The Corporate Executive Board Q2 2009 Earnings Call Transcript

Aug. 4.09 | About: CEB Inc. (CEB)

The Corporate Executive Board (EXBD) Q2 2009 Earnings Call Transcript August 4, 2009 9:00 AM ET

Executives

Tom Monahan – Chairman and CEO

Rich Lindahl – CFO

Analysts

Gary Bisbee – Barclays Capital

David Ridley-Lane – Banc of America

David Cohen – Midwood Capital

Vance Edelson – Morgan Stanley

Brandon Dobell – William Blair

Meg Devry [ph] – Robert W. Baird

Operator

Good morning and welcome to the Corporate Executive Board’s Second Quarter 2009 Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 12th by dialing 719-457-0820. The confirmation code for the replay is 6847522. The replay will also be available beginning later today and through August 12th at the company's website, which is executiveboard.com and at www.earnings.com.

To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the home page of the company’s website for yesterday’s news release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding the Corporate Executive Board’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 affected by important factors among others set forth in the Corporate Executive Board’s filings with the Securities and Exchange Commission and in its second quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time for opening remarks, I’d like to turn the conference over to the company’s Chairman and Chief Executive Officer, Mr. Tom Monahan. Please go ahead, sir.

Tom Monahan

Good morning and thank you all for calling and/or logging into our second quarter 2009 conference call. It's my pleasure today to introduce Rich Lindahl, our new CFO whom as you know, joined us in the middle of May and is already off to a fast start.

After I give you an overview of the quarter and execution priorities, Rich will give you some financial and operational highlights. Then I'll return to talk a little more about our longer-term strategy and we'll break for questions.

We got some very important things done in this quarter, essentially completing the reorganization of our North American large corporate selling and servicing platform. At the same time, our teams kept on track to turn in the financial performance we expected.

Revenues for the quarter were $110.7 million. Net income for the quarter was $4.9 million. Diluted earnings per share were $0.14. Excluding costs associated with exit activities and restructuring, second quarter activities were – second quarter earnings were $0.41. EBITDA for the quarter was $14 million or 12.7% of revenues. Adjusted for restructuring and exit costs, EBITDA was $29.8 million or 26.9% of revenues. And contract value was $401.6 million.

With the bulk of our organizational transitions behind us, we enter the second half in position to execute aggressively against our best opportunities throughout the remainder of this year. Throughout this process, we have also maintained tight fiscal discipline. As a result, although quarterly revenues and earnings again declined on a year-on-year basis, we continue to deliver solid operating margins. Based on our current outlook, we are reaffirming our previous annual 2009 guidance for revenues, non-GAAP diluted earnings per share, and adjusted EBITDA margin.

We see hopeful signs about the general direction of the larger economy, but like everyone else, we cannot predict a turnaround and we are certainly not counting on one. Instead, we are focusing on those things that we can influence in order to manage through this period.

For us, that means three things. First, we are focusing on our best prospects for near-term bookings for the rest of the year. These are renewals, cross-sales and recapture of previously lost contracts. This is still hard going, but month-on-month bookings are trending in the right direction. June was considerably stronger than May. By the end of June, we have been able to recapture about 5% of the relationships that we had lost in Q1.

And of course we continue to work on sales. In fact, in this quarter new sales were up considerably over last quarter. We expanded our reach into several of our major member institutions and we are pleased to welcome a very solid group of new companies to the membership.

Second, we are putting selective emphasis on new markets with the most potential. For example, the corporate finance and strategy practice launched a new membership program for government finance round table.

As you know, we have always served various functions within various governmental departments. But this quarter, we pulled these together into a dedicated offering that leveraged our extensive cannon of finance resources to provide government-specific data, best practices, and networking opportunities for finance leaders operating a complex government environment. The early membership is a who's who of executives at the federal level and provides a great platform for growth in that sector.

Third, we continue to exercise the highest vigilance on cost without compromising the resources that we need to grow. The most recent voluntary separation initiative is an example. We responded rapidly to protect our margin structure in the face of reduced revenues and at the same time, we were able to realign and optimize our resource allocation based on changing market demand and opportunities.

