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Edited Transcript of CSOD earnings conference call or presentation 12-Feb-19 10:00pm GMT

Q4 2018 Cornerstone OnDemand Inc Earnings Call

SANTA MONICA Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Cornerstone OnDemand Inc earnings conference call or presentation Tuesday, February 12, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam L. Miller

Cornerstone OnDemand, Inc. - Founder, President, CEO & Director

* Brian L. Swartz

Cornerstone OnDemand, Inc. - CFO

* Jennifer Gianola

Cornerstone OnDemand, Inc. - VP of IR

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Conference Call Participants

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* Bradley Hartwell Sills

BofA Merrill Lynch, Research Division - VP

* Corey Adam Greendale

First Analysis Securities Corporation, Research Division - MD

* Kevin Kumar

Goldman Sachs Group Inc., Research Division - Associate

* Matthew James Coss

JP Morgan Chase & Co, Research Division - Analyst

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Scott Alan Wilson

Piper Jaffray Companies, Research Division - Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Latiff, and I will be your conference operator today. At this time, I would like to welcome everyone to Cornerstone OnDemand's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. I will now turn the call over to Jennifer Gianola, Vice President of Investor Relations.

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Jennifer Gianola, Cornerstone OnDemand, Inc. - VP of IR [2]

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Good afternoon, everyone, and welcome to Cornerstone OnDemand's Fourth Quarter 2018 Earnings Call. By now you should have received our shareholder letter providing details on the fourth quarter and full year 2018 results. On today's call, we will hear brief comments from Adam Miller, our Founder and CEO; and Brian Swartz, our CFO. After the remarks, the operator will open this line for questions.

You should have also received a copy of our press release and shareholder letter, which was released after the market closed today and was furnished with the SEC on Form 8-K. You can access the shareholder letter, press release and related investor materials, including detailed financials on our Investor Relations website. As a reminder, today's call is being recorded, and a replay will be made available following the conclusion of the call.

Our discussion will include forward-looking statements including, but not limited to, statements regarding the expected performance of our business; our 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 to 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 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 that the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in our shareholder letter and the press release.

Please note that we have made some changes to our disclosures in part due to the new ASC 606 revenue recognition standard. All financial figures discussed today are on an ASC 606 basis unless we state that the value is on an ASC 605 basis.

With that, I will turn the call over to Adam.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [3]

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Thanks, Jen, and thank you to everyone joining our call. 2018 was a transformational year for Cornerstone. During the year, we executed our strategic plan to get fit and grow. We reported recurring revenue growth of 19% year-over-year, generated healthy cash flow, exited our enterprise service delivery business, expanded our global partner ecosystem, introduced new recurring revenue streams, doubled our operating margin and achieved our third consecutive year of non-GAAP net income.

I'm extremely proud to report that, in 2018, our execution of the plan yielded significant results. For fiscal year 2018, we reported subscription revenue of $473 million, representing 19% growth year-over-year on a reported basis and 18% growth on a constant currency basis. Sales productivity was up over 50%, as measured by new ARR per rep for fiscal year 2018. Sales and marketing expenses ended the fourth quarter at 34% of revenue, significantly down from 52% in the fourth quarter of fiscal year 2015.

We successfully exited the enterprise service delivery business by transitioning it to our global service partners. In the fourth quarter, our services revenue represented only 9% of total revenue, down significantly from 19% in the fourth quarter of 2017. We ended the year with over 450 certified consultants who've completed more than 1,000 product certifications of Cornerstone to date.

We doubled our operating margin to 12% in fiscal year 2018 compared to 6% in the previous year and increased unlevered free cash flow margin to 12% from 9% in the same period, inclusive of the build-out of 2 new data centers in Continental Europe.

Our focus on content yielded strong results with over 100% growth year-over-year in new ARR, the largest number of customer wins in history. And with the acquisition of Grovo, we are building on our momentum to deliver additional curated subscriptions for our clients. We built a strong leadership team with tenured experienced executives and added 3 new board members to help us to scale to $1 billion and beyond.

Our solid performance from the year was driven by consistent execution across all teams around the world. Our public sector team had its strongest year ever with significant wins across all verticals, including federal, state and local, K-12, higher ed and health care. In the private sector, our North American team continued to demonstrate solid execution throughout the year. Abroad, EMEA had a record Q4 with its strongest quarter in the company's history and near record number of new client wins. And our global client sales team achieved in the best year in the company's history in new annual recurring revenue.

