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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)
Q4 2019 Earnings Call
Feb 24, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Cornerstone OnDemand's Q4 2019 Earnings Conference Call. [Operator Instruction] After the speaker's presentation, there will be a question-and-answer. [Operator Instruction].

I'd now like to hand the conference over to your speaker today, Jason Gold, Vice President of Finance and Corporate Development. Thank you. Please go ahead sir.

Jason Gold -- Vice President of Finance and Corporate Development

Thank you very much. Good afternoon, everyone, and welcome to Cornerstone OnDemand's fourth quarter 2019 earnings call. With me today are our Chief Executive Officer, Adam Miller and our Chief Financial Officer, Brian Swartz.

We published two press releases today, one related to our fourth quarter and 2019 financial results and a second announcing our acquisition of Saba. Adam and Brian will be discussing both on today's call. The press releases were furnished with the SEC in a Form 8-K. There's also a presentation on our Investor Relations website. We did not publish a shareholder letter this quarter. Today's call is being recorded and a replay will be made available following the conclusion of the call.

Today's discussion will include forward-looking statements, including but not limited to statements regarding the expected performance of our business, the anticipated acquisition of Saba, our future financial and operating performance, including our GAAP and non-GAAP guidance, our strategy, our long-term growth and our overall 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 figures 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 the earnings press release and also in the presentation.

With that as a backdrop, I'd like to turn the call over to Adam.

Adam L. Miller -- Chief Executive Officer

Thanks, Jason. Good afternoon, everybody, and thank you for dialing in today. In Q4, we celebrated our 20th anniversary. When we first got started, our mission was simple but audacious, improved access to education for adults on a global basis. Over the last two decades, we have witnessed multiple market cycles, technological revolutions and global economic transformation, but we never veered from our original mission.

Last year, nearly 20 years after setting what at the time seemed like a nearly unachievable goal, we delivered over 600 million online classes to millions of people in 187 countries. And now, as Cornerstone enters its third decade with nearly 2000 global employees in almost $550 million in subscription revenue, we are taking our vision to the next level.

To kick off the next decade in our history, we have some exciting news to share. We have signed a definitive agreement to acquire Saba for $1.395 billion. As you know, Saba is one of the pioneers in the creation of the global talent management industry we know today. We believe this transaction enables us to build a sustainable business for the long term. We have a shared passion for people development and will help thousands of organizations and millions of people around the world to overcome the skills divide. To provide a sense of the reach of this combination, our 2019 pro forma entity would have delivered nearly $820 million of ARR and $775 million in subscription revenue.

When we first began to evaluate this transaction, we recognized that the time was right to do this deal. The talent management industry has rapidly evolved over the last several years. And as we looked ahead to the next wave of industry innovation and took stock of the sheer size of our global market opportunity, we saw the acquisition of Saba is an excellent way to position Cornerstone for the long term growth and innovation, driving substantial value for both our clients and our shareholders.

While Cornerstone has always been known for our innovation, the new Cornerstone will take this to a whole new level. The combination of Saba's domain expertise and deep engineering resources will enable us to accelerate our piece of innovation like never before, delivering new products and features that will meet the evolving needs of our clients and help millions of people to realize their potential.

Before we get into the details of the transaction in greater detail, I'd like to review our fourth quarter and full year results for 2019. For the full year 2019, we exceeded our guidance on total revenue, operating profit and unlevered free cash flow, driven in part by strength in our U S public sector, EMEA and SMB businesses. We reported subscription revenue of $543 million, representing 15% year-over-year growth on a reported basis and 16% growth on a constant currency basis.

During the quarter, we had some notable wins at organizations like the State of Wisconsin, Sun Life and Northwestern Mutual. Our European team and US sales team had particularly strong fourth quarters. Sales and marketing expenses were approximately 33% of revenue, down from 41% two years ago. This contributed to operating margins of approximately 19%, which rose 485 basis points from our 2018 results.

Despite the successes in 2019, annual recurring revenue fell short of our guidance, and I'd like to provide some more color on this to help investors understand the drivers. The shortfall can be attributed to softness in Q4 total content sales relative to our forecast to an increase in churn and to a lesser extent to increase competition.

Let me elaborate. The shortfall in ARR can be partially attributed to a change we made in our content business at the end of the year. In the fourth quarter, we made the decision to focus our sales teams on selling content anytime subscriptions versus other types of content sales. While the change had the intended effect of dramatically increasing content -- sales of content anytime, which resulted in 400% growth year-over-year, the change also had the unintended effect of dramatically decreasing our ala carte content sales, where we simply resell the libraries of our content partners.

Long-term this change is good, because the content anytime subscriptions are the core of our content strategy, and are more aligned with our business model of driving healthy LTV to CAC ratios. In Q4, content anytime represented approximately 50% of our new content bookings. However, short-term, the impact was negative as we saw a drop off in shorter sales cycle ala carte content sales. So while content does represent a high-single-digit percentage of our ending annual recurring revenue, we did not meet our internal forecasts and consequently came in light on ARR.

