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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)
Q3 2019 Earnings Call
Nov 6, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Cornerstone OnDemand's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded.

And now I'd like to introduce your host for today's program, Jason Gold Cornerstone's Vice President of Finance and Corporate Development. Please go ahead.

Jason Gold -- Vice President of Finance and Corporate Development

Good morning, everyone and welcome to Cornerstone OnDemand's Third Quarter 2019 Earnings Call. Before I read the obligatory Safe Harbor disclaimer, I'd like to point out that in the letter we've outlined our Investor Relations calendar for the quarter, including the conferences we will attend and when we plan to enter into our quiet period. If you'd like to participate in any of our scheduled events, please feel free to reach out.

And now, for our disclaimer. Our press release and shareholder letter were both furnished with the SEC in a Form 8-K, we plan to file our Form 10-Q for the third quarter prior to the deadline on November 12. You can access the shareholder letter, press release and related investor materials including detailed financials on our Investor Relations website.

As a reminder, today's call is being recorded and a replay will be made available following the conclusion of the call. Our discussion will include forward-looking statements, including but not limited to statements regarding the expected performance of our business, our future financial and operating performance including our GAAP and non-GAAP guidance, strategy, long-term growth and overall future prospects.

Forward-looking statements involve risks, uncertainties and assumptions. These risks, uncertainties and assumptions as well as other factors that could cause actual results to differ materially from those contained in our forward-looking statements are included in our most recent 10-Q and 10-K, as well as subsequent periodic filings with the SEC.

During the call, we will be referring to both GAAP and non-GAAP financial measures, all financial measures discussed today are non-GAAP, unless we state that the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in our shareholder letter and in our press release.

With that I'd like to turn the call over to Adam.

Adam Miller -- Founder and Chief Executive Officer

Thanks, Jason, and good morning everyone. As I think about our performance for the first three quarters of 2019, I'm quite pleased with what our team has accomplished and feel good about our transformation and our positioning for the future.

Despite some recent noise in the macro economy globally, our outlook for the balance of the year remains solid and we've raised our guidance across all metrics accordingly. Over the past few quarters, we've talked a lot about how we think the combination of our Learning Suite and our emerging content offering has started to create a flywheel effect, which we believe distances us from our traditional competitors. We've also talked about the benefits we get from the immense volume of data we have collected over the years from all the online courses that flow through our platform.

This massive dataset provides us with the insights to optimize our content strategy and enables both personalization and effective machine learning. The output is an ability to serve the right content to the right employee at the right time driving employee engagement, reducing turnover and improving productivity. What we haven't talked about much though our three things. One, Cornerstone Originals; two, our approach to skills management; and three, the opportunity to leverage our base

Let's first talk about Cornerstone Originals. One of the real benefits of our global acquisition was the creation of Cornerstone studios, which allows us to produce original content to meet the needs of our client-base and further differentiate our Content Anytime subscriptions. With Cornerstone Originals, we are able to address important topics, which are not currently met by our existing portfolio of leading content providers.

We have figured out how to make unique content in a repeatable and scalable way that engages learners and leads to better retention of the subject matter, the most traditional courses. We're particularly excited about our newest original content series, DNA, which will be exclusively part of our professional skills Content Anytime subscription. What's so special about DNA or digital natives advancement, is how powerfully it addresses the emerging needs that so many of our clients out that is to help their youngest workers thrive in the business world today

The next generation of the global workforce Gen Z has grown up with multiple screens and with social networks all around them but haven't yet been taught the norms and interpersonal skills that happened in the workplace. We've built a series of 90 second courses on topics that manage how an employee should behave in the workplace, how to manage up, how to communicate with your boss and even how to dress most appropriately for work. The whole series is designed to be binge-watched on a mobile phone and the early feedback we're getting from our clients has been very positive.

One big client told us that they'd be willing to buy our professional skills Content Anytime subscription, just to get access to this series, validating the entire concept. So the opportunity with Cornerstone Originals is clear.

