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Cornerstone OnDemand, Inc. (NASDAQ:CSOD)
Q4 2020 Earnings Call
Feb 16, 2021, 4:00 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 Cornerstone OnDemand's Q4 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host, VP of Finance and Investor Relations, Jason Gold. Sir, please go ahead.

Jason Gold -- Investor Relations

Thank you very much. Good afternoon, everyone, and welcome to Cornerstone's fourth quarter 2020 earnings call. With me today are our Chief Executive Officer, Phil Saunders and our Chief Financial Officer, Chirag Shah. In conjunction with today's call, we published a presentation that's located on the Investor Relations section of our website. Today's press release was also furnished to the SEC in a Form 8-K.

Today's 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, the integration of Saba into our business and achievement of related cost synergies and efficiencies, our strategy, our long-term growth and our overall future prospects.

Forward-looking statements involve risks, uncertainties and assumptions. These risks, uncertainties and assumptions, as well as other future factors that could cause actual results to differ materially from those contained in our forward-looking statements are included in the Risk Factors section of 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 the measure is a GAAP number. The reconciliation of our GAAP to non-GAAP information is provided in the earnings press release and in the presentation.

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

Phil Saunders -- Chief Executive Officer

Thank you, Jason and thanks everyone for joining us today. Like all of you, we're thrilled to be in the new year of 2021. First and foremost, we're encouraged to see the developing progress of the COVID vaccine programs and are hopeful about what this new year will bring us for the well being of our families, employees, customers and communities.

As we look at our business, the team here at Cornerstone is excited about our execution in Q4 and the sheer momentum, we feel, it has given our company as we gracefully, yet aggressively lean into 2021. Our people have embraced significant change and persevered through a complex acquisition and integration, while never taking our eyes off the responsibilities we have to our customers and our stakeholders. I have to say the sheer conviction and professionalism I've witnessed here is nothing short of awesome. Our team, and me included, take this personally and the numbers prove it. You may recall a more measured tone from me over the past couple of earnings calls and while we have a lot of continued execution ahead for us, I now believe we have turned the corner and are starting to unlock the growth and earnings power of this company.

In the fourth quarter, we delivered GAAP subscription revenue of $198 million; operating income of $52 million; earnings per share of $0.64; and unlevered free cash flow of $36 million. We continued on our journey toward achieving operational excellence, and as a result, generating significant cash flow. This enabled us to maintain our commitment to accelerating our debt paydown and reducing our Term Loan B debt by an additional $100 million earlier this quarter.

Our strong results are the output of several factors and we believe all are quite fundamental in nature. Our top-line performance was driven by our focus on deeper engagement with our large global customer base, which drove improved expansion, while we also had good success in closing new opportunities where we simply outperformed our competition. We see this as the essence of focusing on our Win Zone folks. And while there's certainly more work to do here in the coming months, the proof points from Q4 were highly encouraging.

As we've outlined for you in past earnings calls, we have continued to align our company's efforts around our core business, which at 89% of our total 2020 ARR, grew by nearly 6% during the past year and we expect this growth will accelerate in 2021. Since our last call, we've continued to execute the drive of unique innovation we feel we can bring to the market, while we have formalized the programs and offerings to properly serve our customers on non-core solutions. Our bottom-line performance, in combination with driving top-line results, is something we're quite proud of. We reduced our spend, invested with purpose and operated the business with a clear sense of ownership. You combine these factors with a passionate team of employees and you have a winning quarter.

From an operational perspective, we've evolved our discussion from outlining for you how we proposed to run the business to now actively demonstrating it and proving that we can simultaneously integrate a large strategic acquisition and drive material business improvement. Our responsibility is to increase our company's value and market leadership, and that is borne out of customer focus, efficient growth and expanded profitability. We've been executing on that responsibility.

Let's cover some of the highlights of the quarter, beginning with the foundation of our business, our customers and, namely our hyper focus on delivering the engagement and value they require to drive their own agility and business transformation. During Q4, we continued prioritizing our customer retention efforts, which resulted in improved year-over-year renewal rates with a notable step-up in the second half of the year. As our customers began to see our renewed focus and commitment, we experienced significant expansion of our customers leveraging the Cornerstone offering and more than doubling in the use of our mobile offerings since 2019.

Our ongoing efforts of integrating curated content to drive outcomes for our customers led to a surge in business during the fourth quarter, which we believe further validates our strategy and execution. Not only did we have the best quarter of content sales in the company's history, we're even more excited that due to our continued investments and enhancements, our customers adoption and usage of our content offerings climbed to all-time highs. The strategy for us is beyond merely selling content; it's about harnessing the power of data to extract insights that drives hyper-personalized development engagement with our customers' users.

