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Advisory Board Co. (NASDAQ:ABCO)

F4Q09 (Qtr End 03/31/09) Earnings Call

May 05, 2009 6:00 pm ET

Executives

Robert Musslewhite - CEO

Michael Kirshbaum - CFO

Analysts

Paul Ginocchio - Deutsche Bank

Scott Schneeberger - Oppenheimer

Vance Edelson - Morgan Stanley

Brandon Dobell - William Blair

Shlomo Rosenbaum - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the Advisory Board Company's fourth quarter earnings conference call. At this time all participants are in listen-only mode. (Operator Instructions). As a reminder, this conference call is being recorded. Your host for the call today is Mr. Robert Musslewhite, Chief Executive Officer and Director of The Advisory Board Company. This call will be archived and available from 8:00 pm this evening until 8:00 p.m. on May 12 via webcast on the company's website in the section entitled 'The Firm', found under the 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 of fiscal 2010.

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 fourth fiscal quarter news release.

Consequently, actual operations and 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 fourth 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 Chief Executive Officer, Mr. Robert Musslewhite.

Robert Musslewhite

Thank you and good evening. This is Robert Musslewhite, CEO of The Advisory Board, and I'm joined today by Michael Kirshbaum, our Chief Financial Officer. We have a three-part agenda for this evenings call. First, I will give you a summary of our performance for the quarter, and for our fiscal year which ended March 31, 2009, covering our financial results, discussing the broader market environment, and announcing our most recent new program launch.

I will then turn it over to Michael to take us through a more detailed review of the financials. Finally, I will close with an update on our key operational and strategic priorities. As always, we will be happy to take questions at the end of the session.

Let me start with our financial results. In the quarter ended March 31, 2009, Advisory Board revenues were $56.2 million, versus $57.9 million in the comparable quarter of the prior year.

Net income was $3.9 million or $0.25 per diluted share compared to $8.5 million or $0.47 per diluted share for the same period a year ago. EBITDA, excluding foreign currency loss was $7.7 million for the quarter, compared to $12.4 million in the fourth quarter of fiscal 2008.

For the year ended March 31, 2009, revenue increased 5% to $230.4 million, from $219 million for the year ended March 31, 2008. Net income for the year ended March 31, 2009 was $21.5 million or $1.30 per diluted share, compared to $32.1 million or $1.72 per diluted share for the same period a year ago.

At the conclusion of the March quarter, our contract value stood at $230.8 million, constant versus last year at the same time, and we have grown our membership base to 2,817 institutions. Putting those together, our average contract value per member was $81,920.

In addition, we also achieved a member renewal rate of 88%, well within our historical range of 86% to 90%. Our overall performance for both the quarter and the fiscal year were in line with our expectations, given the current macroeconomic environment, and we're reiterating the outlook for the calendar year that we provided on our February call.

In addition, we are pleased that our overall renewal rate for the year of 88% was well within our historical range, and that we increased the number of Advisory Board members, both of which served to illustrate the strong value we continue to deliver through our on-point research agendas, proven best practices and superior services.

While our members are still experiencing budget pressure and uncertainty, we remain highly focused on executing at a high standard, including communicating and delivering strong financial returns for our program, driving superior sales and account management performance, improving efficiency across our operations, and developing mission-critical new programs that provide large rapid returns around the key pain points of the membership.

In terms of the broader environment, as we expected, we continue to see a challenging market across the last quarter. Our members still face a difficult operating environment, and maintain an uncertain outlook in the face of the upcoming July budget season. As a result, they're scrutinizing every dollar that they spend, making us work harder for each new unit and renewal.

While the environment this quarter was challenging across the board, we continued to see performance variations by program consistent with the patterns we saw in the prior quarter.

In general, core strategy operations research programs, analytical tool programs oriented at specific margin related issues, and the education practice continued to perform relatively well, while programs oriented around leadership development, our higher price point installation support programs, and our workforce and nursing oriented research programs continued to fare less we will.

Looking ahead, we project that both new business and renewals will continue to be challenging throughout the remainder of the year, and as a result, we have redoubled our efforts at ensuring that we are consistently delivering on-point research agendas, proven best practices and measurable impact for our members.

If there's a silver lining of the current environment, it is that our members need our guidance now more than ever, and we're working hard to capitalize on the opportunity that this presents.

The healthcare industry is facing tremendous complexity, and we're demonstrating each day that we can provide measurable impact on our members' most important strategic and operational issues.

Let me share a few examples. Each year, one of the highlights of our research calendar is our series of interactive discussion-based sessions for member CEOs, focused on the hottest topics and our most ground breaking research.

