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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to                      
Commission File Number 001-35098
 
Cornerstone OnDemand, Inc.
(Exact name of registrant as specified in its charter)

Delaware 13-4068197
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1601 Cloverfield Blvd.
Suite 620 South
Santa Monica, CA 90404
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code:
(310) 752-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.0001 per share CSOD Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes      No  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
As of May 7, 2020, the registrant had 63,831,865 shares of common stock, $0.0001 par value per share, outstanding.





CORNERSTONE ONDEMAND, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
    Page No.
2
2
3
4
5
6
7
19
30
31
32
32
54
54
54
54
55
56
TRADEMARKS
© Copyright 2020 Cornerstone OnDemand, Inc. All rights reserved. “Cornerstone,” “Cornerstone OnDemand,” the Cornerstone OnDemand logo, “CyberU” and other trademarks or service marks of Cornerstone OnDemand, Inc. appearing in this Quarterly Report on Form 10-Q are the property of Cornerstone OnDemand, Inc. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders and should be treated as such.
1


PART I. FINANCIAL INFORMATION

ITEM 1.Condensed Consolidated Financial Statements
CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
(unaudited)
March 31, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents $ 456,154    $ 215,907   
Short-term investments —    201,579   
Accounts receivable, net 94,200    131,105   
Deferred commissions, current portion 33,470    33,215   
Prepaid expenses and other current assets 33,789    30,512   
Total current assets 617,613    612,318   
Capitalized software development costs, net 50,169    50,023   
Property and equipment, net 33,581    36,526   
Operating right-of-use assets 70,908    72,944   
Deferred commissions, net of current portion 70,919    74,563   
Long-term investments 9,715    60,192   
Intangible assets, net 18,251    9,440   
Goodwill 56,282    47,453   
Other assets 3,947    2,642   
Total assets $ 931,385    $ 966,101   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 4,511    $ 3,803   
Accrued expenses 59,247    78,075   
Deferred revenue, current portion 300,068    339,522   
Operating lease liabilities, current portion 8,769    7,235   
Other liabilities 10,511    11,015   
Total current liabilities 383,106    439,650   
Convertible notes, net 294,264    293,174   
Deferred revenue, net of current portion 6,850    6,945   
Operating lease liabilities, net of current portion 64,252    67,195   
Other liabilities, non-current 1,655    655   
Total liabilities 750,127    807,619   
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.0001 par value    
Additional paid-in capital 716,158    682,717   
Accumulated deficit (538,455)   (524,680)  
Accumulated other comprehensive income 3,549    439   
Total stockholders’ equity 181,258    158,482   
Total liabilities and stockholders’ equity $ 931,385    $ 966,101   

See accompanying notes.
2


CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
  Three Months Ended
March 31,
  2020 2019
Revenue $ 150,136    $ 140,117   
Cost of revenue 41,924    33,695   
Gross profit 108,212    106,422   
Operating expenses:
Sales and marketing 55,330    54,505   
Research and development 24,085    27,746   
General and administrative 24,725    22,940   
Acquisition-related costs 6,811    —   
Total operating expenses 110,951    105,191   
(Loss) income from operations (2,739)   1,231   
Other income (expense):
Interest income 1,728    1,990   
Interest expense (5,501)   (5,366)  
Other, net (7,092)   (597)  
Other expense, net (10,865)   (3,973)  
Loss before income tax provision (13,604)   (2,742)  
Income tax provision (171)   (722)  
Net loss $ (13,775)   $ (3,464)  
Net loss per share, basic and diluted $ (0.22)   $ (0.06)  
Weighted average common shares outstanding, basic and diluted 61,631    59,141   

See accompanying notes.
3


CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
  Three Months Ended
March 31,
  2020 2019
Net loss $ (13,775)   $ (3,464)  
Other comprehensive income, net of tax:
Foreign currency translation adjustment 3,333    169   
Net change in unrealized (losses) gains on investments (223)   172   
Other comprehensive income, net of tax 3,110    341   
Total comprehensive loss $ (10,665)   $ (3,123)  

See accompanying notes.
4


CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

  Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income Total
  Shares Par Value
Balance as of December 31, 2019 61,038    $   $ 682,717    $ (524,680)   $ 439    $ 158,482   
Issuance of common stock upon the exercise of options 699    —    8,081    —    —    8,081   
Vesting of restricted stock units 775    —    —    —    —    —   
Stock-based compensation —    —    25,360    —    —    25,360   
Net loss —    —    —    (13,775)   —    (13,775)  
Other comprehensive income, net of tax —    —    —    —    3,110    3,110   
Balance as of March 31, 2020 62,512    $   $ 716,158    $ (538,455)   $ 3,549    $ 181,258   

Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income Total
Shares Par Value
Balance as of December 31, 2018 58,886    $   $ 585,387    $ (520,626)   $ 476    $ 65,243   
Issuance of common stock upon the exercise of options 129    —    4,984    —    —    4,984   
Vesting of restricted stock units 392    —    —    —    —    —   
Stock-based compensation —    —    17,797    —    —    17,797   
Net loss —    —    —    (3,464)   —    (3,464)  
Other comprehensive income, net of tax —    —    —    —    341    341   
Balance as of March 31, 2019 59,407    $   $ 608,168    $ (524,090)   $ 817    $ 84,901   

See accompanying notes.
5


CORNERSTONE ONDEMAND, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  Three Months Ended
March 31,
  2020 2019
Cash flows from operating activities
Net loss $ (13,775)   $ (3,464)  
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 11,964    10,858   
Accretion of debt discount and amortization of debt issuance costs 1,090    1,027   
Amortization (accretion) of purchased investment premium or discount, net 41    (216)  
Net foreign currency and other loss 5,585    294   
Stock-based compensation expense 23,170    17,045   
Changes in operating assets and liabilities:
Accounts receivable 35,516    32,955   
Deferred commissions 582    (4,274)  
Prepaid expenses and other assets (6,550)   3,641   
Accounts payable 523    (2,781)  
Accrued expenses (18,079)   (23,287)  
Deferred revenue (35,557)   (23,959)  
Other liabilities 1,478    (545)  
Net cash provided by operating activities 5,988    7,294   
Cash flows from investing activities
Purchases of marketable investments (20,419)   —   
Maturities and sales of investments 272,173    170,679   
Capital expenditures (971)   (4,243)  
Capitalized software costs (7,389)   (7,399)  
Cash paid for acquisition, net of cash acquired (18,639)   —   
Net cash provided by investing activities 224,755    159,037   
Cash flows from financing activities
Proceeds from employee stock plans 10,130    6,840   
Net cash provided by financing activities 10,130    6,840   
Effect of exchange rate changes on cash and cash equivalents (626)   248   
Net increase in cash and cash equivalents 240,247    173,419   
Cash and cash equivalents at beginning of period 215,907    183,596   
Cash and cash equivalents at end of period $ 456,154    $ 357,015   
Supplemental cash flow data
Cash paid for interest $ 8,625    $ 8,685   
Cash paid for income taxes 955    390   
Non-cash investing and financing activities:
Assets acquired under capital leases and other financing arrangements $ —    $ 485   
Capitalized assets financed by accounts payable and accrued expenses 176    1,789   
Capitalized stock-based compensation 2,190    752   

