RGM Capital Urges Board of Cornerstone OnDemand to Consider Strategic Options

NAPLES, Fla., July 27, 2017 /PRNewswire/ -- RGM Capital today released the following letter it sent on July 24 to the Board of Directors of Cornerstone OnDemand, Inc. (NASDAQ: CSOD).  It calls on the Board to create an independent strategic review committee immediately and hire financial and legal advisors to assist in the process.

July 24, 2017

Cornerstone OnDemand, Inc.
1601 Cloverfield Blvd.
Suite 620 South
Santa Monica, CA 90404

To the Members of the Board:

RGM Capital, LLC ("RGM", "us", "we") is a registered investment adviser managing private limited partnership funds and separate accounts that own, in aggregate, approximately 4.7% of the common stock of Cornerstone OnDemand ("Cornerstone", the "company").  We have been shareholders of the company since 2015 and appreciate the dialogue that we have had with the management team and Board during our ownership period.  We are writing to share our perspective on the company's most optimal path forward to create shareholder value, which we believe includes establishing a strategic review committee to vet all options, including the potential sale of the business.  We have not reached this conclusion hastily, but rather have formed this opinion after significant due diligence of the company's business model and competitive position, while also considering the currently favorable merger and acquisition environment.

While we acknowledge management has done an admirable job building the company to greater than $435 million in annual revenue, recent revenue and billings growth rates have slowed materially, even when excluding the significant foreign exchange headwinds that the company has encountered.  It is difficult to fully determine whether this deceleration is due to execution issues, a changing competitive landscape, or a combination of other factors.  Regardless of the culprit, it is unlikely that the competitive environment will moderate as Human Capital Management software suite providers continue to strengthen their offerings.  While we are confident that the current installed base of customers will remain stable, we are concerned that net new business will be increasingly difficult to secure without better execution.

With revenue growth slowing, management has more recently, and rightly in our view, discussed the trade-off between revenue growth and operating margin, effectively embracing the "rule of 40" concept, whereby revenue growth and operating margins should sum to 40% in any given year.  Based on management's guidance provided in early May, however, the company is only half way to its target with roughly 14% revenue growth and 6% non-GAAP operating margins forecasted in 2017.  Although we certainly applaud the team's recent focus on operating margin expansion, we would argue that there is much more work to do.  Sales and marketing expenses, in particular, remain stubbornly high when compared to peers with similar scale and growth rates.  We believe an increased sense of urgency is required to improve margins as an independent public entity, but are also confident that the company's ability to improve profitability could be significantly accelerated in the private domain or as part of a larger strategic entity. 

The company's recent struggles have not gone unnoticed.  Using Cornerstone's self-defined peer group of software companies in the most recent proxy statement, the shares have significantly underperformed over a one, three, and five-year time horizon (see Figure 1).  Also notable is the significant withhold votes for incumbent Board members at the most recent Annual General Meeting (see Figure 2).  We believe the results of the vote indicate shareholders feel strongly that recent operating performance is unacceptable, and perhaps more importantly, that the Board has not been nearly focused enough on shareholder value creation.

Figure 2:  Form 8-K filed on June 19, 2017

We firmly believe that market conditions are favorable for the company to consider strategic alternatives and therefore the time to act is now.  Strategic buyers are flush with cash and it has been well publicized that financial sponsors in the technology space have recently raised significant amounts of capital to be deployed in the near term.  In fact, we would be surprised if the company has not already received indications of interest from private equity firms and/or strategic acquirers.  It would be particularly concerning to us if the company had rebuffed any interest based on a predetermined price set by management or if there is a "preferred buyer" list.  We would like to remind the Board that it is your fiduciary duty to represent ALL shareholders' interests.  Strong corporate governance calls for any indications of interest to be presented to and vetted by the entire Board or a separate and independent strategic advisory committee of the Board.  This is particularly important in situations such as this when the Chairman of the Board is also the CEO, founder, and a large shareholder of the company.

To be clear, we believe Cornerstone has outstanding technology and the company is a unique and scarce asset.  With over 3,000 customers, more than 31 million users, and an average annual dollar renewal rate of approximately 95%, the company indeed has a valuable and likely long-lived subscription revenue stream.  We question, however, whether the company will be able to reach its full potential and value as an independent public company, particularly when factoring in the time value of money and execution risk of its business plan.  We urge the Board to establish an independent strategic review committee immediately and hire an experienced investment banker and legal counsel to assist in the process.

We would be pleased to discuss our perspective in more detail at your earliest convenience.

Sincerely,

Robert Moses
Managing Partner
RGM Capital, LLC
9010 Strada Stell Court, Suite 105
Naples, FL  34109

Media Contacts:

Richard Mahony
Bryant Park Financial Communications
[email protected]
(917) 257-6811

Bill McBride
Bryant Park Financial Communications
[email protected]
(917) 239-6726

SOURCE RGM Capital, LLC