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Edited Transcript of CSOD earnings conference call or presentation 6-Nov-19 1:30pm GMT

Q3 2019 Cornerstone OnDemand Inc Earnings Call

SANTA MONICA Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Cornerstone OnDemand Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:30:00pm 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

* Jason Gold

Cornerstone OnDemand, Inc. - VP of Finance & Corporate Development and IR

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Conference Call Participants

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* Bradley Hartwell Sills

BofA Merrill Lynch, Research Division - VP

* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Corey Adam Greendale

First Analysis Securities Corporation, Research Division - MD

* Nandan Girish Amladi

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Rishi Nitya Jaluria

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

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Sitikantha Panigrahi

Mizuho Securities USA LLC, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Cornerstone OnDemand's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Jason Gold, Cornerstone's Vice President of Finance and Corporate Development. Please go ahead.

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Jason Gold, Cornerstone OnDemand, Inc. - VP of Finance & Corporate Development and IR [2]

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Good morning, everyone, and welcome to Cornerstone OnDemand's Third Quarter 2019 Earnings Call.

Before I read the obligatory safe harbor disclaimer, I'd like to point out that in the letter, we've outlined our Investor Relations calendar for the quarter, including the conferences we will attend and when we plan to enter into our quiet period. If you'd like to participate in any of our scheduled events, please feel free to reach out.

And now for our disclaimer. Our press release and shareholder letter were both furnished with the SEC in a Form 8-K. We plan to file our Form 10-Q for the third quarter prior to the deadline on November 12. 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 measures 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 in our press release.

With that, I'd like to 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, Jason, and good morning, everyone. As I think about our performance for the first 3 quarters of 2019, I'm quite pleased with what our team has accomplished and feel good about our transformation and our positioning for the future. Despite some recent noise in the macro economy globally, our outlook for the balance of the year remains solid, and we've raised our guidance across all metrics accordingly.

Over the past few quarters, we've talked a lot about how we think the combination of our learning suite and our emerging content offering has started to create a flywheel effect, which we believe distances us from our traditional competitors. We've also talked about the benefits we get from the immense volume of data we have collected over the years from all the online courses that flow through our platform. This massive data set provides us with the insights to optimize our content strategy and enables both personalization and effective machine learning. The output is an ability to serve the right content to the right employee at the right time, driving employee engagement, reducing turnover and improving productivity.

What we haven't talked about much, though, are 3 things: one, Cornerstone Originals; two, our approach to skills management; and three, the opportunity to leverage our base.

Let's first talk about Cornerstone Originals. One of the real benefits of our Grovo acquisition was the creation of Cornerstone Studios, which allows us to produce original content to meet the needs of our client base and further differentiate our Content Anytime subscriptions. With Cornerstone Originals, we are able to address important topics which are not currently met by our existing portfolio of leading content providers.

We have figured out how to make unique content in a repeatable and scalable way that engages learners and leads to better retention of the subject matter than most traditional courses.

We're particularly excited about our newest original content series, DNA, which will be exclusively part of our Professional Skills Content Anytime subscription. What's so special about DNA, or Digital Native Advancement, is how powerfully it addresses the emerging needs that so many of our clients have, that is to help their youngest workers thrive in the business world today.

The next generation of the global workforce, Gen Z, has grown up with multiple screens and with social networks all around them, but haven't yet been taught the norms and interpersonal skills that happen in the workplace. We've built a series of 90-second courses on topics that manage how an employee should behave in the workplace, how to manage up, how to communicate with your boss and even how to address most appropriately for work. The whole series is designed to be binge watched on a mobile phone, and the early feedback we're getting from our clients has been very positive.

One big client told us that they'd be willing to buy our Professional Skills Content Anytime subscription just to get access to this series, validating the entire concept.

So the opportunity with Cornerstone Originals is clear. Our clients expressed a need. We surveyed the content landscape and saw that nobody else was filling that need, and we acted accordingly, building the series in under 6 months with an extremely limited budget and big potential return.

