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 integrateSaba 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 , we acquiredSaba 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 and markets. 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 solutions 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. Our enterprise people development solutions are composed of: •Our Learning solutions, which provide robust, modern learning management software designed to scale with the organization and comprehensively support compliance, knowledge sharing, and employee-driven development training to close skills gaps; •Our Content solution, which provides modern, personalized learning content from our own studios and a variety of quality partners in a streamlined, easy way; •Our Performance solutions, which provide tools to manage goal setting, performance reviews, competency assessments, compensation management, and succession planning; 23 -------------------------------------------------------------------------------- •Our Careers solution, which 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 Recruiting solutions, which help organizations to attract, hire, and onboard the right employees; and •Our HR solution, which provides an aggregated view of 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 comprehensive people development solutions that are 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. Over the last 20 years, we believe we have developed 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. We believe that continued innovation is key to success in expanding our business with existing customers and reaching new customers. We plan to continue to invest in research and development innovation initiatives, such as ourCornerstone Innovation Lab , to develop new products. Retain and Expand Business with Existing Customers. We believe our existing installed base of customers offers a substantial opportunity for growth, and we plan to undertake initiatives to improve our customer retention as well as expand sales of new and existing products into our customer base. •Focus on Customer Success, Retention, and Growth. We believe focusing on our customers' success leads to our own success. We have continued to build on our Customer Success Framework that governs our operating model. We strive to maximize our customer retention rates by continuing to invest in our global support resources and improving upon our delivery model by investing in training and support initiatives to ensure that service requirements are met with strong satisfaction. •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 solutions. With our expanding product portfolio functionality, we believe significant upsell opportunity remains within our existing customer base. Furthermore, we believe the addition of customers acquired from Saba offers a significant cross-sell opportunity for products within our existing portfolio, including but not limited to, Content Anytime. Focus on Growing Recurring Revenue. Our go-to-market strategy involves driving recurring revenue growth. We believe our primary growth drivers are as follows: •Continue to Invest in Direct Sales Initiatives Domestically. We believe the market for people development is large and remains significantly underpenetrated. We plan to continue to invest resources in direct sales initiatives to acquire new customers. We believe concentrating sales resources in markets with higher win rates will provide us the flexibility and return on investment to test new markets for growth. •Continue to Invest in Our International Operations. We believe a substantial opportunity exists to continue to grow sales of our solutions internationally. We intend to continue to grow ourEurope ,Middle East , andAfrica ("EMEA") andAsia-Pacific andJapan ("APJ") operations. For the three months endedMarch 31, 2021 , we generated approximately 39% of our total revenue from regions outside ofthe United States . We expect this percentage to grow in the future. 24 -------------------------------------------------------------------------------- •Continue to Grow and Develop Our Content Anytime Subscriptions. We believe there is a significant market opportunity for developing employees throughout their careers with modern, fresh e-learning content. Our Content Anytime subscription solution provides access to industry leading content which we believe will increase user engagement with 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 solutions. We intend to enter into additional license agreements to continue providing the best content available for our customers. Furthermore, we plan to continue to invest in developing new Content Anytime subscriptions that focus on highly regulated industries, such as the public sector and healthcare, to meet demand from existing and new customers. •Expand the Ecosystem. We have migrated a sizable portion of our implementation services to our partners, and have recently migrated Saba's legacy implementation services to our partners. In recent years, we have also expanded our relationships with various third-party consulting firms to deliver the successful implementation of our solutions and to optimize our customers' use of our solutions during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to facilitate 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 are focused on managing our costs while making smart investments to scale our operations, which we believe will support growth in recurring revenue and our long-term success over time. We have been optimizing our network delivery operations for the long-term by transitioning our data center operations to the public cloud, which we believe will provide us the long-term flexibility to expand our solutions and enter new markets without having to invest in and develop new local data centers. We plan to continue to assess and execute on 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 solutions, enhance our technical capabilities, or otherwise offer growth opportunities. Most recently, inApril 2020 , we acquired Saba, a provider of talent experience solutions. InJanuary 2020 , we acquired Clustree, a developer of a skills engine and skills ontology. We acquired Saba to expand our customer base and we acquired Clustree to accelerate the development of a skills engine. Sources of Revenue and Revenue Recognition. We generate most of our revenue from the sale of our products pursuant to multi-year customer agreements. Customer agreements for our people development solutions 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 annually in advance for subscription fees for multi-year subscriptions. Services are generally billed either upfront on a fixed rate basis, on a time and materials basis, or are included as part of the subscription fee. 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. 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. 25 --------------------------------------------------------------------------------
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 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, including the
progress of domestic and international vaccination efforts as well as the
emergence of new virus variants, 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 have been and may continue to be negatively impacted
by COVID-19. This has resulted in and may continue to result in delayed
purchasing decisions from prospective customers, reduced customer demand,
reduced customer spend (which had an impact on our net annual dollar retention
rate in 2020), and delayed payments, all of which could affect our future
revenues and cash flows. 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. See "Risks Related to COVID-19" in
Item 1A Risk Factors of this Quarterly Report on Form 10-Q for a description of
risks to us due to the COVID-19 pandemic.
