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Value Line has initiated coverage of Cornerstone OnDemand, Inc. (CSOD) in its flagship product, The Value Line Investment Survey. Cornerstone is a provider of talent management solutions as Software-as-a-Service (SaaS). Its primary solution is a cloud-based product that provides enterprise and mid-market organizations with the ability to maximize the productivity of their human capital. Some of the services that its products assist include hiring and developing employees, engaging employees effectively, improving business execution, and delivering training and certification programs. As of December 31, 2013, the company had 987 employees. Its principal offices are located in Santa Monica, California and the company was incorporated in Delaware on May 24, 1999.

The firm’s core solution consists of four integrated clouds: Recruiting, Learning, Performance, and Extended Enterprise. These clouds can be purchased individually or as a package. Aside from its core solution, the company also offers Cornerstone for Small Business (CSB) and Cornerstone for Salesforce. CSB is a talent management solution, while the latter group is a learning application which allows clients to access sales info and just-in-time training.

The company’s products are accessible through a standard web browser and therefore does not require large investments for hardware or implementation time.  Sales are typically seasonal, with higher revenues in the fourth quarter as the company signs a higher percentage of new clients and also renews contracts with existing clients. Cornerstone operates in a single segment.

The company sells its solutions through both direct and indirect channels, including direct sales teams and distributor relationships with payroll, consulting, and human resource service companies. Most contracts are multi-year agreements, based on the number of employees. Fees include those for consulting and annual subscriptions. Sales to the United States accounted for 70% of 2013 revenue.

Some of Cornerstone’s clients include multi-national corporations, mid-market companies, public sector organizations, higher education institutions, and non-profits. Some of its larger customers include Barclays Bank, Carlson Restaurants Worldwide, Walgreen Co. (WAG), and American International Group (AIG).   As of December 31, 2013, 1,631 clients used Cornerstone’s products to empower more than 14 million users in 191 countries and 41 languages. No single customer accounted for more than 10% of total revenues in 2013.

The market that Cornerstone serves is highly competitive, fragmented, and rapidly evolving. Changes in technology, shifting client needs, and frequent introductions of new technology all add to the difficult landscape. Some of its primary competitors in the tracking systems segment are Oracle Corporation (ORCL) and IBM (IBMFree IBM Stock Report). In the learning management systems group, its primary competitors are Oracle, Saba Software, and SAP America. Halogen Software and Lumesse Limited are competitive in the performance management division. Many of these companies have better name recognition and larger marketing budgets, which pose risks to Cornerstone’s growth.

The company faces other risks. It has a history of posting operating losses. In fact, it has posted an operating loss in every year since its inception. Given the continued spending for research and development, SG&A, and expanding the business, the company expects to continue to incur losses in the coming quarters. It also has a significant amount of debt on its balance sheet. As of December 31, 2013, Cornerstone had roughly $220 million in debt, or about 80% of total capital.

Business prospects at Cornerstone remain mixed. While the company has posted considerable increases in sales growth over the past few years, thanks to strong demand for its products, it also continues to post operating losses every year. This is largely due to the high level of SG&A (nearly 60% of 2013 revenues) and R&D (12%) spending management invests. However, we believe that these heavy investments will pay off in the longer term, as the bottom line should turn to the black sooner rather than later. 

Subscribers interested in learning more about this cloud computing company are advised to consult Value Line’s quarterly reports for Cornerstone, as well as any supplemental reports and relevant articles that may arise as important news comes to light.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.