Our clients expressed a need, we surveyed the content landscape and saw that nobody else was filling that need and we acted accordingly. Building the series in under six months with an extremely limited budget and big potential return.

The second thing I'd like to touch on is our approach to skills management. We've discussed at length, our skills are the new digital currency and how companies globally will need to help upskill and reskill their workers if they plan to remain competitive over the next few years. To help our clients with this immense challenge we are building a universal ontology of skills that maps to our universal taxonomy of subjects that will enable us to both identify gaps in the skills of employees and teams, and then recommend trainings to specifically address those gaps.

By leveraging the massive dataset we have, we can also provide a highly personalized talent experience that supports employees throughout their entire career journey, whether they be new to a company or role seeking to gain mastery of their position or preparing to transition to a new role or management position. Skills management also helps organizations to better identify potential internal candidates to fill open roles and it provides employees with enhanced tools for effective career pathing.

The third area, I would like to highlight is the opportunity that we have to leverage our installed base to continue growing our revenue. Today we have over 40 million users on the Cornerstone platform and while we've talked about the massive opportunity that exist to sell content back into this space, it's also worth reminding you that we have over 1,500 clients that do not have our broader talent management tools. We see a tremendous opportunity to leverage the relationships we've built with our Learning customers to expand our footprint and increase our revenue and to some extent, this is already happening. You can see it and how our annual recurring revenue in and revenue -- subscription revenue have grown nicely without a commensurate increase in our new client count. Of course, we're always focused on bringing in new clients, but it's important to point out that our focus on leveraging our base has already begun to bear fruit.

Our products team is constantly evaluating the competitive landscape and developing new features and products that keep us ahead of the competition. In both performance and recruiting, we continue to develop new capabilities to keep setting us up for success.

Turning back to the quarter for a moment. During the third quarter, we had some notable wins at organizations like Beaumont Health, Ricoh and Cupertino Electric. Our SMB team had a particularly strong third quarter, as did our US Public Sector team, which closed a large 7-figure deal with the United States Census for our recruiting product.

With the skills divide making news almost every week, the need for companies to reskill and upskill their workforces has never been greater. As this continues to gain traction, we think we're extremely well-positioned to capitalize on this macro trend. I feel really good about our strategic positioning and the opportunity that sits before us as a leader in both learning and talent management

The onus is really upon us to deliver and while the road may not always be linear and we'll surely encounter some minor bumps along the way, our strategy is clear and I'm really excited about our future.

I'll now turn the call over to Brian to provide a few comments on our financials.

Brian Swartz -- Chief Financial Officer

Thank you, Adam. And good morning everyone. Since we provided a very thorough overview of the quarter and our updated guidance in the shareholder letter, I'm going to keep my comments today brief. As you can see we had a good third quarter and accordingly we chose to raise our guidance on several metrics. Our subscription revenue grew to $137 million, which is just over 17% year-over-year growth in constant currency or 16% on a reported basis as a result of our strong ARR performance over the course of the past 12 months.

We're also very pleased with our operating margin of nearly 17% , which grew over 300 basis points year-over-year and was the highest in the Company's history, due to solid expense control and leverage across the entirety of our operating expense line items. And finally, our unlevered free cash flow margin of 15%, while down from nearly 24% in Q3 of 2018 was comfortably above our high single-digit margin guidance due to strong collections and solid overall performance. As a reminder, during last year's third quarter, we had an unusually strong cash flow, primarily due to earlier than anticipated collections. We expect the positive trends we saw in our operating cash flow margins to continue, not just in Q4 but into 2020.

We did mentioned in the letter that some of our Q3 deals slipped into Q4. However, a majority of them have already closed and we expect the rest to close in November and December. While we drive our sales team teams on ARR and that measure remains solid, the timing of these deals does have some minor ripple through effect to both revenue and cash flow. Our Professional Services business is now at what we think is a normalized run rate and we will soon anniversary our intentional exit from the Service Delivery business. While quarterly professional services revenue will continue to vary from quarter-to-quarter, we expect the drag from the decline in the Services business to soon abate, what this means is that our total revenue growth rate should start to accelerate and converge toward our subscription revenue growth rate.

