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The Advisory Board Company (NASDAQ:ABCO)

F3Q09 Earnings Call

February 9, 2009 6:00 pm ET

Executives

Frank J. Williams – Chairman and Chief Executive Officer

Robert W. Musslewhite – Chief Executive Officer

Michael Kirshbaum – Chief Financial Officer

Analysts

Paul Ginocchio – Deutsche Bank

Scott Schneeberger – Oppenheimer

Vance Edelson – Morgan Stanley

Shlomo Rosenbaum – Stifel Nicolaus

Brandon Dobell – William Blair

Susan McGarry – Granahan

Lance Marx – Wells Capital Management

Jim Bradshaw – Bayers Capital Management

David Cohen – Midwood Capital

Operator

Welcome to the Advisory Board Company’s third quarter earnings conference call. As a reminder this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Executive Chairman of The Advisory Board Company. This call will be archived and available from 8 p.m. this evening until 8 p.m. on February 16th via web cast on the company’s web site in the section entitled The Firm found under tab Investor Relations.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among other regarding the advisory board company’s expected quarterly and annual financial performance for fiscal 2009. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements without limiting the foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations, and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be effected by important factors, among others set forth in the Advisory Board Company’s filings with the Securities and Exchange Commission, and its third fiscal quarter news release.

Consequently, actual operations or results may differ materially from the results discussed in the forward-looking statements. For additional information on the company’s results and outlook, please refer to its third fiscal quarter news release. The company undertakes no obligations to update any forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, I will turn the call over to the company's Executive Chairman, Mr. Frank Williams.

Frank Williams

Thank you and good evening. I’m Frank Willams, Executive Chairman of the Advisory Board, and I’m joined this evening by Robert W. Musslewhite, our Chief Executive Officer, and Michael Kirshbaum, our Chief Financial Officer. In terms of this evening’s call, we’ve organized the discussion into four sections. First, I’ll give you a brief summary our performance for the quarter that ended on December 31st as well as the broader market environment across the quarter. I’ll then turn it over to Robert to discuss our outlook for 2009, including more depth on the critical factors affecting our members and how we are responding across the business. Michael will then take us through a more detailed review of the financials and our guidance for calendar year 2009, and Robert will then wrap with a few closing comments. Of course, we’ll be happy to take your questions at the end of the call.

Let me start with our financial results. In the quarter ended December 31, 2008, Advisory Board revenues were 59.3 million, up 6% from $55.9 million last year. Net income was $5.8 million or $0.37 per diluted share compared to $7.9 million or $0.42 per diluted share for the same period a year ago. As of December 31, 2008, our contract value grew to $230.9 million, up from $225.4 million the prior year.

We are pleased that we met our revenue and EPS guidance despite a worsening economic environment for our membership base in the last half of the year. However, we are disappointed that contract value and our accompanying outlook for revenue in 2009 came in below our expectations and historical growth rates. In terms of the market, we saw a very difficult environment in the last quarter as our members’ financial performance worsened and their outlook for 2009 deteriorated. Despite strong attachment to our clear value proposition, a number of members have delayed decisions to join new programs or even declined outright due to large organizational wide budget cuts or in many cases complete budget freezes.

While the new business environment was more challenging across the board, performance did vary by program. Our core strategy and operations research programs held up reasonably well as did our analytical tool programs oriented at specific margin-related issues. The education practice also performed relatively well as the pressure on state budgets created urgency around universities’ need for best practices to cut costs and create efficiencies.

Our programs oriented around leadership development, our higher price point insulation support programs, and our workforce and nursing-oriented research programs did not fair as well. This is consistent with our historical experience in a tougher economy as training and consulting budgets in certain areas are substantially, but it was even more acute in the last few months of the year. Renewals which had held strong through the September quarter also showed some signs of softening as 2008 came to a close with a few members, particularly larger institutions, pushing out renewal decisions.

We are encouraged that we nonetheless ended the year within our historical renewal rate range and with countless examples of members driving great value from our margin improvement research. Thus far, in 2009, the environment feels consistent with what we were seeing at the end of last year, so right now we are focused on strong execution in a tough environment and on positioning the organization for growth and scale once the economic portions of our members improve.

Let me now turn things over to Robert to provide more background on the current dynamics of our market, our outlook for 2009, and our plan for the coming year.

Robert Musslewhite

As Frank mentioned, hospitals have been pushed into conservative spending posture by several specific factors related to the broader economy. I’ll quickly touch on just three of them. First, hospitals have seen a shift in case mix as volumes have slowed in key surgical and ambulatory areas with patients delaying care consumption for elective procedures. With a large proportion of hospital margins coming from procedures and outpatient services, this softening also creates downward pressure on hospital profitability.

Second, with greater contraction in the broader economy and continued job losses, hospitals nationwide are facing a growing burden of uncompensated care and patient bad debt putting further pressure on margins. Third, capital availability has been constrained with a substantial drop-off in hospital investment income, restricted capital access for municipal borrowers, and general fear about the direction of the economy. This has led to real constraints on the capital budgeting side and tightening of operating budgets in almost every area.

The combination of these factors has driven a dramatic tightening of hospital budgets and unwillingness to spend products and services that fall outside of direct patient care. As a result, we are anticipating roughly flat revenues for calendar year 2009 based on our current visibility. It’s possible that our growth rate could be a few points above or below that number, and while we do have strong visibility into 80% of our forward revenues at this time of the year, it is difficult to provide greater precision given the higher levels of uncertainty in the current environment.

