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The Advisory Board Company (NASDAQ:ABCO)

F1Q10 (Qtr End 6/30/09) Earnings Call Transcript

August 4, 2009 6:00 pm ET

Executives

Robert Musslewhite – CEO

Michael Kirshbaum – CFO

Analysts

Paul Ginocchio – Deutsche Bank

Brandon Dobell – William Blair

Shlomo Rosenbaum – Stifel Nicolaus

Scott Schneeberger – Oppenheimer

Frank Sparacino – First Analysis

Operator

Welcome to the Advisory Board Company's first quarter earnings conference call. 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 PM on August 11 by 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 others, regarding The Advisory Board Company's expected quarterly and annual financial performance for 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 affected by important factors, among others set forth in The Advisory Board Company's filings with the Securities and Exchange Commission and its first 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 first fiscal quarter news release. The company undertakes no obligations to update any forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Robert Musslewhite. Please proceed.

Robert Musslewhite

Thank you, good evening. I am 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 evening's call. First, I will give you a summary of our performance for the quarter ended June 30, 2009, covering our financial results as well as the broader market environment. I will then turn it over to Michael to take us through a more detailed review of the financials. And 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.

In the quarter ended June 30, 2009, Advisory Board revenues were 56.7 million compared to 57.2 million in the comparable quarter of the prior year. Net income was 4.2 million or $0.27 per diluted share compared to 6.3 million or $0.36 per diluted share for the same period a year ago. EBITDA excluding foreign currency gain was 7.3 million for the quarter compared to 9.4 million in the first quarter of fiscal 2009. Contract value as of June 30, 2009 stood at $232.8 million versus $232.3 million as of June 30, 2008.

Our overall performance for the quarter was in line with our expectations. Despite the challenging economic climate, our contracts values remain steady year over year and increased sequentially, illustrating our ability to address our members' most critical issues through programs that deliver tangible value. While the ongoing budget pressures that our members are experiencing continued to impact our performance, our action plan for the year has put us in a solid position to weather these times with stability and to position for growth as the climate improves.

The broader environment continues to feel similar to that of the last several quarters with members scrutinizing every dollar that they spend and demanding clear, measurable and your near term returns on their investment in memberships with us. As we have indicated in prior quarters, this dynamic is impacting our results in both new sales and renewals. However as we have discussed, there are some differences across our programs as to the degree of impact. For example, as we expected, our renewal discussions for our workforce, nursing, and philanthropy oriented research membership programs and our leadership development programs have been more challenging this year.

While our teams leading these programs have done an excellent job of documenting the impact they have had on each of our membership organizations, there are still members who feel that they must delay renewal decisions or even take a year off from membership due to extreme financial constraints or the overall spending environment at their institutions. Where this happens, the message is almost universally positive in terms of the incredible value the members are receiving from these programs. However, we do here more of them saying, I would love to continue my membership, your research has an important enormous impact on our organization. However, we are cutting all discretionary expenses right now, so I have to take some time off and we would like to talk again later in the year.

In contrast, many of our programs anchored by analytical tools have fared better in terms of renewals as we have begun to see how the inherent stickiness of these tools and their delivery of clear, tangible ROI resulted in strong number attachment. The integration of these tools into daily workforce means that they are less often considered discretionary and members having invested both dollars and internal resources in implementing the tools generally are reluctant to consider taking a year off. The strong renewal profile is one reason along with the large new market, the potential for dramatic member impact and the scalable economics that we have been so excited about our newer analytical tools programs.

In terms of new sales, the environment this past quarter remained challenging as we expected and programs not directly tied to margin improvement continued to lag. We were however encouraged to see some early results of our investments in the sales and marketing organization and our focus on launching new programs with clear financial returns as we were able to achieve greater traction in the market with these high-priority offerings. Despite tight budgets, members have been willing to budget for and spend on solutions in areas of urgency that offer proof of tangible margin improvement and we have benefited where our programs and tools meet these needs.

Looking ahead, our members continue to cope with economic pressures and questions are on pending reforms. However, as we move towards the September to December time frame, which is our biggest sales of renewals period of the year, we are hopeful that we will be able to continue and build on the pockets of momentum we have seen in some areas this past quarter and we are allocating more sales and marketing resources to these areas to take advantage of the opportunities. We have also redoubled our efforts at ensuring that we are consistently delivering on point research agendas, proven best practices, and measurable impact for our members.

