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Nov. 12, 2019, 9:17 a.m. EST

10-Q: CORNERSTONE ONDEMAND INC

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(EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new clients to enter into subscriptions for our solutions; our ability to service those clients effectively and induce them to renew and upgrade their deployments of our solutions; our ability to expand our sales organization to address effectively the new industries, our ability to optimize the efficiency of our operations and scalability of our business; geographies and types of organizations we intend to target; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhancements to our solutions; alternate ways of addressing human capital management needs or new technologies generally by us and our competitors; continued acceptance of SaaS as an effective method for delivering human capital management solutions and other business management applications; the attraction and retention of qualified employees and key personnel; our ability to protect and defend our intellectual property; costs associated with defending intellectual property infringement and other claims; events in the markets for our solutions and alternatives to our solutions, as well as in the United States and global markets generally; future regulatory, judicial and legislative changes in our industry; the timing and amount of capital expenditures and share repurchases; and changes in the competitive environment in our industry and the markets in which we operate. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as "may," "believe," "could," "anticipate," "would," "might," "plan," "expect," and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, "Risk Factors," and in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. Overview

Our Learning suite enables clients to manage training and development programs, knowledge sharing and collaboration among employees, track compliance requirements and support career development for employees. We deliver a fresh, modern content offering, fueling employee curiosity and inspiring growth;

Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback, compensation management and succession planning; and

Our HR Administration suite supports employee records administration, organizational management, employee and manager self-service, workforce planning and compliance reporting.

Our goal is to empower people, organizations and communities to realize their potential with a comprehensive human capital management platform that is built to last. Our growth strategy since inception has been deliberate and focused on long-

term success. This has allowed us to weather periods of economic turmoil and significant changes in the markets we serve. We plan to continue with the same systematic approach in the future. Key elements of our strategy include:

Sell Additional Products to Existing Clients. We believe there is a significant growth opportunity in selling additional functionality to our existing clients. Many clients have added functionality subsequent to their initial deployments as they recognize the benefits of our unified platform. With our expanding product portfolio functionality, we believe significant upsell opportunity remains within our existing client base.

Focus on Growing Subscription Revenue. Beginning in 2018, we focused our go-to-market capabilities on driving subscription revenue growth. We believe our primary growth drivers are as follows:

Invest in Direct Sales in North America. We believe that the market for human capital management is large and remains significantly underpenetrated. In particular, Recruiting and Content Anytime provides an opportunity to increase our sales to both new and existing clients. Additionally, the Small and Medium-sized Business (SMB) market represents a very large and underpenetrated opportunity.

Significantly Grow Our International Operation. We believe a substantial opportunity exists to continue to grow sales of our platform internationally. We intend to grow our Europe, Middle-East and Africa ("EMEA") and Asia-Pacific and Japan ("APJ") operations.

Expand the Ecosystem. During 2018, we migrated a sizable portion of our implementation services to our partners. We have also expanded in recent years our relationships with various third-party consulting firms to deliver the successful implementation of our platform and to optimize our clients' use of our platform during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to ensure successful delivery by our partners and continued high client satisfaction. We believe we have a significant opportunity to leverage these third-parties interested in building or expanding their businesses to increase our market penetration.

Increase Operating Income and Free Cash Flow. In November 2017, we announced a strategic plan designed to better position us for long-term growth and increase shareholder value. We believe managing our operating costs while making smart investments in scaling our middle and back-office operations to support revenue growth is critical to our long-term success. We intend to focus on operational excellence initiatives that drive increases in operating income and free cash flow.

We generally price our human capital management platform based on the number of products purchased and the permitted number of users with access to each product.

Subscription revenue. Subscription revenue includes revenue from subscriptions to our human capital management platform and related support. We generally recognize subscription revenue ratably over the contract period, and as a result of timing of when we enter into new client agreements, revenue from subscriptions signed in the current period are typically reflected in future periods.

Annual recurring revenue. In order to assess our business performance with a metric that reflects a subscription-based business model, we track annual recurring revenue, which we define as the annualized recurring value of all active subscriptions at the end of a reporting period.

Free cash flow. We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital expenditures and capitalized software costs. We present this metric because it is a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet.