We also saw a notable increase in our customers embracing the vision of a connected experience for their employees, where the power of combining the capabilities of our platforms' reach is far beyond just learning. And despite all the headwinds of global macroeconomic realities, we also had meaningful improvement in our new business performance during Q4 with our deal sizes on new customers expanding materially in the period, which was fueled, in part, by an increase in cross-sell efforts and our competitive positioning and proving in the opportunities in which we competed.

As I suspect, you can tell, we're excited about these results, yet I would be remiss not mentioning the realities of COVID-19. To be clear, there are headwind realities that we continue to navigate due to this pandemic. And while we believe what we do here at Cornerstone is essential to our customers and their people, perhaps now, more than ever, there is no denying the potential for ongoing tight budgets and extended sales cycles. Thus far, we've navigated these turbulent dynamics successfully and plan to continue to be quite agile as we execute our go-to-market motions in these unpredictable times.

We've discussed over the past few earnings calls, the various transformation initiatives. So I'd like to take a few minutes to update you on how we're tracking against our stated plans. We'll start with, you guessed it, customer experience. As you know, we've made significant strides in evolving our people, processes and systems related to our customer support approach. We've simplified and improved how we engage and support cases by leveraging advanced technology to enable our customers to get the answers to their questions faster and with more information than ever before. We've dialed into the heart of the channels by not only managing CSAT, customer sat scores, which have improved 10% over the past quarter, to inspecting, dare I say, a DSAT; that's right, unpacking why customers are dissatisfied so that we can drive improved results in the future. The team has made tremendous strides in the past 90 days and we are excited about the planned continued improvements ahead in '21.

Now turning to our innovation initiatives. With the sheer firepower of our deep R&D organization, coupled with our experienced product management teams and process, we've been advancing the existing capabilities on the platforms our customers rely upon, while delivering innovative people development experiences. We've recently announced our strategic efforts with Microsoft as one of the first and leading partners in delivering learning and development, literally, in the flow of work via Microsoft Teams. By integrating both the Cornerstone and Saba learning and development platforms into Microsoft Teams, we expect users will be able to effortlessly discover, share and engage with learning while they work without having to switch back and forth between solutions. We're really excited about what these opportunities means for our customers and look forward to sharing more about not only this integration and depth of functionality with Microsoft, but our wider commitment to enhancing the user experience over the coming months.

As we have advanced our efforts in expanding the power of our platforms for our customers and their users, a community of early adopter customers is already actively using and benefiting from our Skills Graph technology. Five customers are now live with the technology and 40 more customers are staging production rollouts. In March, we expect Cornerstone customers will be able to benefit from this powerful new technology with the general availability of Cornerstone Skills Graph.

We've also launched our Innovation Zone, where we are delivering innovation via a modern people-first architecture in a manner that enables us to deliver advanced applications on our platforms in a uniform manner and in an accelerated timeframe. To address head on, the variety of questions we've been asked previously on this important topic, we are advancing our offerings on both Saba and Cornerstone platforms via this Innovation Zone in a manner that delivers capabilities and integrations in an efficient, scalable and expedient methodology. In fact, we plan to deliver the next generation of our Learning Experience Platform or LXP via this new architecture.

So when you consider the combination of our core learning management capabilities with the forthcoming LXP, our skills offering, our expertly curated micro-learning content and our career [Indecipherable] solutions, you can see not only how our focus on the employee journey is an amazing connected experience, but also how as a premier vendor that can combine all these capabilities into a singular experience, we believe we are forming a swim lane that sets us apart from both our smaller learning-only competitors and the larger ERP companies. The progress around innovation is real and I hope you sense our excitement.

We also discussed the concept of Win Zones together; these particular use cases and environments where the data proves we are simply more successful than our competition. Since our last discussion, we formalized our specific Win Zone programs and have aligned our product development and go-to-market teams to deliver on these initiatives. We're early in our motions here, but as I mentioned earlier, we've experienced increased average deal sizes and win rates in our Win Zones; two notable metrics we measure. In the fourth quarter, we witnessed this momentum and overall performance across each of our global regions and saw a notable improvement in our SMB business and select vertical teams; solid progress.

Last item on our transformation points list is overall design and efficiency. To be clear, we've done what we stated we were going to do and have continued to execute on our plans. We've successfully integrated Saba into the new Cornerstone. And now we're marching forward as a highly efficient scalable company, we feel, is poised for advanced growth and profitability.

I'd like to spend a moment on our ESG, environmental social and corporate governance-related initiatives. Here inside Cornerstone, diversity and employee wellness have always been top of mind and now are more important to us than ever. We have recently begin -- I'm sorry, we have recently been recognized by Comparably as one of the best companies for women to work and one of the best companies for work-life balances in 2020. To take things a step further, we published our very first Corporate Sustainability Report and launched our sustainability website to provide greater disclosure on our own environmental, social and governance efforts.