One priority issue that has taken center stage in that endeavor has been healthcare reform. As our members wrestle with this rapidly changing and difficult set of issues, they turn to us to distill the larger implications of reform into meaningful imperatives for superior performance in the coming years. Of course, this topic has been the top of our agenda since president Obama's inauguration and it now headlines our largest and most important member meetings as well as warrant significant proactive communication with the membership through teleconferences, special red alerts and publications.

While the specific details of delivery system and financing reform proposals are yet to be finalized, many common themes exist across all proposals on the table. As such, we have developed a framework of ten critical implications that are and will be relevant in almost any scenario that results from the Congressional debates. For each of the implications within this framework, we provide a full complement of key resources to help members develop the strategy that will best position them for future success as the policy landscape coming months and years.

As we anticipate the changes likely to come from healthcare reform, one concept garnering significant attention from our members is the prospect of bundle payments. While legislative negotiations continue, the longer-term direction of payment reform is relatively clear. Providers will be held increasingly accountable for the overall quality and cost of care provided to their patients. Policymakers seeking to break down silos and barriers to collaboration across the continuum of care are likely to require all of the patient providers to collectively share a single bundled payment for that patient's care.

Under this structure, hospitals and health systems must rethink the composition, structure, and contractual underpinnings of their medical staff and the ways in which they collaborate with their physicians. As they do so, the top resources to which they turn are on our existing publications on best practices in physician alignment and our newest research on going through the summer on breakthrough physician integration, which profiles emerging models for managing the shared accountability and shared risk that are likely to emerge from the reform discussions.

Over the years, members have consistently reported that our guidance has been critical to the development of the best physician alignment strategy for their institutions. Without fail, they also tell us that our best practices and structuring these relationships and our library of actionable resources, identify physician recruitment workflows, specialist employment matrices, and practice management tool kits, have been critical to the successful implementation of their chosen approach. Our track records of helping members work more closely with physicians is evident across our product portfolio and the tangible results that these effects produce further reinforce our position as the trusted advisor on this set of issues.

For example, our physician management performance program, which is, anchored around the Crimson business intelligence platform for hardwiring the improvements of physician clinical performance has garnered many outstanding stories of financial returns. For example, through just six months of program membership, one hospital was able to streamline care processes for high length of stay diagnosis, saving $800,000. Another hospital used the tool to improve its core measure of compliance to the 90th percent term nationally, earning $500,000 in pay per performance incentives in its first year of membership. A nine facility system achieved over $3.5 million in savings by reducing care variation across its sites through the program. And a vertically integrated health system used the tools to reign in physician cost outliers for over $5.5 million in savings.

Standalone hospital or large health systems, all types of organization can and do benefit from better visibility into physician performance and are best practices for leveraging that data to influence physician behavior. One CEO of a member institution is so enthusiastic about the program that he told us "If I had the ear of the president, I would tell him that we need two things, a national fishing holiday in Crimson. Your physician management program provides with strategic pillars for moving an organization forward."

Prospects for national fishing holiday aside, whatever the end results of today's policy level discussions, these types of performance improvement are certain to stand our members in good stead. The institutions that have in place effective models for physician collaboration and powerful data-driven insights to inform physician behavior are going to be winners in tomorrow's healthcare system. It is gratifying to see that across our membership programs, our research, insights and tools are positioning our members for superior performance over the coming years.

Before I turn the call over to Michael, I would like to provide an update on several of our recent product launches. Our revenue integrity performance program is off to a great start and is garnering increased attention in the marketplace given the impending commencement in August of the government's Medicare payment audits through recovery audit contractors or RACs. In preparation for the start of these audits, we held a very successful teleconference recently, profiling two of our outlook cohort members and their development of the best practice workflow to handle the many complex demands of the RAC audit. Our initial members are well positioned to respond to the audit and stand to avoid millions of dollars in potential repayments. The program has added some great institutions to our membership process, including Charleston Area Medical Center, Jackson Memorial Hospital, East Orange General Hospital, and Methodist Medical Center of Illinois.

Our university business executive program too is continuing to build momentum. Having closed our inaugural meeting series this spring to a strong 3.7 GPA, we are now in the process of preparing for the fall meeting series, which will focus on the timely imperative of managing and reducing costs in several key areas. Our growing cohort of outstanding university business executives, including recent joins from such institutions as Texas A&M, Bucknell, Oklahoma State and the American University will ensure that our upcoming meeting discussions are as lively, interactive and informative as the last round.

