Cornerstone OnDemand Inc. is in the business of managing people, or at least helping other companies do so.
The Santa Monica company provides cloud-based software sold on a subscription basis that handles all aspects of everyday life at work — including recruiting, training, performance, managing compensation and planning succession strategies.
Cornerstone receives regular payments from clients who subscribe to its service. Such an arrangement is unlike some of the more traditional software companies whose clients often pay upfront for a license. That means Cornerstone takes an initial hit for the expenses of getting new customers, but takes revenue over a longer period.
Cornerstone is one of the earliest heavyweights in the now crowded Southern California tech scene. Its chief executive, Adam Miller, co-founded the company in his New York City apartment in 1999 and moved its headquarters to California the same year.
Today, the company’s client roster includes the Los Angeles Unified School District, Virgin Media, Barclays and Starwood Hotels & Resorts.
“We help organizations manage the entire employee life cycle,” Miller said. “We built one of the largest enterprise software companies, and certainly one of the largest cloud computing companies, outside of Silicon Valley.”
In the first quarter of 2014, Cornerstone reported a net loss of $15.8 million, or 30 cents a share, compared with a loss of $9.9 million, or 20 cents, a year earlier. Revenue shot up 52% to $57.4 million.
Over the last two years, Cornerstone has more than doubled its sales team to aggressively expand its customer base.
The company sees opportunities to grow after three of its rivals were gobbled up by tech giants in recent years. In late 2012, IBM acquired talent management company Kenexa. Before that, SuccessFactors was purchased by SAP and Taleo was bought by Oracle.
“The biggest news is that almost all of our competitors got taken out,” Miller said.
Cornerstone is now poised to reap the benefits of being the only big company left solely dedicated to cloud-based employee management software, he said. “We started in a pretty crowded space,” Miller said, “and now we are essentially the last man standing.”
Miller described the company as a trailblazer for other tech companies in the Southland, and one of the early pioneers that laid the groundwork for the hot tech scene today.
“When I started, all my advisors said, ‘You have to either stay in New York or go to Silicon Valley,’” he said. “There were very few tech companies here. You had to hire for potential and not for prior experience.”
Miller said a key challenge is expanding its client roster quickly while ensuring the quality of service remains high for existing customers. The company is also aware of the importance of maintaining tight security around its vast troves of customer data, especially given the recent hacks at companies such as Target.
“You have to be constantly vigilant,” he said. “In particular, working with Europe, there is a lot of concern about data privacy.” Cornerstone has data centers in Europe to satisfy its European customers.
Brendan Barnicle, senior research analyst at Pacific Crest Securities, said Cornerstone is operating at a loss now to put money into expanding aggressively. He said the company, which upped its revenue 36% in 2013 compared with the prior year, could pull in a profit by 2018 or 2019.
“You get to a certain scale, or the growth opportunities slow. And you can dial back those investments,” he said. “Look at Salesforce.com or Netsuite.com. Those are larger revenue bases and they have profitable earnings.”
Since peaking Feb. 27, shares of Cornerstone have dropped 28.9%. On Friday, the stock closed at $43.25, up 46 cents, or 1.1%.
Analysts said much of the dropoff in price this spring can be blamed on a general sell-off of high-growth stocks that has plagued companies such as Twitter. But it has fallen even more sharply compared with an index of high tech small capital companies, which fell 9.7% over the same period.
Barnicle said the stock also came under pressure because the company reported slightly slower growth in the first quarter compared with a year earlier.
“From a shareholder perspective, any time a company goes through slowing growth, it’s something to take note of,” he said.
Fourteen analysts have rated Cornerstone a buy, one recommends holding the stock, and one said it’s time to sell.