Q1 2021 Cornerstone OnDemand Inc Earnings Call

May 6, 2021

[music].

2021 earnings call with me today are our Chief Executive Officer, Phil Saunders, and our Chief 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 furnished to the SEC and our form 8-K.

Today's 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 the elite and cost synergies and efficiencies our strategy our 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 future factors that could cause actual results to differ materially from those contained in our forward looking statements are included and 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. The reconciliation of our GAAP to non-GAAP information is provided and the earnings press release and and the presentation.

With that as a backdrop I'd like to turn the call over to Phil.

Yeah.

Thank you, Jason and thanks, everyone for joining US today, we're excited to update you on our first quarter results and overall progress as we continue to advance our company for cornerstone team delivered another strong financial performance in Q1 with the numbers being just an element of the wider momentum we've seen and the business sure I will dive into the details.

Of our financial performance with you, but for some review as this our top line results continue to reflect the resilience of our business and the exciting opportunity we see in front of us while coupled with the continued bottom line progress driven by our team's strong operational focus this powerful combination has positioned us to build out and efficient.

Scalable and highly profitable growth business.

As you know this performance doesn't happen by accident, the commitment and perseverance of our team has powered our success during the unprecedented times and we've all been living through over the past 12 to 15 months. When we also consider the internal realities of the past year, given the complexities associated with integrating a large acquisition.

Really humbling to see what this team has accomplished the Q1 results further validate the power of cornerstone of the business and the criticality of our solutions to organizations and every corner of the globe. The business is healthy our operational focus is undeniable and our team is dialed into delivering success.

We spent time over the past few earnings calls outlining for you the various areas, we're actively transforming and cyber company and while our experience has proven these initiatives can have a long tail to reveal their ultimate return.

And continue to see encouraging signs that we believe validate the long term strategic value creation capability of this business as we look at our current opportunity. There is simply no doubt that companies around the world need to accelerate their digital transformation, we see a timely and ongoing need for organizations to enable to <unk>.

And upskilling for their people and a matter that is native and personal and that aligns with their strategic destinations. We believe its this alignment for symbiosis of our company and its employees to transform that fuels, our current relevance and our growth outlook. This opportunity to have such an impact for our customers and there are <unk>.

<unk> drives tremendous excitement for us here at cornerstone.

So let's dive into a couple of operational areas that we feel are fundamental to accelerating our business performance starting with customer experience. It's a broad area of investment is there are a number of customer lifecycle touch points that we are deeply focused on in order to materially and positively impact our customer engagement motions.

One of those touch points as our global customer support our team and its continued their hustle towards the improvement and engagement of our customers.

Which we know is a critical success factor and driving long term retention and the SaaS business, given the multiplier effect and blending talented people with improved processes and systems. We have added several new members to the customer support team to improve coverage and shortened resolution times. We've done this in combination with and aggressive rollout of our advanced <unk>.

And service platform, which is already enabled a meaningful improvement and our <unk>.

And as another related example, we also expanded our designated services manager roles to include Onboarding and implementation and concert with our partners.

No that customer journey started signature and by refining how we support customers right from the get go and providing them the engagement to be successful with a single internal contact we expect that customer sat and and churn retention should be.

Should trend higher we rolled this out in North America during Q1 and plan to bring it to the rest of the world and Q2.

As we continue to run as a newly combined larger company. We've also been on the hunt to reduce and ultimately remove internal silos and ineffective processes that just impede customer success and Q1, we've driven detailed clarity and communicating our product roadmaps, while updating our customer community portals and order for customer.

To have greater insights as to what capabilities and enhancements to expect and combination with improving their access to our teams and their peers and cornerstones 6000, plus base of customers. We expect these.

These initiatives along with our global.

Global field sales teams commitment to and awesome customer experience to ultimately serve our long term retention and growth objectives. The second area worth highlighting is our accelerated progress and innovation.

As our R&D teams continue to advance the power of the deepest experience and people development software our product innovation advancements have become increasingly meaningful. One example is our AI fueled skilled craft offer and which we highlighted for you last quarter, which is now readily available to our customers.

And enables them to power their journeys toward their transformation.

Another is the controlled release of are in the flow of work learning capabilities inside Microsoft teams, which is on the horizon and well ahead of schedule and we're also leveraging the expertise and scale of cornerstone with two additional public data centers, now live and Japan, and Australia, enabling global customers to serve their regulatory.

And data sovereignty requirements, which is already unlocked new business for US there is more to come with dedicated resources on innovation and our AI lab investments, we've quietly and confidently been building out a unique framework and a set of capabilities that further the company and employee calendar and many of them.

We expect to be released later this year I look forward to sharing more on future earnings calls.

And as I mentioned earlier, we believe that some of the transformational shifts we've been making inside the company have a long tail to realize the value and returns, but we're excited about the progress. We've made in Q1 as we executed and in our market in the quarter, we experienced another positive uptick and our win rates and each of our global theaters, which we believe is based on two <unk>.

Notable factors first the sheer breadth and depth of capabilities, we offer a truly differentiated and second our glue.