Finally as I mentioned earlier, our physician management performance program is proving to have significant impact for our participating members. Our many case studies have demonstrated ROI make way for very compelling story to the market and as a result this has been one of the strongest launches in our history. In addition, with rapid average implementation times, the program allows members to begin receiving value extremely quickly, further reinforcing the purchase decision and members' willingness to recommend the membership, with over 90% of members reporting in QA calls that they will recommend the program to their peers.

The accomplishments of our recent launches stand as a testament to our outstanding new product development process. Our NPD pipeline is very robust and we're excited about the compelling products we have in progress for launches later this year and into 2010. A heavily member driven process we employer focuses on solutions in an era of urgency that offer proof of tangible financial returns and based on our intensive testing process and our early member collaboration, we anticipate continued success of the upcoming new program launches.

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

Michael Kirshbaum

Thanks, Robert. I've organized today's financial review around 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 are on a March 31 fiscal year-end, which means we just finished the first quarter of fiscal year 2010.

For the quarter just ended, revenue was 56.7 million compared to 57.2 million the same period last year. EBITDA excluding foreign currency gains, net income and earnings per diluted share were 7.3 million, 4.2 million and $0.27 respectively for the quarter ending June 30, 2009 compared to 9.4 million, 6.3 million and $0.36 respectively for the same quarter last year. Reconciliation of GAAP net income to EBITDA can be found in our press release.

For the quarter, cost of services increased to $30.1 million or 53% of revenue compared to 28.6 million or 49.9% of revenue in the same quarter the prior year. The increase in cost of services is primarily due to the increased cost associated with newer programs launched in previous quarters as well as increased investment associated with some of our analytical tools programs as discussed in previous calls. Member relations and marketing expenses was $12.6 million or 22.1% of revenue compared to $12.4 million or 21.7% of revenue in the same quarter the prior year. Currently, we have 111 sales teams in place compared to 111 in June 2008.

G&A expenses in the quarter decreased to $6.8 million or 11.9% of revenue compared to $6.9 million or 12.1% of revenue in the same quarter of the prior year. Depreciation and amortization expenses in the quarter increased to $1.9 million or 3.4% of revenue compared to $1.1 million or 1.9% of revenue in the same quarter of the prior year. The increase was primarily from the amortization of capitalized costs related to the development of analytical tools and some of our newer programs as well as amortization of intangible assets from the Crimson acquisition. Other expense net in the quarter was $1 million. This amount consists of interest income of $600,000 and a gain of $400,000 from changes in foreign currency exchange rates affecting our receivables from international members.

Turning to the balance sheet, membership fees receivable which excludes long term receivables increased $124.6 million as of June 30, 2009 versus $98.1 million as of June 30, 2008. DSOs which we calculate using average receivables was 191 in the quarter ended June 30, 2009 up from 143 days as of June 2008 and down from 196 days as of March 2009. Year-over-year increase in DSOs is due to continued increased mix towards our higher placement programs which includes more progress billings.

Excluding the effect of progress payments, DSOs on bill day are 45 days as of June 30, 2009, similar to the same metric in June 2008, which was 43 days. Deferred revenue, net of amounts that we billed up to 12 months increased 13.6% to 171 million as of June 30, 2009, up from 150.5 million as of June 30, 2008. The increase in deferred revenue is due mainly to higher proportion of multiyear contracts. Excluding prepaid contracts and long-term deferred, the deferred revenue balance for June 30, 2009 was 149.8 million up 13.5% over the prior year.

Looking at cash flow, during the three months ended June 30, 2009, we received $2.6 million of cash from operating activities compared to 93,000 provided from operating activities in the same quarter last year. The first quarter of our fiscal year typically provides the lowest quarterly cash flow from operations. For fiscal year 2010, we continue to expect cash flow from operations to be approximately 1.5 to two times net income. Capital expenditures for the three months ending June 30, 2009 were approximately $700,000 compared to $5.9 million in total capital expenditures for the three months ending June 30, 2008. This decrease is due to the buildup expense for our DC headquarters last year as well as reduced levels of capital expenditures associated with our analytic tools program this year when compared to the same period of the prior year.