As we have continued to make exciting business progress in the markets we serve, our teams' humanitarian passions and commitment to the communities we live in remain front and center for us. Our Cornerstone Cares initiative continues to expand its positive impact and usage, offering any individual essential development and training anytime and anywhere at no charge.

We also remain committed to enabling non-profit organizations to increase the preparedness and effectiveness of humanitarians around the world via the Cornerstone Foundation. The foundation celebrated its 10th anniversary with historic year of impact on the non-profit sector. Over 400,000 non-profit professionals and humanitarian aid workers have signed up for its flagship free online learning and development programs in our DisasterReady and NonprofitReady programs. In 2020 alone, learners from 195 countries enrolled in over 1.3 million online courses and earned 21,000 professional certificates, shattering all previous records. We're super proud of these initiatives and hope you share our passion for doing what we can to serve our global communities and our neighbors.

As you know, we announced earlier this month that Chirag Shah, a longtime Cornerstone teammate and leader has taken on the role of Chief Financial Officer in our company; something that I'm personally excited about, given Chirag's crisp handle on the operations of our business and the depth of market expertise he brings to the role. I also have to say how much I appreciate Trish Coughlin's tireless effort in being our Interim CFO for the past several months, while still leading the Chief Accounting Officer activities. This is The-Only [Phonetic] just being played, this is a sincere thank you to Trish for tackling multiple roles and putting up with me during the process.

Lastly, as we evolve our company, we've recently added two valuable and quite-fitting directors in Felicia Alvaro and Nancy Altobello and I'm excited about the strategic value they bring to me and our team.

With that, I will now turn the floor over to Chirag.

Chirag Shah -- Chief Financial Officer

Thank you, Phil. It's a privilege to be with all of you today on my first earnings call as Cornerstone's Chief Financial Officer. As some of you know, I've been with the company for many years, both as a member of the finance team and as an operator and I look forward to bringing perspective from both experiences to the CFO role.

After witnessing the events of the past year and speaking to business leaders all over the globe while in my prior seat, there is no doubt in my mind that enabling the workforce to effectively learn and develop remotely has never been more critical than it is today to organizations of all sorts. By taking a thoughtful, disciplined approach to capital allocation, I believe Cornerstone has a compelling opportunity to achieve significant growth in the coming years, while also continuing to drive annual improvements in both operating and free cash flow margins.

Now let's turn to the fourth quarter. As Phil mentioned, we had a strong quarter across all financial metrics. ARR of $840 million was up 2.8% year-over-year on a pro forma basis, aided by approximately $14 million of FX-related benefits. As we have noted in the past, our North Star for this business is our core product ARR since we have several non-core products there declining. Our core product ARR grew by 5.7% year-over-year to $751 million. Q4 GAAP subscription revenue came in at $198 million, benefiting from very good new ARR linearity during Q4, as well as some catch-up revenue related to a customer in the global e-commerce retail category whose user count increased significantly as a result of the pandemic and exceeded their contractual thresholds.

Our Q4 services revenue was also strong. We continued to burn down the Saba professional services backlog at a rapid clip and were able to perform more of this work using internal resources than anticipated, which aided both our gross and operating margins. Our total customer count fell sequentially by 72 customers from 6,229 to 6,157. However, excluding churn from our non-core product customer base, we saw an increase in the number of customers last quarter, similar to what happened in Q3.

Moving down the income statement, we delivered operating income of $52 million during Q4, resulting in a 25% operating margin. This outperformance is the output of strong, sustained operational discipline and a multitude of operational efficiency improvement initiatives we have been working on. We also saw strong billings and collections during Q4, which enabled us to deliver $36 million in unlevered free cash flow. Given our strong cash position, we are committed to delevering expeditiously but prudently and initial proof point is the early paydown of $100 million of principal on our outstanding Term Loan B instrument that Phil mentioned earlier which was finalized just this week and will save us approximately $4 million in annual interest expense. I would also note that the call protection on our Term Loan B instrument expires toward the end of April, and we are looking at all available options to optimize our capital structure based on the current state of the debt markets.

As you review our filings, you will notice that we have moved away from defining annual dollar retention on a gross basis and we'll be defining it going forward on a net basis, inclusive of all incremental sales to customers during the year. Given our combination with Saba, we also took the opportunity to make this calculation more comprehensive by including customers of all products within our portfolio. Although the metric declined on a year-over-year basis, the decline was predominantly driven by the following three factors. One, the anticipated churn of the recruiting deal we had with the U.S. Census Bureau, which was a one-year deal signed in 2019 to support the completion of the 2020 census. Two, churn from our one-time concessions provided to customers severely impacted by the pandemic. And three, churn in our non-core product customer base. With that said, our core product renewal rates, excluding unusual one-time items such as U.S. Census or pandemic-related concessions, demonstrated improvement on a year-over-year basis.