Global sales teams ability to demonstrate the power of our newly combined assets and resources that directly serves our customers and prospects.

<unk> development objectives, we respect the competition and this exciting market and we take the responsibility and preparing for and winning those opportunities cornerstone is best suited for quite serious.

We have numerous examples of us winning against big ERP and our more traditional competitors.

Multiple verticals, where our depth and learn anything or wider talent capabilities and our strategic direction led us to experience another quarter of increased average selling prices and our enterprise market and while we continue to navigate sales cycle impact stocks due to COVID-19 across our markets and vertical.

EMEA and APAC regions had a strong performance.

Exceeding our expectations, we also experienced encouraging dynamics and our content business with over 200 transactions globally during the quarter strong growth year over year, and the United States and usage levels at all time highs as you call out that while we are proud of this the reality is we believe we have room for improvement and our content and motions with.

Our customers and we've been investing the mind share to accomplish the same as we've discussed in prior calls this is far beyond merely selling content. This is about the integrated power data AI and machine learning that allows us to drive personalized recommendations and hence skills tracking and development and curate a truly personalized.

And so the user and the increasing consumption of content.

And with our 75 million users actively engaged on our platforms create and expanding data lake to mine beyond what we believe our competition can capture.

Folks this is about driving tangible outcomes for our customers through the combined data content and platform and we believe outcomes equate to engage users and a valued customer experience.

Given all that's going on around us I feel compelled to cover a couple of other relevant and personal topics for years for here for US here at cornerstone. During Q1, we continued our proper attention on diversity equity and inclusion as we prepared for the Q2 rollout of our <unk> strategy that includes metrics, we will measure and report on.

And that's in both the top and bottom line perspective.

Subscription revenue of $206 million, coupled with services revenue eight $7 million drove total Q1 revenue of 209 $3 million, which was well above our guidance range of 203 and $205 million.

Our total customer account of 6080 for this down 1% sequentially.

Similar to what we've seen and the last few quarters sequential growth and our core product customer account is offset by decline and our non for about a customer count.

We delivered non-GAAP operating income of $59 $2 million during the quarter.

This resulted and $28, 3% non-GAAP operating margin, representing a sequential increase of 313 basis points I.

I would also note that on a year over year basis relative to cornerstone Standalone non-GAAP operating margins have increased by 1170 basis points and <unk>.

Improve and stem from strong operational disciplined and the multitude of operational efficiency initiatives, we've been working on over the past several quarters.

While much of the outperformance on the operating income line sustainable and the flow through the future periods. Some of it was driven by changing the timing of certain expenses that we still expect to incur later and the year.

And we're also taking something outperformance and room investing back into our business strength product innovation that we believe will deliver strong returns.

Moving on to cash flow you reported to one another free cash flow and $88 $4 million and.

This cash flow performance is largely driven by operating disciplined and efficiency, but also benefited from stronger than expected collections.

As you like we saw from our press release last week, we completed the repricing of our term loans the deck and late April lowering our effective interest rate by 100 basis points to LIBOR, plus 3% to 5%.

A current LIBOR and debt levels, we expect this will save us approximately $9 million and annual cash interest expense.

And conjunction with the re price, we also paid down and additional $20 million a principal bringing the outstanding value of the term long day that to $839.

And remain committed to Delevering expeditiously prudently.

Let's now turn to our guidance starting with their full your era.

We are reiterating our 2021 for your ear or guidance for the $868 million to $878 million and and doing so absorbing foreign exchange headwinds for just over $6 million caused by adverse movements for several currency is relative to the U S. Dollar.

Purchase accounting treatment will be material after the second quarter.

Let's now move to profitability.

We are raising our 2021 full year non-GAAP operating income guidance to a range of $215 million to $222 million, which at the midpoint of $218 $5 million would result, and a non-GAAP operating margin of 25, 6% up 350 basis points from 2024.

And you reported basis.

And this $10 million increase from our prior guidance of $205 million to $212 million takes into consideration for outperformance. We saw in Q1 with adjustments made for the timing of certain expenses as well as the plan as I mentioned earlier, reinvest EBITDA business and drive long term growth and shareholder value.

For Q2, we expect non-GAAP operating income for the moment.

And $1 million and $51 million.

We typically experienced sequential expense increases and the second quarter depressed areas.

Areas and initiatives, including marketing program spend R&D hiring and investments and our employees.

We now expect our 2021 full year Unlevered free cash flow to be and the range of $208 million to $216 million, which at the midpoint of $212 million, resulting and Unlevered free cash flow margin of 24, 8%.

This represents a $12 million raised from the $200 million midpoint of our prior guidance range of 100 million from room to $205 million.

As a reminder, this guidance accounts for and assumed $50 million and nonrecurring onetime cash outflows for restructuring and integration activities related to the <unk> acquisition.

As I mentioned on last quarter's call. Excluding these one time integration expenses are pro forma unlevered free cash flow expectation would be $50 million higher and our guidance range. So again, when you think about the unlevered free cash flow and 2022, we believe they should start with the pro forma 2021, unlevered free cash flow that excludes the $50 million and onetime cash.