Non-GAAP Financial Measures and Other Key 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, 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.
•Net Annual Dollar Retention Rate. We define net annual dollar retention rate 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. This percentage excludes all annual recurring revenue
from new customers added during the fiscal year. Incremental sales during the
fiscal year to customers are included in the calculation solely for customers
that existed as of the first day of the fiscal year. Therefore, it is possible
for our net annual dollar retention rate to exceed 100% in a given fiscal year
if incremental sales to existing customers exceed the churn in annual recurring
revenue from those same customers during that year.
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Prior to 2020, incremental sales were only included to the extent those sales
offset any decrease in annual recurring revenue from the original amount on the
first day of the fiscal year and therefore, the historical net annual dollar
retention rate could never exceed 100%. Beginning in 2020, this ratio includes
all customers. Previously, Cornerstone for Salesforce, Cornerstone PiiQ, Grovo,
and Workpop customers were excluded from the calculation. We believe that our
net annual dollar retention rate is an important metric to measure the long-term
value of customer agreements and our ability to retain and incrementally sell to
our customers.
•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 solutions are 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 either upfront on a fixed rate basis, on a time
and materials basis, or are included as part of the subscription fee. 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,
developed technology software license rights, and technology-related intangible
assets from acquisitions; 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.
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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.
•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 and Integration. Acquisition-related and integration
expenses 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 expenses 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 three months ended March 31, 2021 .
Critical Accounting Policies and Estimates
Our condensed 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 condensed 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.
There have been no material changes to our critical accounting policies and
estimates disclosed in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies and
Estimates" and "Note 2 - Summary of Significant Accounting Policies" in our
Annual Report on Form 10-K for the year ended December 31, 2020 , filed with the
SEC on February 22, 2021 .
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.
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Results of Operations
The following table sets forth our results of operations as a percentage of
total revenue for each of the periods indicated. The period-to-period comparison
of financial results is not necessarily indicative of future results.
Three Months Ended
March 31,
2021 2020
Revenue 100.0 % 100.0 %
Cost of revenue 28.9 % 27.9 %
Gross profit 71.1 % 72.1 %
Operating expenses:
Sales and marketing 33.3 % 36.9 %
Research and development 14.7 % 16.0 %
General and administrative 15.1 % 16.5 %
Acquisition-related and integration 0.7 % 4.5 %
Restructuring 2.9 % - %
Total operating expenses 66.7 % 73.9 %
Income (loss) from operations 4.3 % (1.8) %
Other income (expense):
Interest expense (9.0) % (3.7) %
Other, net (2.3) % (3.6) %
Other expense, net (11.3) % (7.3) %
Loss before income tax provision (7.0) % (9.1) %
Income tax benefit (provision) 1.0 %
(0.1) %
Net loss (6.0) % (9.2) %
Non-GAAP Financial Measures and Other Key Metrics
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:
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Revenue $ 209,273 $ 150,136
Subscription revenue $ 200,584 $ 144,421
Income (loss) from operations $ 9,051 $ (2,739)
Free cash flow $ 69,447 $ (2,372)
Number of customers 6,084 3,522
Revenue increased by $59.1 million or 39.4% for the three months ended March 31,
2021 as compared to the same period in 2020. 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 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
March 31,
2021 2020
(dollars in thousands)
Subscription revenue $ 200,584 $ 144,421
Percentage of subscription revenue to total revenue 95.8 % 96.2 %
Professional services revenue $ 8,689 $ 5,715
Percentage of professional services revenue to total revenue 4.2 % 3.8 %
Total revenue $ 209,273 $ 150,136
Subscription revenue increased by $56.2 million , or 38.9%, for the three months
ended March 31, 2021 as compared to the same period in 2020. The increase was
primarily 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 $3.0 million , or 52.0%, for the three
months ended March 31, 2021 as compared to the same period in 2020. 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