I'd also like to make two comments related to the detail we provide them letter about our annual dollar retention rates. The first is that although we're of course happy with a very large deal, we signed in Q3 with the United States Census Bureau, and our success with that program, we would expect some meaningful portion of that to churn over the next couple of years as the census winds down.

The second relates to our 2019 renewable base and how it's growth over 2018 has been a factor in our expectation that we will experience a modest decline in our ADR rate in 2019. It's important to understand that as the size of the renewable base increases there is natural pressure on our ADR, even if the renewal rates remained flat.

And finally, as we have discussed on prior calls, we expect to achieve The Rule of 40, which we define as the sum of constant currency subscription revenue growth and unlevered free cash flow margin in 2020, and expect to do so in a manner that shows unlevered free cash flow margins to be a larger contributor to this metric than constant currency subscription revenue growth. This is expected to result in approximately $150 million of unlevered free cash flow next year. And furthermore, we also expect that absent any new reinvestment opportunities or other non-operational changes, such as higher cash income taxes, our dollars of unlevered free cash flow will continue to grow in 2021 and beyond. Like Adam. I'm very proud of the team for what they've accomplished so far this year, and I'm excited about what lies ahead.

With that, we will now take your questions.

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, if you have a question at this [Operator Instructions] Our first question comes from the line of Scott Berg from Needham & Company, your question, please.

Scott Berg -- Needham -- Analyst

Hi, Adam and Brian. Congrats on the quarter and thanks for taking my questions. Adam, I wanted to start with the North American Enterprise business, you called it out in your shareholder letter, it sounds like those deals will closed in the fourth quarter, but any commonality across those deals in terms of why they moved periods?

Adam Miller -- Founder and Chief Executive Officer

Those deals in particular were weighted toward healthcare and Latin America and in both those sectors as well as some of the larger enterprise deals, the timing is often difficult to predict. In this particular case we had a fairly back-end loaded quarter that sometimes happens in Q3 because our clients are out on vacation in July and August, and so you tend to have more of the deals closing in September then in the other two months. And in this particular case, some of the deals literally signed two days after the quarter ended. And so you have a timing issue. It wasn't necessarily a sales execution issue and obviously we won the deal, it's just timing

Scott Berg -- Needham -- Analyst

Got it. Helpful. And then, Brian, you're I guess recommitment, maybe that's the right word in terms of The Rule of 40 next year, it does imply a healthy jump in your unlevered free cash flow margin. Can you help us maybe give a little more granularity on the visibility into that in terms of maybe the CapEx spend in the next year or some of the operating margin leverage just help give what comfort level that would help? Thank you.

Brian Swartz -- Chief Financial Officer

Yeah, so I mean, just a couple of data points. We're obviously going through our 2020 detailed budgeting processes now, so I'll have more to comment. I think on that, Scott, certainly in the next call. But just a couple of data points, one, we would expect lower CapEx next year. As you know, we've had some real estate projects this year that will be completed and we do not expect them to repeat next year.

The other thing I would point out is that sequentially from Q2 to Q3. We've been very mindful on managing headcount and you actually see our headcount down about 2 points or 2% sequentially and we're just being very mindful of backfills, where we're hiring to help support that that margin expansion as we go into 2020.

So we're feeling really good about it. Again, we're going through some detailed model -- detailed planning but our head count plans, more or less are locked through the end of next year. And it's really about reallocating headcount and make sure we're investing in the right areas are not cutting off any growth opportunities .

Jason Gold -- Vice President of Finance and Corporate Development

Very helpful. Thanks and congrats again.

