Q2 2019 Earnings Call

Good day, ladies and gentlemen, and welcome to cornerstone Ondemand second quarter 2019 earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time, if anyone should require assistance. During the program. Please press Star then zero on your Touchtone telephone as a reminder, today's program is being recorded and now I would like to introduce your host for today's program, Jason Gold Cornerstones, Vice President of Finance and corporate development. Please go ahead Sir.

Thank you good afternoon, everyone and welcome to cornerstone Ondemand second quarter 2019 earnings call. The format of today's call will be similar to last quarter.

Did you published the shareholder letter with a lot of information about our Q2 results and our updated outlook Adams in Brian's prepared remarks today will be relatively short, which should give us plenty of time for acuity.

In the letter we've also outlined our Investor relations calendar for the quarter, including when we played the indoor like Korea, So if you'd like to participate in any of our scheduled events. Please feel free to reach out.

A press release and shareholder letter were both furnished with the FCC in a form 8-K.

You can access the shareholder letter press releases and related investor materials, including detailed financials on our Investor Relations website.

As a reminder, today's call is being recorded a replay will be made available following the conclusion of the call.

Our discussion will include forward looking statements, including but not limited to statements regarding the expected performance of our business or future financial and operating performance, including our GAAP and non-GAAP guidance strategy long term growth and overall future prospects.

Forward looking statements involve risks uncertainties and assumptions these risks uncertainties and assumptions as well as other factors that could cause actual results.

Could differ materially from those contained in our forward looking statements are included in our most recent 10-Q and 10-K as well as subsequent periodic filings with the FTC.

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 that the measure is a GAAP number reconciliation of our GAAP to non-GAAP information is provided in our shareholder letter and in the press release.

That is backed up I'd like to turn the call over that.

Thanks, Jason and thanks to everyone, who joined us today.

Q2 marked the best second quarter, we've had in the company's history.

When looking at the first half of the overall, we feel good about our position and we are raising our financial outlook Accordingly.

I remain incredibly proud of our team for what they've accomplished and how they have thrived through this transition.

Which they've done while simultaneously increasing the size of our competitive moat.

To that point on competitive positioning.

We talked about this a little on the last quarter's call and again on the analyst day, we had at convergence in June .

But so core to the fundamental story of cornerstone did I think it's worth repeating.

The combination of our learning suite in our emerging content offering is starting to create a flywheel effect, which we believe will distance us from our traditional competitors.

One of our greatest assets.

Is the scale, we have developed over the years.

Over the past 12 months, we've had over 550 million online course registrations on our platform.

Think about that amount of data.

And what it provides particularly since the related user data and content medidata flows through our system.

We know which of those courses are the most popular not only overall, but also by geography by industry by job function. It provides us with an extremely valuable repository of anonymized data and when matched up with the data we have from our performance suite.

We have the ability to surface relevant content that drives employee engagement reduces turnover and improved productivity.

These are the things that all our clients want.

With the skills divide making news almost every week the need for companies to re skilling upskill their workforces has never been greater.

Think about how prevalent things like AI machine learning and cloud computing it become in today's world.

And then compare that to the number of workers that was that possess.

The requisite skills in these areas.

And you will soon realize how the skills. The Vod is becoming a burning issue for companies all around the globe.

Our solutions actively address this issue.

And now when we walk into a sales meeting and we are asked to present our vision. These clients see that we not only have the right products and strategy.

But we're the only company that's properly position to execute on that strategy by leveraging our scale, our distribution and our data while simultaneously providing content subscriptions globally.

As we pointed out last quarter, we think that having a compelling content offering will act as a propellant for our overall business.

It's the injection of this content into our massive install base and the scale that brings.

That is enabling us to tell a story to our clients that is truly differentiating in helping us win.

This strategy drove strong performance is around the globe and across our product suites.

During the second quarter, we had some notable wins it organizations like the U.S. Postal service CB, Richard Ellis and locked in.

Our U.S. commercial sales team had a particularly strong Q2.

In our strategic accounts team closed the first multimillion dollar deal of our proprietary content subscription cornerstone content anytime.