As we continue to enhance our product offerings, we will continue to grow our revenue opportunity within our installed base. From a bottom line perspective, we continued to see improvements in profitability throughout the year and achieved our second consecutive quarter of GAAP operating profitability. While much of this progress can be attributed to the continued improvement in sales rep productivity, additional benefits to the bottom line have continued to be realized through our operational excellence initiatives.

Much of 2018 focused on getting the right people, technology and processes in place. As such, we built our first ever global strategic sourcing team who invested in new tools to optimize our processes on a global scale. We are also enabling cost-effective expansion as we open our second largest U.S. office in Sandy, Utah this year.

As we move on to 2019, we believe the team, technology and processes that have been put in place are the right foundation to unlock incremental margin improvement through further strategic sourcing, business alignment, automation and process improvement initiatives. Looking ahead, Cornerstone has a number of growth opportunities to accelerate our path to $1 billion in annual recurring revenue.

The talent management market continues to grow, and in 2018, our leadership position in the marketplace remained unchallenged as we continue to receive significant recognition from leading industry analysts. In December, we were recognized as the leader in the 2018 Nucleus Research Talent Management Technology Matrix. We garnered the highest ranking for product usability.

Throughout the year, we also received recognition as the leader in talent management from Gartner, Fosway and IDC as well as advanced our position in Fosway's 9-Grid for human capital management due to our investments in the Cornerstone HR product. Cornerstone was also recognized numerous times throughout the year for our corporate culture and overall leadership in the HR space.

Content Anytime continues to be our fastest growing product release to date. Our content team had a record fourth quarter with its largest sales quarter ever resulting in full year sales more than doubling relative to the prior year. Momentum was driven by client expansion and our innovative product road map supported by our acquisition of Grovo. In 2019, we will launch additional subscription and product offerings and anticipate continued momentum across our content offerings.

In addition, while Cornerstone has been quite successful internationally for many years with 36% of total revenues coming outside the U.S, most of that success can be attributed to the EMEA region. We expect Asia Pacific and Japan to contribute much more meaningfully in the years to come as that market continues to rapidly mature with respect to the adoption of both SaaS solutions and talent management best practices.

In 2019, we are increasing our level of investment in Japan, which is not only the third largest economy in the world but also a market that is highly enterprise centric and has seen multiple SaaS companies and other industries experience material success.

Finally, Cornerstone HR, which is primarily sold in Europe today, had strong momentum in 2018 and is now almost 15% penetrated across our EMEA client base, demonstrating the demand for the solution to both prospects and existing clients. As the Cornerstone HR suite continues to evolve, opportunities to expand our footprint across industries and regions continues to emerge.

And with that, I will pass the call over to Brian, who will share his comments and our 2019 outlook.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [4]

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Thanks, Adam. 2018 was a truly remarkable year for our company. In November of 2017, we announced a 5-point plan to transform Cornerstone into an industry leading, high-margin growth company. The magnitude of the changes could have been very disruptive to any business, particularly one in the public eye.

But we believe that, if done correctly, the transformation would better position Cornerstone for long-term success and create significant value for our stakeholders. The plan worked, and we believe the results speak for themselves. We reported a strong fourth quarter to end the year, which demonstrates that we are a stronger, fitter company.

In the fourth quarter of 2018, subscription revenue was $126 million, representing 19% growth year-over-year. Subscription revenue benefited from approximately $3 million of accelerated revenue-related items that will not reoccur in the future. Non-GAAP operating income for the quarter was $19 million or 14% operating margins, and unlevered free cash flow improved year-over-year to $34 million, representing a 24% margin.

Our rapid shift out of the services business and our 100% focus on recurring revenue in 2018 has yielded significant results. In the fourth quarter, subscription revenue exceeded our expectations and came in at $126 million, representing year-over-year growth of 19% or 20% on a constant currency basis.

For the full year, subscription revenue was $473 million, a year-over-year increase of 19% or 18% on a constant currency basis. Our services revenue was intentionally down 24% for the year; and in the fourth quarter, our services represented only 9% of total revenue compared to 19% in the fourth quarter of 2017.

We also have significantly improved our operating margins and cash flows. In 2018, we doubled our operating margin to 12% from 6% in 2017 and increased our unlevered free cash flow by 45% to $63 million from $44 million in 2017. It's worth noting the acquisition of Grovo adversely impacted the fourth quarter operating income by approximately $1 million. As a reminder, our financial guidance on the last earnings call, other than ARR, excluded any impact from Grovo.