The second thing I'd like to touch on is our approach to skills management. We've discussed at length how skills are the new digital currency and how companies globally will need to help upskill and reskill their workers if they plan to remain competitive over the next few years. To help our clients with this immense challenge, we are building a universal ontology of skills that maps to our universal taxonomy of subjects that will enable us to both identify gaps in the skills of employees and teams and then recommend trainings to specifically address those gaps.

By leveraging the massive dataset we have, we can also provide a highly personalized talent experience that supports employees throughout their entire career journey, whether they be new to a company or role, seeking to gain mastery of their position or preparing to transition to a new role or management position. Skills management also helps organizations to better identify potential internal candidates to fill open roles, and it provides employees with enhanced tools for effective career pathing.

The third area I'd like to highlight is the opportunity that we have to leverage our installed base to continue growing our revenue. Today, we have over 40 million users on the Cornerstone platform. And while we've talked about the massive opportunity that exists to sell content back into the space, it's also worth reminding you that we have over 1,500 clients that do not have our broader talent management tools. We see a tremendous opportunity to leverage the relationships we've built with our learning customers to expand our footprint and increase our revenue. And to some extent, this is already happening. You can see it in how our annual recurring revenue and revenue -- subscription revenue have grown nicely without a commensurate increase in our new client count.

Of course, we're always focused on bringing in new clients, but it's important to point out that our focus on leveraging our base has already begun to bear fruit. Our products team is constantly evaluating the competitive landscape and developing new features and products that keep us ahead of the competition. In both performance and recruiting, we continue to develop new capabilities to keep setting us up for success.

Turning back to the quarter for a moment. During the third quarter, we had some notable wins at organizations, like Beaumont Health, Ricoh and Cupertino Electric. Our SMB team had a particularly strong third quarter as did our U.S. public sector team, which closed a large 7-figure deal with the United States Census for our recruiting product.

With the skills divide making news almost every week, the need for companies to reskill and upskill their workforce has never been greater. As this continues to gain traction, we think we are extremely well positioned to capitalize on this macro trend. I feel really good about our strategic positioning and the opportunity that sits before us as a leader in both learning and talent management.

The onus is really upon us to deliver. And while the road may not always be linear, and we'll surely encounter some minor bumps along the way, our strategy is clear. And I'm really excited about our future.

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

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

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Thank you, Adam, and good morning, 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 today brief. As you can see, we had a good third quarter. And accordingly, we chose to raise our guidance on several metrics.

Our subscription revenue grew to $137 million, which is just over 17% year-over-year growth in constant currency or 16% on a reported basis as a result of our strong ARR performance over the course of the past 12 months.

We're also very pleased with our operating margin of nearly 17%, which grew over 300 basis points year-over-year and was the highest in the company's history due to solid expense control and leverage across the entirety of our operating expense line items.

And finally, our unlevered free cash flow margin of 15%, while down from nearly 24% in Q3 of 2018, was comfortably above our high single-digit margin guidance due to strong collections and solid overall performance.

As a reminder, during last year's third quarter, we had an unusually strong cash flow primarily due to earlier-than-anticipated collections.

We expect the positive trends we saw in our operating and cash flow margins to continue, not just in Q4, but into 2020.

We did mention in the letter that some of our Q3 deals slipped into Q4. However, a majority of them have already closed, and we expect the rest flows in November and December. While we drive our sales team -- teams on ARR and that measure remains solid, the timing of these deals does have some minor ripple-through effect to both revenue and cash flow.

Our professional services business is now at what we think is a normalized run rate, and we will soon anniversary our intentional exit from the service delivery business. While quarterly professional services revenue will continue to vary from quarter-to-quarter, we accept -- we expect the drag from the decline in the services business to soon abate. What this means is that our total revenue growth rate should start to accelerate and converge towards our subscription revenue growth rate.

I'd also like to make 2 comments related to the detail we provided in the letter about our annual dollar retention rates. The first is that although we're, of course, happy with the very large deal we signed in Q3 with the United States Census Bureau and our success with that program, we would expect some meaningful portion of that to churn over the next couple of years as the Census winds down.