Let me give you some color on the assumptions shaping our growth outlook. As Frank discussed, we felt increasing pressure on renewals in the fourth quarter. We had a solid renewal year overall in 2008. Given the budget issues that our members are experiencing, we are assuming a tougher renewal environment for 2009. On the new business side, while we are rapidly repositioning our programs around financial topics, we assume that new business will continue to be challenging in 2009. Our assumption is that sales trends will mirror those that we saw in the latter part of 2008 with leadership development and installation and support programs as well as workforce and nursing-oriented programs harder hit relative to core strategy and operation research programs and our analytical tool programs focused on margin-related issues.

Given slowing revenue growth, we are projecting EBITDA in the range of $27 million to $33 million. This level reflects two forces that work on costs. On the one hand, we took aggressive actions on a number of important cost items. In all, we removed more than $10 million from our existing cost base through restructuring program operations in a number of areas to drive greater efficiency, reducing bonus and salary levels, and making selective position reductions. We continue to scrutinize each additional expenditure and new resource decision as well as search for additional efficiencies across the firm, and we have the entire organization focused on improved performance.

On the other hand, we strongly believe that we should make key investments this year in three critical areas to position the organization for strong top and bottom line growth when the economy begins to improve. The first area is a largely one-time investment in our core technology platform across our analytical tools programs. We have an opportunity to upgrade our current data extraction and loading process through the development of more standardized tools for implementation, particularly in accessing data from clinical systems. This investment represents approximately $7 million in operating expense for calendar year 2009.

While we have made some important investments in individual analytical tools programs across the last two years, an improved and more integrated platform is key to increasing predictability of installations and will set us up well for improved scalability and margin expansion as we continue to add new members through our existing programs and new programs for the platform. The long-term return on investment is quite attractive given the future growth of the analytical tools business and the new market that is opening up for us.

The second area is a new program development which has two primary components. Last year we launched four new programs, which are still scaling and therefore have a full year of costs in this calendar year as we continue to expand membership. The additional cost in 2009 associated with scaling these launches is approximately $6 million. We also want to take advantage of the current economic climate to launch financially focused new programs across the coming year to address the acute issues that our members are facing.

New investment in these programs represents approximately $4 million in operating expenses for calendar year 2009. This obviously will have a negative impact on this year’s margins because of the upfront fixed cost nature of these programs, but it will help to drive growth and improved profitability as these programs scale over time.

We are already seeing a strong response in our early charter advisor conversations about these programs, so we are optimistic about their prospects.

Finally, we are planning to invest about $3 million in our sales and marketing organization to ensure that we are most effectively generating inbound interest from the membership and rapidly converting this interest into new sales. This includes one-time investments to optimize the process for modifying our sales collateral quickly to focus on the hottest highest ROI areas, update our CRM system, and add a few key sales people in newly developed roles. The net effect of all these changes to last year’s cost base is to increase expenses this year by roughly $10 million. Without these investments, we would have seen improved EBITDA margins even at flat revenue growth due to our cost cutting measures.

While these investments impact our profitability for the upcoming calendar year, we believe that there are important steps to take today to position the company to drive top line growth as the economic environment for our members improves and for scaling our growing analytical tools business which will help with long-term margin performance.

Now, let me turn to how we are responding across the business to this challenging environment. We’ve taken a number of measures that we believe position us well to both weather the current downturn and prepare for future growth. These initiatives fall into three main categories. Our first area of focus is ensuring that our agendas, services, and message positioning are all highly tuned to members’ needs during this time of particular volatility and uncertainty.

We had a tremendous response to the work that our research teams have done across all terrains to provide both real-time in-depth analysis of financial developments and immediately actionable insight to help members navigate this difficult economy. The initiative has been organized around five critical imperatives: Maximum revenue capture, containing supply costs, managing labor costs, reprioritizing capital allocation, and securing profitable volumes.

We have had more than 2000 key member executives actively engage with us on the material through a series of teleconferences across December and January. In addition, we’ve reached another 9000 CXOs through our Leadership through the Downturn Series of five best practice implementation tool kits published across the course of just six weeks, and we expect to host over 500 chief executive officers at our CEO round table meetings on the topic in the early part of year of this year. Executive reaction to material has been extremely positive.

Our secondary focus is in improving cross sell performance through a number of initiatives in our sales and marketing group. First of all, we are creating much stronger linkages between our renewal teams and the sales force to drive a much more strategic and relationship oriented approach in the sales process. We are achieving this end through both technology by an upgraded CRM system and organizational changes that better align the two groups. Secondly, we are focused on improved allocation of resources around our high return programs such as CFO program and our revenue cycle, supply chain, and bad debt performance programs. As such, we have heavily concentrated merchandizing and promotion efforts in these areas and have disproportionately allocated top sales talent here as well.

Taking these actions has been a very easy decision given the compelling stories we have collected about the rapid impact our members are seeing from these programs. For example, one health system in its first 100 days as a member of our revenue cycle performance program reduced AR days by 9% to achieve an increasing cash collection of $8 million. Another hospital achieved over $1 million in savings through contract renegotiations, identified through their participation in our supply chain performance program, and a two-hospital system realized an over $5 million improvement to the bottom line by using our bad debt performance program to increase collections and decrease collection costs.

For each of these stories, we have dozens more; therefore, we are hopeful we can create some momentum on the sales side by highlighting the tangible economic improvements from participation in these programs. Finally, we continue to emphasize strong execution in every aspect of the sale process to improve conversion rates and to ensure strong accountability across the sales organization.

The third area of focus and our response to the current environment is focused new product development. We have tasked our NPD team with identifying mission critical program ideas that drive strong rapid financial returns with the goal of launching these programs quickly in order to be responsive to the key points of the membership. We anticipate continuing our launch pace of three to four new programs this year and firmly believe that this ongoing NPD focus will not only provide near term revenue contributions but also set us up well for the future.