As we've said, we aim to drive necessary changes to our operating model in the first half of the year so that we could be in a good position to execute effectively and aggressively in the back half of the year and on into the recovery across 2010 and beyond. There are many signs that we are on the right track. Customer reaction to our new stratified sales and innovative account management model has been very positive and our teams let us to a strong June close.

While the whole organization has not progressed at the same rate, there is no question that the teams that are furthest along the development curve are delivering better and more consistently across their objectives. As more of our people grow more experienced and confident in their new roles, we can expect to see meaningfully better results throughout the company.

That having been said, it's reasonable to expect that contract value will decline sequentially for at least one more quarter although at a decelerating rate and revenues, as always will lag contract value by about a quarter.

The economy will certainly continue to restrain corporate budgets and while we are seeing promising early returns, we don’t expect to realize the full benefits of our reorganization in a single quarter. Change of this magnitude takes sometime to take hold in an organization of our size. I'm confident, however, that we have set the right path back to growth. Our cash position remains strong, our teams are gaining skills and confidence, their productivity is rising, increasingly they are producing results.

While there is no hockey stick in our immediate future, we are seeing the beginnings of stabilization in our critical metrics. We have every reason to expect to see substantial benefits from our strategy across the back half of the year into 2010 and beyond.

And now, I'll turn it over to Rich for a more detailed review of the quarter.

Rich Lindahl

Thanks, Tom and good morning, everyone. First of all, I'd like to say that I'm delighted to have joined the Corporate Executive Board. This is a great company with a rich heritage, unique intellectual capital, and exceptional employees. I look forward to working with Tom and the rest of the team as we address the current challenges in our business and take advantage of what I see as a very significant opportunity for growth.

I'll start my discussion of financial and operating results by noting that contract value decrease by 24.1% to $401.6 million at June 30, 2009 from $529 million a year ago. On a sequential basis, contract value declined in the second quarter by approximately $30 million or 6.9% from $431.1 million at the end of March.

Here are some observations to put this outcome in context. Of the $30 million quarterly decline in contract value, $5 million was due to programs that were sunsetted or consolidated. The 6.9% quarterly decline was lower than both the 11.5% we experienced in the first quarter and the 9.5% we saw in the fourth quarter of 2008.

Bookings were weaker in April and May due to the organizational transition effort, but sequential volume improved in June as people began settling into their new roles. Renewal rates remained lower than our historical averages, but were stable relative to the first quarter and in line with our expectations.

Even though institutional loyalty was high, customers were very careful with their spending, which had a negative effect on program level renewals. The overall cross-sell ratio declined, although at a much slower rate than in previous quarters and cross-sell in middle market grew.

We are far from satisfied here as we need to push the cross-sell rate for our large corporate customers closer to historical levels. As our new account management model matures, we expect to see improvement in both cross-sell and renewals. The going remained tough in new sales, but we were encouraged that we were still able to add new institutions to our roster and at a faster rate than in the first quarter.

These new institutions included both traditional, large corporate customers such as Apollo Group, Lionsgate Entertainment and Volt Information Sciences, as well as middle-market companies like Friendly's Ice Cream.

The selling environment was difficult everywhere, but we did see modest differences between regions. As you are seeing elsewhere, Europe continues to be very challenging relative to North America. On a U.S. dollar basis, Asia-Pacific also declined, although it actually experienced a slight increase on a local currency basis. The decline was more evenly distributed across industry segments than at recent quarters. Financial services appears to be stabilizing at least at the largest companies and held steady at 21% as a percent of our total contract value.

Next I'll turn to a review of the income statement. First [ph] quarter revenues decreased 21.6% to $110.7 million from $141.2 million for the first quarter -- second quarter last year. Cost of services, as a percent of revenue, increased to 34.3% compared to 32.9% in the quarter -- in the second quarter of 2008 as cost reductions did not fully offset the annual decline in revenue. This trend reflects the loss of some scale benefits as revenue declined, partially offset by careful cost management, particularly around variable costs such as meetings and travel.