Operator

Thank you. Our next question comes from the line of Brad Sills from Bank of America Merrill Lynch, your question, please.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks guys for taking my question. Wanted to ask about the focus on selling into the base. Are there any particular modules that you think are under-penetrated and maybe some low hanging fruit there across the stack that you might see some, near-term traction?

Adam Miller -- Founder and Chief Executive Officer

Yeah. I mean, I've talked about this before. Obviously, when we look at things like recruiting and CHR, in both cases we're penetrated far below 50% of the client base, so we believe there is a big upside opportunity from that perspective.

And we believe there's still opportunity to further penetrate performance. Today, it's a little over half our client base with performance but that number could be bigger. And as we do more and more work around the linkage between skills and the training, it allows us to deepen the effectiveness of our performance tools and our learning tools simultaneously making them both more attractive. And then lastly, we see a very big opportunity around content, which isn't quite a product module but we think of it as our fifth product and the Content Anytime subscriptions also have relatively low penetration to-date in our client base. So all four of those have significant potential upside

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, Adam. And then any color you could provide on some of the potential wins this quarter with Content Anytime maybe the library that was sold or domain use-cases and deal sizes. Any color on just the Content Anytime business this quarter? Thanks again.

Adam Miller -- Founder and Chief Executive Officer

Yeah. I mean it's still early days. So I would say it's all over the map, it's every geography, it's every vertical, it's all different sized companies we're selling. Today, we have five subscriptions, all five of those subscriptions are being sold. Where we think we have tremendous upside opportunity going into Q4 and certainly into next year is our professional skills subscription, and that's why I was talking about DNA, that original content is driving people to that professional skills subscription in much the same way that back in the day House of Cards and Orange is a New Black drove people to purchase a subscription to Netflix or the Handmade Tale got people to buy Hulu.

I think you're seeing a similar effect here now, when we show some of this original content to our client base they get really excited. It's very unique and it literally gets them excited enough to take the whole subscription now. So even though it's only one series in a subscription that has over 1,000 titles that series drives interest to the fuller subscription, which then converts into more Content Anytime business.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks, Adam.

Adam Miller -- Founder and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Corey Greendale from First Analysis. Your question, please .

Corey Greendale -- First Analysis -- Analyst

Hey. Good morning and congratulations on the quarter. First question is, just -- I understand the dynamics around the census deal. I was hoping you might be able to give us a little bit more on the size of that deal. I'm just trying to understand what the effect will be on churn once that does roll out?

Brian Swartz -- Chief Financial Officer

Yeah. So I mean it was a multimillion-dollar deal, Corey, and I would say high single-digit 7-figure kind of deal and that was just the upsell or the -- this quarter. Obviously, they've been a client for several years, as you know we've talked about that before. In terms of exactly how we'll churn, we don't know exactly, quite frankly. But we do believe over the course of the next 2 to 3 years there will be some large portion of that that will churn as the census ramps ups and then ramps down, so we are obviously working with the census on that and more to come as we know more.

Operator

Thank you. Our next question comes from the line of Rishi Jaluria from DA Davidson. Your question, please.

Rishi Jaluria -- DA Davidson. -- Analyst

Hi, guys. Thanks for taking my questions. First, I wanted to ask about some of the Cornerstone Originals, I know we're early in the process, but maybe just wanted to understand what would the margin implications be, should we expect higher than that kind of 50% gross margins that you've talked about the Content business before, given that you're not doing any revenue sharing theoretically? And then I've got a quick follow-up for Brian.

