CORNERSTONE ONDEMAND, INC. 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 customers to enter into subscriptions for our solutions; our ability to service those customers 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, geographies, and types of organizations we intend to target; our ability to optimize the efficiency of our operations and scalability of our business; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhancements to our solutions; alternate ways of addressing people development needs or new technologies generally by us and our competitors; continued acceptance of software-as-a-service as an effective method for delivering people development 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; the effects of global outbreaks of pandemics or contagious diseases or fear of such outbreaks, such as the ongoing COVID-19 pandemic, including on the demand for our products, our ability to expand in new geographic markets, or the timing of such expansion efforts, and on overall economic conditions and software-as-a-service spending; other events in the markets for our solutions and alternatives to our solutions, as well as inthe United States and global markets generally; future regulatory, judicial, and legislative changes in our industry; our ability to successfully and efficiently integrate Saba Software, Inc. into our business; 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 theSecurities 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. OverviewCornerstone OnDemand, Inc. is a leading global provider of learning and people development solutions, delivered as software-as-a-service ("SaaS"). Unless the context requires otherwise, the words "Cornerstone," "we," "Company," "us," and "our" refer toCornerstone OnDemand, Inc. and its wholly owned subsidiaries. We were founded with a passion for empowering people through learning and a conviction that people should be an organization's greatest competitive advantage. We believe people can achieve anything when they have the right development and growth opportunities. We offer organizations the technology, content, expertise, and specialized focus to help them realize their potential. Cornerstone's people development solutions feature comprehensive recruiting, personalized learning, modern content delivered in the flow of work, development-driven performance management, and holistic workforce data management and insights. OnApril 22, 2020 , the Company acquired Saba Software, Inc. ("Saba"), a provider of talent experience solutions. We are actively engaged in integrating Saba. Together, the combined Company reaches over 6,000 customers of all sizes across over 180 countries and nearly 50 languages. We work with customers across all geographies, vertical markets, and market segments. Our customers include multi-national corporations, large domestic and foreign-based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations, and small businesses. We sell our solution domestically and internationally through both direct and indirect channels, including direct sales teams throughoutNorth and South America ,Europe , andAsia-Pacific and distributor relationships with payroll companies, human resource consultancies, and global system integrators. 24 -------------------------------------------------------------------------------- Our enterprise people development solution is composed of: •Our Cornerstone Learning solution provides robust, modern learning management software designed to scale with the organization. Cornerstone Learning comprehensively supports compliance, knowledge sharing, and employee-driven development training to close skills gaps; •Our Cornerstone Content Anytime offering provides modern, personalized learning content from our own studios or a variety of quality partners in a streamlined, easy way; •Our Cornerstone Performance solution provides tools to manage goal setting, performance reviews, competency assessments, compensation management, and succession planning; •Our Cornerstone Careers solution helps employees understand how to get from their current position to future strategic roles with continuous feedback, goal setting, development plans, career exploration, and engagement survey tools; •Our Cornerstone Recruiting solution helps organizations to attract, hire, and onboard the right employees; and •Our Cornerstone HR solution provides an aggregated view of all employee data with workforce planning, self-service management, and compliance reporting capabilities resulting in more accurate data. Our goal is to empower people, organizations, and communities to realize their potential with a comprehensive people development solution 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 without experiencing business contraction. We plan to continue with the same systematic approach in the future. Key elements of our strategy include: Continue to Innovate and Extend Our Technological Leadership. We believe we have developed over the last 20 years a deep understanding of the people development challenges our customers face. We continually collaborate with our customers to build extensive functionality that addresses their specific needs and requests. We plan to continue to leverage our expertise in people development and customer relationships to develop new products, features, and functionality that will enhance our solutions and expand our addressable market. We plan to continue our policy of implementing best practices across our organization, expanding our technical operations, and investing in our network infrastructure and service capabilities in order to support continued future growth. Retain and Expand Business with Existing Customers. We believe our existing installed base of customers offers a substantial opportunity for growth. •Focus on Customer Success, Retention, and Growth. We believe focusing on our customers' success will lead to our own success. We have developed a Customer Success Framework that governs our operating model. We strive to maintain our strong retention rates by continuing to provide our customers with high levels of service, support, and increasing functionality. •Sell Additional Products to Existing Customers. We believe there is a significant growth opportunity in selling additional functionality to our existing customers. Many customers have added functionality subsequent to their initial deployments as they recognize the benefits of our unified solution. With our expanding product portfolio functionality, we believe significant upsell opportunity remains within our existing customer base. Focus on Growing Recurring Revenue. We believe our primary growth drivers are as follows: •Invest inNorth America . We believe the market for people development is large and remains significantly underpenetrated. In particular, content and recruiting provide an opportunity to increase our recurring sales to both new and existing customers. Additionally, we believe the small and medium-sized business ("SMB") market represents a very large and underpenetrated opportunity. •Continue to Invest in Our International Operations. We believe a substantial opportunity exists to continue to grow sales of our solution internationally. We intend to grow ourEurope ,Middle East , andAfrica ("EMEA") andAsia-Pacific andJapan ("APJ") operations. •Grow Our Cornerstone Content Anytime Sales. We believe there is a significant market opportunity for developing employees throughout their careers with modern, fresh e-learning content. Our Content Anytime subscription offering provides access to industry leading content which we believe will increase user engagement on our solution. Our content partners for Content Anytime include industry leaders as well as regional, functional, and vertically-focused online training providers. In addition, we have agreements with providers of specific competency models for use by our customers directly in our people development solution. We intend to enter into additional license agreements to continue providing the best content available for our customers. 