Member relations and marketing expense, as a percentage of revenues, was 28.7% in the second quarter of 2009 as compared to 29.1% in the second quarter of 2008. Second quarter expenses were favorably impacted by the initial redeployment of resources in the move to our new account management model. We also saw lower travel costs while sales teams -- sales team assignments were finalized during the transition.

As the full effect of prior quarter softness in bookings flows through the revenues, we continue to anticipate member relations and marketing expense, as a percentage of revenues, will be higher than 2008 levels on a full-year basis. We will continue to invest here to ensure we have the resources in place to improve the member experience and generate higher renewal and cross-sell rates.

General and administrative expense, as a percentage of revenues, was 13.5% in the second quarter, a 290 basis point reduction from the 16.4% level seen in the second quarter of 2008. We continue to manage G&A spend tightly by keeping personnel costs in line with revenues and aggressively reducing discretionary costs.

Depreciation and amortization, as a percentage of revenues, increased to 5.7% from 3.7% in the second quarter of 2008. The increase was primarily due to additional amortization of leasehold improvements for our Arlington, Virginia headquarters as 2008 reflects a half-year convention.

We recorded $11.5 million of costs associated with exit activities in the second quarter, primarily related to the write-off of leasehold improvements and furniture, fixtures, and equipment at our headquarters. As previously disclosed, we entered into a sublease agreement in June for a portion of our headquarters space.

Exit activities are expected to reduce rent expense by approximately $4 million in the second half of this year and $9 million in 2010. In the quarter, we recorded net restructuring costs of $4.2 million, primarily related to the voluntary separation program we announced in July. These charges reflect the portion of severance to be paid, pursuant to our standard separation policy.

We expect to record an additional $1.8 million of restructuring costs in the third quarter related to the incentive portion of the voluntary program. We took this action to both maintain profitability as revenues declined and to create additional flexibility to redeploy resources to areas with greater growth potential.

On a run rate basis, we expect these actions to produce approximately $15 million of operating savings, some of which we may use to pursue market opportunities in Asia and the government sector or to develop promising technologies for our customers.

Other income in the second quarter increased by $3.2 million over the prior year period, primarily due to a $2.2 million foreign currency gain and an increase in the fair value of deferred compensation plan assets.

Second quarter EBITDA was $14 million or 12.7% of revenues. Adjusted EBITDA, which excludes costs associated with exit activities and restructuring costs, was $29.8 million for the quarter or 26.9% of revenues compared to 21.6% in the second quarter of 2008.

Diluted earnings per share was $0.14 compared to $0.46 in the second quarter of 2008. Non-GAAP earnings per diluted share, which adjusts for the cost associated with exit activities and restructuring costs, was $0.41, a 10.9% decline versus the year-earlier figure.

Now, turning to the balance sheet and cash flows. Membership fees receivable declined 46.8% to $67.5 million at June 30, 2009 from $127 million on December 31st, reflecting both successful collections and weak bookings volume during the first half of the year. DSOs, which we calculate using average receivables, were 59 days for the second quarter of 2009, in line with historical ranges.

Deferred revenues decreased 18.3% to $215.9 million at June 30, 2009 from $264.3 million at December 31st, due primarily to the performance of bookings relative to expiring contracts. And cash flow from operations were $19.8 million during the first half of ’09 versus $71.1 million in the first half of last year. This decrease was primarily driven by lower collections as a result of softer booking volumes.

Capital expenditures were $2.4 million for the quarter. We paid a $0.10 per share dividend in the quarter for a total of $3.4 million and we had $22.3 million in remaining share repurchase authorization as of June 30. On June 30, 2009, our cash, cash equivalents, and marketable securities balance totaled $73.4 million.

We are taking a cautious stance on use of cash in this environment. While we remain committed to returning cash to shareholders over time, we will also preserve the financial flexibility necessary to ensure adequate liquidity and invest in our business to meet our long-term growth objectives.

And now, an update on our outlook. 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 over time.