This year's agenda covers our analysis of the short and long-term implications of the recession and the recent movement towards healthcare reform on hospital and health system economics. These roundtables are very execution focused. A highlight of the meeting is our recession playbook which provides 65 best practices for responding to the downturn, from rationalizing expenses in a principled manner, to boosting growth prospects in a low-demand market.

Response from our members to the material has been fantastic, garnering a meeting GPA of 3.86. Speaking with CEOs in attendance and reviewing their evaluations of the meeting, it was gratifying to hear and see comments like, the meeting provided good data and original content. It demonstrates how relevant and valuable the Advisory Board is to the performance of my organization.

The CEO roundtables are the culmination of the first phase of our ongoing multi-disciplinary campaign to provide an aggressive response to member concerns about the economy. The initiative has been incredibly well received overall and our members are very enthusiastic about the concrete value that they are receiving from it.

The story of one recent member renewal shows just how much impact this work is having. With a new executive team recently [emceed] this health system was making large budget cuts on all outside spending, including evaluating their advisory board relationship. We used our economy book as materials to anchor a dialogue with them during which we diagnosed their specific areas of need and opportunity in today's environment.

It quickly became clear that this member's biggest performance lever would be short-term volume growth and we were able to immediately direct them to our 100-day volume campaign toolkit. This resource provided structured support for their most critical need and they used it along with our inpatient and outpatient demand forecasters and physician demand assessment to drive specific near-term actions to capture incremental volume.

As a result, the system realized significant value, and the executives decided not only to renew their memberships, but also to expand their membership portfolio by three programs and increase the contract value by over 40%. It is stories like this particularly in today's environments that illustrate just how meaningful our economy-focused work has been.

From accelerating revenue capture to reigning in labor costs, to expediting patient throughput to a whole host of other imperatives, our definitive framework helps members understand all the levers for improved performance, diagnose their own needs and access our deep reserve of resources for inflecting performance in the way that will be most meaningful for them.

The economy is not the only issue keeping our members up at night. Further increasing the complexity they face is the dizzying pace of changes across the policy landscape, from the federal stimulus bill, to nascent healthcare reform efforts. Here, too, we have been nimble in our response.

For example, less than two weeks after the passage of the American Recovery and Reinvestment Act, otherwise known as the Obama Stimulus Plan, we had developed extensive resources to assist our members, including a policy memo and member teleconference that covered the implications of the $19 billion in incentives for hospital and health system IT strategy and investment.

Shortly thereafter, we unveiled an online calculator that estimates the maximum incentive payments our members might receive from the program. Finally, we have launched a specific research initiative to identify the crucial steps hospital and health system leaders must take today to prepare for a potentially very different future under healthcare reform, one in which continuous care of the chronically ill may displace acute interventions with expensive technology, as the measure of value in the healthcare system.

Early feedback from our members indicates that our analysis here has been more comprehensive, relevant, and accurate than that of any other organization, association, or vendor offering information in this terrain. Also, members indicated that they see a real role for us to play in helping them through additional reform related products and tools in the future.

Along those lines, let me now turn to our most recent launch, which grew out of another policy imperative that is an up at night issue for our members. This year's national rollout of CMS's largest cost saving initiative in two decades, the Recovery Audit Contractor, or RAC program. Created in 2003 as part of the Medicare Modernization Act, the RAC program is designed to identify and recover improper Medicare payments made to healthcare providers. Through a five-state demonstration project, RAC contractors have already identified and recovered more than $1 billion in overpayments in just three years. The vast majority coming from inpatient providers.

Given that some hospitals in the demonstration project had give backed totaling more than 5% of their Medicare revenue, it is no surprise that CMS and Congress deems the demonstration of success and mandated a nationwide rollout by 2010.

This program certainly has the attention of our members. To prepare for their audits, we see providers across the country, urgently focused on repairing the multiple weaknesses in their revenue cycle processes that lead to non-compliant billing.

Additionally, their significant upside for hospitals that do this well and elevate operational performance and registration, physician documentation and claims coding. The rollout of the CMS program has created a driving need for hospitals to develop a broad compliance improvement plan quickly, and given our strong knowledge base, expertise and program depth in the revenue cycle space, we are well positioned to help them.

To that end, I am pleased today to announce the launch of the Revenue Integrity Performance Program. This renewable membership program provides a comprehensive toolkit to help health system CFOs meet the challenges and opportunities presented by the RAC program by ensuring precision in coding and documentation, to enhance revenue capture accuracy and mitigate compliance related losses.