25 -------------------------------------------------------------------------------- •Expand the Ecosystem. In recent years, we have expanded our relationships with various third-party consulting firms to deliver the successful implementation of our solution and to optimize our customers' use of our solution 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 customer 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. We have increased our focus on managing our costs while making smart investments to scale our middle and back-office operations, which we believe will support growth in recurring revenue and our long-term success over time. We believe we have executed and intend to continue to execute operational excellence initiatives to optimize our margin profile, which we believe will enable further leverage in our expense structure and growth in operating income and free cash flow. Acquisitions and Strategic Investments. We may acquire or invest in additional businesses, products, or technologies that we believe will complement or expand our solution, enhance our technical capabilities or otherwise offer growth opportunities. Most recently, inApril 2020 , we completed our previously announced acquisition of Saba, a provider of talent experience solutions. InJanuary 2020 , we acquired Clustree SAS ("Clustree"), a developer of a skills engine and skills ontology. InDecember 2019 , we invested inTalespin Inc. ("Talespin"), a developer of enterprise virtual reality training software. InNovember 2018 , we acquiredGrovo Learning, Inc. ("Grovo"), a provider of Microlearning® content. InSeptember 2018 , we acquiredWorkpop Inc. ("Workpop"), a web and mobile solution for candidates and hiring managers in service-based industries. Saba was acquired to expand our customer footprint and engineering resources. Clustree was acquired to accelerate the development of a skills engine. Grovo was acquired to enhance our Content Anytime offering and Workpop was acquired to enhance our Recruiting solution. We generate most of our revenue from the sale of our products pursuant to multi-year customer agreements. Customer agreements for our people development solution generally have terms of three years. Our sales processes are typically competitive, and sales cycles generally vary in duration from two to nine months depending on the size of the potential customer. We generally price our people development solution based on the number of products purchased and the permitted number of users with access to each product. We generally recognize revenue from subscriptions ratably over the term of the customer agreement and revenue from professional services as the services are performed. We normally invoice our customers upfront for annual subscription fees for multi-year subscriptions and upfront for professional services. We record amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue. We have historically experienced seasonality in terms of when we enter into customer agreements. We usually sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year. This seasonality is driven by customer purchasing patterns. As the terms of most of our customer agreements are full year increments, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we generally recognize subscription revenue ratably over the term of the customer agreement, which is generally three years. In addition, this seasonality is reflected in changes in our deferred revenue balance, which generally is impacted by the timing of when we enter into agreements with new customers, invoice customers, and recognize revenue. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future results. Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control, including those described in the "Risk Factors" section of this Quarterly Report on Form 10-Q. One or more of these factors may cause our operating results to vary widely. As such, we believe our quarterly results of operations may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. 26 --------------------------------------------------------------------------------
COVID-19
The impact of the COVID-19 pandemic on the global economy and on our business
continues to be fluid. We responded quickly across our organization to guard the
health and safety of our team, support our partners and vendors, and mitigate
risk. After careful review of our operations, while the ongoing and developing
circumstances related to the COVID-19 pandemic remain highly uncertain, we
believe that we are well positioned to address challenges related to the
COVID-19 pandemic and to continue to execute against our strategic priorities
and financial goals. We have several members of our team working
cross-functionally to collect, monitor, and analyze evolving information
regarding the COVID-19 pandemic and to make recommendations to our executive
leadership team and board of directors regarding risk identification and
mitigation planning. We have also taken steps to protect the health and welfare
of our employees by temporarily closing our offices and suspending non-essential
business-related travel, while continuing our commitment and efforts to serve
customers that rely on us. Thus far, we believe our employees have rapidly
adapted to working remotely and we are closely monitoring the COVID-19 pandemic
to ensure we have all necessary plans in place for mitigating disruptions in our
operations, including maintaining high levels of uptime, and service and support
to our customers. We continue to proactively assess, monitor, and respond to
domestic and international developments related to the COVID-19 pandemic, and we
will implement risk-mitigation plans as needed to minimize the impact on our
partner relationships and business operations. While our customer base spans a
variety of industries and geographies, our customers may be negatively impacted
by COVID-19 which may result in an increase in delayed purchasing decisions from
prospective customers, reduced customer demand, reduced customer spend, and
delayed payments, all of which could affect our future revenues. Because our
near-term revenues are relatively predictable as a result of our
subscription-based business model, the effect of the COVID-19 pandemic may not
be fully reflected in our operating results and financial condition until future
periods.
Metrics
We regularly review a number of metrics, including the following key metrics, to
evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections, and make strategic decisions.
•Revenue. Revenue consists primarily of subscription revenue and professional
services revenue. We generally recognize revenue over the delivery period.
Because of the seasonality of our business and the timing of when we enter into
new customer agreements, revenue from customer agreements signed in the current
period may not be fully reflected in the current period.
•Subscription Revenue. Subscription revenue represents subscriptions to our
people development solution, content subscriptions, and related support sold on
a recurring basis.