Let's now turn to our guidance. We expect our 2021 ending ARR to be in a range of $868 million to $878 million. To get there, we are expecting accelerating ARR growth across our core products to bring our year-over-year growth near or just into the high-single-digits. We expect our 2021 full year GAAP subscription revenue to be in the range of $825 million to $835 million, which accounts for a headwind of approximately $6 million resulting from the purchase accounting treatment of the Saba acquisition. For Q1, we expect GAAP subscription revenue between $198 million and $200 million, which accounts for a headwind of approximately $5 million due to the same purchase accounting treatment. As you look at the Q4 to Q1 change in subscription revenue implied by this guidance range, I'd like to remind you of the Q4 catch-up revenue from our e-commerce retail customer, which impacts the sequential optics.

As many of you may recall, last quarter we communicated an anticipated expense envelope for 2021, including both cost of sales and operating expenses of $650 million. As a result of our ongoing operational efficiency initiatives, we expect to reduce our 2021 expense envelope from $650 million to $645 million net of some incremental investments in growth initiatives we've elected to make. As a result, we expect our 2021 full year non-GAAP operating income to be in the range of $205 million to $212 million, which at the midpoint of $208.5 million would result in an operating margin of 24.5%. For Q1, we expect our operating income to be between $44 million and $46 million,

We expect our 2021 full year unlevered free cash flow to be in the range of $195 million to $205 million, which at the midpoint of $200 million would result in an unlevered free cash flow margin of 23.5%. As a reminder, this guidance accounts for an assumed $50 million in non-recurring one-time cash outflows for restructuring and integration activities related to the Saba acquisition, or said differently, if we were to exclude the one-time cash outflows that we have assumed for acquisition-related restructuring and integration work, our pro forma unlevered free cash flow expectation would be $50 million higher than the issued guidance. So as you think about unlevered free cash flow in 2022, we feel you should start with pro forma 2021 unlevered free cash flow that excludes the $50 million in one-time cash outflows and expect natural growth against that number as the business continues to scale.

Given our strong progress and current trajectory, we believe what we previously referred to as mid-term targets of $1 billion ARR and unlevered free cash flow margins that exceed 30% are now very much in sight. We've issued an updated IR deck on our website in which you'll find slides that may provide additional perspective on our business strategy and financial performance.

Before turning the call back over to the operator, I want to take a moment to express my gratitude to Trish, Jason and the rest of our finance team for so graciously balancing the onboarding of a new CFO with an extremely demanding stretch of work these past few weeks. My transition has been seamless due to the above and beyond efforts of this group and I can't thank them enough.

Questions and Answers:

Operator

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

Scott Berg -- Needham & Co. -- Analyst

Hi, Phil and Chirag, congrats on a very good quarter and Chirag I'd like to say welcome to the group, but I guess welcome back is probably a better comment.

Chirag Shah -- Chief Financial Officer

Thank you, Scott. I appreciate it.

Scott Berg -- Needham & Co. -- Analyst

Yeah. I guess a couple for me. Chirag, let's start with your very last comment, first, about the confidence in a $1 billion ARR level and 30% unlevered free cash flow margins. Obviously the $1 billion target probably is in sight at some point in the next couple of years, given the kind of the growth rate that you guys have outlined here, but that 30% unlevered free cash flow margin, talk about kind of where you are with the guidance here in '21 and into the pushes and close to get us there over the next couple of years.

Chirag Shah -- Chief Financial Officer

Sure. Well, Scott, I mean, if on a pro forma basis, if you were to add back the $50 million in one-time restructuring and integration expenses, that I talked about, to our guidance, which at the midpoint is $200 million, you would get very close to 30% this year. And so we expect that as we continue to scale the business, we're going to be able to get to 30% or more in the very near future, next year or the year after. So we're very well-positioned for that, obviously, based on where we are on a pro forma basis this year. And so as the business just keep scaling, we will get there soon.

Scott Berg -- Needham & Co. -- Analyst

Got it. Helpful. And then, Phil, from a follow-up perspective, in your pre-scripted remarks, you talked about kind of the demand environment and there is still some headwinds out there today. I guess, if you look at the product set out there, are you seeing headwinds across the entire product set or is it maybe certain modules because you did talk about a good bookings quarter for the CCA solution out there and if you had a crystal ball, I know it's probably early, do you see some of those headwinds maybe subsiding through the end of the year on the demand cycle or is this something that you think can persist for longer? Thank you.