See accompanying notes.
6


CORNERSTONE ONDEMAND, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Overview
Cornerstone OnDemand, Inc. (“Cornerstone” or the “Company”) is a leading global provider of people development solutions, delivered as software-as-a-service (“SaaS”). The Company helps organizations around the globe recruit, train, and manage their employees. The Company’s solution combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to enable organizations to manage the entire employee lifecycle. Its focus on continuous learning and development helps organizations empower employees to realize their potential and drive success. On April 22, 2020, the Company acquired Saba Software, Inc. (“Saba”), a provider of talent experience solutions.
The Company works with customers across all geographies, vertical markets, and market segments. Its Learning, Performance, Recruiting, and HR administration solutions help with sourcing, recruiting, and onboarding new hires; managing training and development requirements; nurturing knowledge sharing and collaboration among employees; goal setting reviews, competency management, and continuous feedback; linking compensation to performance; identifying development plans based on performance gaps; streamlining employee data management, self-service, and compliance reporting; and then utilizing state-of-the-art analytics capabilities to make smarter, more-informed decisions using data from across the solution for talent mobility, engagement, and development so that HR and leadership can focus on strategic initiatives to help their organizations succeed.
The Company’s management has determined that the Company operates in one segment as it only reports financial information on an aggregated and consolidated basis to the Company’s founder and chief executive officer, who is the Company’s chief operating decision maker.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the Company's annual consolidated financial statements. These unaudited condensed financial statements are presented in accordance with (i) accounting standards generally accepted in the United States of America (“GAAP”) for interim financial information and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented.
Results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, for any other interim period, or for any other future year.

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Recently Adopted Accounting Pronouncements
Effective January 1, 2020, the Company adopted the requirements of Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), using a modified retrospective method of adoption. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after January 1, 2020 presented under ASU 2016-13, while prior period amounts and disclosures were not adjusted and continue to be reported under the accounting standards in effect for the prior period. ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology, referred to as current expected credit loss (“CECL”), for financial instruments, including accounts receivables. The cumulative effect of adopting ASU 2016-13 did not have a material impact on the Company's accumulated deficit as of January 1, 2020. The Company's expected loss allowance methodology for accounts receivable is developed using historical collection experience, consideration of current and anticipated future economic conditions, and other relevant data. As of March 31, 2020 the allowance for credit losses increased by $0.5 million using the CECL methodology.
On January 1, 2020, the Company adopted Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (“ASU 2018-15”), using a prospective method of adoption. ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The adoption did not have a material impact on the Company’s condensed consolidated financial statements for the three months ended March 31, 2020.
Accounting Pronouncements Pending Adoption
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which enhances and simplifies various aspects of income tax accounting guidance. The guidance is effective for the Company in the first quarter of 2021, although early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its consolidated financial statements.
Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on February 25, 2020.
2. BUSINESS COMBINATIONS
On January 24, 2020, the Company purchased all of the outstanding shares of Clustree SAS (“Clustree”), a developer of a skills engine and skills ontology. The Company paid cash consideration of approximately $18.6 million. The purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date with the excess recorded as goodwill, none of which is expected to be deductible for tax purposes. The goodwill generated from this transaction is primarily attributable to the ability to enhance the Company's product portfolio. Acquisition-related costs of $0.3 million were expensed as incurred during the three months ended March 31, 2020 and were recorded within acquisition-related costs in the condensed consolidated statement of operations. The final allocation of purchase consideration to certain assets and liabilities, primarily related to taxes and assumed liabilities, remains in process as the Company continues to evaluate certain estimates and assumptions during the measurement period (up to one year from the acquisition date).
The Company's preliminary allocation of the total purchase consideration as of January 24, 2020 is summarized below (in thousands):
Fair Value
Tangible assets $ 1,275   
Intangible assets - developed technology 9,800   
Intangible assets - customer relationships 800   
Goodwill 8,875   
Deferred tax liabilities (1,020)  
Accounts payable and accrued expenses (755)  
Deferred revenue (336)  
Net assets acquired $ 18,639   
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The intangible assets related to developed technology and customer relationships are amortized on a straight-line basis over three years to cost of revenue and two years to sales and marketing expense, respectively.
Pro forma results of operations have not been presented as the impact of the acquisition is not material to the Company’s financial results.
3. NET LOSS PER SHARE
The following table presents the Company’s basic and diluted net loss per share (in thousands, except per share amounts): 
  Three Months Ended March 31,
  2020 2019
Net loss $ (13,775)   $ (3,464)  
Net loss per share, basic and diluted $ (0.22)   $ (0.06)  
Weighted-average shares of common stock outstanding, basic and diluted 61,631    59,141   
The potential shares of common stock that would have a dilutive impact are computed using the treasury stock method or the if-converted method, as applicable. The following potential shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive (in thousands):
Three Months Ended March 31,
  2020 2019
Options to purchase common stock, restricted stock units, and performance-based restricted stock units 7,240    10,029   
Shares issuable pursuant to employee stock purchase plan 173    96   
Convertible notes 7,143    7,143   
Total shares excluded from net loss per share 14,556    17,268   