Outflows.

I want to reiterate our previously issued midterm targets of $1 billion, and the IRR and Unlevered free cash flow margins and 30% and we are moving closer to both with each passing quarter.

We're encouraged both by the momentum, we're seeing and our marketing business as well as the opportunities, we're continuing to find and unlock to improve our efficiency.

And with that I'd like to turn the call back over to the operator, so Phil and I can take your questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone and again Thats Star one on your Touchtone telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Yes.

Our first question comes from the line of <unk> <unk> of Mizuho. Your line is open.

Hi, This is Michael Berg on for <unk>, Congrats and good quarter.

I wanted to get some more color around <unk> and you maintained your sales full year outlook, but when I think about what you can disclose in Q4, and the results and Q1 and implied guidance and Q2 it appears.

There is a T cell and total IRR from Q4 to Q1 and Q1 to Q2 could you add some color around that and what might be happening and the background and puts and takes behind us.

Yes, I mean really the Q1 to Q2 subscription revenue sort of.

The change and the mix of subscription revenue from Q2 relative to our expectations and it started the year. It was driven by foreign exchange and we are also expecting a slightly more back weighted sales inter quarter sales seasonality than originally anticipated. So that's that's what's.

And in Q2, and then from an overall perspective, just to give some additional color on foreign exchange impact. There, obviously <unk> is going to be more impacted than subscription revenue because theres, a recognition aspect and subscription revenue.

Doesn't have so.

And it's just moving about seasonality of sales within Q2 and foreign exchange.

Is there any color around.

The core versus value piece, there I mean is value going dropping.

Costs are for the core assortment further and more color around that.

Sorry, when you say value, where you're talking about that and the noncore products for yes, I just want to clarify the question.

Yes, Phil do you want to provide any color on core versus noncore.

Sure glad to I think it was Michael right Mike.

Micra and in fact, the balance between core and non core quarter over quarter.

For core stuff.

Was that a notable effect on the non core while we expected frankly more of migration, we saw greater retention and the core I think largely due to the customer communications and the portals and the roadmap to be what price provided so no. We did not see any further acceleration of churn in the non core.

The churn numbers actually look pretty stable and putting for the non core business.

Great. Thank you.

And Michael I, just want to reiterate that we are on a constant currency basis, increasing our <unk> guidance and also increasing our subscription revenue guidance. So again and moving between Q2 and Q3 and Q4 is simply just a slightly different distribution of revenue, but obviously the guidance for the year is rising.

Understood and it was a $3 million.

That's a kind of a correct.

On subscription revenue the FX headwind was $3 million.

And the mid point, we Inc.

And <unk> by $1 million for the operational increase and guidance for subscription revenue was $4 million the headwind on <unk>.

FX headwind was $6 million and so we are effectively increasing.

And constant currency basis by $6 million.

Thank you very much.

Yeah.

Thank you. Our next question comes from Keith Bachman of BMO. Your line is open.

Hi, Thank you I had two questions if I could.

The first is on <unk>.

Customer metrics I was wondering if you could.

Tell us how we should be thinking about and you had another sequential price decline I know youre doing some.

And.

Increased focus and perhaps some of that churn is desired, but could you give us any sense about how that trend will continue through the year and do you see it stabilizing.

And the corollary part of that same question is any comments on subscribers.

Within the context of how Youre envisioning the customer count moving through the year.

Yeah. So.

Can you can you actually just repeat the first part of your question and answer your churn I just want make sure I understood it correctly.

Your client numbers.

And have moved down sequentially for the last three quarters. Some of that's expected and I was just wondering how.

And how that will trend for the year.

And the second part of the clients is underneath that hour subscribers, what or subscriber trends looking like and how would you anticipate that unfolding through the year got it. Okay. So, yes, I mean and non core non core customer base has sought.

And we saw outsized churn last year, we started to see it.

Deceleration of that churn this year, we expect that to continue throughout the year. So while right now we're still seeing and Q1 as I mentioned during my prepared remarks and Michelle.

Higher non core churn.

And for customer adds we expect that to flip over the course of the year from a subscriber perspective, we would also expect to see increasing number of subscriber additions over the course of the year as we for the restaurant unfortunate.

Okay. Okay.

So effectively that day.

Net basically what will happen is the net customer adds slipped to the flip to the positive and that should also lead to increasing subscribers.

Okay Fair enough interesting. My second question is on cash flow you had a very strong cash flow of $88 million Unlevered.

Your cash flow metrics are moving up.

Call it $12 million per round numbers, but it looks like frankly.

Youre going to do $2 10 for round numbers. It doesn't look for ROIC for the balance of the year.

Is there anything you could call out on why the cash flow.

For FY 'twenty, one wouldn't affect be higher given the performance in Q1.

Well, we had a very strong as I mentioned and collections quarter and Q1 that was much higher than we need to Brian and much more cash flow than we expected. We also have obviously, our seasonally largest quarter and Q4 and because of that we had a significant and the.

A significant amount of collections to bring in Q1, and Q2 are seasonally lowest quarters through the year. So you Shouldnt expect day $88 million would continue.