Now on to our outlook. As a reminder, 2019 guidance is available in our shareholder letter and a supplemental financial presentation posted to our IR website today. Our outlook has been developed using the best information we have as of today. We have not experienced any material impact on our pipeline or in our business from the recent U.S. government shutdown. For reference, our federal business represents about 5% of our total business.

Also, we are obviously well aware of the news headlines regarding macroeconomic and geopolitical issues today, including Brexit. Our forward guidance today takes into account consideration of the best estimates of these potential risks, and any further significant headwinds related to these types of impacts -- or items could impact our guidance.

Let me spend a minute to summarize our guidance and walk you through the impact of the Grovo acquisition on the outlook. We expect 2019 subscription revenue of $533 million to $543 million, which at the midpoint represents 14% growth or 15% constant currency growth.

Regarding total revenue, we expect our services revenue decline to mask our strong subscription revenue growth and expect 2019 total revenue of $558 million to $568 million or an increase of 4% to 6%. Our 2018 ending ARR was $510 million, which included $8 million of ARR from Grovo; and we expect that to grow to $575 million to $590 million by the end of 2018 (sic) [2019], representing 13% to 16% growth.

It's worth noting that we expect our content business to be in the high single digits as a percent of our total ARR by the end of 2019. As a result of purchase accounting rules, $5 million of deferred revenue related to the Grovo acquisition will not be recognized as revenue and will adversely impact our 2019 subscription and total revenue growth by approximately 1 percentage point and further dampen our operating margins by nearly 1 percentage point.

Our operating income is expected to be $74 million to $84 million or at the midpoint, an operating margin of 14%. Remember, our Grovo acquisition will have an adverse impact on this margin by nearly 1 percentage point.

Finally, regarding cash flow, we expect unlevered free cash flow of $82 million to $92 million with our capital expenditures slightly elevated in 2019 primarily rated -- related to leasehold improvements to build out our new office in Salt Lake City. That, combined with the continued transition of our services business in 2019, will impact our working capital benefit on unlevered free cash flow. We do expect further improvements in this lead-out margin, or the difference between our operating and unlevered free cash flow margins, in 2020 when the services business is fully transitioned.

With respect to Q1, we expect subscription revenue between $127.5 million to $129.5 million and total revenue of $134.5 million to $136.5 million. We further expect positive operating margin that will be slightly better than the prior year and in the low double digits and negative unlevered free cash flow margin or rather unlevered -- negative unlevered free cash flow due to the seasonality of our business with unlevered free cash flow margins in line with the first quarter of 2018.

With respect to our longer-term margin targets, we continue to target the Rule of 40, which we define as the sum of annual subscription revenue growth and unlevered free cash flow margin by 2020 resulting in roughly $150 million of unlevered free cash flow or approximately $2 per diluted share.

In summary, we are pleased with the significant progress we made in 2018 as a result of executing on our strategic transformation plan. Looking ahead to 2019, we believe there are more opportunities to drive additional improvements in our profitability while also investing to drive sustainable long-term growth.

I'll hopefully see you on the road at the Goldman Sachs, Morgan Stanley and JMP conferences later this month. And with that, I'll turn the call back over to Adam.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [5]

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Thanks, Brian. As we look back on the past year, I would like to thank everyone who has joined Cornerstone on this journey. 2018 was a remarkable year for us. We underwent a strategic transformation. We successfully shifted our business to a recurring revenue model, and we did all of this while demonstrating solid sales execution and margin improvement. We will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brad Sills of Bank of America Merrill Lynch.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [2]

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Congratulations on a nice quarter. I wanted to ask about the content business. I mean, what would you attribute the strength in that business to? Is it just positive reception to Grovo? Were there any verticals or domains, if you will, that you saw strength in or even geographies for Grovo?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [3]

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Thanks, Brad. The content business really is capturing the momentum you see in the consumer world for subscription media services. Whether we're talking about Spotify and Pandora on the audio side or you're talking about Netflix and Hulu on the video side, it's just the way people have learned to consume content, and we have taken that same methodology and applied it to the training world.

So the same rise in demand that you're seeing in the consumer world, I think we're participating in, and it's a really good tailwind for us. You also have to remember that even before we started the content business, we were the largest distributor of e-learning in the world. So for us, it was also a move to monetize a business that already latently existed, and now we're getting to capitalize on it.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [4]

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And then one more if I may, please, on sales productivity. Obviously, some great results this year with the new ARR per rep metric you mentioned earlier. Is there still room to grow here at sales productivity? Are there other initiatives to continue to improve on that?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [5]

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Yes, we absolutely think there's room for growth. We would like to see all of our reps beating quota. We have a very strong sales enablement function in place now that is a globally training and refining our processes for the sales team. We keep improving our tools and our pipelines, all of which will ultimately lead to greater sales productivity.