4. CASH AND INVESTMENTS
The Company’s investments in marketable and non-marketable securities are made pursuant to its investment policy, which has established guidelines relative to the diversification of the Company’s investments and their maturities, with the principal objective of capital preservation and maintaining liquidity that is sufficient to meet cash flow requirements.
The following is a summary of cash and marketable investments, including those that meet the definition of a cash equivalent, as of March 31, 2020 (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Cash $ 450,658    $ —    $ —    $ 450,658   
Cash equivalents:
Money market funds 2,496    —    —    2,496   
Commercial paper 3,000    —    —    3,000   
Total cash equivalents 5,496    —    —    5,496   
Total cash and cash equivalents $ 456,154    $ —    $ —    $ 456,154   


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The following is a summary of cash and marketable investments, including those that meet the definition of a cash equivalent, as of December 31, 2019 (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Cash $ 67,818    $ —    $ —    $ 67,818   
Cash equivalents:
Money market funds 126,075    —    —    126,075   
Corporate bonds 1,000    —    —    1,000   
Agency bonds 6,485      —    6,486   
Commercial paper 9,609    —    (1)   9,608   
Certificates of deposit 171    —    —    171   
US treasury securities 4,749    —    —    4,749   
Total cash equivalents 148,089      (1)   148,089   
Total cash and cash equivalents $ 215,907    $   $ (1)   $ 215,907   
Short-term investments:
Corporate bonds $ 103,130    $ 110    $ (7)   $ 103,233   
Agency bonds 3,966      —    3,968   
US treasury securities 50,703    62    (1)   50,764   
Commercial paper 23,827      —    23,828   
Certificates of deposit 3,936      (1)   3,937   
Asset-backed securities 15,837    12    —    15,849   
Total short-term investments $ 201,399    $ 189    $ (9)   $ 201,579   
Long-term marketable investments:
Corporate bonds $ 19,407    $ 12    $ (4)   $ 19,415   
US treasury securities 19,300    25    —    19,325   
Asset-backed securities 11,693    10    (1)   11,702   
Total long-term marketable investments $ 50,400    $ 47    $ (5)   $ 50,442   
During the three months ended March 31, 2020, the Company recognized a $1.9 million realized loss on the sale of available-for-sale securities. Realized gains and losses for sales of investments during the three months ended March 31, 2019 were not significant.
As of March 31, 2020, the Company’s remaining investments in commercial paper had a weighted-average maturity date of less than one month. Unrealized gains and losses on investments were not significant individually or in aggregate as of March 31, 2020 and December 31, 2019.
The Company’s long-term investments are composed of the following (in thousands):
March 31, December 31,
2020 2019
Long-term marketable investments $ —    $ 50,442   
Non-marketable investments 9,715    9,750   
Total long-term investments $ 9,715    $ 60,192   
The Company’s non-marketable investments are composed of the following (in thousands):
March 31, December 31,
2020 2019
Accounted for at cost, adjusted for observable price changes $ 1,750    $ 1,750   
Accounted for using the equity method 7,965    8,000   
Total non-marketable investments $ 9,715    $ 9,750   

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5. INTANGIBLE ASSETS AND GOODWILL
Finite-lived Intangibles
The Company has finite-lived intangible assets which are amortized over their estimated useful lives on a straight-line basis. The following table presents the gross carrying amount and accumulated amortization of finite-lived intangible assets (in thousands):
  March 31, 2020 December 31, 2019
  Weighted Average Useful Life (in years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Developed technology 3.0 $ 19,749    $ (5,730)   $ 14,019    $ 39,984    $ (34,268)   $ 5,716   
Content library 5.5 4,700    (1,189)   3,511    4,700    (976)   3,724   
Customer relationships 2.0 800    (79)   721    —    —    —   
Total $ 25,249    $ (6,998)   $ 18,251    $ 44,684    $ (35,244)   $ 9,440   
During the first quarter of 2020, the gross carrying amount and accumulated amortization of fully amortized intangible assets were written off. Amortization of customer relationships is recorded in sales and marketing expense in the accompanying condensed consolidated statements of operations; amortization for all other finite-lived intangibles is recorded in cost of revenue. Total amortization expense was $1.7 million and $1.3 million for the three months ended March 31, 2020 and 2019, respectively.
The following table presents the Company's estimate of remaining amortization expense for finite-lived intangible assets that existed as of March 31, 2020 (in thousands):
2020 - remaining period $ 5,877   
2021 6,884   
2022 4,129   
2023 1,055   
2024 306   
Estimated remaining amortization expense $ 18,251   
The Company evaluates the recoverability of its long-lived assets with finite useful lives, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company does not believe there were any negative qualitative factors impacting the recoverability of the carrying values as of March 31, 2020. There were no impairment charges related to identifiable intangible assets for the three months ended March 31, 2020 and 2019.
Goodwill
The following table presents the carrying amount of goodwill (in thousands):
Balance as of December 31, 2019 $ 47,453   
Goodwill resulting from acquisition 8,875   
Effect of foreign currency translation (46)  
Balance as of March 31, 2020 $ 56,282   

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6. OTHER BALANCE SHEET AMOUNTS
Property and Equipment, net
The balance of property and equipment, net is as follows (in thousands):
  Useful Life March 31, December 31,
  2020 2019
Computer equipment and software
3 – 5 years
$ 57,139    $ 57,482   
Furniture and fixtures 7 years 6,075    6,096   
Leasehold improvements
2 – 6 years
22,775    22,800   
Total property and equipment 85,989    86,378   
Less: accumulated depreciation and amortization (52,408)   (49,852)  
Total property and equipment, net $ 33,581    $ 36,526   
Depreciation expense for the three months ended March 31, 2020 and 2019 was $3.1 million and $2.7 million, respectively.
Accrued Expenses
The balance of accrued expenses is as follows (in thousands):
  March 31, December 31,
  2020 2019
Accrued compensation $ 26,025    $ 33,626   
Accrued commissions 7,670    18,834   
Accrued interest 4,313    8,625   
Other accrued expenses 21,239    16,990   
Total accrued expenses $ 59,247    $ 78,075   
Deferred Commissions
The Company defers commissions paid to its sales force and related payroll taxes as these amounts are incremental costs of obtaining a contract with a customer and are recoverable from future revenue due to the non-cancelable customer agreements that gave rise to the commissions. These deferred commissions are then amortized over the related benefit period. For the three months ended March 31, 2020 and 2019, the Company recognized $9.1 million and $8.7 million, in commissions expense, respectively, which was recorded in sales and marketing expense.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that management has the ability to access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs.


