UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number: 001-35098
______________________________
Cornerstone OnDemand, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-4068197
(I.R.S. Employer
Identification Number)
1601 Cloverfield Blvd.
Suite 620 South
Santa Monica, California 90404
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (310) 752-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Name of each exchange on which registered
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
(Nasdaq Global Select Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”). Yes ¨
No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ý
No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ý
No ¨
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
ý
¨
Accelerated filer
Smaller reporting company
Emerging growth company
¨
¨
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No ý
The aggregate market value of voting and non-voting common stock equity held by non-affiliates of the registrant, as of June 30, 2018 , the last day of the
registrant’s most recently completed second fiscal quarter, was $1,303,889,877 (based on the closing price for shares of the registrant’s common stock as reported
by the Nasdaq Global Select Market on June 30, 2018).
On February 20, 2019 , 59,100,210 shares of the registrant’s common stock, $0.0001 par value, were outstanding.
Portions of the information called for by Part III of this Form 10-K are hereby incorporated by reference from the Definitive Proxy Statement for the registrant’s
annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018 .
DOCUMENTS INCORPORATED BY REFERENCE
CORNERSTONE ONDEMAND, INC.
2018 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Summary 10-K
Signatures
PART IV
TRADEMARKS
Page No.
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© Copyright 2019 Cornerstone OnDemand, Inc. All rights reserved. “Cornerstone,” “Cornerstone OnDemand,” the Cornerstone OnDemand, Inc. logo, “CyberU” and other
trademarks or service marks of Cornerstone OnDemand, Inc. appearing in this Annual Report on Form 10-K are the property of Cornerstone OnDemand, Inc. Trade names,
trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective holders and should be treated as such.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements
regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new clients to enter into subscriptions for our
products; our ability to service those clients effectively and induce them to renew and upgrade their deployments of our products; 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 accurately forecast revenue and
appropriately plan our expenses; market acceptance of enhanced products; alternate ways of addressing talent management needs or new technologies generally
by us and our competitors; continued acceptance of SaaS as an effective method for delivering human capital management products and other business
management products; 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; our ability to exploit Big Data to drive increased demand for our products; events in
the markets for our products and alternatives to our products, as well as in the United States and global markets generally; future regulatory, judicial and
legislative changes in our industry; our ability to successfully integrate our operations with those of recently acquired companies; 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 Annual Report on Form 10-K 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 I, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update the
forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.
Item 1.
Overview
Business
Cornerstone OnDemand, Inc. was incorporated on May 24, 1999 in the state of Delaware and began its principal operations in November 1999. Unless the
context requires otherwise, the words “Cornerstone,” “we,” “Company,” “us” and “our” refer to Cornerstone 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 are a global human capital management leader with a core belief that companies thrive when they help their employees to realize their potential.
Putting this belief into practice, we offer solutions to help companies strategically manage and continuously develop their talent throughout the entire employee
lifecycle. Featuring comprehensive recruiting, personalized learning, development-driven performance management, and holistic HR planning, our human capital
management platform is successfully used by more than 3,535 global clients of all sizes, spanning more than 40 million users across 192 countries and 43
languages.
We work with clients across all geographies, verticals and market segments. Our clients 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 platform domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and
South America, Europe and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies and global system integrators.
Our enterprise human capital management platform is composed of four product suites:
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Our Recruiting suite helps organizations to attract, hire, and onboard the right employees;
Our Learning suite 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 content offering delivers
fresh, modern content, fueling employee curiosity and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback,
compensation management and succession planning; and
Our HR suite provides an aggregated view of all employee data with workforce planning, self-service management, and compliance reporting capabilities
resulting in more accurate data.
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The Market
The Human Capital Management (“HCM”) technology market is one of the largest in the software industry. According to an International Data
Corporation (“IDC”) market forecast report, titled “Worldwide Human Capital Management and Payroll Applications Forecast, 2017-2021,” published in June
2017, the global market for Human Capital Management and Payroll Applications in 2018 was predicted to be $19.7 billion, of which $15 billion is for HCM
applications. According to IDC, the HCM application market in particular is expected to grow to $19.7 billion by 2021, representing a 9.0% CAGR, and includes
payroll, HR, talent acquisition, workforce management, document management, performance management, compensation management, and succession planning.
The global corporate training market is also one of the largest in the software industry. According to a Training Industry, Inc. report, titled “The Anatomy
of the Modern Learning System,” global spend on corporate training initiatives was estimated to be $362 billion in 2017, of which approximately $25 billion was
spent on third-party external training courses in North America.
Our Human Capital Management Platform
Our human capital management platform is a comprehensive Software-as-a-Service (“SaaS”) solution that consists of four integrated suites to help
organizations manage their recruiting, learning, performance and HR administration processes. These suites are supplemented by state-of-the-art analytics and
reporting as well as a number of cross-product tools for employee profile management and e-learning content aggregation and delivery. We believe that our human
capital management platform delivers the following benefits:
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Comprehensive Functionality. Our platform provides a comprehensive approach to human capital management by offering products to address all stages
of the employee lifecycle: recruiting, onboarding, learning, performance, succession, compensation, enterprise social collaboration and HR administration
processes. Employees use our platform throughout their careers to engage in performance processes such as goal management, performance reviews,
continuous feedback, competency assessments and compensatory reviews; to complete job-specific and compliance-related training; to evaluate potential
career changes, development plans or succession processes; and to connect and collaborate with co-workers by leveraging enterprise social networking
tools. Employee managers and HR managers use our platform to perform their human capital administrative responsibilities effectively throughout their
employees’ careers. We believe our comprehensive, unified platform enables our clients to align their human capital management processes and practices
with their broader strategic goals.
Flexible and Highly Configurable. Our platform offers substantial configurability that allows our clients to match the use of our software with their
specific business processes and workflows. We also provide web services to facilitate the importing and exporting of data to and from other client
systems, such as enterprise resource planning and human resource information system platforms. Our clients can configure various features, functions and
work flows in our platform by business unit, division, department, region, location, job position, pay grade, cost center, or self-defined organizational unit.
Our clients are able to adjust features to configure specific processes, such as performance review workflows or training approvals, to match their existing
or desired practices. This high level of configurability means that custom coding projects generally are not required to meet the diverse needs of our
clients.
Easy-to-Use, Personalized User Interface. Our platform employs an intuitive user interface and may be personalized for the end user, typically based on
position, division, pay grade, location, manager and particular use of the solution. This ease of use limits the need for end-user training, which we believe
increases user adoption rates and usage.
Software-as-a-Service Solution Lowers the Total Cost of Ownership and Speeds Delivery. Our platform is accessible through a standard web browser and
does not require the large investments in implementation time, personnel, hardware and consulting that are typical of hosted or on-premise solutions. With
a single code base to maintain, we are able to release improved functionality on a quarterly basis. This is a more rapid pace than most hosted or on-
premise solution providers can afford to deliver.
Scalable to Meet the Needs of Organizations. Our platform has been used by Fortune 100 companies since 2001. While the complex needs of these global
corporations required us to build a solution that can scale to support large, geographically-distributed employee bases, our platform is capable of
supporting deployments of various sizes. Today we service 40 multi-national corporations with over 150,000 active users each. Our largest deployment is
for over 600,000 users.
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Insights and Predictive Analysis. Our platform leverages technology powered by a highly refined machine learning system for human capital
management. We also offer a large network of shared talent data. This enables leaders to answer critical questions about how to better hire, manage,
retain, and reward talent with dashboards that can be drilled down to individual employees. Enhanced by additional Cornerstone suite usage, these insights
allow organizations to manage their human capital proactively and be strategic with initiatives that affect thousands of employees across many groups and
locations.
Continued Innovation through Collaborative Product Development. We work collaboratively with our clients on an ongoing basis to develop almost
every part of our platform. The vast majority of our thousands of software features were designed using feedback from existing and prospective clients
based on their specific functional requests.
Focus on Data Privacy. We have designed our platform to meet certain rigorous industry and jurisdictional security standards and to help assure clients
that their sensitive data is protected across the system. We ensure high levels of security by logically segregating each client’s data from the data of other
clients and by enforcing a consistent approach to roles and rights within the system. These restrictions limit system access to only those individuals
authorized by our clients. We also employ multiple standard technologies, protocols and processes to monitor, test and certify the security of our
infrastructure continuously.
Our Human Capital Management Solutions
Our comprehensive human capital management platform is a collection of four integrated suites to help organizations manage key phases of the employee
life cycle. To complement our platform, we offer a number of cross-product tools for analytics and reporting, employee profile management and e-learning content
aggregation.
Cornerstone Recruiting
Cornerstone Recruiting. Our applicant tracking product supports the modern ways that organizations attract and hire new employees. From easily tracking
applicants through the hiring process, to managing interviews and tracking feedback, our solution simplifies processes to save recruiters and hiring managers time.
With mobile-friendly, customizable career sites, organizations can showcase their unique employer brand to attract top talent.
Cornerstone Onboarding. Our onboarding product enables clients to tailor resources based on a new hire's specific position - avoiding wasted effort and
enabling new hires to focus on meaningful activities that accelerate productivity to help new employees acclimate quickly by providing a personalized, modern,
onboarding experience that equips them with the right resources. The onboarding product complements the recruiting product by providing a seamless and
engaging experience for the employee, while reducing administrative burden and promoting collaboration across departments.
Our Recruiting suite is utilized by approximately 23% of our total base of 3,535 clients.
Cornerstone Learning
Cornerstone Learning. Our learning product helps clients deliver mobile-ready, enterprise-class training and development programs. It links employee
development to other parts of the talent management lifecycle, including onboarding, performance management and succession planning. The learning product
supports all forms of learning, including online, instructor-led and collaborative and on-the-job learning, as well as robust reporting and embedded predictive
analytics. With tens of thousands of online training titles from dozens of global content providers accessible through our new engaging Learning Experience
Platform, clients reduce overall training expenses, while quickly transforming their learning programs with modern, curated content. The access to personalized
content delivered at scale with Cornerstone’s machine learning technology builds a culture of continuous learning, boosting employee engagement and retention.
Cornerstone Extended Enterprise. Our extended enterprise product helps clients provide training and enablement to their customers, vendors and
distributors. The extended enterprise product empowers clients to develop new profit centers, increase sales, cut support costs and boost channel productivity.
Cornerstone for Salesforce. Our Cornerstone for Salesforce product is an enablement solution for employees, partners and customers developed natively on
the Salesforce.com platform. Cornerstone for Salesforce leverages clients’ Salesforce investments across all products to build high-performance sales and service
teams with triggered, just-in-time training, as well as leverage learning to engage and enable customers and partners.
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Cornerstone Content. Our Cornerstone Content solutions enable organizations to deliver fresh, modern content to their workforce. We have entered into
license agreements with a wide range of vendors that provide off-the-shelf e-learning content and custom learning content development services. Through this
network, we are able to offer an extensive library of online training content to our clients through our Learning Experience Platform. Content Anytime is our
proprietary, foundational e-learning content subscription which integrates seamlessly into Cornerstone Learning. The subscription provides access to pre-curated
packages around a variety of popular topics. We plan to expand our Content Anytime offering as part of our strategic initiative to grow our content sales.
Our Learning suite is utilized by approximately 87% of our total base of 3,535 clients.
Cornerstone Performance
Cornerstone Performance. Our performance management product allows clients to direct and measure performance at the individual, departmental and
organizational levels through ongoing competency management, organizational goal setting, performance appraisal, development planning and feedback.
Performance data can also be used by the learning product offering to set training priorities and to make informed workforce planning decisions.
Cornerstone Succession. Our succession product allows clients to proactively plan for organizational change and talent mobility. The succession product
serves both the employee looking for career advancement and management team members planning for the future. Employees can share career preferences and
discover development opportunities. Management team members can utilize tools provided to identify skill gaps, implement development plans and create talent
pools for future needs.
Cornerstone Compensation. Our compensation product allows clients to reward their employees for hard work in direct relation to performance. The
compensation product enables clients to make more informed decisions about the allocation of base pay, bonus and equity awards.
Our Performance suite is utilized by approximately 52% of our total base of 3,535 clients.
Cornerstone HR
Cornerstone HR. Our HR product offers a modern interface for centralized HR administration across an organization’s disparate systems. Acting as a source
of truth for core employee and talent data, the system supports employee self-service, absence management, organization management and records administration.
Cornerstone View. Our view product allows clients to access HR data across our human capital management products. The view product enables
organizations to utilize interactive data visualization tools to discover their top performers and future leaders, proactively answer workforce questions, and achieve
business results.
Cornerstone Benchmark. Our benchmark product enables organizations to compare internal employee data with peers in external companies or across
divisions, subdivisions, subsidiaries, or regions within their own organization. Both options allow the organization to visualize how they compare against custom
and internal business segments across a variety of metrics.
Our HR suite is utilized by approximately 5% of our total base of 3,535 clients.
Our Strategy
Our goal is to empower people, organizations and communities to realize their potential with a comprehensive human capital management platform that is
built to last. Our growth strategy since inception has been deliberate and focused on long-term success. This has allowed us to weather periods of economic turmoil
and significant changes in the markets we serve 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 twenty years a deep understanding of the
human capital management challenges our clients face. We continually collaborate with our clients to build extensive functionality that addresses their specific
needs and requests. We plan to continue to leverage our expertise in human capital management and client relationships to develop new products, features and
functionality that will enhance our platform and expand our addressable market.
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Retain and Expand Business with Existing Clients. We believe our existing installed base of clients offers a substantial opportunity for growth.
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Focus on Client Success, Retention and Growth. We believe focusing on our clients’ success will lead to our own success. We have developed a Client
Success Framework that governs our operating model. Since 2002, we have averaged annual gross dollar retention rates of approximately 95% . We strive
to maintain our strong retention rates by continuing to provide our clients with high levels of service, support and increasing functionality.
Sell Additional Products to Existing Clients. We believe there is a significant growth opportunity in selling additional functionality to our existing clients.
Many clients have added functionality subsequent to their initial deployments as they recognize the benefits of our unified platform. As a result,
approximately 71% of our clients today utilize two or more products and approximately 41% utilize three or more products. With our expanding product
portfolio functionality, we believe significant upsell opportunity remains within our existing client base.
Focus on Growing Recurring Revenue. Beginning in 2018, we focused our go-to-market capabilities on driving recurring revenue growth. We believe our
primary growth drivers are as follows:
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Invest in Direct Sales in North America. We believe that the market for human capital management is large and remains significantly underpenetrated. In
particular, Recruiting and Content provide an opportunity to increase our recurring sales to both new and existing clients. Additionally, we believe the
Small and Medium-sized Business (SMB) market represents a very large and underpenetrated opportunity.
Significantly Grow Our International Operation. We believe a substantial opportunity exists to continue to grow sales of our platform internationally. We
intend to grow our Europe, Middle-East and Africa ("EMEA") and Asia-Pacific and Japan ("APJ") operations. As of December 31, 2018 , we had 827
clients in EMEA and 198 clients in APJ.
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 platform. 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 clients directly
in our human capital management platform. We intend to enter into additional license agreements to continue providing the best content available for our
clients.
Expand the Ecosystem. During 2018, we migrated a sizable portion of our implementation services to our partners. We have also expanded in recent years
our relationships with various third-party consulting firms to deliver the successful implementation of our platform and to optimize our clients’ use of our
platform during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to ensure successful
delivery by our partners and continued high client satisfaction. We believe we have a significant opportunity to leverage these third-parties interested in
building or expanding their businesses to increase our market penetration.
Increase Operating Income and Free Cash Flow. In November 2017, we announced a strategic plan designed to better position us for long-term growth
and increase shareholder value. We believe managing our operating costs while making smart investments in scaling our middle and back-office operations to
support recurring revenue growth is critical to our long-term success. We intend to focus on operational excellence initiatives that drive increases in operating
income and free cash flow.
Acquisitions. We may acquire or invest in additional businesses, products or technologies that we believe will complement or expand our platform, enhance
our technical capabilities or otherwise offer growth opportunities. Most recently, in November 2018, we acquired Grovo Learning, Inc., a leading provider of
Microlearning® content, and in September 2018, we acquired Workpop Inc., a web and mobile solution for candidates and hiring managers in service-based
industries. We completed these transactions to support our strategic initiatives to enhance the Recruiting and Content areas of our platform.
Global Client Success
We are dedicated to the success of our clients. We have developed a Client Success Framework which governs our operational model, the structure of our
Client Management teams and the types of services necessary at each stage of a client’s lifecycle.
Within this framework, we have developed the following roles with primary responsibility to our clients at various levels of their organizations:
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Client Executives who interact with executive-level sponsors and human resources executives at a client and are focused on the overall relationship,
including sales to existing clients;
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Client Success Managers who work directly with executive-level sponsors and human resources executives at our clients to maximize the value of their
investment in our human capital management platform; and
Product Specialists who interact with client administrators and are focused on features and functions of our human capital management platform.
We believe this life cycle driven approach to client support and client success has contributed directly to our high client retention rate and high rankings for
client satisfaction in independent research studies.
We offer support in multiple languages, at multiple levels and through multiple channels, including global support coverage available 24 hours a day, seven
days a week. We use our own enterprise social collaboration product to provide our clients and distributors with a virtual community to collaborate on product
design, release management and best practices.
We monitor client satisfaction internally as part of formalized programs and at regular intervals during the client lifecycle, including during the transition
from sales to implementation, at the completion of a consulting project and daily based on interactions with our client-facing teams.
Technology, Operations and Research and Development
Our human capital management platform is designed and deployed with an on-demand, multi-tenant, and multi-user architecture which our clients access via
a standard web browser. It currently uses a single code base, with all of our clients running on the current version of our software. We employ a modularized
architecture to balance the load of clients on separate sub-environments, as well as to provide a flexible method for scalability without impacting other parts of the
current environment. This architecture allows us to provide the high levels of uptime required by our clients. Our existing infrastructure has been designed with
sufficient capacity to meet our current and estimated near term future needs. Global uptime in 2018 was 99.986%.
We physically host our human capital management platform for our clients in secure third-party data center facilities located in the United States, the United
Kingdom, France, and Germany. These facilities provide physical security, including biometric access controls and systems security, redundant power and
environmental controls.
We are continuing to build out services and functionality in the public cloud with a view to migrating more software to the public cloud over time. This
strategy provides us flexibility to service customers in new and emerging regions and scale our deployment capabilities as we continue moving from a monolithic
to a microservices architecture. We maintain the same or higher standards of security and compliance with our public cloud providers as we do in our leased
facilities.
Our ability to compete depends largely on our continuous commitment to product development and ability to rapidly introduce new products, technologies,
features, and functionality. The responsibilities of our research and development organization include product management, product development, quality
assurance, IT security, and technology operations. Our research and development organization is global, with major engineering centers in the United States, Israel,
New Zealand, and India.
Sales and Marketing
Sales
We sell our software, content and services both directly through our sales force and indirectly through our domestic and international network of distributors.
We currently service clients in a wide range of industries, including, among others business services, financial services, healthcare, pharmaceuticals, insurance,
manufacturing, retail and high technology. We have a number of direct sales teams organized by market segment, industry vertical, and geographic regions such as
the Americas, EMEA, and Asia-Pacific and Japan.
Our direct sales team is supported by product specialists who provide technical and product expertise to facilitate the sales process. Our sales enablement
professionals provide on-boarding and ongoing professional development for the sales professionals to increase their effectiveness at selling in the field. We also
maintain a separate team of client executives responsible for renewals and up-sales to existing clients.
Marketing
We manage global demand generation programs, develop sales pipelines and enhance brand awareness through our marketing initiatives. Our marketing
programs target HR executives, technology professionals and senior business leaders. Our principal marketing initiatives include:
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Demand Generation. Our demand generation activities include lead generation through email and direct mail campaigns, participation in industry events,
securing event speaking opportunities and online marketing, including both SEM and organic SEO online marketing.
Corporate Marketing. We market to our clients by leveraging product marketing, client success stories, thought leadership content and brand awareness
advertising campaigns. Additionally, we host regional client user group meetings and we also co-market with our strategic distributors, including joint
press announcements and demand generation activities.
• Marketing Communications. We undertake media relations, corporate communications, industry analyst relations activities, client advocacy and social
media outreach.
Competition
The market for human capital management software is highly competitive, rapidly evolving and fragmented. This market is subject to changing technology,
shifting client needs and frequent introductions of new products and services.
Most of our sales efforts are competitive, often involving requests for proposals. We compete primarily on the basis of providing a highly configurable,
comprehensive, fully unified platform for human capital management as opposed to specific service offerings.
In the applicant tracking systems segment, which our Recruiting suite offerings serve, our principal competitors include companies such as Oracle
Corporation, International Business Machines Corporation and Saba Software, Inc. (Lumesse). In the learning management systems segment, which our Learning
suite offerings each serve, our principal competitors include companies such as Oracle Corporation, Saba Software, Inc., SAP America, Inc. and SkillSoft Corp. In
the performance management systems segment, which our Performance suite offerings each serve, our principal competitors include companies such as Saba
Software, Inc., Talentsoft SA, Oracle Corporation, Peoplefluent, Inc. and SAP America, Inc. These vendors are, like us, largely SaaS providers. We compete in
these segments primarily on the basis of:
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the level of integration of our product offerings within our human capital management platform;
the breadth and depth of our product functionality;
the flexibility and configurability of our product offerings to meet the changing content and workflow requirements of our clients’ business units;
the quality of our service and focus on client success;
our ability to provide scalability and flexibility for large and complex global deployments; and
the ease of use of our product offerings and overall user experience.
In addition, we occasionally compete with custom-built software that is designed to support the needs of a single organization, as well as with third-party
talent and human resource application providers that focus on specific aspects of human capital management.
Many of our competitors and potential competitors have greater name recognition, longer operating histories and larger marketing budgets than we do. For
additional information, see “ Risk Factors—Risks Related to Our Business and Industry—The market in which we participate is intensely competitive and if we do
not compete effectively, our operating results could be harmed ” and “ Risk Factors—Mergers of or other strategic transactions by our competitors could weaken
our competitive position or reduce our revenue.”
Proprietary Rights
To safeguard our proprietary and intellectual property rights, we rely upon a combination of patent, copyright, trade secret and trademark laws in the United
States and in other jurisdictions and on contractual restrictions. We have confidentiality and license agreements with employees, contractors, clients, distributors
and other third parties, which limit access to and use of our proprietary information and software.
Though we rely in part upon these legal and contractual protections, we believe that factors such as the skills and ingenuity of our employees, creation of new
suites, features and functionality, collaboration with our clients and frequent enhancements to our platform are larger contributors to our success in the
marketplace.
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Government Contracts
Many of our contracts with government agencies are subject to termination at the election of the government agency. While our government contracts
generally do not provide for renegotiation of fees at the election of the government, it is possible that the government agency could request, and that we could
under certain circumstances agree to, the renegotiation of the payments otherwise payable under such contracts. However, we have not in the past renegotiated
significant payment terms under our government contracts. For additional information, see “ Risk Factors-Our sales to government entities are subject to a number
of additional challenges and risks.”
Seasonality
Our sales are seasonal in nature. We sign a higher percentage of agreements with new clients, as well as renewal agreements with existing clients, in the
fourth quarter of each year. In addition, within a given quarter, we sign a significant portion of these agreements during the last month, and often the last two
weeks, of that quarter. Our agreements generally come up for renewal at the same time of the year they were originally signed, which further amplifies the seasonal
nature of our sales.
We believe this seasonality is driven by several factors, most notably the tendency of our clients’ procurement departments to purchase technology at the end
of a quarter or calendar year, possibly in order to use up their available quarterly or annual funding allocations.
Employees
At December 31, 2018 , we had 1,953 employees. None of our employees are covered by a collective bargaining agreement and we have never experienced a
strike or similar work stoppage. We consider our relations with our employees to be strong.
The Cornerstone OnDemand Foundation
To demonstrate our commitment to empowering people and communities, we helped form the Cornerstone OnDemand Foundation, or the Foundation, in
2010. The Foundation seeks to empower communities in the United States and internationally by increasing the impact of the non-profit sector through the
utilization of our human capital management platform and capacity building programs.
The Foundation focuses its efforts on the areas of education, workforce development and disaster relief. We have enlisted the help of our employees, clients
and distributors to support the Foundation in its efforts. The Foundation is designed to be self-sustaining over time through a variety of ongoing funding streams,
such as donations, sponsorships and distribution fees.
Available Information
Our Internet address is www.cornerstoneondemand.com and our investor relations website is located at http://investors.cornerstoneondemand.com. We make
available free of charge through our investor relations website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after we electronically file such materials with, or furnish them to, the SEC. Information contained on, or that can be accessed through, our website is not
incorporated by reference into this report and you should not consider information on our website to be part of this report.
The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC.
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Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also
impair our business operations. Please see Part I, “Special Note Regarding Forward-Looking Statements” for a discussion of the forward-looking statements that
are qualified by these risk factors. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results and
financial condition could be materially adversely affected.
Risks Related to Our Business and Industry
Unfavorable conditions in our industry or the global economy, or reductions in information technology spending, could limit our ability to grow our business
and negatively affect our operating results.
Our operating results may vary based on the impact of changes in our industry or the global economy on us or our clients. The revenue growth and potential
profitability of our business depends on demand for enterprise application software generally and for human capital management platform in particular. We sell our
human capital management platform primarily to large, mid-sized and small business organizations whose businesses fluctuate based on general economic and
business conditions. In addition, a portion of our revenue is attributable to the number of users of our products at each of our clients, which in turn is influenced by
the employment and hiring patterns of our clients and potential clients. To the extent that economic uncertainty or weak economic conditions cause our clients and
potential clients to freeze or reduce their headcount, demand for our products may be negatively affected. Historically, economic downturns have resulted in
overall reductions in spending on information technology and human capital management platforms as well as pressure from clients and potential clients for
extended billing terms. If economic conditions deteriorate, our clients and potential clients may elect to decrease their information technology and human capital
management budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating
results.
Our business depends substantially on the level of our client satisfaction and specifically on clients renewing their agreements with us, purchasing additional
products from us or adding additional users. Any significant decline in our client satisfaction rates or clients renewing their agreements, purchasing additional
products or adding additional users would harm our future operating results.
In order for us to improve our operating results, it is important that our client satisfaction remains high and that our clients renew their agreements with us
when the initial contract term expires and also purchase additional products or add additional users. Our clients have no obligation to renew their subscriptions after
the initial subscription period, and we cannot assure you that our clients will renew their subscriptions at the same or a higher level of service, if at all. Every year,
some of our clients elect not to renew their agreements with us. Moreover, certain of our clients have the right to cancel their agreements for convenience, subject
to certain notice requirements and, in some cases, early termination fees. Our client renewal rates may decline or fluctuate as a result of a number of factors,
including their satisfaction or dissatisfaction with our products, our pricing, the prices of competing products or services, mergers and acquisitions affecting our
client base, reduced hiring by our clients or reductions in our clients’ spending levels. If our clients do not renew their subscriptions, renew on less favorable terms,
fail to purchase additional products or fail to add new users, our revenue may decline and our operating results may be harmed.
If we fail to retain key employees and recruit qualified technical and sales personnel, our business could be harmed.
We believe that our success depends on the continued employment of our senior management and other key employees, such as our chief executive officer.
In addition, because our future success is dependent on our ability to continue to enhance and introduce new software and services, we are heavily dependent on
our ability to attract and retain qualified engineers with the requisite education, background and industry experience. As we expand our business, our continued
success will also depend, in part, on our ability to attract and retain qualified sales, marketing and operational personnel capable of supporting a larger and more
diverse client base. The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business
relationships. In addition, if any of our key employees joins a competitor or decides to otherwise compete with us, we may experience a material disruption of our
operations and development plans, which may cause us to lose clients or increase operating expenses as the attention of our remaining senior managers is diverted
to recruit replacements for the departed key employees.
Changes to U.S. immigration and work authorization laws and regulations can be significantly affected by political forces and levels of economic activity.
Our international expansion and our business may be materially adversely affected if legislative or administrative changes to immigration or visa laws and
regulations impair our hiring processes or projects involving personnel who are not citizens of the country where the work is to be performed.
Our financial results may fluctuate due to various business factors, some of which may be beyond our control.