The second relates to our 2019 renewable base and how its growth over 2018 has been a factor in our expectation that we will experience a modest decline in our ADR rate in 2019. It's important to understand that as the size of the renewable base increases, there is natural pressure on our ADR, even if the renewal rates remain flat.

And finally, as we have discussed on prior calls, we expect to achieve the Rule of 40, which we define as the sum of constant currency subscription revenue growth and unlevered free cash flow margin in 2020 and expect to do so in a manner that shows unlevered free cash flow margins to be a larger contributor to this metric than constant currency subscription revenue growth. This is expected to result in approximately $150 million of unlevered free cash flow next year. And furthermore, we also expect that absent any new reinvestment opportunities or other nonoperational changes, such as higher cash income taxes, our dollars of unlevered free cash flow will continue to grow in 2021 and beyond.

Like Adam, I'm very proud of the team for what they've accomplished so far this year, and I'm excited about what lies ahead.

With that, 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 Scott Berg from Needham and Company.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [2]

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Congrats on the quarter. Adam, I wanted to start with the North American enterprise business. You called it out in your shareholder letter. Sounds like those deals will close in the fourth quarter. But any commonality across those deals in terms of why they moved periods?

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

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Those deals, in particular, were weighted towards health care and Latin America. And in both those sectors as well as some of the larger enterprise deals, the timing is often difficult to predict. In this particular case, we had a fairly back-end loaded quarter. That sometimes happens in Q3 because our clients are out on vacation in July and August. And so you tend to have more of the deals closing in September than in the other 2 months. And in this particular case, some of the deals literally signed 2 days after the quarter ended, and so you have a timing issue. It wasn't necessarily a sales execution issue. And obviously, we won the deal. It's just timing.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Got it. Helpful. And then, Brian, your, I guess, recommitment, maybe that's the right word, in terms of the Rule of 40 next year, it does imply a healthy jump in your unlevered free cash flow margin. Can you help us maybe give a little more granularity on the visibility into that in terms of maybe the CapEx spend into next year or is some of the operating margin leverage? Just help -- get a little comfort there would help.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [5]

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Yes. So I mean, just a couple of data points. We're obviously going through our 2020 detailed budgeting processes now. So I'll have more to comment, I think, on that, Scott, certainly on the next call. But just a couple of data points. One, we would expect lower CapEx next year. As you know, we've had some real estate projects this year that we -- will be completed, and we do not expect them to repeat next year.

The other thing I would point out is that, sequentially, from Q2 to Q3, we've been very mindful on managing head count. And you actually see our head count down about 2 points -- or 2% sequentially. And we're just being very mindful of backfills where we're hiring to help support that margin expansion as we go into 2020. So we're feeling really good about it. Again, we're going through some detailed model, detailed planning, but our head count plans, more or less, are locked through the end of next year, and it's really about reallocating head count and make sure we're investing in the right areas and not cutting off any growth opportunity.

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Operator [6]

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Our next question comes from the line of Brad Sills from Bank of America Merrill Lynch.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [7]

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Great. Wanted to ask about the focus on selling into the base. Are there any particular modules that you think are underpenetrated and maybe some low-hanging fruit there across the stack that you might need some near-term traction?

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

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Yes. I mean I've talked about this before. Obviously, when we look at things like recruiting and CHR, in both cases, they're penetrated far below 50% of the client base. So we believe there's big upside opportunity from that perspective. And we believe there's still opportunity to further penetrate performance. Today, it's a little over half our client base with performance, but that number could be bigger. And as we do more and more work around the linkage between skills and training, it allows us to deepen the effectiveness of our performance tools and our learning tools simultaneously, making them both more attractive. And then lastly, we see a very big opportunity around content, which isn't quite a product module, but we think of it as our fifth product. And the Content Anytime subscriptions also have relatively low penetration to date in our client base. So all 4 of those have significant potential upside.

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Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [9]

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Great. And then any color you could provide on some of the potential wins this quarter with Content Anytime, maybe the library that was sold or domain use cases and deal sizes? Any color on just the Content Anytime business this quarter?

