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Recommendation: BuyChristian Meunier, Ian StrgarApril 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 $4B– CAGR of 16.5% through 2014, fastest within overall HCM
› Sources: Deloitte, Forrester
3.3
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2011 2012 2013 2014
Talent Management Market Size ($B)
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
› Public sector– Cloud First, FEDRAMP
69%
11%
20%
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30%
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United States United Kingdom All Other Countries
2012 Geographic Revenue
Good Things To Come: Bookings Growth› A view into CSOD’s backlog of sales
Comparable Companies
› 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
Workday Ultimate Software Group Salesforce.com Netsuite Splunk
Weight 30% 30% 15% 15% 10%
Product Offering HCM HCM CRM ERP BI Analytics
Growth, products Products, industry, capital Products (integrated), Growth, beta, Unprofitable, risks, beta, industry structure, beta, business growth, business model, unprofitable, beta, growth
unprofitable, business model, size beta business model
model, capital structure
Comparability
Multiple Implied Price Weight
EV/Revenue 49.18$ 50%EV/Gross Profit 55.00$ 50%
Price Target $52.09Current Price $33.19Undervalued 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
0%
5%
10%
15%
20%
25%
30%
35%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Cost of Revenue
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
› BetaCornerstone 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 Considerations
Tax Rate 30.00% Terminal Growth Rate 3.00%
Risk Free Rate 1.78% Terminal Value 5,734,203
Beta 1.58 PV of Terminal Value 1,090,722
Market Risk Premium 5.79% Sum of PV Free Cash Flows 853,978
% Equity 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%