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Operator [6]

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Our next question comes from Scott Berg of Needham & Company.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [7]

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Congrats on a good quarter. I guess my questions are on the EMEA side of the house. You continue to have some good strength there throughout the year. I guess, it's a two-part question. First of all, outside of the Cornerstone HR product there, anything else helping drive kind of a resurgence in some of that business?

And then secondly, with regards to the guidance, Brian, you had mentioned you're taking into account the Brexit event this year to the guidance. Should we assume that you will have some conservative numbers baked into that relative to kind of some of the uncertainty there?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [8]

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Thanks, Scott. With regard to Europe, we have seen really good success in Europe. Honestly, for many, many years now, it's for many years been our strongest business unit with just consistent performance, the one exception, of course, being 2016 when Brexit happened, we were not at all prepared.

I would say with clear understanding of what's going on in the U.K. today, we are much better prepared. We have 2 data centers now in Continental Europe. We have a data privacy team and security team online in Europe. We have created new accounts to deal with the transactional risk around currency, so we are very well positioned for continued growth in Europe.

The success we've had is really a combination of very good leadership, a very good team with solid performance. They benefit from the fact that our application is now in 43 different languages. It's in use in 192 countries. Many, many of the clients we have in Europe are multinationals.

Our strength in Cornerstone HR has led to greater product adoption even beyond Cornerstone HR. So we see really good penetration rates in Europe for all of our products, and the ASPs are good. So all of that together has led to consistent performance that I think will only improve as we continue to build the business.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [9]

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Yes, and Scott, it's Brian. With respect to the guidance and specifically how we baked that in, obviously, forecasting exactly what will happen if there's a, what's commonly referred to as a, hard Brexit versus a soft Brexit is very difficult.

We have assumed in our outlook that we've taken basically the best facts we have today. I mean, if there is a hard Brexit and spending comes to a halt in the U.K. and slows down dramatically in Continental Europe, that could have an impact on our guidance. Having said that, we believe the team is very well positioned as Adam said and think they can continue to grow not just this year but into the future.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [10]

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We're much better diversified in Europe than we were in the past as well. So even as compared to 2016, we have much better diversification across 7 different regions in Europe with the U.K. only being 1 of 7. And that's quite different than even a couple of years ago.

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Operator [11]

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Our next question comes from the line of Alex Zukin of Piper Jaffray.

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Scott Alan Wilson, Piper Jaffray Companies, Research Division - Research Analyst [12]

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This is Scott Wilson on for Alex. Maybe for Adam or Brian. On the last earnings call, you mentioned that 7-figure deals were up 2x relative to the first 9 months. I'm curious if you might be able to update that status to kind of let us know how large deal activity ended the year and how you're thinking about that kind of pipeline heading into 2019 as compared to heading into 2018.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [13]

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Yes. So we did have a lot of success, obviously, in large deals in 2018. When -- you defined the large deals differently but for purposes of this discussion, let's define them over $1 million in ARR, ACV. We did have twice the number of those deals in 2018 than we did in '17.

What I will say even with that statistic, now that you, Scott and everyone else has 3 data points of ARR, you have end of '17, end of '18 and some guidance for '19, to actually do some roll forwards. And I would point out that despite that large comp or larger comp in '18 versus '17, new ARR is still -- the implied new ARR, I should say, when you do those roll-forwards, are still growing and in some cases, growing healthy at the higher end of our guidance.

So despite those tougher comps, which were real throughout all of 2018, we believe we can continue to grow new ARR and new ACV as we look to 2019 and beyond.

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Scott Alan Wilson, Piper Jaffray Companies, Research Division - Research Analyst [14]

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Perfect. And maybe just a quick -- another quick one. Your retention rates did tick down a little bit modestly, less than 100 basis points. So I'm just curious, with that in mind, can you touch on what you're seeing competitively. How did win rates look through the year? What are you seeing in terms of kind of potential pricing pressure from competitive alternatives? Just anything, what do you attribute the modest decline in retention rates? Can you speak to that?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [15]

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Yes. So as I spoke about on several of the calls throughout 2018 or the prior 3 calls we had, our renewable base was obviously much bigger in 2018 than it was in prior years, specifically 2017.