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

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Yes. I mean it's still early days, so I would say it's all over the map. It's every geography. It's every vertical. It's all different-sized companies. We're selling -- today, we have 5 subscriptions. All 5 of those subscriptions are being sold. Where we think we have tremendous upside opportunity going into Q4, and certainly into next year, is our Professional Skills subscription, and that's why I was talking about DNA. That original content is driving people to that Professional Skills subscription in much the same way that, back in the day, House of Cards and Orange is the New Black drove people to purchase a subscription in Netflix or The Handmaid's Tale got people to buy Hulu. I think you're seeing a similar effect here now. When we show some of this original content to our client base, they get really excited. It's very unique. And it literally gets them excited enough to take the whole subscription down. So even though it's only one series in a subscription that has over 1,000 titles, that series drives interest to the fuller subscription, which then converts into more Content Anytime business.

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Operator [11]

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Our next question comes from the line of Corey Greendale from First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [12]

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Congratulations on the quarter. First question is just I understand the dynamic around the Census deal. I was hoping you might be able to give us a little bit more on the size of that deal. I'm just trying to understand what the effect will be on churn once that does roll up.

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

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Yes. So I mean it was a multimillion dollar deal, Corey. I mean I would say high single digit, 7-figure kind of deal. And that was just the upsell or the -- this quarter. We've -- obviously, they've been a client for several years. As you know, we've talked about them before. In terms of exactly how it will churn, we don't know exactly, quite frankly. But we do believe, over the course of the next 2 to 3 years, there'll be some large portion of that, that will churn as the Census ramps up and then ramps down. So we -- we're obviously working with the Census on that, and more to come as we know more.

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Operator [14]

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Our next question comes from the line of Rishi Jaluria from D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [15]

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First, I wanted to ask about some of the Cornerstone Originals. I know we're early in the process, but maybe I just wanted to understand what would the margin implications be. Should we expect higher than that kind of 50% gross margins that you've talked about with the content business before given that you're not doing any revenue sharing theoretically? And then I've got a quick follow-up for Brian.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [16]

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Yes, 2 points there. So one is on the gross margin. Obviously, it's higher than 50% because we own the content, so there is no royalty payment to any third party. It also has higher operating margin because we have the higher gross margin, and that will flow through. I think there's some concern out there that we are going to increase our CapEx because of this original content. That's not the case. All of this is already baked into the budget. This is operational spend. It's part of the flow of how our Content Studios work, which are producing significant content, not just Content Originals, but the fuller Grovo library and the coproduced content. So all 3 brands are being produced by that studio as part of our normal operational cadence. And we've just gotten pretty good at it, and it's a very efficient model.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [17]

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Great. That's helpful. And then -- yes. And then, Brian, I just wanted to maybe drill a little bit down into your commentary in the shareholder letter on the dollar retention and seeing that number kind of come down slightly this year relative to last year. If we take that into consideration and also look at the fact that you've raised guidance on ARR and you're essentially implying that your air -- or your new ARR, so to say, that you generate this year relative to last year is probably going to be growing at a slightly -- maybe in line to maybe even slightly faster than we've seen subscription revenue growing. Maybe if you can help us kind of bridge those and how we should be thinking about new ARR in light of annual dollars retention coming down.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [18]

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Yes. So we -- obviously, once we close out the year, we'll comment a lot more of this on the end of the year. We report the actual ADR on the fourth quarter call, Rishi. I think what you're saying makes sense. And so I think you're thinking about it the right way. We are growing new ARR this year, which is good. The teams have executed very well in that regard. The ADR has -- there's lots of moving pieces that impact the ADR because it's on the whole base, whether it's the renewal rate on what's up for renewal. There's obviously other churn reasons that go into the overall -- the final number. But I think the way to think about it, we've been pretty specific on ARR growth this year and, obviously, quantitatively on the guidance. And then next year, we obviously talked about the Rule of 40, and we expect cash flow to be a larger contributor than subscription revenue growth next year -- constant currency subscription revenue growth. So as we close out the year, we'll finalize the guidance and then give you some more quantitative 2020 look on the next call.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [19]

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But you're right. Basic arithmetic, if ARR is going up and churn is slightly elevated, then it means your new ARR sales are also higher.