In Q2, Q3, and just because we have smaller sales seasonality and Q on Q2, and we do in Q4.

Okay, Alright, well metrics look pretty good guys congratulations.

Thank you.

Thank you once again to ask a question. Please press star one and your touch tone telephone and again Thats Star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Scott Berg of Needham Your line is open.

Hey, Phil and Sean Congrats on the good quarter and thanks for taking my questions and jumped on a moment late so hopefully you guys have the cash.

This yet.

I guess, Phil as you look at the balance of 'twenty, one and I know, we're still kind of a relatively early on it.

Is how do you look at sales trends either from a seasonality perspective, or maybe momentum today and for the next six seven months versus a typical kind of pre pandemic year, obviously, we'll throw out last year, because everything was different.

Yes, Hey, Scott good to hear your voice again and this is like the magic.

Dollar question right.

I perspective and that as I.

<unk> be amazed about the level of transactions that are taking place amidst the pandemic and I think there's a really interesting balance there Scott I think there's obviously the need and the relevance for what we do on here.

And not just for us and obviously our competition.

A very important space to develop your people for.

Remote learning for remote engagement checking with their managers and scaling. So that's all good but we also know that the pandemic has really shut down a lot of sales cycles.

And with them. So I would say on the balance I believe as we go through the year and with the power of the vaccine programs around the world some more spotty than others I think we're going to see the positive metrics we.

We experienced in Q1 to continue and I am caught me Scott Im cautiously optimistic I think about the long term direction, but I'm really cautiously optimistic about those metrics playing themselves through Q2 through Q4, So I feel good about things getting better through the year not worse.

Got it and then kind of a follow up on that Phil If I went back to 2014 through 2019, and I think and every U S News and World report or time magazine article on.

And the priorities for corporate executives.

Workforce management was always a top two or three theme given the one channel that's out there.

Obviously sales and the space slowed last year, but are you hearing that seem kind of come back, especially as unemployment.

Unemployment rates are dropping relatively fast and it seems like there is a mismatch and skills between whats available and the market what companies are truly looking for and indeed.

And the personnel day.

Yes, Scott for me.

I tried to put this into the script I'm not sure our pumps through rate, but we're really excited to hear cornerstone the conversations we're having with customers and prospects.

And the last six years and me being in this business are are more strategic and board level with our customers than they've ever been before whether it's SMB mid or large enterprise, whether it be and Japan or in New York City and I think that's not just because of this new normal, but I think what we're all getting.

Ready for us.

Coming out of the pandemic the old way of five to eight we think and the office is going to be gone, but it will be a hybrid weighted.

There'll be in and out of the office and Thats going to require a blending of talent development capabilities and remote learning, but it's also.

Along with the fact that these companies around the world are all in the midst of transformation.

As an example, I can think across multiple industries the power of zero carbon and just as an example that initiative I'm going to be zero carbon by 2028.

Wired a whole set of things that frankly, five years ago, Scott you and I wouldn't be talking about how do I re skill my talent to go get my repair folks to be able to fix and electric engine versus a GAAP.

<unk> engine and.

And that requires talent that doesn't exist and the market. So you have to transform your talent and train them properly that transformational.

Is that.

One example, and combination with what's going on with the new world of work.

<unk> pandemic I think makes our market, probably I'm biased, but the most standard exciting market demand.

Yes.

Got it. Thank you congrats on a great quarter and the TSA.

Thanks, Scott Thanks, Scott.

Yeah.

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

Well, thanks folks we really appreciate you joining us we're excited about what the future holds for US here at cornerstone and we look forward to updating you. After our second quarter was close looking forward to talking to you by now.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Thank you for standing by and welcome to the cornerstone Ondemand Q1, 2021 earnings 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 Touchtone telephone.

Please be advised that today's conference is being recorded share do you require any further assistance. Please press star zero and.

I would now like to hand, the conference over to your host senior Vice President Finance and corporate development, Jason Gold you may begin.

Thank you very much the team.

Good afternoon, everyone and welcome to cornerstone <unk> first quarter 2021 and earnings call with me today are our Chief Executive Officer, Phil Saunders, and our Chief Financial Officer, Schwab and shop.

In conjunction with today's call we published a presentation located on the Investor Relations section of our website. Today's press release was also furnished to the S E and a form 8-K.

And as discussion will include forward looking statements, including but not limited to statements regarding the expected performance of our business and our future financial and operating performance, including our GAAP and non-GAAP guidance, the integration of Saba into our business and achievement of the elite and cost synergies and efficiencies and our strategy and long term growth and.

And our overall future prospects forward looking statements involve risks uncertainties and assumptions. Please.

These risks uncertainties and assumptions as well as other feature factors that could cause actual results to differ materially from those contained in our forward looking statements are included and the risk factors section of our most recent 10-Q and 10-K as well and subsequent periodic filings with the SEC.

During the call and we'll be referring to both GAAP and non-GAAP financial measures. The reconciliation of our GAAP and non-GAAP information is provided and the earnings press release and and the presentation.