There are a number of other factors that may cause our financial results to fluctuate from period to period, including among others:
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the extent to which new clients are attracted to our products to satisfy their human capital management needs;
the timing and rate at which we sign agreements with new clients;
our access to service providers and partners when we outsource client service projects;
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our ability to manage the quality and completion of the client implementations performed by partners;
the timing and duration of our client implementations, which is often outside of our direct control;
our ability to provide, or partner with effective partners to provide, resources for client implementations and consulting projects;
the extent to which we retain existing clients and satisfy their requirements;
the extent to which existing clients renew their subscriptions to our products and the timing of those renewals;
the extent to which existing clients purchase or discontinue the use of additional products and add or decrease the number of users;
the extent to which our clients request enhancements to underlying features and functionality of our products and the timing of our delivery of these
enhancements to our clients;
the addition or loss of large clients, including through acquisitions or consolidations;
the number and size of new clients, as well as the number and size of renewal clients in a particular period;
the mix of clients among large, mid-sized and small organizations;
changes in our pricing policies or those of our competitors;
seasonal factors affecting demand for our products or potential clients’ purchasing decisions;
the financial condition and creditworthiness of our clients;
the amount and timing of our operating expenses, including those related to the maintenance, expansion and restructuring of our business, operations and
infrastructure;
changes in the operational efficiency of our business;
the timing and success of our new product and service introductions;
the timing of expenses of the development of new products and technologies, including enhancements to our products;
our ability to exploit Big Data to drive increased demand for our products;
continued strong demand for human capital management in the U.S. and globally;
our ability to successfully integrate our operations with those of recently acquired privately-held companies;
the success of current and new competitive products and services by our competitors;
other changes in the competitive dynamics of our industry, including consolidation among competitors, clients or strategic partners;
our ability to manage our existing business and future growth, including in terms of additional headcount, additional clients, incremental users and new
geographic regions;
expenses related to our network and data centers and the expansion of such networks and data centers;
the effects of, and expenses associated with, acquisitions of third-party technologies or businesses and any potential future charges for impairment of
goodwill resulting from those acquisitions;
equity issuances, including as consideration in acquisitions or due to the conversion of our outstanding convertible notes due 2021;
business disruptions, costs and future events related to shareholder activism;
legal or political changes in local or foreign jurisdictions that decrease demand for, or restrict our ability to sell or provide, our products;
fluctuations in foreign currency exchange rates, including any fluctuation caused by uncertainties relating to the United Kingdom's vote in favor of exiting
the European Union (often referred to as “Brexit”);
general economic, industry and market conditions; and
various factors related to disruptions in our SaaS hosting network infrastructure, defects in our products, privacy and data security and exchange rate
fluctuations, each of which is described elsewhere in these risk factors.
In light of the foregoing factors, we believe that our financial results, including our revenue, operating income and free cash flows may vary significantly
from period-to-period. As a result, period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of
future performance.
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Existing or future laws and regulations relating to privacy or data security could increase the cost of our products, limit their use and adoption, and subject us
or our clients to litigation, regulatory investigations and penalties and other potential liabilities.
Our human capital management platform enables our clients to collect, manage and store a wide range of data, including personal data, related to every phase
of the employee performance and management cycle. The United States and various state governments have adopted or proposed laws governing the collection,
use, storage, sharing and processing of personal data. Several foreign jurisdictions, including but not limited to the European Union (the “EU”) and its member
states, the United Kingdom (the “UK”), Korea, Japan, Singapore, Australia and India, have adopted legislation (including directives or regulations) that increase or
change the requirements governing the personal data of individuals in these jurisdictions. In some cases, these laws impose obligations not only on many of our
clients, but also directly on us. These laws and regulations are complex and change frequently, at times due to differing economic conditions and changes in
political climate, with new laws and regulations proposed frequently and existing laws and regulations subject to different and conflicting interpretations. These
laws have the potential to increase costs of compliance, risks of noncompliance and penalties for noncompliance and the cost and complexity of selling and
delivering our solutions.
For example, the EU’s General Data Protection Regulation (“GDPR”), which took effect on May 25, 2018, imposes new obligations on our clients and
directly on us. Among other obligations under the GDPR, we are required to give more detailed disclosure about how we collect, use and share personal data;
contractually commit to data protection measures in our contracts with customers; maintain adequate data security measures; notify regulators and affected
individuals of certain personal data breaches; meet extensive privacy governance and documentation requirements; and honor individuals’ expanded data
protection rights, including their rights to access, correct and delete their personal data. Companies that violate the GDPR can face fines of up to the greater of 20
million euros or 4% of their worldwide annual turnover.
In addition, the mechanisms allowing companies to transfer personal data outside of the European Economic Area (“EEA”) face ongoing legal challenges in
the EU and threaten our ability to lawfully process personal data where we operate outside of the EEA. One of these challenges has been brought against the EU-
U.S. Privacy Shield Framework, which we rely on for transfers of personal data from the EEA to the United States. We also rely on the European Commission’s
recognition of Israel and New Zealand, where we maintain significant support centers, as providing an “adequate” level of protection for personal data transferred
from the EEA to those countries. Finally, we rely on the European Commission’s Standard Contractual Clauses for transfers of personal data from the EEA to
India, where we also maintain a significant support center. Loss of our ability to lawfully transfer personal data out of the EEA to these or any other jurisdictions
may cause reluctance or refusal by current or prospective European clients to use our products. Additionally, other countries outside of the EEA have passed or are
considering passing laws requiring local data residency, which could increase the cost and complexity of delivering our services.
Further, “Brexit” has created uncertainty with regard to data protection regulation in the United Kingdom, where our operations involve the processing of EU
residents’ personal data. In particular, it is unclear whether, after Brexit, the UK will enact data protection legislation equivalent to the GDPR and how data
transfers to and from the UK will be regulated. Thus, it is uncertain whether our operations in, and data transfers to and from, the UK, can comply with UK and EU
law post-Brexit.
Just over a month after the GDPR took effect, the California legislature passed the California Consumer Privacy Act of 2018 (“CCPA”), which takes effect
on January 1, 2020. The CCPA gives California residents certain rights similar to the individual rights given under the GDPR, including the right to access and
delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used.
The CCPA prohibits discrimination against individuals who exercise their privacy rights, provides for civil penalties for violations, and creates a private right of
action for data breaches that is expected to increase data breach litigation.
The costs of compliance with, and other burdens imposed by, privacy and data security laws and regulations may limit the use and adoption of our services,
lead to negative publicity, reduce overall demand for our services, make it more difficult to meet expectations of or commitments to customers, require us to take
on more onerous obligations in our contracts with customers, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close
sales transactions, any of which could harm our business. These laws could also impact our ability to offer, or our customers’ ability to deploy, our services in
certain locations. The costs, burdens and potential liabilities imposed by existing privacy laws could be compounded if other jurisdictions in the U.S. or abroad
begin to adopt similar laws.
In addition to government activity, privacy advocacy and other industry groups have established or may establish new self-regulatory standards that may
place additional burdens on our ability to provide our services globally. Our customers expect us to meet voluntary certifications and other standards established by
third parties, such as ISO 27001. If we are unable to earn and maintain these certifications or meet these standards, it could adversely affect our ability to provide
our solutions to certain customers and could harm our business.
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Furthermore, concerns regarding data privacy and security may cause our customers’ customers to resist providing the data necessary to allow our customers
to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements
could inhibit sales of our products or services and could limit adoption of our cloud-based solutions.
Any of these matters could materially adversely affect our business, financial condition or operational results.
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for human capital management platforms is highly competitive, rapidly evolving and fragmented. Many of our competitors and potential
competitors are larger and have greater brand name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than
we do. In addition, with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete
effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures.
Similarly, some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels and
billing terms, our operating results could be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales,
reduced margins, losses or the failure of our products to achieve or maintain more widespread market acceptance, any of which could harm our business.
We face competition from paper-based processes and desktop software tools. We also face competition from custom-built software that is designed to
support the needs of a single organization, as well as from third-party talent and human resource application providers. These software vendors include, without
limitation, International Business Machines Corporation, Oracle Corporation, Peoplefluent, Inc., Saba Software, Inc., SAP America, Inc., Skillsoft Corp.,
Talentsoft and Workday, Inc. In addition, some of the parties with which we maintain business alliances offer or may offer products or services that compete with
our products or services.
Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our
competitors have established marketing relationships, access to larger client bases and major distribution agreements with consultants, system integrators and
distributors. Moreover, many software vendors can bundle human resource products or offer such products at a lower price as part of a larger product sale. In
addition, some competitors may offer software that addresses one or a limited number of human capital management functions at a lower price point or with greater
depth than our products. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards or client requirements. Further, some potential clients, particularly large enterprises, may elect to develop their own internal products. For
all of these reasons, we may not be able to compete successfully against our current and future competitors.
Our systems collect, access, use and store personal and other client proprietary information. As a result, we are subject to security risks and are required to
invest significant resources to prevent, mitigate, or correct issues arising from potential or actual security breaches. If a security breach occurs, our reputation
could be harmed, our business may suffer and we could incur significant liability.
Our human capital management platform involves the storage and transmission of clients’ sensitive, proprietary and confidential information, including
personal information, over the Internet (including public networks). Our security measures may be breached as a result of efforts by individuals or groups of
hackers and sophisticated organizations, including state-sponsored organizations or nation-states. Our security measures could also be compromised by employee
error or malfeasance, which could result in someone obtaining unauthorized access to, or denying authorized access to our IT systems, our customers’ data or our
data, including our intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or
customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers’ data, our data or our IT
systems.
Such breaches and other incidents can result in a risk of unauthorized, unlawful or inappropriate access to, denial of access to, disclosure of, or loss of our
customers’ or our sensitive, proprietary and confidential information, as well as damage to our IT systems and our ability to make required reporting and
disclosures as a public company. An actual or perceived security breach or similar incident could adversely affect our operating results and financial condition due
to loss of confidence in the security of our products, damage to our reputation, early termination of contracts, decline in sales, disruption to our operations,
litigation, regulatory investigations and penalties, or other liabilities.
In particular, federal, state and foreign governments continue to adopt new, or modify existing, laws requiring companies and their service providers to
maintain certain security measures or to report data breaches to government authorities or affected individuals. In turn, customers’ expectations for the security
measures we implement have increased. If we experience security breaches that could have been prevented by measures required by these laws or our customer
contracts, or fail to report security breaches within timeframes mandated by law or our customer contracts, we could face significant liability.
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Techniques to compromise IT systems have become more complex over time and are often not identified until they are exploited. As a result, we may be
unable to anticipate or prevent such techniques. Our products operate in conjunction with and are dependent on a broad range of products, components and third-
party services, and a vulnerability in any of them can expose us to a security breach. In addition, our customers and their third-party service providers may not have
adequate security measures in place to protect their data that is stored in our platform, and, because we do not control our customers or their service providers, we
cannot prevent vulnerabilities in their security measures from being exploited.
Our efforts to detect, prevent and remediate known or potential security vulnerabilities, including those arising from third-party hardware or software, may
result in additional direct and indirect costs.
Finally, if a high profile security breach occurs with respect to another SaaS provider, our clients and potential clients may lose trust in the security of the
SaaS business model generally, which could adversely impact our ability to retain existing clients or attract new ones.
Any significant disruption in our SaaS hosting network infrastructure could harm our reputation, require us to provide credits or refunds, result in early
terminations of client agreements or a loss of clients and adversely affect our business.
Our SaaS hosting network infrastructure is a critical part of our business operations. Our clients access our human capital management platform through a
standard web browser and depend on us for fast and reliable access to our products. Our software is proprietary, and we currently rely on four third-party data
center hosting facilities, which we lease, and the expertise of members of our engineering and software development teams for the continued performance of our
platform. We are in the process of migrating our platform from our leased data center hosting facilities to public cloud third-party data center providers. After we
complete this migration, we will rely extensively on these public cloud providers to provide to our clients and their users with fast and reliable access to our
products. Any disruption of or interference with our SaaS hosting network infrastructure, including the services and operations of the public cloud providers could
harm our reputation, business and results of operations. We have experienced, and may in the future experience, disruptions in our computing and communications
infrastructure. Factors that may cause such disruptions that may harm our reputation include:
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telecommunications outages from third-party providers;
computer viruses;
acts of terrorism, sabotage or other intentional acts of vandalism, including cyber attacks;
unforeseen interruption or damages experienced in moving hardware to a new location;
fire, earthquake, flood and other natural disasters; and
power loss.
Although we generally back-up our client databases hourly, store our data in more than one geographically distinct location at least weekly and perform real-
time mirroring of data to disaster recovery locations, we do not currently offer immediate access to disaster recovery locations in the event of a disaster or major
outage. Thus, in the event of any of the factors described above, or certain other failures of our computing infrastructure, clients may not be able to access their data
for 24 hours or more and there is a remote chance that client data from recent transactions may be permanently lost or otherwise compromised. In addition, we may
not have adequate insurance coverage to compensate for losses from a major interruption. Moreover, some of our agreements include performance guarantees and
service level standards that obligate us to provide credits, refunds or termination rights in the event of a significant disruption in our SaaS hosting network
infrastructure or other technical problems that relate to the functionality or design of our platform.
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Defects in our platform could affect our reputation, result in significant costs to us and impair our ability to sell our products and related services.
Defects in our platform could adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. The
costs incurred in correcting any product defects may be substantial and could adversely affect our operating results. Although we continually test our products for
defects and work with clients through our client support organization to identify and correct errors, defects in our products are likely to occur in the future. Any
defects that cause interruptions to the availability of our products could result in:
lost or delayed market acceptance and sales of our products;
early termination of client agreements or loss of clients;
credits or refunds to clients;
product liability suits against us;
diversion of development resources;
injury to our reputation; and
increased maintenance and warranty costs.
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While our client agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our products,
such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.
Evolving regulation of the Internet, changes in the infrastructure underlying the Internet, or interruptions in Internet access may adversely affect our financial
condition by increasing our expenditures and causing client dissatisfaction.
As Internet commerce continues to evolve, regulation by federal, state or foreign agencies may increase. We are particularly sensitive to these risks because
the Internet is a critical component of our business model. In addition, taxation of services provided over the Internet or other charges for accessing the Internet
may be imposed by government agencies or private organizations. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet,
or impact the way that Internet service providers treat Internet traffic, including laws impacting net neutrality, may negatively increase our operating costs or
otherwise impact our business. Any regulation imposing greater fees for Internet use or restricting information exchanged over the Internet could result in a decline
in the use of the Internet and the viability of Internet-based services, which could harm our business.
In addition, the rapid and continual growth of traffic on the Internet has resulted at times in slow connection and download speeds among Internet users. Our
business expansion may be harmed if the Internet infrastructure cannot handle our clients’ demands or if hosting capacity becomes insufficient. If our clients
become frustrated with the speed at which they can utilize our products over the Internet, our clients may discontinue the use of our human capital management
platform and choose not to renew their contracts with us. Further, the performance of the Internet has also been adversely affected by viruses, worms, hacking,
phishing attacks, denial of service attacks and other similar malicious programs, as well as other forms of damage to portions of its infrastructure, which have
resulted in a variety of Internet outages, interruptions and other delays. These service interruptions could diminish the overall attractiveness of our products to
existing and potential users and could cause demand for our products to suffer.
Failure to effectively retain, expand, and continue to increase the productivity of our direct sales teams and develop and expand our indirect sales channel will
impede our growth.
We will need to continue to increase the productivity of and expand our sales and marketing infrastructure in order to grow our client base and our business.
We plan to expand our direct sales teams and engage additional third-party distributors, both domestically and internationally. Identifying, recruiting and training
these people and entities will require significant time, expense and attention. Our business will be seriously harmed and our financial resources will be wasted if
our efforts to expand our direct and indirect sales channels do not generate a corresponding increase in revenue, and we may be required to sacrifice near-term
growth and divert management attention in order to restructure our direct sales teams. In particular, if we are unable to achieve our expected productivity increases,
we may not be able to significantly increase our revenue, profitability and/or free cash flows.
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If for any reason we are not able to develop enhancements and new features, keep pace with technological developments or respond to future disruptive
technologies, our business will be harmed.
Our future success will depend on our ability to adapt and innovate. To attract new clients and increase revenue from existing clients, we will need to
enhance and improve our existing products and introduce new features. The success of any enhancement or new feature depends on several factors, including
timely completion, introduction and market acceptance. If we are unable to enhance our existing products to meet client needs or successfully develop or acquire
new features or products, or if such new features or products fail to be successful, our business and operating results will be adversely affected.
In addition, because our products are designed to operate on a variety of network, hardware and software platforms using Internet tools and protocols, we
will need to continuously modify and enhance our products to keep pace with changes in internet-related hardware, software, communication, browser and
database technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our products may become less
marketable and less competitive or obsolete, and our operating results may be negatively impacted.
Finally, our ability to grow is subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver a human capital
management platform at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
We rely significantly on implementation partners to deliver professional services to our clients, and if these implementation partners fail to deliver these
professional services effectively, or if we are unable to incentivize new partners to service our customers, our operating results will be harmed.
We rely significantly on various partners to assist us in the successful implementation of our products and to optimize our clients’ use of our products during
the terms of their engagements. We provide our implementation partners with specific training and programs to assist them in servicing our clients, but there can be
no assurance that these steps will be utilized or effective. If these partners fail to deliver these services to our customers in an effective and timely manner, we may
suffer reputational harm and our results of operations may be adversely impacted. We also may not be able to incentivize new partners to service our customers. If
we are unable to maintain our existing relationships or enter into new ones, we would have to devote substantially more resources to delivering our professional
services. If we fail to effectively manage our implementation partners, our ability to sell our products and subscriptions and our operating results will be harmed.
Our growth depends in part on the success of our strategic relationships with third parties.
We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In addition to growing our indirect sales
channels, we intend to pursue additional relationships with other third parties, such as technology and content providers and implementation consultants. For
example, in June 2018 we expanded our learning and content offerings with new content partnerships and learning content subscriptions, in addition to the
availability of integrations with LinkedIn Learning and Workplace by Facebook. Identifying, negotiating and documenting relationships with third parties require
significant time and resources, as does integrating third-party content and technology. Our agreements with distributors and providers of technology, content and
consulting services are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. Our competitors
may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our products. In addition, these
distributors and providers may not perform as expected under our agreements, and we have had and may in the future have, disagreements or disputes with such
distributors and providers, which could negatively affect our brand and reputation. A global economic slowdown could also adversely affect the businesses of our
distributors and it is possible that they may not be able to devote the resources we expect to our relationships with such distributors.
If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our
revenue could be impaired and our operating results could suffer. Even if we are successful, we cannot assure you that these relationships will result in improved
operating results.
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Our financial results may fluctuate due to our long, variable and, therefore, unpredictable sales cycle and our focus on large and mid-market organizations.
We plan our expenses based on certain assumptions about the length and variability of our sales cycle. If our sales cycle becomes longer or more variable,
our results may be adversely affected. Our sales cycle generally varies in duration from two to nine months and, in some cases, much longer depending on the size
of the potential client. Factors that may influence the length and variability of our sales cycle include among others:
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the need to educate potential clients about the uses and benefits of our products;
the relatively long duration of the commitment clients make in their agreements with us;
the discretionary nature of potential clients’ purchasing and budget cycles and decisions;
the competitive nature of potential clients’ evaluation and purchasing processes;
the lengthy purchasing approval processes of potential clients;
the evolving functionality demands of potential clients;
fluctuations in the human capital management needs of potential clients; and
announcements or planned introductions of new products by us or our competitors.
The fluctuations that result from the length and variability of our sales cycle may be magnified by our focus on sales to large and mid-sized organizations. If
we are unable to close an expected significant transaction with one or more of these companies in a particular period, or if an expected transaction is delayed until a
subsequent period, our operating results for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized,
may be adversely affected.
Mergers of or other strategic transactions by our competitors could weaken our competitive position or reduce our revenue.
If one or more of our competitors were to merge, acquire or partner with another of our competitors, the change in the competitive landscape could adversely
affect our ability to compete effectively. For example, in May 2017, Saba Software, Inc. acquired Halogen Software, Inc.; and in October 2018, Saba Software, Inc.
acquired Lumesse. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic distributors, systems integrators,
HR outsourcers, payroll services companies, third-party consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote
our products and limiting the number of consultants available to implement our products. Disruptions in our business caused by these events could reduce our
revenue.
Our business and operations are experiencing growth and organizational change. If we fail to effectively manage such growth and change in a manner that
preserves the key aspects of our corporate culture, our business and operating results could be harmed.
We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant
demands on our operational, financial and management resources. We may continue to expand our international operations into other countries in the future, either
organically or through acquisitions. We have also experienced significant growth in the number of users, transactions and data that our SaaS hosting infrastructure
supports. Finally, our organizational structure is becoming more complex as we improve our operational, financial and management controls as well as our
reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in
these areas without undermining our corporate culture of rapid innovation, teamwork and attention to client success that has been central to our growth so far. If we
fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our products may suffer, which
could negatively affect our brand and reputation and harm our ability to retain and attract clients.
For a detailed discussion of the risks related to our ability to expand our business internationally, manage growth in our SaaS hosting network infrastructure
and expand parts of our organization to implement improved operational, financial and management controls and reporting systems and procedures, see the risk
factors titled “ —As a public company, we are obligated to maintain proper and effective internal control over financial reporting. If our internal control over
financial reporting is ineffective, our financial reporting may not be accurate, complete and timely and our auditors may be unable to attest to its effectiveness
when required, thus adversely affecting investor confidence in our company.” and “—We currently have a number of international offices and are expanding our
international operations. Doing business internationally has unique risks with respect to operational execution and regulatory compliance.”
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Fluctuations in the exchange rate of foreign currencies could result in foreign currency gains and losses.
We conduct our business in the Americas, Europe, and Asia Pacific. As we continue to expand our international operations, we will become more exposed to
the effects of fluctuations in currency exchange rates. This exposure is the result of selling in multiple currencies and operating in foreign countries where the
functional currency is the local currency. Further, our overseas subsidiaries’ results are also impacted by exchange rates affecting the carrying value of U.S. dollar
denominated intercompany loans with us. Because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars,
fluctuations in the exchange rates of these foreign currencies, including any fluctuations caused by uncertainties relating to Brexit, may hinder our ability to predict
our future results and earnings and materially impact our business, financial condition and operating results. Due to our legal structure, any fluctuations in the
exchange rates of the British pound may be particularly impactful. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign
currency exposure, we may not be able to completely eliminate the impact of fluctuations in the exchange rates.
We have in the past acquired, and may in the future acquire, other companies or technologies, which could divert our management’s attention, result in
additional dilution to our stockholders or otherwise disrupt our operations and harm our operating results.
We have in the past acquired, and may in the future acquire, other companies or technologies. Most recently, in November 2018 we acquired Grovo
Learning, Inc., a leading provider of Microlearning® content, and in September 2018, we acquired Workpop Inc., a web and mobile solution for candidates and
hiring managers in service-based industries. In the future, we may seek to acquire or invest in other businesses, products or technologies that we believe could
complement or expand our existing platform, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may
divert the attention of management, result in additional dilution, and cause us to incur various expenses in identifying, investigating and pursuing suitable
acquisitions, whether or not they are ultimately consummated.
We have limited experience in acquiring other businesses. We may not be able to successfully integrate the personnel, operations and technologies of any
businesses that we have acquired or may acquire in the future or effectively manage the combined business following the acquisition. We may also not achieve the
anticipated benefits from other acquired businesses due to a number of factors, including:
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unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs;
diversion of management’s attention from other business concerns;
harm to our existing relationships with partners, distributors and clients, including as a result of competing in the markets in which such parties operate;
the potential loss of key employees and clients;
exposure to claims and disputes by third parties, including intellectual property claims and disputes;
the use of resources that are needed in other parts of our business; and
the use of substantial portions of our available cash to consummate the acquisition.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill, which must be assessed for
impairment at least annually, or to intangible assets, which are assessed for impairment upon certain triggering events. In the future, if our acquisitions do not yield
expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our operating results.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. For
example, in our acquisition of Sonar Limited, we issued an aggregate of 46,694 shares of our common stock. In addition, if an acquired business fails to meet our
expectations, our operating results, business and financial condition may suffer.
As a public company, we are obligated to maintain proper and effective internal control over financial reporting. If our internal control over financial
reporting is ineffective, our financial reporting may not be accurate, complete and timely and our auditors may be unable to attest to its effectiveness when
required, thus adversely affecting investor confidence in our company.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of
our internal control over financial reporting. Our auditors also need to audit the effectiveness of our internal control over financial reporting. These assessments
need to include disclosure of any material weaknesses in our internal control over financial reporting.
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We have incurred and continue to incur significant costs assessing our system of internal control over financial reporting and processing documentation
necessary to perform the evaluation needed to comply with Section 404. We may discover, and may not be able to remediate, future significant deficiencies or
material weaknesses, or we may be unable to complete our evaluation, testing or any required remediation in a timely fashion. Further, to the extent we acquire
other businesses, the acquired company may not have a sufficiently robust system of internal controls and we may discover deficiencies. Failure of our internal
control over financial reporting to be effective could cause our financial reporting to be inaccurate, incomplete or delayed. Moreover, even if there is no inaccuracy,
incompletion or delay of reporting results, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to
assert, and our auditors will be unable to affirm, that our internal control is effective, in which case investors may lose confidence in the accuracy and completeness
of our financial reports, which could have a material adverse effect on the price of our common stock.
Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.
We have historically experienced seasonality in terms of when we enter into client agreements for our products. We sign a significantly higher percentage of
agreements with new clients, and renewal agreements with existing clients, in the fourth quarter of each year and a significant portion of these agreements are
signed during the last month, and with respect to each quarter, often the last two weeks of the quarter. 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 over the term of the client agreement,
which is generally three years. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and
thus difficulties in predictability.
We rely on third-party computer hardware and software that may be difficult to replace or could cause errors or failures of our service.
In addition to the software we develop, we rely on computer hardware, purchased or leased, and software licensed from third parties in order to deliver our
platform. This hardware and software may not continue to be available on commercially reasonable terms, if at all. Any loss of the right to use any of this hardware
or software could result in delays in our ability to provide our platform until equivalent technology is either developed by us or, if available, identified, obtained
and integrated. In addition, errors or defects in third-party hardware or software used in our platform could result in errors or a failure of our products, which could
harm our business.
If we fail to manage our SaaS hosting network infrastructure capacity, our existing clients may experience service outages and our new clients may experience
delays in the deployment of our human capital management platform.
We have experienced significant growth in the number of users, transactions and data that our hosting infrastructure supports. We seek to maintain sufficient
excess capacity in our SaaS hosting network infrastructure to meet the needs of all of our clients. We also seek to maintain excess capacity to facilitate the rapid
provision of new client deployments and the expansion of existing client deployments. However, the provision of new hosting infrastructure requires significant
lead time. If we do not accurately predict our infrastructure capacity requirements, our existing clients may experience service outages that may subject us to
financial penalties, financial liabilities and client losses. If our hosting infrastructure capacity fails to keep pace with increased sales, clients may experience delays
as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.
Restructuring activities could adversely affect our ability to execute our business strategy.
In December 2017, we implemented a restructuring plan to reduce the headcount of our global service delivery team, as well as the headcount of some of our
sales teams, representing a workforce reduction of approximately six percent. In connection with this action, we incurred approximately $8.9 million of
expenditures in the year ended December 31, 2018 and $10.5 million of expenditures since the plan was announced in December 2017 through December 31, 2018
. This restructuring and any future restructurings, should it become necessary for us to continue to restructure our business due to worldwide market conditions or
other factors that reduce the demand for our products and services, could adversely affect our ability to execute our business strategy.
Failure to effectively manage client deployments by our third-party service providers could adversely impact our business.
In cases where our third-party service providers are engaged either by us or by a client directly to deploy a product for a client, our third-party service
providers need to have a substantial understanding of such client’s business so that they can configure the product in a manner that complements its existing
business processes and integrates the product into its existing systems. It may be difficult for us to manage the timeliness of these deployments and the allocation of
personnel and resources by our clients. Failure to successfully manage client deployments by us or our third-party service providers could harm our reputation and
cause us to lose existing clients, face potential client disputes or limit the rate at which new clients purchase our products.
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Forecasts of our business growth and profitability may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we
cannot assure you our business will grow at similar rates, or at all.
Our forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. These assumptions and
estimates include the timing and value of agreements with our customers, variability in the service delivery periods for our customers, impact of foreign currency
exchange rate fluctuations and expected growth in our market and related costs to support the growth of our business. Our assumptions and estimates related to our
business growth and profitability, including the performance of our core business and emerging businesses and the demand for our products in the United States,
Europe, Japan and other regions, may prove to be inaccurate. Even if the markets experience the forecasted growth, we may not grow our business at similar rates,
or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.
Even if demand for human capital management products and services increases generally, there is no guarantee that demand for SaaS products like ours will
increase to a corresponding degree.