The feedback we received a convergence or annual client conference in June made me feel even better about our strategic positioning and the opportunity that sits before us as a leader in both the learning and talent management.

Because of that and our performance in the first half of this year I'm, even more enthusiastic about our business today that I've been.

The onus is really on us to deliver while the road may not always be linear and will surely encounter some minor bumps along the way our strategy is clear.

And I'm really excited about it.

Before I turn things over to Brian .

I want to comment about our philosophy and our plan to achieve the rule 40 in 2020.

We believe our ability to continue driving operational efficiency, while simultaneously capitalizing on our growth opportunities is the foundation for creating long term shareholder value.

Over the last several months.

We have discussed our aspiration to achieve the rule 40 next year in 2020.

We no longer consider this goal and aspiration.

It is now or expectation.

Although things may change on the way today, we see a clear path and are feeling increasingly confident about our ability to achieve the rule 40.

Which in 2020, we'll have an unlevered free cash flow margin be is somewhat stronger.

Contributor to this metric that constant currency subscription revenue growth.

In the shareholder letter, we published earlier today, we detailed some of the operational efficiency initiatives that are driving our margin expansion over the next 18 months.

Our team has really stepped up and found ways to become more efficient in almost every corner of our business.

There's always more that we can do but I believe we have an excellent plan in place and I'm confident in our ability to deliver on that plan.

I'll now turn the call over to Brian to provide a few comments on our financials.

Thanks, Adam and good afternoon, everyone.

Since we provided a very thorough overview of the quarter and our updated guidance in the shareholder letter I'm going to keep my comments brief.

As you can see we had a strong second quarter and we feel good about our performance. Accordingly, we chose to raise our full year financial guidance on all metrics, our revenue profit and cash flow.

A few key financial highlights in Q2 subscription revenue was $133 million, representing 16% year over year growth or 17% on a constant currency basis.

This constant currency year over year growth rate was better than the midpoint of our Q2 guidance by about 130 basis points.

Operating income was nearly $17 million, representing an approximate 12% operating margin or an improvement of 175 basis points over the prior year.

There were a few timing related expense items that fell into Q2 that we budgeted to come in the second half of the year.

Since there are timing related they won't occur in the second half. Additionally, we have raised our full year constant currency, our currency neutral operating income guidance at the midpoint by $1.2 million.

This amount is adversely impacted by $700000 in currency headwind for a net increase of $500000.

Regarding our cash flow guidance for the second half, we expect a more back end loaded year than we had in 2018, So 2019 will be more in line with our historical trends.

Please note that we expect higher Capex in Q3 of this year, which will further exacerbate the comparison to 2018 linear.

While these quarterly variations create the optics of a backend loaded year, we're confident in our ability to meet these forecasts.

Regarding currency impacts on our guidance, you'll notice in our shareholder letter that in keeping with our practice over the last few quarters. We have just aggregated our updated financial guidance into changes that result from movements in currency from changes which are operational in nature.

As you can see changes in the spot rate most notably the British pound have moved considerably from where they were when we initially gave guidance about six months ago.

It's also worth pointing out that we have provided new FX sensitivity disclosures.

So do you have a better understanding of the magnitude of currency changes depending on what are the transactions are tied to the British pound or the euro.

Finally in the spirit of full transparency I'd also like to point out that R&D expenses declined by a few million dollars sequentially, which is a typical for our business. While there were some operational items that drove this namely costs associated with transitioning our tech stack into the public cloud, which could result in some quarter to quarter variability on a prospective basis. We also chose to more appropriately classify an immaterial dollar amount into cost of revenue that was previously classified in R&D. Obviously this has no impact on our operating income or cash flow.

Like Adam I'm very proud of the team for what we've accomplished in Q2 and I'm excited about what lies ahead.

Although we still have a lot of the year left in front of US. The first half has been our strongest on record and I feel good about the strength of our team and the opportunity ahead.

With that we will now take your questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the queue. Please press the pound key we also ask that you. Please limit yourself to one question you may get back into the queue. As time allows our first question comes from the line of Chris Merwin from Goldman Sachs. Your question. Please.