Through best practice research, peer networking, and a robust web-based analytical tool, the Revenue Integrity Performance Program provides strategies for preventing negative RAC determinations, protocols for efficiently managing the RAC audit process, and filtering mechanisms for triaging potential RAC appeals.

We've been able to get to market quickly and with the relatively low upfront investment by working with our revenue cycle technology partner on this launch. And as a result, we have already established a strong charter membership, including Hartford Health Care Corporation, Northern Michigan Hospital, Willis-Knighton Health System, Seton Family of Hospitals, and Nebraska Methodist Health System. The program is off to a very good start, and we are excited about its potential.

I also wanted to provide an update on our work in the higher education sector. Now, three programs strong and serving provost, university business executives and student affairs officer. We continue to be pleased with our rollout of this business and are proud to be serving such premier organizations as Duke, Brown, Cornell, Georgetown, and the University of California System.

Across, the programs, we've held five meeting series with an average GPA of 3.8, a strong showing for such [young] programs. As with our healthcare business and our education programs, we've also been nimble with our research topics, rapidly adjusting agenda to meet key member needs.

To that end, recent research for our provost audience focuses on balancing university budgets and advancing academic and research priorities in a time of fiscal austerity while our upcoming student affairs research will surface best practices in capturing alternative revenue sources.

Finally, our recent work for our university business executives is centered around finding and realizing cost reduction benefits, specifically in the areas of business services and energy cost. Across all three programs, members are very enthusiastic about the tangible impact our work provides and we are gratified with the traction we've got in this sector.

Let me now turn it over to Michael to review our financial results in greater detail.

Michael Kirshbaum

Thanks, Robert. I've organized today's financial review on five categories. Income statement, balance sheet, cash flow, contract value and outlook for the remainder of calendar year 2009. First, the income statement. A quick reminder that we're on a March, 31 fiscal year end, which means we just finished the fourth quarter of fiscal year 2009.

For the quarter just ended, revenue was $56.2 million, compared to $57. 9 million in the same period last year. EBITDA, excluding foreign exchange loss, net income and earnings per diluted share were $7.7 million, $3.9 million, and $0.25 respectively for the quarter ending March 31, 2009, compared to $12.4 million, $8.5 million and $0.47 respectively for the same quarter last year. A reconciliation of GAAP net income to EBITDA can be found in our press release.

Cost of services increased to $29.3 million or 52.1% of revenue, compared to $27.5 million or 47.5% revenue in the same quarter of the prior year. The increase in cost of services is primarily due to increased costs associated with new program launches, including Crimson, as well as increased investment associated with some of our analytic tools programs as discussed in our last call.

Cost of services for the quarter ending March 31, 2009, decreased slightly sequentially from $29.7 million in the quarter ended December 31, 2008, due to the initial reductions from cost savings initiatives we put in place earlier in the year.

Member relations and marketing spends was $13.3 million or 23.7% of revenue, compared to $12.2 million or 21.1% revenue in the same quarter the prior year. The increase in expense is attributable mainly to an increase in our number of sales teams and other marking personnel. We currently have 111 sales teams in place.

Member relations and marketing expense for the quarter ending March 31, 2009 decreased sequentially from $13.5 million in the quarter ending December 31, 2008, due to reductions in staff levels and other personnel expense.

G&A expense in the quarter increased to $6 million or 10.6% of revenue, compared to $5.8 million or 10% of revenue in the same quarter the prior year. Due to a decrease in equity forfeitures compared to the prior year.

G&A expense for the quarter ending March 31, 2009 decreased sequentially by $800,000 from $13.5 million in the quarter ended December 31, 2008 due to personnel related savings. Depreciation and amortization expense in the quarter increased to $1.8 million or 3.2% of revenue, compared to $1 million or 1.7% of revenue in the same quarter of the prior year.

The increase is primarily from the amortization of capitalized costs related to development of analytical tools for some of our newer programs, as well as the amortization of intangible assets from the Crimson acquisition.

Other expense net in the quarter was $300,000. This amount consists of interest income of $600,000, and an expense of $900,000 from changes in foreign currency exchange rates affecting our receivables from international members.

Moving on to our fiscal year income statement results. The 12 months ending March 31, 2009, revenue increased to $230.4 million, up from $219 million last year. EBITDA, excluding foreign exchange loss, net income and earnings per diluted share were $34.8 million, $21.5 million and $1.30 respectively for the 12 months ending March 31, 2009, compared to $45.5 million, $32.1 million, and $1.72 respectively for the same period last year.