Adam Miller -- Founder and Chief Executive Officer

Yeah. Two points there, so one is on the gross margin, obviously, it's higher than 50% because we own the content, so there is no royalty payment to any third -party. It also has higher operating margin because we have the higher gross margin and that will flow through. I think there's some concern out there that we are going to increase our CapEx because of this original content that's not the case at all. This is already baked into the budget . This is operational spend, it's part of the flow of how our content studios work, which are producing significant content, not just Content Originals but the fuller global library and the co-produced content. So all three brands are being produced by that studio. It's part of our normal operational cadence and we've just gotten pretty good at it and it's a very efficient model

Rishi Jaluria -- DA Davidson. -- Analyst

Great. That's helpful. And then -- yes, hi, thanks. And then, Brian, I just wanted to maybe drill a little bit down into your commentary in the shareholder letter on the dollar retention and I've seen that number kind of come down slightly this year relative to last year. If we take that in a consideration and also look at the fact that you've raised guidance on ARR, I mean you are essentially implying that your new ARR so to say that you generate this year relative to last year, it's probably growing at a slightly -- maybe in line to maybe even slightly faster than we've seen subscription revenue growing. Maybe if you can help us kind of bridge those and how we should be thinking about newer ARR n light of annual dollar retention coming down? Thanks.

Brian Swartz -- Chief Financial Officer

Yeah. So obviously, once we close out the year we'll comment a lot more on this at the end of the year. We report the actual ADR on the fourth quarter call, Rishi. I think what you're saying makes sense and so I think you're thinking about it the right way. We are growing new ARR this year, which is good. The teams have executed very well in that regard. The ADR heads -- there are lots of moving pieces that impact the ADR because it's on the whole base, whether it's the renewal rate or what's up for renewal.

There'ss obviously other churn reasons that go into the overall the final number, but I think the way to think about it, we've been pretty specific on ARR growth this year, obviously, quantitatively on the guidance. And then next year, we obviously talked about The Rule of 40 and we expect cash flow to be a larger contributor than subscription revenue growth next year, constant currency subscription revenue growth. So as we close out the year we'll finalize the guidance and then give you some more quantitative 2020 look on the next call.

Adam Miller -- Founder and Chief Executive Officer

But you are right, basic arithmetic if ARR is going up and churn is slightly elevated then it means you're new ARR sales are also higher.

Rishi Jaluria -- DA Davidson. -- Analyst

Got it. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Raimo Lenschow from Barclays. Your question, please.

Raimo Lenschow -- Barclays -- Analyst

Hey. Congrats from me as well. Adam, on the original content, can you just help us understand a little bit like where you think you want to kind of come up with original versus partnering like what's your criteria there?

Adam Miller -- Founder and Chief Executive Officer

Yeah. So we have a very specific strategy there. We want for each of the subscriptions that we offer for Content Anytime, we want to have at least one original content series and at least one co-produced content series, example today being the sales Content Anytime subscription has content that's been co-produced with Sandler Training, which is one of the top training providers out there for salespeople and each of the subscriptions will have at least one original series and one co-produced series, which makes the subscription even more exclusive because you're not going to be able to get that content from any other subscription service. On top of that, we have a broad range of content from a number of content providers in each and every subscription that our global providers -- we're also making sure that every subscription is localized. We obviously, as you know, have a big business in Europe. So we're very attentive to French, German and Spanish content. Right now, we will expand that list later, but the content will be in four different languages that means also that there'll be different content providers meeting the subject-matter for each subscription in each language.

So for example, some of the top German content will come from German content providers that might not have content in French or Spanish but rather in German and perhaps English. And so it will be a mix of providers, mix of languages and a mix of both partnerships, original content and co-produce content in each of the subscriptions

Raimo Lenschow -- Barclays -- Analyst

Okay. Makes sense. And then as we were just discussing Europe, you had a comment around Europe in your shareholder letter and if you look at the space at the moment there are like two types of companies, there's some that say, OK, there is Europe there's issues, I'm fine and your comment leads like in that a little bit and then there is others that actually kind of have impact on numbers already. Could you like kind of take the right conclusion there that you're just acknowledging that there's something out there?

Adam Miller -- Founder and Chief Executive Officer

Yeah, it's the former. But as you know, back in 2016, we got burned by Brexit. So we still view it as a potential risk. It's been highly mitigated both by the fact that we've reduced concentration risk of the UK versus our broader EMEA business and the fact that we now have multiple data centers not only in the UK, but also in France and Germany and we've de-risked the way we handle currency, so we treat the pound separate from the euro separate from the dollar, whereas before we had some translation risk as well.