March 31,
2021 2020
(dollars in thousands)
United States $ 127,192 $ 97,918
Percentage for United States 60.8 % 65.2 %
All other countries $ 82,081 $ 52,218 Percentage for all other countries 39.2 % 34.8 % Total revenue
$ 209,273 $ 150,136
Net Cash Provided By Operating Activities and Free Cash Flow
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Net cash provided by operating activities $ 78,111 $ 5,988
Capital expenditures (943) (971)
Capitalized software costs (7,721) (7,389)
Free cash flow $ 69,447 $ (2,372)
Free cash flow margin 33.2 % (1.6) %
Net cash provided by operating activities for the three months ended March 31,
2021 and 2020 was $78.1 million and $6.0 million , respectively. The increase was
primarily due to the timing of cash receipts from customers as a result of
improved day sales outstanding from stronger than expected collections. The
increase was also attributable to changes in net income adjusted for non-cash
items including depreciation and amortization, and timing of disbursements to
vendors as compared to the same period in 2020.
Free cash flow for the three months ended March 31, 2021 and 2020 was $69.4
million and $(2.4) million , respectively, resulting in free cash flow margins of
33.2% and (1.6)%.
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--------------------------------------------------------------------------------Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Cost of revenue $ 60,536 $ 41,924
Gross profit $ 148,737 $ 108,212
Gross margin 71.1 % 72.1 %
Cost of revenue increased $18.6 million , or 44.4%, for the three months ended
March 31, 2021 as compared to the same period in 2020. The increase was
primarily due to the acquisition of Saba, including amortization of acquired
developed technology intangible assets of $7.5 million . The increase was
partially offset by decreased employee-related expenses, stock-based
compensation, and external implementation professional service costs.
Sales and Marketing
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Sales and marketing $ 69,735 $ 55,330
Percent of revenue 33.3 % 36.9 %
Sales and marketing expenses increased $14.4 million , or 26.0% for the three
months ended March 31, 2021 as compared to the same period in 2020. The increase
was primarily due to the acquisition of Saba. The increase was partially offset
by decreased employee-related expenses, decreased travel and entertainment
expenses in response to the ongoing COVID-19 pandemic, and decreased marketing
expenses.
Research and Development
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Research and development $ 30,770 $ 24,085
Percent of revenue 14.7 % 16.0 %
Research and development expenses increased $6.7 million , or 27.8%, for the
three months ended March 31, 2021 as compared to the same period in 2020. The
increase was primarily attributable to the acquisition of Saba.
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 $8.6 million and $7.6 million of
software development costs and amortized $7.0 million and $7.2 million during
the three months ended March 31, 2021 and 2020, respectively.
General and Administrative
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
General and administrative $ 31,562 $ 24,725
Percent of revenue 15.1 % 16.5 %
General and administrative expenses increased by $6.8 million , or 27.7%, for the
three months ended March 31, 2021 as compared to the same period in 2020. The
increase was primarily due to the acquisition of Saba, as well as increases in
employee-related expenses and professional services expenses.
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--------------------------------------------------------------------------------Acquisition-Related and Integration
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Acquisition-related and integration $ 1,530 $ 6,811
Percent of revenue 0.7 % 4.5 %
Acquisition-related and integration expenses decreased by $5.3 million or 78%
for the three months ended March 31, 2021 as compared to the same period in
2020. The decrease was primarily due to reduced professional services directly
associated with the acquisition of Saba as compared to the first quarter of
2020. Acquisition-related and integration expenses 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. We expect to continue to incur additional costs related to the
integration of Saba during 2021.
Restructuring
Three Months Ended
March 31,
2021 2020
(dollars in thousands)
Restructuring $ 6,089 $ -
Percent of revenue 2.9 % - %
During the three months ended March 31, 2021 , we incurred $6.1 million of
restructuring costs, primarily due to workforce reductions as part of our
integration plan associated with the acquisition of Saba. We continue to
evaluate other areas for synergies as part of our integration planning efforts
in 2021. During the fourth quarter of 2020, we commenced the process to exit
certain redundant facilities, the financial impact of which will continue in
2021. For additional information refer to Note 7 - Restructuring of the Notes to
Condensed Consolidated Financial Statements.