Free cash flow defined as cash flow from operations less capital expenditures was $3.4 million used in the quarter ending June 30, 2009 compared to $5.6 million used in the same quarter of the previous year. For the three months ended June 30, 2009, we repurchased $900,000 of stock or approximately 35,000 shares. This brings our total share repurchase since the inception of the program in 2004 to $304.9 million or approximately 7.2 million shares. As of June 30, 2009, the remaining authorized repurchase amount was $45.1 million. As of June 30, 2009, our cash, cash equivalents and marketable securities balances were approximately $83.2 million.

As to contract value, contract value increased 0.2% to 232.8 million as of June 30, 2009 from 232.3 million as of June 30, 2008. 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 the remaining duration of any such agreements. For contracts of more than 12 months 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 over time. As previously announced, calendar 2009 revenues are expected to be within a few percentage points of calendar 2008 revenue. We expect EBITDA in the range of approximately $27 million to $35 million and earnings per diluted share of approximately $0.90 to $1.20. Each of the deferrals and marketing and new property expenses from the June quarter until late in the year, we expect expense for the calendar year to be back weighted.

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

Robert Musslewhite

Thanks, Michael. I want to close with a brief update on our progress against several key elements of our action plan for the year. First, we remain intently focused on value delivery to members. Within our existing programs, this focus is manifested in a relentless drive for superior service, product innovation, and research excellence. Member feedback through all channels including member surveys, QA calls, performance improvement tracking and impromptu communications, indicates that our work is paying dividends, both in members recognition of program value, and in the measurable returns that our work is producing through enhanced member performance.

Second, sales and marketing execution has been and continues to be another of our top priorities and we are pleased that we have began to see some early results from our investments in this area. With a 111 sales teams and seats, we have made significant innovations in the process for modifying our sales collateral quickly to focus on the hottest, highest ROI areas, and these messages are resonating well with the market. To complement these efforts, we are currently looking at leveraging our account management organization in creative ways to expand this more cost-effective channel for selling some of our still valuable but less hot products.

Finally, new techniques and campaigns are effectively generating inbound interest from the membership, which we are rapidly converting into new sales. Third, our cost management efforts continue to garner our attention and support from all members of our staff, from management down to the frontline. Having restructured program operations in a number of years earlier in the year, we are now seeing enhanced efficiency throughout the organization, which now stands at just under a thousand people. We continue to scrutinize each additional expenditure and new resource decisions as well as search for additional efficiencies across the firm and are gratified with the ongoing focus on improved cost performance that we see across the entire organization.

Overall, throughout the firm, everyone is working with commitment and engagement to execute at an A+ standard on all fronts to maintain stability this year and position us for a successful 2010. Our hard work, expertise and passion that our employees exhibit each day is energizing, and along with our strong business model, exceptional member relationships and track record of impact, it gives me tremendous confidence in our future prospects.

That completes the formal part of the call. I'll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bill Ginocchio with Deutsche Bank. Please proceed.

Paul Ginocchio – Deutsche Bank

I think Bill is my brother actually but this is Paul. A question on the for profits, hospitals had another good quarter again helped by cost savings, but I think also they are seeing an increase in admission, just wondering I know you said that many of you clients are mainly not-for-profit, are just scrutinizing their budgets, but it seems like maybe with the increased admissions that maybe budgets are getting a little bit better, is that the right read or is that still too early to say that?

Robert Musslewhite

It's a good question. I think it is still a member by member, you're looking at right factors, and I probably wouldn't differentiate necessarily between for profits and not-for-profits. I think we're seeing characteristics on both sides, for profit and not-for-profit. So what I look for on the volume side if you are seeing outpatient and surgical volumes go up, that is generally a good sign. We have got a balanced side against bad debt and so areas with large unemployment, sometimes the bad debt can work the other way against that.

Certainly, we are still seeing even in the for profits that you mentioned, Paul, cost control, so if you look at all those reports, I think we see members still focused on cost controls, which can make some of impact on us feel acute. And then I factor in just the reform outlook and how the reform levers are going to play to where they are. So there are still a lot of factors at work in economics. We certainly have some members that are starting to perform pretty well and some members that are still feeling some real economic pressures. So I wouldn't confine that to just the not-for-profit or the for-profit, I think we're seeing it in different areas across the board.

Paul Ginocchio – Deutsche Bank

Thanks. Just a couple more, I think it sounds like overall what you said in your call, the healthcare reform has really driven engagement and is there any way to measure that? Obviously you have launched some new programs, it helped them, is there anyway we could – you can measure the increased engagement just from that healthcare reform?