Another contributing factor to the shortfall in total ARR relates to churn. As you can see, our annualized dollar retention number dropped to approximately 90% in 2019. For clarity, this is a gross number. On a net basis, the number remained above 100%.

Last quarter, we discussed how the increase in the size of our renewable base created some downward pressure on our retention rates. We also discussed how our churn rate was impacted by customer service issues we faced at the end of 2018 and the beginning of 2019, resulting from improper staffing of our support centers after we transitioned out of the delivery business in early 2018. We simply missed the impact our delivery teams historically had in deflecting cases from our support centers. When that delivery team moved to our partner ecosystem, those previously deflected calls went straight to our support centers, and we were not equipped to handle the increase in volume.

We addressed this issue in 2019, in part with the opening of our office in Salt Lake City, and our customer satisfaction scores are now back up to the historically high levels. However, the damage had been done, so we experienced some elevated churn through the third quarter of 2019. It is worth noting that with the Saba acquisition, we expect to add significant incremental customer service resources, which should enable us to provide even more exceptional customer service to our clients.

The final contributing factor to the ARR shortfall was increased competition we faced from both our traditional ERP competitors and the new learning experience platform or LXP providers. In particular, several venture back start-ups have worked to create a new category in workplace learning, focused on employee directed self-development, which competes for HR wallet share.

The LXP market is one with real demand and we were on track to release Cornerstone skills this year, which will be a state-of-the-art learning experience solution that is completely unified with our industry-leading Cornerstone learning product.

Our recent acquisition of Clustree provides a skills engine, which will be at the core of Cornerstone skills. We believe the incremental R&D resources with today's acquisition will also help accelerate our integration of Clustree in the launch of Cornerstone skills with our thousands of learning clients as the prime beneficiaries. In total, the ARR shortfall was less than 2%, but it does put pressure on our 2020 subscription revenue growth.

As a result, we needed to take some incremental cost actions to increase our unlevered free cash flow margin to stay on track to hit the rule of 40 as planned on a stand-alone basis. To help identify the appropriate cost actions and to simultaneously help us optimize our overall cost structure and improved performance we retained AlixPartners, a world-class consulting firm with particular expertise in performance improvement and cost optimization.

AlixPartners has performed a deep dive on our cost structure and has delivered a series of actionable recommendations, many of which we were already implementing. With this plan, we expect to drive operational efficiency to meet and possibly exceed our initial margin targets.

Now let's talk more about today's big news, our planned acquisition of Saba. We plan to acquire 100% of the outstanding shares of Saba for $1.395 billion in a transaction that is over 95% cash and the rest equity. Pending regulatory approval and subject to other customary closing conditions, we expect the deal to close in Q2.

By way of background, Saba has a complimentary product portfolio to Cornerstone with approximately 3,300 clients and a global revenue footprint in 2019 of over $260 million. The company today looks very different from the last time they were visible in the public markets.

You might remember that they went private in 2015 after a long history as a learning management company. Over the course of the next four years, they've restructured their cost profile, dramatically improved margins and broadened their product portfolio by acquiring Halogen for performance management and Lumesse for recruiting. We believe this transaction will provide three major benefits, among many others to Cornerstone and to our shareholders.

The first is greater reach. The acquisition dramatically increases our ability to reach clients and users. Our new company will have more software developers, more talent specialists and more expertise to support an expanded client community of over $75 million users in approximately 7,000 organizations of all sizes around the globe. This will enables stronger partnerships with content providers, system integrators and technology leaders worldwide. In addition, it allows us to augment our service and support operations, accelerate our move to the public cloud and grow our HR partner ecosystem. We also expect to rapidly augment our curetted content anytime subscriptions with more languages, more subjects and more partners.

This transaction also allows us to run Cornerstone's successful cross-selling playbook on a meaningfully larger surface area. Specifically, we've had great momentum with our client sales teams cross-selling our software products and content anytime. We can now offer Saba's clients cutting edge products like content anytime, Cornerstone careers and Cornerstone skills in addition to the Saba products they already have. Over the last two years, Saba also recognize the appeal of selling content to their install base. Their initial traction in selling content is promising, but their offering was limited, and we see significant opportunity to bring our content anytime offering to Saba's global user base.

With content anytime average selling prices ranging from $20 to over $100 per user per year, we see an untapped opportunity that we believe we can leverage for many years to come. We are very excited about the opportunity that Saba brings us to cross-sell our portfolio of products as a complement to the product Saba clients already have. It is worth noting that while we have taken cost synergies into account when determining the accretion offered by the acquisition, we have not modeled any of the potential revenue opportunities in determining the medium term value of the deal.

The second big benefit is innovation. The combination provides us with the resources to substantially accelerate our piece of innovation and product development. Not only will our product development personnel significantly increase, but as importantly, those resources have domain experience. Remember, Saba's product development organization has been working in the talent management industry over the last 20 years and understands the nuances of the space.