So for all those reasons, the risk is much lower in our case and we have not seen any impact, but it's out there. And I think it's a fool's errand for anybody to predict exactly what's going to happen based on Brexit or based on some of these tariff wars that are going on. So we're taking that into account, when we think about guidance but we have not seen any impact to-date.

Raimo Lenschow -- Barclays -- Analyst

Okay. Perfect. Hey, congrats on a great quarter.

Adam Miller -- Founder and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Nandan Amladi from Guggenheim. Your question, please.

Nandan Amladi -- Guggenheim -- Analyst

Hi, good morning. Thanks for taking my question. So Adam, you talked about the three growth vectors, the originals, skills management and leveraging the installed base. How do these layer in over the next, say, 2 or 3 years?

Adam Miller -- Founder and Chief Executive Officer

Yeah. So the originals, like I said, is starting to happen now. I think certainly going into next year, we're going to see the impact of DNA and the incremental content that we produce. So we think that's part of what's going to accelerate our content business and the growth there.

With regard to skills management, that's something we're working on very actively and could have an impact as early as next year and even early in the year, because of some things we're doing from a product standpoint, both with regard to the products that we actually bring to market and with regard to how the products work today and there is other vectors as well.

I mean, the opportunity to upsell the installed base has been not only thoroughly discussed in the past, but is now fairly well documented with the growth in ARR that we've seen. And the last factor that I didn't talk about is, obviously, international, we still feel good about the opportunities in APJ and in LATAM. We've seen good results already from some of the parts of Europe that are maybe further out from some other companies. So whether we're talking about the Nordics or Benelux or Central Europe or Southern Europe, I mean outside of the UK, France and Germany, we're seeing good results there.

And lastly, we've seen a real uptick in our SMB business, we've grown our inside sales teams, we've built out another center for that operation in Salt Lake City and we think there's a lot of upside in that segment as well. It's predominantly greenfield and not a whole lot of competition in that segment.

Nandan Amladi -- Guggenheim -- Analyst

Thank you. A quick follow-up, if I might, at HR Tech there were lot of your LMS -- traditional LMS competitors also making this pitch about connecting the LMS to performance management and making it more actionable and more directly measurable. How does your solution differentiate?

Adam Miller -- Founder and Chief Executive Officer

Yeah. I would say it's not a new thing, right? The Holy Grail in HR Tech is the linkage between jobs, and skills and training because if I could connect all three of those things I know which people have which skills, what jobs their most appropriate for. I know if I want to move you from job A to job B, what skills you might be missing and I know what training you need to remediate those skills gaps. So it's a very powerful combination, if you can do all three.

And this is always been a data science challenge at the end of the day. Obviously, data science technology is improving, machine learning is improving but they don't all have the kind of data sets that we have, they don't all have the kind of data science talent that we have, they don't all have the machine learning platform that we have and so that puts us in a fairly unique situation.

We see there are start-ups in this space that are doing interesting things from that perspective, all of which enables us to have a competitive advantage in this area. And obviously, we have very, not only deep data, but a deep set of training content that allows us to the extent we identify the gaps to remediate them in a way that others simply can't. And so I wouldn't say this is a new idea, this has been around for almost as long as I've been in this space, which is quite a while now, but it is something that's closer to reality than it's been in the past generally, and for us specifically much closer to reality.

Nandan Amladi -- Guggenheim -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Merwin from Goldman Sachs. Your question, please.

Chris Merwin -- Goldman Sachs -- Analyst

Okay. Thanks for taking my questions. You called out some recent successes in SMB and is that, I know it's early, is that starting to become a more meaningful driver of the business and maybe can you just talk about what's driving that improvement there? I think you mentioned an investment in the sales team. Anything else you're doing there in terms of how you price that product? Just some more color there would be great? Thank you.

