Cornerstone OnDemand Announces Fourth Quarter and Fiscal Year 2018 Financial Results

SANTA MONICA, Calif.–(BUSINESS WIRE)–Human capital management software provider Cornerstone
OnDemand, Inc.
(NASDAQ: CSOD) today announced results1
for its fourth quarter and year ended December 31, 2018. The Company has
provided a quarterly shareholder letter and supplemental financial
information located on its Investor Relations website at http://investors.cornerstoneondemand.com.

2018 was a transformational year for Cornerstone, and we are proud of
our results,” said Adam Miller, founder and CEO of Cornerstone. “The
changes we made to our business in 2018 delivered innovative products,
more recurring revenue, more profits and healthy, growing cash flow to
benefit our clients, partners, employees and shareholders.”

Adoption of the New Revenue Recognition Standard – ASC 606:

The Company adopted the new revenue recognition accounting standard
Accounting Standards Codification (“ASC”) 606 effective January 1,
2018 on a modified retrospective basis. Financial results for reporting
periods during 2018 are presented in compliance with the new revenue
recognition standard. Historical financial results for reporting periods
prior to 2018 are presented in conformity with amounts previously
disclosed under the prior revenue recognition standard ASC 605. This
press release includes additional information to reconcile the impacts
of the adoption of the new revenue recognition standard on the Company’s
financial results for the quarter ended December 31, 2018, which
includes the presentation of financial results during 2018 under ASC 605
for comparison to the prior year.

Fourth Quarter 2018 Results – ASC 606 (standard adopted effective
January 1, 2018):

  • Revenue for the fourth quarter of 2018 was $138.2 million compared to
    a guided range of $128.0 million to $131.0 million.2
  • Subscription revenue for the fourth quarter of 2018 was $126.3 million
    compared to a guided range of $119.0 million to $122.0 million.2
  • Operating income for the fourth quarter of 2018 was $2.6 million,
    yielding a margin of 1.9%.
  • Non-GAAP operating income for the fourth quarter of 2018 was $19.4
    million, yielding a margin of 14.1%.2
  • Net loss for the fourth quarter of 2018 was $(3.2) million, or a
    $(0.05) diluted net loss per share.
  • Non-GAAP net income for the fourth quarter of 2018 was $15.4 million,
    or a $0.24 diluted net income per share.
  • Unlevered free cash flow for the fourth quarter of 2018 was $33.7
    million, yielding a margin of 24.4%, compared to $46.4 million,
    yielding a margin of 35.2%, in the prior year.

Fourth Quarter 2018 Results – ASC 605:

  • Revenue for the fourth quarter of 2018 was $137.9 million,
    representing a 4.5% increase compared to the prior year. Revenue
    growth on a constant currency basis was 5.8%.
  • Subscription revenue for the fourth quarter of 2018 was $127.5
    million, representing a 20.0% increase compared to the prior year.
    Subscription revenue growth on a constant currency basis was 21.4%.
  • Operating income for the fourth quarter of 2018 was $2.3 million,
    yielding a margin of 1.6%, compared to $(5.4) million, yielding a
    margin of (4.1)%, in the prior year.
  • Non-GAAP operating income for the fourth quarter of 2018 was $19.1
    million, yielding a margin of 13.9%, compared to $13.0 million,
    yielding a margin of 9.9%, in the prior year.
  • Net loss for the fourth quarter of 2018 was $(3.5) million, or a
    $(0.06) diluted net loss per share, compared to a net loss of $(9.0)
    million, or a $(0.16) diluted net loss per share, in the prior year.
  • Non-GAAP net income for the fourth quarter of 2018 was $15.1 million,
    or a $0.23 diluted net income per share, compared to $12.1 million, or
    a $0.19 diluted net income per share, in the prior year.