The widespread adoption of our products depends not only on strong demand for human capital management products and services generally, but also for
products and services delivered via a SaaS business model in particular. There are still a significant number of organizations that have adopted no human capital
management functions at all, and it is unclear whether such organizations will ever adopt such functions and, if they do, whether they will desire a SaaS human
capital management platform like ours. As a result, we cannot assure you that our SaaS human capital management platform will achieve and sustain the high level
of market acceptance that is critical for the success of our business.
Integrated, comprehensive SaaS products such as ours represent a relatively recent approach to addressing organizations’ human capital management
challenges, and we may be forced to change the prices we charge for our products, or the pricing model upon which they are based, as the market for these
types of products evolves.
Providing organizations with applications to address their human capital management challenges through integrated, comprehensive SaaS products is a
developing market. The market for these products is therefore still evolving, and competitive dynamics may cause pricing levels, as well as pricing models
generally, to change, as the market matures and as existing and new market participants introduce new types of products and different approaches to enable
organizations to address their human capital management needs. As a result, we may be forced to reduce the prices we charge for our products or the pricing model
on which they are based, and may be unable to renew existing client agreements or enter into new client agreements at the same prices and upon the same terms
that we have historically, which could have a material adverse effect on our revenue, gross margin and other operating results.
We currently have a number of international offices and are expanding our international operations. Doing business internationally has unique risks with
respect to operational execution and regulatory compliance.
We currently have international offices in several countries, and we may expand our international operations into other countries in the future. International
operations involve a variety of risks that may decrease demand for, or restrict our ability to sell or provide, our products, including:
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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
differing labor regulations;
regulations relating to data security and the unauthorized use of, or access to, commercial and personal information;
potential penalties or other adverse consequences for violations of anti-corruption, anti-bribery and other similar laws and regulations, including the U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act;
greater difficulty in supporting and localizing our products;
unrest and/or changes in a specific country’s or region’s social, political, legal or economic conditions;
challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement
appropriate systems, controls, policies, benefits and compliance programs;
currency exchange rate fluctuations, including any fluctuations caused by uncertainties relating to Brexit;
limited or unfavorable intellectual property protection; and
restrictions on repatriation of earnings.
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We have less significant experience in marketing, selling and supporting our products and services abroad than domestically. Our less significant experience
in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. In addition, it
may take us longer to build our presence in international markets. If we invest substantial time and resources to expand our international operations and are unable
to do so successfully and in a timely manner, our business and operating results will suffer.
Our operations could be materially affected by changes in domestic and foreign economic, political or legal conditions. For example, in 2016 the UK held a
referendum to determine whether the UK should leave the EU or remain as a member state, the outcome of which was in favor of leaving the EU. This event is
commonly referred to as Brexit. We are monitoring developments related to Brexit, which could have significant implications for our business. Lack of clarity
about future UK laws and regulations as the UK determines which EU rules and regulations to replace or replicate in the event of a withdrawal from the EU,
including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws
and regulations, immigration laws and employment laws, could decrease foreign direct investment in the UK, increase costs, depress economic activity and restrict
access to capital. The political and economic instability created by the UK’s vote to leave the EU has also caused and may continue to cause significant volatility in
global financial markets and the value of the British pound currency or other currencies, including the euro.
Such a withdrawal from the EU is unprecedented, and it is unclear how the UK’s access to the European single market for goods, capital, services and labor
within the EU, or single market, and the wider commercial, legal and regulatory environment, will impact our UK operations and customers. Our UK operations
service customers in the UK as well as in other countries in the EU and the EEA, and these operations could be disrupted by Brexit, particularly if there is a change
in the UK’s relationship to the single market.
We may also face new regulatory costs and challenges that could have an adverse effect on our operations. Depending on the terms of the UK’s withdrawal
from the EU, the UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its members, which may result in increased trade barriers
that could make our doing business in the EU and the EEA more difficult. Even prior to any change to the UK’s relationship with the EU, the announcement of
Brexit has created economic uncertainty surrounding the terms of Brexit and its consequences could adversely impact customer confidence resulting in customers
reducing their spending budgets on our solutions, which could adversely affect our business, revenue, financial condition, and results of operations.
Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act and other anti-corruption, anti-bribery and anti-money laundering
laws in various jurisdictions both domestic and abroad. We leverage third parties, including channel partners, to sell subscriptions to our platform and conduct our
business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-
owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees,
representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address
compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for
which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws
could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or
debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.
If we fail to develop our brand cost-effectively, our business may suffer.
We believe that developing and maintaining awareness of the Cornerstone OnDemand brand in a cost-effective manner is critical to achieving widespread
acceptance of our existing and future products and is an important element in attracting new clients. Furthermore, we believe that the importance of brand
recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing
efforts and on our ability to provide reliable and useful services at competitive prices. In the past, our efforts to build our brand have involved significant expenses.
Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our
brand. In addition, the Cornerstone OnDemand Foundation shares our company name and any negative perceptions of any kind about the Cornerstone OnDemand
Foundation could adversely affect our brand and reputation. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an
unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a
sufficient return on our brand-building efforts, and our business could suffer.
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Our sales to government entities are subject to a number of additional challenges and risks.
We sell to U.S. federal and state and foreign governmental agency customers, and we may increase sales to government entities in the future. For example, in
June 2017, we entered into an agreement with the U.S. Postal Service that authorizes, but does not guarantee, the purchase by the U.S. Postal Service of our
software and services to support their more than 600,000 employees. The additional risks and challenges associated with doing business with governmental entities
include, but are not limited to, the following:
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Selling to governmental entities can be more competitive, expensive and time-consuming than selling to private entities, often requiring significant
upfront time and expense without any assurance that these efforts will generate a sale;
Government certification requirements may change, or we may lose one or more government certifications, such as FedRAMP, and in doing so restrict our
ability to sell into the government sector until we have attained revised certificates;
Governmental entities may have significant leverage in negotiations, thereby enabling such entities to demand contract terms that differ from what we
generally agree to in our standard agreements, including, for example, most favored nation clauses and terms allowing contract termination for
convenience;
Government demand and payment for our products may be influenced by public sector budgetary cycles and funding authorizations, with funding
reductions or delays having an adverse impact on public sector demand for our products; and
Government contracts are generally subject to audits and investigations, which we have limited experience with, potentially resulting in termination of
contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government
business.
To the extent that we become more reliant on contracts with government entities in the future, our exposure to such risks and challenges could increase,
which, in turn, could adversely impact our business.
We may require additional capital to support business growth, and this capital may not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may seek additional funds to respond to business challenges, including the
need to develop new features or enhance our existing products, improve our operating infrastructure or acquire complementary businesses and technologies.
Accordingly, we may need to engage in additional equity or debt financings to secure additional funds. If we raise additional funds through issuances of equity or
debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges
could be significantly impaired.
Further, the indenture governing the convertible notes due 2021 includes a restrictive covenant that, subject to specified exceptions and parameters, limits our
ability to incur additional debt. We may be unable to take advantage of strategic or business development opportunities as they arise, or we may not be able to react
to market conditions, if we are restricted in our ability to raise debt financing, or we may be required to seek alternative means to generate cash, including by
selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive, if available at all.
In addition, in connection with the sale of our convertible notes due 2021, we entered into an investment agreement with Silver Lake providing Silver Lake
with the option to purchase all or a portion of any equity securities, or instruments convertible into or exchangeable for any equity securities, in any proposed
offerings by us until the earlier of June 2019 or such time as Silver Lake no longer has a representative and no longer has rights to have a representative on our
board of directors. Although Silver Lake’s option will not apply to equity securities issued in connection with acquisitions, underwritten public offerings, strategic
partnerships or commercial arrangements, or equity compensation plans, Silver Lake’s participation rights could impact our ability to raise additional capital.
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Servicing our debt will require a significant amount of cash, which could adversely affect our business, financial condition and results of operations.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our convertible notes due 2021,
which represent an aggregate principal amount of $300.0 million, depends on our future performance, which is subject to economic, financial, competitive and
other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the notes and any
future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or
more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that
may be onerous or highly dilutive. Our ability to refinance the notes or future indebtedness will depend on the capital markets and our financial condition at such
time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the notes or future
indebtedness.
Further, with certain exceptions, upon a change of control, the holders of our convertible notes due 2021 may require that we repurchase all or part of such
notes at a purchase price equal to the principal amount plus the total sum of all remaining scheduled interest payments through the remainder of the term of the
notes. In such event, we may not have enough cash available or be able to obtain financing to repurchase the notes, and our ability to repurchase notes may be
limited by law, regulatory authority or agreements governing our other indebtedness.
Because of how we recognize revenue, a significant downturn in our business may not be immediately reflected in our operating results.
Generally, we recognize revenue from subscription agreements monthly over the terms of these agreements, which is typically three years for our human
capital management platform. As a result, a significant portion of the revenue we report in each quarter is generated from client agreements entered into during
previous periods. Consequently, a decline in new subscriptions in any one quarter may not significantly impact our revenue and financial performance in that
quarter, but will negatively affect our revenue, or rate of revenue growth and financial performance in future quarters.
In addition, if subscription agreements expire and are not renewed in the same quarter, our revenue and financial performance in that quarter and subsequent
quarters will be negatively affected. However, the revenue impact may not be immediately reflected in our operating results to the extent there is an offsetting
increase in revenue from services contracts performed in that same quarter.
Finally, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market
acceptance of our products may not be reflected in our short-term operating results.
Because we generally recognize subscription revenue from our clients over the terms of their agreements but incur most costs associated with generating such
agreements upfront, rapid growth in our client base may put downward pressure on our operating margin in the short term.
The expenses associated with generating client agreements are generally incurred up front but the resulting subscription revenue is generally recognized over
the life of the agreements; therefore, increased growth in the number of our clients will result in our recognition of more costs than revenue during the early periods
covered by such agreements, even in cases where the agreements are expected to be profitable for us over their full terms.
We have a history of losses, and we cannot be certain that we will achieve or sustain profitability.
We have a history of incurring losses. We experienced net losses of $33.8 million , $61.3 million and $66.8 million in 2018 , 2017 and 2016 , respectively.
At December 31, 2018 , our accumulated deficit was $530.0 million and total stockholders’ equity was $55.9 million . Although our operating losses have
decreased in each of the last three years, and in the second half of 2018 we reported operating income, it is possible that we may continue to incur operating losses
in the future as a result of expenses associated with the continued development and expansion of our business. Our expenses include among others, sales and
marketing, research and development, consulting and support services and other costs relating to the development, marketing and sale and service of our products
that may not generate revenue until later periods, if at all. Any failure to increase revenue or manage our cost structure as we implement initiatives to grow our
business could prevent us from sustaining profitability. In addition, our ability to achieve sustained profitability is subject to a number of the risks and uncertainties
discussed below, many of which are beyond our control. We cannot be certain that we will be able to sustain profitability on a quarterly or annual basis.
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The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment
affecting GAAP is uncertain. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and
affect our reported operating results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board
(“FASB”), the Securities and Exchange Commission and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, many
companies’ accounting disclosures are being subjected to heightened scrutiny by regulators and the public. A change in accounting standards or practices can have
a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting
pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning
of current practices may adversely affect our reported financial results or the way we conduct our business.
To the extent that our pre-tax income or loss becomes relatively modest, our ability to conclude that a control deficiency is not a material weakness or that an
accounting error does not require a restatement could be adversely affected.
Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative
factors, and depending upon that analysis, we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness. One
element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of
pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a
significant deficiency or material weakness.
To the extent that our pre-tax income or loss is relatively small, if management or our independent registered public accountants identify an error in our
interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or be considered a material error that could,
depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.
If we fail to adequately protect our proprietary rights, our competitive advantage and brand could be impaired and we may lose valuable assets, generate
reduced revenue and incur costly litigation to protect our rights.
Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks,
trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our
intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect
unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information
that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer
and disclosure of our licensed products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do
not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized
copying and use of our products and proprietary information may increase. We enter into confidentiality and invention assignment agreements with our employees
and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. These agreements may
not be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from
independently developing technologies that are substantially equivalent or superior to our products. Litigation brought to protect and enforce our intellectual
property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. If
we fail to secure, protect and enforce our intellectual property rights, we may lose valuable assets, generate reduced revenue and incur costly litigation to protect
our rights, which could seriously harm our brand and adversely impact our business.
We may be sued by third parties for alleged infringement of their proprietary rights or may find it necessary to enter into licensing arrangements with third
parties to settle or forestall such claims, either of which could have a material adverse effect on our operating results and financial condition.
There is considerable patent and other intellectual property development activity in our industry. Our success depends in part upon our not infringing the
intellectual property rights of others. However, our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual
property relating to our industry or, in some cases, our technology or products. From time to time, such third parties may claim that we are infringing their
intellectual property rights, and we may actually be found to be infringing such rights. Moreover, we may be subject to claims of infringement with respect to
technology that we acquire or license from third parties. The risk that we could be subject to infringement claims is increasing as the number of products and
companies competing with our platform grows. Any claims or litigation could require the commitment of substantial time and resources and, if successfully
asserted against us, could require that we pay substantial
26
damages or ongoing royalty or licensing payments, indemnify our clients, distributors or other third parties, modify or discontinue the sale of our products, or
refund fees, any of which would deplete our resources and adversely impact our business. We have in the past obtained, and may in the future obtain, licenses from
third parties to forestall or settle potential claims that our products and technology infringe the intellectual property rights of others. Discussions and negotiations
with such third parties, whether successful or unsuccessful, could result in substantial costs and the diversion of management resources, either of which could
seriously harm our business.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with clients and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or
incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our
products, services or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement.
Large indemnity payments could harm our business, operating results and financial condition. From time to time, we are requested by clients to indemnify them for
breach of confidentiality with respect to personal data. Although we normally do not agree to, or contractually limit our liability with respect to, such requests, the
existence of such a dispute with a client may have adverse effects on our client relationships and reputation.
We use open source software in our products, which could subject us to litigation or other actions.
We use open source software in our products and may use more open source software in the future. From time to time, there have been claims challenging
the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by
parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating
results and financial condition or require us to devote additional research and development resources to change our products. In addition, if we were to combine our
proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source
code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the sale of
our products or take other remedial actions.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and
subject us to liability if we are not in full compliance with applicable laws.
Our products are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade
sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with
these laws. If we fail to comply with these U.S. export control laws and import laws, including U.S. Customs regulations, we and certain of our employees could be
subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible
employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. In addition, if our distributors fail to obtain appropriate
import, export or re-export licenses or authorizations, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary
authorizations, including any required license, for a particular sale may be time-consuming and is not guaranteed, and may result in the delay or loss of sales
opportunities. Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment of certain products and services to U.S. embargoed or
sanctioned countries, governments and persons. Even though we take precautions to prevent our products from being shipped or provided to U.S. sanctions targets,
our products and services could be shipped to those targets or provided by our distributors despite such precautions. Any such shipment could have negative
consequences, including government investigations, penalties and reputational harm. In addition, various countries regulate the import of certain encryption
technology, including through import permitting or licensing requirements, and have enacted laws that could limit our ability to distribute our products or could
limit our clients’ ability to implement our products in those countries. Changes to our products or changes in export and import regulations may create delays in the
introduction and sale of our products in international markets, prevent our clients with international operations from deploying our products or, in some cases,
prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import regulations, economic
sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by
such regulations, could result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential clients with
international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business,
financial condition and operating results.
27
Our investment portfolio is subject to general credit, liquidity, counterparty, market and interest rate risks, any of which could impair the market value of our
investments and harm our financial results.
At December 31, 2018 , we had $183.6 million in cash and cash equivalents and $204.7 million in short-term and long-term investments in marketable
securities, consisting of corporate bonds, money market funds backed by United States Treasury Bills, U.S. treasury securities and agency securities. Although we
follow an established investment policy and set of guidelines to manage our investment portfolio, our investments are subject to general credit, liquidity,
counterparty, market and interest rate risks, which have been exacerbated by the recent financial and credit crisis, rising bankruptcy filings in the United States and
the ongoing debt-ceiling debate.
Because the market value of fixed-rate debt securities may be adversely impacted by a rise in interest rates, our future investment income may fall short of
expectations if interest rates rise. In addition, we may suffer losses if we are forced to sell securities that have experienced a decline in market value because of
changes in interest rates. Currently, we do not use financial derivatives to hedge our interest rate exposure.
The fair value of our investments may change significantly due to events and conditions in the credit and capital markets. Any investment securities that we
hold, or the issuers of such securities, could be subject to review for possible downgrade. Any downgrade in these credit ratings may result in an additional decline
in the estimated fair value of our investments. Changes in the various assumptions used to value these securities and any increase in the perceived market risk
associated with such investments may also result in a decline in estimated fair value.
In the event of adverse conditions in the credit and capital markets, and to the extent we make future investments, our investment portfolio may be impacted,
and we could determine that some or all of our investments experienced an other-than-temporary decline in fair value, requiring impairment, which could adversely
impact our financial position and operating results.
We may invest in companies for strategic reasons and may not realize a return on our investments .
In November 2013, we launched a strategic initiative created to invest in, advise and collaborate with promising cloud startups building innovative business
applications that support the continued expansion of our market reach. We have made, and from time to time may continue to make, strategic investments in
privately-held companies. The privately-held companies in which we may invest are considered inherently risky. The technologies and products these companies
have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment
in these companies. The evaluation of privately-held companies is based on information that we request from these companies, which is not subject to the same
disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from
these companies.
Risks Related to Tax Issues
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in
various jurisdictions.
As a multinational organization, we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of
which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles,
including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our
liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and
the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our
subsidiaries, any of which could have a material impact on us and our operating results. If we are selected for future examinations that uncover incorrect tax
positions, we could be subject to additional taxes, interest and penalties.
28
Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.
We conduct operations worldwide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries. If two
or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as
those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe
that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable
tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could
require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In
addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double
taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would
increase our consolidated tax liability, which could adversely affect our financial condition, operating results and cash flows.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, new legislation was enacted that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal
income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of
35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitations on the
deductibility of executive compensation, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating
loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings
(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and
modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will
conform to the newly enacted federal tax law. The Act's new international rules, including the Global Intangible Low-Taxed Income, the Foreign Derived
Intangible Income and the Base Erosion Anti-Avoidance Tax, are highly complex and may affect our financial condition as additional interpretive guidance is
issued. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal
and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our ability to use net operating loss carryforwards to reduce future tax payments may be subject to limitations.
We have federal and state net operating loss carryforwards that will begin to expire, if not utilized. These net operating loss carryforwards could expire
unused and be unavailable to offset future income tax liabilities. Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and
in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses may be limited. It is uncertain if and to what extent
various states will conform to the newly enacted federal tax law. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation
undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s
ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may
be limited. We may experience ownership changes in the future and subsequent shifts in our stock ownership. As a result, we may be limited in the portion of net
operating loss carryforwards that we can use in the future to offset taxable income for U.S. Federal income tax purposes.
29
Risks Related to Ownership of Our Common Stock
The trading price of our common stock may be volatile.
The trading price of our common stock has at times been volatile and could continue to be subject to significant fluctuations in response to various factors,
some of which are beyond our control. In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies operating in such markets. The
market price of our common stock may be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including
as a result of factors unrelated to our operating performance and prospects. The market price of our common stock could be subject to wide fluctuations in response
to a number of factors, including:
•
•
•
•
•
•
•
•
•
•
•
our operating performance and the performance of other similar companies;
the financial or non-financial metric projections we provide to the public, including the failure of the projections to meet the expectations of securities
analysts or investors, and any changes in these projections or our failure to meet or exceed these projections;
the overall performance of the equity markets;
developments with respect to intellectual property rights;
publication of unfavorable research reports about us or our industry or withdrawal of research coverage by securities analysts;
speculation in the press or investment community;
the size of our public float;
natural disasters or terrorist acts;
actual or perceived data security incidents that we or our service providers may suffer;
announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital
commitments; and
global economic, legal and regulatory factors unrelated to our performance.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action
litigation has often been initiated against these companies. This litigation, if initiated against us, could result in substantial costs and a diversion of our
management’s attention and resources.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, the market price of our common
stock and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business or our
market. If one or more of the analysts who cover us downgrade our common stock or publish incorrect or unfavorable research about our business, the market price
of our common stock would likely decline. In addition, if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly,
demand for our common stock could decrease, which could cause the market price of our stock or trading volume to decline.
The issuance of additional stock in connection with acquisitions, our stock incentive plans or otherwise will dilute all other stockholdings.
Our certificate of incorporation authorizes us to issue up to 1,000,000,000 shares of common stock and up to 50,000,000 shares of preferred stock with such
rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these
shares that are not already outstanding without any action or approval by our stockholders. We intend to continue to evaluate strategic acquisitions in the future.
We may pay for such acquisitions, partly or in full, through the issuance of additional equity. Any issuance of shares in connection with our acquisitions, the
exercise of stock options, the vesting of restricted stock units or otherwise would dilute the percentage ownership held by existing investors.
30
Conversion of our convertible notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their notes, or
may otherwise depress the price of our common stock.
The conversion of some or all of our convertible notes due 2021, to the extent we deliver shares upon conversion of the 2021 notes, will dilute the ownership
interests of existing stockholders. The convertible notes due 2021 and the underlying shares issuable upon conversion of such 2021 notes may be sold pursuant to a
resale registration statement on Form S-3 that we filed with the Securities and Exchange Commission on August 7, 2018. Any sales in the public market of the
2021 notes or our common stock issuable upon conversion of the 2021 notes could adversely affect prevailing market prices of our common stock. In addition, the
existence of the notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions, or anticipated
conversion of the notes into shares of our common stock could depress the price of our common stock.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to sell all or
part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Investors seeking cash dividends should not purchase our common stock.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our certificate of incorporation, our bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us
or changes in our management. Our certificate of incorporation and our bylaws include provisions that:
•
•
•
•
•
•
•
•
authorize “blank check” preferred stock, which could be issued by the board of directors without stockholder approval and may contain voting,
liquidation, dividend and other rights superior to our common stock;
create a classified board of directors whose members serve staggered three-year terms, until the 2021 annual meeting of stockholders, at which point all
directors will be elected for a one-year term;
specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer or
the president;
establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to our board of directors;
provide that our directors may be removed only for cause until the 2021 annual meeting of stockholders when all directors may be removed either with or
without cause;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
specify that no stockholder is permitted to cumulate votes at any election of directors; and
require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which
limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.
Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay
for our common stock.
Item 1B.
Unresolved Staff Comments
Not applicable.
31
Item 2.
Properties
Our principal offices are located in Santa Monica, California, where we occupy approximately 94,000 square feet of office space under operating leases that
expire in January 2024. We have additional established offices in Amsterdam, Netherlands; Auckland, New Zealand; Bangalore, India; Düsseldorf, Germany;
Hong Kong; London, United Kingdom; Madrid, Spain; Mumbai, India; Munich, Germany; New York City, United States; Paris, France; Salt Lake City, United
States; San Francisco, United States; São Paulo, Brazil; Singapore, Singapore; Stockholm, Sweden; Sunnyvale, United States; Sydney, Australia; Tel Aviv, Israel;
and Tokyo, Japan to support our international operations. We believe that our facilities are adequate for our current needs and that suitable additional or substitute
space will be available as needed to accommodate planned expansion of our operations.
Item 3.
Legal Proceedings
From time to time, we are involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, including
actions with respect to intellectual property claims, breach of contract and tort claims, labor and employment claims, tax and other matters. Although claims, suits,
investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending
matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flow. Regardless of the outcome,
litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors. In addition, it is possible that an
unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our financial position, results of operations or cash flows
in a particular period.
Item 4.
Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Our Common Stock
Our common stock has been traded on the Nasdaq Global Select Market under the symbol “CSOD” since March 17, 2011. Prior to that time, there was no
public market for our common stock. The following table sets forth for the periods indicated the high and low closing sale prices for our common stock as reported
on the Nasdaq Global Select Market.
First quarter
Second quarter
Third quarter
Fourth quarter
Holders of Record
Fiscal 2018
Fiscal 2017
High
Low
High
Low
$
45.66 $
35.09 $
43.75 $
53.18
58.18
55.65
38.79
47.97
46.17
39.51
41.14
40.90
38.36
35.31
33.82
34.17
As of January 31, 2019 there were 19 holders of record of our common stock. Because many of our shares of common stock are held of record by brokers
and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by such record holders.
32
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to the
declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial
condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
STOCK PRICE PERFORMANCE GRAPH
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or
incorporated by reference into any filing of Cornerstone OnDemand, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.
The following graph compares (i) the cumulative total stockholder return on our common stock from December 31, 2013 through December 31, 2018 with
(ii) the cumulative total return of the Nasdaq Global Market Index and (iii) the Nasdaq Computer & Data Processing Index over the same period, assuming the
investment of $100 in our common stock and in both of the other indices on December 31, 2013 and the reinvestment of all dividends. As discussed above, we
have never declared or paid a cash dividend on our common stock and do not anticipate declaring or paying a cash dividend in the foreseeable future.
COMPARISON OF CUMULATIVE TOTAL RETURN OF CORNERSTONE ONDEMAND
33
Cornerstone OnDemand
Nasdaq Global Market Index
Nasdaq Computer & Data Processing Index
December
31, 2013
December
31, 2014
December
31, 2015
December
31, 2016
December
31, 2017
December
31, 2018
$
$
$
100.00 $
100.00 $
100.00 $
66.03 $
106.01 $
119.88 $
64.77 $
106.00 $
127.36 $
79.37 $
101.91 $
142.99 $
66.27 $
127.16 $
198.42 $
94.60
118.96
191.11
The comparisons shown in the graph and table above are based upon historical data. We caution that the stock price performance shown in the graph above is
not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. See the disclosure in Part I, Item 1A. “Risk
Factors.”
Equity Compensation Plan Information
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table summarizes stock repurchases during the year ended December 31, 2018 (in thousands, expect per share amounts):
January 1-31, 2018
February 1-28, 2018
March 1-31, 2018
April 1-30, 2018
May 1-31, 2018
June 1-30, 2018
July 1-31, 2018
August 1-31, 2018
September 1-30, 2018
October 1-31, 2018
November 1-30, 2018
December 1-31, 2018
Total Number of
Shares
Repurchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plan or
Programs (1)
219 $
161
44
100
212
131
43
216
41
307
177
—
1,651 $
36.53
38.93
40.32
39.67
48.46
49.11
47.15
54.78
55.71
51.62
48.81
—
46.85
219 $
161
44
100
212
131
43
216
41
307
177
—
1,651
69,413
63,138
61,376
57,389
47,113
40,658
38,648
26,818
24,515
8,648
—
—
(1)
In November 2017, our board of directors authorized a $100.0 million share repurchase program of our common stock. The share repurchase program
was completed as of December 31, 2018.
34
Item 6.
Selected Financial Data
The consolidated statements of operations data for the three years ended December 31, 2018 , 2017 and 2016 and the consolidated balance sheet data at
December 31, 2018 and 2017 , respectively, are derived from, and qualified by reference to, our audited financial statements included elsewhere in this Annual
Report on Form 10-K. The consolidated statements of operations data for the two years ended December 31, 2015 and 2014 and the consolidated balance sheet data
at December 31, 2016, 2015 and 2014, respectively, are derived from our audited financial statements not included in this Annual Report on Form 10-K.
The selected consolidated financial data below are not necessarily indicative of future performance and should be read in conjunction with Item 7, “
Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the consolidated financial statements and related notes thereto
included in Item 8 of this Annual Report on Form 10-K.
Consolidated statements of operations data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense) and other income
(expense), net
Loss before provision for income taxes
Income tax (provision)
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic
and diluted
* See Note 2 for summary of adjustments.
Years Ended December 31,
2018 *
2017
2016
2015
2014
(in thousands, except per share data)
$
537,891 $
481,985 $
423,124 $
339,651 $
144,349
393,542
142,867
339,118
224,635
240,271
76,981
90,749
8,946
401,311
(7,769)
(23,478)
(31,247)
(2,595)
61,975
84,589
1,539
388,374
(49,256)
(10,333)
(59,589)
(1,746)
135,752
287,372
225,781
46,977
70,956
—
343,714
(56,342)
(9,288)
(65,630)
(1,207)
109,864
229,787
207,626
40,991
49,877
—
298,494
(68,707)
(15,628)
(84,335)
(1,181)
$
$
(33,842) $
(61,335) $
(66,837) $
(85,516) $
(0.58) $
(1.07) $
(1.20) $
(1.58) $
263,568
77,684
185,884
163,380
30,618
41,802
—
235,800
(49,916)
(14,128)
(64,044)
(855)
(64,899)
(1.22)
58,159
57,262
55,595
54,171
53,267
35
Consolidated balance sheet data:
Cash and cash equivalents
Short-term and long-term investments
Property and equipment, net
Working capital, excluding deferred revenue, current
portion 1
Total assets
Deferred revenue, current and non-current portion
Debt, current portion and non-current portion
Capital lease obligations, current portion and non-current
portion
Facility financing obligation, current portion and non-
current portion
Total stockholders’ equity
* See Note 2 for summary of adjustments.