Other Income (Expense)
Three Months Ended
March 31,
2021 2020
(in thousands)
Interest expense $ (18,770) $ (5,501)
Other, net (4,904) (5,364)
Total $ (23,674) $ (10,865)
Interest expense increased for the three months ended March 31, 2021 as compared
to the same period in 2020, 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. On April 23, 2021 , we refinanced our Term
Loan Facility. For additional information refer to Note 17 - Subsequent Events
of the Notes to Condensed Consolidated Financial Statements.
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 decrease in other, net for the three months ended March 31, 2021 as
compared to the same period in 2020 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. The
decrease was partially offset by a write-down of $6.9 million related to a
non-marketable investment.
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--------------------------------------------------------------------------------Income Tax Benefit (Provision)
Three Months Ended
March 31,
2021 2020
(in thousands)
Income tax benefit (provision) $ 2,171 $ (171)
For the three months ended March 31, 2021 , we recorded an income tax benefit
related to certain foreign and state income taxes.
Liquidity and Capital Resources
At March 31, 2021 , our principal sources of liquidity were $128.9 million of
cash and cash equivalents and $137.2 million of accounts receivable, compared to
$153.2 million of cash and cash equivalents and $221.5 million of accounts
receivable at December 31, 2020 . On April 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 our common stock. 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 at a rate of 0.25% of the
original principal amount; the remaining outstanding principal balance is due in
April 2027 . Interest is payable on a monthly or quarterly basis at our option.
We also entered into a revolving credit facility (the "Revolving Credit
Facility") to borrow up to an additional $150.0 million , of which $150.0 million
and $102.5 million remained available at March 31, 2021 and December 31, 2020 ,
respectively. The available borrowings under the Revolving Credit Facility are
limited by indebtedness covenants with the holders of the Convertible Notes
(defined below) and 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 the related debt arrangements and
subsequent refinancing, refer to Note 2 - Business Combinations, Note 3 - Debt,
and Note 17 - Subsequent Events 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 with Silver Lake (a
principal owner of Cornerstone) 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. On April 20,
2020 , we amended the indenture to the Convertible Notes with US Bank National
Association , as trustee (the "Supplemental Indenture"). Upon the completion of
the acquisition of Saba on April 22, 2020 , the Supplemental Indenture became
effective, which permitted us to incur additional indebtedness and extended the
maturity date of the Convertible Notes from July 1, 2021 to March 17, 2023 . In
connection with this amendment, we paid approximately $3.4 million in consent
and other fees to the holders of the Convertible Notes.
Our principal commitments consist of obligations for contractual debt payments,
leases for our office space, software and cloud services, and other contractual
obligations. In March 2020 , we entered into an agreement with a provider of
cloud computing services to provide services over approximately seven years.
Refer to Note 13 - Commitments and Contingencies of the Notes to Condensed
Consolidated Financial Statements for additional information regarding this
agreement. As part of the acquisition of Saba in April 2020 , 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.
Based on our current level of operations and anticipated growth, we believe our
future cash flows from operating activities, existing cash and cash equivalents,
and access to the Revolving Credit Facility 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 our cash from operations, existing cash and cash
equivalents, 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.