And that as a backdrop and I can turn the call over.

Thank you, Jason and thanks, everyone for joining US today, we're excited to update you on our first quarter results and overall progress as we continue to advance our company.

Cornerstone and delivered another strong financial performance in Q1 with the numbers being just an element of the wider momentum we've seen and the business sure I will dive into the details of our financial performance with you, but the summary view is this our top line results continue to reflect the resilience of our business and exciting.

The change you see in front of us while coupled with the continued bottom line progress driven by our team's strong operational focus this powerful combination has positioned us to build out and efficient.

<unk> and highly profitable growth business.

As you know this performance doesn't happen by accident, the commitment and perseverance of our team has powered our success during the RT Precedented times and we've all been living through over the past 12 to 15 months. When we also consider the internal realities of the past year, given the complexities associated with integrating a large acquisition. It is.

Really humbling to see what this team has accomplished the Q1 results further validate the power of cornerstone of the business and the criticality of our solutions to organizations and every corner of the globe business is healthy our operational focus is undeniable and our team is dialed into delivering success.

We spent time over the past few earnings calls outlining for you the various areas. We're actively transforming inside the company and while our experience is prudent these initiatives can have a long tail to reveal their ultimate return.

We continue to see encouraging signs that we believe validate our long term strategic value creation capability of this business as we look at our bar good opportunity. There is simply no doubt that companies around the world need to accelerate their digital transformation, we see a timely and ongoing need for organizations to enable the reskilling.

And upskilling for that people and a matter that is native and personal and that aligns with their strategic destinations. We believe assists alignment for symbiosis of our company and its employees to transform that fuels, our current relevance and our growth outlook. This opportunity to have such an impact for our customers and there are <unk>.

<unk> drives tremendous excitement for us here at cornerstone.

So let's dive into a couple of operational areas that we feel are fundamental to accelerating our business performance starting with customer experience. It's a broad area of investment is there are a number of customer lifecycle touch points and we are deeply focused on in order to materially and positively impact our customer engagement motions.

One of those touch points with our global customer support our team has continued their hustle towards the improvement and engagement of our customers.

Which we know is a critical success factor and driving long term retention and a SaaS business given the multiplier effect and blending talented people with improved processes and systems. We have added several new members for the customer support team to improve coverage and shortened resolution times. We've done this in combination with and aggressive rollout of our advanced <unk>.

And service platform, which is already enabled a meaningful improvement and our C. Sat right Inc. As another related example, we also expanded our designated services manager roles to include Onboarding and implementation in concert with our partners.

And those that customer journey started signature and by refining how we support customers right from the get go and providing them the engagement to be successful with a single internal contact we expect that customer sat and in turn retention.

Should trend higher.

Rolled this out in North America during Q1 and plan to bring it to the rest of the world in Q2.

As we continue to one and a newly combined larger company. We've also been on the hunt to reduce and ultimately remove internal silos and ineffective processes that just impede customer success and Q1, we've driven detailed clarity and communicating our product roadmaps, while updating our customer community portals and order for customers.

And to have greater insight as to what capabilities and enhancements to expect and combination with improving their access to our teams and their peers and cornerstone 6000 plus base of customers.

We expect these initiatives along with our global Fat Global field sales teams commitment to and awesome customer experience to ultimately serve our long term retention and growth objectives. The second area worth highlighting is our accelerated progress and innovation.

As our R&D teams continue to advance the power of the deepest experience and people development software and our product innovation advancements have become increasingly meaningful. One example is our AI fueled skilled rep offer and which we highlighted for you last quarter, which is now readily available to our customers.

And enables them to power their journeys toward their transformation and <unk>.

And there is the control lease up are in the flow of work learning capabilities inside Microsoft teams, which is on the horizon and well ahead of schedule and we're also leveraging the expertise and scale of cornerstone with two additional public data centers, now live and Japan, and Australia, enabling global customers to serve their regulatory and.

And data sovereignty requirements, which has already unlocked new business for US there is more to come with dedicated resources on innovation and our AI lab investments, we've quietly and constantly been building out a unique framework and set of capabilities that further the company and employee calendar and many of them.

We expect to be released later this year I look forward to sharing more on future earnings calls.

As I mentioned earlier, we believe that some of the transformational shifts we've been making inside the company have a long tail to realize the value and returns, but we're excited about the progress. We've made in Q1 as we executed and in our market in the quarter, we experienced another positive uptick and our win rates and each of our global theaters, which we believe is based on <unk>.

Two notable factors first the sheer breadth and depth of capabilities, we offer our truly differentiated and second.

Global sales teams ability to demonstrate the power of our newly combined assets and resources that directly serves our customers and prospects.

Talent development objectives, we respect the competition and this exciting market and we take the responsibility and preparing for and winning those opportunities cornerstone is best suited for quite serious.

We have numerous examples of us winning against big ERP and our more traditional competitors across multiple verticals, where our depth and Larry are wider talent capabilities and our strategic direction led us to experience another quarter of increased average selling prices and our enterprise market and while we continue to navigate sales cycle.