To that end, I’m pleased today to announce the launch of the University Business Executive Program, our third program in the education space. University business executives oversee all the business and administrative functions of the university and have a 40% to 50% of the overall university operating budget under their control.

Working closely with the provost, they run the university day to day and advise the president on such key strategic issues as enfranchising academic leaders in business transformation, hardwiring cost discipline, and making difficult capital allocation choices as universities face the need to replacing aging facilities.

The university business executive program is a renewable membership program that provides best practice research, peer networking, and benchmarking tools to assist university business executives in addressing these and other key operational and strategic issues. The membership is designed to help university business executives better mange financial operations, set priorities, and measure and improve performance. As always we have established a strong chartered membership for the program including Georgetown, Brown, Cornell, Indiana University, Boulder, Texas Tech, and Cal Tech.

Despite the tough environment, we remain confident about the long-term growth potential of the healthcare and education verticals given the level of spend, the complexity of the issues that organizations in these sectors face and our ability to effectively drive performance improvement through our unique membership model. That the most progressive universities across the country are meeting our early work in the education realm with such enthusiasm illustrates our ability to successfully expand into this new market segment. We are similarly optimistic about our opportunities in several other areas including applying our expertise across the international market and leveraging our growing data asset to serve the non-hospital healthcare sector.

With that, let me now turn things over to Michael to review our financials in more detail and to provide some additional color on our 2009 guidance.

Michael Kirshbaum

We’ve organized today’s financial review around five categories: Income statement, balance sheet, cash flow, contract value, and outlook for calendar year 2009. First the income statement, a quick reminder that we on a March 31st fiscal year end which means we just finished the third quarter of fiscal year 2009. For the quarter just ended, our revenue increased 6.1% to $59.3 million, up from $55.9 million in the same period last year. Income from operations, net income, and earnings per diluted share were $7.8 million, $5.8 million, and $0.37 respectively with the quarter ending December 31, 2008 compared to $10.2 million, $7.9 million, and $0.42 respectively for the same quarter last year.

Costs of services increased to 50.1 of revenue compared to $46.7 of revenue in the same quarter the prior year. Increasing cost of services was primarily due to increased cost associated with new program launches, increased consulting and licensing fees associated with some of our analytic tools programs and costs from our integration of Princeton operations. Increasing cost of services as a percentage of revenue is also attributable to the impact of lower revenue growth and our largely fixed cost structure.

Member relations and marketing expense was 22.8% of revenue compared to 21.2% of revenue in the same quarter the prior year. The increase in expense is attributable mainly to our increase in the number of sales teams. We currently have 112 sales teams in place compared to 107 in December 2007. D&A expense in the quarter decreased to 11.5% of revenue compared to 12.1% of revenue in the same quarter the prior year due to the scaling of our fixed administrative cost over a larger revenue base.

Deprecation and amortization expense in the quarter increased to 2.4% of revenue compared to 1.7% of revenue in the same quarter the prior year. This increases primarily from the amortization of capitalized cost related to the development of analytical tools for some of our new programs and the amortization of intangible accents from the Crimson accusation.

Now moving on to our 9-month income statement results, for the 9 months ended December 31, 2008, revenues increased 8.1% to $174.2 million, up from $161 million last year. Income from operations, net income, and earnings per diluted share were $23.1 million, $17.6 million, and $1.04 respectively for the 9 months ended December 31, 2008, compared to $30.6 million, $23.5 million, and $1.25 respectively through the same period last year.

Turning to the balance sheet, membership fees receivable which excludes long-term receivables increased to $127.3 million as of December 31, 2008, versus $93.3 million as December 31, 2007. DSOs as calculated using average receivables were 176 days in the quarter ended December 31, 2008, up from 158 days last quarter and 133 days in December 2007. Increase in DSOs is due to the continued increasing mix towards our higher price point programs which include more progress billings. Excluding the effects of progress payments, DSOs on billed AR remained consistent with our reputations, and we’re 57 days as of December 31, 2008, similar to the same metric in 2007, which was 58 days.

Deferred revenue net of amount that build up for 12 months increased 19.7% to $182.3 million as of December 31, 2008, up from $152.3 million as of December 31, 2007. The increase in deferred revenue is due mainly to higher proportion of multi-year contracts. Excluding pre-paid contract and long-term deferred, the deferred revenue balance as of December 31, 2008, was $155.4 million, up 13.5% over the prior year.

Looking at cash flow, during the 3 months ended December 31, 2008, we generated $17.8 million of cash from operating activities compared to $24 million in the same quarter last year. For the nine months ending December 31, 2008, cash flow generated from operations was $30.1 million, or 1.7 times net income, compared to $38.6 million or 1.6 times net income in the same period last year.

Capital expenditures for the three months ended December 31, 2008, were approximately $3 million, of which $2.2 million was related to capitalized development of hardware associated with analytic tools included in some of our newer programs and $300,000 related to the build out of a new floor at our DC headquarters.

For the three months ended December 31, 2008, we repurchased $13.2 million of stock or approximately 512,000 shares. This brings our total share repurchase since the inception of the program in 2004 to $299 million or approximately 6.9 million. As of December 31, 2008, the remaining authorized repurchase amount was $51 million. At December 31, 2008, our cash, cash equivalents, and marketable securities balances were approximately $90.9 million.

As to contract value, contract value increased 2.4% to $230.9 million as of December 31, 2008, up from $225.4 million as of December 31, 2007. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at any point in time without regard to initial term or remaining duration of any such agreements. For contracts of more than 12 months’ duration, we include only 12 months in contract value.

With respect to calendar year 2009, the following comments are intended to follow under the safe harbor provision as outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time. For calendar year 2009, we anticipate revenue to be relatively flat when compared to calendar year 2008. Our gross rate could be a few points above or below that number, but it’s difficult to provide greater precision given the higher level of uncertainty in the current environment.