Having said that, we think there continues to be a very large opportunity. It is worth pointing -- it is worth noting that is a gross dollar retention rate. If you look at net retention, which includes upsells, it continues to be well north of 100%, which is what it's been for many years in the past even though the gross number is a little bit lower than it was last year.

So we continue to see a lot of opportunity. When you think about just the greenfield opportunity out there and the Fortune 100, we have, we believe, less than roughly 30% of the Fortune 100. There's lots of other opportunity we talked about a lot in our shareholder letter and then Adam commented on in his prepared remarks where we think we can continue to grow and not just keep those growth rates up but also keep the retention rate up. Client success is, obviously, our #1 priority, and we are relentless about it.

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Operator [16]

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Our next question comes from Chris Merwin of Goldman Sachs.

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Kevin Kumar, Goldman Sachs Group Inc., Research Division - Associate [17]

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This is Kevin Kumar on for Chris. Regarding the partner ecosystem, as you continue to onboard new SIs, are you starting to see more partner-led deals? Any commentary on that you can share?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [18]

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Yes. So we have a fairly stable partner ecosystem now. Our goal was to have the right partners. We have those in place now. We are building out, at this point, the number of consultants that are available to those partners, and that's why that certification number keeps growing.

In terms of partner-led deals or partner-delivered deals, I would say we are still in the early stages of that. We have seen some success. Some of the larger deals did include partner influence, but we think there's much more room for improvement there, particularly with some of our newer partners that are not yet fully operational and have not yet aligned the sales teams to our organization. When that happens, we expect to get more partner-influenced activity throughout the pipeline.

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Kevin Kumar, Goldman Sachs Group Inc., Research Division - Associate [19]

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Got it. That's helpful. And then maybe a second one here. Regarding the commercial segment, how was deal activity for the year kind of -- did it meet internal expectations? And then any commentary on the pipeline for '19?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [20]

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Yes. So U.S. commercial was up year-over-year, and we see very good pipeline activity. We are feeling very good about 2019 and have continued to evolve that group. So we have very stable leadership in that area. We continue to build out the team, and we have seen a lot of opportunity, particularly in recruiting, which is going to be a big focus for us in 2019, specifically for North America and commercial sales.

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Operator [21]

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Our next question comes from Corey Greendale of First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [22]

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Quick one to start. Brian, I think you said that the -- that content would represent about a high single-digit percentage of ARR at the end of '19. Any chance you'd give us what percent it was at the end of 2018?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [23]

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Well, no, we haven't disclosed that. We expect it to obviously grow. We did say, Corey, and you can probably do some math, but it was up over 100% in 2018 versus '17 in total content. So you can assume that it's obviously trending up nicely on a mix basis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [24]

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Okay. And then going back to the guidance question, I think when you sort of caveated the guidance saying you are anticipating -- I think it was a longer look than just Brexit. It was macro trends overall.

I just want to be clear given the one thing in the quarter that was a little below what we expected with the billings number. Are you seeing any impact today? Your tone is positive, so I just want to be clear, macro factors affecting the business in any negative way now.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [25]

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Yes. No, so let me be clear and I just -- for the sake of doubt. We have not seen any slowdown in our business. We are very excited about 2019. '18 finished strongly. There was obviously an extended partial government shutdown in the U.S. We did -- have not seen any negative impacts from that, and we're not forecasting any particular slowdown in our business.

Having said that, there obviously is a lot of unknowns going on out there in the world, both from an economic point of view, a political point of view and others. And so to the extent there is any major disruption in the next 3 to 6 months related to that, that could have an impact on the guidance, was all I was trying to say. We've baked in our best estimates as of today, and have not seen a negative -- an adverse impact from it.

With respect to billings, just to be clear, I haven't comment -- I know we talked about this over the course of the last year. As we transitioned services, billings is becoming a -- it is a non -- an irrelevant metric at this point and will remain that way for virtually all of 2019 until we truly burn off all of the services backlog and services revenue.

It was down dramatically about 20%, 23% in 2018, our services revenue. We expect that to be down north of 60% or roughly 60% in 2019. Once we get out to 2020 and beyond, that metric should become kind of more apples to apples and more relevant from a performance point of view. So I encourage everyone to focus on ARR. You have 3 data points on ARR now, and that's the way you should be thinking about the growth in our business.