2018 *
2017
At December 31,
2016
(in thousands)
2015
2014
$
183,596 $
393,576 $
83,300 $
107,691 $
205,982
77,254
485,138
807,156
325,801
288,967
—
46,100
55,907
266,500
20,817
449,874
967,190
326,163
533,193
—
—
259,837
23,962
419,408
623,629
282,332
238,432
—
—
22,120
26,963
201,088
27,021
334,664
561,545
252,139
232,583
33
—
7,822
166,557
170,044
21,424
356,553
505,655
191,336
225,445
236
—
35,502
1 Working capital is defined as total current assets minus total current liabilities.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the
related notes set forth in Item 8. “Financial Statements and Supplementary Data.” The following discussion also contains forward-looking statements that involve
a number of risks and uncertainties. See Part I, “Special Note Regarding Forward-Looking Statements” for a discussion of the forward-looking statements
contained below and Part I, Item 1A. “Risk Factors” for a discussion of certain risks that could cause our actual results to differ materially from the results
anticipated in such forward-looking statements.
Overview
Cornerstone is a leading global provider of learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). 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 that companies thrive when they help their employees to realize their potential. Putting this belief into practice, we offer solutions to help companies
strategically manage and continuously develop their talent throughout the entire employee lifecycle. Featuring comprehensive recruiting, personalized learning,
development-driven performance management, and holistic HR planning, our human capital management platform is successfully used by more than 3,535 global
clients of all sizes, spanning more than 40 million users across 192 countries and 43 languages.
We work with clients across all geographies, verticals and market segments. Our clients 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 platform domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and
South America, Europe and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies and global system integrators.
Our enterprise human capital management platform is composed of four product suites:
Our Recruiting suite helps organizations to attract, hire, and onboard the right employees;
Our Learning suite 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 content offering delivers
fresh, modern content, fueling employee curiosity and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback,
compensation management and succession planning; and
Our HR suite 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 human capital management platform that is
built to last. Our growth strategy since inception has been deliberate and focused on long-term success. This has allowed us to weather periods of economic turmoil
and significant changes in the markets we serve 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 twenty years a deep understanding of the
human capital management challenges our clients face. We continually collaborate with our clients to build extensive functionality that addresses their specific
needs and requests. We plan to continue to leverage our expertise in human capital management and client relationships to develop new products, features and
functionality that will enhance our platform 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 Clients. We believe our existing installed base of clients offers a substantial opportunity for growth.
•
Focus on Client Success, Retention and Growth. We believe focusing on our clients’ success will lead to our own success. We have developed a Client
Success Framework that governs our operating model. Since 2002, we have averaged annual gross dollar retention rates of approximately 95% . We strive
to maintain our strong retention rates by continuing to provide our clients with high levels of service, support and increasing functionality.
•
Sell Additional Products to Existing Clients. We believe there is a significant growth opportunity in selling additional functionality to our existing clients.
Many clients have added functionality subsequent to their initial deployments as they recognize the benefits of our unified platform. As a result,
approximately 71% of our clients today utilize two or more products and approximately 41% utilize three or more products. With our expanding product
portfolio functionality, we believe significant upsell opportunity remains within our existing client base.
Focus on Growing Recurring Revenue. Beginning in 2018, we focused our go-to-market capabilities on driving recurring revenue growth. We believe our
primary growth drivers are as follows:
•
•
•
•
Invest in Direct Sales in North America. We believe that the market for human capital management is large and remains significantly underpenetrated. In
particular, Recruiting and Content provides an opportunity to increase our recurring sales to both new and existing clients. Additionally, the Small and
Medium-sized Business (SMB) market represent a very large and underpenetrated opportunity.
Significantly Grow Our International Operation. We believe a substantial opportunity exists to continue to grow sales of our platform internationally. We
intend to grow our Europe, Middle-East and Africa ("EMEA") and Asia-Pacific and Japan ("APJ") operations. As of December 31, 2018 , we had 827
clients in EMEA and 198 clients in APJ.
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 platform. 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 clients directly
in our human capital management platform. We intend to enter into additional license agreements to continue providing the best content available for our
clients.
Expand the Ecosystem. During 2018, we migrated a sizable portion of our implementation services to our partners. We have also expanded in recent years
our relationships with various third-party consulting firms to deliver the successful implementation of our platform and to optimize our clients’ use of our
platform during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to ensure successful
delivery by our partners and continued high client satisfaction. We believe we have a significant opportunity to leverage these third-parties interested in
building or expanding their businesses to increase our market penetration.
36
Increase Operating Income and Free Cash Flow. In November 2017, we announced a strategic plan designed to better position us for long-term growth
and increase shareholder value. We believe managing our operating costs while making smart investments in scaling our middle and back-office operations to
support recurring revenue growth is critical to our long-term success. We intend to focus on operational excellence initiatives that drive increases in operating
income and free cash flow.
Acquisitions. We may acquire or invest in additional businesses, products or technologies that we believe will complement or expand our platform, enhance
our technical capabilities or otherwise offer growth opportunities. Most recently, in November 2018, we acquired Grovo Learning, Inc., a leading provider of
Microlearning® content, and in September 2018, we acquired Workpop Inc., a web and mobile solution for candidates and hiring managers in service-based
industries. We completed these transactions to support our strategic initiatives to enhance the Recruiting and Content areas of our platform.
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. We generally recognize subscription revenue over the contract period, and as a result of our revenue recognition policy and the seasonality of
when we enter into new client agreements, revenue from client agreements signed in the current period may not be fully reflected in the current period.
Subscription revenue. Revenue from subscriptions to our human capital management platform and related support sold on a recurring basis.
Annual recurring revenue. In order to assess our business performance with a metric that reflects a subscription-based business model, we track annual
recurring revenue, which is another financial metric we define as the annualized recurring value of all active contracts at the end of a reporting period.
Unlevered free cash flow. We define unlevered free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital
expenditures and capitalized software costs plus cash paid for interest. We present this metric because it is a liquidity measure that provides useful
information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including
investing in our business and strengthening our balance sheet.
Annual dollar retention rate . We define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a
fiscal year, divided by the implied monthly recurring revenue, for that same client base, at the beginning of the fiscal year and includes incremental sales
up to but not exceeding the original renewal amount to the existing client base. This ratio does not reflect implied monthly recurring revenue for new
clients added between the end of the prior fiscal year and the end of the current fiscal year. We define implied monthly recurring revenue as the total
amount of minimum recurring revenue to which we have a contractual right under each of our client agreements over the entire term of the agreement, but
excluding non-recurring support, consulting and maintenance fees, divided by the number of months in the term of the agreement. Implied monthly
recurring revenue is substantially comprised of subscriptions to our enterprise human capital management platform. This ratio excludes the implied
monthly recurring revenue from clients of our Cornerstone for Salesforce, Cornerstone PiiQ, Grovo Learning, Inc. and Workpop Inc. products. We believe
that our annual dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients.
Constant currency results . We present constant currency information, a non-GAAP financial measure, to provide a framework for assessing how our
underlying business performed excluding the effect of foreign currency fluctuations. Due to our legal and operating structure, our international revenues
are favorably impacted as the U.S. dollar weakens relative to the British pound and euro, and unfavorably impacted as the U.S. dollar strengthens relative
to the British pound and euro. We believe the presentation of results on a constant currency basis in addition to reported results helps improve the ability
to understand our performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results. To
present this information, current period results for entities reporting in British pounds and euros are translated into U.S. dollars at the prior period
exchange rates as opposed to the actual exchange rates in effect for the current period. These results should be considered in addition to, not as a substitute
for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled
measures used by other companies and are not a measure of performance presented in accordance with GAAP.
37
•
Number of clients . We believe that our ability to expand our client base is an indicator of our market penetration and the growth of our business as we
continue to invest in our direct sales teams and distributors. Our client count includes contracted clients for our enterprise human capital management
platform as of the end of the period and excludes clients of our Cornerstone for Salesforce, PiiQ, Grovo Learning, Inc. and Workpop Inc. products. In
2018 , our number of clients grew 9% .
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our platform is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate
revenue from the following sources:
•
•
Subscriptions to Our Products and Other Offerings on a Recurring Basis. Clients pay subscription fees for access to our enterprise human capital
management platform, 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 client. 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 clients and implementation partners assistance in implementing our products and optimizing their use.
Professional services include application configuration, system integration, business process re-engineering, change management and training services.
Services are generally billed upfront on a fixed fee basis and to a lesser degree on a time-and-material basis. These services are generally purchased as part
of a subscription arrangement and are typically performed within the first several months of the arrangement. Clients may also purchase professional
services at any other time. We generally recognize revenue from fixed fee professional services contracts as services are performed based on the
proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as
such time and materials are incurred.
Our client 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 client support;
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. We expect gross margin to increase over time as we optimize the efficiency of our
operations, continue to scale our business and deemphasize the sale of professional services.
38
Operating Expenses
Our operating expenses 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; and allocated overhead.
During the third quarter of 2018, we completed certain aspects of our strategic transformation plan to position us for long-term growth. The completion of
this transformation phase resulted in the reallocation of certain resources. The primary reallocation resulted in some sales and marketing headcount that
were moved to research and development activities to better align the organization with their job functions. On a go-forward basis, this will have the
impact of reducing sales and marketing and increasing research and development, as a percentage of revenue, by approximately 4%. The same impact
would be approximately 3% excluding stock-based compensation expense.
We intend to continue to invest in sales and marketing strategically to expand our business both domestically and internationally. We expect over time
sales and marketing expenses, as a percentage of revenue, to decrease.
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.
As described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing to research and development.
We have focused our research and development efforts on continuously improving our products. We believe that our research and development activities
are efficient because we benefit from maintaining a single software code base for each of our products. We expect research and development expenses to
increase proportionately with our business.
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; other corporate
expenses; and allocated overhead. Over time we expect our general and administrative expenses to decrease as a percentage of revenue.
Restructuring. Restructuring consists of stock-based compensation, payroll-related costs, such as severance, outplacement costs and continuing healthcare
coverage, associated with employee terminations.
Other Income (Expense)
•
•
•
Interest Income . Interest income consists primarily of interest income from investment securities partially offset by amortization of investment premiums.
We expect interest income to vary depending on the level of our investments in marketable securities, which include corporate bonds, agency bonds, U.S.
treasury securities and commercial paper.
Interest Expense. Interest expense consists primarily of interest expense from our convertible notes, accretion of debt discount and amortization of debt
issuance costs.
Other, Net. Other, net consists of income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to strategic
investments and other non-operating expenses. We expect other income (expense) to vary depending on the movement in foreign currency exchange rates
and the related impact on our foreign exchange gain (loss).
Income Tax (Provision) Benefit
On a consolidated basis, we have incurred operating losses and have recorded a full valuation allowance against our United States, United Kingdom, New
Zealand, Hong Kong and Brazil deferred tax assets for all periods to date and, accordingly, have not recorded a (provision) benefit for income taxes for any of the
periods presented other than a (provision) benefit for certain foreign and state income taxes. Certain foreign subsidiaries and branches provide intercompany
services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
39
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. The adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers , as amended
(“ASC 606”) had an inconsequential impact on the comparability of our financial results for the years ended December 31, 2018 , 2017 and 2016 .
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Other income (expense), net
Loss before income tax provision
Income tax provision
Net loss
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
40
$
2018 *
537,891 $
144,349
393,542
224,635
76,981
90,749
8,946
401,311
(7,769)
7,796
(28,176)
(3,098)
(23,478)
(31,247)
(2,595)
Year Ended
December 31,
2017
2016
481,985 $
142,867
339,118
240,271
61,975
84,589
1,539
388,374
(49,256)
2,951
(14,762)
1,478
(10,333)
(59,589)
(1,746)
$
(33,842) $
(61,335) $
423,124
135,752
287,372
225,781
46,977
70,956
—
343,714
(56,342)
1,702
(12,924)
1,934
(9,288)
(65,630)
(1,207)
(66,837)
The following table sets forth our results of operations as a percentage of total revenue for each of the periods indicated.
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Loss before income tax provision
Income tax provision
Net loss
2018 *
100.0 %
26.8 %
73.2 %
41.8 %
14.3 %
16.9 %
1.7 %
74.6 %
(1.4)%
1.4 %
(5.2)%
(0.6)%
(5.8)%
(0.5)%
(6.3)%
Year Ended
December 31,
2017
2016
100.0 %
29.6 %
70.4 %
49.9 %
12.9 %
17.6 %
0.3 %
80.6 %
(10.2)%
0.6 %
(3.1)%
0.3 %
(12.4)%
(0.4)%
(12.7)%
100.0 %
32.1 %
67.9 %
53.4 %
11.1 %
16.8 %
— %
81.2 %
(13.3)%
0.4 %
(3.1)%
0.5 %
(15.5)%
(0.3)%
(15.8)%
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Metrics
The following table sets forth our key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business,
formulate financial projections and make strategic decisions:
Revenue (in thousands)
Subscription revenue (in thousands)
Annual recurring revenue (in thousands)
Unlevered free cash flow (in thousands)
Annual dollar retention rate
Number of clients
$
$
$
$
At or For Year Ended December 31,
2018 *
2017
2016
537,891
473,052
510,000
63,471
$
$
$
$
92.8%
3,535
$
$
481,985
396,764
439,000
43,680
$
93.5%
3,250
423,124
339,756
n/a
16,411
95.1%
2,918
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Revenue increased $55.9 million , or 12% , in 2018 when compared to 2017 . Revenue growth on a constant currency basis increased 10% in 2018 when
compared to 2017 . Revenue increased $58.9 million, or 14% , in 2017 when compared to 2016 . Revenue growth on a constant currency basis increased 15% in
2017 when compared to 2016 .
The rate at which total revenue increased year over year declined in 2018 , from 14% in 2017 to 12% in 2018 . Our growth rate can depend on a variety of
factors, such as new clients, the size, volume and complexity of our agreements with our customers, foreign currency movements, our ability to work with our
customers to implement and deliver our products, our ability to upsell and renew our existing customers, the success of our alliance and partnership arrangements
and the expansion of our business through emerging markets. The decline in the growth rate of total revenue was driven by our strategic plan to transition away
from one-time professional services and recommit our efforts to grow recurring revenue and unlevered free cash flows.
41
The following table sets forth our sources of revenue for each of the periods indicated (dollars in thousands):
Subscription revenue
Percentage of subscription revenue to total revenue
Professional services revenue
Percentage of professional services to total revenue
At or For Year Ended December 31,
2018 *
2017
2016
473,052
$
87.9%
64,839
$
12.1%
537,891
$
396,764
$
82.3%
85,221
$
17.7%
481,985
$
339,756
80.3%
83,368
19.7%
423,124
$
$
$
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Subscription revenue increased by $76.3 million , or 19% , in 2018 when compared to 2017 . Subscription revenue growth on a constant currency basis
increased 20% in 2018 when compared to 2017 . The increase was attributable to new business, which includes new clients, upsells, cross-sells and renewals from
existing clients.
Professional services revenue decreased by $20.4 million , or 24% , in 2018 when compared to 2017 . The decrease of professional services revenue is
attributable to the continued execution of our strategic initiative announced in the fourth quarter of 2017, to sharpen our focus on recurring revenue growth and
migrate much of our implementation services to our global partners.
Subscription revenue increased by $57.0 million, or 17%, in 2017 when compared to 2016. The increase was attributable to new business, which included
new clients, upsells and renewals from existing clients. Professional services revenue increased by $1.9 million, or 2%, in 2017 when compared to 2016.
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 (dollars in thousands):
Revenue for United States
Percentage of total revenue for United States
Revenue for all other countries
Percentage of total revenue for all other countries
At or For Year Ended December 31,
2018 *
2017
2016
343,206
$
63.8%
194,685
$
36.2%
537,891
$
313,729
$
65.1%
168,256
$
34.9%
481,985
$
284,657
67.3%
138,467
32.7%
423,124
$
$
$
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Annual recurring revenue for the year ended December 31, 2018 was $510.0 million . In order to assess our business performance with a metric that reflects
our transition to an even more subscription-based (or recurring revenue) business model, we track annual recurring revenue, which is a non-GAAP financial
measure we define as the annualized recurring value of all active contracts at the end of a reporting period. Management believes 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.
Unlevered free cash flow for the year ended December 31, 2018 was $63.5 million , resulting in an unlevered free cash flow margin of 11.8% as compared to
unlevered free cash flow of $43.7 million and unlevered free cash flow margin of 9.1% for year ended December 31, 2017 .
42
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue
Gross profit
Gross margin
Year Ended December 31,
2018 *
2017
2016
$
$
144,349
393,542
$
$
73.2%
(dollars in thousands)
142,867
339,118
$
$
70.4%
135,752
287,372
67.9%
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Cost of revenue increased $1.5 million , or 1% , in 2018 as compared to 2017 . The increase in cost of revenue was primarily due to $6.0 million in increased
capitalized software amortization and $4.5 million in increased content costs. These increased costs were partially offset by $6.6 million in decreased amortization
of acquired intangible assets and $2.9 million in external implementation service costs. These costs were incurred to service our existing clients and support our
continued growth. The improvement in gross margin was primarily due to a higher mix of subscription revenue, which carries a higher gross margin.
Cost of revenue increased $7.1 million, or 5%, in 2017 as compared to 2016 . The increase in cost of revenue was primarily due to $4.4 million in increased
amortization of capitalized software, $1.9 million in increased employee-related costs due to higher headcount and $1.9 million in increased third-party content
costs. These increased costs were offset by $2.2 million in decreased costs related to outsourced consulting services. These costs were incurred to service our
existing clients and support our continued growth. The improvement in gross margin was primarily due to a higher mix of subscription revenue, which carries a
higher gross margin.
Aside from the improvement in gross margin from the higher mix of subscription revenue, we expect gross margin to increase over time as we optimize the
efficiency of our operations and continue to scale our business.
Sales and Marketing
Sales and marketing
Percent of revenue
Year Ended December 31,
2018 *
2017
2016
$
224,635
$
(dollars in thousands)
240,271
$
41.8%
49.9%
225,781
53.3%
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Sales and marketing expenses decreased $15.6 million , or 7% , in 2018 as compared to 2017 . As a percentage of revenue, sales and marketing expense
decreased by approximately eight percentage points, primarily resulting from a combination of increased cost efficiency, reduction in headcount as part of our
planned restructuring and leverage realized from changes to our sales commission plans, as we continued our efforts to strategically scale our sales teams and
improve their productivity.
Sales and marketing expenses increased $14.6 million, or 6%, in 2017 as compared to 2016 . As a percentage of revenue, sales and marketing expense
decreased by approximately three percentage points, primarily resulting from a combination of increased cost efficiency and leverage realized from changes to our
sales commission plans, as we continued our efforts to strategically scale our sales teams and improve their productivity.
As described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing to research and development. We assess our
investments in new and existing markets strategically, and we believe we have gained leverage through our operational excellence initiatives. We expect over time
sales and marketing expense, as a percentage of revenue, to continue to decrease as we gain efficiency throughout the various sales teams.
43
Research and Development
Research and development
Percent of revenue
Year Ended December 31,
2018
2017
2016
$
76,981
$
14.3%
(dollars in thousands)
61,975
$
12.9%
46,977
11.1%
Research and development expenses increased $15.0 million , or 24% , in 2018 as compared to 2017 . The increase was principally due to an increase in
research and development headcount to maintain and improve the functionality of our products. As a result, we incurred increased employee-related costs of $12.1
million.
Research and development expenses increased $15.0 million, or 32%, in 2017 as compared to 2016 . The increase was principally due to an increase in
research and development headcount to maintain and improve the functionality of our products. As a result, we incurred increased employee-related costs of $10.4
million. In addition, we determined that previously capitalized software costs were impaired resulting in the write-off of $1.3 million.
We continue to develop and release new products and new features within existing products and, as a result, we expect research and development expense to
increase proportionately with revenue. Additionally, as described above, during the third quarter of 2018, we reallocated certain resources from sales and marketing
to research and development.
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 of our capitalizable development and enhancement projects may affect the amount of development costs expensed in any given period. We
capitalized $31.6 million , $24.3 million and $20.9 million of software development costs and amortized $23.5 million , $17.6 million and $13.2 million in 2018 ,
2017 and 2016 , respectively.
General and Administrative
General and administrative
Percent of revenue
Year Ended December 31,
2018
2017
2016
$
90,749
$
16.9%
(dollars in thousands)
84,589
$
17.6%
70,956
16.8%
General and administrative expenses increased $6.2 million , or 7% , in 2018 as compared to 2017 . The increase was primarily due $4.0 million of increased
professional and consulting expenses. The increase was also driven by higher costs to support our growing business and incremental spend to support our
operational excellence initiatives, which we expect to result in future margin improvements.
General and administrative expenses increased $13.6 million, or 19%, in 2017 as compared to 2016 . The increase was largely driven by higher costs to
support our growing business and incremental spend to support our operational excellence initiatives, which we expect to result in future margin improvements.
We incurred increased employee-related costs of $9.8 million as a result of increased headcount and stock-based compensation awards.
We expect over time our general and administrative expense to decrease as a percentage of revenue as we continue our cost containment measures.
44
Restructuring
Restructuring
Percent of revenue
Year Ended December 31,
2018
2017
2016
$
8,946
$
1.7%
(dollars in thousands)
1,539
$
0.3%
—
—%
Restructuring expenses increased $7.4 million , or 481% , in 2018 as compared to 2017 . The increase was primarily due to increased payroll-related costs,
such as severance, outplacement costs and continuing healthcare coverage for terminated employees, associated with the planned restructuring which was
completed in the third quarter of 2018.
Other Income (Expense)
Interest income
Interest expense
Other, net
Other income (expense), net
Year Ended December 31,
2018
2017
(in thousands)
2016
$
$
7,796 $
2,951 $
(28,176)
(3,098)
(14,762)
1,478
(23,478) $
(10,333) $
1,702
(12,924)
1,934
(9,288)
Interest income in 2018 increased by $4.8 million due to the increase in interest income earned on investment securities and money market portfolio.
Interest expense in 2018 increased $13.4 million due to an increase in interest expense for our convertible notes. Refer to the section titled “Liquidity and
Capital Resources” below for additional information on the convertible notes.
Other, net primarily comprises foreign exchange gains and losses related to transactions denominated in foreign currencies and foreign exchange gains and
losses related to our intercompany loans and certain cash accounts. Foreign exchange gains and losses for the years ended December 31, 2018 , 2017 and 2016 ,
respectively, were primarily driven by fluctuations in the euro and U.S. dollar in relation to the British pound.
Income Tax Provision
Year Ended December 31,
2018
2017
(in thousands)
2016
Income tax provision
$
(2,595) $
(1,746) $
(1,207)
For each of the years presented, we have recorded a full valuation allowance against our United States, United Kingdom, New Zealand, Hong Kong and
Brazil net deferred tax assets and therefore have not recorded a provision or benefit for income taxes for any of the years presented, other than provisions for
certain foreign and state current income taxes. We expect the provision to increase over time as the business grows and we become more profitable.
Liquidity and Capital Resources
At December 31, 2018 , our principal sources of liquidity were $183.6 million of cash and cash equivalents, investments in marketable securities of $204.7
million and $125.3 million of accounts receivable, net.
In December 2017, we issued $300.0 million principal amount of 5.75% senior convertible notes due July 1, 2021 (the “2021 Notes”) for a purchase price
equal to 98% of the principal amount, to certain entities affiliated with Silver Lake and LinkedIn. Holders of the 2021 Notes may convert their 2021 Notes at any
time prior to the close of business on the scheduled trading day immediately preceding the maturity date. We utilized the proceeds in part to repay the $253.0
million of 1.5% convertible notes which matured on July 1, 2018 (the “2018 Notes”) and were paid on July 2, 2018. The 2018 Notes are no longer outstanding.
45
In September 2018, we used approximately $18.2 million of cash in connection with our acquisition of Workpop Inc and in November 2018, we used
approximately $22.9 million of cash in connection with our acquisition of Grovo Learning, Inc. With the acquisition of Grovo, we recorded a facility financing
obligation of $46.1 million associated with the build-to-suit asset recorded on our consolidated balance sheets.
We intend to use our cash for general corporate purposes, potential future acquisitions or other transactions. Depending on certain growth opportunities, we
may choose to accelerate investments in sales and marketing, research and development, technology and services, which may require the use of proceeds for such
additional expansion and expenditures. Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities
and existing cash and cash equivalents will provide adequate funds for our ongoing operations and general corporate purposes for at least the next 12 months. Our
future capital requirements will depend on many factors, including 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 and cash from operations 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.
The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
2018
Year Ended
December 31,
2017
$
90,253 $
67,510 $
(20,876)
(278,016)
(36,666)
276,852
2016
35,252
(81,638)
23,515
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 $90.3 million in 2018 , compared to $67.5 million in 2017 . The increase in operating cash flow was primarily due
to improved profitability, improved collections and other working capital changes in 2018 when compared to 2017 .
Our primary investing activities have consisted of investments in marketable securities to maximize return on excess cash, 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 $20.9 million in 2018 , compared to $36.7 million in 2017 . The net decrease in cash used in investing activities was
primarily due to the decrease in purchases of marketable securities in 2018. This was offset by the decrease in maturities of marketable securities and cash used to
complete the Workpop, Inc. and Grovo Learning, Inc. acquisitions in 2018.
Cash used in financing activities was $278.0 million in 2018 , compared to $276.9 million of cash provided by financing activities in 2017 . The decrease in
cash provided by financing cash activities was primarily due to the repayment of the 2018 Notes as well as additional repurchases under the share purchase
program. The cash provided by financing activities in 2017 was primarily composed of proceeds from the 2021 Notes.
46
Share Repurchase Program
In November 2017, our board of directors authorized a $100.0 million share repurchase program of our common stock. We repurchased all shares authorized
under the share repurchase program as of December 31, 2018 .
The following is a summary of our stock repurchases under our $100.0 million share repurchase program as of December 31, 2018 (in thousands, except per
share information):
Period
November 8, 2017 - December 31, 2017
January 1, 2018 - March 31, 2018
April 1, 2018 - June 30, 2018
July 1, 2018 - September 30, 2018
October 1, 2018 - December 31, 2018
Subtotal
Contractual Obligations
# of Shares
Repurchased
Average Price per
Share
635 $
423 $
444 $
300 $
484 $
Total Expenditures
22,599
35.55 $
37.84
46.66
53.82
50.59
16,024
20,718
16,143
24,516
2,286 $
43.71 $
100,000
Our principal commitments consist of obligations for outstanding debt, leases for our office space, contractual commitments for professional service projects
and third-party consulting firms. The following table summarizes our contractual obligations at December 31, 2018 (in thousands):
Long-term debt obligations including interest
Operating lease obligations (1)
Software subscription and other contractual obligations
$
$
Less than 1 Year
Total
351,750 $
17,250 $
334,500 $
— $
Payments Due by Period
1-3 Years
3-5 Years
87,509
29,450
11,576
17,834
28,439
8,802
29,533
2,814
More than 5
Years
—
17,961
—
468,709 $
46,660 $
371,741 $
32,347 $
17,961
(1) The table above includes future minimum lease payments for the Company's facility financing obligation as follows: less than 1 Year: $4.8 million ; 1-3 Years:
$9.8 million ; 3-5 Years: $10.6 million ; More than 5 Years: $16.4 million .
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.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with
accounting principles generally accepted in the United States. 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.
47
Revenue Recognition and Deferred Revenue
Identification of the contract, or contracts, with a customer
Identification of all performance obligations in the contract
We recognize revenue from contracts with customers based on the following five steps:
1)
2)
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
We identify enforceable contracts with a customer when the agreement is signed. We account for individual performance obligations separately if they are
distinct. The transaction price is generally based on fixed fees stated in the contract. We exclude from the transaction price any amounts relating to taxes from
product sales which are collected from customers and remitted to governmental authorities. If the contract contains a single performance obligation, the entire
transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction
price to each performance obligation based on a relative standalone selling price basis. We are not able to directly observe a standalone selling price for each
performance obligation, as the performance obligations are sold separately and within a sufficiently narrow price range only infrequently, and because we have
determined that there are no third-party offerings reasonably comparable to our products. Accordingly, total contract values are allocated to subscriptions to the
products and professional services based on the standalone selling price (“SSP”). The determination of SSP requires us to make certain estimates and judgments.