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Assets and liabilities measured at fair value on a recurring basis included the following (in thousands):
  March 31, 2020 December 31, 2019
  Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3
Cash equivalents $ 5,496    $ 5,496    $ —    $ —    $ 148,089    $ 148,089    $ —    $ —   
Corporate bonds —    —    —    —    122,648    —    122,648    —   
Agency bonds —    —    —    —    3,968    —    3,968    —   
US treasury securities —    —    —    —    70,089    —    70,089    —   
Commercial paper —    —    —    —    23,828    —    23,828    —   
Certificate of deposit —    —    —    —    3,937    3,937    —    —   
Asset-backed securities —    —    —    —    27,551    —    27,551    —   
Total $ 5,496    $ 5,496    $ —    $ —    $ 400,110    $ 152,026    $ 248,084    $ —   
At March 31, 2020 cash equivalents of $5.5 million consisted of money market funds and commercial paper with original maturities of three months or less on the date of purchase. At December 31, 2019, cash equivalents of $148.1 million consisted of money market funds with original maturity dates of three months or less backed by US Treasury bills, as well as corporate bonds, agency bonds, commercial paper, certificates of deposit, and US treasury securities.
As of March 31, 2020, all investments were classified within Level 1 of the fair value hierarchy. At December 31, 2019, agency bonds, asset-backed securities, corporate bonds, US treasury securities, and commercial paper were classified within Level 2 of the fair value hierarchy. The instruments were valued using information obtained from pricing services, which obtained quoted market prices from a variety of industry data providers, security master files from large financial institutions, and other third-party sources. The Company performed supplemental analysis to validate information obtained from its pricing services. As of March 31, 2020 and December 31, 2019, no adjustments were made to such pricing information.
Convertible Notes
The Company’s Convertible Notes, described below, are presented in the accompanying condensed consolidated balance sheets at their original issuance value, net of unamortized discount and debt issuance costs, and are not remeasured to fair value each period. The approximate fair value of the Company’s Convertible Notes as of March 31, 2020 was $353.7 million. The fair value of the Convertible Notes, which are classified as Level 2 financial instruments, was estimated on the basis of the current equity value implicit in the instrument.
8. DEBT
Convertible Notes
In 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “Convertible Notes”) for a purchase price equal to 98% of the principal amount. The Company received net proceeds of $284.9 million, net of a discount of $6.0 million and issuance costs of $9.1 million. The debt discount is being accreted to interest expense over the term of the Convertible Notes using the interest method. The issuance costs were deferred and are being amortized to interest expense over the same term.
The Convertible Notes are governed by an Indenture, dated December 8, 2017 between the Company and US Bank National Association, as trustee (the “2017 Indenture”). The Convertible Notes originally matured on July 1, 2021, unless earlier repurchased or converted. Interest is payable semi-annually in arrears on January 1 and July 1, commencing January 1, 2018.
The Convertible Notes are convertible at an initial conversion rate of 23.8095 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which represents an initial conversion price of $42.00 per share, subject to adjustment for anti-dilutive issuances, voluntary increases in the conversion rate, and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s common stock, and a liquidation of the Company. Upon conversion, the Company will deliver the applicable number of the Company’s common stock and cash in lieu of any fractional shares. Holders of the Convertible Notes may convert their Convertible Notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date.
The holders of the Convertible Notes may require the Company to repurchase all or a portion of their Convertible Notes at a cash repurchase price equal to 100% of the principal amount of the notes being repurchased, plus the remaining scheduled interest through and including the maturity date, upon a fundamental change and events of default, including non-payment of interest or principal and other obligations under the 2017 Indenture.
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On April 20, 2020, the Company entered into the First Supplemental Indenture to the 2017 Indenture with US Bank National Association, as trustee (the “Supplemental Indenture”). Upon the completion of the acquisition of Saba on April 22, 2020, the Supplemental Indenture became effective, which amended the 2017 Indenture to permit the Company to incur additional indebtedness and extend the maturity date of the Convertible Notes to March 17, 2023. In connection with this amendment, the Company paid approximately $3.0 million in consent fees to the holders of the majority of the Convertible Notes.
The net carrying amounts of the liability components of the Convertible Notes consist of the following (in thousands):
March 31, 2020 December 31, 2019
Principal amount $ 300,000    $ 300,000   
Unamortized debt discount (2,260)   (2,691)  
Net carrying amount before unamortized debt issuance costs 297,740    297,309   
Unamortized debt issuance costs (3,476)   (4,135)  
Net carrying value $ 294,264    $ 293,174   
The effective interest rate of the liability component is 6.4% for the Convertible Notes.
The following table presents the interest expense recognized related to the Convertible Notes (in thousands):
Three Months Ended March 31,
2020 2019
Contractual interest expense $ 4,313    $ 4,313   
Amortization of debt issuance costs 663    623   
Accretion of debt discount 431    404   
Total $ 5,407    $ 5,340   