Fiscal Year 2018 Results – ASC 606 (standard adopted effective
January 1, 2018):

  • Revenue for the full year of 2018 was $537.9 million compared to a
    guided range of $528.0 million to $531.0 million.2
  • Subscription revenue for the full year of 2018 was $473.1 million
    compared to a guided range of $466.0 million to $469.0 million.2
  • Annual recurring revenue as of December 31, 2018 was $510.0 million,
    representing a 16.2% increase compared to the prior year. Annual
    recurring revenue growth on a constant currency basis was 17.9%.2
  • Operating income for the full year of 2018 was $(7.8) million,
    yielding a margin of (1.4)%.
  • Non-GAAP operating income for the full year of 2018 was $63.4 million,
    yielding a margin of 11.8% compared to guided range of $61.0 million
    and $64.0 million.2
  • Net loss for the full year of 2018 was $(33.8) million, or a $(0.58)
    diluted net loss per share.
  • Non-GAAP net income for the full year of 2018 was $47.0 million, or a
    $0.74 diluted net income per share.
  • Unlevered free cash flow for the full year of 2018 was $63.5 million,
    yielding a margin of 11.8%, compared to guided range of $59.0 million
    and $63.0 million.

Fiscal Year 2018 Results – ASC 605:

  • Revenue for the full year of 2018 was $537.2 million, representing a
    11.5% increase compared to the prior year. Revenue growth on a
    constant currency basis was 10.4%.
  • Subscription revenue for the full year of 2018 was $479.4 million,
    representing a 20.8% increase compared to the prior year. Subscription
    revenue growth on a constant currency basis was 19.8%.
  • Operating income for the full year of 2018 was $(7.5) million,
    yielding a margin of (1.4)%, compared to $(49.3) million, yielding a
    margin of (10.2)%, in the prior year.
  • Non-GAAP operating income for the full year of 2018 was $63.7 million,
    yielding a margin of 11.9%, compared to $26.9 million, yielding a
    margin of 5.6%, in the prior year.
  • Net loss for the full year of 2018 was $(33.5) million, or a $(0.58)
    diluted net loss per share, compared to a net loss of $(61.3) million,
    or a $(1.07) diluted net loss per share, in the prior year.
  • Non-GAAP net income for the full year of 2018 was $47.3 million, or a
    $0.75 diluted net income per share, compared to $25.2 million, or a
    $0.41 diluted net income per share, in the prior year.

Last year we saw significant improvement in our profitability,
unlevered free cash flow and a near doubling of our non-GAAP earnings
per share,” said Brian Swartz, CFO, Cornerstone. “Looking ahead to 2019,
we believe there are more opportunities to drive further improvements in
our operating model while investing for sustainable growth.”

Recent Highlights:

  • The Company acquired Grovo Learning, Inc., the global leader in
    Microlearning® content, and expanded its Content Anytime subscription
    offerings.2
  • The Company was recognized as a Leader in the 2018 Nucleus Research
    Talent Management Technology Value Matrix following the evaluation of
    its product usability and functionality, and the overall value it
    brings to its clients.
  • The Company announced that the EMEA region gained a near
    record-breaking number of new clients during the third quarter of 2018.
  • The Company is helping train the next generation of leaders at
    ArcBest, a leading logistics company for supply chain solutions.
  • European CEO magazine named Adam Miller the Best CEO in the HR
    Technology Industry.
  • The Company ended the fourth quarter of 2018 with 3,535 clients and
    40.2 million users.3

Stock Repurchase Program:

The following is a summary of the Company’s stock repurchases under its
$100.0 million share repurchase program, which has been completed as of
December 31, 2018 (in thousands, except per share information):

Period  

# of Shares
Repurchased

 

Average Price
per Share

 

Total
Expenditures

November 8, 2017 – December 31, 2017 635 $ 35.55 $ 22,599
January 1, 2018 – March 31, 2018 423 $ 37.84 16,024
April 1, 2018 – June 30, 2018 444 $ 46.66 20,718
July 1, 2018 – September 30, 2018 300 $ 53.82 16,143
October 1, 2018 – December 31, 2018 484   $ 50.59 24,516
Total 2,286 $ 43.71 $ 100,000
 

Financial Outlook:

The following outlook is based on information available as of the date
of this press release and is subject to change in the future.

For the first quarter ending March 31, 2019, the Company provides the
following outlook:

  • Revenue between $134.5 million and $136.5 million, representing
    year-over-year growth at the mid-point of 1.8%4, or 4.2%5
    on a constant currency basis.
  • Subscription revenue between $127.5 million and $129.5 million,
    representing year-over-year growth at the mid-point of 13.6%4,
    or 16.0%5 on a constant currency basis.