As we have discussed during this call, in the second quarter we saw some initial signs of trend stabilization on a sequential basis and are encouraged by the returns of our cost management efforts. Our first half results put us on track to comfortably achieve the financial guidance we provided following the first quarter.

However, we continue to face significant headwinds in this environment as companies maintain longer purchase decision cycles and the shape and nature of a broader economic recovery remains uncertain. And while the early returns from our account management model are promising, we are still early in the process and the full benefits will be realized over the course of several quarters.

Accordingly, we are reaffirming our prior guidance as follows. Annual revenues ranging from $410 million to $450 million, non-GAAP diluted earnings per share of $0.90 to $1.40, depreciation and amortization expense of $23.5 million to $24.5 million, and adjusted EBITDA margin of between 18.5% and 23%. We also continue to project full-year CapEx spend to not exceed $10 million.

The above guidance represents our best estimate at this point. We will keep you updated on our progress and revise our forecast as appropriate. That's it for the financial summary. I'll now turn the call back over to Tom.

Tom Monahan

Thanks, Rich. Even as we are working hard on this year's results, we are also making sure we deliver on five key priorities that will ensure we create superior value and growth for the long term. Let me lay those out for you.

Number one, as always, relevant to compelling content. This means we must provide the best and most useful data analysis for the important decisions on our members' desks today and give them the tools to take immediate and effective action.

Second, timely, seamless delivery systems. We continue to invest in multiple delivery systems that make our content assets to members' workflow in ways that embed us naturally and easily into our members' business, management process – processes on a daily basis.

Third, customer intimacy. We are mobilizing through our new sales an integrated account management model to provide more frequent, relevant, and personal contact with members to drive the loyalty and impact that we'll need to increase renewals, cross-sales, and new sale referrals.

Fourth, innovation and new products. We continue to be very focused on creating new products that add significant value to our members and give our teams powerful tools to deepen relationships.

Fifth, efficiency and cost management. We will continue to relentlessly pursue efficiency to free up resources from market impact and we will continue to diligently manage our cost to protect profitability and financial flexibility.

I'd like to share just a few examples to give you a flavor of what we are doing and how are these resulting in a more compelling value proposition, better member experience, and better results for members and for us.

First, a great example of timely and compelling content comes from our compliance and ethics leadership council product. And we've built a database of more than 175,000 employee surveys, highly analyzed, that helps our members track and target key corporate risks.

Our research has confirmed an alarmingly strong correlation between difficult economic times and employee misconduct. Key categories in misconduct such as the violation of environmental regulations, violation of safety standards or plain old stealing are up by 50% to 100%. The potential economic and legal consequences are huge particularly in an era when employee use of social media amplifies visibility and liability. As you would guess, members are eager to find ways to target and eliminate these risky behaviors.

Accordingly, we supply them with a cultural diagnostic survey that helps them target potential areas of risk in their companies and a great toolset of best practices that help them to quickly identify and remediate risk areas. We also give them benchmarks and tools to help them accomplish all of this very efficiently in an era of declining budgets and staff.

Second, we continue to aggressively invest and innovate to ensure that our resources are closely linked to members' daily workflow. As an example, our finance division has built a series of news feeds that now go out to more than 85,000 users on a daily basis. These feeds distill down key news items and financial data to support the unique needs of corporate financial professionals. Moreover, they drive users to other areas of our content that help them take action on the data and insights we supply.

Third, we continue to make sure that we leverage our new organizational model in key investments to deliver highly personal and relevance service as executives confront uncharted terrain at their own companies. Across the first half of this year, we conducted more than 20% more in-person service visits than last year with an emphasis on engaging our largest customers directly. And there, particularly, we see early signs that this is beginning to pay off. In the second quarter, nearly a quarter of our largest 200 customers began to increase their spend levels with us.

Fourth, we continue to devote energy to innovation and new products. In the quarter, we put real effort against adapting our product set to the needs of a large and very obviously growing government market. We continue to see real opportunities in our five target domains and have strong new products ready to go as our teams acquire seasoning and corporate budgets stabilize.