Capex due to COVID-19 across our markets and vertical our EMEA and APAC regions had a strong performance.

Leading our expectations, we also experienced encouraging dynamics and our content business with over 200 transactions globally during the quarter strong growth year over year, and the United States and usage levels at all time highs.

I should call out that while we are proud of this the reality is we believe we have room for improvement and our content and motions with our customers and we've been investing the mind share to accomplish this inc.

As we've discussed in prior calls this is far beyond merely selling content. This is about the integrated power data AI and machine learning that allows us to drive personalized recommendations enhanced skills tracking and development and curate a truly personalized experience for the user and the increasing consumption of content Hello, one without.

75 million users actively engaged and our platforms create and expanding data lake combined beyond what we believe our competition can capture.

Folks this is about driving tangible outcomes for our customers through the combined data content and platform and we'd leave outcomes equate to engage users and a valued customer experience.

Given all that's going on around us I feel compelled to cover a couple of other relevant and personal topics for years for here for US here at cornerstone during Q1, and we continued our proper attention on diversity equity and inclusion as we prepared for the Q2 rollout of our <unk> strategy that includes metrics, we will measure and report on.

And on an ongoing basis, we also hosted our first session.

And internal program, we call courageous conversations. These are facilitated panel discussions used to discuss difficult topics with our initial one addressing the rise of anti Asian aggression over the past year our highlight this.

And is simply to bring to the surface that we deeply care about how our people are doing and building a better company as a result.

Additionally, with rising rates of COVID-19, 19, infection, and Newberry and emerging around the world. There is an urgent need for all countries to vaccinate their populations to support this effort. Our cornerstone Foundation has partnered with project Hope and Brown University to create a series of free online courses for frontline health care workers on the.

Delivery of COVID-19, vaccines as well as how to address <unk> concerns and encourage vaccine uptake. These courses will be about over the coming weeks Fireeye foundations for free online learning programs, both at Astro ready that org and nonprofit ready dialogue I encourage you to check out these sites along with our cornerstone care.

This initiative for relevant development offerings, we could all personally benefit from for.

For over 20 years, it has been and our DNA.

To better the work flow by developing people and we take great Pride and these programs with that I'll turn things over to Rob to discuss our financials and outlook.

Thanks, Bill and good afternoon, everyone.

Bill mentioned, we had a strong first quarter from both the top and bottom line perspective.

Subscription revenue of $206 million, coupled with services revenue of $8 $7 million for total Q1 revenue of $209 $3 million, which was well above our guidance range of 203.

And $5 million.

Total customer count of 6080 for was down 1% sequentially.

Similar to what we've seen and the last few quarters sequential growth and our core product customer count is offset by declining and our non core product customer count.

We delivered non-GAAP operating income of $59 $2 million during the quarter.

And this resulted in 23% non-GAAP operating margin, representing a sequential increase of 313 basis points.

I would also note that on a year over year basis relative to cornerstone stand alone non-GAAP operating margins and increased by 1170 basis points.

This improvement stemmed from strong operational discipline and the multitude of operational efficiency initiatives, we've been working on over the past several quarters.

While much of the outperformance on the operating expense and sustainable and will flow through to future periods. Some of it was driven by choosing the time from certain expenses that we still expect to incur motor and the year.

No.

We're also taking some of the outperformance.

Packaged tour business strength.

The innovation that we believe will deliver strong returns.

Moving on to cash flow.

For Q1, Unlevered free cash flow of $88 4 million.

And this cash flow performance was largely driven by operating discipline and efficiency, but also benefited from stronger than expected collections.

As you likely saw from our press release last week, we completed the repricing of our term loan b debt and total April lowering our effective interest rate by 100 basis points to LIBOR plus 325%.

And the current LIBOR and debt levels. We expect this will save us approximately $9 million and annual cash interest expense.

In conjunction with the re price, we also paid down and Bushnell $20 million of principal and bringing the outstanding value of the term loan b debt to $830 million.

We remain committed to Delevering expeditiously and prudently.

Let's now turn to our guidance starting with our full year era.

We are reiterating our 2021 full year <unk> guidance for $868 million to $878 million and in doing so absorbing foreign exchange headwind adjusted over $6 million cause the adverse movements of several currencies relative to the U S dollar.

Said another way before considering the effects of currency fluctuations on our reported results. We are raising the midpoint of our guidance range by $6 million.

We now expect our 2021 full year GAAP subscription revenue to be and the range of $827 million to $835 million with a low point and 831 zone.

This is up from our prior expectation at 212.

$5 million to $835 million.

Which had a midpoint of $830 million.

Similar to IRR, this guidance and absorbed $3 million and foreign exchange headwinds relative to our prior guidance.

Therefore on a constant currency basis, we are effectively raising the midpoint of our guidance by $4 million.

As a reminder, the full year subscription revenue guidance also accounts for and women's approximately $6 million, resulting from the purchase accounting treatment of the south acquisition.

Both our <unk> and subscription revenue guidance due to the strong performance that we've seen from the business, thus far and 2021.

For Q2, we expect GAAP subscription revenue of between $203 million and $205 million.