9. STOCKHOLDERS EQUITY
Common Stock
As of March 31, 2020 and December 31, 2019 there were 1,000,000,000 shares of common stock authorized. As of March 31, 2020 and December 31, 2019 there were 62,512,123 and 61,037,517 shares issued and outstanding, respectively.
Share Repurchase Programs
In August 2019, the Company’s board of directors authorized a $150.0 million share repurchase program of its common stock (the “2019 Share Repurchase Program”). The 2019 Share Repurchase Program is set to terminate when the aggregate cost of shares repurchased under the 2019 Share Repurchase Program reaches $150.0 million. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions, or otherwise. The timing and amount of any share repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. At April 1, 2020, $127.6 million remained available for repurchase of shares under the 2019 Share Repurchase Program. There were no share repurchases under the 2019 Share Repurchase Program during the three months ended March 31, 2020.
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10. STOCK-BASED AWARDS
Stock Options
Stock option activity is summarized as follows (in thousands, except per share and term information):
Number of Shares Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value1
Outstanding, December 31, 2019 2,851    $ 30.97    3.1 $ 78,580   
Exercised (699)   11.51   
Forfeited (155)   41.74   
Outstanding, March 31, 2020 1,997    $ 36.96    3.4 $ 7,301   
Exercisable at March 31, 2020 1,993    $ 36.96    3.4 $ 7,301   
Vested and expected to vest at March 31, 2020 1,995    $ 36.96    3.4 $ 7,301   
1 Based on the Company’s closing stock price of $31.75 on March 31, 2020 and $58.55 on December 31, 2019.
There were no stock options granted for the three months ended March 31, 2020 and 2019.
Restricted Stock Units
Restricted stock unit (“RSU”) activity is summarized as follows (shares in thousands):
Number of Shares Weighted-
Average Grant Date
Fair Value
Unvested shares at December 31, 2019 3,756    $ 47.76   
Granted 368    40.46   
Forfeited (88)   50.62   
Vested (775)   43.55   
Unvested shares at March 31, 2020 3,261    $ 47.86   
Unrecognized compensation expense related to unvested RSUs was $116.9 million at March 31, 2020, which is expected to be recognized over a weighted-average period of 2.5 years.
Performance-Based Restricted Stock Units
Performance-based restricted stock unit (“PRSU”) activity is summarized as follows (shares in thousands):
Number of Shares Weighted-
Average Grant Date
Fair Value
Unvested shares at December 31, 20191
1,752    $ 44.21   
Granted 230    41.39   
Unvested shares at March 31, 20201
1,982    $ 43.88   
1 Assumes maximum achievement of the specified financial targets.
Unrecognized compensation expense related to unvested PRSUs was $18.4 million at March 31, 2020, which is expected to be recognized over a weighted-average period of 1.9 years.
Employee Stock Purchase Plan
Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”), eligible employees are granted the right to purchase shares at the lower of 85% of the fair value of the stock at the time of grant or 85% of the fair value at the time of exercise. The right to purchase shares is granted semi-annually for six month offering periods each June and December. Under the ESPP, 3,846,143 shares remained available for issuance at March 31, 2020. During the three months ended March 31, 2020, no shares were purchased under the ESPP.
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Stock-Based Compensation
Stock-based compensation expense is reflected in the accompanying condensed consolidated statements of operations as follows (in thousands):
  Three Months Ended March 31,
  2020 2019
Cost of revenue $ 2,701    $ 1,136   
Sales and marketing 8,584    6,047   
Research and development 4,800    4,196   
General and administrative 7,085    5,666   
Total $ 23,170    $ 17,045   

11. INCOME TAXES
The Company’s income tax provision was approximately $0.2 million and $0.7 million with an effective income tax rate of (1.3)% and (26.3)% for the three months ended March 31, 2020 and 2019, respectively. The Company’s effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s deferred tax assets and foreign income taxes.
The income tax provision is related to domestic income, certain foreign income, and withholding taxes. The Company does not have a material tax provision in the most significant jurisdictions in which it operates, such as the United States and United Kingdom, as it has historically generated losses. The Company has recorded a full valuation allowance against the net deferred tax assets and the Company does not currently anticipate recording an income tax benefit related to these deferred tax assets or current year losses.
The Company is subject to United States federal income tax as well as to income tax in multiple state and foreign jurisdictions, including the United Kingdom. Federal income tax returns of the Company are subject to IRS examination for the 2016 through 2019 tax years. State income tax returns are subject to examination for the 2015 through 2019 tax years. Currently, an audit is ongoing in the UK for the year ended December 31, 2017. There are no ongoing audits in any other significant foreign tax jurisdictions.
12. COMMITMENTS AND CONTINGENCIES
Commitments
In March 2020, the Company entered into an agreement with a provider of cloud computing services which obligates us to pay $84.6 million over approximately 7 years.
Letters of Credit
The Company maintains standby letters of credit in association with other contractual arrangements. Total letters of credit outstanding at March 31, 2020 and December 31, 2019 were $8.1 million and $8.3 million, respectively.
Guarantees and Indemnifications
The Company has made guarantees and indemnities under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. The Company is obligated to indemnify its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases, is indefinite but subject to statutes of limitations. To date, the Company has made no payments related to these guarantees and indemnities. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and the Company’s insurance coverage and, therefore, has not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.
Litigation
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. If the Company determines that it is probable that a loss has been incurred and the amount is reasonably estimable, the Company will record a liability. The Company has determined that it does not have a potential liability related to any legal proceedings or claims that would individually, or in the aggregate, have a significant adverse effect on its financial condition or operating results.
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13. LEASES
The Company has various non-cancelable operating leases for its offices and data centers. These arrangements have remaining lease terms ranging from one to 12 years. Certain lease agreements contain renewal options, termination rights, rent abatement, and/or escalation clauses with renewal terms that can extend the lease term from one to five years or more.
The components of lease cost related to the Company's operating leases is as follows (in thousands):
Three Months Ended March 31,
2020 2019
Operating lease cost $ 3,969    $ 3,821   
Sublease income (1,037)   (810)  
Net lease cost $ 2,932    $ 3,011   
Supplemental cash flow information related to leases is as follows (in thousands):
Three Months Ended March 31,
2020 2019
Cash paid for operating leases $ 2,629    $ 2,601   
Right-of-use assets obtained in exchange for lease obligations 1,062    5,452   
Supplemental balance sheet information related to the Company's operating leases is as follows (dollars in thousands):
March 31 December 31
2020 2019
Operating lease right-of-use assets $ 70,908    $ 72,944   
Operating lease liabilities (current and non-current) $ 73,021    $ 74,430   
Weighted-average remaining lease term 4.5 years 6 years
Weighted-average incremental borrowing rate 3.3  % 3.3  %

Maturities of the Company’s operating lease liabilities at March 31, 2020 are as follows (in thousands):
2020 - remaining period $ 12,614   
2021 16,199   
2022 15,822   
2023 15,830   
2024 8,063   
Thereafter 18,662   
Total lease payments $ 87,190   
Less: Imputed interest1
(14,169)  
Present value of operating lease liabilities $ 73,021   
1 Calculated using the incremental borrowing rate for each lease.