Hi, This is Kevin Kumar on for Chris. Thanks for taking my question for Federal You mentioned you US Postal service was one of the deals sounds like it was a relatively large deal can you talk about the.

Federal pipeline more broadly and.

How that's looking for Q3.

Yes, we're feeling good about our federal business, which had very good momentum over the last couple of years in federal in that continues through today.

So we're feeling good about our relationships with our existing clients and the growth opportunities there.

As well as the new business opportunities, we're seeing as well we already.

Have.

Seen a good opportunities in Q3, and we will continue to see that going into the future.

Thank you. Our next question comes in line of Raimo Lenschow from Barclays. Your question. Please.

Hey, this is Mike on for Raimo.

Just had a quick question on the partner relationships that you guys are working through it seems like your.

On a shareholder letter you're talking about a best practices evaluation of the partner operating model could you go into a little bit more detail on that and what's going on in that end.

Sure. So what we did is we brought in some help from the outside and analyzed or.

Entire structure.

In operating with our partner ecosystem, so everything from how we organize our alliances team to how we interact with our partners to how we deal with things like service delivery advisory work.

Delivery assurance quality control partner audit certification partner enablement, all of which are.

We had been doing but we had to make guesses back 18 months ago. When we first moved to this new service model, where our partners did that the vast majority of the service work and so 18 months later, we feel good about the partners that we have in place we feel good about the work they've done we feel good.

About the relationships Weve established and we really want to drive efficiency in our model, particularly the back office components, there and and that's exactly what we did so we we did this study over a close to six month period.

And reviewed the results of that study and made some changes which result in real efficiency in the business.

Thank you. Our next question comes the line of Mark Murphy from Jpmorgan. Your question. Please.

Yes. Thank you you mentioned that you had the best second quarter for new sales in the company's history and I just wanted to clarify.

Brian It's got a reference to the new subscription bookings.

And if so did you consider lifting the constant currency, our or subscription revenue guidance.

By a bit more than you are for the year or was it is it a case where that kind of that strength was apparent in the pipeline and you had you had sort of seen this developing coming into Q2.

Well, so mark I Hope I understand your question I mean first of all the reference to the best quarter. It's measured on basically a new air our new HCV basis, right booking new bookings in the quarter and it was the best first half in the company's history. So that's what we mean by that from a pure metric perspective in terms of how that flows through to our guidance last quarter and this quarter, we obviously take that into account and flow through and subscriptions. There's other things that impact that as well, whether it's currency rates to renewal rates and otherwise, but all of that is reflected in whatever guidance. We give at any point in time, obviously they got its we have today reflects all that performance.

Thank you. Our next question comes from the line of Nandan Amladi from Guggenheim. Your question. Please.

Yes, Thanks for taking my question, so, but the big push on the content side now in your sense efforts how much emphasis are you continuing to place on the protein and you're expanding got talent management suite.

So those are both very important parts of our business.

Whether we're talking about sales of our performance, we would still remain extremely strong.

The recruiting suite, which were seeing very good growth opportunity for and continue to see good pipeline growth for or cornerstone HR, they're all important components of how we go to market.

Content, obviously is the big incremental upside to all of that.

And so that's why we've been calling out content specifically.

But today, if you look at our software business about half our business is the learning suite and about half are the other talent management components.

And that's remained true when we'll be true into the future content is incremental to all of the software.

Thank you. Our next question comes from the line of Scott Berg from Needham Your question. Please.

Hi, Adam and Brian Thanks.

Thanks for taking my questions and congrats on a good quarter I guess my question Adam is around that first multimillion dollar content anywhere transaction that you discussed is there anything that's unique about that deal outside of maybe just the sheer number of seats that were part of that to drive this level of spend.

Yes, it was actually a combination both of the size of the account and the fact that they bought.

Multiple.

Subscriptions.

So as you know continuity time now is five separate subscription offerings everything from.

Professional skills and digital fluency too.

Sales and customer relationships in modern compliance and we have.