Robert Musslewhite

Well, on that one, we have had – we just concluded our CEO meetings there. We had seen 700 CEOs in our hospice or in hotels across the country that had been talking to about these issues and those meetings scores have been some of the highest we have had in our history. So I think that we are seeing CEOs really engaged in the topic. It is on everyone's mind and it is one of the things where daily there is new news to get out there and new developments here on Capitol Hill. So I think it is just an area that everyone is interested in, both hospitals, and a lot of people outside of hospitals, so I think it is just naturally something where when people get a needed advice and counsel in terms of how to grapple with some of the plans that come out of reform, they are turning to us more and more for that.

Paul Ginocchio – Deutsche Bank

Thank you.

Robert Musslewhite

But, it is not a quantitative measure other than I can tell you the meetings of course have been exceptionally high and we have seen a lot of member interested in follow up after the meetings in terms of some of the things we have talked about in the meetings.

Paul Ginocchio – Deutsche Bank

Great. Thanks very much.

Operator

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

Brandon Dobell – William Blair

Thanks. Michael, at the end of your prepared comments, you talked about kind of timing around spending your expenses, wanted to make sure I understood what you're trying to communicate there that is more weighted towards the back half of the year or how do we think about it? I think I am missing what you said.

Michael Kirshbaum

Yes, that is right. I think if you look at our expense line for the year, we expect more expenses in the second half due to two factors. One, we didn't launch any new program this quarter, I think we will just defer that to later in the year, so plan to get our normal pace of new program launches in the year. And two, our planned investments at the beginning of the year are a little more back weighted towards the second half.

Brandon Dobell – William Blair

Okay, makes sense. If you look at the CV in the quarter, pretty decent results in a pretty tough market, how do you characterize or how do you rank the sources of strength between new customers that have been either vertical, cross sell, strength on renewals or lack thereof, just some color around how the CV played out?

Michael Kirshbaum

Sure. I think it is consistent what we saw last quarter. We have several new programs that are performing particularly well. Our revenue integrity performance program that Robert mentioned earlier continues to do well. Programs we launched last year continue to perform well that are financially focused. So from a new program perspective, I think that matrix has been kind of consistent with historical ranges. Renewals have been little tougher and sales of existing programs that are not financially focused are going to be tougher and that affects our cross sell ratio. Pricing has been – there has been a little pressure on pricing, but probably still within historical ranges, maybe towards the low-end and new members. It's a pretty small percentage of the total amount but no different from historical. So, summing it all up, I would say that we continue to see pressure on cross sell, but see increased strong results on new programs.

Brandon Dobell – William Blair

Okay. And then finally, how do you characterize your execution around new program installations at existing or new customers now versus a couple of quarters ago and also if you look at a quarter where you have really set all your execution metrics were kind of really doing well, strong across the board, how much room is there between how you are executing now and let us say, not the perfect storm quarter, but a quarter where you guys really prodded the execution?

Robert Musslewhite

Sorry, Brandon; I'm not fully understanding the question.

Brandon Dobell – William Blair

I guess if you look at your execution on the say new engagements, now let us say was on a scale of 1 to 10, it was, I don't know, I will pick a number of 5 or 7, whatever it is. Now how do you characterize that now to where you were a couple of quarters ago and you know how much better can you execute and how should we think about the impact of that gap between where you are now and where you want to be, in terms of what that does to the expense structure or the margin leverage?

Robert Musslewhite

Like any answer from just a quality of delivery and impact we are having, I feel it is about as high as we have ever seen it. We're getting really good scores back from members on our meetings series, our QA scores in each of our programs have been out or very close to historical highs and so it feels like the value being delivered to members is where we want it to be. It feels very, very good. I think that has been a pretty high-level now for several months and the difference I'm not sure if this is exactly what you're asking but if anything I think that value is starting to come around and we're seeing some better activity on the new sales side. So we're able to translate some of the momentum that we felt on the delivery and the value delivery side into some better performance on the sell side of the market especially around the financially focused programs as Michael indicated.

Brandon Dobell – William Blair

Okay. And final question, I know that that education vertical is still pretty small but any of the – as much chaos in education these days, it seems like it is maybe in healthcare, any color you can give us around momentum with potential new programs, potential new clients with an higher rate, are they pushing back in the same kinds of ways that your hospital customers may be pushing back just given the budget are facing?