Finally, we continue to manage our cost base to protect profitability, cash generation, and flexibility to continue with critical investment areas. You recently saw that we undertook a small set of voluntary separations. These helped us to protect our profitability, and more importantly, that we accelerated investments we needed to make to prepare for growth.

For example, the staff reductions we took in April to target more resources on the high end of the market – put more resource – research and sales capacity in key global markets, most notably Asia-Pac and make deeper investments in technologies. These efforts can't change the direction of their – of the economy on their own, but by executing the right steps today, we will position the company to recapture growth if the economy rebounds.

Thanks for dialing in. We'll now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We’ll take our first question from Gary Bisbee with Barclays Capital.

Gary Bisbee – Barclays Capital

Hi guys, good morning. I guess a couple of questions on the cost. First of all, just to be clear, the savings on rent from the sublease agreement, is that marginally going to fall in G&A or will a component of it also be within depreciation and amortization?

Rich Lindahl

Yes, that's actually going to be spread across the cost categories of cost of service, G&A, and member and marketing expense.

Gary Bisbee – Barclays Capital

Okay. When we look at the G&A, what was a real strong job bringing down the cost base this quarter, is there anything within that line item that's not likely to continue as we look for the back half because assuming you get the benefit from the leases and you were able to keep what you did this quarter? I have a hard time staying within the guidance range. What could change in the -- if anything, on the G&A line?

Rich Lindahl

Yes, I think the number that you have for G&A is a pretty good proxy for what we would expect for the rest of the year with some additional reduction to be found. I think in terms of your comment about the guidance range, I mean I think we have made good progress in the first half of the year and certainly have taken a number of actions to protect our margin position, the lease and voluntary separation being two examples.

But as you know, there is a lot of operating leverage in our model and where we end the year will really depend in large measure on how our bookings and revenue fall in the second half of the year. And as Tom indicated, while we are certainly feeling more hopeful about the overall state of the economy, it's still a volatile environment and we are also in the early stages of getting traction on our new account management model. So at this stage, we feel the ranges we provided are appropriate.

Gary Bisbee – Barclays Capital

Okay. Within member relations expense, I believe I heard you say that your expectation is that for the year, as a percent of revenue, that expense line would likely be at least up a little bit year-over-year, which is a big change from the first half where it come down. Are there new investments that are planned? I heard you say the process is investing more in Asia and potentially the government verticals. Is that something that would fall there, what are you expecting to change in terms of the cost on the member relations line?

Rich Lindahl

Well, certainly it's both the function of the cost, as well as the trend on revenue. As Tom mentioned, we do expect it's most likely that contract value would go down again in the third quarter and revenue will tend to lag performance on contract value.

So it's really more of an issue of how those items trend relative to each other. I think we feel that the level of expense on member and – member relations and marketing is about right for the rest of the year. And there also is the potential that we will make some incremental investments there to take advantage of some of these opportunities as well.

Gary Bisbee – Barclays Capital

Okay. And then just a bigger picture question for Tom. You closed 10 programs or I should say you're closing or consolidating 10 programs this year after disappointing results from those. What are you doing different today in terms of due diligence on – prior to launch of new programs to make sure that there actually is the customer demand and that the retention of those programs will be good, do anything different to make sure that we don’t have a repeat of some of these that were a lot less successful?

Tom Monahan

Gary, I think the number one learning that we took away is we wanted the – to focus our energy and resources on the domains where we are very strong. We saw market difference in those programs launched into those five core domain areas we talked about, where we've got strong brand, deep-seeded member relationships, strong internal referrals, and already great intellectual capital.

And I think the one new product we put in the market in this quarter, which targets the large government market, is based in our finance practice where we know an awful lot about how to make a finance organization drive corporate value and we saw a nice bridge from that depth to adapt the product a little more clearly for the specific needs of government, but staying right in that swim lane of finance excellence.

Gary Bisbee – Barclays Capital

Okay. So like some of the stuff that you had a more challenging time with, supply chain management, some of these things were farther from the course, but the right expectation would be that the – as you say, right sort of down the middle of what you've done in terms of end markets?

