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%