For the year ending December 31, 2019, the Company provides the
following outlook:

  • Revenue between $558 million and $568 million, representing
    year-over-year growth at the mid-point of 4.7%6, or 5.7%7
    on a constant currency basis.
  • Subscription revenue between $533 million and $543 million,
    representing year-over-year growth at the mid-point of 13.7%6,
    or 14.7%7 on a constant currency basis.
  • Annual recurring revenue as of December 31, 2019 between $575 million
    and $590 million.6, 8
  • Non-GAAP operating income between $74 million and $84 million.
    Assuming the midpoint of the revenue range, this represents an
    operating margin of 14%.
  • Unlevered free cash flow between $82 million and $92 million. Assuming
    the midpoint of the revenue range, this represents an unlevered free
    cash flow margin of 15.5%.

The Company has not reconciled the guidance for non-GAAP operating
income or non-GAAP operating margin to the corresponding GAAP measures
because it does not provide guidance for such GAAP measures and would
not be able to present the reconciling items between such GAAP and
non-GAAP measures without unreasonable efforts. For non-GAAP operating
income and non-GAAP operating margin, the Company excludes stock-based
compensation expense, which is impacted by factors that are outside of
the Company’s control and can be difficult to predict. The actual amount
of stock-based compensation expense in the first quarter ending March
31, 2019 and the year ending December 31, 2019 will have a significant
impact on the Company’s GAAP operating margin.

1

  Financial measures presented under ASC 605, financial measures
presented on a constant currency basis, non-GAAP operating income,
non-GAAP operating income margin, non-GAAP net income, non-GAAP
diluted net income per share, unlevered free cash flow and unlevered
free cash flow margin are non-GAAP financial measures. Please see
the discussion in the section titled “Non-GAAP Financial Measures”
and the reconciliations at the end of this press release.

2

The acquisition of Grovo Learning, Inc during the quarter had the
following impacts:

– $1.0 million adverse impact on non-GAAP operating income for the
quarter and full year-ended December 31, 2018.

– $8.4 million of annual recurring revenue is included in the
reported amount as of December 31, 2018. As a result of purchase
price accounting rules, $5.0 million of deferred revenue related
to the Grovo acquisition has been written off and will not be
recognized as revenue in future periods. Prior to the write off,
the deferred revenue would have been substantially recognized
between the closing of the acquisition and the full year-ended
December 31, 2019.

– $46.1 million of property & equipment and a corresponding
facility financing obligation for build-to-suit lease agreements
were recorded on the consolidated balance sheets.

3

Includes contracted clients and active users of our enterprise
human capital management platform and excludes clients and users
of Cornerstone for Salesforce, PiiQ, Workpop Inc. and Grovo
Learning, Inc. As discussed on the Company’s second quarter 2018
earnings call, the Company reported that user count is no longer
relevant in the assessment of its performance and beginning in the
first quarter 2019, the Company will no longer report user count
on a quarterly basis.

  In order to translate the financial outlook for entities reporting
in GBP to USD and EUR to USD, the following exchange rates have been
applied:

4

  Exchange rate applied to revenue for the first quarter of 2019   $1.29 USD per GBP

5

Exchange rate from the first quarter of 2018 applied to calculate
revenue growth for the first quarter of 2019 on a constant currency
basis
$1.39 USD per GBP

6

Exchange rate applied to revenue and annual recurring revenue for
fiscal 2019
$1.29 USD per GBP

7

Average exchange rate from fiscal 2018 applied to calculate revenue
growth for fiscal 2019 on a constant currency basis
$1.33 USD per GBP

8

Exchange rate applied to annual recurring revenue for fiscal 2019 $1.14 USD per EUR
 

Quarterly Conference Call

Cornerstone will host a conference call to discuss its fourth quarter
and fiscal year 2018 results at 2:00 p.m. PT (5:00 p.m. ET) today. A
live audio webcast of the conference call, together with detailed
financial information, can be accessed through the Company’s Investor
Relations website at http://investors.cornerstoneondemand.com.
The live call can be accessed by dialing (877) 445-4619 (U.S.) or
(484) 653-6763 (outside the U.S.) and referencing passcode: 6486058. A
replay of the call will also be available at http://investors.cornerstoneondemand.com/investors/news-and-events/events/default.aspx
or via telephone until 11:59 p.m. PT (2:59 p.m. ET) on February 15, 2019
by dialing (855) 859-2056 (U.S.) or (404) 537-3406 (outside the U.S.),
and referencing passcode: 6486058.