Tom Monahan

Yes, getting deeper and deeper into those five core functions that we know very well, to keep buying centers with the large corporation.

Gary Bisbee – Barclays Capital

Great. Thanks a lot.

Operator

We'll take our next question from Scott Schneeberger with Oppenheimer.

Unidentified Analyst

Hi, good morning. This is (inaudible) for Scott. First of all, can you update us on the number of programs and the number of sales teams as of 2Q ’09?

Rich Lindahl

On the – this is Rich. On the sales teams, we had a total sales staff of 477 employees at the – as of the end of the June and as you know, we reorganized our sales model. So this number actually reflects the redeployment of resources into that model. So it's not directly comparable to prior periods.

But I think it's important to point out that this represents about – over 25% of our total headcount, which is more than we've historically had in terms of total sales teams to total employees. And we've also upgraded these positions and we had sort of heavier weight people operating there. So we would expect that they can deliver greater productivity once they get comfortable in their roles moving forward.

I think the other thing I'd point out just while we are on the topic is that we are continuing to fine-tune the model even though we've implemented it and so, you might see some adjustments as we go down the road in terms of total staff relative to opportunity.

Unidentified Analyst

So, just a – if compared to the end of ’08, which was the last time you provided the number of sales teams, is it a net decrease or is it a net increase?

Rich Lindahl

It's a net decrease, it's – we are roughly in the – we are at about 80% of our total sales resources relative to where we were at the end of the year. And again, as revenue has come down, we have had to moderate that but again, we want to keep those resources aligned with the opportunity and based on the way we've created the model, the type of people we have in there, we feel very comfortable they can deliver the targets that we are shooting for.

Tom Monahan

I think just a bridge over to that program question, the programs we ID'ed for sunset or consolidation were those which were often most difficult to sell. So and – as we wind those down, they absorbed a disproportionate share of selling expense relative to opportunities. That's why that overall number could come down a little bit because we removing things that made people less productive than they should have been.

To get to the products question, as we said, at the end of the year we were at 52 and we saw about 10 products that we need to sunset or consolidate. With those now well into the wind-down and consolidation process plus one new program, we are at 43.

Unidentified Analyst

All right, thanks for the color. And also as in – you talked about that you recaptured about 5% of the relationships that you lost in 1Q ’09. Can you provide some color on what leads you to the recapture? Is it that your clients have increasing spending or is it that you provide better content or maybe you have a bit more favorable pricing point for those clients?

Rich Lindahl

No, I think the – the storyline when we are able to get back someone who wasn't able to renew our contract in their – at their anniversary date is usually one of just outstanding service by the team facing off against that customer. We know that this is a year where that over-investment at the customer relationship and being close to them as the year unfolds allows us to do two things. One is identity certain needs that emerge where we can help them and then use that as an opportunity to reinsert ourselves.

And secondly, identify budget dollars that become available in very short windows. We are seeing an environment where very few companies are doing anything that resembles traditional annual budgeting. So our teams have to be there front and center in order to identify those new needs and match them to available budget dollars. So I'd credit the teams in the field with those successes.

Unidentified Analyst

Okay, thank you.

Operator

We'll take our next question from David Ridley-Lane with Banc of America.

David Ridley-Lane – Banc of America

Sure. So I think on last quarter's call you said a decline in contract value as a result of the 10 programs being sunsetted was $12 million. You lost $5 million in the second quarter. How much would you expect in the third and how much in total just remains?

Rich Lindahl

Yes, basically there is about $12 million left in the rest of the year and that number when added to the $17 million year-to-date is about $29 million total for the year.

David Ridley-Lane – Banc of America

Okay. And just trying to get a sense here. New bookings in second quarter were greater than first quarter despite the sales and service reorganization. Was this like a month lost or a week? I'm just trying to get a sense of how much time for the sales people was unavailable. I did hear you note lower travel costs. So I think it might be a pretty significant portion of their time.

