet to unfold.
This year as a consequence of that strong free cash flow or <unk> or any other comments.
As you look out over the next.
Even a little bit beyond 'twenty.
'twenty one period, how should we be thinking about the balance sheet changes, resulting from the cash flow. Thank you.
Yeah, well as I mentioned I mean, we're obviously very focused on de levering. So that's something that we're going to continue to be focused on over the course of the year as our cash continues to continues to build.
We have a call protection as I also mentioned in my script that expires at the end of April and the term lumpy. So we are going to be moving into all available options for for that based on again, where the debt markets are.
And as I talked about in relation to 2022.
We do believe that the 'twenty, two and 'twenty two cash flow expectations should be viewed based on the pro forma 2021 number which again would be our guidance plus the $50 million in one time.
One time nonrecurring restructuring integration activities that we're that we're assuming within that guidance.
Some growth on top of that so we do expect that there'll be meaningful growth in cash flow again in 2022 and beyond.
Okay, Alright, many thanks congratulations.
Thank you. Our next question comes from <unk> <unk>.
Your line is open.
Hi, This is Michael on for city grants on a great quarter guys.
Cook, we want to follow up on Keith's question looking at the strategic.
Or are you can see in 2020, there is 40 million of incremental IRR, while the value migration piece declined $18 million.
Would any of that 18 million to be accounted for in that $40 million incremental and strategic core and that same dynamic going to happen in 2021.
Yeah.
Charlie do you want me to start and then pass the Tuesday, we wanted to take it.
Go ahead until you can start now evident sure.
Don't have the exact numbers.
I think that was migrate but I would tell you that.
One of three things happens to the noncore <unk> alright.
And customers of course, either we continue to keep them and they stay as part of our book of business and Theyre happy customers, which obviously is important to us.
The other item is that we have we've invested in migration programs. So customers that are on non core platforms and solutions, who want to we're still active talent development buyers people development buyers, we provide them frictionless paths to the core platforms and the <unk>.
Third and last of course is that some of those moves but to answer your question specifically, Mike Yes. Some of that <unk> growth will come from noncore I don't think its a number certainly 2020 was not a notable number but as much as we can get <unk> to grow as a result of noncore moving.
That's a win for us.
Understood.
Just the only thing I'd add to that is that we have them and we have seen success with with our migration programs are ready in 2020. So that is something that we'll be investing more into in 2021, and we're obviously trying to save as much of that non core <unk> as we can as Phil said. It is these are all qualified talent management buyers debt.
Our potential buyers for cornerstone. So in every one of those cases, where we think that there is a risk that the noncore product customers are going to move to something else outside of our portfolio, we're proactively going after them and trying to keep them with us.
Understood got it. Thank you and then quick follow up is it fair to assume those trends you're seeing you saw in 2020 will continue into 2021 as it pertains to migration or do you expect more migration contribution in 'twenty or 'twenty, one given the investments in those programs.
I would expect generally that we would have more migration contribution just because we we didn't have a full year of our migration efforts in 2020, obviously 'twenty 'twenty one we're going to have a full year of trying to make those migrations happen. So just by virtue of that we should have we should have more.
And because we've gotten.
A nice sort of track record of success over these past six months in terms of making those migrations happen that we can replicate in 2021, and we know how to do them. We know how to approach these customers and we feel like we can do that effectively going forward.
Thank you.
Thank you at this time I would like to turn the call back over to Jason go for closing remarks, Sir.
Yeah.
I think I'll hand, it to Phil actually for those remarks.
Sure.
Be glad to close thanks, Jason and thanks a lot.
Everyone. Thanks for joining the call. Thanks for spending the nearly an hour with US. We appreciate it I hope you get a sense that we're really excited about what we're doing here certainly passionate about it no one quarter makes you usually successful but another successful quarter is really good proof point for what were building here. So thanks again for your attention and your interest in our company.
And with that have a wonderful rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Jason.
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