•Annual Recurring Revenue. In order to assess our business performance with a
metric that reflects our focus on a subscription-based (or recurring revenue)
business model, we track annual recurring revenue, a non-GAAP financial measure,
which we define as the annualized recurring value of all active contracts at the
end of a reporting period. We believe this metric is useful to investors in
evaluating our ongoing operational performance and trends, and in comparing our
financial measures with other companies in the same industry. However, it is
important to note that other companies, including companies in our industry, may
calculate annual recurring revenue differently or not at all, which may reduce
its usefulness as a comparative measure.
•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, a
non-GAAP financial measure, as the percentage of annual recurring revenue from
all customers on the first day of a fiscal year that is retained from those same
customers on the last day of that same fiscal year. Accordingly, this percentage
excludes all annual recurring revenue from new customers added during the fiscal
year. Furthermore, incremental sales during the fiscal year to customers
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 customers 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 customer agreements and our ability to retain our
customers.
•Constant Currency Results. We have historically presented constant currency
information, a non-GAAP financial measure, to provide a framework for assessing
how our underlying business performed excluding the effect of foreign currency
fluctuations. However, due to the acquisition of Saba in the second quarter of
2020, constant currency results on a combined company basis were not presented
for the second and third quarter in 2020 as the historical comparative periods
did not include the combined company results for a full quarter.
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•Number of Customers. We believe that our ability to expand our customer 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 customer
count includes contracted customers for our enterprise people development
solution as of the end of the period. During the second quarter of 2020, we
adjusted our method of determining customer count to exclude customers that are
sold through resellers that share one tenant or instance of our product. We
continue to exclude customers from our Cornerstone for Salesforce, PiiQ, Grovo,
Workpop, and Clustree products from our customer count metrics.
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our solution 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:
•Subscriptions to Our Products and Other Offerings on a Recurring Basis.
Customers pay subscription fees for access to our enterprise people development
solution, other products, and support on a recurring basis. Fees are based on a
number of factors, including the number of products purchased, which may include
e-learning content, and the number of users having access to a product. We
generally recognize revenue from subscriptions ratably over the term of the
agreements beginning on the date the subscription service is made available to
the customer. Subscription agreements are typically three years, billed annually
in advance, and non-cancelable, with payment due within 30 days of the invoice
date.
•Professional Services and Other. We offer our customers and implementation
partners assistance in implementing our products and optimizing their use.
Services are generally billed upfront on a fixed fee basis and to a lesser
degree on a time-and-material basis. 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 customer agreements generally include both subscriptions to access our
products and related professional services. Our agreements generally do not
contain any cancellation or refund provisions other than in the event of our
default.
Cost of Revenue
Cost of revenue consists primarily of costs related to hosting our products and
delivery of professional services, and includes the following:
•personnel and related expenses, including stock-based compensation;
•expenses for network-related infrastructure and IT support;
•delivery of contracted professional services and on-going customer support and
customer success initiatives;
•payments to external service providers contracted to perform implementation
services;
•depreciation of data centers and amortization of capitalized software costs and
developed technology software license rights; and
•content and licensing fees and referral fees.
In addition, we allocate a portion of overhead, such as rent, IT costs,
depreciation and amortization, and employee benefits costs, to cost of revenue
based on headcount. The costs associated with providing professional services
are significantly higher, as a percentage of revenue, than the costs associated
with providing access to our products due to the labor costs to provide the
consulting services. Cost of revenue also includes amortization of
technology-related intangible assets from acquisitions.
Operating Expenses
Our operating expenses generally are as follows:
•Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related expenses for our sales and marketing staff, including
salaries, benefits, bonuses, stock-based compensation, and commissions; costs of
marketing and promotional events, corporate communications, online marketing,
product marketing, and other brand-building activities; amortization of
customer-related intangible assets from acquisitions; and allocated overhead.
•Research and Development. Research and development expenses consist primarily
of personnel and related expenses for our research and development staff,
including salaries, benefits, bonuses, and stock-based compensation; the cost of
certain third-party service providers; and allocated overhead. Research and
development costs, other than software development costs qualifying for
capitalization, are expensed as incurred.
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•General and Administrative. General and administrative expenses consist
primarily of personnel and related expenses for administrative, legal, finance,
and human resource staff, including salaries, benefits, bonuses, and stock-based
compensation; professional fees; insurance premiums; amortization of
acquisition-related intangible assets; other corporate expenses; and allocated
overhead.
•Acquisition-Related Costs. Acquisition-related costs consist primarily of
external professional services directly associated with acquisitions, such as
advisory fees, accounting and legal costs, filing fees, due diligence, and
integration costs.
•Restructuring. Restructuring costs consist primarily of payroll-related and
stock-based compensation costs associated with employee terminations.
Other Income (Expense)
•Interest Expense. Interest expense consists primarily of interest expense from
our debt obligations, including our Term Loan Facility, Revolving Credit
Facility, and Convertible Notes (each defined below). Interest expense is
primarily composed of contractual interest, commitment fees on unused amounts
available on the Revolving Credit Facility, accretion of debt discount, and
amortization of debt issuance costs.