Turning to the balance sheet. Membership fees receivable, which excludes long-term receivables increased to $116.7 million as of March 31, 2009, up from $81.5 million as of March 31, 2008.

DSOs, which were calculated using average receivables were 196 days in the quarters ended March 31, 2008, up from 176 days last quarter, and 137 days in March, 2008. Increase in DSOs is due to the continued increase in mix towards a higher price point programs, which include more progress billings.

Excluding the effects of these progress payments, DSOs on billed AR remained constant with our expectation, and we're 56 days as of March 31, 2009, similar to the same metric of March, 2008 of 55 days.

Deferred revenue, net of amounts that we've build up for 12 months, increased to 18.3% to $170.5 million as of March 31, 2009, up from $144.1 million as of March 31, 2008. Increase in deferred revenues is due mainly to higher proportion of multi-year contracts.

Excluding prepaid contract and long-term deferred, the deferred revenue balance as of March 31, 2009 was $148.3 million, up 12.6% over the prior year.

Looking at cash flow. During the three months ended December 31, 2009, we generated $9.6 million of cash from operating activities, compared to $21.7 million in the same quarter last year.

In the 12 months ending December 31, 2009, cash flow generated from operations was $39.7 million, or 1.9 times net income, compared to $60.3 million, also 1.9 times net income in the same period last year.

Capital expenditures for the three months ending December 31, 2009, were approximately $1.7 million, of which $1.2 million was related to capitalized development and hardware associated with analytic tools included in some of our newer programs, compared to $3.2 million in total capital expenditures for three months ended December 31, 2008.

This decrease is due to reduced levels of capital expenditures associated with our analytic tools programs when compared to the same period of the prior year. In the three months ending March 31, 2009, we repurchased $5 million of stock or approximately 273,000 shares. This brings our total share repurchase since the inception of the program in 2004 to $304 million or approximately 7.2 million shares. As of March 31, 2009, the remaining authorized repurchase amount was $46 million.

As of March 31, 2009, our cash, cash equivalents, and marketable securities balances were approximately $93.8 million.

Now to contract value. Our contract value was $230.8 million as of March 31, 2009, and March 31, 2008, compared to $230.6 million and $230.9 million in September and December of 2008 respectively.

We define contract value as the aggregate annualized revenue attributable to all agreements in effect at any given point in time, without regard to initial term or remaining duration of any such agreements. For contracts with than 12 months in duration, we include only 12 months of contract value.

With respect to the remainder of calendar year 2009, the following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call, and are based on preliminary assumptions which are subject to change overtime.

For the remainder of calendar year 2009, we are reiterating our guidance for revenue, earnings per diluted share and EBITDA. As previously announced, calendar 2009 revenue is expected to be within a few percentage points of calendar 2008 revenue, and we expect it to be evenly distributed to slightly back-weighted on the year.

We expect EBITDA in a range of approximately $27 million to $33 million, and earnings per diluted share of approximately $0.90 to $1.20. EBITDA and earnings per diluted share are expected to be fairly evenly distributed across the year.

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

Robert Musslewhite

Thanks, Michael. As will you recall, on our last call we highlighted three key areas of investment this year that will position us for future growth and scale. New program development, enhancing our sales and marketing organization, and improving our core data management and technology platform for our analytical tools program.

I wanted to give you a brief update on each of these areas in turn. First, let me turn to new program development, which has two main components. Scaling last year's launches, and launching new financially focused programs this year.

Last year's launches continue to perform well and expand their footprints in the market. As an example, while it is still early, the traction that the Physician Management Performance Program has gotten in the marketplace indicates that Crimson was a strong choice to add to our portfolio.

This has been one of our fastest launches in our history and we are pleased that the average implementation time remains under three months, despite the large influx of business.

In addition, member feedback has been extraordinary, with the programs physician executive intensive scoring a 3.8 GPA, and 92% of members reporting in QA call, that they would recommend the program to their peers.

Given the critical role that physicians play in hospital's cost containment efforts, the membership has been a good match for today's environment of cost austerity, and we project the program to continue to scale well into the future.

This year, we have continued to invest in new launches, specifically in products heavily tailored to delivering tangible margin impact in this climate. The market interest, we are already seeing in the Revenue Integrity Performance Program indicates that even in these times, there's still an acute need for mission-critical new programs that provide large rapid returns, around the key pinpoints of the membership and we're feeling good about the early returns on this area of investment.