We expect EBITDA in the range of approximately $27 million to $33 million and earnings per diluted share of approximately $0.90 to $1.20. Included in this EBITDA and EPS guidance are the cost reductions and investments that Robert mentioned earlier. As discussed these investments are growth focused and largely one time in nature. Without these investments, we would have expected increasing EBITDA margins for 2009.

We expect revenue to be evenly distributed to slightly back-weighted on the year, and EBITDA and EPS to be fairly evenly distributed across the year. For calendar 2009, we will be a federal cash tax payer, but still expect cash flow from operations to be approximately 1.5 to 2 times net income. We expect capital expenditures of approximately $10 to $15 million in the calendar year 2009, compared to $16 million in calendar ’08. This estimated amount consists mainly of continued investment in both internal and external development resources to build web-based tools for some of our recent new program launches. For calendar 2009, we expect an effective tax rate in the range of approximately 31.5 to 33.5%.

This concludes the financial summary. I’ll now turn things back over to Robert.

Robert Masslewhite

Our entire staff is aligned and accountable for flawless execution, and our leadership team is fully engaged in making the operational adjustments required to get the organization on a strong growth path as the economy improves. While we are all in heads-down execution mode at the moment, we continue with the conviction that we have a great opportunity for future growth, and our action plan for 2009 reflects that belief.

Despite the tough current economic environment, we are squarely focused on building a scalable high-growth company which provides world class programs and services to our healthcare and higher education membership. The industries we serve, while under financial pressure at the moment, offer extraordinary growth potential over the long term, and we intend to strengthen our position across the coming year to capture that potential.

We continue to have a very strong business model, a balance sheet with no debt, and over $90 million in cash, and renewable revenue base which will serve us well in the current business climate. Most of all, we believe that our fantastic and committed talent, extraordinary assets of intellectual capital, and unique member relationships will stand us in good stead over the long term.

That completes the formal part of the call, and now we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your next question comes from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio – Deutsche Bank

Can you just talk about the trends in higher ed versus the trends in healthcare. I know it’s more immature, but do you think you’re having the same impact that the hospital industry is having or is it just mainly the hospital industry, and secondly just to understand where all the one-time costs are going, is that all in process services or some of that going to be in member relations?

Robert Masslewhite

On the higher ed and hospitals question, I think the first comment on higher ed is that it’s certainly a challenging market for higher education members as well. They’ve had a lot of factors going against them in terms of state budget cuts. I think what we’ve seen is they’ve turned to us for best practice research and solutions to address those challenges, and so we still feel like the business is performing reasonably well. Certainly on the healthcare side, we went through the factors as I went through the remarks on what we’re seeing these, and it’s a very challenging environment.

Paul Ginocchio – Deutsche Bank

Is it less impacted or more about the same?

Robert Masslewhite

I think it’s about the same.

Michael Kirshbaum

On your question on the investments, we do expect a small increase in marketing expense of about $3 million that Robert mentioned.

Operator

Your next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott Schneeberger – Oppenheimer

Could you guys speak a little bit about what you see with the sales teams? Are you going to keep that level where it is, or as part of your new program development, do you see more sales growth or are you going to temper that a little bit?

Robert Masslewhite

I think right now we’re planning to temper it relative to what we’ve done in prior year. I think you’ll see largely flat sales team investment across the air. We might add two or three sales teams as we launch the programs, but in general we would keep it relatively flat.

Scott Schneeberger – Oppenheimer

Are you doing anything significantly different with the way you compensate changing the mix of fixed compensation versus variable or anything to that degree?

Robert Masslewhite

I think every year we go into the year and look at all the compensation levers that we have available to us and for our sales staff. Certainly, we want to be sure that they are incented to perform against revenues, so I think the mix largely will stay the same. We will tweak some things around the edges and be sure that the incentives are in place to deliver the performance that we want to see. Obviously, our sales force has a lower base than you’d see in the rest of the company and a higher proportion of their comp in incentives, so I think we’d stick with that same structure for this year.

Scott Schneeberger – Oppenheimer

Earlier in the calendar year, there were some issues with a couple of the analytical tools, and I noticed you mentioned that one of the biggest spends is going to be working on some technology to improve data feeds. Could you just talk a little bit about improvements versus what was going on, and then what you look to gain from what you’re doing now?

Robert Masslewhite

I think what you’re seeing now is just more of a cross platform investment and some of the same issues that we see in it. As we want to be setting up these programs to scale in the future, we want to be making investments to be sure that our data extraction and loading process is as easy as possible on a per member basis, so I think what you’re seeing is we had some progress against the challenges over the last year, but we felt like we wanted to make platform-wide investments this year versus just improvements in a couple of programs to improve our ability to scale over time. If you remember what we do in these programs, members are continuing to demand important data they use in week to week and day to day decision making, and so we feel like with these investments, it will help us continue to make these programs sticky and continue to renew it at the high rates that we’ve seen. We remain optimistic that these changes are the ones we ought to be making to continue that performance.

Scott Schneeberger – Oppenheimer

What is the general commentary your sales force has been faced with as you go out and speak to your customers in this environment?

Robert Masslewhite

We hear pretty good visibility through all of our members, and what we’re hearing from our sales force right now is just similar to what we were hearing at the end of fourth quarter of last year. Strong member attachment to our programs, good reaction to the research agendas and to what the programs will deliver. Just a tougher budget environment, so I think for each sale that we would normally make, we are having more steps to get to a decision, and a lot of decisions are pushing off into the future until members have more certainty around their core budgets.

Scott Schneeberger – Oppenheimer

You said low end of historical rates. Could you give a more exact number please?

Michael Kirshbaum

We will actually measure the renewal rate at the end of the fiscal year in March.