We consider numerous factors, including the nature and complexity of the performance obligations themselves; the geography, market conditions and competitive
landscape for the sale; internal costs; and pricing and discounting practices. We update our estimates of SSP on an ongoing basis through internal periodic reviews
and as events or circumstances may require. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a
customer. We satisfy performance obligations over time.
In a limited number of cases, the client’s intended use of a product requires contractually specified enhancements to its underlying features and functionality.
In some of these cases, revenue is recognized as a combined single performance obligation on a straight-line basis from the point at which access to the enhanced
product(s) have been provided, through the remaining term of the agreement. In other cases where the enhancement is not contractually specified by the customer
for its initial use, revenue is recognized separately for the enhancement and the product as a second distinct performance obligation. In such cases where a second
performance obligation exists, the enhancement revenue is recognized based on a SSP allocation on a straight-line basis once access to the enhancement has been
provided, through the remaining term of the agreement.
For arrangements in which we resell third-party e-learning training content to clients, revenue is recognized in accordance with accounting guidance as to
when to report gross revenue as a principal or report net revenue as an agent. We typically recognize third-party content revenue at the gross amount invoiced to
clients as (i) we are primarily responsible for hosting the content on our platform for the term of the agreement, (ii) we control the content before access is provided
to the customer, and (iii) we typically have discretion to establish the price charged.
We record amounts that have been invoiced to our clients in accounts receivable and in either deferred revenue or revenue depending on whether the revenue
recognition criteria described above have been met. Deferred revenue that will be recognized during the succeeding twelve-month period from the respective
balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Sales Commission
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 client agreements that gave rise to the commissions. 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 took into consideration
technology and other factors in estimating the benefit period. Sales commissions for renewal contracts are deferred and amortized on a straight-line basis over the
related contract renewal period. Amortization expense is included in sales and marketing expenses in the accompanying condensed statements of operations. We
generally commence payment of commissions within 45 to 75 days after execution of client agreements.
48
Stock-based Compensation
We account for stock-based awards granted to employees and directors by recording compensation expense based on the awards’ estimated fair values. We
grant stock options and restricted stock units that vest over time based on the continuing employment of the employee, as well as restricted stock units that vest
based on meeting certain performance targets. We expect that our expense related to stock-based compensation will increase proportionally with the growth in the
business.
We estimate the fair value of our restricted stock units based on the closing price of our common stock as of the date of grant. We estimate the fair value of
our stock options as of the date of grant using the Black-Scholes option-pricing model. Determining the fair value of stock options under this model requires
judgment, including estimating (i) the value per share of our common stock, (ii) volatility, (iii) the term of the awards, (iv) the dividend yield and (v) the risk-free
interest rate. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, based on management’s judgment and
subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model change significantly, stock-based
compensation recorded for future awards may differ materially from that recorded for awards granted previously.
Beginning in 2017, we began estimating expected volatility based solely on our historical volatility as a public company. In previous years, we estimated this
using the average volatility of similar publicly traded companies as sufficient trading history of our stock was not available. For purposes of determining the
expected term of the awards in the absence of sufficient historical data relating to stock option exercises for our company, we apply a simplified approach in which
the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award. The risk-free interest rate for periods
within the expected life of an award, as applicable, is based on the United States Treasury yield curve in effect during the period the award was granted. Our
estimated dividend yield is zero, as we have not declared dividends in the past and do not currently intend to declare dividends in the foreseeable future.
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for stock options granted
within each of the last three years:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2018
2017
2016
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1.4%
5.8
—%
48.8%
Once we have determined the estimated fair value of our stock-based awards, we recognize the portion of that value that corresponds to the portion of the
award that is ultimately expected to vest, taking estimated forfeitures into account. This amount is recognized as an expense over the vesting period of the award
using the straight-line method for awards which contain only service conditions, and using the graded vesting method based upon the probability of the
performance condition being met for awards which contain performance conditions. We estimate forfeitures based upon our historical experience and, for each
period, we review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change.
In addition, we have issued performance-based restricted stock units that vest based upon continued service through the vesting term and achievement of
certain market conditions and performance goals, and others that vest based upon continued service through the vesting term and achievement of certain market
conditions or performance goals, established by the board of directors, for a predetermined period. The fair value of the performance-based awards containing a
market condition are determined using a Monte-Carlo simulation model that factors in the probability of the award vesting. The fair value of the performance-based
awards containing only a service and performance condition are determined based upon the closing price of our common stock on the date of the grant. For
performance-based awards, the fair value is not determined until all of the terms and conditions of the award are established.
49
As of December 31, 2018 , we had approximately $0.6 million of unrecognized employee related stock-based compensation, net of estimated forfeitures,
relating to stock options that we expect to recognize over a weighted-average period of approximately 0.7 years . Unrecognized compensation expense related to
unvested restricted stock units was $127.8 million at December 31, 2018 , which is expected to be recognized as expense over the weighted-average period of 2.9
years. Additionally, during 2018, 2017, 2016 and 2014, we granted certain performance-based restricted stock units. There was $18.4 million unrecognized
compensation expense related to performance-based restricted stock units at December 31, 2018 . The amount of compensation cost relating to performance awards
may change in future periods to the extent that another target level becomes probable of achievement.
Stock-based compensation expense is expected to increase in 2019 compared to 2018 as a result of our existing unrecognized stock-based compensation and
as we issue additional stock-based awards to continue to attract and retain employees.
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, and who devote time to, 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 and enhancements 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.
Business Combinations
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase
accounting results in assets and liabilities of an acquired business being 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.
We perform valuations of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to its respective net tangible and
intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the
selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. We engage the assistance
of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business
combination.
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 bases 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 valuation allowances, we consider our projected future taxable income and future reversals of existing taxable temporary differences. We have recorded a
full valuation allowance to reduce our United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets to zero, because we have
determined that it is not more likely than not that any of our United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets will be
realized. If in the future we determine that we will be able to realize any of our United States, United Kingdom, New Zealand, Hong Kong and Brazil 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. Certain of our foreign
subsidiaries and branches provide intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes
in their respective jurisdictions.
50
We have assessed our income tax positions and recorded tax benefits for all years subject to examination, based upon our evaluation of the facts,
circumstances and information available at each period end. For those tax positions where we have determined there is a greater than 50% likelihood that a tax
benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. For those income tax positions where we have determined there is a less than 50% likelihood that a tax benefit will
be sustained, no tax benefit has been recognized in our consolidated financial statements.
Recent Accounting Pronouncements
For additional information regarding recent accounting pronouncements adopted and under evaluation, refer to Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We have operations in the 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. To reduce certain of these risks, we monitor the financial condition of our large clients and limit credit exposure by principally
collecting 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, U.S. treasury securities, agency securities, commercial paper and money market funds backed by United States Treasury Bills within the
guidelines established under our investment policy. We also make strategic investments in privately-held companies in the development stage. To date, we have
not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or
speculative purposes.
Interest Rate Risk
At December 31, 2018 , we had cash and cash equivalents of $183.6 million and investments of $204.7 million , which primarily consisted of corporate
bonds, U.S. treasury securities, agency securities, commercial paper, money market funds backed by United States Treasury Bills and other debt securities. The
carrying amount of our cash equivalents reasonably approximates fair value due to the short maturities of these instruments.
The primary objectives of our 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. Our investments are exposed to market risk due to fluctuations in interest rates,
which may affect the fair market value of our investments. An increase of 50 basis points in interest rates would have resulted in a $(0.1) million reduction on the
fair market value of our portfolio as of December 31, 2018 . We therefore do not expect our operating results or cash flows to be materially affected by a sudden
change in market interest rates.
We do not believe our cash equivalents, corporate bonds, U.S. treasury securities, agency securities and commercial paper have significant risk of default or
illiquidity. While we believe these cash investments do not contain excessive risk, we cannot provide assurance 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 provide assurance that we will not experience losses on these deposits.
51
Foreign Currency Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily euros and
British pounds. To a lesser extent, we also have revenue denominated in Australian dollars, Brazilian reals, Canadian dollars, Chinese yuan, Hong Kong dollars,
Indian rupees, Japanese yen, Mexican pesos, New Zealand dollars, Singapore dollars, South African rand, Swedish kronor, Swiss francs and other foreign
currencies, and operating expenses denominated in Australian dollars, Brazilian reals, Canadian dollars, Hong Kong dollars, Indian rupees, Israeli shekels,
Japanese yen, Mexican pesos, New Zealand dollars, Singapore dollars, Swedish kronor, and Swiss francs. 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 U.S. 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 U.S. 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 or a weakening U.S. dollar can increase the costs of our international expansion. To date, we have
not entered into any foreign currency hedging contracts although we may do so in the future. The effect of an immediate 10% adverse change in foreign exchange
rates on foreign-denominated accounts at December 31, 2018 , including our intercompany loans with our subsidiaries, would result in a foreign currency loss of
approximately $7.5 million.
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 consolidated financial statements are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We attempt to
mitigate this risk through credit monitoring procedures.
52
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
53
PAGE
54
56
57
58
59
60
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Cornerstone OnDemand, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cornerstone OnDemand, Inc. and its subsidiaries (the “Company”) as of December 31, 2018
and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers
and the manner in which it accounts for sales commissions in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting
appear under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the
54
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2019
We have served as the Company’s auditor since 2001.
55
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
December 31, 2018
December 31, 2017
Assets
$
183,596 $
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Deferred commissions, current portion
Prepaid expenses and other current assets
Total current assets
Capitalized software development costs, net
Deferred commissions, net of current portion
Property and equipment, net
Long-term investments
Intangible assets, net
Goodwill
Other assets, net
Total Assets
Liabilities:
Accounts payable
Accrued expenses
Liabilities and Stockholders’ Equity
$
$
Deferred revenue, current portion
Convertible notes, net
Other liabilities
Total current liabilities
Convertible notes, net
Other liabilities, non-current
Deferred revenue, net of current portion
Facility financing obligation
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ Equity:
Common stock, $0.0001 par value; 1,000,000 shares authorized, 58,886 and 57,512 shares issued and
outstanding at December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
204,732
125,300
24,467
34,940
573,035
45,416
45,444
77,254
1,250
13,867
47,453
3,437
807,156 $
11,921 $
68,331
312,526
—
7,645
400,423
288,967
2,484
13,275
46,100
751,249
6
585,387
(529,962)
476
55,907
393,576
169,551
154,428
42,806
21,754
782,115
37,431
—
20,817
96,949
—
25,894
3,984
967,190
17,637
57,528
311,997
248,025
9,051
644,238
285,168
1,498
14,166
—
945,070
6
536,951
(515,054)
217
22,120
967,190
$
807,156 $
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
56
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Other income (expense), net
Loss before income tax provision
Income tax provision
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
2018
Years Ended
December 31,
2017
2016
$
537,891 $
481,985 $
144,349
393,542
224,635
76,981
90,749
8,946
401,311
(7,769)
7,796
(28,176)
(3,098)
(23,478)
(31,247)
(2,595)
142,867
339,118
240,271
61,975
84,589
1,539
388,374
(49,256)
2,951
(14,762)
1,478
(10,333)
(59,589)
(1,746)
$
$
(33,842) $
(0.58) $
58,159
(61,335) $
(1.07) $
57,262
423,124
135,752
287,372
225,781
46,977
70,956
—
343,714
(56,342)
1,702
(12,924)
1,934
(9,288)
(65,630)
(1,207)
(66,837)
(1.20)
55,595
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
57
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income, net of tax:
Foreign currency translation adjustment
Net change in unrealized gains (losses) on investments
Other comprehensive income (loss), net of tax
Total comprehensive loss
2018
Years Ended
December 31,
2017
2016
(33,842) $
(61,335) $
(66,837)
(210)
469
259
(3,795)
(434)
(4,229)
3,748
88
3,836
(33,583) $
(65,564) $
(63,001)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
58
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balance as of December 31, 2015
54,704 $
5 $
394,089 $
(386,882) $
610
$
7,822
Common
Stock
Shares
Par
Value
Additional
Paid-In
Capital
(Deficit)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Shares issued under employee stock
purchase plan
Stock-based compensation
Net loss
Other comprehensive income, net of tax
Balance as of December 31, 2016
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Shares issued under employee stock
purchase plan
Repurchase of common stock
Stock-based compensation
Net loss
Other comprehensive loss, net of tax
Balance as of December 31, 2017
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Shares issued under employee stock
purchase plan
Repurchase of common stock
Stock-based compensation
Cumulative effect of accounting change
Net loss
Other comprehensive income, net of tax
Balance as of December 31, 2018
978
699
135
—
—
—
1
—
—
—
—
—
18,904
—
4,286
58,951
—
—
—
—
—
—
(66,837)
—
—
—
—
—
—
3,836
56,516 $
6 $
476,230 $
(453,719) $
4,446
$
414
1,035
182
(635)
—
—
—
—
—
—
—
—
—
—
6,777
—
5,621
(22,599)
70,922
—
—
—
—
—
—
(61,335)
—
—
—
—
—
—
(4,229)
57,512 $
6 $
536,951 $
(515,054) $
217
$
1,474
1,370
181
(1,651)
—
—
—
—
—
—
—
—
—
—
—
—
47,816
—
6,422
(77,401)
71,599
—
—
—
—
—
—
—
—
18,934
(33,842)
—
58,886 $
6 $
585,387 $
(529,962) $
—
—
—
—
—
—
—
259
476
$
18,905
—
4,286
58,951
(66,837)
3,836
26,963
6,777
—
5,621
(22,599)
70,922
(61,335)
(4,229)
22,120
47,816
—
6,422
(77,401)
71,599
18,934
(33,842)
259
55,907
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
59
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Accretion of debt discount and amortization of debt issuance costs
Purchased investment premium, net of amortization
Net foreign currency gain
Stock-based compensation expense
Write-off of capitalized software
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Deferred commissions
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Maturities of investments
Capital expenditures
Capitalized software costs
Cash paid for acquisition, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Payments of debt issuance costs and proceeds from convertible notes
Repayment of debt
Principal payments under capital lease obligations
Proceeds from employee stock plans
Repurchases of common stock
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
Proceeds from employee stock plans received in advance of stock issuance
Non-cash investing and financing activities:
Assets acquired under capital leases and other financing arrangements
Capitalized assets financed by accounts payable and accrued expenses
Capitalized stock-based compensation
Deferred debt issuance costs included in accrued expenses
Unsettled share repurchase in other liabilities
Years Ended December 31,
2018
2017
2016
$
(33,842)
$
(61,335)
$
(66,837)
35,260
8,929
(160)
(440)
66,557
—
123
27,199
(15,316)
(11,443)
(5,496)
9,291
10,803
(1,212)
90,253
(125,109)
185,733
(14,895)
(25,515)
(41,090)
(20,876)
(152)
(253,000)
—
54,402
(79,266)
(278,016)
(1,341)
(209,980)
393,576
35,377
9,833
1,135
(2,461)
65,924
1,339
52
(14,317)
(5,249)
(2,704)
(6,820)
8,530
35,829
2,377
67,510
(323,413)
314,418
(7,100)
(20,571)
—
(36,666)
285,077
—
—
12,509
(20,734)
276,852
2,580
310,276
83,300
$
$
$
183,596
$
393,576
$
13,628
$
1,859
642
47,070
$
1,566
5,042
—
—
$
$
3,841
2,243
575
3,467
1,829
4,998
152
1,866
32,392
9,130
240
(7)
54,699
—
(736)
(38,092)
(2,543)
(3,623)
5,939
3,727
43,379
(2,416)
35,252
(210,534)
151,533
(6,228)
(16,409)
—
(81,638)
—
—
(33)
23,548
—
23,515
(1,520)
(24,391)
107,691
83,300
3,796
2,334
489
—
2,080
4,252
—
—
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
60
CORNERSTONE ONDEMAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION
Company Overview
Cornerstone OnDemand, Inc. (“Cornerstone” or the “Company”) was incorporated on May 24, 1999 in the state of Delaware and began its principal
operations in November 1999 .
The Company is a leading global provider of learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). The Company
helps organizations around the globe recruit, train and manage their employees. It is one of the world’s largest cloud computing companies. The Company's human
capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to
enable organizations to manage the entire employee lifecycle. Its focus on continuous learning and development helps organizations to empower employees to
realize their potential and drive success.
The Company works with clients across all geographies, verticals and market segments. Its Recruiting, Learning, Performance and HR Administration suites
help with sourcing, recruiting and onboarding new hires; managing training and development requirements; nurturing knowledge sharing and collaboration among
employees; goal setting reviews, competency management and continuous feedback; linking compensation to performance; identifying development plans based
on performance gaps; streamlining employee data management, self-service and compliance reporting; and then utilizing state-of-the-art analytics capabilities to
make smarter, more-informed decisions using data from across the platform for talent mobility, engagement and development so that HR and leadership can focus
on strategic initiatives to help their organization succeed.
The Company’s management has determined that the Company operates in one segment as it only reports financial information on an aggregate and
consolidated basis to the Company’s chief executive officer, who is the Company’s chief operating decision maker.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are presented in accordance with accounting standards generally accepted in the United States of
America (“GAAP”), and include the accounts of Cornerstone OnDemand, Inc. and its wholly owned subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
On an on-going basis, management evaluates its estimates, including among others those related to: (i) the realization of tax assets and estimates of tax
liabilities and reserves, (ii) the recognition and disclosure of contingent liabilities, (iii) the evaluation of revenue recognition criteria, including the determination of
standalone value and estimates of the selling price of multiple-deliverables in the Company’s revenue arrangements, (iv) fair values of investments in marketable
securities and strategic investments carried at fair value, (v) the fair values of acquired assets and assumed liabilities in business combinations, (vi) the useful lives
of property and equipment, capitalized software and intangible assets, (vii) impairment of long-lived assets, (viii) the period of amortization of the commission
payments to record to expense and (ix) determination of the number of shares that are probable of vesting for performance-based restricted stock unit awards.
These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The
Company engages third-party valuation specialists to assist with the allocation of the purchase price in business combinations. Such estimates required the selection
of appropriate valuation methodologies and models and significant judgment in evaluating ranges of assumptions and financial inputs.
61
Business Combinations
The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the
acquisition. Purchase accounting results in assets and liabilities of an acquired business being 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 Company performs valuations of assets acquired and liabilities assumed for an acquisition and allocates the purchase price to its respective net tangible
and intangible assets. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair
values of assets acquired and liabilities assumed in a business combination.
Revenue Recognition
Effective January 1, 2018, the Company adopted the guidance under Topic 606 on a modified retrospective approach. All balances reported prior to this date
are presented under Topic 605. Refer to the discussion under Recently Adopted Accounting Pronouncements below to understand the impacts of adopting Topic
606 on our financial statements.
The Company derives its revenue from the following sources:
Subscriptions to the Company’s products and other offerings on a recurring basis
Clients pay subscription fees for access to the Company’s enterprise human capital management platform, 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. The Company generally recognizes revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service
is made available to the client. 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
The Company offers its clients and implementation partners assistance in implementing its products and optimizing their use. Professional services include
application configuration, system integration, business process re-engineering, change management and training services. Services are generally billed up-front on
a fixed fee basis and to a lesser degree on a time-and-material basis. These services are generally purchased as part of a subscription arrangement and are typically
performed within the first several months of the arrangement. Clients may also purchase professional services at any other time. The Company generally
recognizes 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.
Identification of the contract, or contracts, with a customer
Identification of all performance obligations in the contract
The Company recognizes revenue from contracts with customers based on the following five steps:
1)
2)
3) Determination of the transaction price
4) Allocation of the transaction price to the performance obligations in the contract
5) Recognition of revenue as the Company satisfies a performance obligation
62
The Company identifies enforceable contracts with a customer when the agreement is signed. The Company accounts for individual performance obligations
separately if they are distinct. The transaction price is generally based on fixed fees stated in the contract. The Company excludes from the transaction price any
amounts relating to taxes from product sales which are collected from customers and remitted to governmental authorities. If the contract contains a single
performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company is not able to directly
observe a standalone selling price for its performance obligations, as the performance obligations are sold separately and within a sufficiently narrow price range
only infrequently, and because management has determined that there are no third-party offerings reasonably comparable to the Company’s products. Accordingly,
total contract values are allocated to subscriptions to the products and professional services based on the standalone selling price (“SSP”). The determination of
SSP requires the Company to make certain estimates and judgments. The Company considers numerous factors, including the nature and complexity of the
performance obligations themselves; the geography, market conditions and competitive landscape for the sale; internal costs; and pricing and discounting practices.
The Company updates its estimates of SSP on an ongoing basis through internal periodic reviews and as events or circumstances may require. Revenue is
recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer. The Company satisfies performance
obligations over time.
In a limited number of cases, the client’s intended use of a product requires contractually specified enhancements to its underlying features and functionality.
In some of these cases, revenue is recognized as a combined single performance obligation on a straight-line basis from the point at which access to the enhanced
product(s) have been provided, through the remaining term of the agreement. In other cases where the enhancement is not contractually specified by the customer
for its initial use, revenue is recognized separately for the enhancement and the product as a second distinct performance obligation. In such cases where a second
performance obligation exists, the enhancement revenue is recognized based on a SSP allocation on a straight-line basis once access to the enhancement has been
provided, through the remaining term of the agreement.
For arrangements in which the Company resells third-party e-learning training content to clients, revenue is recognized in accordance with accounting
guidance as to when to report gross revenue as a principal or report net revenue as an agent. The Company typically recognizes third-party content revenue at the
gross amount invoiced to clients as (i) the Company is primarily responsible for hosting the content on the Company's platform for the term of the agreement,
(ii) the Company controls the content before access is provided to the customer, and (iii) the Company typically has discretion to establish the price charged.
Deferred Revenue
The Company records amounts that have been invoiced to its clients in accounts receivable and in either deferred revenue or revenue depending on whether
the revenue recognition criteria described above have been met. Deferred revenue that will be recognized during the succeeding twelve-month period from the
respective balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The decrease in the deferred revenue
balance for the year ended December 31, 2018 is primarily driven by $301.6 million of revenue recognized that were included in the deferred revenue balances as
of January 1, 2018 offset by invoices billed in advance of satisfying performance obligations in accordance with contract payment terms.
Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2018 , approximately $876.0 million of revenue is expected to be recognized from remaining performance obligations. This amount
mainly comprises subscription revenue, with less than 10% attributable to professional services and other revenue. The Company expects to recognize revenue on
approximately two thirds of these remaining performance obligations over the next 18 months , with the balance recognized thereafter.
The estimated revenues from the remaining performance obligations do not include uncommitted contract amounts such as (i) amounts which are cancelable
by the client without any significant penalty, (ii) future billings for time-and-material contracts, and (iii) amounts associated with optional renewal periods.
63
Sales Commission
The Company defers commissions paid to its 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 client agreements that gave rise to the commissions. 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. The
Company took into consideration technology and other factors in estimating the benefit period. Sales commissions for renewal contracts are deferred and amortized
on a straight-line basis over the related contract renewal period. Amortization expense is included in sales and marketing expenses in the accompanying
consolidated statements of operations. The Company generally commences payment of commissions within 45 to 75 days after execution of client agreements.
During the years ended December 31, 2018 , 2017 and 2016 , the Company deferred $65.3 million , $48.2 million and $33.3 million , respectively, of
commissions on the consolidated balance sheets. During the years ended December 31, 2018 , 2017 and 2016 , the Company recognized $37.9 million , $41.7
million and $33.0 million in commissions expense to sales and marketing expense, respectively. As of December 31, 2018 and 2017 , deferred commissions on the
Company’s consolidated balance sheets totaled $69.9 million and $42.8 million , respectively.
Impact of New Standard on Financial Statement Line Items
The following tables summarize the effect of the adoption of Topic 606 on the Company’s select line items, included in the consolidated condensed financial
statements as of and for the year ended December 31, 2018 , as if the previous accounting was in effect (in thousands).
Consolidated Condensed Balance Sheet
Assets
Deferred commissions, current portion
Deferred commissions, non-current
Liabilities
Accrued expenses
Deferred revenue, current portion
Stockholders’ Equity
Accumulated deficit
Consolidated Condensed Statement of Operations
Revenue
Operating expenses:
Sales and marketing
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
December 31, 2018
As Reported
(ASC 606)
Impacts of
Adoption
Without
Adoption
(ASC 605)
$
24,467 $
30,624 $
55,091
45,444
(45,444)
—
68,331
312,526
(1,697)
6,751
66,634
319,277
(529,962)
(19,874)
(549,836)
Year Ended
December 31, 2018
As Reported
(ASC 606)
Impacts of
Adoption
Without
Adoption
(ASC 605)
$
537,891 $
(696) $
537,195
224,635
(33,842)
(0.58)
58,159
(992)
296
223,643
(33,546)
(0.58)
58,159
The adoption of Topic 606 had no impact to net cash provided by or used in operating, investing or financing activities in the Company’s consolidated
statements of cash flows for the year ended December 31, 2018.
64
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 client support staff;
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, content and licensing
fees and referral fees.
In addition, the Company allocates a portion of overhead, such as rent, IT costs, depreciation and amortization and employee benefits costs, to cost of
revenue based on headcount. Costs associated with providing professional services are recognized as incurred when the services are performed. Out-of-pocket
travel costs related to the delivery of professional services are typically reimbursed by the client and are accounted for as both revenue and cost of revenue in the
period in which the cost is incurred.
Research and Development
Research and development expenses consist primarily of personnel and related expenses for the Company’s 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
expenses, other than software development costs qualifying for capitalization, are expensed as incurred.
Advertising
Advertising expenses for 2018 , 2017 and 2016 were $7.1 million , $9.0 million and $6.6 million , respectively, and are expensed as incurred and is
recorded within Sales and Marketing in the accompanying consolidated statements of operations.
Stock-Based Compensation
The Company accounts for stock-based awards granted to employees and directors by recording compensation expense based on the awards’ estimated fair
values. The Company grants stock options and restricted stock units that vest over time based on the continuing employment of the employee, as well as restricted
stock units that vest based on meeting certain performance targets.
The Company estimates the fair value of its restricted stock units based on the closing price of its common stock as of the date of grant. The Company
estimates the fair value of its stock options as of the date of grant using the Black-Scholes option-pricing model. Determining the fair value of stock options under
this model requires judgment, including estimating (i) the value per share of the Company's common stock, (ii) volatility, (iii) the term of the awards, (iv) the
dividend yield and (v) the risk-free interest rate. The assumptions used in calculating the fair value of stock based awards represent the Company’s best estimates,
based on management’s judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model
change significantly, stock-based compensation recorded for future awards may differ materially from that recorded for awards granted previously.
Beginning in 2017, the Company began estimating expected volatility based solely on its historical volatility as a public company. In previous years, the
Company estimated this using the average volatility of similar publicly traded companies as sufficient trading history of the Company’s stock was not available.
For purposes of determining the expected term of the awards in the absence of sufficient historical data relating to stock option exercises for the Company, it
applies a simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the
award. The risk-free interest rate for periods within the expected life of an award, as applicable, is based on the United States Treasury yield curve in effect during
the period the award was granted. The estimated dividend yield is zero, as the Company has not declared dividends in the past and does not currently intend to
declare dividends in the foreseeable future.
65
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for stock options granted
during each of the last three years:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2018
2017
2016
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1.4%
5.8
—%
48.8%
Once the Company has determined the estimated fair value of its stock-based awards, it recognizes the portion of that value that corresponds to the portion of
the award that is ultimately expected to vest, taking estimated forfeitures into account. This amount is recognized as an expense over the vesting period of the
award using the straight-line method for awards which contain only service conditions, and using the graded vesting method based upon the probability of the
performance condition being met for awards which contain performance conditions. The Company estimates forfeitures based upon its historical experience and for
each period, the Company reviews the estimated forfeiture rate and makes changes as factors affecting the forfeiture rate calculations and assumptions change.
In addition, the Company has issued performance-based restricted stock units that vest based upon continued service over the vesting term and achievement
of certain performance goals, established by the Board of Directors, for a predetermined period. The fair value of the performance-based awards are determined
based upon the closing price of the Company’s common stock on the date of the grant and the Company recognizes the fair value of awards only if it is probable
the performance condition will be met. For performance-based awards, the fair value is not determined until all of the terms and conditions of the award are
established.
Due to the full valuation allowance provided on its net deferred tax assets, the Company has not recorded any significant tax benefit attributable to stock-
based compensation expense as of December 31, 2018 , 2017 and 2016.