In that particular case seem to the purchase of multiple continuity time subscriptions.

Which increases the size of the deal obviously.

So we're feeling we're feeling good about the cuts in a business specifically in the content business generally.

And it's just another proof point of our progress.

Thank you. Our next question comes from the line of Cory Greendale from first analyst Your question. Please.

Hey, good afternoon, Thanks for taking my question.

Actually I'm going to try to sneak in a two part first on the the enhanced or the continued guidance on the rule 40, I just want to make sure that when you say you expect more of a contribution to come for free cash flow margin than subscription revenue growth that is intended to be consistent with what you communicated at the Investor day and the second part of my question is just on the up the content as you as you are sort of getting traction. There. If you could just elaborate a bit in talking to some content partners or potential content partners. One of the questions that here is about.

Data, you're starting back with the content partners and as Youre getting data are you now or is there potential to share data or the medidata with your partners in a way that can help them improve their content or is it really.

Is that not any idea is just to pick find the best combination.

Yes, Corey it's Brian I'll take part one and then I'll handle I'll handover part to to to add up.

So to answer your question on the role of 40. It is consistent we've consistently said.

That we expect to achieve the rule 40 in a balanced way we are feeling more confident now as you can see in the shareholder letter we published today, we laid out a variety of kind of operational levers for us to get there. We spent a lot of time over the course of the last quarter really fine tuning the operational plans and the cost base plan to enable us to achieve the rule 40, given our current air our guide for this year. So thats roughly mid teens as you can see give or take maybe a little bit higher we're basically planning on being able to.

Achieve the targets that we talked about next year through bottom line free cash flow, our unlevered free cash flow performance, obviously, we're continuing to strive for higher revenue and subscription revenue growth and we believe the market opportunity is very strong as we talked about on the call, particularly with content next year and in the coming years, but we are feeling even more confident now than we did at our analyst day.

And with regard to.

The data around content, we are going to be sharing that with our content partners part of the benefit of working with cornerstone is going to be a suite of tools that were providing for the content providers to help them optimize their individual businesses as well as obviously support cornerstones overall content business. So.

The data has been put into a system that allows us to visualize the data.

Both for internal consumption as well as to provide the content partners with their own provider portal to manage that data and leverage that theater for improving their own business.

Thank you. Our next question comes from the line of Brad Sills from Bank of America. Your question. Please.

Okay, Great Hey, guys. Thanks for taking my question.

Just wanted to ask about content again.

Just on any use cases or domains that you've seen some success in any any themes here that are emerging as to use cases or domains.

Actually it is very.

Broad.

Or horizontal is probably the best way to talk about it.

Virtually every business every organization is not limited to companies or corporations, but any organization needs to train its people and those people typically need to be trained in a variety of areas depending on what particular job they have so.

Some content is functionally specific other content is based on the level of the employee obviously entry level employees don't need.

Management or leadership development.

By the same token senior employees don't need some of the basic time management or professional skills that entry level employees need because hopefully they already have it and.

Our content offerings allow for all of that disparate.

Subject matter and that's one of the things that's compelling about continuity time is that you're able to handle the breadth of content required by an organization irrespective of your size and irrespective of your geography. So downmarket content anytime is compelling because you don't have the people internally that are able to do that kind of work for you to do the curations build the content too.

Enter into these agreements or even optimize how the employee learning pads. We're operating by the same token up market you have a different level of complexity being a multinational having lots of employees at different levels of skill different functional requirements different potentially industry requirements.

Combined with just breath.

Subject matter, which makes duration more difficult so our content anytime offering works, both down market and up market. We've seen that clearly now are the price points varied depending on if you're up market a down market, obviously large enterprises have lower prices per seat and small companies do.

And the ASP is very.

For each sale.

Predominantly because big clients have big volumes and even if the price per seat is lower the total volume's going to be a lot higher so those deals tend to be bigger like this multimillion dollar deal we just had.

By contrast, you'll have deals down market that are much smaller low volume, but high price points per seat and they're also very nice opportunities for us, albeit not multimillion dollar deals.