Annual dollar retention rate. We define annual dollar retention rate as the percentage of annual recurring revenue from all clients on the first day of a fiscal year that is retained from those same clients on the last day of that same fiscal year. Accordingly, this percentage excludes all annual recurring revenue from new clients added during the fiscal year. Furthermore, incremental sales during the fiscal year to clients included in the calculation are only counted to the extent those sales offset any decreases in annual recurring revenue from the original amount on the first day of our fiscal year. Therefore, the annual dollar retention rate can never exceed 100%. This ratio excludes the annual recurring revenue from clients of our Cornerstone for Salesforce, Cornerstone PiiQ, Grovo, and Workpop products. We believe that our annual dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients.

Constant currency results. We present constant currency information, a non-GAAP financial measure, to assess how our underlying business performed excluding the effect of foreign currency fluctuations. Due to our legal and operating structure, our international revenues are favorably impacted as the U.S. dollar weakens relative to the British pound and euro, and unfavorably impacted as the U.S. dollar strengthens relative to the British pound and euro. We believe the presentation of results on a constant currency basis in addition to reported results helps improve the ability to understand our performance as it excludes the effects of foreign currency volatility that are not indicative of our core operating results. To present this information, current period results for entities reporting in British pounds and euros are translated into U.S. dollars at the prior period exchange rates instead of the actual exchange rates in effect for the current period. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.

Number of clients. We believe that our ability to expand our client base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors. Our client count includes contracted clients for our enterprise human capital management platform as of the end of the period and excludes clients of our Cornerstone for Salesforce, PiiQ, Grovo, and Workpop products. During the three months ended September 30, 2019, our number of clients grew 6% when compared to the same period in the prior year.

Key Components of Our Results of Operations Sources of Revenue and Revenue Recognition Our platform is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate revenue from the following sources:

Professional Services and Other. We offer our clients assistance in implementing our products and optimizing their use. Professional services include application configuration, system integration, business process re-engineering, change management and training services. Services are generally billed upfront on a fixed fee basis and to a lesser degree on a time-and-material basis. These services are generally purchased along with a subscription arrangement and are typically performed within the first several months of the arrangement. Clients may also purchase professional services at any other time. We generally recognize revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time-and-materials are incurred.

Our agreements generally do not contain any cancellation or refund provisions other than in the event of our default.

Operating Expenses

During the third quarter of 2018, we completed certain aspects of our strategic transformation plan to position us for long-term growth. The completion of this transformation phase resulted in the reallocation of certain sales and marketing headcount to research and development activities. This will have the impact of reducing sales and marketing and increasing research and development. We intend to continue to invest in sales and marketing strategically to expand our business both domestically and internationally. We expect sales and marketing expenses, as a percentage of revenue, to decrease in part due to the reallocation of resources discussed above.

As described above, during the third quarter of 2018, we reallocated headcount from sales and marketing to research and development. We have focused our research and development efforts on continuously improving our products. We believe that our research and development activities are scalable because we maintain a single software code base for each of our products. However, in order to remain competitive, we expect research and development expenses to increase in 2019 as a percentage of revenue, in part due to the reallocation described above.

Restructuring. Restructuring consists of stock-based compensation, payroll-related costs, such as severance, outplacement costs and continuing healthcare coverage, associated with employee terminations.

Other Income (Expense)

Interest Expense. Interest expense consists primarily of interest expense from our convertible notes, accretion of debt discount and amortization of debt issuance costs.

Other, Net. Other, net consists of income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to investments and other non-operating expenses. We expect other income (expense) to vary depending on the movement in foreign currency exchange rates and the related impact on our foreign exchange gain (loss).

Income Tax Provision

Critical Accounting Policies and Estimates Information with respect to our critical accounting policies that we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 26, 2019.







                                            Three Months Ended           Nine Months Ended
                                               September 30,               September 30,
                                            2019          2018          2019          2018
        Revenue                          $ 144,952     $ 134,014     $ 426,929     $ 399,644
        Cost of revenue                     37,167        36,171       111,049       109,556
        Gross profit                       107,785        97,843       315,880       290,088
        Operating expenses:
        Sales and marketing                 57,815        53,215       171,011       172,281
        Research and development            25,695        19,705        77,778        52,014
        General and administrative          20,562        23,128        65,741        67,214
        Restructuring                            -           221             -         8,946
        Total operating expenses           104,072        96,269       314,530       300,455
        . . .
        


Nov 12, 2019

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