Tom Monahan

Certainly, May was a month of very real transition and we certainly saw the teams step up and begin to perform very well in June and got some momentum back. I think it's safe to say you can't put a start – you can put a start time on change, you can't put a stop time on it. So there are still people learning new roles and learning new things. I’m very impressed with how teams have adopted to the new model, but I also wouldn’t say for a minute that all the cost of the change is behind us yet.

David Ridley-Lane – Banc of America

Sure. And then just because I love metrics, I think you said 250 new firms were added in the first quarter. Would you have that same number for the second?

Tom Monahan

I think, as Rich said, that number was higher and we were very pleased with it.

David Ridley-Lane – Banc of America

Okay, thank you very much.

Operator

We'll take our next question from David Cohen with Midwood Capital.

David Cohen – Midwood Capital

Yes. You guys obviously reiterated your guidance and you said you would comfortably be within it based upon your results in the first half. Is the lower end of the guidance even relevant at this point? I mean, is there a non-zero possibility of being at the low end here?

Rich Lindahl

Well, I think – again, you got to look at the guidance in the aggregate. I think certainly as it relates to EPS, that's more in line with the low end of the revenue guidance and the low end – or the high end of EPS is more in line with the high end of the revenue guidance.

And so, it really just depends. Like we've said, we feel good about where we are, we feel like we are on the right track. We can't control everything in the environment certainly and I think it's a reasonable position to take that we are going to work as hard as we can to drive it – drive those as hard as – as high as we can, but it's not all completely within our control.

David Cohen – Midwood Capital

All right, thanks.

Operator

We'll take our next question from Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, thanks. So the improvement you saw in the selling environment in June sounds like that was at least partially a matter of April and May being slow as a result of the reorg. Could you compare June relative to how you were doing before the May-June time frame or before April? Maybe that would be more representative. And then similarly, can you comment on whether June's relative strength continued into July and up to the present day? Thanks.

Tom Monahan

Hi, Vance. The – I think if you looked at June on a standalone basis, vis-à-vis other months, I think we certainly saw more stability in corporate budgets. It's still at the – if you look at corporate performance, they are – the vast majority of our companies are facing real headwinds in their own businesses. So it's a difficult budgeting environment, but I think it was a more stable budgeting environment and our team certainly performed very well.

What we would have seen is that our June performance, which was consistent with prior year June, so – I mean, with a slight uptick these teams really found their feet and executed incredibly well. So that's probably the best comparable I can give you for this operating environment.

Vance Edelson – Morgan Stanley

Okay. And you also mentioned that your 200 largest customers, about a quarter of them, if I heard correctly, increased their spend level during the quarter. Can you give us a feel for the portion that held steady or that decreased their spend during the quarter? Thanks.

Tom Monahan

The largest segment was people who either that held steady or maybe slightly declined in the quarter and there is still a tail of people who have gone through very difficult circumstances in their own business who have come to us and asking – needing – as Rich said, our institutional loyalty rate remains very high, but people are coming to us and saying, "I did seven things with you last year, I can only do four this year. Help me decide which four are most important to me given what we are going through right now."

So that – there is a tail of customers who are still having that conversation with us. I don’t think we are out of that woods yet. We are thrilled with – thrilled with the fact that we are in that conversation, we are thrilled with the fact that we are able to keep such a great client roster. Obviously, we think it provides a great platform for growing those relationships as their businesses stabilize. But there is still a tail of customers who are behaving that way.

Vance Edelson – Morgan Stanley

Okay, great. And just one more question. On the voluntary program, the portion you've already been for – been through ahead of the incentive portion, how successful was that versus your expectations? Do you feel like it went far enough when all was said and done or was it not quite as successful and that's why you think there could be some additional cost cutting as we move into the fall?

Tom Monahan

I would say it was very successful getting not only the levels of expense out of the system, but making sure we are able to redeploy our resources and capabilities where we most urgently needed them. So it was a win for us from that perspective and I think it's safe to say, assuming we don't have any other – assuming that this Q3's economic events don’t compare to last year's Q3 economic events, that we put a – we put the company in a good position and put the bulk of our reorgs behind us.

Vance Edelson – Morgan Stanley

Okay, that makes sense. Thanks a lot.