Capitalized Software Costs
The Company capitalizes the costs associated with software developed or obtained for internal use, including costs incurred in connection with the
development of its products, when the preliminary project stage is completed, management has decided to make the project a part of its 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 and who devote time to 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 and enhancements to the 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 an estimated useful life
of the software, which is typically three years , commencing when the software is ready for its intended use. The Company does not transfer ownership of or lease
its software to its clients.
During the years ended December 31, 2018 , 2017 and 2016 , the Company capitalized $31.6 million , $24.3 million and $20.9 million , respectively, of
software development costs to the consolidated balance sheets. During the years ended December 31, 2018 , 2017 and 2016 , the Company amortized $23.5 million
, $17.6 million and $13.2 million to cost of revenue, respectively. Based on the Company’s capitalized software costs at December 31, 2018 , estimated
amortization expense of $22.3 million , $13.5 million , $4.6 million and $0.1 million is expected to be recognized in 2019 , 2020 , 2021 and 2022 , respectively.
Comprehensive Loss
Comprehensive loss encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net loss, currency
translation adjustments and unrealized gains or losses on investments. For the years ended December 31, 2018 , 2017 and 2016 , accumulated other comprehensive
income (loss) comprised a cumulative translation adjustment and also included net unrealized gains (losses) on investments.
66
Income Taxes
The Company uses 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 bases
differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In
determining the need for valuation allowances, the Company considers projected future taxable income and future reversals of existing taxable differences. The
Company has recorded a full valuation allowance to reduce its United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets to zero,
as it has determined that it is not more likely than not that any of these net deferred tax assets will be realized.
The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts,
circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that
a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax
benefit will be sustained, no tax benefit has been recognized.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and
so near their maturity that they present insignificant risk of changes in value, including investments with original or remaining maturities from the date of purchase
of three months or less. At December 31, 2018 and 2017 , cash and cash equivalents consisted of cash balances of $54.4 million and $24.7 million , respectively,
money market funds backed by U.S. treasury securities of $129.2 million and $358.9 million , respectively, and certificates of deposit of $0.0 million and $10.0
million , respectively.
Investments in Marketable Securities
During the year ended December 31, 2018 the Company prospectively adopted ASU 2016-01, which requires equity securities to be measured at fair value
and recognize any changes in fair value within the consolidated statements of operations. The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements. The cost of marketable securities sold is determined based on the specific identification method and any realized
gains or losses on the sale of investments are reflected as a component of interest income or expense. In addition, the Company classifies marketable securities as
current or non-current based upon the maturity dates of the securities. At December 31, 2018 and 2017 , the Company had $204.7 million and $263.5 million ,
respectively, of investments in marketable securities.
Strategic Investments
The Company has invested in equity securities of multiple privately-held companies. The Company accounted for each of these investment using the cost
method of accounting, as the Company does not have significant influence or a controlling financial interest over these entities. These investments are subject to
periodic impairment reviews and are considered to be impaired when a decline in fair value is judged to be other-than-temporary. These investments are included
in long-term investments on the consolidated balance sheets, and any impairment losses are recorded in other, net in the accompanying consolidated statements of
operations.
Allowance for Doubtful Accounts
The Company bases its allowance for doubtful accounts on its historical collection experience and a review in each period of the status of the then-
outstanding accounts receivable.
67
A reconciliation of the beginning and ending amount of allowance for doubtful accounts for the years ended December 31, 2018 , 2017 and 2016 , is as
follows (in thousands):
Beginning balance, January 1
Additions and adjustments
Write-offs
Ending balance, December 31
2018
2017
2016
7,478 $
3,532 $
1,691
(6,740)
7,680
(3,734)
2,429 $
7,478 $
2,578
3,165
(2,211)
3,532
$
$
The Company recognized bad debt expense of $0.8 million , $1.4 million and $0.8 million for the years ended December 31, 2018 , 2017 and 2016 ,
respectively.
Property and Equipment, Net
Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method based upon the estimated useful lives of the assets, generally two to seven years (See Note 7 ).
Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Repair and maintenance costs
are charged to expense as incurred, while renewals and improvements are capitalized.
Impairment of Long Lived Assets
The Company evaluates the recoverability of its long-lived assets with finite useful lives, including intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. Such triggering events or changes in circumstances may include: a significant
decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant
adverse change in legal factors or in the business climate, the impact of competition or other factors that could affect the value of a long-lived asset, a significant
adverse deterioration in the amount of revenue or cash flows expected to be generated from an asset group, an accumulation of costs significantly in excess of the
amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing
losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of
significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that
the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the
carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined
based upon estimated undiscounted future cash flows. There were no impairment charges related to identifiable long lived assets in the year ended December 31,
2018 . During the year ended December 31, 2017 , the Company determined that previously capitalized software costs were impaired resulting in the write-off of
$1.3 million , which was recorded in research and development expense in the accompanying consolidated statements of operations.
Intangible Assets
Identifiable intangible assets primarily consist of acquisition-related intangibles. The Company determines the appropriate useful life of its intangible assets
by performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives ranging from three to six
years, generally using the straight-line method which approximates the pattern in which the economic benefits are consumed.
Goodwill
Goodwill is not amortized, but instead is required to be tested for impairment annually and under certain circumstances. The Company performs such testing
of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. Events or changes in circumstances which could trigger an impairment review include a significant adverse change in legal factors or in
the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the
Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, or significant
underperformance relative to expected historical or projected future results of operations.
68
As part of the annual impairment test, the Company may conduct an assessment of qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. Based on the results of the qualitative assessment, no impairment of goodwill existed at December 31,
2018 or 2017 .
Convertible Notes
In June 2013, the Company issued 1.50% convertible notes due July 1, 2018 with a principal amount of $253.0 million (the “2018 Notes”). In December
2017, the Company issued 5.75% senior convertible notes due July 1, 2021 with a principal amount of $300.0 million (the “2021 Notes”). In accounting for the
2018 Notes at issuance, the Company separated the 2018 Notes into debt and equity components pursuant to the accounting standards for convertible debt
instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was estimated using an interest rate, with terms
similar to the 2018 Notes, excluding the conversion feature. The carrying amount of the liability component was calculated by measuring the fair value of similar
liabilities that do not have an associated convertible feature. The excess of the principal amount of the 2018 Notes over the fair value of the debt component was
recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interest expense over the term of the 2018
Notes using the interest method. The equity component of the 2018 Notes recorded to additional paid-in capital is not to be remeasured as long as it continues to
meet the conditions for equity classification. The 2021 Notes were recorded based on the fair value of the proceeds, net of discounts and issuance costs, and will be
accreted to face value over the term of the 2021 Notes.
Fair Value of Financial Instruments
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on the following three levels of inputs,
of which the first two are considered observable and the last one is considered unobservable:
•
•
•
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that management has the ability to access at the measurement date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3—Unobservable inputs.
Observable inputs are based on market data obtained from independent sources.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, restricted cash and
accounts receivable. The Company’s cash and cash equivalents are deposited with several financial institutions and, at times, may exceed federally insured limits,
as applicable. The Company performs ongoing credit evaluations of its clients.
For the years ended December 31, 2018 , 2017 and 2016 , no single client comprised more than 10% of the Company’s revenue. No single client had an
accounts receivable balance greater than 10% of total accounts receivable at December 31, 2018 or 2017 .
69
Foreign Currency Transactions and Translation
Transactions in foreign currencies are translated into U.S. dollars at the rates of exchange in effect at the date of the transaction. Unrealized transaction
(losses) gains were approximately $(0.4) million , $(3.1) million and $20 thousand for the years ended December 31, 2018 , 2017 and 2016 , respectively, and are
included in other, net within other income (expense), net, in the accompanying consolidated statements of operations.
The Company has entities in various countries. For entities where the local currency is different than the functional currency, the local currency financial
statements have been remeasured from the local currency into the functional currency using the current exchange rate for monetary accounts and historical
exchange rates for nonmonetary accounts, with exchange differences on remeasurement included in other income (loss). To the extent that the functional currency
of the Company's subsidiaries is different than the U.S dollar, the financial statements have then been translated into U.S. dollars using period-end exchanges rates
for assets and liabilities and average exchanges rates for the results of operations. Foreign currency translation gains and losses are included as a component of
accumulated other comprehensive income or loss in the consolidated balance sheets.
Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-07, "Compensation—Stock
Compensation: Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). The ASU aligns the accounting for share-based
compensation for non-employees with employees. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The
Company early adopted this ASU in the second quarter of 2018, and the adoption did not have a material impact on its consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting" ("ASU 2017-09"). The ASU amends the scope of modification accounting for share-based payment arrangements. It provides guidance on the types of
changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting
Standards Codification (“ASC”) 718, Compensation - Stock compensation . The Company implemented this requirement as of the beginning of the first quarter of
2018. The adoption did not have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of a Business"
("ASU 2017-01"). The ASU amended the existing FASB Accounting Standards Codification to clarify the definition of a business, which affects many areas of
accounting including acquisitions, disposals, goodwill and consolidation. The Company implemented this requirement as of the beginning of the first quarter of
2018. The adoption did not have a material impact on its consolidated financial statements.
In August 2016, the FASB issued FASB issued Accounting Standards Update No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments"
("ASU 2016-15"). The ASU clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The Company
implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities"
("ASU 2016-01"). The ASU that provides guidance for the recognition, measurement, presentation and disclosure of financial assets and liabilities. The Company
implemented this requirement as of the beginning of the first quarter of 2018. The adoption did not have a material impact on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). The
ASU supersedes the revenue recognition requirement in ASC Topic 605 , Revenue Recognition (“Topic 605”) , and requires the recognition of revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the expected consideration entitled in exchange for those goods or services. The
ASU also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers , which requires the deferral of incremental costs of obtaining a
contract with a customer.
The Company adopted the requirements of ASU 2014-09 utilizing the modified retrospective method of transition to contracts as of January 1, 2018. The
accumulated deficit balance was reduced, thus stockholders' equity was increased by $18.9 million as of January 1, 2018 due to the cumulative impact of adopting
the ASU. The impact was primarily related to:
•
$15.5 million increase in deferred commissions. Such costs are considered to be costs to obtain a contract under Topic 606, and primarily relate to the
execution of software subscription contracts. In addition, upon adoption, these incremental commission costs to obtain a contract are now amortized over
a period of benefit, which is generally six years.
70
•
•
$2.7 million of additional liability offsets the impact to retained earnings from the increase of the deferred commission above. The liability is to accrue
commission costs earned but not yet paid.
$6.1 million reduction in deferred revenue related to additional contract value being allocated to professional services delivered prior to adoption.
Previously such amounts were not recognized based on contractual payment limitations. Upon adoption, revenue for professional services is based on the
relative standalone selling price without any such limitation.
The adoption had no impact to net cash provided by or used in operating, investing or financing activities in the Company’s consolidated statements of cash
flows.
Accounting Pronouncements Pending Adoption
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) -
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," ("ASU 2018-15"). The ASU aligns the
accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop
or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. ASU 2018-
15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to
implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is currently evaluating the impact of the adoption of
ASU 2018-15 on its consolidated financial statements in order to adopt the new standard in the first quarter of 2020.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). The ASU requires lessees to record
most leases on their balance sheets but recognize the expenses on their statements of operations in a manner similar to current accounting rules. ASU 2016-02
states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use (ROU) asset for the right to use the underlying
asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 on a modified retrospective basis.
The new standard provides a package of practical expedients for an entity’s ongoing accounting which the Company expects to elect. This means, for existing
short-term leases and others that qualify, the Company will not recognize ROU assets or lease liabilities. Additionally, the Company will not separate lease and
non-lease components for all of our leases.
The Company is in the process of completing its assessment of the standard as the analysis of its leasing arrangements from a recent acquisition are ongoing.
The Company will finalize the analysis and adopt the standard as of January 1, 2019 ("effective date") in connection with the preparation of its consolidated
financial statements as of and for the quarter ended March 31, 2019. The Company expects that this standard will have a material effect on its consolidated balance
sheets. The most significant impacts relate to:
the recognition of new ROU assets and operating lease liabilities on the consolidated balance sheets for its office and data center leases, with the
•
cumulative-effect of applying the standard being recognized as a reduction to opening retained earnings as of the effective date;
the de-recognition of existing assets and liabilities for certain sale-leaseback transactions (including those arising from build-to-suit lease arrangements
•
for which construction is complete and the Company is leasing the constructed asset) that currently do not qualify for sale accounting; and
providing significant new disclosures about the Company's leasing activities. The Company does not expect a significant change in its leasing activities
•
as a result of the adoption.
3. BUSINESS ACQUISITIONS
Workpop Inc.
On September 10, 2018, the Company completed the acquisition of Workpop Inc. (“Workpop”), a privately held company. Workpop is a robust web and
mobile solution for candidates and hiring managers in service-based industries. The acquisition was completed pursuant to a merger whereby Workpop became a
wholly-owned subsidiary of the Company. In connection with the merger, the Company paid cash consideration of approximately $18.2 million . The Company
acquired Workpop to leverage and develop new web and mobile recruiting products as part of the Cornerstone Recruiting suite.
The Company had a $0.5 million cost basis investment in Workpop prior to the acquisition. As part of the acquisition of Workpop, the Company received a
return of its investment with an immaterial loss, which is included in general and administrative expenses in the consolidated statements of operations.
71
The acquisition has been accounted for under the acquisition method of accounting for business combinations with the Company as the accounting acquirer in
accordance with ASC 805, Business Combinations . As such, the Workpop assets acquired and liabilities assumed are recorded at their acquisition-date fair values.
Acquisition-related transaction costs of $0.5 million are not included as a component of consideration transferred, but are accounted for as an expense in the period
in which the costs are incurred. Accordingly, these acquisition-related transaction costs have been included in general and administrative expenses in the
consolidated statements of operations. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to
goodwill. Goodwill is attributable primarily to expected benefits, including the acquired workforce, from combining Workpop with the Company. Upon the filing
of the Company's 2018 tax returns, it expects all of the acquired goodwill to be deductible for tax purposes.
The Company’s allocation of the total purchase price consideration as of September 10, 2018 is summarized below (in thousands):
Cash and cash equivalents
Other assets
Intangible assets - developed technology
Goodwill
Total purchase price
$
$
Fair Value
115
68
7,500
10,525
18,208
The fair value of the developed technology is being amortized on a straight-line basis over 3 years , which is the expected useful life of the asset.
Pro forma results of operations have not been presented because the effects of this acquisition is not material to the Company's financial results.
Grovo Learning, Inc.
On November 9, 2018, the Company completed the acquisition of Grovo Learning, Inc. (“Grovo”), a privately held company. Grovo helps learning and
development teams engage employees and drive their business forward by delivering an evolving library of customizable Microlearning® content. The acquisition
was completed pursuant to a merger whereby Grovo became a wholly-owned subsidiary of the Company. In connection with the merger, the Company paid cash
consideration of approximately $22.9 million . The Company acquired Grovo to expand its Cornerstone Content Anytime subscription offerings which are
accessed through the Cornerstone Learning suite.
The acquisition has been accounted for under the acquisition method of accounting for business combinations with the Company as the accounting acquirer in
accordance with ASC 805, Business Combinations . As such, the Grovo assets acquired and liabilities assumed are recorded at their acquisition-date fair values.
Acquisition-related transaction costs of $0.6 million are not included as a component of consideration transferred, but are accounted for as an expense in the period
in which the costs are incurred. Accordingly, these acquisition-related transaction costs have been included in general and administrative expenses in the
consolidated statements of operations. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to
goodwill. Goodwill is attributable primarily to expected benefits, including the acquired workforce, from combining Grovo with the Company. Upon the filing of
the Company's 2018 tax returns, it expects all of the acquired goodwill to be deductible for tax purposes.
72
The Company’s allocation of the total purchase price consideration as of November 9, 2018 is summarized below (in thousands):
Cash and cash equivalents
Accounts receivable
Property and equipment, net
Other current and noncurrent assets
Intangible assets - content library
Intangible assets - developed technology
Goodwill
Facility financing obligation
Accounts payable, accrued expenses, and other liabilities, current and noncurrent
Net assets acquired
Fair Value
508
761
51,967
1,001
4,700
2,500
11,034
(46,100)
(3,465)
22,906
The Company acquired a property lease and related leasehold improvements whereby it was deemed, for accounting purposes only, to be the owner of the
entire project. In connection with the Company’s accounting for this transaction, the Company capitalized $51.1 million as a build-to-suit property within property
and equipment, net, and recognized a corresponding facility financing lease obligation for approximately $46.1 million . Expected future lease payments under the
build-to-suit lease as of December 31, 2018 are included in Note 16 - Commitments and Contingencies .
The fair value of the building asset is being amortized on a straight-line basis over 25 years , which is the expected useful life of the asset.
The fair value of the content library is being amortized on a straight-line basis over 6 years, which is the expected useful life of the asset.
The fair value of the developed technology is being amortized on a straight-line basis over 3 years , which is the expected useful life of the asset.
Pro forma results of operations have not been presented because the effects of this acquisition is not material to the Company's financial results.
4.
NET LOSS PER SHARE
The following table presents the Company's basic and diluted net loss per share (in thousands, except per share amounts):
Net loss
Weighted-average shares of common stock outstanding
Net loss per share — basic and diluted
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
73
For the Years Ended December 31,
2018 *
2017
2016
$
$
(33,842) $
58,159
(0.58) $
(61,335) $
57,262
(1.07) $
(66,837)
55,595
(1.20)
The potential shares of common stock that would have a dilutive impact are computed using the treasury stock method or the if-converted method, as
applicable. At December 31, 2018 , 2017 and 2016 , the following potential shares were excluded from the computation of diluted net loss per share because their
effect would have been anti-dilutive (in thousands):
Options to purchase common stock, restricted stock units and performance-based restricted
stock units
Shares issuable pursuant to employee stock purchase plan
Convertible notes
Common stock warrants
Total shares excluded from net loss per share
5. INVESTMENTS
Investments in Marketable Securities
2018
December 31,
2017
2016
9,869
97
7,143
936
18,045
10,143
114
11,825
4,682
26,764
10,635
89
4,682
4,682
20,088
The Company’s investments in available-for-sale marketable securities are made pursuant to its investment policy, which has established guidelines relative
to the diversification of the Company’s investments and their maturities, with the principal objective of capital preservation and maintaining liquidity that is
sufficient to meet cash flow requirements.
The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of December 31, 2018
(in thousands):
Money market funds
Corporate bonds
U.S. treasury securities
Commercial paper
December 31, 2018
Amortized Cost
Basis
$
$
$
129,321 $
58,115
138,826
7,973 $
334,235 $
Unrealized Gains
Unrealized Losses
Fair Value
Cash Equivalent
Investments
— $
—
—
— $
— $
— $
129,321 $
129,321 $
(82)
(100)
— $
(182) $
58,033
138,726
7,973 $
—
—
— $
334,053 $
129,321 $
—
58,033
138,726
7,973
204,732
The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of December 31, 2017
(in thousands):
Money market funds
Certificate of deposits
Corporate bonds
U.S. treasury securities
December 31, 2017
Amortized Cost
Basis
$
$
358,859 $
10,000
74,868
189,310
633,037 $
Unrealized Gains
Unrealized Losses
Fair Value
Cash Equivalent
Investments
— $
—
—
—
— $
358,859 $
358,859 $
—
(220)
(430)
10,000
74,648
188,880
10,000
—
—
— $
(650) $
632,387 $
368,859 $
—
—
74,648
188,880
263,528
As of December 31, 2018 , the Company’s investment in corporate bonds and U.S. treasury securities had a weighted-average maturity date of approximately
two months . Unrealized gains and losses on investments were not significant individually or in aggregate, and the Company does not believe the unrealized losses
represent other-than-temporary impairments as of December 31, 2018 .
74
6. INTANGIBLE ASSETS AND GOODWILL
Finite-lived Intangibles
The Company has finite-lived intangible assets, which are amortized over their estimated useful lives on a straight-line basis. The following table presents the
gross carrying amount and accumulated amortization of finite-lived intangible assets as of December 31, 2018 and 2017 (in thousands):
Developed technology
Content library
Total
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
39,984 $
(30,817) $
9,167 $
29,984 $
(29,984) $
4,700
—
4,700
—
—
44,684 $
(30,817) $
13,867 $
29,984 $
(29,984) $
—
—
—
During 2018, the Company recorded additional finite-lived intangible assets totaling $7.5 million and $7.2 million , related to developed technology from the
acquisitions of Workpop Inc. and Grovo Learning, Inc, respectively. (see Note 3 ).
Total amortization expense from finite-lived intangible assets was $0.8 million , $7.4 million and $9.3 million for the years ended December 31, 2018 , 2017
and 2016 , respectively. The amortization expense recognized was related to developed technology and was recorded in cost of revenue.
The following table presents the Company's estimate of remaining amortization expense for finite-lived intangible assets that existed as of December 31,
2018 (in thousands):
2019
2020
2021
2022
2023 and
thereafter
Estimated remaining amortization expense
$
4,188 $
4,188 $
3,355 $
855 $
1,281
The Company evaluates the recoverability of its long-lived assets with finite useful lives, including intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. There were no impairment charges related to identifiable intangible assets in
the years ended December 31, 2018 , 2017 and 2016 .
Goodwill
The carrying amount of goodwill as of December 31, 2018 was $47.5 million . Additions in 2018 of $20.8 million resulted from the acquisitions of Workpop
Inc. and Grovo Learning, Inc. The carrying amount of goodwill as of December 31, 2017 was $25.9 million . Based on the results of the annual impairment test, no
impairment of goodwill existed at December 31, 2018 or 2017 .
75
7.
OTHER BALANCE SHEET AMOUNTS
The balance of property and equipment, net is as follows (in thousands):
Computer equipment and software
Build to suit property
Furniture and fixtures
Leasehold improvements
Renovation in progress
Less: accumulated depreciation and amortization
Total property and equipment, net
Useful Life
2018
2017
December 31,
3 – 5 years $
25 years
7 years
2 – 6 years
n/a
$
52,055 $
51,058
4,367
9,987
1,984
119,451
(42,197)
77,254 $
Depreciation expense for the years ended December 31, 2018 , 2017 and 2016 was $10.2 million , $10.3 million , $9.9 million , respectively.
The balance of accrued expenses is as follows (in thousands):
Accrued compensation
Accrued commissions
Other accrued expenses
Accrued interest
Total accrued expenses
December 31,
2018
2017
$
$
$
31,799 $
13,856
14,051
8,625 $
68,331 $
38,838
—
3,855
10,046
58
52,797
(31,980)
20,817
23,056
12,401
19,071
3,000
57,528
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent
sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered
unobservable:
•
•
•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs.
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2018 and 2017 (in thousands):
Cash equivalents
Corporate bonds
U.S. treasury securities
Commercial paper
December 31, 2018
December 31, 2017
Fair Value
$
129,172 $
Level 1
129,172
Level 2
Level 3
Fair Value
$
— $
368,859 $
Level 1
358,859 $
58,033
138,726
7,973
—
—
—
58,033
138,726
7,973
—
—
—
74,648
188,880
—
—
—
—
Level 2
Level 3
10,000 $
74,648
188,880
—
$
333,904 $
129,172 $
204,732 $
— $
632,387 $
358,859 $
273,528 $
—
—
—
—
—
76
At December 31, 2018 and 2017 , cash equivalents of $129.2 million and $358.9 million , respectively, consisted of money market funds with original
maturity dates of three months or less backed by U.S. Treasury bills.
As of December 31, 2018 , corporate bonds, U.S. treasury securities and commercial paper were classified within Level 2 of the fair value hierarchy. The
bonds were valued using information obtained from pricing services, which obtained quoted market prices from a variety of industry data providers, security
master files from large financial institutions, and other third-party sources. The Company performed supplemental analysis to validate information obtained from
its pricing services. As of December 31, 2018 , no adjustments were made to such pricing information.
Convertible Notes
The Company’s 2021 Notes described below, are shown in the accompanying consolidated balance sheets at their original issuance value, net of unamortized
discount and debt issuance costs, and are not remeasured to fair value each period. The approximate fair value of the Company’s 2021 Notes as of December 31,
2018 was $415 million . The fair value of the 2021 Notes was estimated on the basis of quoted market prices of similar instruments, which, due to the lack of
trading activity, are considered Level 2 in the fair value hierarchy.
9.
DEBT AND OTHER FINANCING ARRANGEMENTS
2018 Convertible Notes
In 2013, the Company issued convertible notes (the “2018 Notes”) raising gross proceeds of $253.0 million . The 2018 Notes bore interest at a rate of 1.50%
per year payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2014. On July 1, 2018, the 2018 Notes matured and the
$253.0 million principal amount due was repaid. The 2018 Notes are no longer outstanding.
In accounting for the 2018 Notes at issuance, the Company separated the 2018 Notes into debt and equity components pursuant to the accounting standards
for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was estimated using an interest
rate for nonconvertible debt, with terms similar to the 2018 Notes, excluding the conversion feature. The excess of the principal amount of the 2018 Notes over the
fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount was accreted to
interest expense over the term of the 2018 Notes using the interest method. The amount recorded to additional paid-in capital was not to be remeasured as long as it
continues to meet the conditions for equity classification. Upon issuance of the $253.0 million of 2018 Notes, the Company recorded $214.3 million to debt and
$38.7 million to additional paid-in capital for the debt discount.
The Company incurred transaction costs of approximately $7.3 million related to the issuance of the 2018 Notes. In accounting for these costs, the Company
allocated the costs to the debt and equity components in proportion to the allocation of proceeds from the issuance of the 2018 Notes to such components.
Transaction costs allocated to the debt component of $6.2 million are deferred and amortized to interest expense over the term of the 2018 Notes. The transaction
costs allocated to the equity component of $1.1 million were recorded to additional paid-in capital.
2021 Senior Convertible Notes
In December 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “2021 Notes”) for a purchase price equal to
98% of the principal amount, raising net proceeds of $294.0 million .
The 2021 Notes are governed by an Indenture, dated December 8, 2017 between the Company and U.S. Bank National Association, as trustee (the “2017
Indenture”). The 2021 Notes mature on July 1, 2021, unless earlier repurchased or converted, and bear interest at a rate of 5.75% per year payable semi-annually
in arrears on January 1 and July 1 of each year, commencing January 1, 2018.
The 2021 Notes are convertible at an initial conversion rate of 23.8095 shares of the Company’s common stock per $1,000 principal amount of the 2021
Notes, which represents an initial conversion price of $42.00 per share, subject to adjustment for anti-dilutive issuances, voluntary increases in the conversion rate
and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s common stock and a
liquidation of the Company. Upon conversion, the Company will deliver the applicable number of the Company’s common stock and cash in lieu of any fractional
shares. Holders of the 2021 Notes may convert their 2021 Notes at any time prior to the close of business on the scheduled trading day immediately preceding the
maturity date, subject to a restricted period through December 2018.
77
The holders of the 2021 Notes may require the Company to repurchase all or a portion of their 2021 Notes at a cash repurchase price equal to 100% of the
principal amount of the Notes being repurchased, plus the remaining scheduled interest through and including the maturity date, upon a fundamental change and
events of default, including non-payment of interest or principal and other obligations under the 2017 Indenture.
The 2021 Notes were issued at a two percent discount and were accounted for as debt upon issuance. The Company recorded $300.0 million of debt and $6.0
million for the debt discount. The debt discount is accreted to interest expense over the term of the 2021 Notes using the interest method.
The Company incurred debt issuance costs of $9.2 million that were deferred and will be amortized to interest expense over the term of the 2021 Notes.
The Company agreed to register the resale of the 2021 Notes and the shares of common stock issuable upon conversion of the 2021 Notes. A registration
statement on Form S-3 relating to such securities was filed with the U.S. Securities and Exchange Commission by the Company on August 7, 2018.
2018 Notes and 2021 Notes
The net carrying amounts of the liability components of the 2018 Notes and 2021 Notes as of December 31, 2018 and 2017 consists of the following (in
thousands):
Principal amount
Unamortized debt discount
Net carrying amount before unamortized debt issuance costs
Unamortized debt issuance costs
Net carrying value
December 31, 2018
December 31, 2017
$
$
300,000 $
(4,348)
295,652
(6,685)
288,967 $
553,000
(10,190)
542,810
(9,617)
533,193
The effective interest rate of the liability component is 6.4% for the 2021 Notes.