•Other, Net. Other, net consists of interest income, income and expense
associated with fluctuations in foreign currency exchange rates, fair value
adjustments to strategic investments, and other non-operating expenses. Interest
income consists primarily of interest income from investment securities. We
expect interest income to vary depending on the level of our investments in
marketable securities, which may include corporate bonds, agency bonds, US
treasury securities, and commercial paper. We expect other, net to vary
depending on the movement in foreign currency exchange rates and the related
impact on our foreign exchange gain (loss).
Income Tax Provision
On a consolidated basis, we have incurred operating losses and have recorded a
valuation allowance against our US, UK , and other deferred tax assets for all
periods to date and, accordingly, have not recorded a benefit for income taxes
for any of the periods presented, other than a provision for certain foreign and
state income taxes and a benefit for the nine months ended September 30, 2020 .
This benefit, which was realized in connection with the recording of deferred
tax liabilities from the acquisition of Saba, was attributable to the reversal
of $26.7 million of a portion of our US federal and state valuation allowance on
deferred tax assets that are more likely than not to be realized. Certain
foreign subsidiaries and branches provide intercompany services and are
compensated as limited risk distributors and/or on a cost-plus basis, and
therefore, have incurred liabilities for foreign income taxes in their
respective jurisdictions.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere
in this Quarterly Report on Form 10-Q are prepared in accordance with US GAAP.
The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses, provision for income taxes, and
related disclosures. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Changes in accounting estimates are reasonably likely to occur
from period to period. Accordingly, actual results could differ significantly
from the estimates made by our management. We evaluate our estimates and
assumptions on an ongoing basis. To the extent that there are material
differences between these estimates and actual results, our future financial
statement presentation, financial condition, results of operations, and cash
flows will be affected.
We believe that the following critical accounting policies involve a greater
degree of judgment or complexity than our other accounting policies.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
Revenue Recognition
We recognize revenue from contracts with customers based on the five steps
below. The application of these steps may require the use of certain estimates
and judgments, particularly in identifying and evaluating complex or unusual
contract terms and conditions that may impact revenue recognition.
1) Identification of the contract, or contracts, with a customer
2) Identification of all performance obligations in the contract
3) Determination of the transaction price
4) Allocation of the transaction price to the performance obligations in the
contract
5) Recognition of revenue as we satisfy a performance obligation
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We identify enforceable contracts with a customer when the agreement is signed.
Contracts may contain multiple performance obligations. For these contracts, we
account for individual performance obligations separately if they are distinct.
The transaction price is allocated to the separate performance obligations on a
relative standalone selling price ("SSP") basis. We determine the SSP based on
our overall pricing objectives, taking into consideration market conditions and
other factors, including the value of our contracts, the products sold, customer
demographics, geographic locations, and the number and types of users within our
contracts.
Business Combinations
The results of businesses acquired in a business combination are included in our
consolidated financial statements from the date of the acquisition. Assets and
liabilities of an acquired business are recorded at their estimated fair values
on the acquisition date. Any excess consideration over the fair value of assets
acquired and liabilities assumed is recognized as goodwill.
The purchase price allocation process requires management to make significant
estimates and assumptions. Although we believe the assumptions and estimates we
have made are reasonable, they are inherently uncertain and based in part on
experience, market conditions, projections of future performance, and
information obtained from legacy management of acquired companies. Critical
estimates include but are not limited to:
•estimated future subscription revenue; related profit margin associated with
subscription revenues; and, expected customer retention rates;
•costs anticipated to fulfill remaining acquired performance obligations and
estimated profit margin for such obligations;
•technology migration curves and royalty rates;
•discount rates;
•useful lives assigned to acquired intangibles assets; and
•uncertain tax positions and tax-related valuation allowances assumed.
The identifiable intangible assets are amortized on a straight-line basis over
their respective estimated useful lives to sales and marketing for
customer-related intangible assets, cost of revenue for developed technology
intangible assets, and general and administrative expense for all other
intangible assets.
Sales Commissions
We defer commissions paid to our sales force and related payroll taxes as these
amounts are incremental costs of obtaining a contract with a customer and are
recoverable from future revenue due to the non-cancelable customer agreements
that gave rise to the commissions. We determine separate periods of benefit for
commissions related to initial contracts and commissions related to renewal
contracts. Commissions for initial contracts are deferred on the consolidated
balance sheets and amortized on a straight-line basis over a period of benefit
that has been determined to be six years. We consider technology life and other
factors in estimating the benefit period. Commissions for renewal contracts are
deferred and amortized on a straight-line basis over the related contract
renewal period. Amortization of deferred commissions is included in sales and
marketing expense in the accompanying consolidated statements of operations.
Stock-based Compensation
We measure and recognize compensation expense for stock-based awards granted to
employees and directors using a fair value method, including restricted stock
units ("RSUs") and performance-based restricted stock units ("PRSUs"). For RSUs,
and PRSUs with service and performance conditions, fair value is based on the
closing price of our common stock on the date of grant. For PRSUs with service
and market conditions, fair value is estimated using a Monte-Carlo simulation.
We recognize compensation expense for PRSUs only if it is probable the
performance or market conditions will be met, which is dependent upon our
expectations of whether future specified financial targets will be achieved. The
likelihood of achievement of these targets is assessed at each balance sheet
date. We may prospectively adjust previously recognized compensation expense if
current expectations differ from assessments made in previous periods.