While engineering resources will continue to support Saba's existing product offerings, we also expect to leverage Saba's development expertise to accelerate our ambitious product roadmap to the Cornerstone platform, which will enable us to simultaneously increase our competitive differentiation and effectively respond to our clients' needs.

We have long been an industry leader around product vision and innovation, yet a key bottleneck has been engineering capacity. We believe the substantial increase in engineering capacity resulting from the acquisition will allow us to productize that vision even faster and significantly extend our product lead at precisely at the time that the skills divide has become top of mind for organizations around the world.

More users also mean more data to feed into our machine learning platform to drive even better AI based personalization and insights for our clients, which can generate a flywheel effect, more accurate recommendations drive more usage, which in turn drives more data to feed the engine and the cycle continues.

And the third big benefit of the acquisition is cash flow. We believe we will see a substantial increase in cash flows, resulting from the convergence of the cost actions we have taken to drive our stand-alone unlevered free cash flow margins, the strength of Saba's margin profile and the meaningful cost synergies we have identified. We believe that the sizable cash flows will allow us to continue to invest in state of the art solutions to optimize people development, rapidly de-lever our balance sheet and drive shareholder returns.

We know the integration will not be an easy undertaking. We will need to have a heightened focus on execution and so we have brought on significant resources to work with us as we combine these entities and continue to scale for the next decade. We've extended the scope of our engagement with AlixPartners to help support the transaction, and they will help run the integration management office for the acquisition. We have already identified more than $35 million of annual run rate cost synergies and we expect to identify millions more that we plan to take out of the combined entity over the course of the next 24 months. As a frame of reference, $35 million represents approximately 5% of our combined 2019 cost base.

We will also seek to benefit from Saba's strong operational discipline, which is demonstrated by their margin profile. Working with AlixPartners in leveraging their insights and benchmarking capabilities, we already see many opportunities to improve operational efficiency for the combined company.

As an example, one of the benefits of the combination is Saba's effective use of offices in low cost locations, such as Mumbai and Pune, India and Krakow, Poland. We believe this acquisition will allow us to improve our combined mix of employee headcount in lower cost geographies, which will drive further operating margin improvement.

I'm also very pleased to announce that Phil Saunders, Sabah's current CEO will become the interim COO of the combined business. Phil's experience, knowledge and leadership will greatly support the organizational and operational optimization of our combined business.

With that, I will hand the call off to Brian to discuss the financing specifics of this transaction and some initial thoughts on pro forma financials.

Brian L. Swartz -- Chief Financial Officer

Thank you, Adam, and good afternoon everyone. I'd like to provide more details about the impact of the anticipated transaction on our capital structure, financials and liquidity position. Of the $1.39 billion purchase price, we expect to provide the sellers with cash of $1.33 billion and common shares of $65 million. To fund the cash portion of the transaction, a group of banks led by Morgan Stanley have provided us with commitment papers for a senior secure credit facility of up to $985 million. We expect to fund the balance of the purchase price with cash from our balance sheet.

In the coming weeks, we plan to meet with the rating agencies and begin marketing a term loan B debt offering. Although subject to market conditions, we are targeting a mid single B rating and an interest rate of approximately LIBOR plus 350 or approximately 5.3%. Looking at the two companies' combined 2019 financial results, the pro forma entity would have delivered nearly $820 million of ARR and $775 million in subscription revenue.

At closing, we expect our LTM leverage to be approximately six times. But if we include the approximate $35 million in cost synergies, we would be much closer to five times. We expect the combined cash flows of the business plus synergies will enable a rapid de-leveraging of our balance sheet over the course of the next three years. The substantial pro forma cash flow generation and resulting ability to pay down the debt quickly is one of the key attributes of this transaction that we believe makes it particularly attractive to our shareholders. We believe the strength of the combined companies' cash flows will enable us to drive our leverage below two times within two to three years from the transactions' close date.

Our board has unanimously approved this transaction and initial support for the deal, Silver Lake Partners has waived their covenant related to the increased level of indebtedness and will extend the duration of their convertible note for 20 months until March of 2023 or roughly three years from now. Another financial benefit of the transaction is our ability to leverage Saba's tax net operating losses, which we currently estimate to be approximately $250 million. As a result of this anticipated financial benefit, we do not believe we will be a full taxpayer until 2023.

Now turning to our outlook. Due to the uncertainty around the timing of when the deal will close, we are not providing quantitative full year 2020 guidance for the combined entity at this time. We will, however, provide incremental guidance upon closing, which we expect to occur in the second quarter. Having said that, I do want to provide you with some details to help you understand the pro forma earnings power of the combined company.

As Adam mentioned, with the cost actions we are taking, we are on track to achieve the Rule of 40 on a stand-alone basis. While our original plan for 2020 had us reaching $150 million of unlevered free cash flow in 2020, based on our revised plan developed with the assistance of AlixPartners, we now believe our stand-alone unlevered free cash flow will be meaningfully higher than that.