Phil Saunders -- Chief Executive Officer

Hey, Scott. Thanks for the question and thanks for joining. I made that comment in the earnings script because I thought it was important to be balanced. I mean, I think we all can witness and saw the strong performance in Q4. And while I believe what we do is really essential and we're seeing that demand, we're also seeing the conflicting challenges of budgets being really tight, for obvious reasons, for a sale cycle starting and stopping due to the pandemic. And so I would say that, by and large, we're seeing, in that, some gain, but I wanted to balance that message, Scott, because, well, we're in a pandemic and I don't have a magic apple [Phonetic] about what all will happen. I do think that as we get through the vaccine program and as things go on, that will ease, but it would be hard to leave that out and which is why I included it, Scott.

Scott Berg -- Needham & Co. -- Analyst

Great. I'll pass the baton. Thanks for taking my questions.

Operator

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

Raimo Lenschow -- Barclays Capital -- Analyst

Congrats from me as well on a great Q4 and Chirag, good to connect again. Let's start with a first question for Phil. Phil, now that you have like -- have like a year, kind of, operating, kind of, with -- as a combined entity, what are you seeing in terms of competitive dynamic with, kind of, the ERP players etc., and, like, because like initially everyone is, kind of, going to, kind of, throw front [Phonetic] around, but like the -- what are you seeing now in terms of sales cycle, customer engagement, etc., that everything has settled down? And then I have a follow-up for Chirag, please.

Phil Saunders -- Chief Executive Officer

Sure. And don't let the time go too fast, it's only been nine months operating, but thank you for the compliment -- for [Indecipherable] the compliment. I would say that from a competitive perspective, we continue to see the same motions of our large ERP competitors that we have, well, for me now almost six years-plus in the business. So I think that does continue. I think it will continue and I frankly don't think it's going to go away anytime soon. So I think we will be living with that. I would say that, obviously, as Cornerstone and Saba together, we see a better opportunity in how we compete with them in terms of our arsenal of capabilities and so it's early to say, but I'm not anymore thoughtful or worried about the ERP competition.

In fact, I would say that, given COVID and given the importance of companies' transformations and their peoples' transformation, I think people are looking for technologies that are literally the best that can coexist with their existing solutions in ERP, payroll and others. So I don't really sense any further competition than we have in the past, and I don't expect that to change markedly going forward.

Raimo Lenschow -- Barclays Capital -- Analyst

Okay, perfect. And then, Chirag, you mentioned you're, kind of, moving over from gross to net on the retention numbers. Did you -- I don't know if I missed it in the presentation, but can you talk a little bit about the levels that we are at and what are puts and takes we need to think about there? Thank you.

Chirag Shah -- Chief Financial Officer

Yeah, so, Raimo, we were above on a combined basis above 100% in 2019. We dipped to below 100% on net retention basis in 2020. The reasons for that were mostly one-time. Again, I mentioned the U.S. Census Bureau, which was a significant deal that impacted our net retention number. The churn from one-time concessions that we provided to customers that were impacted by the pandemic also had a pretty significant impact on our net retention number, as did churn in our non-core product customer base. We expect that number to improve as some of these one-time items that we experienced in 2020 are lifted in 2021 and beyond and we continue to grow the business and focus on the product areas that we have had the most success with.

Raimo Lenschow -- Barclays Capital -- Analyst

Okay, perfect. So -- but you didn't do a -- did you do some math around the core, what's the -- what core would have been like? That -- I would assume that's above -- at 100% and above, but I'm not quite sure.

Chirag Shah -- Chief Financial Officer

Yeah, the core renewal rate improved year-over-year. So the -- of the available-to-renew clients that we had in 2020, we had an improvement in the renewal rate of our core products.

Raimo Lenschow -- Barclays Capital -- Analyst

That's great to hear. Thank you. Well done.

Operator

Thank you. Our next question comes from the line of Rishi Jaluria of D.A. Davidson. And your question, please.

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

Hey, guys. Thanks so much for taking my questions. And, Chirag, looking forward to working with you. I wanted to start maybe with the outlook for operating margins next year. Can you give us a sense how you're thinking about the sustainability of some of the cost savings that you got during the pandemic, including effectively having zero T&E and maybe what your assumptions baked into opex for next year are? And I've got a follow-up.

Chirag Shah -- Chief Financial Officer

Yeah, absolutely. Obviously, we do expect travel to return at some point during the year. So we have modeled that in to our operating expense guidance for the year, our operating margin guidance for the year. We do also believe there are additional opportunities for us to optimize our spend from a real estate perspective. So that's something that we'll be spending some time on this year. And there are still additional opportunities for us within our overall expense portfolio for us to realize expense improvements and so generally, we are being conservative in assuming that some of the COVID-related benefit that we got last year, particularly in relation to travel, is going to return to kind of more of a normal state. We won't have as much benefit in this year -- as we did last year, this year, but we also have, in addition to that, some additional areas that we believe we'll realize some incremental expense savings from.