Scott Schneeberger – Oppenheimer

Could you give any color to the March quarter? I appreciate the good color on the calendar year. Is there anything near term you can discuss on the pending quarter or you choose not to?

Michael Kirshbaum

I think basically the comments I made for our distribution of revenue and EPS for the year. I would think that revenue would be relatively even to slightly back-weighted on the year. EPS and EBITDA will be relatively even on the year.

Scott Schneeberger – Oppenheimer

For the tax rate, any lumpiness to that?

Michael Kirshbaum

I think the tax rate variability does depend on where we end up with EBITDA. In terms of the first quarter, I would expect it to be somewhere around what we did in the previous quarter, and then for fiscal 2010, it will be in the range of 31.5% to 33.5%.

Operator

Your next question comes from the line of Vance Edelson with Morgan Stanley

Vance Edelson – Morgan Stanley

You mentioned the revenues will be slightly back-end weighted, but not the earnings. I would have thought the opposite with carryover costs from coming entirely ’09 from calendar ’08 and perhaps some cost cutting helping EPS even further later in the year, so why is it that earnings aren’t expected to ramp while the revenues are?

Michael Kirshbaum

Just looking at the way we’ve laid out the cost budget this year, a couple of our cost investments will actually hit a little bit later in the year. New program launches, etc., will hit later in the year, and some of the cost savings initially that we put in place, we are not really waiting on those to materialize. We have those in place and should realize those across the year.

Operator

Your next question comes from the line of Shlomo Rosenbaum with Stifel Nicolaus.

Shlomo Rosenbaum – Stifel Nicolaus

Do you guys seen any opportunity to merge or sunset some of your programs that are not generating the returns that you think necessary in order to cut some costs?

Robert Masslewhite

We look at it all the time to be sure that we’re both adding significant discrete value to the membership as well as being operationally efficient. In this economy, obviously every program is impacted somewhat, but I think what we feel like is even in the current environment, all of our programs still have significant revenue streams, and each one is positively contributing to EBITDA. I think also they serve as strong bases off which we cross-sell our other programs and new programs in the future, so right now, we haven’t taken those steps. We will continue to monitor it over time, but right now, that’s where we are.

Shlomo Rosenbaum – Stifel Nicolaus

Why is there such a large range on your EPS, if you seem to be more clear on the revenue?

Michael Kirshbaum

With the revenues, there’s a decent amount of uncertainty in the current environment. Our EBITDA, what’s in there is a range of a lot of different scenarios on the revenue side and some variable costs as well. We’ve looked at sensitivity analysis and a number of different factors that can impact it—revenue, variable costs, new program launches, etc., and given the visibility we have into a large portion of our revenue and the predictability of cost structure, we are pretty comfortable with the range, but it’s a little bit wider than it’s been in the past because of the uncertainty on revenue.

Shlomo Rosenbaum – Stifel Nicolaus

The revenue theoretically should have some kind of range around that as well. That is what it sounds you’re saying.

Michael Kirshbaum

Historically if you look at our revenue expectations for the beginning of the year, there is usually about 3 to 4 points of variability up or down. In the current market, I think you could see a wider range of variability than that.

Shlomo Rosenbaum – Stifel Nicolaus

You mentioned 80% visibility to revenue, which is similar to what you had last year, but given the renewal trends and stuff like that, what do you think is really a comfortable level to visibility out there? Would you even venture a guess?

Michael Kirshbaum

I think the attributes to our business are the same. We’ve got a large deferred revenue balance coming in the year. We’ve got renewals that have renewed historically in tight ranges, obviously a little bit more uncertainty in the future there, but still we do expect a band around that. New sales going into the year are harder to predict, how the environment will impact it, so I think the 80% visibility that we had going into the year, we still have good visibility there. The remaining 20% is a little bit more uncertain this year than it has been in the past.

Shlomo Rosenbaum – Stifel Nicolaus

How much stock did you purchase in the last quarter?

Michael Kirshbaum

It was about $13 million.

Shlomo Rosenbaum – Stifel Nicolaus

Was it post the last call? Is that how it worked?

Michael Kirshbaum

Before the last call, we had some instructions in during the quiet period and then during the open window, we made some repurchased and put some instructions in during the subsequent quiet period as well.

Shlomo Rosenbaum – Stifel Nicolaus

Are you having to discount more now?

Michael Kirshbaum

I think discounting historically has never been a huge lever for us. We are better off trying to prove the discrete value of our program than we are trying to discount several percentage points, also because our costs are relatively low to begin with. Our approach to sales is we do a line by line review of if discounting helps us or pushing invoices in certain one-off instances. If it’ll help us, we’ll do it, but across the board, it’s not really a great lever for us.

Shlomo Rosenbaum – Stifel Nicolaus

How about the progress billings as you phrased it? Is that becoming more prevalent?

Michael Kirshbaum

Yes, it is. Two reasons for that, one because of continued shift in mix towards higher placement programs. A lot of our recent launches have been higher placement programs and along with that comes more progress billing, and secondly in one-off instances when it does win us business, we’ve been more willing to do that.

Operator

Your next question comes from the line of Brandon Dobell with William Blair.

Brandon Dobell – William Blair

As a followup to the last line of questioning, if you look out the next of years or three years or so, is it fair to assume that your DSOs should be structurally higher in that 100 to 125 days just because the mix of the business is changing, and then in a similar fashion, with the new program rollouts, should we expect there to be just a higher level of CapEx with those programs since they are going to be a little bit different or should we see a reversion to the historical ratios between EBITDA and free cash flow?