Robert Musslewhite

We have there programs there, all research memberships programs right now, and I think we felt pretty similar as we have seen in healthcare, our healthcare programs, so there are some tough forces like you said in education members as well. I think we have seen similar impact on the sales on the renewal side, obviously as we have been able to tailor the agendas more towards financial focus, that has helped. And on the score side, again, very strong scores for those programs, high-quality content, high value to members. Overall, we still feel great about the growth potential. So I think if anything probably feels like there is a lot of room for improvement in the metrics there as the economy improves just because we are feeling economic pressures in that part of the business as well.

Brandon Dobell – William Blair

Okay. Great, thanks a lot.

Operator

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

Shlomo Rosenbaum – Stifel Nicolaus

Hi. Thanks for taking my questions. I want to ask if you can characterize where your bookings came from in the quarter, is it a similar trend of the research membership trending downward, about the analytical tools trending upward, are you seeing some stability in the research membership now.

Robert Musslewhite

Well, I think we have seen good sales success wherever we have been able to successfully position the programs against margin related issues. So financially focused programs on the tools business and financially focused programs on the research side have done quite well. I think the places where it has been harder to position those programs against specific ROI such as leadership development, workforce, and nursing related programs, even our philanthropy program, those have been a little bit tougher. So I think it is less of a program model issue and more of the content focus of the programs. You know the one thing I will say is, if you look at this past quarter, as we talked about renewal challenges, especially on the membership side throughout the quarter, throughout the first half of the year, I think we saw some of the members coming back in in the prior quarter. So we had some sales success on the membership side and places where the repositioning against the economy I think really paid dividends.

Shlomo Rosenbaum – Stifel Nicolaus

So, are you seeing any, did you see any change in the sales you know through the quarter, was June better than May, that was better than April, I mean how do you characterize what was going on?

Robert Musslewhite

I think it felt better throughout the quarter. So June was certainly a strong month in terms of where we hoped to be generating sales. It came in line with where we wanted it to be but it was a good month relative to the rest of the quarter, yes.

Shlomo Rosenbaum – Stifel Nicolaus

Okay. And just a couple, like housekeeping stuff, tax rate up, what does that due to again, Michael?

Michael Kirshbaum

As you remember, we talked last quarter as higher levels of net or pretax income, the tax rate will be higher because we have some fixed tax credits, which is where we ended up for this quarter. We ended up sort of in the high level of pretax income tax rate firmly up from where it was last year. And for the rest of the year, I think our previous guidance of tax rate within a couple of business points of where it is now, from the mid-33s and mid 34s probably we would say.

Shlomo Rosenbaum – Stifel Nicolaus

Just to get clear from some of the installation support programs that you guys have been doing, excuse me, the analytical tools programs that we are having problems with the implementations, how far along do you guys feel you are with those implementations and working out the kinks and do you feel like you're getting towards the tail end of that?

Robert Musslewhite

Well it is at a similar position we have discussed before, it is still in progress. I don't think we expect it to be going on throughout the year. You know as you know we have seen some real benefit from the scalable processes in some of our programs and we have been working on getting those into other programs where it wasn't so scalable, improving the data extraction process, testing it and getting it implemented with members. So there is still work to do throughout this year. We're heartened by the renewal success in some of these programs, and I think that has been a positive and hopefully we will see it continue to yield as we move across the year, but I think we expect that to continue throughout the year.

Shlomo Rosenbaum – Stifel Nicolaus

So you know is there some way that you have some kind of measurement of success of the installations where you are streamlining them and you can see measured success or you know do you sort of have to wait a couple of quarters to look through that out?

Robert Musslewhite

No, there is four ways in which we would expect to see improvement, just to let some renewal, QA scores, implementation speed, and ultimately cross sell back into those members. And so I think on the renewal and QS score side, I think we have seen some yield, it is still early, but we have seen a little bit of yield there. On the implementation speed and cross sell, it is just hard to say yet, but I think we would expect to see improvements on those metrics as we get through the end of the year and into next year.

Shlomo Rosenbaum – Stifel Nicolaus

Okay, very good. Thanks a lot.

Operator

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

Scott Schneeberger – Oppenheimer

Thanks. Good afternoon. You had said at the beginning of the prepared remarks new sales were tougher and renewals were tougher, , I know you gave annual renewable numbers, but could you speak to that a little bit on what you have seen versus the last update which was the last quarter?

Robert Musslewhite

Well, the environment remained tough. I think what we saw is on the renewal side, renewals of programs that where as we have always talked about the work force focus, leadership development oriented, nursing oriented, even philanthropy oriented, those have just been tougher because it is harder to demonstrate members the clearly link ROI as far as we try and you have a lot of members where there has been extreme budget pressure, they just wanted to take a little bit of time off.