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Operator [20]

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Our next question comes from the line of Raimo Lenschow from Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [21]

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Congrats from me as well. Adam, on the original content, can you just help us understand a little bit like where you think you want to kind of come up with original versus partnering? Like what's your criteria there?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [22]

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Yes. So we have a very specific strategy there. We want -- for each of the subscriptions that we offer for Content Anytime, we want to have at least one original content series and at least one coproduced content series, the example today being the sales Content Anytime subscription has content that's been coproduced with Sandler Training, which is one of the top training providers out there for sales people. And each of the subscriptions will have at least one original series and one coproduced series, which makes the subscription even more exclusive because you're not going to be able to get that content from any other subscription service. On top of that, we have a broad range of content from a number of content providers in each and every subscription that our global providers. We're also making sure that every subscription is localized. We obviously, as you know, have a big business in Europe, so we're very attentive to French, German and Spanish content. Right now, we will expand that list later, but the content will be in 4 different languages. That means also that there'll be different content providers meeting the subject matter for each subscription in each language. So for example, some of the top German content will come from German content providers that might not have content in French or Spanish, but rather in German and perhaps English. And so it will be a mix of providers, mix of languages and a mix of both partnerships, original content and coproduced content in each of the subscriptions.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [23]

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Okay. Makes sense. And then as you -- as we were discussing Europe, the -- you had a comment around Europe in your shareholder letter. And if you look at the space at the moment, there are like 2 types of companies. There's some that say, "Okay, there's Europe. There's issues. I'm fine." And your comment reach like that a little bit. And then the others that actually kind of have impact on numbers already. Do I kind of take the right conclusion there that you're just acknowledging there's something out there?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [24]

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Yes, yes. It's the former. But as you know, back in 2016, we got burned by Brexit, so we still view it as a potential risk. It's been highly mitigated both by the fact that we've reduced concentration risk of the U.K. versus our broader EMEA business and the fact that we now have multiple data centers, not only in the U.K., but also in France and Germany. And we've derisked the way we handle currency, so we treat the pound separate from the euro, separate from the dollar, whereas before, we had some translation risk as well. So for all those reasons, the risk is much lower in our case. And we have not seen any impact, but it's out there. And I think it's a fool's errand for anybody to predict exactly what's going to happen based on Brexit or based on some of these tariff wars that are going on. So we're taking that into account when we think about guidance, but we have not seen any impact to date.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [25]

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Congrats on a great quarter.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [26]

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Thank you.

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Operator [27]

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Our next question comes from the line of Nandan Amladi from Guggenheim.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [28]

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So Adam, you talked about the 3 growth vectors: the originals; skills management; and leveraging the installed base. How do these layer in over the next, say, 2 or 3 years?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [29]

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Yes. So the originals, like I said, is starting to happen now. I think certainly going into next year, we're going to see the impact of DNA and the incremental content that we produce. So we think that's part of what's going to accelerate our content business and the growth there.

With regard to skills management, that's something we're working on very actively and could have an impact as early as next year and even early in the year because of some things we're doing from a product standpoint, both with regard to the products that we actually bring to market and with regard to how the products work today.

And there's other vectors as well. I mean, the opportunity to upsell the installed base has been not only thoroughly discussed in the past, but is now fairly well documented with the growth in ARR that we've seen.

And the last vector that I didn't talk about is obviously international. We still feel good about the opportunities in APJ and in LATAM. We've seen good results already from some of the parts of Europe that are maybe further out from some other companies. So whether we're talking about the Nordics or Benelux or Central Europe or Southern Europe, I mean, outside of the U.K., France and Germany, we're seeing good results there.

