A Cornerstone of the Cloud

 | Apr 27, 2012 | 1:00 PM EDT
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Some young tech companies seem to think that the best way to describe their business is to take a set of note cards containing hot buzzwords, mix them up in an oversized Red Bull can and arrange them in the order they are picked out by an intern.

That's what I encountered at Cornerstone OnDemand (CSOD), whose name is unwieldy enough. But then it describes it approach like this: ''Empowering businesses and people through on-demand integrated talent management solutions.''

Oh brother. But if you can get past the jargon, this is one red-hot business.  Cornerstone is a provider of cloud-based learning and talent management software that already boasts 7 million users in more than 150 countries. A seasoned company despite being public for barely a year.  

The learning and talent management market overall is nearly $4 billion in size and growing at 8% annually. But Cornerstones' corner of the business, providing software as a service, or cloud-based offerings, is growing at closer to 20%.

The company essentially looks to help clients manage their employees better and does that by providing software that helps them hire the right people, evaluate them, develop their skills and compensate them. This could be a 2010s version of PeopleSoft, which was an incredible human-resources management stock before it was gobbled up by Oracle in 2004.

These services can help link pay to performance, retain employees, lower personnel costs and maximize efficiencies and productivity. Talk of streamlining and automating internal tasks sound good, but as we all know if it doesn't improve the bottom line, these initiatives usually don't go very far. Cornerstone has done an excellent job proving its worth, and the phenomenal growth the past few years is proof of that.


Cornerstone OnDemand (CSOD)
Source: StockCharts.com


The company is the 1999 brainchild of founders Adam Miller, Perry Wallack and Steve Seymour, who are all still execs at the firm. Headquartered in Santa Monica, Calif., Cornerstone started as CyberU, which provided online corporate training and education for adults, but as its clients begin to ask for more ways to help automate their human resource functions, the company pivoted and morphed into the industry titan it is today. 

Cornerstone now has offices in London, Paris, Munich, Tel Aviv and Mumbai. With more than 7,000 features in its software suite, its services are broken into four primary business segments: Recruiting Cloud, Performance Cloud, Learning Cloud, and Extended Enterprise Cloud. The Recruiting Cloud software helps manage every aspect of the process from job postings, tracking candidate competencies and social networking integration for both external and internal candidates. 

The goal is to reduce the time it takes from initial assessment of a job need all the way through the new employee integration period. Another example of Cornerstone's offerings is the performance management software, which helps to align employee objectives with the overarching strategic goals of the organization.

Each of its modules are sold as independent solutions, but because they are all built on the same technology platform, full integration of all human management tasks is what really differentiates Cornerstone from its more singularly focused peers.

The client breadth is impressive and includes multinationals, public sector organizations, higher education institutions and non-profits. Ticketmaster, Starwood Hotels, Scottrade, Brooklyn Public Library, London Business School, and MasterCard all utilize some or all of Cornerstone's services. The firm generates strong recurring revenue streams from its customer base with three-year average contracts and a renewal rate in excess of 95%.

Its software as a service solution is a key selling point, allowing clients to access the product suite through any Web browser and not requiring large up-front investments in time or money. It's the same cloud-based theme that's permeating nearly every aspect of technology. No hardware to maintain onsite, no software downloads and no storage issues, which ultimately means costs savings for clients.

Cornerstone closed fiscal 2011 with 62% revenue growth, 60% bookings growth,   improving gross margins and 800 clients worldwide.  Shares are up 16% since going public about a year ago and trading at a slight premium to its peer group, but its first-mover advantage, combined with integrated solutions, should allow it to trade at the top of the industry's valuation range.

You don't see 60% top line growth, margin expansion and niche domination very often these days, so if you can stand a price-to-sales multiple over 10, put this in your lesson plan with the expectation of a lot of volatility. Cornerstone reports earnings on May 12.

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