Second, our work continues on enhancing our sales and marketing organization and we are making strides in building the infrastructure that we believe will service well going forward. While in general, given that the March quarter is usually a small sales quarter for us, we would not expect to see results earlier in the year, preliminary indicators such as inbound sales leads are trending positively, and we remain committed to improving the flow of information and intelligence about members and prospective members across the organization. We continue to feel confident that these investments will improve our future sales effectiveness and efficiency.

Finally, we are progressing in our analytical tools, platform investments. These programs continue to be strong additions to our portfolio, as they address critical member needs for actionable and reliable data that enabled performance improvement in multiple areas. We remained excited about these programs, given the large new market they tap, their stickiness and renewability, their potential to drive dramatic impact for our members and the industry as a whole and their potential to deliver strong contribution as the membership moves into renewal years.

Our work here has centered in four main areas. First, fortifying program operations. As we mentioned, we're in the process of upgrading our current data extraction and loading process through the development of more standardized tools for implementation, particularly in the clinical terrain where accessing the data is more complex.

The good news is that we are proven processors for doing this that we use successfully today in our more recent launches, such as the Emergency Department Performance Program and the Physician Management Performance Program that serve as a roadmap for the upgrades we are making in other products.

Second, we are taking advantage of interesting high margin extensions around current tools, which we can bring to market with development and marketing costs that are significantly lower than those for selling a brand new product into a new constituency.

Third, we are employing strategies to ensure that all of our analytical tools in all programs are leveraged in key daily workflows at our member institutions. By syndicating best practices and tool usage across the membership through such channels as push emails, teleconferences, and annual member summits, we are able to enhance both the value that the individual members received from the pogroms and the stickiness of the tools.

Finally, we are continuing to see significant opportunity in new terrains and areas of member need. Our recent launch experience shows that members continue to be willing to purchase products when there's a critical member issue and we can offer a solution that provides clear, measurable value. Therefore, our ongoing firm-wide new program development efforts, include research into new opportunities to serve our members with highly impactful analytical tools.

Let me close with a word about talent. In an environment, where we took costs out of our base operations and have higher expectations than ever for the impact that we need to provide our members, I am extremely proud of our outstanding staff, now more than 1,000 strong.

Everyone throughout the organization has met these challenging times with commitment, engagement and a burning drive to execute the highest standards. Their hard work, expertise and passion is the engine that powers the impact that we are having across the industry and positions us well for future success.

While the environment remains challenging, we continue to be very focused on building a scaleable high-growth company, which provides superior member value and service. We see incredible long-term growth potential in the industries we serve and continue to focus intently on capturing this potential.

With our strong cash flow characteristics, renewable revenue base, and over $90 million in cash on the balance sheet, combined with our extraordinary talent and strong member relationships, we continue to be well positioned for success over the longer 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 first question comes from the line of Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Just about contract value, the trend was absolutely better than I expected here in the quarter. Do you think you are going to make it through this downturn without seeing a year-on-year decrease in contract value?

And is there anything that the hospitals are telling you that the CFOs that would suggest that budgets are going to be cut going forward? Then, a quick follow-up on the interest expense line, why it was down. Thanks.

Michael Kirshbaum

This is Michael. On the first part of your question, on contract value, as you know it's hard to project forward contract value that are based on a mix of future sales and renewal performance and obviously the environment is uncertain right now. I think given the level of visibility we have in the business coming off our busiest fourth quarter last year, and contract value being relatively stable for the last several quarters, I think we feel comfortable with our guidance range on revenue for the year, but the exact contract value numbers, whether there is a little bit decline going forward, it's hard to say with any certainty.

Robert Musslewhite

Paul, on budgets, just to answer your budget question, I think we're talking about hospital budgets. We know through the eyes of our 2700 members what they're feeling, and we just had a bunch of CEOs in our offices over the last couple weeks.

I think what we're hearing from them is the environment is still tough. They are very nervous about volume performance, obviously a few exceptions, but in general worried about volumes on outpatient and surgical procedures.

Lot of hospitals seeing a higher proportion of uninsured and rising bad debt, and as a result, I think almost every hospital out there has felt budget pressure and is looking at cutting costs, in some cases pretty large cost cuts.

Michael Kirshbaum

Lastly, on the foreign exchange, Paul. Over the past year we've seen some success in selling many of our US-based programs internationally, seeing the investment we made in extra sales people they're paying off. Obviously, as you know over the last six months exchange rates have fluctuated with the dollar strengthening felt substantially. So in our financials this quarter, what do you see as an adjustment made to our AR balance on the balance sheet to reflect the current exchange rates, and the resulting is an expense through the income statement and net income.