And lastly, we've seen a real uptick in our SMB business. We've grown our inside sales teams. We've built out another center for that operation in Salt Lake City, and we think there's a lot of upside in that segment as well. It's predominantly greenfield and not a whole lot of competition in that segment.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [30]

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And a quick -- a follow-up, if I might. At HR Tech, there were -- a lot of your LMS -- traditional LMS competitors also making this pitch about connecting the LMS to performance management and making it more actionable and more directly measurable. How does your solution differentiate?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [31]

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Yes. I would say it's not a new thing, right? The Holy Grail in HR Tech is the linkage between jobs and skills and training because if I could connect all 3 of those things, I know which people have which skills, what jobs they are most appropriate for. I know if I want to move you from job A to job B, what skills you might be missing. And I know what training you need to remediate those skills gaps. So it's a very powerful combination if you can do all 3, and this has always been a data science challenge at the end of the day. Obviously, data science technology is improving. Machine learning is improving, but they don't all have the kind of datasets that we have. They don't all have the kind of data science talent that we have. They don't all have the machine learning platform that we have. And so that puts us in a fairly unique situation. We see there are start-ups in the space that are doing interesting things from that perspective, all of which enables us to have a competitive advantage in this area. And obviously, we have very -- not only deep data, but a deep set of training content that allows us, to the extent we identify the gaps, to remediate them in a way that others simply can't. And so I wouldn't say this is a new idea. This has been around for almost as long as I've been in the space, which is quite a while now. But it is something that's closer to reality than it's been in the past generally and, for us, specifically, much closer in reality.

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Operator [32]

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Our next question comes from the line of Chris Merwin from Goldman Sachs.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

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Okay. You called out some recent successes in SMB. And is that -- I know it's early. Is that starting to become a more meaningful driver of the business? And maybe can you just talk about what's driving that improvement there? I think you mentioned an investment in the sales team. Anything else you're doing there in terms of how you price that product? Just some more color there would be great.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [34]

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Yes. So we brought in new leadership about 18 months ago at this point. And that, combined with investment in the team, combined with how we reorganized our mid-market operations and split it between SMB and enterprise, the build-out of the inside sales teams, the change to our go-to-market strategy for SMB, our marketing effectiveness around SMB and our general product capability for small businesses all have led to very significant growth in that segment for us. It is still relatively small, but becoming increasingly substantial and, by next year, will be a meaningful contributor to our growth.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [35]

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And when we think about kind of leveraging the existing base and, at the same time, you've got this opportunity for new logos down market with SMB and mid-market customers, I mean, could we see a reacceleration there in logos, I mean, to the extent that there's more wins there? Just -- they're not mutually exclusive, but just as we think about the metrics going forward, curious how we should think about that.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [36]

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Can you say that again? Sorry.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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To the extent you're focusing more on SMB and mid-market, presumably there's an opportunity to start adding a lot more logos, especially if they're smaller customers. And I think we've seen a bit of a deceleration in the customer growth, while you continue to leverage the base of enterprise customers and expand within those. So just when we look at the overall metrics, is there an opportunity to reaccelerate customer growth as you win more new logos in SMB and mid-market?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [38]

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100%. I think part of the change you've seen is a combination of both our focus on upselling, growing the installed base, strengthening our penetration rates within the installed base, combined with the disruption we had in our mid-market operations. As that has settled down, I think you will see an uptick in client count. I know that's a metric that some people look at. And we think that metric will go back to improving over time. The other thing that has continued is our overall user base continues to grow at scale. And we don't disclose that quarterly, but the numbers continue to rise from that standpoint.

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Operator [39]

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(Operator Instructions) Our next question comes from the line of Siti Panigrahi from Mizuho.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [40]

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Just for 2020, you guys talked about teen subscription growth. Just wanted to understand a little bit more your expectations from these 2 segments, like SMB versus enterprise segment, into 2020 and also expectation from North America versus EMEA.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [41]

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Yes. So the second one's fairly straightforward. EMEA contributes close to 30% of our business. That's been true now for several years, and we expect that to continue to be true. The non-U. S., non-EMEA portion of our business continues to grow. And so it's difficult to quantify that exactly right now for 2020, but that is a growing part of our business. We also think of the U.S. itself as 2 different businesses. We have Americas commercial, which also includes Canada and Latin America as well as Mexico. And we have our U.S. public sector business, which has grown nicely. So we think of this as really 4 separate theaters. And then SMB is the fifth. That's how we go to market. That's how we organize our sales operations. And it's how we think about our business overall. So we have seen a shifting mix amongst those 5 different groups as our business continues to expand, and we expect that shift to continue over time. Obviously, the public sector business has grown quite well and has become a much more significant part of our business overall. The SMB business is growing and, as I've just mentioned, is becoming more substantial, especially going into the next couple of years. APJ, we view as a really big growth driver of the business, and that's something that had historically been a very small portion of our overall mix.