This guidance absorbs nearly $1 million for foreign exchange headwinds relative to our second quarter outlook at the start of the year.

Similar to the full year I would remind everyone that our Q2 subscription revenue guidance also accounts for a headwind of approximately $1 million related.

And related to the purchase accounting treatment and the south average.

With that said, we do not expect the headwind impact from purchase accounting treatment will be material after the second quarter.

Let's now move to profitability.

We are raising our 2021 full year non-GAAP operating income guidance to a range of $215 million to $222 million, which at the midpoint of $282 $5 million would result in a non-GAAP operating margin of 25, 6% up 350 basis points from 2020.

For you or reported basis.

This $10 million increase from our prior guidance for Q1 and $5 million for $212 million takes into consideration the outperformance we saw in Q1.

Adjustments made from a time from certain expenses as well as the plan and as I mentioned earlier, reinvest EBITDA business and drive long term growth and shareholder value.

For Q2, we expect non-GAAP operating income per common share.

$9 million and $51 million.

We typically experienced sequential expense increases and the second quarter to price race areas and initiatives, including marketing program spend R&D hiring and investments and our employees.

We now expect our 2021 full year Unlevered free cash flow and being in the range of 208 million to $216 million, which.

Which at the midpoint at $212 million, resulting and Unlevered free cash flow margin of 24, 8%.

This represents a $12 million range from the QM loans, our midpoint of our prior guidance range of 100 per month from room.

For $205 million.

As a reminder, this guidance accounts for and assumed $50 million and nonrecurring onetime cash outflows for restructuring and integration activities related to <unk> acquisition.

Cash outflows.

I want to reiterate our previously issued midterm targets of $1 billion, and the IRR and Unlevered free cash flow margins and <unk>.

Percentage and we are moving closer to both with each passing quarter.

We're encouraged by the momentum, we're seeing and our marketing and business as well as the opportunities, we're continuing to find and unlock to improve our efficiency.

With that I'd like to turn the call back over to the operator, so far and I can take your questions.

Yes.

Our first question comes from the line and <unk> of Mizuho. Your line is open.

Hi, This is Michael Berg on for.

Rocco and good quarter.

I wanted to get some more color around <unk> you maintained your same full year outlook, but when I think about what you disclosed in Q4 and the <unk>.

And Q1 and implied guidance and Q2 it appears.

There is a T cell and total IRR from Q for Q1, and Q1, and Q2 and you've heard some color around that and and what might be happening and the background and puts and takes behind us.

Sure.

Yes, and it really the Q1 day Q2 subscription revenue sort of.

The change in the mix of subscription revenue from Q2 relative to our expectations and it started the year. It was driven by foreign exchange and we are also expecting a slightly more back weighted sales and support our sales seasonality than originally anticipated. So that's that's what's happening in Q2, and then from an overall <unk> perspective, just to give some additional.

And all color on foreign exchange impact there, obviously <unk> is going to be more impacted than subscription revenue because theres, a recognition aspect and subscription revenue that.

Doesn't have so there is just again, it's just.

And only about seasonality of sales within Q2 and foreign exchange.

Is there any color around.

This core versus value piece, there I mean is value going dropping.

Cost per click the core solid waste price any more color around that.

Sorry, when you say value, where you're talking about that the non core products.

For the question.

Yes, Phil do you want to provide any color on core versus noncore.

Sure glad to I think it was Michael right Mike.

Microsoft and in fact, the balance between core non core quarter over quarter.

For core stuff.

Was that a notable effect on the non core while we expected frankly more of migration, we saw greater retention and the core I think largely due to the customer communications and the portals and the Roadmaps fever price provided so no. We did not see any further acceleration of churn and the noncore.

The churn numbers actually look pretty stable and recruiting for the noncore business.

Great. Thank you.

And Michael I, just want to reiterate that we are on a constant currency basis, increasing our <unk> guidance and also increasing our subscription revenue guidance, So again and moving between Q2 and Q3 and Q4 is simply just a slightly different distribution.

But obviously the guidance for the year it is rising.

Understood and it was a $3 million.

And that's all kind of a correct.

And subscription revenue the FX headwind was $3 million.

At the midpoint, we Inc.

Kris by $1 million for the operational increase and guidance for subscription revenue was $4 million headwind on FX.

FX headwind was $6 million and so we are effectively increasing.

From constant currency basis by $6 million.

Thank you very much.

Thank you. Our next question comes from Keith Bachman of BMO. Your line is open.

Hi, Thank you I had two questions if I could.

First is on <unk>.

Customer metrics I was wondering if you could.

Tell us how we should be thinking about and you had another sequential price decline I know youre doing some.

For increased focus and perhaps some of that churn is desired, but could you give us any sense about how that trend will continue through the year and do you see it stabilizing.

And the corollary part of that same question is any comments on subscribers.

Within the context of how Youre envisioning the customer count moving through the year.

Yes, so the.

Can you actually just repeat the first part of your question and actually churn I just want to make sure I understood. It correctly.

Your client numbers.

And have moved down.