33
--------------------------------------------------------------------------------The following table sets forth a summary of our cash flows:
Three Months Ended
March 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 78,111 Net cash (used in) provided by investing activities (8,664)
224,755
Net cash (used in) provided by financing activities (95,001)
10,130
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$78.1 million for the three months endedMarch 31, 2021 compared to$6.0 million for the same period in 2020. The increase in operating cash flows was primarily due to timing of cash receipts from customers as a result of improved day sales outstanding from stronger than expected collections. The increase was also attributable to changes in net income adjusted for non-cash items including depreciation and amortization, and timing of disbursements to vendors as compared to the same period in 2020. 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$8.7 million for the three months endedMarch 31, 2021 , compared to cash provided by investing activities of$224.8 million for the same period in 2020. The change in investing cash flows was primarily due to an increase in maturities and sales of investments in the same period of 2020, the proceeds from which were used to partially fund the acquisition of Saba onApril 22, 2020 . Cash used in financing activities was$95.0 million for the three months endedMarch 31, 2021 , compared to cash provided by financing activities of$10.1 million for the same period in 2020. The decrease in financing cash flows was primarily due to voluntary prepayments of our Term Loan Facility in the first quarter of 2021. Share Repurchase Program InAugust 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 ofMarch 31, 2021 . We did not repurchase any of our shares during the three months endedMarch 31, 2021 and 2020. As ofMarch 31, 2021 ,$127.6 million was available for repurchase 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. 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. ITEM 3.Quantitative and Qualitative Disclosures About Market Risk We have operations inthe United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, inflation, and counterparty risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. The ongoing COVID-19 pandemic has resulted in negative impacts on global economies and financial markets, which may increase our foreign currency exchange risk and interest rate risk. For further discussion of the potential impacts of the COVID-19 pandemic on our business, operating results, and financial condition, refer to "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by principally collecting payment from our customers in advance and setting credit limits as we deem appropriate. In addition, our investment strategy has been to invest in financial instruments, including corporate bonds, US treasury securities, agency securities, commercial paper, certificates of deposit, asset-backed securities, and money market funds backed byUnited States Treasury Bills within the guidelines established under our investment policy. We also make strategic investments in privately-held companies in the development stage. 34 -------------------------------------------------------------------------------- Interest Rate Risk AtMarch 31, 2021 , we had cash and cash equivalents of$128.9 million , compared to$153.2 million atDecember 31, 2020 . We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe these cash equivalents do not contain excessive risk, we cannot guarantee that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot guarantee that we will not experience losses on these deposits. AtMarch 31, 2021 , we had$849.7 million principal outstanding under our Term Loan Facility, compared to$952.2 million atDecember 31, 2020 . Our Term Loan Facility bears interest at a variable rate. As a result, we are exposed to market risk associated with the variable interest rate payments on these borrowings. A hypothetical immediate increase of 100 basis points in interest rates would result in an increase of approximately$2.1 million in quarterly interest payments, compared to$2.4 million atDecember 31, 2020 . We use interest rate swap contracts to manage our exposure to fluctuations in interest rates related to our Term Loan Facility. We had two interest rate swap contracts outstanding atMarch 31, 2021 . These instruments effectively cap a portion of our interest rate exposure by converting$596.7 million of our variable rate debt to a fixed interest rate. A hypothetical immediate increase of 100 basis points in interest rates would result in an increase of approximately$12.7 million in the fair value of our interest rate swap contracts, compared to$14.3 million atDecember 31, 2020 . For additional information regarding our interest rate swap contracts, refer to Note 9 - Fair Value of Financial Instruments of the Notes to Condensed Consolidated Financial Statements. OnApril 23, 2021 , we refinanced our Term Loan Facility. For additional information refer to Note 17 - Subsequent Events of the Notes to Condensed Consolidated Financial Statements. AtMarch 31, 2021 andDecember 31, 2020 , we had no marketable investments. The primary objectives of our marketable investment activities are the preservation of capital, the fulfillment of liquidity needs, and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. We liquidated a significant portion of our investment portfolio during the first quarter of 2020 to partially fund the acquisition of Saba; we liquidated the remainder of our investment portfolio during the second quarter of 2020. We, therefore, do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates on interest-bearing investments. Foreign Currency Risk We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the US dollar, primarily euros and British pounds. Increases and decreases in our foreign-denominated revenue from movements in foreign exchange rates are often partially offset by the corresponding decreases or increases in our foreign-denominated operating expenses. Due to our legal structure, revenue and operating expenses denominated in currencies other than the US dollar primarily flow through subsidiaries with functional currencies of the British pound and euro. Our other income (expense) is also impacted by the remeasurement of US dollar denominated intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, and accounts payable denominated in foreign currencies. As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations can increase the costs of our international expansion. The effect of a hypothetical immediate 10% adverse change in foreign exchange rates on foreign-denominated accounts atMarch 31, 2021 andDecember 31, 2020 , including our intercompany loans with our subsidiaries, would result in a foreign currency loss of approximately$12.3 million and$4.7 million , respectively. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations. Counterparty Risk Our financial statements are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We are closely tracking counterparty risk and we will continue to attempt to mitigate this risk through credit monitoring procedures. 35
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