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Operator [26]

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(Operator Instructions) Our next question comes from the line of Rishi Jaluria of D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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Let me start on the gross margin front. We saw a nice pickup on gross margins year-over-year and even sequentially. Was this driven by just mix shift and then having recurring be a significantly higher portion of revenue? Or did recurring gross margins also improve in the quarter? And then I've got a follow-up.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [28]

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Yes. So it's primarily the mix shift. We obviously are always focused on -- just, in general, we've talked a lot about operational excellence initiatives, Rishi, and those continue to be a big focus for us. We yielded a lot, but that well is not dry yet. And we think there's a lot more we can continue to do in 2019 and beyond. So -- but the benefit we saw in '18 versus '17 was primarily due to that mix shift.

The other thing I would point out, and we spent some time talking about this, that is the content business continues to grow. We obviously had very healthy growth in '18, and we do expect continued strong growth in '19 that those will provide a headwind with respect to gross margins because of the nature of the business, right? We collect all the money from our customers. We keep 50% of it, and then we give the other 50% to the other participants in that subscription.

So that will be a bit of a headwind with respect to consolidated gross margins. But most importantly, the operating margins on that incremental revenue related to content are well north of where we are today and on par with kind of traditional software margins in mid-20s call it. So the incremental benefit there you'll see on the bottom line, but you will see some headwind on gross margin as that business continues to grow.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

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And just going back to the guidance. I don't mean to beat a dead horse here. But if we'd just go back to 2018, normalizing for 606 and currency, you did about 20% subscription growth. You're talking 15% subscription growth next year in 2019 on a constant currency, apples-to-apples accounting basis. Is that decel purely the result of just conservatism around Brexit and macro factors? Or are there any other factors that are baked into subscription decel-ing by about 5%?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [30]

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No, I mean, listen, it's everything we've talked about, Rishi. I think it's the right question. We are trying -- here's the way I would say it. I think this is a fair way of putting it. We had terrific momentum in 2018, whether it was rep productivity, all these metrics we've shown you, 3 quarters of continuous outperformance, both relative to our internal metrics and what we've discussed externally.

And I think it's fair to say that if that momentum continues at the same rate through 2019, which has just been very strong, and by the way, there was some low hanging fruit with the transformation that we undertook in late 2017, but if that momentum stays at that same rate, we would certainly expect to be in a position to raise our guidance.

I don't want to make it sound like the guidance is a way up. The guidance is our best estimate today factoring in a bunch of different variables over the course of the next 4 quarters, but we're obviously looking to exceed it and outperform it.

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Operator [31]

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(Operator Instructions) Our next question comes from Matt Coss of JPMorgan.

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Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [32]

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I'm on for Mark Murphy. Brian, you mentioned $3 million in accelerated subscription revenue items that won't recur. What were they? And why won't they recur?

And then secondly on the cash flow statements, you mentioned that outside -- that cash flow next -- or CapEx for this year will be slightly elevated. Outside the new office you're building out, where is that CapEx spending going to occur?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [33]

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Yes. So on the CapEx question, let me just start with that, Matt. So there is CapEx associated with building out our Salt Lake City office. Some of that is actually funded by the landlord, but the way that will get classified in the cash flow statement, we will have a return of some of those tenant improvements that flow through operating activities. And then the gross CapEx expenditures associated with the TI, or tenant improvements, will be in investing activities and therefore, show up as CapEx.

So it's roughly about 2% gross CapEx expenditures that we expect this year, half of which, give or take, will be funded through landlord improvements. And it's not just Salt Lake City. There's a couple other offices we're doing some work in, but it's primarily Salt Lake City. So I -- hopefully that addresses your question on CapEx and cash flows. I'm sorry, Matt, what was the first question again?

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Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [34]

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Just on the $3 million that's not going to reoccur again added to subscription revenue this quarter.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [35]

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Yes. So don't think of it as an acceleration of future revenue. It's actually a catch-up of prior revenue, prior deferred revenue. So there are situations and times where we will do things like enhancement, contractual enhancement requests with our clients, and we carve out value associated with those contractual enhancements we're at and defer that until it's delivered.

When it's delivered, there's a catch-up of kind of that prior deferred revenue that would have been straight line. And we recognize some of that in Q4, and that's what the $3 million represents primarily. So it's obviously continuous subscription revenue, but it's kind of a onetime catch-up from prior deferred revenue that wasn't recognized on a straight line basis related to those enhancement requests.

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Operator [36]

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Thank you. At this time, I'd like to turn the call back over to Adam Miller for any closing remarks. Sir?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [37]

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Thank you to everybody who joined the call today, and thank you to our global team for great results. We'll see you on the road. Thanks, everyone.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.