Michael Kirshbaum

On the DSOs, if you look at the billed DSOs, the collectibility of that, that’s been pretty consistent over the years. As we have shifted more towards high upfront programs, the unbilled AR has increased as we’ve done product billings, and then by definition, the AR on the balance sheet and DSOs, if you’re doing the math with the balance sheet, have increased. As we continue to launch programs, if we are doing a higher percentage of them with analytic tools, then you would continue to see the unbilled increase and the DSOs therefore go up, but on the billed basis, I would expect our collections to remain the same. In terms of CapEx, again it depends on the programs we launch. If we launch a high proportion of analytic tools programs, you would see CapEx roughly where it has been the last year, maybe a little bit more. If we launch less of them, you’d see CapEx go down.

Brandon Dobell – William Blair

A couple of quarters ago, we talked about the impact of Crimson on the business. Maybe you could update us where we are with either revenue contribution or cost drag or what we should expect the next 12 months from an impact perspective.

Michael Kirshbaum

When we initially acquired Crimson last year, we expected dilution of $0.10 in calendar ’08 and about breakeven in calendar 2009. I think we’re pacing towards those expectations. I think it’s been a positive contributor on the revenue side. We seem pretty successful with that in the market. On the cost side, we have acquired their cost structure, and we don’t get to really take their revenue. That will be something that stays with us for the next couple of years as we have to write down the deferred revenue we acquired. So it’s not contributing positively to EBITDA, but it’s more at a breakeven state now.

Brandon Dobell – William Blair

On the $7 million operating expense number for this year, how should we think about that from a return or a payback perspective, or as you look out into 2010 and 2011, should we see some better margin levers on the cost of services? Should we see a lower CapEx number? I am trying to figure out how this is going to flow through the income statement and how you guys thought about the return on making that investment.

Robert Masslewhite

Strategically, I think our tools based business as a whole has grown rapidly over the past several years, and I think we see this year we have the opportunity to standardize some of the key processes in terms of getting data in and loading them into the tools. We see it as a one-time investment largely for this year, and what we hope to get out of it at a high level is that it lowers the cost per member and it enables us to scale the business better over time, and so we forecast this business to continue grow, and it continue to be an important part of our strategy. Like I mentioned before, important programs for our members is what they are demanding. It delivers strong and visible ROI to members that they can see through their tools, and the price points are much higher than our other membership programs, and so as we look forward, it’s a huge market for us, and we felt like this was the right time to be making the investment and scale.

Brandon Dobell – William Blair

If we were a year or year and a half ago and you had made this investment back in the middle of ’07, let’s say, would you still have encountered some of the same issues with putting those new programs in place, or would this have helped your avoid the extra consultants and the delayed start times and those? I’m trying to figure out from a personnel perspective how it would have made a difference if you had done it back then.

Robert Masslewhite

It’s a growing business, and we’ve learned a lot over our experience with it, so I think certainly if we had been able to make a bunch of these investments across our platform at that time, it would have helped. When we did it, we had a couple of program where we started to make these investment, and now it’s something that we’re rolling out across the whole business, which I think can extend the benefits that we’ve seen in those programs now across the rest of the business.

Brandon Dobell – William Blair

Looking at the contract value this quarter and what we calculate as a bookings number, would it be fair to assume that you guys could see dip into a year over year negative contract value before it recovers or do you think that this level is sustainable given what you see on the renewal side?

Michael Kirshbaum

I think projecting for contract value is tough because it tends on what we do performance in a couple of quarters. Contract value, obviously when things are changing quickly, can be somewhat of a lagging indicator, so given our revenue guidance of revenue to be flat, we would expect contract value to approach that at some point. Potentially it could go a little bit below that or stay a couple of points above it, but over time, over time we would expect contract value revenue to converge.

Operator

Your next question comes from the line of Susan McGarry with Granahan.

Susan McGarry – Granahan

I’m a little bit unclear about what you just said, Robert. Are you going to be establishing something that you already have for a couple of programs and now rolling that out for all of the analytical tools programs, or are you putting in an entirely new platform to deal with all of them?

Robert Masslewhite

I think the right way to answer it is that we’re applying the process learnings that we have applied in a couple of programs now across the broader set of tools, and so if you think about the standardized process that we had worked on in a couple of specific tools where we have driven greater efficiency in the data standardization and the data loading process, we are now expanding that across the entire set of tools platform.

Susan McGarry – Granahan

What was the level of one-time expenses that you spent on the analytical tools have been in calendar ’08? Do you have a sense of that?

Robert Masslewhite

It would be a smaller number than obviously what we’re spending this year. I would say if you think about how we’re grown these programs now to significant number of memberships and a significant number of programs over time, so if you look at just what we’ve spent around our nursing program and bad debt, and now we’re spending this across all our programs. It’s probably in the less than $1 million or $1 million range.

Susan McGarry – Granahan

The $6 million in additional expenses for year 2 of the programs that were introduced last year, how does that compare with year 2 of previously introduced programs?

Michael Kirshbaum

It’s been pretty similar year over year. Our launches have been about 3 or 4 per year for the last several years. In the first year, we launched some evenly throughout the year to roughly later in the year, so the first year spend would be about $3 to $4 million. Second year spend, full-year expenses program is in the $6 to $7 million range historically.

Susan McGarry – Granahan

How about the amount that you talked about spending on the new programs for ’09, the $4 million?

Michael Kirshbaum

Again, pretty similar to what we’ve done historically.

Susan McGarry – Granahan

The $27 to $33 million in calendar EBITDA, how does that compare to calendar ’08 EBITDA?

Michael Kirshbaum

’08 was approximately $39 million.

Susan McGarry – Granahan

Did you say that you’ve already taken out $10 million in costs already?

Michael Kirshbaum

If you think the expenses for calendar 2008, we reduced $10 million off that run rate, and the used that to invest in some of the things that Robert mentioned earlier on the call.