What happens eventually, when those receivables are collected eventually. We could realize a gain from where we are today or see a further reduction, depending on the relative strength of the dollar.

Paul Ginocchio - Deutsche Bank

What's your outlook for that line item for calendar '09?

Michael Kirshbaum

My guess is the change from going forward will be relatively small. You have to see a material change in interest rates for us to record an additional expense or initial gain. Just to give you a sense of it, a 10% change in exchange rates would be about $200,000 to $300,000 impact.

Operator

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

Scott Schneeberger - Oppenheimer

Just follow-up on the FOREX topic, Michael you mentioned adding some international sales folks. And I believe you said 111 sales team. What percent of those are now international and what percent of your business would say revenues, would you categorize as international?

Michael Kirshbaum

The number on both is still relatively small, international sales team is handful about four to five. Our total business is still probably less than 5%, potentially even less than 4%.

Scott Schneeberger - Oppenheimer

Okay. Thanks. Is that something that you are looking to aggressively expand right now, or are you just really more in a hunker down mode?

Michael Kirshbaum

The international business, Scott?

Scott Schneeberger - Oppenheimer

Yes. Correct.

Michael Kirshbaum

Last year we saw a tremendous growth in the international business, and I think it's an area where and in markets where governments and regulators are demanding additional performance related metrics. We feel like we have great opportunities given some of the products and services we have here today. So, we see it as an area of opportunity. I don't think we're over investing there, but we do see it as an area of growth across this year.

Scott Schneeberger - Oppenheimer

Could we get an update? About a year ago there were some issues with the implementation of a couple of your analytical tools? Where do you stand on that? I know, you've been spending on some technology to streamline that. An update on both of those, please.

Robert Musslewhite

Yes. We're midstream in terms of the investments we're making in the platform this year. So, we've seen the benefit of scalable processes and tools, and some of our analytical tools programs, and as we discussed, we're continuing to invest significant resources in improving the processes and rolling those out across our other analytical tools programs across this year.

Obviously, that takes a lot of resource allocation and testing and getting members up and running. We're hopeful we'll see the yield that we've seen on the original products across the rest of the products as we move across the year, but still work to do on that front.

If you are talking about the impact on implementations, we still have some member backlogs, so we're still seeing the effects early this year of some of the push start dates, but I think across the year, we hope that those would abate.

Scott Schneeberger - Oppenheimer

I take that there is no change to the budget numbers you provided on last quarter's call with regard to what you are going to spend on technology, scaling last year's programs, new programs, sales and marketing? Any changes?

Michael Kirshbaum

Scott, the numbers we gave last quarter are still our expectation. We're underway in some of those initiatives now, and our expectations also have not changed.

Scott Schneeberger - Oppenheimer

Okay, thanks. Then, with the implementation of analytical tools, is that still very much the installation part in outsource, or are you moving towards insource? Any changes on that front?

Robert Musslewhite

I think the right answer there is, as we've scaled up these programs early on, we did use contract labor in situations where we felt like we needed to get people on board. As we move to a more scalable process, we're hoping to move away from some of the manual data processes towards more automated processes, which should mitigate the need for the contract labor.

In select circumstances, we've replaced contract labor that might be more expensive with someone full-time that we can bring in at a more reasonable comp level to do the same job. So, on both of those levers that should help with the overall cost base there moving forward.

Scott Schneeberger - Oppenheimer

Finally, Michael, could you help us out with a little tax rate guidance, please.

Michael Kirshbaum

The tax rate guidance for the fiscal 2010 is unchanged from where we were last time, so we expect approximately 31% to 33.5%.

Scott Schneeberger - Oppenheimer

Any movement among the quarters or is it flat lining on that front?

Michael Kirshbaum

Across the year, right now our expectation is that it will be even. We gave a range of EBITDA, depending on where we are on EBITDA and pre-tax income, it affects our tax rate, because we have some fixed credits in there, so higher income would lead to higher tax rate, because it minimizes the effects of the fixed tax credit towards the lower end of the range. It would be towards the lower end of the tax rate range.

Operator

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

Vance Edelson - Morgan Stanley

Thanks a lot. The renewal rate of 88% right in the middle of the normal range of 86% to 90%. The 90% was hit last year, I believe. Do you know offhand when the 86% was registered?

Robert Musslewhite

I think it was several years ago, Vance. Many years ago.

Michael Kirshbaum

In the last several years we've been in the higher end of the range, the 88% to 90%. Last year being 90%, the year before being 89%.