The following table presents the interest expense recognized related to the 2018 Notes and the 2021 Notes for years ended December 31, 2018 , 2017 and
2016 (in thousands):
Contractual interest expense at 1.50% and 5.75% per annum
Amortization of debt issuance costs
Accretion of debt discount
Total
Years Ended December 31,
2018
2017
2016
$
$
19,147 $
3,086
5,843
28,076 $
4,897 $
1,472
8,360
14,729 $
3,795
1,263
7,867
12,925
Net proceeds of approximately $245.7 million and $284.9 million from the 2018 Notes and the 2021 Notes, respectively. The Company used approximately
$49.5 million of the net proceeds of the 2018 Notes offering to pay the cost of the Note Hedges described below, which was partially offset by $23.2 million of the
proceeds from the Company’s sale of the Warrants also described below.
78
Note Hedges
Concurrent with the 2018 Notes that were issued in 2013, the Company entered into note hedges (the “Note Hedges”) with certain bank counterparties, with
respect to its common stock. The Company paid $49.5 million for the Note Hedges. The Note Hedges cover approximately 4.7 million shares of the Company’s
common stock at a strike price of $54.04 per share and were exercisable by the Company upon conversion of the 2018 Notes. The Note Hedges were intended to
reduce the potential economic dilution upon conversion of the 2018 Notes in the event that the fair value per share of the Company’s common stock at the time of
exercise was greater than the conversion price of the 2018 Notes. On July 1, 2018, the Note Hedges expired upon the maturity of the 2018 Notes.
Warrants
Separately and concurrently with the entry by the Company into the Note Hedges in 2013, the Company entered into warrant transactions, whereby it sold
warrants to the same bank counterparties as the Note Hedges to acquire up to 4.7 million shares of the Company’s common stock at a strike price of $80.06 per
share (the “Warrants”), subject to anti-dilution adjustments. The Company received proceeds of $23.2 million from the sale of the Warrants. The Warrants expire
at various dates during 2018 and 2019. As of December 31, 2018 , 3.7 million shares of the Warrants expired and 0.9 million shares were outstanding. If the fair
value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will reduce diluted earnings per share to the extent that the
calculation does not have an anti-dilutive effect.
The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges was
not and the Warrants are not remeasured through earnings each reporting period.
10.
STOCKHOLDERS ’ EQUITY
Capitalization
As of December 31, 2018 , the Company’s authorized stock consists of 1,000,000,000 shares of common stock, par value of $0.0001 per share, and
50,000,000 shares of preferred stock, par value of $0.0001 per share. No shares of preferred stock were issued or outstanding at December 31, 2018 and 2017.
Share Repurchase Program
In November 2017, the Company’s board of directors authorized a $100.0 million share repurchase program of its common stock. The Company may
repurchase its common stock for cash in the open market in accordance with applicable securities laws.
During the year ended December 31, 2018 , the Company repurchased 1.7 million shares of its common stock at an average cost of $46.85 per share for a
total expenditure of $77.4 million , which completed the share repurchase program.
The following is a summary of the Company's stock repurchases under its $100.0 million share repurchase program as of December 31, 2018 (in thousands,
except per share information):
Period
November 8, 2017 - December 31, 2017
January 1, 2018 - March 31, 2018
April 1, 2018 - June 30, 2018
July 1, 2018 - September 30, 2018
October 1, 2018 - December 31, 2018
Total
11. STOCK-BASED AWARDS
1999 and 2009 Plans
# of Shares
Repurchased
Average Price per
Share
635 $
423 $
444 $
300 $
484 $
Total Expenditures
22,599
35.55 $
37.84
46.66
53.82
50.59
16,024
20,718
16,143
24,516
2,286 $
43.71 $
100,000
In November 1999, the Company adopted the 1999 Stock Plan (“1999 Plan”) as amended. In January 2009, the Company adopted the 2009 Plan (“2009
Plan”) as amended. Stock options granted under the 1999 and 2009 Plans may be incentive stock options or non-statutory stock options. At December 31, 2018 , no
new shares are issuable under the 1999 and 2009 Plans.
79
2010 Plan
In March 2011, upon the completion of the Company’s initial public offering, the Company adopted the 2010 Plan and determined that it will no longer grant
any additional awards under the 1999 Plan and the 2009 Plan. However, the 1999 Plan and the 2009 Plan continue to govern the terms and conditions of the
outstanding awards previously granted under each respective plan. Upon the adoption of the 2010 Plan, the maximum aggregate number of shares issuable
thereunder was 3,680,480 shares, plus (i) any shares subject to stock options or similar awards granted under the 1999 Plan or 2009 Plan prior to March 16, 2011
that expire or otherwise terminate without having been exercised in full and (ii) shares issued pursuant to awards granted under the 1999 Plan and 2009 Plan that
are forfeited to or repurchased by the Company after March 16, 2011, with the maximum number of shares to be added to the 2010 Plan from the 1999 Plan and
2009 Plan equal to 5,614,369 shares of common stock. In addition, the number of shares available for issuance under the 2010 Plan will be annually increased on
the first day of each fiscal year beginning with 2012, by an amount equal to the lesser of 5,500,000 shares, 4.5% of the outstanding shares of the Company’s
common stock as of the last day of the immediately preceding fiscal year, or such other amount as the Company’s Board of Directors determines.
Shares issued pursuant to awards under the 2010 Plan that are repurchased by the Company or that expire or are forfeited, as well as shares used to pay the
exercise price of an award or to satisfy the minimum tax withholding obligations related to an award, will become available for future grant or sale under the 2010
Plan. In addition, to the extent that an award is paid out in cash rather than shares, such cash payment will not reduce the number of shares available for issuance
under the 2010 Plan.
The 2010 Plan permits the grant of incentive stock options to employees and the grant of non-statutory stock options, restricted stock, restricted stock units,
stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants.
Under the 2010 Plan, 4,145,181 shares remained available for issuance, at December 31, 2018 .
Stock Options
The exercise price of stock options granted under the 2010 Plan must equal at least the fair market value of the Company’s common stock on the date of
grant. The term of an incentive stock option may not exceed ten years ; provided, however, that an incentive stock option held by a participant who owns more than
10% of the total combined voting power of all classes of the Company’s stock, may not have a term in excess of five years and must have an exercise price of at
least 110% of the fair market value of the Company’s common stock on the grant date.
Restricted Stock Units
The Company may also grant restricted stock units under the 2010 Plan. The fair value of each restricted stock unit granted is equal to the grant date fair
market value of the Company’s common stock. The payment of restricted stock units may be in the form of cash, shares, or in a combination thereof, as determined
by the Board of Directors. During 2018 , the Company granted 2,227,182 restricted stock units under the 2010 Plan, containing service conditions.
Performance Units/Performance Shares
The Company may also grant performance units and performance shares under the 2010 Plan. Performance units and performance shares are awards that will
result in a payment to a participant only if performance goals for a predetermined period, established by the Board of Directors, are achieved or the awards
otherwise vest. The fair value of each performance unit and performance share awarded is equal to the grant date fair value of the Company’s common stock when
the performance goals are defined solely by reference to the Company’s own operations. The fair value of each performance unit and performance award that
contain performance goals tied to performance of the Company’s common stock is estimated using a Monte-Carlo simulation. The payment of performance units
and performance shares may be in the form of cash, shares, or a combination thereof, as determined by the Board of Directors.
Employee Stock Purchase Plan
Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”) eligible employees are granted the right to purchase shares at the lower of 85% of the
fair value of the stock at the time of grant or 85% of the fair value at the time of exercise. The right to purchase shares is granted twice yearly for six month
offering periods in June and December and exercisable on or about the succeeding December and June, respectively, on each year. Under the ESPP, 3,438,935
shares remained available for issuance, at December 31, 2018 . The Company recognized compensation expense related to the ESPP of $1.9 million , $1.6 million
and $1.4 million for the years ended December 31, 2018 , 2017 and 2016, respectively.
80
Stock Options
The Company has granted stock options, which vest upon meeting service conditions. The following table summarizes the stock option activity which
contain only service conditions, under the Company’s 1999, 2009 and 2010 Plans (in thousands, except per share and term information):
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
Exercisable at December 31, 2018
Vested and expected to vest at December 31, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
32.73
—
32.48
44.59
32.41
Aggregate
Intrinsic
Value (1)
5.3 $
42,282
4.1
70,436
Shares
5,432 $
—
(1,472)
(132)
3,828
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value (1)
Shares
3,777 $
3,826
32.38
32.41
4.0 $
4.1
69,658
70,405
(1) Based on the Company’s closing stock price of $50.43 on December 31, 2018 and $35.33 on December 31, 2017.
The following table summarizes information about stock options, which contain only service conditions, under the Company’s equity incentive plans at
December 31, 2018 (in thousands except term information):
Options Outstanding
at December 31, 2018
Options Exercisable
at December 31, 2018
Range of Exercise Prices
Number of Options
Weighted
Average
Remaining
Contractual
Term (in
years)
Number of Options
Weighted
Average
Remaining
Contractual
Term (in
years)
$0.34 to $1.65
$5.93 to $8.88
$12.54 to $15.41
$16.24 to $18.82
$20.85 to $23.94
$27.55 to $31.44
$31.64 to $36.15
$38.03 to $45.76
$46.20 to $56.05
29
618
119
223
398
129
546
656
1,110
3,828
1.2
1.9
2.7
3.0
3.4
4.7
5.5
4.9
4.8
4.1
29
617
119
223
398
129
495
656
1,110
3,776
1.2
1.9
2.7
3.0
3.4
4.7
5.5
4.9
4.8
4.0
The total intrinsic value of options exercised during the years ended December 31, 2018 , 2017 and 2016 was $25.8 million , $9.2 million and $18.2 million ,
respectively. The total grant date fair value of stock options vested during the years ended December 31, 2018 , 2017 and 2016 was $5.5 million , $15.4 million and
$24.3 million , respectively. The Company recognized compensation expense related to stock options of $4.8 million , $14.0 million and $23.0 million for the years
ended December 31, 2018 , 2017 and 2016 , respectively.
81
Unrecognized compensation expense relating to stock options was $0.6 million at December 31, 2018 which is expected to be recognized over a weighted-
average period of 0.7 years.
The aggregate grant date fair value of stock options granted for the year ended December 31, 2016 was $1.8 million . There were no stock options granted for
the years ended December 31, 2018 and 2017 .
Restricted Stock Units
Restricted stock unit activity for the year ended December 31, 2018 under the Company’s equity incentive plans is summarized as follows (shares in
thousands):
Outstanding at December 31, 2017
Granted
Forfeited
Vested
Outstanding at December 31, 2018
Number of Shares
Weighted
Average Grant Date
Fair Value
$
3,790
2,227
(530)
(1,370)
4,117
$
37.22
46.17
39.07
36.87
41.94
The weighted-average grant date fair value of the restricted stock units granted during the years ended December 31, 2018 , 2017 and 2016 was $46.17 ,
$37.99 and $37.49 , respectively. The total fair value of restricted stock units vested as of the vesting dates during the years ended December 31, 2018 , 2017 and
2016 was $49.9 million , $37.2 million and $24.7 million .
The Company recognized compensation expense related to restricted stock units of $53.2 million , $44.1 million and $31.9 million for the years ended
December 31, 2018 , 2017 and 2016 , respectively. Unrecognized compensation expense related to unissued shares of the Company’s common stock subject to
unvested restricted stock units was $127.8 million at December 31, 2018 , which is expected to be recognized as expense over the weighted-average period of 2.9
years.
Performance-Based Restricted Stock Units
The Compensation Committee designed an annual equity compensation structure to further align the compensation levels of certain executives to the
performance of the Company through the issuance of performance-based restricted stock units. The number of shares of the Company’s common stock issuable
upon the vesting of these performance-based restricted stock unit awards is based upon the Company meeting composite revenue and cash flow growth targets
determined at the time of their grant. The total amount of compensation expense recognized is based on the number of shares that the Company determines are
probable of vesting. The estimate will be made each reporting period and determined by the Company’s actual and projected revenue and cash flow performance
and other factors that may impact the likelihood of vesting. The compensation expense will be recognized over the vesting term of the awards.
82
The following table summarizes the Company’s issuances of awards under the new compensation award structure at December 31, 2018 :
Vesting
Term
Three years
Performance
Period
Fiscal years 2016,
2017 and 2018
# of Shares
at Target
166,600
# of Shares at
Maximum
499,800
$
Grant Date
Fair Value
per share
38.67
# of Shares
Outstanding at
Target
# of Shares
Outstanding at
Maximum
—
—
Three years
Fiscal years 2017,
2018 and 2019
185,270
555,810
$
41.73
149,490
448,470
Three years
Fiscal year 2020
121,764
304,410
$
40.64
121,764
304,410
Five years (2)
Fiscal years 2020,
2021 and 2022
411,412
1,028,530
$
40.64
411,412
1,028,530
Three years
Fiscal year 2020
3,572
8,930
$
39.54
3,572
8,930
Five years (2)
Fiscal years 2020,
2021 and 2022
53,572
133,930
$
39.54
53,572
133,930
Grant
Date
July 2016
(1)
March
2017
February
2018
February
2018
April
2018
April
2018
Performance Measures
(a) the Company meeting certain
revenue and cash flow targets
through December 31, 2018 and (b)
the recipient continuing to provide
services to the Company through
the end of June 2019
(a) the Company meeting certain
revenue and cash flow targets
through December 31, 2019 and (b)
the recipient continuing to provide
services to the Company through
the end of March 2020
(a) the Company meeting certain
combined subscription revenue and
unlevered cash flow margin targets
for the year ending December 31,
2020 and (b) the recipient
continuing to provide services to
the Company through the end of
February 2021
(a) the Company meeting certain
combined subscription revenue and
unlevered cash flow margin targets
for each of the years ending
December 31, 2020, December 31,
2021, and December 31, 2022 and
(b) the recipient continuing to
provide services to the Company
through each respective vest date at
the end of February 2020, 2021 and
2022
(a) the Company meeting certain
combined subscription revenue and
unlevered cash flow margin targets
for the year ending December 31,
2020 and (b) the recipient
continuing to provide services to
the Company through the beginning
of April 2021
(a) the Company meeting certain
combined subscription revenue and
unlevered cash flow margin targets
for each of the years ending
December 31, 2020, December 31,
2021, and December 31, 2022 and
(b) the recipient continuing to
provide services to the Company
through each respective vest date at
the beginning of April 2020, 2021
and 2022
(1) In December 2018, based on the performance of the Company’s results for certain revenue and cash flow targets, the Company determined it
had not achieved the required performance level for the performance-based awards granted in July 2016, which resulted in none of the shares
being issued.
(2) One-third of the total eligible shares shall vest on each of the third, fourth and fifth anniversaries of the grant date. This award is a one-time
equity award intended to cover expected grant levels over a three-year period. In exchange, the Compensation Committee does not plan to grant
any additional equity awards to recipients of this award until 2021.
83
The Company recognized compensation expense related to all performance-based awards in the aggregate amount of $5.5 million , $11.2 million and $2.6
million for the years ended December 31, 2018 , 2017 and 2016 , respectively. Unrecognized compensation expense related to unvested performance-based
restricted stock units was $18.4 million at December 31, 2018 , which is expected to be recognized as expense over the weighted-average period of 3.0 years.
Stock-Based Compensation
Stock-based compensation expense related to stock options, restricted stock units, the ESPP and performance-based restricted stock units is included in the
following line items in the accompanying consolidated statements of operations for the years ended December 31, 2018 , 2017 and 2016 (in thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
Restructuring
Total
Years Ended December 31,
2018
2017
2016
4,218 $
4,904 $
24,440
11,800
19,872
6,227
28,427
9,630
22,869
—
66,557 $
65,830 $
4,732
25,642
7,586
16,739
—
54,699
$
$
In certain instances the Company is responsible for payroll taxes related to stock options exercised or the underlying shares sold by its employees. The
Company accrues its obligations at the time of the exercise of the stock options or the sale of the underlying shares.
12.
INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code of
1986, as amended. Changes attributed to the Tax Act include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years
beginning after December 31, 2017, further limitation on deductibility of interest expense, the transition of U.S international taxation from a worldwide tax system
to a territorial system, creation of a new provision designed to tax global low-tax intangible income ("GILTI), and a one-time transition tax on the mandatory
deemed repatriation of cumulative foreign earnings as of December 31, 2017. The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting
Implications of The Tax Cuts and Jobs Act ("SAB") 118, which allowed the Company to record provisional amounts during a measurement period not to exceed
beyond one year of the enactment date. The Company completed its analysis to determine the effect of the Tax Act and recorded immaterial adjustments as of
December 31, 2018.
The components of the Company’s loss before provision (benefit) for income taxes are as follows (in thousands):
United States
Foreign
Loss before provision for income taxes
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
84
Years Ended December 31,
2018 *
2017
2016
$
$
(21,174) $
(10,073)
(31,247) $
(32,853) $
(26,736)
(59,589) $
(39,107)
(26,523)
(65,630)
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
Current income tax provision:
Federal
State
Foreign
Total current income tax provision
Deferred income tax benefit:
Federal
State
Foreign
Total deferred income tax benefit
Total income tax provision (benefit)
Years Ended December 31,
2018
2017
2016
$
— $
— $
204
2,514
2,718
—
—
(123)
(123)
114
1,580
1,694
—
—
52
52
$
2,595 $
1,746 $
—
105
1,838
1,943
—
—
(736)
(736)
1,207
On a consolidated basis, the Company has incurred operating losses and has recorded a full valuation allowance against its United States, United Kingdom,
New Zealand, Hong Kong and Brazil deferred tax assets for all periods to date and, accordingly, has not recorded a provision (benefit) for income taxes for any of
the periods presented other than a provision (benefit) for certain foreign and state income taxes. Certain foreign subsidiaries and branches of the Company provide
intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
The differences in the total provision for income taxes that would result from applying the 21% federal statutory rate beginning in 2018 and 34% federal
statutory rate prior to 2018 to loss before provision for income taxes and the reported provision for income taxes are as follows (in thousands):
U.S. Federal tax benefit at statutory rates
State income taxes, net of federal tax benefit
Foreign rate differential
Stock based compensation
Other permanent differences
Deferred adjustments / U.S. rate change
Other
Valuation allowance
Total income tax (benefit) provision
Years Ended December 31,
2018
2017
2016
(6,562) $
(20,260) $
(22,310)
(248)
2,764
3,029
280
1,430
130
1,772
(806)
5,220
3,182
(494)
7,811
262
6,831
2,595 $
1,746 $
(855)
3,711
4,467
(750)
—
1,494
15,450
1,207
$
$
85
Major components of the Company’s deferred tax assets (liabilities) at December 31, 2018 and 2017 are as follows (in thousands):
Deferred tax assets:
Accrued expenses
Long-lived intangible assets and fixed assets — basis difference
Net operating loss carryforwards
Stock-based compensation
Deferred revenue
Convertible note hedge
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Prepaid expenses and deferred commissions
Convertible note discount
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2018
2017
$
2,353 $
22,947
82,017
15,172
2,861
—
4,557
129,907
(117,058)
12,849
(10,831)
—
(976)
(11,807)
1,042 $
$
2,371
19,884
80,615
16,886
2,739
1,467
2,721
126,683
(118,606)
8,077
(5,672)
(1,074)
(410)
(7,156)
921
At December 31, 2018 , the Company had federal, state and foreign net operating losses of approximately $261.8 million , $269.5 million and $84.8 million ,
respectively. The federal net operating loss carryforward will begin expiring in 2022, the state net operating loss carryforward will begin expiring in 2019, and the
foreign net operating loss has an unlimited carryforward period. The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization
of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as
prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the
Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of
historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC
Section 382. The Company has determined that none of its net operating losses will expire because of the annual limitation.
The Company has recorded a full valuation allowance against its otherwise recognizable United States, United Kingdom, New Zealand, Hong Kong and
Brazil deferred income tax assets as of December 31, 2018 . Management has determined, after evaluating all positive and negative historical and prospective
evidence, that it is more likely than not that these assets will not be realized. The net increase to the valuation allowance of $(1.5) million , $6.8 million and $15.5
million for the years ended December 31, 2018 , 2017 and 2016 , respectively, was primarily due to additional net operating losses generated by the Company.
Deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries because the Company’s practice and
intent is to permanently reinvest these earnings. The cumulative amount of such undistributed earnings was $3.1 million and $3.3 million at December 31, 2018
and December 31, 2017 , respectively. Any future distribution of these non-U.S. earnings may subject the Company to state income taxes, as adjusted for tax
credits, and foreign withholding taxes that the Company estimates would be $0.1 million and $0.1 million at December 31, 2018 and 2017 , respectively. The
Company determined that the transition tax on any undistributed earnings that existed as of December 31, 2018 will be zero .
86
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018 , 2017 and 2016 is as follows (in
thousands):
Balance at January 1
Additions for tax positions related to the current year
Balance at December 31
Years Ended December 31,
2018
2017
2016
$
$
1,271 $
131
1,402 $
276 $
995
1,271 $
276
—
276
The provision for uncertain tax positions relates to business in territories outside of the United States.
The Company’s policy is to classify interest and penalties on uncertain tax positions as a component of tax expense. An immaterial amount of interest and
penalties on unrecognized tax benefits were accrued during the 2018 tax year. The amount of accrued interest and penalties on unrecognized tax benefits was
immaterial, as of December 31, 2018 and 2017 . The Company does not expect the change in uncertain tax positions to have a material impact on its financial
position, results of operations or liquidity. The recognition of previously unrecognized tax benefits on uncertain tax positions would result in a $1.4 million tax
benefit. The Company believes it is reasonably possible that within the next twelve months the Company may resolve certain matters related to the years under
examination, which may result in reductions of the Company's unrecognized tax benefits and income tax expense of up to $1.2 million .
The Company is subject to United States federal income tax as well as to income tax in multiple state and foreign jurisdictions, including the United
Kingdom. Federal income tax returns of the Company are subject to IRS examination for the 2015 through 2018 tax years. State income tax returns are subject to
examination for the 2014 through 2018 tax years. At December 31, 2018, the Company is not impacted by the Global Intangible Low Taxed Income ("GILTI")
provisions.
There are no ongoing audits in any significant foreign tax jurisdictions.
13.
RESTRUCTURING COSTS
In December 2017, as part of the Company’s strategic plan to accelerate revenue growth and increase operating margins, the Company approved a
restructuring plan to reduce the headcount of the Company’s global service delivery team, as well as the headcount of some of its sales teams, representing a total
workforce reduction of approximately six percent. The restructuring is part of the Company’s renewed focus on recurring, or subscription-based, revenue growth
and driving cost reductions to accelerate the growth of its operating margins and free cash flow.
During the year ended December 31, 2018 and December 31, 2017 , the Company continued with a strategic plan to reduce professional service and sales
headcount, resulting in $8.9 million and $1.5 million of restructuring expenses, respectively, which was recorded in “Restructuring” in the accompanying
consolidated statements of operations. For the year ended December 31, 2018 , the restructuring expense consisted primarily of stock-based compensation expense
of $6.2 million , and $2.7 million of payroll-related costs. The stock-based compensation expense relates to accelerated vesting for impacted employees. For the
year ended December 31, 2017 , the restructuring expense consisted primarily of payroll-related costs, such as severance, outplacement costs and continuing
healthcare coverage, associated with employee terminations. The restructuring plan was completed as of December 31, 2018 .
87
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s management has determined that the Company operates in one segment as it only reports financial information on an aggregate and
consolidated basis to its chief executive officer, who is the chief operating decision maker. The Company presents its entity-wide information in the tables below.
The following table sets forth the Company’s sources of revenue (dollars in thousands):
Subscription revenue
Percentage of subscription revenue to total revenue
Professional services revenue
Percentage of professional services revenue to total revenue
At or For Year Ended December 31,
2018 *
2017
2016
473,052
$
396,764
$
339,756
87.9%
64,839
$
12.1%
82.3%
85,221
$
17.7%
80.3%
83,368
19.7%
537,891
$
481,985
$
423,124
$
$
$
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Revenue by geographic region, which is generally based on the address of the Company’s clients as defined in their master subscription agreements, is set
forth below (in thousands):
Revenue
United States
All other countries
Total revenue
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Property and equipment by region is set forth below (in thousands):
Property and equipment, net
United States
United Kingdom
All other countries
Total property and equipment, net
15.
401(K) SAVINGS PLAN
Years Ended December 31,
2018 *
2017
2016
$
$
343,205 $
194,686
537,891 $
313,729 $
168,256
481,985 $
284,657
138,467
423,124
December 31,
2018
2017
$
$
69,550 $
3,558
4,146
77,254 $
16,468
3,378
971
20,817
The Company has a defined contribution savings plan (the “Plan”) under Section 401(k) of the Internal Revenue Code. The Plan covers substantially all
employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company
contributions to the Plan may be made at the discretion of the Board of Directors. The Plan provides for a Company matching contribution in an amount equal to
50% of an employee’s contributions up to $2,400 per year, which vests fully after the four th year of employment.
The Company incurred approximately $2.0 million , $2.0 million and $1.9 million of matching contribution expenses related to the Plan during the years
ended December 31, 2018 , 2017 and 2016, respectively.
88
16.
COMMITMENTS AND CONTINGENCIES
Leases
The Company has various non-cancelable operating leases for its offices and its managed hosting facilities and services. These leases expire at various times
through 2025. Certain lease agreements contain renewal options, rent abatement and escalation clauses. The Company recognizes rent expense on a straight-line
basis over the lease term, commencing when the Company takes possession of the property. Certain of the Company’s office leases entitle the Company to receive
a tenant allowance from the landlord. The Company records tenant allowances as a deferred rent credit, which the Company amortizes on a straight-line basis, as a
reduction of rent expense, over the term of the underlying lease. Total rent expense under operating leases was approximately $9.8 million , $8.0 million and $7.8
million for the years ended December 31, 2018 , 2017 and 2016 , respectively.
Future minimum lease payments under non-cancelable operating leases at December 31, 2018 are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Operating Leases (1)
11,576
14,162
14,277
14,823
14,710
17,961
87,509
$
$
(1) The table above includes future minimum lease payments for the Company's facility financing obligation as follows:
2019: $4.8 million ; 2020: $4.9 million ; 2021: $4.9 million ; 2022: $5.3 million ; 2023 and thereafter: $21.7 million .
Letters of Credit
The Company maintains standby letters of credit in association with other contractual arrangements. Total letters of credit outstanding at December 31, 2018
and December 31, 2017 was $7.7 million and $1.4 million , respectively.
Other Commitments
As of December 31, 2018 , the Company had software subscription and other miscellaneous agreements with various service providers with obligations of
approximately $17.8 million in 2019, $8.8 million in 2020 and $2.8 million in 2021.
Guarantees and Indemnifications
The Company has made guarantees and indemnities under which it may be required to make payments to a guaranteed or indemnified party, in relation to
certain transactions, including revenue transactions in the ordinary course of business. The Company is obligated to indemnify its directors and officers to the
maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its
exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and
indemnities varies and, in many cases, is indefinite but subject to statutes of limitations. To date, the Company has made no payments related to these guarantees
and indemnities. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and the Company’s insurance
coverage and therefore has not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.
Litigation
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. If the Company determines that it is probable
that a loss has been incurred and the amount is reasonably estimable, the Company will record a liability. The Company has determined that it does not have any
reasonably possible liabilities related to any legal proceedings or claims that would individually or in the aggregate materially adversely affect its financial
condition or operating results.
89
Taxes
From time to time, various federal, state and other jurisdictional tax authorities undertake review of the Company and its filings. In evaluating the exposure
associated with various tax filing positions, the Company accrues charges for possible exposures. The Company believes any adjustments that may ultimately be
required as a result of any of these reviews will not be material to its consolidated financial statements.
17.
RELATED PARTY TRANSACTIONS
The Cornerstone OnDemand Foundation (the “Foundation”) empowers communities in the United States and internationally by increasing the impact of the
non-profit sector through the utilization of human capital management technology including the Company’s products. The Company’s chief executive officer is on
the board of directors of the Foundation. The Company does not direct the Foundation’s activities, and accordingly, the Company does not consolidate the
Foundation’s statement of activities with its financial results. During the years ended December 31, 2018 , 2017 and 2016 , the Company provided at no charge
certain resources to the Foundation, with approximate values of $3.7 million , $3.4 million and $3.3 million , respectively.
18.
SUBSEQUENT EVENTS
During January 2019, shares issuable under the Company’s 2010 Employee Stock Purchase Plan increased by 588,856 shares and shares issuable under the
Company’s 2010 Plan increased by 2,649,855 shares in accordance with the automatic annual increase provisions of such plans.
The Compensation Committee has granted or approved performance-based restricted stock units during February 2019. Achievement of the probable target
level would result in the issuance of 93,738 shares of the Company’s common stock upon the vesting of the restricted stock units and achievement of the maximum
target would result in the issuance of 234,345 shares of the Company’s common stock upon the vesting of the restricted stock units. The performance-based
restricted stock units will vest over three years.