The acquisition presents us with the opportunity to dramatically increase the level of cash flow generation for shareholders. As an example, looking at the combined entities in 2019 had you included the full benefit of the annualized cost ratings, we would have generated non-GAAP operating income, plus depreciation and amortization of approximately $250 million or roughly 30% operating margin.

Please keep in mind that purchase accounting rules will make the clean view of the combined entities' revenue and operating income difficult to discern for the first year. We are committed to providing transparent metrics for you to understand the financials of the combined entity and upon closing expect to provide you with a detailed metrics and guidance to help you understand the various components of the model.

For the first quarter of 2020, we are providing subscription revenue guidance of $143 million to $145 million and total revenue guidance of $147 million to $150 million. We believe operating margins should be in the low teens. Our operating margin in Q1 is burdened by a few expenses that don't impact cash flow. And so, while our operating margins are forecasted to be roughly flat on a year-over-year basis, our cash flow margins will show improvement and we expect a more substantial ramp as we progress through the year. Please note, this Q1 guidance is for Cornerstone's stand-alone business today, and does not reflect the completion of the Saba acquisition.

With that, we will now take your questions. 0:26:52

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Scott Berg from Needham. Your line is now open.

Scott Berg -- Needham -- Analyst

Hi, Adam and Brian. Congrats on a really big transaction. I have lots of questions as I'm sure everyone does. Let's start off with the quarter's sales net new business. Adam, you kind of highlighted a couple of different reasons of that ARR shortfall. My guess is the churn issue since they popped up in Q3, were in your initial guidance on the 3Q call. So I guess let's focus on the content side is, was there anything else there to particularly call out in terms of the churning of that business? Is this -- sounds like it's a permanent pivot away from those other content areas. But any less I guess enthusiasm in terms of content over the next maybe one to two years?

Adam L. Miller -- Chief Executive Officer

No, in fact we were actually very happy about the content anytime sales, which was the objective, right, up 400% year-over-year, we thought that was very positive. The old content, which did offer shorter sales cycles is not a great business to be in. Even though content anytime has longer sale cycles, we're really changing the market's buying behavior to move to subscriptions, which we think are the future, they're stickier, they co-terminate with our contracts and it's just a much better business to be in for us and we believe it's much better for the clients, because it's a constantly evolving subscription that is fully personalized, fully curated and constantly improved, so for us putting out new content and maybe more importantly us bringing on more and more partner content from around the world with best of breed content in every subject area. So it does cause some pain, but a long term benefit.

Scott Berg -- Needham -- Analyst

Got it. Helpful. And then from a follow-up perspective. Adam, as you know, I know Saba relatively well from when they are public. I also covered Lumesse when they were StepStone, so I know that business somewhat well. But my expectation is that there's a lot of technology kind of getting under the covers, given all the acquisitions they've made lately, especially when you're throwing Halogen. What do you do with this customer set that you're acquiring going forward? What does this technology platform look like? Are you going to have customers move off from those platforms onto Cornerstone? Do you try to bring those together? And then does that impact your viewpoint on margins next couple years, because that's a pretty large technology undertaking. Thank you.

Adam L. Miller -- Chief Executive Officer

Yeah. Great question. So let me start by saying, the company today, Saba today, is very, very different than the Saba five years ago. Saba five years ago was a mess, there were accounting issues, they were unprofitable, there were many, many, many on-premise clients, they were having difficulty moving to the cloud. Fast forward five years, all of that's been clean up very, very few on-premise clients, I think fewer than 50, I think in fact only 25. They have done a really good job moving to micro services, moving to the cloud and building out Saba cloud.

And we really think of them today as three distinct client bases. They have the Saba client base, which is now 98% in the cloud. They have the Lumesse client base, which is predominantly recruiting clients in Europe. And they have the Halogen client base, which in our world is mostly SMB or almost entirely SMB performance clients. We think of those as three distinct market opportunities. We think the product up sell opportunity is different for each of those three segments. They would work with different parts of our organization. Obviously, we have a global enterprise team. We separately have a global SMB team. We have a dedicated EMEA team. So we're able to handle the integration and support of those clients quite well.

And our primary focus is to make all the clients successful. So make our clients successful by adding their customer support capabilities, by adding some of their service capabilities and some of their operational processes around how they manage the client base, which has been quite well over the last few years.

And on the flip side, giving their clients the benefit of some of the innovation that's happening on our side, whether it's what we're doing around Cornerstone careers and Cornerstone skills, what we're doing with content any time and quite frankly, what we've done with recruiting and performance and learning. So lots of potential benefits to clients on both sides and that's our primary focus. We want to make sure all the clients view this as real upside to their relationship.

Scott Berg -- Needham -- Analyst

Very helpful. Thanks for taking my questions.

Adam L. Miller -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Raimo Lenschow from Barclays. Your line is now open.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks. Congrats on the deal as well from me. Can you talk on the churn rates, like Saba didn't have content or not a lot going on there? Were they suffering more than you guys in terms of churn from the new LXP guys? Can you talk to that?

