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Recommendation: Buy Christian Meunier, Ian Strgar April 19 th , 2013

Recommendation: Buy Christian Meunier, Ian Strgar April 19 th , 2013. Background. Founded in 1999, headquartered in Santa Monica, CA Began principle operations in November Strong IPO (November 17 th , 2011): 10.5 million shares at $13 per share Closed the day up 46.7% to $19.07

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Recommendation: Buy Christian Meunier, Ian Strgar April 19 th , 2013

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  1. Recommendation: Buy Christian Meunier, Ian Strgar April 19th, 2013

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Leadership Recognition • Gartner, Forrester, IDC: talent management market leader

  9. 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%

  10. 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

  11. 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

  12. Good Things To Come: Bookings Growth • A view into CSOD’s backlog of sales

  13. 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

  14. 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

  15. Cost of Revenue • Due to cloud operations, cost of revenue will decline as a percentage of revenue in the future

  16. 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

  17. DCF Price Target

  18. Final Price Target

  19. Questions

  20. Recommendation • In conclusion, we recommend a buy for all portfolios based on qualitative factors and an undervaluation of 38%

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