Cornerstone OnDemand Inc.’s recent initial public offering was the strongest of the year on the Nasdaq, with its share price leaping 47 percent on its first day of trading.
The Santa Monica company sells human resources and employee training software, but investors appear most interested in its software-as-a-service delivery technology. That means customers have access to software by subscription via the Internet instead of by downloading it.
“Software as a service is a hot sector among the investment community,” said Matt Therian, an analyst at IPO tracking firm Renaissance Capital in Greenwich, Conn.
Cornerstone’s software includes employee management programs such as recruitment, training, evaluation and compensation. The company has more than 480 corporate, government and non-profit customers including Microsoft Corp. and THQ Inc.
Software as a service is a compelling business model because it can be accessed from any computer instead of installed on just one. While it may or may not be more profitable than downloaded software, it’s becoming the desired method of software distribution.
The business model works this way: Customers pay a multiyear subscription fee for access to Cornerstone’s software. Subscriptions are typically for a three-year period and vary in price depending on the software and number of people who will use it.
Because customers pay the subscription fee upfront, the company is able to generate quick cash flow, which is attractive to investors, Therian said.
“What’s particularly interesting about this company is that new contracts are growing fast and that’s going to ramp forward bookings growth,” he said.
Adam Miller, Cornerstone’s president and chief executive, founded the company in 1999. Today, Cornerstone has more than 320 employees in six offices. Headquarters are on the sixth floor of an office building in a Santa Monica business park.
The rise of software-as-a-service technology has propelled the growth of the human resources software industry. Bersin & Associates, an Oakland human resources research and consulting firm, estimates that the market will increase by about 11 percent to more than $3 billion this year.
Cornerstone’s revenue was $43.7 million last year, up 49 percent from $29.3 million in 2009. But the company has yet to show a profit. It had a $48.4 million net loss last year, compared with a loss of $8.4 million in 2009. Cornerstone attributes its losses to expenses from sales, marketing and R&D, according to regulatory filings.
The company declined a request for comment for this article.
Josef Schuster, founder of Chicago-based IPO investment firm IPOX Schuster LLC, said investors will overlook Cornerstone’s net losses for a time if the company shows revenue growth. But he warned that the company will need to show profitability soon in order to maintain investor interest.
“Sales and revenue numbers are much more important to the market over the next six months,” he said. “But once you go out 10 or 12 months, the market will start to expect some profit.”
Cornerstone faces a lot of competition in an increasingly crowded market. Its biggest competitors, both in the Bay Area, Taleo Corp. in Dublin and SuccessFactors Inc. in San Mateo, are much larger public companies.
“At this point, Cornerstone is a relatively small player, but they’re growing fast,” said Josh Bersin, chief executive of Bersin & Associates. “If you’re not aggressively trying to grow, you’re losing market share.”
But he said that Cornerstone has a competitive advantage with its training software. The company has fewer competitors that have developed software-as-a-service products for employee training.
“They really benefited from the fact that they started in this part of the market that was kind of old and hadn’t been modernized yet,” he said. “Competitors have not been able to grow at the same rate as Cornerstone.”
Big debut
Cornerstone’s recent IPO should also give it a boost against its larger competitors.
The company debuted on the Nasdaq under the ticker symbol CSOD on March 17. It offered to sell 7.5 million of its shares, and early investors, including Bessemer Venture Partners, Meritech Capital, Bay Partners and Aon Consulting Inc., offered 3 million.
In a regulatory filing earlier this month, the company said it expected to sell shares from $9 to $11. Instead, shares were initially priced at $13. Secondary trading opened at $18 and closed that day at $19.07. The $6 jump was the biggest first-day gain for a U.S. IPO since December.
Bersin said Cornerstone’s high launch price grew out of pent-up demand.
“Investors are really hungry for new stocks,” he said. “Cornerstone was fortunate enough that they were the only IPO that week. All the money that was out there went to them.”
The company’s strong IPO came during a volatile week for the market. The crisis in Japan caused a market decline. Apollo Global Management in New York was scheduled to go public the same week as Cornerstone but opted to delay its debut for a week.
Cornerstone benefited from pushing forward with its offering because it’s less exposed to the international markets, Therian said.
“If this were a global business with customers in Asia, it would have been a different story,” he said.
Cornerstone will need to continue to show growth to keep its stock trading high, Bersin said.
“It’s a good company but the stock is probably a little overpriced right now,” he said. “I don’t think they’re going to be able to maintain that price forever.”