Adam L. Miller -- Chief Executive Officer

Yeah. So historically they had major issues with churn. They have definitely cleaned that up over the last three years and their churn rates actually are pretty good right now. Their churn was predominantly -- they think about their business as two components, right? I just described three client bases. They think of it as two components, their core business, which is entirely in the cloud with Saba Cloud, TalentLink and TalentSpace, those are the three products they focus on. They also have a legacy business which was not in the cloud, which they had expected to either migrate to their cloud products or churn off. And that's what's happened over the last several years as they've moved more and more of their client base to the cloud.

So actually their core business is growing quite well. And they think and we think that a lot of the churn that remains from a much smaller set of split 20% of their business now in what they put in that legacy group that that group has largely already migrated. So the people that are left are likely to stay. And we obviously offer other product options than simply moving to Saba cloud. So we think there's a lot of ability to keep churn low on their side. But I will say that for purposes of modeling, we have modeled an increase in churn, not a decrease in churn.

Raimo Lenschow -- Barclays -- Analyst

Okay. Perfect. And then I'm just trying to understand on the Q1 guidance, so it looks like it's below what's kind of the consensus worth, and I assume like ARR being slightly lower this year is obviously a factor. Have you kind of modeled in anything? Is that kind of just a direct correlation that left ARR means less Q1 etc, or is there also some disruption modeled in on your side?

Brian L. Swartz -- Chief Financial Officer

No. So, Raimo, it's Brian. The Q1 numbers are assuming status quo again Cornerstone only, obviously, there's no Saba assumed in there. And then the numbers are really just a function of where ARR came out at the end of '19 and obviously, we spent some time talking about the things that impacted that.

Raimo Lenschow -- Barclays -- Analyst

Yeah. Okay. Perfect. Good look.

Brian L. Swartz -- Chief Financial Officer

Thank you.

Adam L. Miller -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the Alex Zukin from RBC Capital Markets. Your line is now open.

Alex Zukin -- RBC Capital Markets -- Analyst

Great. Thanks for taking my questions. So Adam, maybe you talked about churn and then increase in competition. What are you thinking, as you look at the market in 2020, can you maybe just talk about the evolving dynamic of the competitive environment? When you lose deals, is it driven more by cost or lack of kind of the fully integrated system or just help us understand that, and then maybe how Saba could kind of change that equation for you?

Adam L. Miller -- Chief Executive Officer

Yeah. I would say that the biggest increase in competition, and I'll answer that in two different ways. So to start with the biggest increase in competition is a result of the capitalization of the start-ups. So if you go back in time to 2011, 2012 when we went public and SuccessFactors, Taleo and Kenexa were all sold, there was a tremendous amount of venture capital that poured into HR tech, so that is now eight years ago, and those companies have gotten bigger, some of them. Some of them went away, a lot of them are still lingering on at very small scale, but some of them got bigger.

And one of the areas that got bigger was this learning experience platform segment. So you have companies like Degreed and EdCast and Fuse, and many others that were out there in the market that raised not just A rounds and B rounds, but C, D rounds and in some cases raised substantial capital. That has proven to be a real market and a real market segment. We have improved Cornerstone learning over the years. We deal with self-directed learning, as well as compliance training. But we are now very aggressively targeting that segment and Cornerstone skills will be the answer to that market.

We think that has taken away wallet share from us. So it's less losing a deal head-to-head and more simply that what would've been an up sell or maybe a new deal or even a conversion from a legacy product, doesn't go-to-market, because they've instead bought one of these learning experience platforms. Our clients have made it very clear to us that if we build something competitive, they would much rather just use our product.

So it simultaneously creates a revenue opportunity for us and a competitive differentiation against this new wave of competition. So that's one side of the competition that we've seen and we think we can address that where Saba comes into play there is the increase in engineering resources. We're going to be able to build it bigger and better than we would have, and we'll be able to do it sooner and be more innovative in what we come out with. So instead of trying to be in parity, we will be better than the other systems that are out there. We have more data, more machine learning, better AI and better breadth and depth. And it's of course unified with Cornerstone learning, which is by far the most used system out there. So that's one side of it.

The other side of it is as I think people know for many years now, the ERP is it tried to block us entering new accounts if we weren't there first. And we've been there first in thousands of accounts, but there are thousands more where we were not there. And so in places where we're not the incumbent, we've had a more difficult time breaking into the account, particularly in the cases of certain vendors. The addition of Saba makes us an incumbent in many, many more accounts, and that is really good for us.

We've shown over the last several years the ability to cross sell and up sell our accounts. Our client sales teams have performed extremely well year-after-year, most notably over the last two years since we did the services transformation and this just gives us more clients. So run the same exact playbook against a larger surface area with more clients, which we think is definitely a winning strategy.