So I think we still saw that phenomenon. If you look at renewals around our tools programs, I think they held up recently well this past quarter, and you know on our minds, that is – it is due to some of the things we have been talking about which are the stickiness of the tools, they get more embedded in the member workflow, they have a clear ROI associated with them, and I think that helps make the value tangibly clear and makes it harder for members to take some time off.

On the sales side, it also still soft environment, but I think we saw some pockets where we had some reasonable sales success over the past quarter. And on the research side, some of the factors that I think were suffer on the renewal side might have been not as impactful on the sales side as we saw some members who might have dropped on the renewal side in the first quarter coming back in during the second quarter on the sale side. So I feel like on the sales side the description is probably better to say wherever we were able to successfully position on the front end around ROI and specific budget impact for members we had reasonable success.

Scott Schneeberger – Oppenheimer

Thanks. That pretty much covers it, but I did think it was very positive to hear that some folks that passed were coming back. Is it enough to offset some of the softer programs right now on a net basis?

Robert Musslewhite

I don't think – you know, not yet. It is not enough to make a noticeable trend. I think the results kind of speak for themselves in terms of where we are. You know there are still some programs that we talk about doing very well, there are obviously some programs in there that aren't doing as well, given that we are still pretty flat on revenues. So I think that the hope is that the programs that are doing extremely well continue to do well. We can build on that momentum as we move through the year. I think we have a lot of optimism that is going to be the case and we can improve results a little bit in some of the programs that haven't been doing as well this year to get to good numbers over the next five months.

Scott Schneeberger – Oppenheimer

Thanks. And just a way – guidance maintained, but within the investment spending that you have outlined for us in the past, has that changed? It sounds like you were consistent with the overall spend but has that changed with regard to which pockets you are allocating? Thanks.

Michael Kirshbaum

No, it is not. We are still pretty much in line to deliver on the plan we talked about in the beginning of the year. Timing maybe a little more back weighted to the year but really hasn't changed any of those investments.

Scott Schneeberger – Oppenheimer

Thanks. And then, finally to follow-up on an earlier question with regard to education, some government money allocated to community colleges going forward, is this an opportunity for you, is this an area that you serve, are you more in the bachelors as opposed to the associate level or is what you serve applicable at all? Thanks.

Robert Musslewhite

We are certainly looking at it. I think it is the same situation in some of the healthcare stimulus spend. I don't think we would be the direct recipients of any of the money but we could be very helpful in members receiving money and so it is something we're looking at and we certainly have some new products ideas around those opportunities in the education space, Scott. It is a good question.

Scott Schneeberger – Oppenheimer

All right, thanks very much.

Robert Musslewhite

Thank you.

Operator

Your next question comes from the line of Frank Sparacino with First Analysis. Please proceed.

Frank Sparacino – First Analysis

Hi guys. I was just wondering if you could just maybe give a little bit more detail in terms of the reallocation of the sales force, Rob, what you talked about earlier.

Michael Kirshbaum

Frank, it is Michael. I think in Robert's remarks, I think he was certain areas as we talked about throughout the question-and-answer portion. We have certain products that are performing reasonably well, they are margin focused products. We have other products that are performing you know in a little more challenging environment. The reallocation was basically just doubling down there, but we have got a little bit of wind at our back and taking more offers from some of the other products and just re-distributing some of our existing planned marketing expense.

Frank Sparacino – First Analysis

Is there any way to quantify that though, Michael?

Michael Kirshbaum

You know, there are several markers on the margins, so we have 111 sales teams, it may be an incremental four, five that we are pulling off of some products that are taking a little more effort to sell and putting them and doubling down in some of our more recent launches, but it is more just re-allocation on the margins and trying to be a little more strategic around how we're using our sales and market resources.

Robert Musslewhite

Hi, Frank. It is a process we go through each year around this time so that we see where we out of the first half and look at where we want to be investing those resources for the second half where you do some shuffling around. So it is a common time of the year to do that.

Operator

With no further questions in the queue, I would now like to turn the call back over to Mr. Robert Musslewhite for closing remarks. Please proceed, sir.

Robert Musslewhite

Thank you all for joining this evening's call and I look forward to seeing many of you out on the road in the coming weeks. Thank you.

Operator

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

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