Operator

We'll take our next question from Brandon Dobell with William Blair.

Brandon Dobell – William Blair

Hi, thanks. A couple of ones related to – let's call it momentum in the new product or with existing customers. If you look at June, did the change in kind of month-on-month trends happened with big corporate middle markets, was it with older programs, newer programs? I guess a little more color on how the reorg started to come and kind of hit the ground.

Tom Monahan

Yes, the particular focus of – the particular focus of the reorg is North America large corporate and so, to the extent that we had a – some challenges in April and May, first of all the economy was a key part of that. And then secondly, we were asking people to get ready for and get into new positions. So to the extent there was a bounce-back, it was a North America large corporate bounce-back in the quarter.

And again, as Rich said, we continue to see that – when you see this – our European CFOs are very clear that they do not see in their domestic markets any green shoots, even green shoots of the moldy variety. So Europe continues to be a difficult operating environment though our team there is doing a great job keeping the business moving forward, but I would say as between North America and Europe, Europe remains more of a challenge due to macro conditions.

Brandon Dobell – William Blair

Okay. Any detail or color you can give us on the mid markets effort in terms of contract value contribution, new bookings in the quarter, just a little more granularity around the financial aspects of that part of the business these days?

Tom Monahan

Sure. We continue to be very pleased with the performance of our new middle market platform, you saw our cross-sell go up go in the quarter even in this environment. That's a really heroic effort by those teams. It continues to be a good growth story. Obviously, those companies have their challenges as well. Overall, it's just – it's still under 10% of CV total and we do see continued growth opportunity there, but obviously the larger opportunity is within large corporate and that's where the focus of the reorg is.

Brandon Dobell – William Blair

Okay. A final question for you. As you look at the programs that are kind of being consolidated or combined, have you approached going back to your existing customers that have, let's say, two or three of those programs and approaching it from either a pricing or a service or what are you doing to kind of keep those relationships going or is there an opportunity to say we are combining two programs, so have a look at the second like, what are the dynamics going on there?

Tom Monahan

Sure. Several things I'd call out. Number one, remember all our companies – all our products target individual buyers within a large company. So certainly a department head might pull his or her team together and say, "What products do we need and how are we getting support from these resources"? But they still target individual buyers. So we are working with the buyers of the products that are being sunsetted individually rather than at some corporate level.

Second, we did deliberately make the investment to serve out all the contracts we put in place. We didn’t feel comfortable having sold these products, not supporting them through the year. So while we aren't selling new products and we are – or selling new sales and we are not renewing them, we are serving them. We know that these people would go in life and hopefully be good friends of our company at their – in their next roles.

And then third, we have found opportunities, maybe a little more than we initially modeled, to consolidate some of these products and kept move someone from one of the sunsetted products into one of the other product areas that we have great strength, you look within.

An example might be within some of the supply chain staff. There were people who were really procurement officers and the better offering for them any way was the procurement offering. So we are making sure that name by name, line by line we are working as these contracts come to an end to honestly ask the question whether this person can be very well served by one of our existing products and if so, working with them to secure that contract.

Brandon Dobell – William Blair

Okay, great. Thanks a lot.

Operator

We'll take our final question from Meg Devry [ph] with Robert W. Baird.

Meg Devry – Robert W. Baird

Good morning, one question from me. We would like to understand how FX rates impact contract value calculations. Do you adjust those at all for FX?

Rich Lindahl

No, we do not. We quote our contracts overseas in U.S. dollars.

Meg Devry – Robert W. Baird

Okay, thank you.

Rich Lindahl

You're welcome.

Operator

And we have no further questions. I'd like to turn the conference back over to Mr. Monahan for any additional or closing remarks.

Tom Monahan

Thanks, everyone, for dialing and/or logging in this morning. We look forward to keeping everyone up to date on our progress in this complicated operating environment and the returns we see from the major changes we've made to the business. Thanks very much for calling in.

Operator

Thank you. Ladies and gentlemen, once again that does conclude today's conference. We thank you for your participation.

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