Alex Zukin -- RBC Capital Markets -- Analyst

And then maybe one for Brian, I think you have -- from a retention rate and renewal base perspective, 2020 is a larger renewal year for you guys. I'm curious what the renewal, how that compares to Saba and I think, Adam, you mentioned you modeled some uptick in churn and into the numbers to account for the execution risk. Can you maybe just talk about how you're thinking about that retention rate both for the core business and any color you can give to how we should think about the impacts to Saba's renewal rates?

Brian L. Swartz -- Chief Financial Officer

Yeah. So let me break that down into maybe two answers, Alex. I mean let me answer the second one. With respect to Saba's renewal rates, as Adam mentioned, they've done a really nice job the last few years being particularly focused on that. And I've seen nice stabilization and even most recently some improving renewal rates, which is terrific. So that's their most recent data. And I think there's things they're doing that we'll learn from and there's things we're doing to collectively we'll be able to work with our clients to improve their experience and just improve the overall renewal rates.

With respect to us, we do have a large renewable base in 2020. As you know, we don't give guidance on forecasted ADRs. It didn't obviously go down in 2019, do keep in mind it's a gross number, we always like to point that out. The net churn is still above 100%, which it consistently is. [Speech Overlap] Net retention, I'm sorry, not net dollar retention and we're super focused on improving those and making sure we just have the right client experience from winning new clients all the way through optimizations with a release that goes out, so we'll stay very focused on it and more to come in the future.

Alex Zukin -- RBC Capital Markets -- Analyst

Thank you, guys.

Operator

Thank you. Our next question comes from the line of Corey Greendale from First Analysis. Your line is now open.

Corey Greendale -- First Analysis -- Analyst

Hey, good afternoon. I have a question about Saba stand-alone and then a bigger picture question. On Saba, can you give us any sense of what percentage of the revenue is coming from L&D specifically versus their other products? And secondly, given the dynamic of transferring some of their maintenance customers to the subscription, is there a way of like giving us some sense of what their subscription growth rate is excluding the migrations?

Brian L. Swartz -- Chief Financial Officer

Yeah. So let me see if I can help you on that, Corey and obviously we'll consolidate all of this and when we give some forward guidance for the combined entity at closing as I mentioned. So on our website today we posted a deck that talks about the combined entity. There is some financial information in there that I would direct everyone to take a look at. If you haven't, it does break down the Saba LTM, ARR, which is around $140 million or so. There's roughly $200 million in core and $40 million give or take in what's referred to as migration. They do not sell the migration products and the core products are the ones that Adam mentioned, Saba cloud, talent link and talent space, which are the Lumesse recruiting and Halogen performance products.

So in terms of growth rates, we're not breaking that down yet, but you can at least see the growth year-over-year in ARR from core versus migration. We also lay out Cornerstone's numbers on that chart and then what the combined pro forma would be. Obviously all on a historical basis and more to come in the future but hopefully, it'll give you a sense of how to add a model of business with the information you have at this point.

Corey Greendale -- First Analysis -- Analyst

And the bigger picture question is just given, I don't want to sort of over index on the recent results versus the long-term, between the commentary in Q4 and the stuff you've worked on with consultants and cost structure. One could have the impression that the long-term sort of way you're looking at the business is more focused on cash generation relative to growth. And that Rule 40 is going to be more on the free cash flow side and I'm talking long term, not just for next year. Is that the right way to think about it? Or you think there's still a chance of reaccelerating growth versus cash flow? How are you thinking about that?

Adam L. Miller -- Chief Executive Officer

Yeah. Absolutely we believe we can reaccelerate growth and we think both are important. None of the revenue synergies are modeled. So we think there is significant upside opportunity if we do well, for example, just taking one component. If we are able to successfully sell content anytime to the Saba user base that is a massive upside opportunity for us, and that's just one component. We could do the same thing with recruiting with Cornerstone HR.

There are the new products that are coming out. There's the ability to, in some cases, cross sell learning to their performance-only clients, so the recruiting only clients. There's opportunities to sell performance to their learning only clients. So there are many opportunities to cross sell and up sell this client base, none of which are modeled in any of the numbers we've talked about or any of the synergy numbers we're talking about.

Now having said that, working with Alixpartners, realizing that we are no longer a small cap company, combined we are becoming a much larger business, there are many opportunities for operational efficiency that don't take away from growth. So whether it's the obvious synergies of a combination where you don't need two auditors, you don't need two law firms, you don't need 14 data centers if you're operating out of AWS.

There are also very obvious optimizations, which would make process wise. I mentioned to you that despite the fact that they have very good margins today, Saba has not completed the integration of Lumesse. And so there's opportunities even on their side stand-alone and we know there's opportunities on our side stand-alone, that's what Brian referenced earlier.

Whereas before, we had $150 million unlevered free cash flow target for 2020, we are now highly confident, we will be well-above that number for 2020. There are also obvious incremental synergies in all different parts of the business. So we think there are both opportunities. They're not exclusive. And in fact one of the reasons we selected Alixpartners to work with us is they have a track record of looking at both sides of the equation, both cost optimizations, some of which are obvious, some of which are less obvious and performance improvement, which really speaks to revenue growth. And we are absolutely looking to do both.