Robert Masslewhite

Susan, for us coming into the year looking at a low growth rate or flat growth rate presented a real challenge. On the one hand, we could have managed a flat or even improved EBITDA number relative to last year, just with our cost cutting without taking into account some of the growth investments we made, and on the other hand, we could have continued to make those future growth investments and given our focus on continuing to drive us to be a scalable growth company for the long terms, we felt like those investments were right investments to make largely one time this year to keep us pushing forwarding against growth.

Susan McGarry – Granahan

I’m trying to get a sense of have you taken out the $10 million in costs already?

Michael Kirshbaum

The short answer is yes. We’ve done it through a mixture of hiring positions that we would normally hire for growth, taking certain positions out and that’s largely been completed, reducing our salary and bonus increases that we’ve given year over year, and in certain programs evaluating the service offering and replacing some more expensive services with some lower cost services in certain programs.

Operator

Your next question comes from the line of Lance Marx with Wells Capital Management.

Lance Marx – Wells Capital Management

You guys have seen contract values slow down now. You clearly saw it most significantly in the June quarter. I’m just trying to comfortable with why this is the right time to be ramping investment into the teeth of a slowdown, and then you guys keep talking about return on this spend. Can you give us some real metrics to measure the success of this spend and when we’d begin to see it, and finally, any more color to make us feel comfortable that analytical tools isn’t just a black hole. We had increased spend throughout ’08, we’re having even more throughout ’09.

Robert Masslewhite

On being the right time to ramp investment, I think the reality is if we had been a little bit higher on growth rate, you would have seen flat or improved EBITDA relative to last year’s, so I think again we’re steering at a flat growth rate and a real decision whether to deliver improved margins or make some of the necessary investments. Certainly not all the investments we would have made in a strong revenue growth environment, but investments that we felt were prudent to continue to set up the business for the long term, and we remain bullish on the long term. If you step back, we’ve performed consistently over the last 8 years and grown at a healthy rate. Our average member still only spends about $80,000 with us which is a small fraction of their related professional spend, and we feel like we have substantial room to continue to grow these relationships. I think that’s an area where we want to continue to invest.

If you look at the return on the spend, your question about some of the metrics that we monitor, the most important is that as we get the platform in place, you’d expect to see implementation cost per member going down, so you’d expect to see the margins on this business over time improving. We’ve always felt like that’s going to be a realistic possibility for them. We certainly need to get the implantation to that scalable point, and I think that’s where you’ve seen over the last several quarters some of the challenges that we’ve faced in getting there, but I feel like this is the right investment to get there, and that’s a metric that we can continue to look at prove the value that the investment is creating. In terms of the NPD investments or the new program investments, obviously a return to topline growth is the place we’d continue to see those investments paying off. Especially as our members’ economic environment improves, you’d expect to see real acceleration in that growth, especially in some of the financially oriented program where we are focused today.

On the marketing side, we’re continuing to have better sales force performance, so we’d expect to see conversion improve. Obviously, in this environment, that’s been a tough metric over the past several quarters, and we’re not projecting miracles this year in terms of improvements there, but I think the investments we’re making will pay off over time in better conversion rates. So those are some of the return metrics that we look around the spend on those programs to be sure that we feel like they’re well spent, and I think just on your final point about giving you comfort around BI tools. I’ll just go back to what these do for members relative to what members demand from us. Members continue to push us in this direction. They’re focused on more precision around analytics and decision making key areas. They demand best practices at their desktop and they want data that they can use to make week to week and day to day decision making, and this is data that they can’t access in other ways. So, when we can deliver on that, the programs become very sticky, and we consistently see high renewal rates for the programs. I mentioned the strong and visible ROI that members get. Members when get the ROI on these have incredible returns that they champion, and we continue to use them to champion sales of the programs to other members, and programs are at high price points, and so we certainly have had growing pains since we scaled some of these programs rapidly in their early months and early years, but we feel like the investments are really important to shore up our ability to manage the data we are getting because we feel like these continue to tap a huge market for us and have potential to drive strong financial performance and rapid growth along with margin expansion for the company.

Lance Marx – Wells Capital Management

Robert, I hear that, but also go that’s the same thing I heard 12 months ago, and so I guess I keep hearing that products are great, clients love them, renewals are great, returns for the clients are great, yet I guess I feel like I’m seeing negative leverage from it from you guys because the investment in it keeps going up, and we’re not seeing the scale, and so what I’m trying to get at is what can you give me to make me feel better that these are good investments and that they aren’t a black hole. I buy it’s a good product and people like and people are paying for it, but it keeps costing you more to deliver it, and I don’t feel like there’s a good answer to where is the scale, why do I think ’09 is the peak investment, and 2010 I’ll really see the fruits of this?

Robert Masslewhite

You can look at our oldest program and you take revenue cycle performance program which we have now been operating for close to 5 years, and it’s fully at scale and it’s very efficient, so margins on that business are quite good. If you look at the Crimson acquisition, obviously we’re getting there, but you think about the prognosis there and you look at the process that they have in place for loading the data there where it works very well and it’s efficient and it has a low per-member cost. You see that business moving towards very strong margins as well, so I think we have some examples within our portfolio that give us confidence that in some of the newer programs while they scaled very rapidly and presented some challenging issues as they’ve grown, I feel like the prognosis is very good.

Lance Marx – Wells Capital Management

If the dilution of these products is so much higher upfront, are you actually charging enough for those programs or is the number of members you have to get to higher to get that scale, and when you talk about good margins, if we compared it to a traditional research service, how do the margins look?

Robert Masslewhite

For the older programs, you’re seeing them approach our typical margins. We have some partnership fees where we pay a license per membership on some of our programs that limits the ultimate profitability, and so we’ve launched programs on our own, so that you don’t have that per-member license fee that we end up paying. We can see the margins absolutely approaching research program levels into the future.