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

Great, that's helpful. Then I wanted to circle back to the new disclosure on NRR, the net retention rate number. You talked, Chirag, about how absent a few one-time factors, churn actually improved relative to last year. How is -- how are the expansions on that side of the equation been trending and how did that fare during 2020 and maybe how should we be thinking about expansions going forward from here? Thanks.

Chirag Shah -- Chief Financial Officer

Yeah, I mean, so the expansions in relation to our core product base were strong in 2020. Content drove a nice piece of that. I mean, obviously we had a lot of success in 2020 with selling content and that was a piece of it. But, generally, we have just done a better job, as Phil talked about during his prepared remarks, of selling a combined value proposition. So we continue to have good success within the client sales organization in Cornerstone in terms of both upselling and processing our -- selling our clients and we definitely saw some success with that in 2020. We expect that to continue.

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

Wonderful. Thank you.

Operator

Thank you. Our next question comes from Pat Walravens of JMP Securities. Please go ahead.

Patrick Walravens -- JMP Securities -- Analyst

Oh, great, thank you. I actually have one for each of you. So maybe I'll go with you first. Can you just help us understand why it is that the learning budgets at your customers and prospects didn't benefit more from COVID? Because there is just -- there is this sense among some investors that, wait a minute, everyone's at home, you can't train in person and distance learning seems like it should be a beneficiary.

Phil Saunders -- Chief Executive Officer

I think -- hey, Pat. First of all, how are you?

Patrick Walravens -- JMP Securities -- Analyst

Good, good, thank you.

Phil Saunders -- Chief Executive Officer

But nice to hear your voice again and hope you're well. Listen, when we -- we have the benefit of working with HR and learning development professionals that have a variety of budgets across the talent or people perspective, everything from onboarding to succession to recruiting to learning, performance management and so on. So when you dial into any one of those specific arenas of people development, the answer would be different. On your particular point about learning, sure, learning budgets were alive and well in 2020, but if you would ask any LND buyer or persona inside of our customers, a lot of that money was going to providing content and, by the way, content was one of the areas that we've already mentioned but put our content side, a lot of attention was going to providing the content for people, as well as other engagement and development capabilities. So it goes beyond learning; the budgets that we serve, but yes, specifically, learning had a -- was not getting cut in 2020. I would not say it surged, either.

Patrick Walravens -- JMP Securities -- Analyst

Okay. And then, Chirag, congratulations. So...

Chirag Shah -- Chief Financial Officer

Thank you, Pat.

Patrick Walravens -- JMP Securities -- Analyst

Been there 11 years. I can't -- that's great. Congratulations. So, look, you've been there 11 years, I already went back and looked at your LinkedIn, I can't believe it's been that long. So what do you think are the most important differences for investors to understand between the business today, with Phil as the CEO and the combination of the Saba versus what it was like before?

Chirag Shah -- Chief Financial Officer

Yeah, it's a good question, Pat. And I think there are a number of things that have changed. I mean, mostly, I think the changes are a result of scale and Phil has got his own philosophy for how to operate the business. And so the way I would sort of characterize how we're different today is, we're very focused on objective data-driven decision-making. Right? So we are a big business now, we've got a lot of data and we're leveraging that data to make decisions every single day. Every decision that we make is based on the data that our business has, which again there is a lot of. Secondarily, focus is a big priority for all of us. Phil has talked about in the context of Win Zones but focus is just really, really important as we try to optimally run the business and maximize our ability to effectively allocate capital. Right? So we're picking the things that we're good at and we're picking the things that we're not good at and we're investing in the former and investing less -- we're not investing in the latter.

And then I would say, we're also, while we've sort of become a lot more disciplined as we've transitioned over the years to the scale that we reached, I think we still are very much focused on continuing to invest in growth where it makes sense for us to invest. Right? We're maintaining accountability across our team for these investments. So every investment that we make requires a very strong business case, but we are still looking for growth. There is an incredible opportunity that we believe we have in our space in the years to come. And we're looking for every chance we can get to seize that opportunity, but we want to do so prudently and with the right business case and accountability aligned with that.

Patrick Walravens -- JMP Securities -- Analyst

All right, great, thank you both.

Operator

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

Kevin -- Goldman Sachs -- Analyst

Hi, this is Kevin on for Chris. Thanks for taking my question. Phil, can you talk a bit about the demand environment internationally? I know there was some softness in Japan last quarter. Anything to call out in terms of adoption trends across the different areas [Phonetic]?