Corey Greendale -- First Analysis -- Analyst

Great. Thanks, Adam. Thanks, Brian.

Operator

Thank you. Our next question comes from the line of Rishi Jaluria from D. A. Davidson. Your line is now open.

Rishi Jaluria -- D. A. Davidson -- Analyst

Hi, Adam and Brian, thanks for taking my questions. I wanted to start by asking about Saba on the technology front. Maybe I wanted to better understand what is the path to technological integration of Saba and Cornerstone look like and what sort of work needs done on that. And with Saba itself, I know you said this is obviously very different companies and when it was taken private, they've clearly got a lot of acquisitions, including Halogen, the most recent big one. Just wanted to get a sense for how integrated from a technological perspective those acquisitions were on Saba? And then I've got a follow up.

Adam L. Miller -- Chief Executive Officer

Yeah, not very. There are, like I said, three separate client bases effectively, one, which is the Saba client base, the second the Lumesse client base, and the third, the Halogen client base. Those products are relatively independent. However, they have done a really nice job of moving to micro services architecture and a more open system, which allows them to plug any product into any other product. For example, they have several situations where they have added Lumesse recruiting to Halogen talent space, and they've done this also with Saba Cloud. So we think that component of it will be relatively straight forward.

Obviously, there's work to do there but we integrate with many, many software providers in the world in all different areas. So we intentionally did not integrate with them before but with both sides trying to do it and making it a priority, I think it'll be relatively straight forward.

Rishi Jaluria -- D. A. Davidson -- Analyst

Got it. That's helpful. Thanks. And then I wanted to go back to the commentary on the -- you would have hit the Rule of 40 on a stand-alone basis this year. If I just look at the Q1 guidance you're guiding to 10%, 10.50% subscription growth constant currency, operating margins down year-over-year. Brian, I know you mentioned there are some non-cash items in that, but even if we assume no sell on the subscription line, you're talking about getting to 30% free cash flow margins this year in 2014, which is nearly double where you were this year. Maybe just help us understand again on a stand-alone basis, what would those drivers be to get such meaningful margin expansion and not have that hit on the subscription line or the potential view as Adam said, reaccelerate growth? Thanks.

Adam L. Miller -- Chief Executive Officer

Yeah. Let me take that one because I think there's a few obvious answers, so one is the move to the public cloud. We're working with AWS. We have an agreement set up that gives us some agreement set up that gives us some advantages that we had previously modeled as expenses that now become credits, so that's one example. Another example is in certain geographies where we've had issues. We are turning some of our go-to-market operations in certain areas that have been less productive. We also see the opportunity to look at some of our basic expenses. Brian put into place a strategic sourcing team a couple of years ago, some of those initiatives are coming online now.

So whether we're talking about travel policies, mobile phone, global mobile phone policies, T&E generally or some other G&A, there's opportunities in many of those areas. So what we've seen is across the board, I'm sure Brian can add some more, across the board the ability to reallocate investments in certain areas to higher growth areas in other cases, actually reducing the level spends.

And with the company still growing, all of that translates to higher margins. Even in the tech area, for example, we've reallocated some of our headcount to work on more pressing initiatives, which has allowed us to keep headcount flat and be more effective at the same time. So all of those things drive higher margins and this is being aided by the analysis that Alixpartners has done, to really make sure we are benchmarking ourselves against other companies out there, not just generally but very specifically in different functional areas.

Brian L. Swartz -- Chief Financial Officer

The only thing I would add to that, Rishi, it's a good question is. There are some items in 2019 that won't repeat in '20. So you've heard me talk about previously our lead out margin, which is kind of a difference between operating margins and unlevered free cash flow margins. And for the last couple of years, those margin rates have been roughly the same and that's unusual with a negative working capital business like ours where we collect before we recognize revenue. So we expect in 2020 that that will provide a tailwind and help close that gap from where we finished out '19 and ultimately will be in 2020 on a stand-alone basis, and we have some elevated capex as well in '19 that we don't expect to repeat in '20.

So just to help bridge that gap when you say doubling of the free cash flow margins, some of that keep in mind is just structural, the full burn off of the services business, which we basically annualize at this point and then just some onetime capex items in '19 that just don't repeat on an ongoing basis. So it just helps bridge the gap as well.

Rishi Jaluria -- D. A. Davidson -- Analyst

All right. Perfect. Thanks, Alen, Thanks, Brian.

Adam L. Miller -- Chief Executive Officer

Thanks you.

Operator

Thank you. Our next question comes from the line of Brad Sills from Bank of America Securities. Your line is now open.

Brad Sills -- Bank of America -- Analyst

Hey, guys. Thanks for taking my question. On the acquisition, Adam, you mentioned number of things that you're excited about for potentially cross selling, some of the Cornerstone legacy into Saba's install base. There's a lot there. I mean, content is developing, recruiting has been out for number of years. I guess when you look at the Saba install base, what are you most excited about for this year, where could you see some low hanging fruit where you're not modeling the revenue synergy now but you could see several upside in the near-term?