During January and February 2019, the Compensation Committee has granted or approved restricted stock units covering an aggregate of 251,928 shares of
the Company’s common stock which generally vest annually over four years.
During February 2019, the Company entered into lease agreements with obligations of approximately $0.5 million in 2019, $1.1 million in 2020, $1.1 million
in 2021, 1.1 million in 2022 and 2.0 million in 2023 and thereafter.
90
19.
SELECTED QUARTERLY DATA (UNAUDITED)
The following unaudited quarterly consolidated statements of operations for each of the quarters in the years ended December 31, 2018 and 2017 have been
prepared on a basis consistent with the Company’s audited annual consolidated financial statements and include, in the opinion of management, all normal
recurring adjustments necessary for the fair presentation of the financial information contained in these statements.
Quarter Ended
(in thousands, except per share data)
Mar. 31,
2017
111,582 $
June 30,
2017
116,651 $
Sept. 30,
2017
121,796 $
Dec. 31,
2017
131,956 $
Mar. 31,
2018 *
133,113 $
June 30,
2018 *
132,517 $
Sept. 30,
2018 *
134,014 $
Dec. 31,
2018 *
138,247
$
33,949
77,633
35,321
81,330
35,708
86,088
37,889
94,067
37,020
96,093
36,365
96,152
36,171
34,793
97,843
103,454
56,894
13,411
20,476
—
62,073
14,684
23,141
—
60,554
16,389
21,249
—
60,750
17,491
19,723
1,539
59,245
15,984
21,985
7,725
90,781
99,898
98,192
99,503
104,939
59,821
16,325
22,101
1,000
99,247
(3,095)
53,215
19,705
23,128
221
52,354
24,967
23,535
—
96,269
100,856
1,574
2,598
(Loss) income from operations
(13,148)
(18,568)
(12,104)
(5,436)
(8,846)
$
(0.23) $
(0.33) $
(0.21) $
(0.09) $
(0.15) $
(0.05) $
0.03 $
0.04
Loss before income tax provision
(15,640)
(20,901)
(14,352)
Income tax provision
(571)
(364)
(503)
(2,492)
(2,333)
(2,248)
(3,260)
(8,696)
(308)
(6,837)
(8,376)
(15,683)
(11,471)
(533)
(536)
(3,499)
(1,925)
(522)
(16,211) $
(21,265) $
(14,855) $
(9,004) $
(16,216) $
(12,007) $
(2,447) $
(4,767)
(2,169)
(1,004)
(3,173)
(0.29) $
(0.37) $
(0.26) $
(0.16) $
(0.28) $
(0.21) $
(0.04) $
(0.05)
56,642
56,935
57,627
57,826
57,425
57,844
58,699
58,649
* See Note 2 for summary of adjustments in relation to the adoption of ASC 606.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
91
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Total operating
expenses
(Loss) income from operations
per share, basic and diluted
Other income (expense):
Interest income (expense)
and other income (expense),
net
Net loss
Net loss per share, basic and
diluted
Weighted average common
shares outstanding, basic and
diluted
$
$
Item 9A.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a
company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2018 , the end of the period covered by this Annual Report on Form 10-K. Based upon such evaluation, our chief executive
officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of such date.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management
and board of directors; and
provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a
material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement misstatements. Also, projections of
any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our chief executive officer and chief financial officer, has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2018 . In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013) . Based on this assessment, our management has concluded that our
internal control over financial reporting was effective as of December 31, 2018 .
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in its report, which appears in Item 8 of this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
Appointment of Principal Accounting Officer
On February 25, 2019, our Board of Directors (our “Board”) appointed Trish Coughlin to replace Brian Swartz as our principal accounting officer, effective
as of the date immediately following the filing of this Annual Report on Form 10-K. Mr. Swartz will continue to serve as our Chief Financial Officer.
Trish Coughlin, age 49, has served as our Chief Accounting Officer since January 2019. From March 2013 to January 2019, Ms. Coughlin worked at
Workday, Inc., most recently serving as its Corporate Controller. From August 2003 to February 2013, Ms. Coughlin worked at Goldman Sachs, most recently
serving as a Managing Director. Prior to that, Ms. Coughlin served as Controller, Specialty Materials of Honeywell and as a Director of PricewaterhouseCoopers.
Ms. Coughlin holds a B.A. in International Relations and a B.S. in Accounting from Lehigh University.
There are no arrangements or understandings between Ms. Coughlin and any other persons pursuant to which she was selected as our Company’s principal
accounting officer. There are also no family relationships between Ms. Coughlin and any of our directors or executive officers and she has no direct or indirect
material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
We have entered into our standard form of Change of Control Severance Agreement with Ms. Coughlin, a copy of which has been filed as Exhibit 10.4 to our
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2013 and is incorporated herein by reference.
We have has entered into our standard form of indemnification agreement with Ms. Coughlin, a copy of which has been filed as Exhibit 10.1 to our
Registration Statement on Form S-1 (File No. 333-169621) filed with the Securities and Exchange Commission on December 17, 2010 and is incorporated herein
by reference.
2019 Executive Bonus Plan
On February 25, 2019, the Compensation Committee (the “ Compensation Committee ”) of our Board established an executive compensation plan for fiscal
year 2019 (the “ 2019 Plan ”) as part of its annual review of target incentive compensation for our executive officers.
Under the terms of the 2019 Plan, each of the eligible executive officers will be entitled to receive a bonus that will vary in amount depending on our success
in achieving certain performance targets with respect to annual recurring revenue, subscription revenue, and operating income. The amount payable with respect to
each metric may be greater or less depending on the extent to which our performance exceeds or falls short of the applicable target. No bonus payout for a
particular performance metric will be earned unless the performance threshold for that metric is met.
The following table shows the target bonus amount payable under the 2019 Plan if the we achieve each performance metric at target for each of the following
executive officers:
Named Executive Officer
Brian Swartz, Chief Financial Officer
Mark Goldin, Chief Technology Officer
Commission Plan with Named Executive Officer
Target Bonus Amount
($)
297,500
262,500
$
$
% of Base
Salary
70
70
On February 26, 2019, we entered into a fiscal year 2019 sales commission plan with Vincent Belliveau, our Executive Vice President and General Manager
of Europe, Middle East and Africa (the “Belliveau Commission Plan”). The Belliveau Commission Plan is effective as of January 1, 2019.
Under the Belliveau Commission Plan, Mr. Belliveau is eligible to receive commissions based on total direct sales in Europe, the Middle East and Africa. To
the extent Mr. Belliveau exceeds his sales quota for revenue in 2019, his commission rate for 2019 sales will be increased with respect to revenue exceeding his
sales quota. In addition, Mr. Belliveau is eligible to receive bonuses totaling up to €20,000 if he meets certain milestone sales targets by specified dates.
92
For fiscal year 2019, the following table shows the target commission and target bonus that Mr. Belliveau is eligible to earn under the Belliveau Commission
Plan:
Target 2019 Commission (1) Target 2019 Bonus (2)
$337,635 $22,800
(1) This amount represents the total performance-based commissions that will be earned under the Belliveau Commission Plan if Mr. Belliveau achieves
the sales quota established under the Belliveau Commission Plan.
(2) Mr. Belliveau's target bonus is €20,000, which has been converted into U.S. Dollars at a rate of $1.14 Dollars per Euro, the exchange rate in effect on
February 25, 2019. The target bonus of €20,000 represents the amount that Mr. Belliveau is eligible to receive if he meets all milestone sales targets by
the dates specified in the Belliveau Commission Plan.
The foregoing description of the Belliveau Commission Plan is qualified in its entirety by reference to the full text of such plan, which is filed as an exhibit to
this Annual Report on Form 10-K.
Compensation of Chief Executive Officer
On February 25, 2019, the Compensation Committee approved a modification to the compensation of Adam Miller, our Chief Executive Officer. At Mr.
Miller's request, he will receive a nominal annual salary of $1, effective as of March 1, 2019, and will not be eligible to participate in the 2019 Plan. Mr. Miller will
continue to be eligible to receive equity awards in connection with his service.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
Item 11.
Executive Compensation
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
The information required by this item will be included in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2018 , and is incorporated herein by reference.
93
With the exception of the information incorporated in Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K, our Proxy Statement for the 2019
Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2018 is not deemed “filed” as part of this Annual
Report on Form 10-K.
Item 15.
Exhibits and Financial Statement Schedules
Documents filed as part of this report are as follows:
1. Consolidated Financial Statements:
PART IV
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Item 8 of this Annual Report on
Form 10-K.
2. Financial Statement Schedules:
Financial Statement Schedules have been omitted as information required is inapplicable or the information is presented in the consolidated
financial statements and the related notes.
3. Exhibits:
The documents listed in the Exhibit Index immediately below are incorporated by reference or are filed with this Annual Report on Form 10-K,
in each case as indicted therein (numbered in accordance with Item 601 of Regulation S-K).
94
Exhibit Index
Exhibit
Number
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
Exhibit Description
Amended and Restated Certificate of Incorporation of the Registrant.
Amended and Restated Bylaws of the Registrant.
Indenture between the Registrant and U.S. Bank National Association, dated
as of June 17, 2013.
Indenture, dated as of December 8, 2017, by and between the Registrant and
U.S. Bank National Association, as trustee (including the form of 5.75%
Convertible Senior Notes Due 2021).
Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers.
The Registrant’s 1999 Stock Plan, including the form of stock option
agreement, as amended.
The Registrant’s 2009 Equity Incentive Plan, including forms of stock option
agreements.
10.3A*
Form of Restricted Stock Unit Award Agreement under 2009 Equity
Incentive Plan.
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
The Registrant’s 2010 Equity Incentive Plan, including form of stock option
agreement.
The Registrant’s 2010 Employee Stock Purchase Plan.
Employment Agreement between the Registrant and Adam Miller, dated as
of November 8, 2010.
Employment Agreement between the Registrant and Mark Goldin, dated as
of May 24, 2010.
Employment Agreement between the Registrant and Brian L. Swartz, dated
as of May 1, 2016
Amended and Restated Employment Agreement between the Registrant and
David J. Carter, dated as of November 8, 2010.
95
Incorporated by Reference
Form
8-K
8-K
8-K
File No.
001-35098
001-35098
001-35098
Exhibit
3.1
3.2
4.1
Filing Date
June 20, 2018
June 20, 2018
June 17, 2013
8-K
001-35098
4.1
December 8, 2017
S-1/A
333-169621
10.1
December 17, 2010
S-1
S-1
333-169621
10.2
September 29, 2010
333-169621
10.3
September 29, 2010
S-1/A
333-169621
10.3A
December 17, 2010
S-1/A
333-169621
10.4
December 17, 2010
S-1/A
S-1/A
333-169621 10.5
333-169621
10.6
December 17, 2010
November 9, 2010
S-1
333-169621
10.11
September 29, 2010
10-Q
001-35098
10.1
August 5, 2016
S-1/A
333-169621
10.9
November 9, 2010
Exhibit
Number
10.10A*
2016 Sales Commission Plan between the Registrant and David J. Carter.
Exhibit Description
10.10B*
2017 Sales Commission Plan between the Registrant and David J. Carter.
10.11*
10.12*
Transition Agreement between the Registrant and David J. Carter, dated as of
February 27, 2018.
Amended and Restated Unlimited Term Employment Contract between the
Registrant and Vincent Belliveau.
Incorporated by Reference
Form
10-Q
10-Q
10-K
File No.
Exhibit
Filing Date
001-35098 10.1
001-35098 10.1
001-35098
10.11
May 6, 2016
May 5, 2017
February 27, 2018
S-1/A
333-169621
10.10
February 11, 2011
10.13A*
2014 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13B*
2015 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13C*
2016 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13D*
2017 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13E*
2018 Sales Commission Plan between the Registrant and Vincent Belliveau.
10-Q
10-Q
10-Q
10-Q
10-Q
001-35098 10.2
001-35098 10.2
001-35098 10.2
001-35098 10.2
001-35098 10.4
10.13F*
2019 Sales Commission Plan between the Registrant and Vincent Belliveau.
August 7, 2014
May 8, 2015
May 6, 2016
May 5, 2017
August 7, 2018
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Employment Agreement between the Registrant and Jeffrey Lautenbach,
dated November 28, 2017.
Employment Agreement between the Registrant and Adrianna Burrows,
dated February 13, 2018.
Form of Change of Control Severance Agreement between the Registrant and
certain of its executive officers.
Transition Agreement between the Registrant and Kirsten Helvey, dated as of
February 27, 2018.
Description of 2017 Executive Bonus Plan.
Description of 2018 Executive Bonus Plan.
Master Service Agreement (United States) between the Registrant and
Equinix Operating Co., Inc., dated as of November 6, 2009.
Master Service Agreement (United Kingdom) between the Registrant and
Equinix (United Kingdom) Limited, dated as of November 4, 2009.
Office Lease between Water Garden Realty Holding LLC and the Registrant,
dated as of November 30, 2011.
First Amendment to the Office Lease between Water Gardens Realty Holding
LLC and the Registrant, dated as of April 24, 2012.
Second Amendment to the Office Lease between Water Garden Realty
Holding LLC and the Registrant, dated as of February 28, 2013.
Third Amendment to the Office Lease between Water Garden Realty Holding
LLC and the Registrant, dated as of April 22, 2014.
Fourth Amendment to the Office Lease between Water Garden Realty
Holding LLC and the Registrant, dated as of December 16, 2014.
96
10-K
001-35098
10.14
February 27, 2018
10-Q
001-35098
10.1
May 8, 2018
10-Q
001-35098
10.4
August 7, 2013
10-K
001-35098
10.16
February 27, 2018
8-K
8-K
S-1
001-35098 n/a
001-35098 n/a
March 9, 2017
March 2, 2018
333-169621
10.17
September 29, 2010
S-1
333-169621
10.18
September 29, 2010
10-K
001-35098
10.16
March 6, 2012
10-Q
001-35098
10.1
10-Q
001-35098
10.2
May 9, 2013
May 9, 2013
10-Q
001-35098
10.1
August 7, 2018
10-Q
001-35098
10.2
August 7, 2018
Exhibit
Number
10.27
10.28
21.1
23.1
24.1
31.1
31.2
32.1†
32.2†
Exhibit Description
Fifth Amendment to the Office Lease between Water Garden Realty Holding
LLC and the Registrant, dated as of April 26, 2018.
Investment Agreement, dated as of November 8, 2017, by and between, inter
alia, the Registrant and Silver Lake Credit Partners, L.P., as amended.
Form
10-Q
File No.
001-35098
Exhibit
10.3
Filing Date
August 7, 2018
10-K
001-35098
10.24
February 27, 2018
Incorporated by Reference
List of subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP.
Power of Attorney (contained in the signature page to this Annual Report).
Certification of the Chief Executive Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
Indicates a management contract or compensatory plan or arrangement.
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and
Exchange Commission and are not to be incorporated by reference into any filing of Cornerstone OnDemand, Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective
of any general incorporation language contained in such filing.
97
Item 16.
Form 10-K Summary
None.
98
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2019 .
SIGNATURES
CORNERSTONE ONDEMAND, INC.
By:
Name:
Title:
/s/ Adam L. Miller
Adam L. Miller
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Adam L. Miller and Brian L.
Swartz, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report
on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Adam L. Miller
Chief Executive Officer and Director (principal executive officer)
February 26, 2019
Adam L. Miller
/s/ Brian L. Swartz
Chief Financial Officer (principal financial and accounting officer)
February 26, 2019
Brian L. Swartz
/s/ Elisa Steele
Elisa Steele
Chair of the Board of Directors
February 26, 2019
/s/ Harold W. Burlingame
Director
Harold W. Burlingame
/s/ Dean Carter
Director
Dean Carter
/s/ Robert Cavanaugh
Director
Robert Cavanaugh
99
February 26, 2019
February 26, 2019
February 26, 2019
Signature
Title
Date
/s/ Richard Hadrill
Director
Richard Hadrill
/s/ Joe Osnoss
Joe Osnoss
Director
/s/ Marcus Ryu
Director
Marcus Ryu
/s/ Kristina Salen
Director
Kristina Salen
/s/ Steffan Tomlinson
Director
Steffan Tomlinson
100
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Cornerstone OnDemand Commission Plan
Exhibit 10.13F
EMPLOYEE NAME:
EMPLOYEE TITLE:
EFFECTIVE DATE:
Vincent Belliveau
Executive Vice President & GM EMEA
1/1/2019
TYPE:
DIVISION:
TERM:
Team
EMEA
Effective Date through 31 Dec 2019
The following sets forth the terms and conditions of your commission plan (the “Plan”). The Plan does not automatically renew at the end of the Term, and is only
valid for the Term, unless it is revised by Cornerstone during the Term. Cornerstone’s Board of Directors (or its authorized committee or delegate) and/or Cornerstone’s CEO
may amend, modify, alter, suspend, or terminate the Plan at any time and in their sole discretion. The Plan may only be modified with the prior written approval of
Cornerstone’s CEO. All calculations and determinations with respect to the Plan shall be made by Cornerstone in its sole discretion, and shall be final. Cornerstone reserves
the right to change at any time the products, services, customers, territories, accounts, commissions or bonuses assigned to you.
1) Definitions.
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
o)
p)
q)
r)
s)
t)
u)
v)
“ Portfolio ” means the territory and/or accounts assigned to you by your manager.
“ SKU ” means a product or service offered for sale by Cornerstone which you are approved to sell. For clarity, certain Overlay Roles may only be approved to sell
certain products or services.
“ Sale ” means a written agreement, order, amendment, addendum, and/or statement of work with approved pricing between Cornerstone and a customer/distributor
in your Portfolio for a SKU, duly executed on behalf of Cornerstone by its CEO or an authorized designee. For clarity, each SKU sale shall be deemed a separate
Sale.
“ Approved Sale ” means a Sale that occurs during the Term.
“ Prior Sale ” means a Sale that occurred prior to the Term and is being renewed by an Approved Sale.
“ Costs ” means amounts owed by Cornerstone to third parties directly resulting from the sale of software and/or services (i.e., inbound referral fees, content fees,
etc.). Inbound referral fee rates that are either: (i) 20% or lower; or (ii) owed to ADP, will not be counted as Costs; referral fee rates above 20% will be counted as
Costs in their entirety.
“ Revenue ” means the total fee(s) contractually committed in a Sale (i.e., across all years) at the time of its execution, less Costs (except in cases where
Cornerstone at its discretion has waived the discount for Costs).
“ Content Revenue ” means, for a given Approved Sale, fifty percent (50%) of total eLearning course and/or related content fee(s) contractually committed in the
Approved Sale at the time of its execution. Notwithstanding the foregoing, if the duration of the Approved Sale is one (1) year or longer, Content Revenue will be
calculated as fifty percent (50%) of total eLearning course and/or related content fee(s) contractually committed in the Approved Sale at the time of its execution,
divided by the number of days in the Approved Sale, multiplied by three hundred sixty-five (365).
“ Recurring ” means Revenue, excluding Content Revenue, invoiced on a recurring basis during the applicable Sale, whether or not the exact same amount is
invoiced for each period (i.e., a “ramping” deal).
“ One-Time ” means Revenue, excluding Content Revenue, invoiced on a non-recurring basis that Cornerstone determines is eligible for Commissions. For clarity, no
One-Time Revenue will count toward Quota. Refer to Sales Wiki for a list of all SKUs eligible for One-Time Revenue Commissions.
“ Annual Recurring Revenue ” or “ ARR ” means, for a Sale with a duration of: (A) one (1) year or longer, total Recurring Revenue, divided by the number of days in
the Sale, multiplied by three hundred sixty-five (365); (B) shorter than one (1) year, total Recurring Revenue.
“ Year ” means each 12-month period of an Approved Sale, with Year 1 beginning on the Approved Sale start date.
“ Co-Terminous ” means an Approved Sale set to co-terminate with another Sale.
“ Equivalent Full-Year Value ” means, for an Approved Sale of less than one (1) year, the annualized value of Recurring Revenue.
“ Baseline ” means, for a Prior Sale, the greater of its: (i) ARR; or (ii) total Recurring Revenue in the last full Year of the Prior Sale.
“ Incremental ” means incremental ARR of an Approved Sale in excess of the aggregate Baseline of all Prior Sales, if any.
“ Quota ” means the combined Incremental ARR and/or Content Revenue value, as set forth in Section 3.
“ Commission ” means incentive compensation relating to procurement of an Approved Sale, calculated as a percentage of applicable Revenue, and paid one time
(i.e., there are no multi-year commission payments).
“Split” means dividing the Revenue (for both Quota and Commission purposes) for an Approved Sale among two or more individuals.
“Overlay Role” means employment as a member of Cornerstone’s a) solution consultant, b) recruiting solution sales, c) alliances, d) content sales, or e) Extended
Enterprise / Cornerstone for Salesforce teams.
“Innovation Index” means an automatic, annual price increase (as a fixed percentage of ARR) set forth in an Approved Sale.
“Quarry” means Cornerstone’s internal online repository of sales enablement information.
2) Quota
Your Quota is: $30,500,000
3) Commissions
a) Regular Commission Rates . Commissions rates for the following Revenue types are as follows:
If the initial term* of the
Approved Sale for a given
SKU is:
2 + years
1-2 years
1 year or less **
Incremental:
1.107%
1.107%
1.107%
Year 1
Baseline:
0.310%
0.190%
0.060%
Content:
1.107%
0.277%
0.277%
The Commission rate for:
Year 2
Incremental:
Baseline:
Content:Incremental:
0.554%
0.443%
0.190%
0.060%
0.221%
0.330%
Year 3
Baseline:
0.060%
*For Federal and SLED Approved Sales, the initial term shall be the total number of base and option years.
**Commissions on Co-Terminous Approved Sales will be paid at the “3 years or more” rate category specific to that Sale.
b) Accelerated Commission Rates .
When Quota attainment reaches:
Commissions on Incremental Revenue exceeding the
applicable Quota threshold shall be paid according to the
following, mutually exclusive accelerated rate (applies
only to Year 1 Commissions):
100%
125%
1.661%
1.937%
4) Bonuses
a) Quota Achievement Bonus (cumulative) .
If your Quota attainment is at least:
By the following date:
You will be eligible for a bonus of:
$4,880,000
$11,895,000
$19,215,000
$30,500,000
End of Q1 5,000 EUR
End of Q2 5,000 EUR
End of Q3 5,000 EUR
End of Q4 5,000 EUR
b) Outbound Referral Bonus . If you refer a client to one of Cornerstone’s referral partners, resulting in a sale by that partner on which Cornerstone earns a referral fee,
you will be eligible for a bonus (“ Referral Bonus ”) equal to four percent (4%).if you are a Content Sales Representative, and the partner is LinkedIn or Pluralsight
you will be eligible for twenty percent (20%), of the referral fee Cornerstone receives. Cornerstone shall at its sole discretion determine whether a given referral is
eligible for a Referral Bonus. In addition, if Cornerstone determines that multiple individuals made or assisted with the referral, the Referral Bonus shall be split
proportionally among those individuals, as Cornerstone decides.
5) Earning of Commissions and Bonuses
a) Commissions are deemed to be earned for a given Approved Sale if and when al l of the following conditions have been satisfied. Cornerstone may waive any of
these conditions on a case-by-case basis at its sole discretion:
i)
There is a valid Approved Sale in place marked “closed/won” in Cornerstone’s customer relationship management (CRM) system (currently, Salesforce), which
includes the Revenue upon which the Commission is based.
ii) Either you (or, in the case of a manager, your team) were/was primarily responsible for procuring (or, in the case of an Overlay Role, primarily responsible for
supporting) the Approved Sale, or else Cornerstone in its sole discretion has predetermined you are eligible for a Split. (Split criteria may be found in the Quarry)
iii) You are employed by Cornerstone on the applicable Payment Date (defined below).
b) Bonuses are deemed to be earned if and when:
All applicable bonus attainment conditions as set forth in section 4 have been satisfied.
i)
ii) You are employed by Cornerstone on the applicable Payment Date (defined below).
6) Payment of Commissions and Bonuses
a) Cornerstone will pay earned Commissions and bonuses in the second calendar month following the month in which the Commission/bonus was earned (the “
Payment Date ”). For exact Payment Dates, see Cornerstone’s payment calendar in the Quarry .
b) Notwithstanding the Payment Date, Cornerstone reserves the right at its sole discretion to delay payment of Commissions in case of non- standard billing and/or
contractual terms, including without limitation delayed invoicing and/or subscription start date, early termination clauses, non-standard billing terms, and/or an
excessively “ramped” sale, where the cost of the final Year is more than four times the cost of the first Year. For more information, please see Cornerstone’s booking
policy in the Quarry.
To the extent permitted by applicable law, Cornerstone may recover Commission and bonus amounts paid to you (each an “ Overpayment ”) if:
i)
The Revenue upon which the applicable Commission or bonus is based is no longer contractually committed to Cornerstone (e.g., the underlying Approved Sale
has been cancelled, etc.);
c)
ii) The applicable Commission or bonus amount was paid to you in error.
d) To the extent permitted by applicable law, Overpayments may be used to offset future Commissions, bonuses, wages, expense reimbursements, accrued vacation,
or any other liability Cornerstone may incur to you.
7) Termination of Your Employment.
a)
b)
If you are an at-will employee, nothing contained in this document in any way changes or limits the “at-will” nature of the employment relationship between
Cornerstone and you.
In the event that your employment with Cornerstone terminates, you will only be paid for earned Commissions/bonuses earned on or prior to the date of your
termination or transfer.
8) Miscellaneous.
a) Nothing in this document obligates Cornerstone to enter into any Approved Sales or other agreements with any customer or otherwise.
b) You are expected to follow the official Cornerstone pricing guidelines, which are subject to change from time to time at Cornerstone's sole discretion.
c)
The Plan supersedes and replaces any all prior commission and bonus plans, as well as any prior written or verbal discussions, agreements or understandings with
respect to the bonuses, commissions and similar items of compensation for sales made during the Term.
In the event that any provision or any portion of any provision hereof becomes or is declared by a court or administrative agency of competent jurisdiction to be illegal,
unenforceable, or void, this Plan shall continue in full force and effect without said provision or portion of provision.
The law governing the Plan, as well as venue for any action, shall be the state where the employee is employed.
e)
f) Notwithstanding anything to the contrary herein, all calculations regarding Quota, Revenue and Commissions are subject at all times to applicable conflict, teaming,
d)
and referral rules, which shall be made available to you online (link to be provided).
CORNERSTONE
By: /s/ Jeff Lautenbach
Name: Jeff Lautenbach
Date: February 26, 2019
Agreed and accepted:
By: /s/ Vincent Belliveau
Name: Vincent Belliveau
Date: February 25, 2019
SUBSIDIARIES OF THE COMPANY
Exhibit 21.1
SUBSIDIARIES:
Cornerstone OnDemand Global Operations, Inc. (Delaware)
Cornerstone OnDemand Holdings, Inc. (Delaware)
Cornerstone OnDemand Europe Limited (United Kingdom)
Cornerstone OnDemand International Limited (United Kingdom)
Cornerstone OnDemand Limited (United Kingdom)
Cornerstone OnDemand Services India Private Limited (India)
Cornerstone OnDemand Spain SL (Spain)
Evolv Inc. (Delaware)
Grovo Learning Inc. (Delaware)
Sonar Limited (New Zealand)
Workpop Inc. (Delaware)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-223430, 333-216245, 333-209817, 333-202940, 333-
194198, 333-189389, 333-180311, 333-173754) of Cornerstone OnDemand, Inc. of our report dated February 26, 2019 relating to the financial statements and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 26, 2019
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Adam L. Miller, certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this Annual Report on Form 10-K of Cornerstone OnDemand, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: February 26, 2019
/s/ Adam L. Miller
Adam L. Miller
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brian L. Swartz, certify that:
1.
2.
3.
4.
(a)
(b)
(c)
(d)
I have reviewed this Annual Report on Form 10-K of Cornerstone OnDemand, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: February 26, 2019
/s/ Brian L. Swartz
Brian L. Swartz
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Adam L. Miller, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report On Form 10-K of Cornerstone OnDemand, Inc. for the fiscal year ended December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Cornerstone OnDemand, Inc.
Date: February 26, 2019
/s/ Adam L. Miller
Adam L. Miller
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Brian L. Swartz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report on Form 10-K of Cornerstone OnDemand, Inc. for the fiscal year ended December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Cornerstone OnDemand, Inc.
Date: February 26, 2019
/s/ Brian L. Swartz
Brian L. Swartz
Chief Financial Officer