Phil Saunders -- Chief Executive Officer

Yeah, sure, Kevin, glad to. I did make mention of it but I sort of genericized it, so sorry about that. The answer is across all geos, so North America and EMEA and APAC, all saw surges and high achievements. We saw Japan have a nice bounce back and a strong year-end finish. So I would say, as well as our vertical teams that we have vertical teams in our federal sector, our higher-ed sector, our state and local governments, across our healthcare verticals, across all of our verticals, we saw a surge and we're seeing benefits to sales cycles from the combination was up. Right? They're just -- the sales cycles are performing well across all geos. So I would say that, to answer your question, Kevin, across all areas geo-wise, as well as verticals, including our SMB team, a strong performance in the Q -- in the fourth quarter.

Kevin -- Goldman Sachs -- Analyst

Great, thanks a lot, Phil.

Operator

[Operator Instructions] Our next question comes from the line of Mark Murphy of J.P. Morgan. Please go ahead.

Matthew Coss -- J.P. Morgan -- Analyst

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Phil, can you talk about some of the changes your new Chief Product Officer is making in terms of streamlining R&D teams, reallocating resources or investing in other areas? And then one for Chirag, I think you mentioned some of the subscription revenue outperformance was due to a customer adding more seats and subsequently catching up. How much did this contribute to the outperformance? Just kind of looking for if it's a couple of hundred thousand dollars or something more significant.

Phil Saunders -- Chief Executive Officer

I'll go first. Thanks, Matt, for the question and it's a good question. We have a new Chief Product Officer, that you -- that I know you're aware of. And he's been very, very active and frankly incredibly aligned with R&D. I would say that one of the benefits that we are seeing is -- more than anything is, of course, some of the items that Chirag actually [Phonetic] covered, how we think about allocating capital and investments, leveraging data to make proper decisions, having business plans and business cases. So those are all very, very clear.

But more than all of that, Matt, is also just the sheer alignment between our various functions. So when we have products aligned with strategy, and then the go-to-market team aligned with product and R&D building with product launch, this sounds sort of like a fundamental stuff and it is, but not every company gets it right. And I would say that we're not perfect there yet, but we've made tremendous, tremendous progress in driving that alignment and making data-driven decisions that we think are going to serve kind of the traditional, let's make our existing products better, while we innovate. So I feel really good about the progress over the last 100 days.

Chirag Shah -- Chief Financial Officer

Yeah. And in relation to the Q4 catch-up revenue from the e-commerce retail customer, it was several million dollars that was material. The contract structure for that customer is a bit unusual where we don't actually, like we do with most customers, build them for users as they go or as they add them over the course of the year. Their contract, specifically, has us building them for all users that are added over the course of a given year at the end of the year and that's why it hit us in Q4. But we don't have other contract structures like that. So it's really a one-time thing.

Matthew Coss -- J.P. Morgan -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Keith Bachman of BMO. Your line is open.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi, thank you very much and congratulations on the strong results. I had two questions, if I could. The first is core ARR growth you're guiding to high-single-digits for '21. A, is there an inorganic piece to that or what's the organic piece to that? And then, B, more importantly, what's the key drivers there in terms of the ARR growth? Could you talk a little bit about new logos? Is that part of that or is most of it driven by cross-sell, up-sell?

Phil Saunders -- Chief Executive Officer

Keith, I'll take a quick stab at it and if I don't cover it property, Chirag will jump in. To your point on core ARR, yeah, we are absolutely driving to single-digit growth and it's a 100% organic. So there is no -- nothing non -- inorganic in that number. And second point is, when we look at overall core ARR growth, it's very foundational. We start with, obviously, customer retention. Right? It's our house. So we want to make sure that -- that's why you hear so much about customer experience, support and retention and renewals because that's obviously a big part of our base as an $800 million-plus business. Then in terms of making sure we do a good job of, once they are happy, providing them capabilities to expand both cross-sell and up-sell, so more users more capabilities. And yes, last but definitely not least, is driving new business growth with new logos with a very, very clear focus on our Win Zone. So it really is the combination of those three things, Keith. And I'll pass it over to Chirag, if he has any other thoughts.

Chirag Shah -- Chief Financial Officer

Yeah, I mean, generally, you covered it Phil. I think the only thing I would say, Keith, is that we are expecting, as I mentioned in my script, we're expecting accelerating growth from our core product base. And so that is going to be a primary driver for us to get to the number that we're expecting to this year.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay. Well, Chirag, my follow-up probably relates to you a little bit. You're generating or anticipate to generate meaningful free cash flow even with the inclusion of the $50 million. How would you anticipate the balance sheet to unfold this year as a consequence of that strong free cash flow or and/or any other comments as you look out over the next, even a little bit beyond this '21 period? How should we be thinking about the balance sheet changes resulting from the cash flow? Thank you.