About Cornerstone

Cornerstone was founded with a passion for empowering people through
learning and a conviction that people should be your organization’s
greatest competitive advantage. Cornerstone is a global human capital
management leader with a core belief that companies thrive when they
help their employees to realize their potential. Putting this belief
into practice, Cornerstone offers solutions to help companies
strategically manage and continuously develop their talent throughout
the entire employee lifecycle. Featuring comprehensive recruiting,
personalized learning, development-driven performance management, and
holistic HR planning, Cornerstone’s human capital management platform is
successfully used by more than 3,500 global clients of all sizes,
spanning over 40.2 million users across 192 countries and 43 languages.

Learn more at www.cornerstoneondemand.com.

Note: Cornerstone® and Cornerstone OnDemand® are
registered trademarks of Cornerstone OnDemand, Inc.

Forward-looking Statements

This press release and the quarterly conference call referenced above
contain 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, our expectations regarding recurring revenue growth and
operating margins, and general business conditions. Any forward-looking
statements contained in this press release or the quarterly conference
call are based upon our historical performance and our current plans,
estimates and expectations and are not a representation that such plans,
estimates, or expectations will be achieved. These forward-looking
statements represent our expectations as of the date of this press
release. Subsequent events may cause these expectations to change, and
we disclaim any obligation to update the forward-looking statements in
the future, except as required by law. These forward-looking statements
are subject to known and unknown risks and uncertainties that may cause
actual results to differ materially from our current expectations.
Important factors that could cause actual results to differ materially
from those anticipated in our forward-looking statements include, but
are not limited to, our ability to attract new clients; the extent to
which clients renew their subscriptions for our solutions; the timing of
when consulting services are delivered to new and existing clients by
our services organization and implementation subcontractors; the
complexity of deployments and product implementations, which can impact
the timing of when revenue is recognized from new and existing clients;
allowing our implementation subcontractors to contract directly with
clients for implementation services; our shift to focusing on recurring
revenue streams; our ability to compete as the learning and human
capital management provider for organizations of all sizes; changes in
the proportion of our client base that is comprised of enterprise or
mid-sized organizations; our ability to manage our growth, including
additional headcount and entry into new geographies; our ability to
expand our enterprise and mid-market sales opportunities; our ability to
maintain stable and consistent quota attainment rates; continued strong
demand for learning and human capital management in the U.S., Europe,
Asia Pacific and Latin America; the timing and success of efforts to
increase operational efficiency and cost containment; the timing and
success of solutions offered by our competitors; unpredictable
macro-economic conditions; the impact of foreign exchange rates;
reductions in information technology spending; the success of our new
product and service introductions; a disruption in our hosting network
infrastructure; problems caused by security breaches; costs and
reputational harm that could result from defects in our solutions; the
success of our strategic relationships with third parties; the loss of
any of our key employees and our ability to locate qualified
replacements; failure to protect our intellectual property; acts of
terrorism or other vandalism, war or natural disasters; changes in
current tax or accounting rules; legal or political changes in local or
foreign jurisdictions that decrease demand for, or restrict our ability
to sell or provide, our products; and unanticipated costs or liabilities
related to businesses that we acquire. Further information on factors
that could cause actual results to differ materially from the results
anticipated by our forward-looking statements is included in the reports
we have filed with the Securities and Exchange Commission, including our
Annual Report on Form 10-K for the fiscal year ended December 31, 2017
and Quarterly Report on Form 10-Q for the quarter ended September 30,
2018.