Sequentially for the last three quarters some of that's expected and I'm just wondering how.

And how that will trend for the year and the <unk>.

Second part of the clients is underneath that hour subscribers, what or subscriber trends looking like and how would you anticipate that unfolding through the year got it. Okay. So, yes, I mean and non core non core customer base has sought.

Outside churned last year, we started to see it.

Deceleration of that churn this year, we expect that to continue throughout the year. So while right now we're still seeing in Q1 as I mentioned during my prepared remarks and Michelle.

Higher non core churn from a core customer adds we expect that to flip over the course of the year from a subscriber perspective, we would also expect to see increasing number of subscriber additions over the course of the year as we see.

And the last non unfortunate.

Okay. Okay.

Effectively that day.

Net basically what'll happen is the net customer adds for flip to the flip to the positive and that should also lead to increasing subscribers.

Okay Fair enough interesting my second question is on cash flow.

You had a very strong cash flow of $88 million Unlevered.

And your cash flow metrics are moving up.

Call it $12 million per round numbers, but it looks like frankly.

And youre going to do $2 10 for round numbers. It doesn't look for ROIC for the balance of the year is there anything you could call out on why the cash flow.

For FY 'twenty, one wouldn't affect the higher given the performance in Q1.

Well, we had a very strong as I mentioned and collections quarter and Q1 that was much higher than me, Brian and much more cash flow than we expected. We also have obviously, our seasonally largest quarter and Q4 and because of that we had a mix.

And the significant amount of collections to bring in and now Q1, and Q2 are seasonally lowest quarters through the year. So you Shouldnt expect day $88 million would continue and.

Q2, and just because we have smaller sales seasonality and Q on Q2, and we do in Q4.

Okay, Alright, well metrics look pretty good guys congratulations.

Thank you.

Thank you once again to ask a question. Please press star one and you had touched on telephone and again Thats Star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Scott Berg of Needham Your line is open.

Hey, Phil and try and congrats on the good quarter and thanks for taking my questions jumped on a moment late so hopefully you guys have a day.

Tackle this yet.

I guess, Phil as you look at the balance of 'twenty, one and I know, we're still relatively early on it is how do you look at sales trends either from a seasonality perspective, or maybe momentum today and for the next six seven months versus a typical kind of pre pandemic.

Obviously, it will throw out last year, because everything and what's different.

Yes, Hey, Scott good to hear your voice again and.

And magic.

A question right.

My perspective, and that is I continue to be amazed about the level of transactions that are taking place amidst the pandemic and.

I think there's a really interesting balance there Scott I think there's obviously the need and their relevance for what we do on <unk>.

And not just for us and obviously our competition.

A very important space to develop your people for remote learning for remote engagement and checking with their managers and skilling. So that's all good but we also know that the pandemic has really shut down a lot of sales cycles.

And he starts with them. So I would say on the balance and I believe as we go through the year and with the power of the vaccine programs around the world some more spotty than others I think we're going to see the positive metrics. We experienced in Q1 to continue and I am caught me Scott Im cautiously optimistic I think about the long.

Term direction, but I'm really cautiously optimistic about those metrics playing themselves through Q2 through Q4, So I feel good about things getting better through the year not worse.

Got it and then kind of a follow up on that Phil If I went back to 2014 through 2019, and I think and every U S News and World report or time magazine article on.

The priorities for corporate executives.

Workforce management was always a top two or three seem given the wide channel and thats out there.

Obviously sales and the space slowed last year, but are you hearing that seem kind of come back, especially as.

Unemployment rates are dropping relatively fast and it seems like there is a mismatch and skills between whats available in the market and what companies are truly looking for and.

And the personnel per day.

Yes, Scott for me.

Really I tried to put this into the script I'm not sure I punched through rate, but we're really excited to hear cornerstone the conversations we're having with customers and prospects.

And the last six years and me being in this business are are more strategic and board level with our customers than they've ever been before whether its F&B mid or large enterprise, whether it would be and Japan or in New York City and I think that's not just because of this new normal, but I think what we're all getting.

Ready for us.

Coming out of the pandemic the old walk way of five to eight.

Chris is going to be gone, but it will be a hybrid way of work, Greg there'll be in and out of the office and Thats going to require a blending of talent development capabilities and remote learning, but it's also.

Along with the fact that these companies around the world are all and the mix of transformation.

As an example, I can think across multiple industries the power of zero carbon and just as an example that initiative I'm going to be zero carbon by 2028, we acquired a whole set of things that frankly, five years ago, Scott you and I wouldn't be talking about how do I re skill my challenge to go get my repair folks.

To be able to fix and electric engine versus a gas engine and that requires talent that doesn't exist and the market. So you have to transform your talent and train them properly that transformational.

Just as one.

And one example, and combination with what's going on with the new World of work post pandemic I think makes our market probably I'm biased, but the most standard exciting market to be in.

Okay.

Yes.

Got it. Thank you congrats on a great quarter and Dsos.

Thanks, Scott Thanks, Scott.

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

And this concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2021 Cornerstone OnDemand Inc Earnings Call

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