Recommendation: Buy
Christian Meunier, Ian Strgar
April 19th, 2013
Background
› Founded in 1999, headquartered in Santa Monica, CA
– Began principle operations in November
› Strong IPO (November 17th, 2011): 10.5 million shares at $13 per
share
– Closed the day up 46.7% to $19.07
› Leading provider of talent management software
Segments
› Talent Management Suite
– SaaS deployment, 1-3 year contracts paid monthly, annually or in three year
installments, pricing based on number of employees
› Supportive Consulting Services
– Implementation, installation, systems configuration and integration, and
training
Talent Management Suite
› Recruiting Cloud
– Manage job postings, new candidate identification, skill and
competency assessment, onboarding
› Learning Cloud
– Train new employees and employees in new positions with classroom training,
online training, social collaboration, compliance management
› Performance Cloud
– Align individual goals with organizational by managing performance
requirements, succession plans, and compensation
› Extended Enterprise Cloud
– Same great features for extend supplier networks
Industry Overview: Talent Management
› Niche industry within overall human capital management (HCM)
› Growth drivers: increasing globalization and competition
– Pressure on HR on recruit, develop, and retain talented individuals
– Consolidation of all talent management processes (cost and effort savings)
› Recruiting & Staffing, Learning & Development, Performance Management, and Career
Planning
Market Opportunity
› Underpenetrated market as talent management is seeing
increased recognition as a necessary function
› 2012 Market Size: Approximately $4B
– CAGR of 16.5% through 2014, fastest within overall HCM
Talent Management Market Size ($B)
6.0
5.4
4.7
5.0
4.0
4.0
3.3
3.0
2.0
1.0
0.0
2011
› Sources: Deloitte, Forrester
2012
2013
2014
Competitive Landscape
› Diversified Software Providers
– IBM (Kenexa, Dec. 2012), Oracle (PeopleSoft, Dec. 2004; Taleo, Feb. 2012), SAP
(SuccessFactors, Feb. 2012)
› SaaS Talent Management Providers
– Halogen Software, Lumesse, Peoplefluent, Saba Software, SilkRoad, SumTotal Systems
› Result: the company reports competing primarily as a comprehensive TM
Suite; enterprise competitors
Leadership Recognition
› Gartner, Forrester, IDC: talent management market leader
Growth Strategies: Organic
› Direct sales team and resellers
– Direct sales team: roughly 1/3 of company in sales and marketing (250-300)
› Non-linear growth in sales teams - allowing for better regional/sector coverage
› Roughly 80% of revenues
– Resellers, alliances: very useful to international growth
› Key international players: Affiliated Computer Services, Appirio, ADP
› Salesforce.com integrations
› Client retention - average ADRR since 2002: 95%
Growth Strategies: Acquisitions
› Sonar Limited, April 5th, 2012
– Based in Auckland, New Zealand
– Strong focus on SMB segments, 375 global clients
› Rebranded “Cornerstone Small Business solution”
– NOT integrated into Cornerstone’s solution
Growth Opportunities
› International: roughly 60% annually; 186 countries and 42 languages
– EMEA: one client in 2007, currently 175
– APAC: opening new offices; plans to provide direct sales, alliances, support
2012 Geographic Revenue
80%
69%
70%
60%
50%
40%
30%
20%
20%
11%
10%
0%
United States
› Public sector
– Cloud First, FEDRAMP
United Kingdom
All Other Countries
Good Things To Come: Bookings Growth
› A view into CSOD’s backlog of sales
Bookings ($M)
180,000
154,286
160,000
140,000
120,000
97,584
100,000
80,000
60,919
60,000
40,000
20,000
15,019
24,857
34,467
2007
2008
2009
2010
2011
2012
Comparable Companies
Workday
Ultimate Software Group
Salesforce.com
Netsuite
Splunk
Weight
30%
30%
15%
15%
10%
Product Offering
HCM
HCM
CRM
ERP
BI Analytics
Comparability
Growth, products
risks, beta, industry
Products, industry, capital
structure, beta, business
Products (integrated),
growth, business model,
Growth, beta,
unprofitable,
Unprofitable,
beta, growth
unprofitable, business
model, size
beta
business model
model, capital structure
› We value CSOD purely on an EV/Revenue and EV/Gross Profit basis
– Lower line growth and CFs irrelevant at this point in the company’s growth stage
Multiple
EV/Revenue
EV/Gross Profit
Price Target
Current Price
Undervalued
Implied Price
Weight
$
49.18
50%
$
55.00
50%
$52.09
$33.19
56.95%
DCF
› Looked at six companies that went through similar growth stages as
Cornerstone OnDemand
– Salesforce.com, Netsuite, Concur Technologies, The Ultimate Software Group,
Exact Target, Responsys
› Revenue model
– Unable to isolate individual line items; 80% of revenues from subscription fees
Cost of Revenue
› Due to cloud operations, cost of revenue will decline as a percentage
of revenue in the future
Cost of Revenue
35%
30%
25%
20%
15%
10%
5%
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
0%
Other DCF Considerations
› Research & Development
– Constant, as a percent of revenue, due to high industry competition
› Tax Rate
– Difficult to currently project due to unprofitability
– Looked at profitable, high growth, tech companies to find rate at perpetuity
› Beta
Cornerstone OnDemand Beta Calculations
Beta
Standard Deviation
Weighting
1 Year Weekly
0.87
0.33
10%
2 Year Daily
1.12
0.10
20%
2 Year Monthly
1.82
0.33
70%
Weighted Average Beta
1.58
DCF Price Target
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
% Equity
30.00% Terminal Growth Rate
1.78% Terminal Value
1.58 PV of Terminal Value
5.79% Sum of PV Free Cash Flows
Considerations
3.00%
5,734,203
1,090,722
853,978
99.84% Firm Value
1,944,700
% Debt
0.16% Total Debt
2,752
Cost of Debt
5.20% Cash & Cash Equivalents
76,442
CAPM
10.94% Market Capitalization
1,941,948
WACC
10.93% Fully Diluted Shares
53,384
Implied Price
$36.38
Current Price
$33.19
Undervalued
9.60%
Final Price Target
Multiple
Implied Price
Weight
Comparable Analysis
$
52.09
60%
Discounted Cash Flow
$
36.38
40%
Price Target
$45.81
Current Price
$33.19
Undervalued
38.01%
Questions
Recommendation
› In conclusion, we recommend a buy for all portfolios based on
qualitative factors and an undervaluation of 38%