So we have multiple vectors of growth from that perspective as well as from a product perspective, and that's part of what gives us confidence into the future.

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Operator [42]

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Our next question is a follow-up from the line of Corey Greendale from First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [43]

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I apologize. My line cut off. I'd be happy to follow up offline. But did I get enough of the question out and you're not able to answer it, should I ask it again?

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Jason Gold, Cornerstone OnDemand, Inc. - VP of Finance & Corporate Development and IR [44]

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We didn't hear the question, Corey. If you could say again.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [45]

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Yes. The question was just the magnitude of the Census contract, just trying to get a sense of how much it's contributing to growth now and what we should be expecting.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [46]

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That one we answered.

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [47]

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Yes. I did answer that, Corey. It's in the transcript. That one I did answer.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [48]

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Okay, okay. The second question is just on the -- more broadly, on churn. Is -- are contracts still typically 3 years to get a sense of what the dollar return in kind of a renewable base is? And could you just comment on what -- if you just look at renewable dollars, if there's any movement in what's happening on the churn?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [49]

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Yes. So as I talked about over the last 6 quarters, our renewable base grew significantly in '18 versus '17, continues to grow in '19. Generally, our contracts are still 3 years, but duration does move around. The other thing to keep in mind, as Adam mentioned, we've obviously had great growth and some very large logos in the public sector. Those deals traditionally are 1-year renewable deal. They generally get renewed, but contractually, they're just 1-year deals. So there has been some impact on duration. Some of it is just where we've grown the business, specifically in the public sector. But in general, most of our new logos and most of our deals in general are still 3 years, and that's what we strive for.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [50]

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And Brian, if you just look at the renewable base, is there any movement on renewed? Is it the percentage of renewable dollars that are renewing as opposed to the impact of the change in the size of the base?

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Brian L. Swartz, Cornerstone OnDemand, Inc. - CFO [51]

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Yes, it's gone up. In fact, in '18, our renewable rate was up over '17. Obviously, '19 is not over yet. We'll talk about it next quarter and in the future. But we actually renewed more dollars, both as a rate and as a percentage in '18 versus '17. ADR did come down because the whole size of the renewable base went up so much.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [52]

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Yes. Got it. And one other quick question, Adam. There's a sentence in the shareholder letter about the balance sheet and the ability to pursue opportunities that can help achieve meaningful growth. I wasn't clear how much that was intending to signal M&A, but can you just comment on whether that's meant to be M&A and what your thoughts are on M&A?

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [53]

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Yes. Our objective is to drive shareholder value by any means necessary. And so that includes organically growing, that includes M&A opportunities, so inorganic growth, and it includes return of dollars to our shareholders, which has recently taken the form of a share buyback. So all 3 are possible. As you know, we're going to have even more free cash flow going forward. So we do have a large and growing balance sheet, which allows us to pursue all 3 approaches to driving shareholder value, and we'll continue to look at optimizing the mix of those 3 things.

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Operator [54]

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And 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.

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Adam L. Miller, Cornerstone OnDemand, Inc. - Founder, President, CEO & Director [55]

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Thank you all for participating. As you can tell from the call and the question and answers, we're feeling very good about the business. We are confident in our ability to hit the Rule of 40 in 2020 and go beyond that. Beyond 2020, we have a very good sense of where expenses are going into next year based on predominantly the fact that we've locked our head count plan through 2020. And we're seeing growth opportunities from a sales perspective across multiple vectors, both with regard to how we go to market and where we go to market as well as with regard to the product base and penetration rates of our installed base.

So thank you all. We will see you on the road, perhaps, over the next quarter or next week at our client conference in London, and thank you all.

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Operator [56]

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And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.