14. REVENUE, DEFERRED REVENUE, AND REMAINING PERFORMANCE OBLIGATIONS
Disaggregation of Revenue
The following table sets forth the Company's sources of revenue (in thousands): 
  Three Months Ended March 31,
  2020 2019
Subscription revenue $ 144,421    $ 131,256   
Professional services revenue 5,715    8,861   
Total revenue $ 150,136    $ 140,117   
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Revenue by geographic region, which is generally based on the address of the Company's customers as defined in their master subscription agreements, is set forth below (in thousands):
  Three Months Ended March 31,
  2020 2019
United States $ 97,918    $ 90,596   
All other countries 52,218    49,521   
Total revenue $ 150,136    $ 140,117   
Deferred Revenue
The Company recognized $134.2 million and $123.4 million of revenue during the three months ended March 31, 2020 and 2019, respectively, that was included in the deferred revenue balances as of December 31, 2019 and 2018, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2020, approximately $904.3 million of revenue is expected to be recognized from remaining performance obligations. This amount mainly comprises subscription revenue, with less than 2% attributable to professional services and other revenue. The Company expects to recognize revenue on approximately two-thirds of these remaining performance obligations over the next 18 months, with the balance recognized thereafter.
The estimated revenues from the remaining performance obligations do not include uncommitted contract amounts such as (i) amounts which are cancellable by the customer without significant penalty, (ii) future billings for time and material contracts, and (iii) amounts associated with optional renewal periods.
15. RELATED PARTY TRANSACTIONS
The Cornerstone OnDemand Foundation (the “Foundation”) empowers communities in the United States and internationally by increasing the impact of the non-profit sector through the utilization of people development technology including the Company’s products. The Company’s chief executive officer is on the board of directors of the Foundation. The Company does not direct the Foundation’s activities, and accordingly, the Company does not consolidate the Foundation’s statement of activities with its financial results. During the three months ended March 31, 2020 and 2019, the Company provided at no charge certain resources to the Foundation, with approximate values of $1.1 million and $1.2 million, respectively.
16. SUBSEQUENT EVENTS
On April 22, 2020, the Company completed its previously announced acquisition of Saba for an aggregate purchase price of approximately $1.295 billion, consisting of $1.262 billion in cash and 1,110,352 shares of common stock of the Company. The purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Company is determining the purchase price allocation and will record its initial fair value estimates during the three months ending June 30, 2020.
In connection with the acquisition, on April 22, 2020, the Company incurred $1.0047 billion of debt in the form of a senior secured first lien term loan B facility with Morgan Stanley Senior Funding, Inc., Credit Suisse AG, Cayman Island Branch, Bank of America, N.A., Deutsche Bank AG New York Branch, Jefferies Finance LLC, and BMO Capital Markets Corp. (the “Term Loan Facility”); and a five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $150.0 million, of which $50.0 million is available upon closing. The Revolving Credit Facility also includes a letter of credit sub-facility of up to $30.0 million. On April 22, 2020, the Company borrowed the full amount of the Term Loan Facility and did not draw any amounts under the Revolving Credit Facility. Proceeds from the Term Loan Facility were used to consummate the acquisition and to pay related fees and expenses.
Additionally, on April 20, 2020, the Company entered into the Supplemental Indenture with US Bank National Association, as trustee. Upon the completion of the Saba acquisition, the Supplemental Indenture became effective, which amended the 2017 Indenture to permit the incurrence of the indebtedness under the credit agreement and extend the maturity date of the Convertible Notes to March 17, 2023. In connection with this amendment, the Company paid approximately $3.0 million in consent fees to the holders of the majority of the Convertible Notes.
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ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new customers to enter into subscriptions for our solutions; our ability to service those customers effectively and induce them to renew and upgrade their deployments of our solutions; our ability to expand our sales organization to address effectively the new industries, geographies, and types of organizations we intend to target; our ability to optimize the efficiency of our operations and scalability of our business; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhancements to our solutions; alternate ways of addressing people development needs or new technologies generally by us and our competitors; continued acceptance of software-as-a-service as an effective method for delivering people development solutions and other business management applications; the attraction and retention of qualified employees and key personnel; our ability to protect and defend our intellectual property; costs associated with defending intellectual property infringement and other claims; the effects of global outbreaks of pandemics or contagious diseases or fear of such outbreaks, such as the recent COVID-19 pandemic, including on the demand for our products, our ability to expand in new geographic markets, or the timing of such expansion efforts, and on overall economic conditions and software-as-a-service spending; other events in the markets for our solutions and alternatives to our solutions, as well as in the United States and global markets generally; future regulatory, judicial,and legislative changes in our industry; our ability to successfully and efficiently integrate Saba Software, Inc. into our business; the timing and amount of capital expenditures and share repurchases; and changes in the competitive environment in our industry and the markets in which we operate. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
Cornerstone OnDemand, Inc. is a leading global provider of learning and people development solutions, delivered as software-as-a-service (“SaaS”). Unless the context requires otherwise, the words “Cornerstone,” “we,” “Company,” “us,” and “our” refer to Cornerstone OnDemand, Inc. and its wholly owned subsidiaries. We were founded with a passion for empowering people through learning and a conviction that people should be an organization’s greatest competitive advantage. We believe people can achieve anything when they have the right development and growth opportunities. We offer organizations the technology, content, expertise, and specialized focus to help them realize their potential. Featuring comprehensive recruiting, personalized learning, modern content delivered in the flow of work, development-driven performance management, and holistic workforce data management and insights, Cornerstone’s people development solutions are successfully used by more than 3,600 global customers of all sizes, across 187 countries and 43 languages. On April 22, 2020, the Company acquired Saba Software, Inc. (“Saba”), a provider of talent experience solutions.
We work with customers across all geographies, vertical markets, and market segments. Our customers include multi-national corporations, large domestic and foreign-based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations, and small businesses. We sell our solution domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and South America, Europe, and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies, and global system integrators.
Our enterprise people development solution is composed of four product suites:
Our Learning suite provides robust, modern learning management software designed to scale with the organization. Cornerstone Learning comprehensively supports compliance, knowledge sharing, and employee-driven development training to close skills gaps. Our content offering delivers fresh, modern content, fueling employee curiosity, and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback, compensation management, and succession planning;
Our Recruiting suite helps organizations to attract, hire, and onboard the right employees; and
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Our HR suite provides an aggregated view of all employee data with workforce planning, self-service management, and compliance reporting capabilities resulting in more accurate data.
Our goal is to empower people, organizations, and communities to realize their potential with a comprehensive people development solution that is built to last. Our growth strategy since inception has been deliberate and focused on long-term success. This has allowed us to weather periods of economic turmoil and significant changes in the markets we serve without experiencing business contraction. We plan to continue with the same systematic approach in the future. Key elements of our strategy include:
Continue to Innovate and Extend Our Technological Leadership. We believe we have developed over the last 20 years a deep understanding of the people development challenges our customers face. We continually collaborate with our customers to build extensive functionality that addresses their specific needs and requests. We plan to continue to leverage our expertise in people development and customer relationships to develop new products, features, and functionality that will enhance our solutions and expand our addressable market. We plan to continue our policy of implementing best practices across our organization, expanding our technical operations, and investing in our network infrastructure and service capabilities in order to support continued future growth.
Retain and Expand Business with Existing Customers. We believe our existing installed base of customers offers a substantial opportunity for growth.
Focus on Customer Success, Retention, and Growth. We believe focusing on our customers’ success will lead to our own success. We have developed a Customer Success Framework that governs our operating model. We strive to maintain our strong retention rates by continuing to provide our clients with high levels of service, support, and increasing functionality.
Sell Additional Products to Existing Customers. We believe there is a significant growth opportunity in selling additional functionality to our existing customers. Many customers have added functionality subsequent to their initial deployments as they recognize the benefits of our unified solution. With our expanding product portfolio functionality, we believe significant upsell opportunity remains within our existing customer base.
Focus on Growing Recurring Revenue. We believe our primary growth drivers are as follows:
Invest in North America. We believe the market for people development is large and remains significantly underpenetrated. In particular, content and recruiting provide an opportunity to increase our recurring sales to both new and existing customers. Additionally, we believe the small and medium-sized business (“SMB”) market represents a very large and underpenetrated opportunity.
Continue to Invest in Our International Operations. We believe a substantial opportunity exists to continue to grow sales of our solution internationally. We intend to grow our Europe, Middle East, and Africa (“EMEA”) and Asia-Pacific and Japan (“APJ”) operations.
Grow Our Cornerstone Content Anytime Sales. We believe there is a significant market opportunity for developing employees throughout their careers with modern, fresh e-learning content. Our Content Anytime subscription offering provides access to industry leading content which we believe will increase user engagement on our solution. Our content partners for Content Anytime include industry leaders as well as regional, functional, and vertically-focused online training providers. In addition, we have agreements with providers of specific competency models for use by our customers directly in our people development solution. We intend to enter into additional license agreements to continue providing the best content available for our customers.
Expand the Ecosystem. In recent years, we have expanded our relationships with various third-party consulting firms to deliver the successful implementation of our solution and to optimize our customers’ use of our solution during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to ensure successful delivery by our partners and continued high customer satisfaction. We believe we have a significant opportunity to leverage these third-parties interested in building or expanding their businesses to increase our market penetration.
Increase Operating Income and Free Cash Flow. We have increased our focus on managing our costs while making smart investments to scale our middle and back-office operations, which we believe will support growth in recurring revenue and our long-term success over time. We believe we have executed and intend to continue to execute operational excellence initiatives to optimize our margin profile, which we believe will enable further leverage in our expense structure and growth in operating income and free cash flow.
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Acquisitions and Strategic Investments. We may acquire or invest in additional businesses, products, or technologies that we believe will complement or expand our solution, enhance our technical capabilities or otherwise offer growth opportunities. Most recently, in April 2020, we completed our previously announced acquisition of Saba, a provider of talent experience solutions. In January 2020, we acquired Clustree SAS (“Clustree”), a developer of a skills engine and skills ontology. In December 2019, we invested in Talespin Inc. (“Talespin”), a developer of enterprise virtual reality training software. In November 2018, we acquired Grovo Learning, Inc. (“Grovo”), a provider of Microlearning® content. In September 2018, we acquired Workpop Inc. (“Workpop”), a web and mobile solution for candidates and hiring managers in service-based industries. Clustree was acquired to accelerate the development of a skills engine. Grovo was acquired to enhance our Content product and Workpop was acquired to enhance our Recruiting product.
We generate most of our revenue from the sale of our products pursuant to multi-year customer agreements. Customer agreements for our people development solution generally have terms of three years. Our sales processes are typically competitive, and sales cycles generally vary in duration from two to nine months depending on the size of the potential customer. We generally price our people development solution based on the number of products purchased and the permitted number of users with access to each product.
We generally recognize revenue from subscriptions ratably over the term of the customer agreement and revenue from professional services as the services are performed. We normally invoice our customer upfront for annual subscription fees for multi-year subscriptions and upfront for professional services. We record amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue.
We have historically experienced seasonality in terms of when we enter into customer agreements. We usually sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year. This seasonality is driven by customer purchasing patterns. As the terms of most of our customer agreements are full year increments, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we generally recognize subscription revenue ratably over the term of the customer agreement, which is generally three years. In addition, this seasonality is reflected in changes in our deferred revenue balance, which generally is impacted by the timing of when we enter into agreements with new customers, invoice customers, and recognize revenue. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future results.
Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control, including those described in the “Risk Factors” section of this Quarterly Report on Form 10-Q. One or more of these factors may cause our operating results to vary widely. As such, we believe our quarterly results of operations may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions.
Revenue. Revenue consists primarily of subscription revenue and professional service revenue. We generally recognize revenue over the delivery period. Because of the seasonality of our business and the timing of when we enter into new customer agreements, revenue from customer agreements signed in the current period may not be fully reflected in the current period.
Subscription Revenue. Subscription revenue represents subscriptions to our people development solution, content subscriptions, and related support sold on a recurring basis.
Annual Recurring Revenue. In order to assess our business performance with a metric that reflects our focus on a subscription-based (or recurring revenue) business model, we track annual recurring revenue, a non-GAAP financial measure, which we define as the annualized recurring value of all active contracts at the end of a reporting period. We believe this metric is useful to investors, in evaluating our ongoing operational performance and trends, and in comparing our financial measures with other companies in the same industry. However, it is important to note that other companies, including companies in our industry, may calculate annual recurring revenue differently or not at all, which may reduce its usefulness as a comparative measure.
Free Cash Flow. We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital expenditures and capitalized software costs. We present this metric because it is a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet.
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Annual Dollar Retention Rate. We define annual dollar retention rate, a non-GAAP financial measure, as the percentage of annual recurring revenue from all customers on the first day of a fiscal year that is retained from those same customers on the last day of that same fiscal year. Accordingly, this percentage excludes all annual recurring revenue from new customers added during the fiscal year. Furthermore, incremental sales during the fiscal year to customers included in the calculation are only counted to the extent those sales offset any decreases in annual recurring revenue from the original amount on the first day of our fiscal year. Therefore, the annual dollar retention rate can never exceed 100%. This ratio excludes the annual recurring revenue from customers of our Cornerstone for Salesforce, Cornerstone PiiQ, Grovo, and Workpop products. We believe that our annual dollar retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers.