Vance Edelson - Morgan Stanley

Okay. Got you. In terms of the calculation methodology for that figures, is that customer renewal I assume if not revenue renewal?

Michael Kirshbaum

Correct. It's our year-over-year number of institutions that renew one or more programs with us. Our revenue rates historically have been a couple points below that in the mid-80s.

Vance Edelson - Morgan Stanley

Okay. In terms of the operating expenses, all the OpEx line items were up year-over-year, but they were down sequentially, so I just wonder what the true trend is there. Is that quarter-to-quarter decline something that's sustainable, such that we might see additional cost cutting ahead, or would you say we've pretty much reached the trough expense level now?

Robert Musslewhite

Yes. It's actually a mix. If you go back to the last call, we did put forward an aggressive cost savings initiative. I think you've seen some of the results of that in the first quarter, and we will continue to take costs out of the budget across the year. At the same time, there were a number of investments that we wanted to make specifically in marketing, and in some of our analytic tools programs.

You will see those coming across the year as well. The likely result is that the expense levels we saw in Q1 would probably be similar levels throughout the rest of the year with the investment offsetting any further cost savings.

Operator

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

Brandon Dobell - William Blair

Hi, guys. Last quarter you talked about trying to put some kind of framework around the revenue guidance, and there being a three points or four points of variability around the mean. Are you still comfortable with that kind of a range into the one quarter into the fiscal year or is there anything to change on how you think about what the right level or range of variability might be?

Robert Musslewhite

We're maintaining the same outlook.

Brandon Dobell - William Blair

Okay. Any change as you look from the December quarter to the March quarter in terms of what your customers are asking for in terms of payment terms, discounting, deal structures, those kinds of things or is it pretty similar to last quarter?

Robert Musslewhite

I think the environment is similar to last quarter. What we're hearing from members and from our staff that are out talking to members, our sales teams, renewal teams are that, it's a tough environment. So, in general, we haven't had a lot of push on overall price levels. We will at times come back with flexible terms where we think it will help to close a deal.

So, we have been somewhat creative around payment terms and things like that if we think it will get a piece of business in the door, but in general, we haven't gone to a wide scale discounting or wide scale term changes.

Brandon Dobell - William Blair

Okay. In the areas where you've got an issue with a company or a customer that doesn't renew, could you characterize what the drivers are there. Is it personnel, turnover? Is it a particular geography or a particular tenure of customer? Just trying to get a feel of what those customers that don't renew, what it would look like?

Michael Kirshbaum

If you think by traditionally, when someone doesn't renew, there's normally two main reasons for that. The first is that we've had member turnover, so the sponsor of the program at the institution leaves the institution and takes awhile to get back in, just to enfranchise his or her successor.

The other reason in the past is always, sometimes a member will join and doesn't get value from the program. That generally happens during their first year, if they don't attend a meeting or we are unable to interact with them like we'd normally want to. So, those would be the reasons we sort to see consistently over time.

I think this year over the past several months, I think what we're seeing is a lot more pressure from the overall economy come into these conversations. So, with members having budgets being cut or feeling a lot of cost cutting pressure, we have members coming to us, and that's a factor in the discussions

Lot of the times, we work through it, but sometimes we don't, and obviously we're pushing hard to combat that and doing everything we can to position our products as impactful against hospital margins and helpers in this environment, but it doesn't always work out.

Brandon Dobell - William Blair

Okay. On the sales force side, two questions. First would be how does your retention or attrition trends, how are those going? And second thing, from a compensation perspective, couple of quarters ago, you've talked about making some changes, just to try and redo some of the incentives. How those played out for you and do you anticipate any further change is necessary to kind of realign how you go to market with those guys?

Robert Musslewhite

Overall retention has been good, including in the sales force. I think, we generally have kept the people we want to keep , and there has been turnover of people who get hired on board and don't work out. We tend to move pretty quick on those as well.

I think what different in this environment is we want to continue to retain our stars and give them good path forward while being prudent on expense. I think our compensation strategy hasn't changed for the sales force. I think we keep a relatively low base relative to the rest of firm with the high incentives that are totally tied to individual performance around revenue. So we've kept that in place. I don't recall the specific changes you're talking about, Brandon.

Brandon Dobell - William Blair

You had talked a couple quarters go about moving around either the portion of incentive comp or the timeframe around incentive comp, so I just want to see if those are working out as you expect them to work out.

Robert Musslewhite

Well, I think so. I think if you look across our sales teams, they're very motivated right now. They have exciting incentive plans in front of them and they're running at a big number. So from that perspective, we feel good. Obviously we keep our foot on that, we keep monitoring this all the time to be sure we have the right mix in there, but I think right now we have them running at the right things.