Compensation expense, net of estimated forfeitures, is recognized over the
requisite service period (which is generally the vesting period) on a
straight-line basis for awards with only service conditions and using the
accelerated attribution method for awards with both performance or market and
service conditions. We estimate forfeitures based on our historical experience
and regularly review the estimated forfeiture rate and make changes as factors
affecting the forfeiture rate calculations and assumptions change.
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Capitalized Software Costs
We capitalize the costs associated with software developed or obtained for
internal use, including costs incurred in connection with the development of our
products, when the preliminary project stage is completed, management has
decided to make the project a part of a future offering and the software will be
used to perform the function intended. These capitalized costs include external
direct costs of materials and services consumed in developing or obtaining
internal-use software, personnel and related expenses for employees who are
directly associated with internal-use software projects and, when material,
interest costs incurred during the development. Capitalization of these costs
ceases once the project is substantially complete and the software is ready for
its intended purpose. Costs incurred for upgrades to our products are also
capitalized. Post-configuration training and maintenance costs are expensed as
incurred. Capitalized software costs are amortized to cost of revenue using the
straight-line method over the estimated useful life of the software of typically
three years, commencing when the software is ready for its intended use.
Income Taxes
We use the liability method of accounting for income taxes. Under the liability
method, deferred taxes are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities, using tax rates
expected to be in effect during the years in which the basis differences are
expected to reverse. We record a valuation allowance when it is more likely than
not that some of our net deferred tax assets will not be realized. In
determining the need for a valuation allowance, we consider our projected future
taxable income and future reversals of existing taxable temporary differences.
We have recorded a valuation allowance to reduce our US, UK , and other net
deferred tax assets to zero, because we have determined that it is not more
likely than not that any of our US, UK , and other net deferred tax assets will
be realized based on a history of losses in these jurisdictions. If in the
future we determine that we will be able to realize any of our US, UK , and other
net deferred tax assets, we will make an adjustment to the allowance, which
would increase our income in the period that the determination is made.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1 -
Organization and Summary of Significant Accounting Policies of the Notes to
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q.
Results of Operations
The following table sets forth our results of operations for each of the periods
indicated (in thousands). The period-to-period comparison of financial results
is not necessarily indicative of future results.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue $ 199,498 $ 144,952 $ 533,992 $ 426,929
Cost of revenue 64,503 37,167 164,427 111,049
Gross profit 134,995 107,785 369,565 315,880
Operating expenses:
Sales and marketing 71,850 57,815 192,122 171,011
Research and development 29,665 25,695 82,088 77,778
General and administrative 28,884 20,562 79,229 65,741
Acquisition-related costs 4,852 - 31,756 -
Restructuring 1,362 - 11,095 -
Total operating expenses 136,613 104,072 396,290 314,530
(Loss) income from operations (1,618) 3,713 (26,725) 1,350
Other expense:
Interest expense (19,609) (3,321) (43,329) (9,889)
Other, net 5,817 (1,018) (61) (2,720)
Other expense, net (13,792) (4,339) (43,390) (12,609)Loss before income tax provision (15,410) (626) (70,115) (11,259)
Income tax (provision) benefit (371) (591) 28,572 (2,227)
Net loss $ (15,781) $ (1,217) $ (41,543) $ (13,486)
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The following table sets forth our results of operations as a percentage of total revenue for each of the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 32.3 % 25.6 % 30.8 % 26.0 %
Gross profit 67.7 % 74.4 % 69.2 % 74.0 %
Operating expenses:
Sales and marketing 36.0 % 39.9 % 36.0 % 40.1 %
Research and development 14.9 % 17.7 % 15.4 % 18.2 %
General and administrative 14.5 % 14.2 % 14.8 % 15.4 %
Acquisition-related costs 2.4 % - % 5.9 % - %
Restructuring 0.7 % - % 2.1 % - %
Total operating expenses 68.5 % 71.8 % 74.2 % 73.7 %
(Loss) income from operations (0.8) % 2.6 % (5.0) % 0.3 %
Other expense:
Interest expense (9.8) % (2.3) % (8.1) % (2.3) %
Other, net 2.9 % (0.7) % - % (0.6) %
Other expense, net (6.9) % (3.0) % (8.1) % (2.9) %
Loss before income tax provision (7.7) % (0.4) % (13.1) % (2.6) %
Income tax (provision) benefit (0.2) % (0.4) % 5.4 % (0.5) %
Net loss (7.9) % (0.8) % (7.7) % (3.1) %
The following table sets forth our revenue and key metrics that we use to
evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections, and make strategic decisions:
Metrics
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Revenue $ 199,498 $ 144,952 $ 533,992 $ 426,929
Subscription revenue $ 185,643 $ 137,446 $ 507,281 $ 401,264
Operating loss $ (1,618) $ 3,713 $ (26,725) $ 1,350
Free cash flow $ 25,740 $ 13,057 $ 38,703 $ 18,133
Number of customers 6,229 3,446 6,229 3,446
Revenue increased by $54.5 million or 37.6% for the three months ended September
30, 2020 as compared to the same period in 2019. Revenue increased by $107.1
million or 25.1% for the nine months ended September 30, 2020 as compared to the
same period in 2019. The rate of our revenue increase was impacted by the
acquisition of Saba, the mix and timing of new customer agreements signed and
upsells to existing customers, the success of our focus on subscription revenue
and reducing our professional services business, and fluctuations in foreign
exchange rates.