Constant Currency Results. We present constant currency information, a non-GAAP financial measure, to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency fluctuations. Due to our legal and operating structure, our international revenues are favorably impacted as the US dollar weakens relative to the British pound and euro, and unfavorably impacted as the US dollar strengthens relative to the British pound and euro. We believe the presentation of results on a constant currency basis in addition to reported results helps improve the ability to understand our performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results. To present this information, current period results for entities reporting in British pounds and euros are translated into US dollars at the prior period exchange rates as opposed to the actual exchange rates in effect for the current period. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
Number of Customers. We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors. Our customer count includes contracted customers for our enterprise people development solution as of the end of the period and excludes customers of our Cornerstone for Salesforce, PiiQ, Grovo, and Workpop products. During the three months ended March 31, 2020, our number of customers grew approximately 4% when compared to the same period in the prior year.
COVID-19
The impact of the COVID-19 pandemic on the global economy and on our business continues to be a fluid situation. We responded quickly across our organization to guard the health and safety of our team and customers, support our partners and vendors, and mitigate risk. After careful review of our operations, while the ongoing and developing circumstances related to the COVID-19 pandemic remain uncertain, we believe that we are well positioned to address challenges related to the COVID-19 pandemic and to continue to execute against our strategic priorities and financial goals. We have several members of our team working cross-functionally to collect, monitor, and analyze evolving information regarding the COVID-19 pandemic and to make recommendations to our executive leadership team and board of directors regarding risk identification and mitigation planning. We have also taken steps to protect the health and welfare of our employees by temporarily closing our offices and suspending non-essential business-related travel, while continuing our commitment and efforts to serve customers that rely on us. Thus far, our employees have rapidly adapted to working remotely and we are closely monitoring the COVID-19 pandemic to ensure we have all necessary plans in place for mitigating disruptions in our operations, including maintaining high levels of uptime, and service and support to our customers. We continue to proactively assess, monitor and respond to domestic and international developments related to the COVID-19 pandemic, and we will implement risk-mitigation plans as needed to minimize the impact on our partner relationships and business operations. While our customer base spans a variety of industries, our customers may be negatively impacted by COVID-19 which may affect our future revenues.
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our solution is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate revenue from the following sources:
Subscriptions to Our Products and Other Offerings on a Recurring Basis. Customers pay subscription fees for access to our enterprise people development solution, other products, and support on a recurring basis. Fees are based on a number of factors, including the number of products purchased, which may include e-learning content, and the number of users having access to a product. We generally recognize revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service is made available to the customer. Subscription agreements are typically three years, billed annually in advance, and non-cancelable, with payment due within 30 days of the invoice date.
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Professional Services and Other. We offer our customers and implementation partners assistance in implementing our products and optimizing their use. Services are generally billed upfront on a fixed fee basis and to a lesser degree on a time-and-material basis. We generally recognize revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time and materials are incurred.
Our customer agreements generally include both subscriptions to access our products and related professional services. Our agreements generally do not contain any cancellation or refund provisions other than in the event of our default.
Cost of Revenue
Cost of revenue consists primarily of costs related to hosting our products and delivery of professional services, and includes the following:
personnel and related expenses, including stock-based compensation;
expenses for network-related infrastructure and IT support;
delivery of contracted professional services and on-going customer support and customer success initiatives;
payments to external service providers contracted to perform implementation services;
depreciation of data centers and amortization of capitalized software costs and developed technology software license rights; and
content and licensing fees and referral fees.
In addition, we allocate a portion of overhead, such as rent, IT costs, depreciation and amortization, and employee benefits costs, to cost of revenue based on headcount. The costs associated with providing professional services are significantly higher, as a percentage of revenue, than the costs associated with providing access to our products due to the labor costs to provide the consulting services.
Operating Expenses
Our operating expenses generally are as follows:
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation, and commissions; costs of marketing and promotional events, corporate communications, online marketing, product marketing, and other brand-building activities; and allocated overhead.
Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation; the cost of certain third-party service providers; and allocated overhead. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for administrative, legal, finance, and human resource staff, including salaries, benefits, bonuses, and stock-based compensation; professional fees; insurance premiums; other corporate expenses; and allocated overhead.
Acquisition-Related Costs. Acquisition-related costs consist primarily of professional services directly associated with acquisitions, such as accounting and legal costs, filing fees, and due diligence costs.
Other Income (Expense)
Interest Income. Interest income consists primarily of interest income from investment securities. We expect interest income to vary depending on the level of our investments in marketable securities, which may include corporate bonds, agency bonds, US treasury securities, and commercial paper.
Interest Expense. Interest expense consists primarily of interest expense from our convertible notes, accretion of debt discount, and amortization of debt issuance costs.
Other, Net. Other, net consists of income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to strategic investments, and other non-operating expenses. We expect other, net to vary depending on the movement in foreign currency exchange rates and the related impact on our foreign exchange gain (loss).
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Income Tax Provision
On a consolidated basis, we have incurred operating losses and have recorded a full valuation allowance against our US, UK, New Zealand, Hong Kong, and Brazil deferred tax assets for all periods to date and, accordingly, have not recorded a benefit for income taxes for any of the periods presented other than a provision for certain foreign and state income taxes. Certain foreign subsidiaries and branches provide intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
Critical Accounting Policies and Estimates
Information with respect to our critical accounting policies that we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 25, 2020.
For information regarding recent changes to our critical accounting policies, refer to Note 1 - Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1 - Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Results of Operations
The following table sets forth our results of operations for each of the periods indicated (in thousands). The period-to-period comparison of financial results is not necessarily indicative of future results.
  Three Months Ended
March 31,
  2020 2019
Revenue $ 150,136    $ 140,117   
Cost of revenue 41,924    33,695   
Gross profit 108,212    106,422   
Operating expenses:
Sales and marketing 55,330    54,505   
Research and development 24,085    27,746   
General and administrative 24,725    22,940   
Acquisition-related costs 6,811    —   
Total operating expenses 110,951    105,191   
(Loss) income from operations (2,739)   1,231   
Other income (expense):
Interest income