Chirag Shah -- Chief Financial Officer

Yeah, well, as I mentioned, I mean, we're obviously very focused on delevering, so that's something that we're going to continue to be focused on over the course of the year as our cash continues to build. We have a call protection, as I also mentioned in my script, that expires at the end of April on the Term Loan B. So we are going to be looking into all available options for that based on, again, where the debt markets are. And as I talked about in relation to 2022, we do believe that the 2022 cash flow expectation should be viewed based on the pro forma 2021 number, which again would be our guidance plus to $50 million in one-time non-recurring restructuring and integration activities that we're assuming within that guidance and some growth on top of that. So we do expect that there'll be meaningful growth in cash flow again in 2022 and beyond.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay. All right. Many thanks. Congratulations.

Operator

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

Michael -- Mizuho Securities -- Analyst

Hi, this is Michael on for Siti. Congrats on a great quarter, guys. I quickly want to follow up on Keith's question. Looking at the strategic ARR, I can see in 2020, there was $40 million of incremental ARR while the value of migration fees declined $18 million. Would any of that $18 million be accounted for in that $40 million incremental in strategic core and is that same dynamic going to happen in 2021?

Phil Saunders -- Chief Executive Officer

Chirag, do you want me to start and then pass it to you or you want to just take it?

Chirag Shah -- Chief Financial Officer

Go ahead, Phil, you can start now. I'm happy to...

Phil Saunders -- Chief Executive Officer

Sure. I mean, so I don't have the exact numbers for you, I think that was Mike, right? But I would tell you that one of three things happens to the non-core ARR, right, and customers, of course. Either we continue to keep them and they stay as part of our ARR book of business and they're happy customers, which obviously is important to us. The other item is that we have -- we've invested in migration programs, so customers that are on non-core platforms and solutions who want to or still active talent development buyers, people development buyers, we provide them frictionless paths to the core platforms. And the third and last, of course, is that some of those we lose. But to answer your question specifically, Mike, yes, some of that core ARR growth will come from non-core. I don't think it's a number -- certainly 2020 was not a notable number, but as much as we can get core ARR to grow as a result of non-core moving, that's a win for us.

Chirag Shah -- Chief Financial Officer

[Speech Overlap] Just the only thing I'd add to that is that we have seen success with our migration programs already in 2020. So that is something that we'll be investing more into in 2021 and we're, obviously, trying to save as much of that non-core ARR as we can. As Phil said, it is -- these are all qualified talent management buyers that are potential buyers for Cornerstone. So in every one of those cases where we think that there is a risk that the non-core product customers are going to move to something else outside of our portfolio, we're proactively going after them and trying to keep them with us.

Michael -- Mizuho Securities -- Analyst

Understood. Got it. Thank you. And then a quick follow-up. Is it fair to assume those trends you saw in 2020 will continue into 2021 as it pertains to migration or do you expect more migration contribution in 2021, given the investments in those programs?

Chirag Shah -- Chief Financial Officer

I mean, I would expect generally that we would have more migration contribution just because we didn't have a full year of our migration efforts in 2020. Obviously, 2021 we're going to have a full year of trying to make those migrations happen. So just by virtue of that, we should have more and because we've gotten a nice sort of track record of success over these past six months in terms of making those migrations happen that we can replicate in 2021. We know how to do them, we know how to approach these customers, and we feel like we can do that effectively going forward.

Michael -- Mizuho Securities -- Analyst

Thank you.

Operator

Thank you. At this time, I'd like to turn the call back over to Jason Gold for closing remarks. Sir?

Jason Gold -- Investor Relations

I think I'll hand it to Phil actually for those remarks.

Phil Saunders -- Chief Executive Officer

Sure, I'll be glad to close. Thanks, Jason and thanks, Latif. Everyone thanks for joining the call. Thanks for spending nearly an hour with us. We appreciate it. I hope you get a sense that we're really excited about what we're doing here. We're certainly passionate about it. No one quarter makes you hugely successful, but another successful quarter is really good proof point for what we're building here. So thanks again for your attention and your interest in our company. And with that, have a wonderful rest of your day.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Jason Gold -- Investor Relations

Phil Saunders -- Chief Executive Officer

Chirag Shah -- Chief Financial Officer

Scott Berg -- Needham & Co. -- Analyst

Raimo Lenschow -- Barclays Capital -- Analyst

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

Patrick Walravens -- JMP Securities -- Analyst

Kevin -- Goldman Sachs -- Analyst

Matthew Coss -- J.P. Morgan -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Michael -- Mizuho Securities -- Analyst

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