Adam Miller -- Founder and Chief Executive Officer

Yeah. So we brought a new leadership about 18 months ago at this point, and that combined with investment in the team, combined with how we reorganized our mid-market operations and split it between SMB and Enterprise, build-out of the inside sales teams, the change in our go-to-market strategy for SMB, our marketing effectiveness around SMB and our general product capability for small businesses, all have led to very significant growth in that segment for us. It is still relatively small but becoming increasingly substantial and by next year will be a meaningful contributor to our growth

Chris Merwin -- Goldman Sachs -- Analyst

And when we think about kind of leveraging the existing base and at the same time you've got this opportunity for new logos down market with SMB and mid-market customers, I mean, could we see a reacceleration there in logos? I mean to the extent that there is more wins there, just they're not mutually exclusive. But just as we think about the metrics going forward, curious how we should think about that? Thanks.

Adam Miller -- Founder and Chief Executive Officer

Could you say that again? Sorry.

Chris Merwin -- Goldman Sachs -- Analyst

To the extent you're focusing more on SMB and mid-market, presumably there is an opportunity to start adding a lot more logos, especially if they're smaller customers and I think we've seen a bit of a deceleration in the customer growth, while you continue to leverage the base of Enterprise customers and expand within those. So just, when you look at the overall metrics, is there an opportunity to reaccelerate customer growth as you as you win more new logos in SMB and mid-market?

Adam Miller -- Founder and Chief Executive Officer

100%. I think part of the change you've seen is a combination of both our focus on upselling, growing the installed base, strengthening our penetration rates within the installed base combined with the disruption we had in our mid-market operations. As that has settled down, I think you will see an uptick in client count.

I know that's a metric that some people look at and we think that metric will go back to improving over time. The other thing that has continued is our overall user base continues to grow at scale and we don't disclose our quarterly but the numbers continue to rise from that standpoint.

Chris Merwin -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Thank you. And as a reminder, ladies and gentlemen, if you have a question at this time [Operator Instruction]. Our next question comes from the line of Siti Panigrahi from Mizuho. Your question, please.

Siti Panigrahi -- Mizuho -- Analyst

Hey. Thanks for taking my question. So just for 2020, you guys have talked about team subscription growth. Just wanted to understand a little bit more your expectation from this two segments like SMB versus Enterprise segment heading into 2020 and also expectation from North America versus EMEA?

Adam Miller -- Founder and Chief Executive Officer

The second one is fairly straightforward, EMEA contributes close to 30% of our business that's been true now for several years and we expect that to continue to be true. The non-US non-EMEA portion of our business continues to grow. And so it's difficult to quantify that exactly right now for 2020, but that is a growing part of our business. We also think of the US itself as two different businesses, we have Americas Commercial, which also includes Canada and Latin America as well as Mexico and we have our US Public Sector business, which has grown nicely. So we think of this as really four separate theaters and then SMB is the fifth, that's how we go to market. That's how we organize our sales operations and that's how we think about our business overall. So we have seen a shifting mix among those five different groups as our business continues to expand and we expect that shift to continue over time. Obviously, the Public Sector business has grown quite well and it's become a much more significant part of our business overall. The SMB business is growing, and as I just mentioned, is becoming more substantial, especially going into the next couple of years. And APJ we view is a really big growth driver of the business and that's something that had historically been a very small portion of our overall mix.

So we have multiple vectors of growth from that perspective, as well as from a product perspective and that's part of what gives us confidence into the future.

Siti Panigrahi -- Mizuho -- Analyst

Thanks for the color.

Operator

Thank you. Our next question is a follow-up from the line of Corey Greendale from First Analysis. Your question, please.

Corey Greendale -- First Analysis -- Analyst

I apologize, my line cut-off, if I have to, yeah, I'll just follow up offline, but, did I get enough of the question, I think you're able to answer or should I ask it again?