So we think we have a very interesting offering that is quite compelling to many many different kinds of clients.

And is quite accretive for us overall.

Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes from the line of Rashid Jaluria from D.A. Davidson Your question. Please.

Hi, guys. This is Hannah on for Christian. Thank you for taking my question today.

On the last call Adam I believe you mentioned that there is still room for improvement with regards to returns on marketing spend and positioning in the market.

Heidi recently hired.

Chief marketing and strategy Officer, what would you say are three top priorities in the near term.

Great question.

I would say number one is.

Branding, so establishing our positioning in the market.

Assuring that we have consistent messaging and that we're positioning things properly visit the bowl.

The competition, but also based on market demand product market fit and where we see the most opportunity. So that's number one number two I would say is blocking and tackling ensuring that our marketing team globally is operating as a single global organization.

We see a lot of room for efficiency by operating some functions more centrally others more de centrally or locally and that makes us more efficient in our spend overall and the third is related to our analysts relationships. So not the financial analyst community, but the industry analyst an influencer community, which has a major impact on.

Demand generation and our ability to compete effectively and that's something we're Heidi has an enormous advantage having been space for over two decades, and having personal relationships with many of these analysts and influencers. So I would say that's top three the list is longer than three but those are the top three and then I'll I'll answer more broadly while we have had tremendous success in improving sales productivity over the last 18 months. We are by no means finished and we think there's opportunity to continue to drive sales productivity and cost efficiencies throughout sales and marketing, making us more efficient as a business overall in driving incremental margin improvement.

Thank you. Our next question comes from the line of Pat Walravens from JMP Securities. Your question. Please.

Oh, great. Thank you and congratulations.

So you know Adam it's interesting to me that.

Last week.

Floral site, which had a sort of a technology skills focus for learning.

Had pretty disappointing results and yet your content anywhere is so strong.

Like you can help us figure out why that might be.

So I'm not going to comment on portal side, obviously very good company good business.

They've done many things extremely well what I will say is that they're offering is very specific so they're very focused on development and engineering, whereas continuity time as I mentioned earlier is very broad offering so its applicable to any group of people any business any organization any size in any geography, and so that gives us a very horizontal opportunity.

That allows us to sell into different markets at different times and different geographies at different times and gives us much better portfolio diversification for that business.

Which I think is one of the keys to our success.

It also allows us to leverage our scale. The fact that we are.

Large and have global distribution allows us to have that kind of offering, but we're not seeing anything concerning in content at all.

And.

I think again part of that has to do with the breadth of our offering and the fact that we are able to sell through the global distribution, we've already established into any market segment anywhere in the world.

Well the reason, we're still bullish on content generally.

Thank you. Our next question is a follow up from the line of Chris Merwin from Goldman Sachs. Your question. Please.

Okay, great. Thanks, very much for prevalence back on.

Just wanted to ask about EMEA I think in the shareholder letter you called it out as having its best first half ever and we've heard other companies. So far this earning cycle talking about pressure. There. So just curious if it is really strong execution. If you did see any loan demand. It on is obviously a great first half. So just curious if you could speak to the climate there.

Yes, obviously Brexit is top of mind for everybody in Europe and all throughout EMEA.

We were severely impacted by Brexit last time around.

And so we wanted to make sure we didnt repeat that mistake, we are much better diversified throughout.

Europe and throughout EMEA generally we have much lower concentration risk in any single market. We are better set up from an accounting and currency perspective, all of which makes us more confident about the opportunity in Europe . We're also not seeing any slowdown in any particular market or geography.

And we're not seeing any headwinds at this time.

That's not to say if theres, a hard Brexit that there won't be any impact I imagine there could be collateral damage, but we're not seeing anything at this time, we feel very good about that business. We have a strong pipeline in EMEA and obviously, an excellent first half of the year.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Adam Miller CEO for any further remarks.

Thank you all for your questions and for your participation on today's call.

As always I want to especially thank our global team for the great work. They have done is cornerstone continues its drive to re skill the global workforce for the future.

Thank you for attending.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.