Michael Kirshbaum

Lance, what you’re also seeing over the past year and a half to two years is these programs do have a higher upfront fee, so they’re more expensive in the first year and second year than traditional research programs, and we’ve launched a lot of them on top of each other. A lot of our most recent launches have been analytic tools programs, so a lot of that upfront fee is stacking up on top of each other. In the latter years, as Robert mentioned, these programs have very high renewal rates and very low per-member cost to serve, so as we scale the number of members there, we should see margins at than approach what we’ve seen in our traditional core business.

Lance Marx – Wells Capital Management

I know this is looking ways out, but if we look to calendar 2010, if the macro environment hasn’t changed much, should we expect you guys to rein in spending and begin to try and show some of the margin expansion? We don’t have the dilution of Crimson. You’re talking about taking all these other expenses out of business, yet we’re still going to see material margin compression, and so is it fair to assume regardless of the economic situation in 2010, we should see margin expansion?

Robert Masslewhite

I don’t think we’re making that decision today. I think we need to continue to monitor where the environment goes.

Lance Marx – Wells Capital Management

But if the expenses are one time, you should be able to commit to that, no?

Robert Masslewhite

For all the one-time expenses, absolutely, but again, if you look to next year, we need to evaluate next year as we get there and see where the economic environment stands. I think if we were to be facing a period where we felt like our long-term growth prospects were not strong and we are facing several years of potentially flat revenue growth, I think you’d see us making different decisions around some of those one-time costs.

Operator

Your next question comes from the line of Jim Bradshaw with Bayers Capital Management.

Jim Bradshaw – Bayers Capital Management

Could you talk a little bit what you are thinking with the stock price now down in the mid teens in regards to your buyback? You’ve got what $51 million left on that versus what your appetite is for something like an acquisition or just reinvesting currently and holding on to what cash you have.

Michael Kirshbaum

Historically, we’ve taken a very conservative approach to keeping cash on the balance sheet and at the same time returning capital to shareholders in an opportunistic way through the share repurchase program. I think in the current environment, we’ll obviously continue to evaluate the factors that go into repurchase, but at the same time, we’d probably like to continue to have a relatively conservative approach here to the balance sheet. As far as acquisition, we are open to the right opportunity coming up that fits strategically. Crimson is a perfect example last year, an acquisition for probably $25 million in total cost that fit really well with our business. It’s something we can ramp and really scale and fits really well strategically with what we are trying to do, so I do think we are open to that. We’ll look for ways to best deploy the cash balance, but I think we will have a conservative posture there.

Jim Bradshaw – Bayers Capital Management

Because of the current environment acquisition wise, are you seeing more opportunity or are you scaling back on that because you are uncertainty with the future or what you thinking there?

Robert Musslewhite

I think we always see several opportunities out there. We interacting with our members daily around the important issues, and lot of times they’ll highlight certain companies or certain services they have seen out there that provide extremely high value that seem like they will be a fit with our strategy. We continue to keep discussions up, and in some cases we’ve made partnerships and in same cases we have looked at acquisitions when we have seen those, so I think that will continue throughout the year. I think what’s interesting is it’s certainly private market valuation, haven’t necessarily reflected public market multiples of late, and so I think you still see a lot of owners who haven’t had to go to the capital markets for financing, still at a different level in terms of what they might expect. As that changes, that might create some better opportunities out in the market, but we haven’t seen full scale shift on the private side yet.

Operator

Your next question comes from the line of David Cohen with Midwood Capital.

David Cohen – Midwood Capital

If you could just go back over the math in terms of the risks and takes on the cost reduction versus the incremental investments you are making this year.

Michael Kirshbaum

As Robert mentioned earlier in the call, we took about $10 million of cost out of the existing budget mostly through just changing some program services and delivering those a little more efficiently and in personnel reducing salary and bonus levels and taking out some select positions.

David Cohen – Midwood Capital

That’s out of the budget, not necessarily out of our run rate cost structure.

Michael Kirshbaum

That’s out of both, out of the existing cost we spent last year. There are some services we delivered last year that this year we will deliver more efficiently by reducing some services and replacing with things that cost less, and obviously taking some positions out of last year’s budget that were less valued and slightly underleveraged this year. We took some positions out and made some reductions that way and then obviously minimize added expense by reducing salary and bonus increases and limiting the future investments that we are making. In terms of the investments, as Robert mentioned, in analytic tools, we are making about $7 million investment to upgrade the platform to set us up for sale for scale and future growth there.

David Cohen – Midwood Capital

Is that incremental?

Michael Kirshbaum

Incremental to what we’ve we spent this year. For new programs, there are programs we launched in Calendar 2008 that had a partial year expense. Annualizing those to a full year in calendar 2009 will be an additional $6 million. The programs we launched in

calendar 2009 will have a partial year expense which will be approximately $4 million in expense in ’09, and then in marketing, we are looking to invest an additional $3 million in some resources to allow some more quicker response to feedback and assure that our sales messaging and collateral is very nimble.

David Cohen – Midwood Capital

The 2008 programs that have a $6 million additional burden, is there any offsetting revenue associated with that? Is there incremental revenue associated with that?

Michael Kirshbaum

I think there is some incremental revenue growth built into our guidance from some of those programs. Some of those programs we launched last year obviously continue to scale.

David Cohen – Midwood Capital

So, simply put, there is $10 million taken out and $20 million going back in. Is that simple math?

Michael Kirshbaum

Yes.

Operator

You have no further questions at this time.

Frank J. Williams

Thank you all for joining today’s call. We will see some of you at the upcoming investor conferences later this month.

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