Non-GAAP Financial Measures and Other Key Metrics

To supplement its consolidated financial statements, which are prepared
and presented in accordance with U.S. generally accepted accounting
principles, or GAAP, the Company has provided in this press release and
the quarterly conference call held on the date hereof certain non-GAAP
financial measures and other key metrics. These non-GAAP financial
measures include:

        (i)   non-GAAP cost of revenue, which is defined as cost of revenue less
amortization of intangible assets and stock-based compensation,
(ii) annual recurring revenue, which is defined as the annualized
recurring value of all active contracts at the end of a reporting
period,
(iii) unlevered free cash flow, which is defined as net cash provided by
operating activities minus capital expenditures and capitalized
software costs plus cash paid for interest,
(iv) unlevered free cash flow margin, which is defined as unlevered free
cash flow divided by revenue,
(v) non-GAAP net income and non-GAAP diluted net income per share, which
exclude, for the periods in which they are presented, stock-based
compensation, amortization of intangible assets, accretion of debt
discount and amortization of debt issuance costs, unrealized fair
value adjustment on strategic investment, write-off of capitalized
software, restructuring costs, acquisition costs and excludes the
impacts of unamortized stock-based compensation expense in applying
the treasury method for determining the non-GAAP weighted average
number of dilutive shares outstanding,
(vi) non-GAAP gross profit and non-GAAP gross margin, which exclude
stock-based compensation and amortization of intangible assets
reflected in cost of revenue,
(vii) non-GAAP operating income and non-GAAP operating income margin,
which are defined as income (loss) from operations excluding
stock-based compensation, amortization of intangible assets,
write-off of capitalized software, restructuring costs and
acquisition costs,
(viii) non-GAAP operating expenses, which exclude stock-based compensation,
amortization of intangible assets, write-off of capitalized
software, restructuring costs and acquisition costs, and
(ix) non-GAAP sales and marketing expense, non-GAAP research and
development expense, and non-GAAP general and administrative
expense, each of which excludes stock-based compensation
attributable to the corresponding GAAP financial measures.

In addition, the Company provides investors with non-GAAP financial
measures under ASC 605 to compare against the Company’s GAAP financial
measures under ASC 606 and discloses revenue and subscription revenue on
a constant currency basis. To present amounts on a constant currency
basis, current period results for entities reporting in functional
currencies other than USD are translated into USD at the prior period
exchange rates as opposed to the actual exchange rates in effect for the
current period. The Company presents constant currency information to
provide a framework for assessing how its underlying business performed
excluding the effect of foreign currency fluctuations.

The Company’s management uses these non-GAAP financial measures and
other key metrics internally in analyzing its financial results and
believes they are useful to investors, as a supplement to the
corresponding GAAP measures, in evaluating the Company’s ongoing
operational performance and trends and in comparing its financial
measures with other companies in the same industry, many of which
present similar non-GAAP financial measures and key metrics to help
investors understand the operational performance of their businesses. In
addition, the Company believes that the following non-GAAP adjustments
are useful to management and investors for the following reasons:

  • Stock-based compensation. The Company excludes stock-based
    compensation expense because it is non-cash in nature, and management
    believes that its exclusion provides additional insight into the
    Company’s operational performance and also provides a useful
    comparison of the Company’s operating results to prior periods and its
    peer companies. Additionally, determining the fair value of certain
    stock-based awards involves a high degree of judgment and estimation
    and the expense recorded may bear little resemblance to the actual
    value realized upon the vesting or future exercise of such awards.
  • Amortization of intangible assets. The Company excludes
    amortization of acquired intangible assets because the expense is a
    non-cash item and management believes that its exclusion provides
    meaningful supplemental information regarding the Company’s
    operational performance and allows for a useful comparison of its
    operating results to prior periods and its peer companies.
  • Accretion of debt discount and amortization of debt issuance costs.
    For GAAP purposes, the Company is required to recognize the effective
    interest expense on its senior convertible notes and amortize the
    issuance costs over the term of the notes. The difference between the
    effective interest expense and the contractual interest expense and
    the amortization expense of issuance costs are excluded from
    management’s assessment of the Company’s operating performance because
    management believes that these non-cash expenses are not indicative of
    ongoing operating performance. In addition, the exclusion of these
    items provides a useful comparison of the Company’s operating results
    to prior periods and its peer companies.
  • Fair value adjustment on strategic investments.

Contacts

Investor Relations Contact:
Jennifer Gianola
Phone: +1
(310) 382-9478
[email protected]

Media Contact:
Kristy Gonzalez
Phone: +1 (310) 382-9563
[email protected]

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