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The following table sets forth our sources of revenue for each of the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Subscription revenue $ 185,643 $ 137,446 $ 507,281 $ 401,264
Percentage of subscription revenue to total 93.1 % 94.8 % 95.0 % 94.0 %
revenue
Professional services revenue$ 13,855 $ 7,506 $ 26,711 $ 25,665 Percentage of professional services revenue to 6.9 % 5.2 % 5.0 % 6.0 % total revenue Total revenue$ 199,498 $ 144,952 $ 533,992 $ 426,929 Subscription revenue increased by$48.2 million , or 35.1%, for the three months endedSeptember 30, 2020 as compared to the same period in 2019. Subscription revenue increased by$106.0 million , or 26.4%, for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. The increase was attributable to the acquisition of Saba as well as new business, which includes new customers, upsells, cross-sells, and renewals from existing customers. Professional services revenue increased by$6.3 million , or 84.6%, for the three months endedSeptember 30, 2020 and by$1.0 million , or 4.1%, for the nine months endedSeptember 30, 2020 as compared to the same periods in 2019, respectively. The increase of professional services revenue was attributable to the acquisition of Saba. Revenue by geography is generally based on the address of the customer as defined in our master subscription agreement with each customer. The following table sets forth our revenue by geographic area for each of the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (dollars in thousands) United States$ 123,907 $ 94,880 $ 341,210 $ 278,157 Percentage for United States 62.1 % 65.5 % 63.9 % 65.2 % All other countries$ 75,591 $ 50,072 $ 192,782 $ 148,772 Percentage for all other countries 37.9 % 34.5 % 36.1 % 34.8 % Total revenue$ 199,498 $ 144,952 $ 533,992 $ 426,929
Net Cash Provided By Operating Activities and Free Cash Flow
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Net cash provided by operating activities
61,909$ 52,955 Capital expenditures (635) (6,713) (2,910) (15,987) Capitalized software costs (6,772) (4,708) (20,296) (18,835) Free cash flow$ 25,740 $ 13,057 $ 38,703 $ 18,133 Free cash flow margin 12.9 % 9.0 % 7.2 % 4.2 % Net cash provided by operating activities for the three months endedSeptember 30, 2020 and 2019 was$33.1 million and$24.5 million , respectively. For the nine months endedSeptember 30, 2020 and 2019, net cash provided by operating activities was$61.9 million and$53.0 million , respectively. The increase was primarily due to changes in net income adjusted for non-cash items including depreciation and amortization, and the timing of cash receipts from customers as compared to the same periods in 2019, and was partially offset by cash payments for acquisition-related costs and restructuring activities. Free cash flow for the three months endedSeptember 30, 2020 and 2019 was$25.7 million and$13.1 million , respectively, resulting in free cash flow margins of 12.9% and 9.0%. Free cash flows for the nine months endedSeptember 30, 2020 and 2019 was$38.7 million and$18.1 million , respectively, and free cash flow margins were 7.2% and 4.2%. 33 --------------------------------------------------------------------------------
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Cost of revenue $ 64,503 $ 37,167 $ 164,427 $ 111,049
Gross profit $ 134,995 $ 107,785 $ 369,565 $ 315,880
Gross margin 67.7 % 74.4 % 69.2 % 74.0 %
Cost of revenue increased $27.3 million , or 73.5%, for the three months ended
September 30, 2020 . The increase is primarily attributable to the acquisition of
Saba. Cost of revenue increased by $53.4 million , or 48.1%, for the nine months
ended September 30, 2020 as compared to the same period in 2019; primarily due
to the acquisition of Saba, the reallocation of certain internal resources to
customer delivery initiatives, and increased allocation of data center costs
from research and development to cost of revenue.
Sales and Marketing
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Sales and marketing $ 71,850 $ 57,815 $ 192,122 $ 171,011
Percent of revenue 36.0 % 39.9 % 36.0 % 40.1 %
Sales and marketing expenses increased $14.0 million , or 24.3% for the three
months ended September 30, 2020 as compared to the same period in 2019,
primarily due to the acquisition of Saba, which was partially offset by
decreased employee-related expenses as well as decreased marketing expenses from
changes to move our Convergence event to fully remote in response to the ongoing
COVID-19 pandemic.
Sales and marketing expenses increased $21.1 million , or 12.3%, for the nine
months ended September 30, 2020 as compared to the same period in 2019 primarily
due to the acquisition of Saba as described above. This increase was partially
offset by decreased employee-related expenses including changes in stock-based
compensation related to expected attainment of performance conditions, and by
decreased travel, marketing, and overhead costs in response to the ongoing
COVID-19 pandemic.
Research and Development
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Research and development $ 29,665 $ 25,695 $ 82,088 $ 77,778
Percent of revenue 14.9 % 17.7 % 15.4 % 18.2 %
Research and development expenses increased $4.0 million , or 15.5%, for the
three months ended September 30, 2020 as compared to the same period in 2019.