Adam Miller -- Founder and Chief Executive Officer

We didn't hear the question. Corey, if you could say it again?

Corey Greendale -- First Analysis -- Analyst

Yeah. The question was just the magnitude of the census, I'm just trying to get a sense of how much it's contributing to growth now and what we should be expecting return?

Adam Miller -- Founder and Chief Executive Officer

That one we answered.

Y

Brian Swartz -- Chief Financial Officer

Yeah, I did answer that, Corey. It's in the transcript. That one I did answer.

Corey Greendale -- First Analysis -- Analyst

Okay then. Thank you. The second question is just on the -- more broadly on churn, is our contract still typically three years to get a sense of what the dollar return on kind of a renewal base is? And could you just comment on what if you just look at adding renewable dollars, if there is any movement in what's happening on the churn?

Brian Swartz -- Chief Financial Officer

Yeah. So I talked about, over the last six quarters or renewable base grew significantly in '18 versus '17, continues to grow in '19. Generally our contracts are still three years but duration does move around. The other thing to keep in mind, as Adam mentioned, we've obviously had great growth and some very large logos in the public sector and those deals traditionally are one-year renewable deals. They generally get renewed but contractually they're just one-year deals.

So there has been some impact on duration, some of it is just where we grow the business, specifically in the public sector. But in general, most of our new logos and most of our deals in general are still three years and that's what we strive for.

Corey Greendale -- First Analysis -- Analyst

And -- but if you just look at the renewable base is there any movement on renewed, is it the percentage of renewable dollars that are renewing as opposed to the impact of the change in the size of the base?

Brian Swartz -- Chief Financial Officer

Yeah, it's gone up. In fact in '18 our renewable rate was up over '17, obviously '19 is not over yet, we'll talk about it next quarter and in the future. But we actually renewed more dollars both as a rate and as a percentage in '18 versus '17. ADR did come down because the whole size of the renewable base went up so much.

Corey Greendale -- First Analysis -- Analyst

Yeah. Got it. One other quick question, Adam, there is a sentence in the shareholder letter about the balance sheet and the ability to pursue opportunities that can help achieve meaningful growth. Now, I wasn't clear how much that was intending to signal M&A, but can you just comment on whether that's meant to be M&A and what your thoughts are on M&A?

Adam Miller -- Founder and Chief Executive Officer

Yeah. Our objective is to drive shareholder value by any means necessary and so that includes organically growing, that includes M&A opportunities, so inorganic growth, and it includes return of dollars to our shareholders, which has recently taken the form of a share buyback. So all three are possible. As you know we're going to have even more free cash flow going forward.

So we do have a large and growing balance sheet which allows us to pursue all three approaches to driving shareholder value and we'll continue to look at optimizing the mix of those three things

Corey Greendale -- First Analysis -- Analyst

Got it. Thanks very much.

Operator

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Adam Miller, CEO, for any further remarks.

Adam Miller -- Founder and Chief Executive Officer

Thank you all for participating. As you can tell from the call and the question and answers, we're feeling very good about the business. We are confident in our ability to hit The Rule of 40 in 2020 and go beyond that. Beyond 2020, we have a very good sense of where our expenses are going into next year based on predominantly the fact that we've locked our headcount plan through 2020 and we're seeing growth opportunities from a sales perspective across multiple vectors both with regard to how we go-to-market and where we go-to-market as well as with regard to the product base and penetration rates of our installed base.

So thank you all. We will see you on the road perhaps over the next quarter or next week at our client conference in London and thank you all.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Jason Gold -- Vice President of Finance and Corporate Development

Adam Miller -- Founder and Chief Executive Officer

Brian Swartz -- Chief Financial Officer

Scott Berg -- Needham -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Corey Greendale -- First Analysis -- Analyst

Rishi Jaluria -- DA Davidson. -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Nandan Amladi -- Guggenheim -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Siti Panigrahi -- Mizuho -- Analyst

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