Operator

(Operator Instructions) Your next question comes from the line of Shlomo Rosenbaum with Stifel Nicolaus.

Shlomo Rosenbaum - Stifel Nicolaus

I wanted to ask, the contract value has been admirably stable over the last few quarters, yet you had a sequential decline in revenue. Are there some bookings that are trending down? How should I think about that?

Michael Kirshbaum

Contract value and revenue do in overtime approximate each other, but in individual periods, there can be some flex depending on contract start dates and other specific terms. I think what you've seen this quarter similar to the previous quarter was we had some differed start dates as members have taken longer time to make decisions, and if you also go back to the end of last year, we had some members in specific programs we were giving some extended terms, in terms of changing start dates and extending some membership terms by adding extra months, and that's showing up new core revenue as well in the first quarter.

Shlomo Rosenbaum - Stifel Nicolaus

Are you seeing clients moving down on their memberships, trading down from four to three, but offset by some sales or can you just talk about the trend in that area, in terms of where the memberships are going per client? On a quarterly basis, not the year-over-year, I know on the year-over-year, you put 88% in terms of client renewals. I want to talk about what the membership trend has been.

Robert Musslewhite

I don't think there's a specific trend across the membership. We obviously have some members that do that, as their way of addressing cost cutting needs. We have other members that are increasing their membership programs. So I think if you look at the average [CV] per member, so contract value per member has been relatively stable, it's down a little bit, but part of that, just the addition of a lot of higher rank members into the overall member count. So for healthcare, it's been reasonably flat.

Shlomo Rosenbaum - Stifel Nicolaus

The investment indeed, the extraction indeed uploading that you talked about, are you seeing the plan, from what I understand is to take it from the a successful program, the few that you have been successfully roll that across the enterprise. Are you seeing any early signs where you adapted it into certain programs and you're really seeing an acceleration in the implementation periods?

Robert Musslewhite

We haven't yet. I think the confidence we have is around the fact that it works well in the programs where we've already had it operating. In terms of rolling it out to new programs, we're still sort of midstream. So, as it plays out across the year, we'll obviously update everything. I think right now we're pushing on, we have the right plan in place, we're executing against the timetables we have and we'd expect those results to play out over the year.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. Has there been any meaningful level of investment in new programs or anything that's been deferred in the quarter or the lower level of operating expenses that is really just a cost take-out, but it's still a long plan?

Michael Kirshbaum

I think we do have some expense from new programs, mostly the ones we launched last year that are still scaling, such as Crimson and other programs we launched last year. The programs we intend to launch this year and the program we launched this quarter, the Revenue Integrity Performance Program. This cost will filter in later in the year offsetting some of the ongoing savings initiatives that we have. So the level expense from the first quarter is probably similar to what we'll see for the rest of the year which is the continued savings offset by future investment in new programs.

Shlomo Rosenbaum - Stifel Nicolaus

For some of your analytical tools programs, is there any potential that the hospitals could get funding to pay for some of that through federal IT subsidies through the Obama budget?

Robert Musslewhite

Well, we certainly looked at it. I don't think we'll get direct federal government money coming straight to us for the programs, we've looked at the possibility that our programs will actually help hospitals satisfy some of the imperatives being put on them by the federal government. So if you take for example, our Crimson program, there's a good opportunity for that to help hospitals in terms of physician integration, physician management, potentially demonstrating meaningful use of some of the other investments. We're looking at it. Don't have a perfect answer on it yet, but I think we're optimistic that we'll find some opportunity in that direction.

Shlomo Rosenbaum - Stifel Nicolaus

So you're saying it might help improve some of the other investments?

Robert Musslewhite

If you step back and look at the trends that the federal government is pushing, data transparency reporting around clinical metrics, things like that, absolutely our programs help members satisfy those needs so the tools-based programs are huge help to members already in that.

If you talk specifically about the stimulus bill, there's a lot of IT-related funding in there. And generally it tends to be around electronic health records implementation. What we do feel like is that some of our programs may help hospitals demonstrate that they're using those programs to actually carryout operational improvement, which we think we're well suited to do.

Operator

Since you have no further questions, I would now like to turn the call over to Robert Musslewhite for closing remarks. Please proceed.

Robert Musslewhite

Well, thank you all for participating today. We look forward to seeing many of you out on the road in the next couple of months. Thank you. Good night.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Advisory Board Co. F4Q09 (Qtr End 03/31/09) Earnings Call Transcript
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