Research and development expenses increased $4.3 million , or 5.5% for the nine
months ended September 30, 2020 as compared to the same period in 2019. The
increases in both periods were attributable to the acquisition of Saba, as
discussed above, and were partially offset by a reduction in spending for
outside consulting services, reduced costs for travel due to COVID-19, and
reallocation of certain internal resources from research and development to
customer delivery initiatives during the first quarter of 2020.
We capitalize a portion of our software development costs related to the
development and enhancements of our products, which are then amortized to cost
of revenue. The timing and levels of resources dedicated to our capitalizable
development and enhancement projects may affect the amount of development costs
expensed in any given period. We capitalized $7.6 million and $6.4 million of
software development costs and amortized $7.1 million and $6.7 million during
the three months ended September 30, 2020 and 2019, respectively. We capitalized
$22.7 million and $22.0 million of software development costs and amortized
$21.0 million and $18.6 million during the nine months ended September 30, 2020
and 2019, respectively.
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General and Administrative
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
General and administrative $ 28,884 $ 20,562 $ 79,229 $ 65,741
Percent of revenue 14.5 % 14.2 % 14.8 % 15.4 %
General and administrative expenses increased by $8.3 million , or 40.5%, for the
three months ended September 30, 2020 as compared to the same period in 2019.
General and administrative expenses increased $13.5 million , or 20.5%, for the
nine months ended September 30, 2020 as compared to the same period in 2019. The
increase in both periods was primarily due to the acquisition of Saba.
Acquisition-Related Costs
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Acquisition-related costs $ 4,852 $ - $ 31,756 $ -
Percent of revenue 2.4 % - % 5.9 % - %
During the three and nine months ended September 30, 2020 we incurred $4.9
million and $31.8 million of costs, respectively, related to the acquisitions of
Saba and Clustree. We expect to incur additional costs related to the
acquisition of Saba during the remainder of 2020.
Restructuring
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in thousands)
Restructuring $ 1,362 $ - $ 11,095 $ -
Percent of revenue 0.7 % - % 2.1 % - %
During the three and nine months ended September 30, 2020 , we incurred $1.4
million and $11.1 million of restructuring costs, respectively, primarily due to
workforce reductions announced as part of our integration plan associated with
the acquisition of Saba. We are evaluating other areas of synergy as part of our
integration planning efforts and expect actions to be substantially complete by
the fourth quarter of 2020 with certain related cash payment obligations
continuing into the first quarter of 2021. For additional information refer to
Note 7 - Restructuring of the Notes to Condensed Consolidated Financial
Statements.
Other Expense
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Interest expense $ (19,609) $ (3,321) $ (43,329) $ (9,889)
Other, net 5,817 (1,018) (61) (2,720)
Total $ (13,792) $ (4,339) $ (43,390) $ (12,609)
Interest expense increased for the three and nine months ended September 30,
2020 as compared to the same periods in 2019, primarily due to additional
interest costs as well as amortization and accretion resulting from the Term
Loan Facility and the modification of our Convertible Notes, (each defined
below), which were executed in April 2020 . Refer to the section below titled
Liquidity and Capital Resources for additional information regarding interest
expense associated with our Term Loan Facility and Convertible Notes.
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Other, net is primarily composed of foreign exchange gains and losses related to
transactions denominated in foreign currencies, foreign exchange gains and
losses related to our intercompany loans and certain cash accounts, and interest
income. The increase in other, net for the three and nine months ended September
30, 2020 as compared to the same periods in 2019 was primarily driven by foreign
exchange gains from fluctuations in exchange rates between the euro and British
pound due to the global nature of our operations, as well as lower interest
income combined with realized losses on the sale of a significant portion of our
investment portfolio during the first quarter of 2020.
Income Tax Benefit (Provision)
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Income tax (provision) benefit $ (371) $ (591) $
28,572
For the three and nine months endedSeptember 30, 2020 , we recorded an income tax provision related to certain foreign and state income taxes. Additionally, for the nine months endedSeptember 30, 2020 , we recorded a benefit attributable to the reversal of$26.7 million of our US federal and state valuation allowance on deferred tax assets that are more likely than not to be realized, in connection with the acquisition of Saba due to the deferred tax liabilities recognized in accounting for the acquisition. Liquidity and Capital Resources AtSeptember 30, 2020 , our principal sources of liquidity were$170.9 million of cash and cash equivalents and$156.7 million of accounts receivable. OnApril 22, 2020 , we acquired Saba for an aggregate purchase price of approximately$1.310 billion , consisting of$1.277 billion in cash and 1,110,352 shares of common stock of the Company. In connection with the acquisition, we incurred$1.0047 billion of additional indebtedness as a senior term loan (the "Term Loan Facility") for a purchase price equal to 97.5% of the principal amount. Principal payments are due quarterly, beginning in the fourth quarter of 2020, at a rate of 0.25% of the principal amount; the remaining outstanding principal balance is due inApril 2027 . Interest is payable on a monthly or quarterly basis at the Company's option. We also entered into a revolving credit facility (the "Revolving Credit Facility") to borrow up to an additional$150.0 million , of which$50.0 million remained available atSeptember 30, 2020 . The available borrowings under the Revolving Credit Facility are limited by indebtedness covenants with the holders of the Convertible Notes (defined below) and drawn letters of credit issued under the Credit Agreement. The Revolving Credit Facility includes a letter of credit sub-facility of up to$30.0 million . For additional information regarding our acquisition of Saba, including the consideration payable and debt