Adam L. Miller -- Chief Executive Officer

We think the biggest most obvious opportunity is content anytime to that entire global client base of theirs.

Brad Sills -- Bank of America -- Analyst

Got it. Okay. And I guess just on the learning experience platform. How is that complimentary to a Cornerstone customer? Is it more of a replacement? I don't need a full learning suites or is this something that's more of an add on a different use case that your install base is interested in potentially adding?

Brian L. Swartz -- Chief Financial Officer

Yes, it's typically add on, particularly the larger the company the more likely it's an add on. A very small business could use a stand-alone, but the installations that we've seen out there from these start-ups are all on top of a learning management company. So they have both the learning management system and the learning experience platform, not one or the other but both. So it's upside. It does not cannibalize our business, it's upside.

Operator

Thank you. Our next question comes from the line of Chris Merwin from Goldman Sachs. Your line is now open.

Kevin Kumar -- Goldman Sachs -- Analyst

Hi. This is Kevin on for Chris. Thanks for taking my question. Moving forward, post the integration, how are you thinking about sales and marketing investments and sales hiring more broadly? And how should we think about rep growth moving forward relative to I guess subscription revenue growth?

Brian L. Swartz -- Chief Financial Officer

Yeah. Hi, Kevin. It's Brian. I think -- we're working through a lot of those things. As you can imagine as we just start talking about the integration planning and obviously there's certain things we can do, if some things we can't do we actually close the transaction. So I think we need to push all those questions down the road. Once we have an actual closing of the transaction, we will provide more incremental guidance both around financial numbers as well as operating metrics that you mentioned as best as we can.

Operator

Thank you. Our next question comes from the line of Siti Panigrahi from Mizuho. Your line is now open.

Siti Panigrahi -- Mizuho -- Analyst

Siti Panigrahi. Thanks for taking my question. Brian -- Adam, this acquisition definitely put you in a leader Cornerstone now in certain segments. But how often, whether it's Halogen or even Lumesse or Saba, how often do you used to see them in competition and winning against them, or how often do you use to display Saba? And how does the competitive landscape change post acquisition?

Adam L. Miller -- Chief Executive Officer

Yeah. I mean, Saba has obviously been a long term competitor and player in the space. This is a crowded space or lots of competitors. They've been one of them. They're probably our longest standing competitor. Most of the others have been acquired away or are gone. So we do see them all the time over the last 20 years and we know the company extremely well.

Siti Panigrahi -- Mizuho -- Analyst

Okay. And then going back to Q4, could you give us some color, what you have seen? You've talked about the weakness here. But geographically, could you talk about any strength and weakness in EMEA and Asia Pac?

Adam L. Miller -- Chief Executive Officer

Yes, so we did quite well in EMEA. EMEA has been a core contributor to the business for a very long time. APJ was mixed as we've said before during quarterly calls last year. Japan still has now reached its potential. And we did see some signs of good momentum going into 2020 for Japan. But I'd say APJ was mixed because of Japan's performance.

Operator

Thank you. Our next question comes from the line of Mark Murphy from JP Morgan. Your line is now open.

Mark Murphy -- JP Morgan -- Analyst

Thank you. Brian, are you not offering full year 2020 guidance for Cornerstone stand-alone?

Brian L. Swartz -- Chief Financial Officer

We did not. We guided Q1, I mean we expect the transaction, Mark, to close in Q2. Obviously, there's some uncertainty related to that. We expected to close in Q2 and at that point at the closing, we do expect to provide combined guidance for 2020 with all the nuances to help you build the model. But given the uncertainty of when that's going to close and that the transaction will be coming into our financials, we are not giving Cornerstone full year financial guidance at this point.

Adam L. Miller -- Chief Executive Officer

Now, the one caveat to that is we did have some qualitative comments, Mark, in our prepared remarks that we do have a plan to hit the rule of 40 in 2020 on a stand-alone basis and we expect to significantly exceed our original cash flow target, which was $150 million. If you recall a couple of years ago, we laid that out we expect to be meaningfully above that.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Adam Miller for closing remarks.

Adam L. Miller -- Chief Executive Officer

Thank you everyone for joining us today. I want to thank our global team as always for all of their contributions. And we will be on the road for the next two weeks. So if you would like to meet, please get in touch with Jason Gold in our IR team and we'll be happy to accommodate. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Jason Gold -- Vice President of Finance and Corporate Development

Adam L. Miller -- Chief Executive Officer

Brian L. Swartz -- Chief Financial Officer

Scott Berg -- Needham -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Alex Zukin -- RBC Capital Markets -- Analyst

Corey Greendale -- First Analysis -- Analyst

Rishi Jaluria -- D. A. Davidson -- Analyst

Brad Sills -- Bank of America -- Analyst

Kevin Kumar -- Goldman Sachs -- Analyst

Siti Panigrahi -- Mizuho -- Analyst

Mark Murphy -- JP Morgan -- Analyst

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