arrangements, refer to Note 2 - Business Combinations and Note 3 - Debt of the Notes to Condensed Consolidated Financial Statements. Additionally, in 2017, we issued$300.0 million principal amount of 5.75% senior convertible notes (the "Convertible Notes") for a purchase price equal to 98% of the principal amount, to certain entities affiliated withSilver Lake and LinkedIn. Holders of the Convertible Notes may convert their notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date. OnApril 20, 2020 , we amended the indenture to the Convertible Notes withUS Bank National Association , as trustee (the "Supplemental Indenture"). Upon the completion of the acquisition of Saba onApril 22, 2020 , the Supplemental Indenture became effective, which permitted us to incur additional indebtedness and extended the maturity date of the Convertible Notes fromJuly 1, 2021 toMarch 17, 2023 . In connection with this amendment, the Company paid approximately$3.4 million in consent and other fees to the holders of the Convertible Notes. Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities, access to the Revolving Credit Facility, and existing cash and cash equivalents will provide adequate funds for our ongoing operations, debt service requirements, and general corporate purposes for at least the next twelve months. However, if the ongoing COVID-19 pandemic worsens or is prolonged, our customers may increasingly delay payments or request price concessions, which could adversely impact our operating cash flows. Our future capital requirements will depend on many factors, including our ability to achieve cost synergies from integrating Saba, our rate of revenue growth and collections, the level of our sales and marketing efforts, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, the timing of general and administrative expenses as we grow our administrative infrastructure, and the continuing market acceptance of our products. To the extent that existing cash, cash from operations, and access to our Revolving Credit Facility are not sufficient to fund our future activities, we may need to raise additional funds. In addition, we may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies in the future, which could also require us to seek additional financing or utilize our cash resources. 36 --------------------------------------------------------------------------------
The following table sets forth a summary of our cash flows:
Nine Months Ended September 30,
2020 2019
(in thousands)
Net cash provided by operating activities $ 61,909 $ 52,955
Net cash used in investing activities (1,066,960) (30,763)
Net cash provided by financing activities 965,106 14,073
Our cash flows from operating activities are significantly influenced by our
growth, ability to maintain our contractual billing and collection terms, and
our investments in headcount and infrastructure to support anticipated growth.
Given the seasonality and continued growth of our business, our cash flows from
operations will vary from period to period.
Cash provided by operating activities was $61.9 million for the nine months
ended September 30, 2020 compared to $53.0 million for the same period in 2019.
The increase in operating cash flow was primarily due to changes in net income
adjusted for non-cash items including depreciation and amortization, and the
timing of cash receipts from customers as compared to the same period in 2019,
and was partially offset by cash payments for acquisition-related costs and
restructuring activities.
Our primary investing activities have consisted of acquisitions, investments,
capital expenditures to develop our capitalized software as well as to purchase
software, computer equipment, leasehold improvements, and furniture and fixtures
in support of expanding our infrastructure and workforce.
Cash used in investing activities was $1.067 billion for the nine months ended
September 30, 2020 , compared to cash used in investing activities of $30.8
million for the same period in 2019. The change in cash flows from investing
activities was primarily due to cash paid for the acquisition of Saba.
Cash provided by financing activities was $965.1 million for the nine months
ended September 30, 2020 , compared to cash provided by financing activities of
$14.1 million for the same period in 2019. The increase in financing cash flows
was primarily due to proceeds from debt that we incurred in connection with the
acquisition of Saba, which were partially offset by payments of debt issuance
and other related costs.
Share Repurchase Program
In August 2019 , the board of directors authorized a $150.0 million share
repurchase program (the "2019 Share Repurchase Program"), under which we have
repurchased 416,761 shares of common stock at an average price per share of
$53.64 as of September 30, 2020 . As of September 30, 2020 , $127.6 million was
available for purchase of shares under the 2019 Share Repurchase Program. For
additional information on the 2019 Share Repurchase Program, refer to Note 10 -
Stockholders' Equity of the Notes to Condensed Consolidated Financial
Statements.
Contractual Obligations
Our principal commitments consist of obligations for contractual debt payments,
leases for our office space, software and cloud services, and other contractual
obligations. In April 2020 , we incurred $1.0047 billion of additional
indebtedness in connection with the acquisition of Saba. Principal payments on
this Term Loan Facility are due quarterly, beginning in the fourth quarter of
2020, at a rate of 0.25% of the principal amount; the remaining outstanding
principal balance is due in April 2027 . Refer to Note 3 - Debt for additional
information. Additionally, as part of the acquisition of Saba, we assumed
$48.2 million of contractual commitments-the majority of which related to lease
agreements and software and cloud services. $43.7 million of these commitments
relate to the five-year period following the acquisition, with the remainder
relating to the period thereafter. In March 2020 , we entered into an agreement
with a provider of cloud computing services to provide services over
approximately 7 years. Refer to Note 13 - Commitments and Contingencies for
additional information regarding this agreement.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not have any relationships with other
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, that have been established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. We are therefore not exposed to any
financing, liquidity, market, or credit risk that could arise if we had engaged
in those types of relationships.
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