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Corporate Executive Board (NYSE:CEB)

Q2 2013 Earnings Call

July 30, 2013 9:00 am ET

Executives

Richard S. Lindahl - Chief Financial Officer and Principal Accounting Officer

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

Paul Ginocchio - Deutsche Bank AG, Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to CEB's Second Quarter 2013 Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 10 by dialing (719) 457-0820. The replay passcode is 5553063. The replay will also be available beginning later today and through August 10 at the company's website.

To the extent any non-GAAP financial measures are 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 company's website and following the Investors link via yesterday's news release. You'll also find a PDF of the supporting materials that the company will use in the prepared remarks this morning by going to the Investors page and following the link to the second quarter 2013 earnings conference call. Please review the second page of these materials, which includes important information about forward-looking information included in the presentation.

This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding CEB's expected quarterly and annual financial performance for fiscal 2013 or beyond.

For this purpose, any statements made during this call that are not statements of historical fact 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 CEB'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 with 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 Chief Financial Officer, Mr. Richard Lindahl. Please go ahead, sir.

Richard S. Lindahl

Thank you, Scott, and good morning, everyone. I'm Rich Lindahl, CFO of CEB. Thank you for calling or logging into our second quarter 2013 earnings report.

On today's call, I'll review our second quarter financial results and discuss our 2013 guidance. Tom Monahan, our Chief Executive Officer, will then takeover to share additional insight on our operations in the quarter and our priorities for the year ahead. Then we'll take your questions.

Please turn to Slide 3 of our presentation and we'll start with a quick summary of today's report. We posted another solid quarter that validates the strategy we shared with you at the beginning of the year and discussed in more detail at our Investor Day in June. Our results were driven by double-digit organic revenue growth. We also were pleased to see the initial returns on the tactical investments we've made in the SHL segment, which posted high single-digit growth. We continued to deploy growth investments, which, as expected, led to sequential increases in operating expenses. And overall, we're pleased with our progress and reaffirming our current guidance with risks and opportunities still balanced toward the midpoint of our ranges.

Let's turn to Slide 4 for a summary recap of our results. Revenue was $204.6 million in the second quarter of 2013, an increase of 50.8% on a year-over-year basis. Adjusted EBITDA margin was 24.6% in the second quarter, compared to 25.9% in the second quarter of 2012. Diluted earnings per share were $0.40, and non-GAAP diluted earnings per share increased 32.7% to $0.73 for the second quarter of 2013.

Now let's turn to Slide 5 to review our key operating metrics, which were solid across-the-board. I'll share some of the numbers with you now and Tom will add more color at the market level in his remarks. CEB segment contract value at June 30, 2013 was $567.2 million, up 10.6% versus June 30, 2012 and reflecting solid bookings growth over the past year.

For the SHL segment, adjusted revenue was $50.7 million in the second quarter, an increase of 8.6%, compared to the second quarter of 2012. Growth was only modestly impacted by exchange rates during the quarter. As on a constant-currency basis, SHL adjusted revenue growth was 8.7%.

CEB segment Wallet retention rate was 99% at June 30, 2013, in the normal range and down slightly compared to 100% in the prior year. SHL segment Wallet retention rate was 96% at June 30, also in the normal range and continuing to reflect the strong recurring revenue in that part of our business.

Total CEB segment member institutions grew 4.7% to 6,189 in the second quarter, and we continue to add institutions in both our middle market and large corporate memberships.

Finally, CEB segment Contract Value per member institution was $91,600 at June 30, a 5.6% over the second quarter of 2012.

Please turn to Slide 6 and I'll review key segment highlights for the quarter. As you can see, our second quarter results benefited from both solid organic gains in our CEB segment and the addition of SHL. CEB segment revenue was $156.8 million in the second quarter, a 15.5% increase, compared to $135.7 million in the second quarter of 2012. Included in the CEB segment is approximately $6.3 million of inorganic revenue from PDRI. And so our organic growth rate was 10.9% in the quarter. The SHL segment contributed $47.8 million of revenue in the second quarter, net of a $3 million reduction to reflect the deferred revenue fair value adjustment. Additional quarterly reductions will be recognized going forward. And we currently estimate the total impact on 2013 revenue will be approximately $13 million.

Moving on to consolidated operating expenses. Cost of services in the second quarter increased by $28.4 million versus the second quarter of 2012. Acquired businesses represented about 80% of this increase, with the additional balance coming from continued investments in product development, as well as additional service delivery resources to support our management tools and solutions offerings.

Member relations and marketing expense increased by $19.6 million in the second quarter versus the prior year period. Acquisitions were the biggest factor here as well, representing about 78% of the change. The remaining portion mainly reflects increased headcount for our sales and marketing teams, as well as increased commissions on higher year-over-year bookings.

General and administrative costs in the second quarter were up $9.2 million compared to the prior year, with about 88% of the increase due to acquired businesses. Acquisition-related costs of $2 million in the second quarter were driven by planned integration expenses.

Interest income and other net expense was negative $0.3 million in the second quarter of 2013, as compared to a net expense of $0.6 million in the second quarter of 2012, on smaller losses in both foreign currency translation and deferred compensation plan assets.

Interest expense in the second quarter was $6.2 million versus $0.1 million in the prior year period, reflecting the interest on the debt raised to fund the SHL acquisition. Total company adjusted EBITDA margin in the second quarter was 24.6% versus 25.9% in the second quarter of 2012.

At the segment level, adjusted EBITDA margin in the quarter was 26.2% for the CEB segment and 19.7% for the SHL segment. CEB segment margins were relatively flat compared to the prior year and consistent with our typical seasonal investment profile.

As expected, margins in the SHL segment remained lower than last year, as expenses continue to ramp-up from increased headcount in the SHL segment sales and product delivery functions.

We did see some sequential improvement in SHL segment margins, which were helped by encouraging growth in adjusted revenue and reflected the initial returns on these tactical investments.

Depreciation and amortization in the second quarter was $14.8 million, an increase of $8.8 million, compared to the second quarter of 2012. Most of this change is from higher amortization of intangible assets, resulting from the SHL acquisition.

Our effective tax rate in the second quarter was 38.4%, which is slightly higher than in the first quarter due mostly to the distribution of global income and the impact of foreign currency translation losses. On a year-to-date basis, our effective tax rate is now 37.9%.

Please turn to Slide 7 for select balance sheet and cash flow highlights. We remain in a healthy financial position with $81.6 million of cash at June 30. Accounts receivable was $187.4 million at June 30, which include $61.1 million for SHL and PDRI. The current portion of deferred revenue was $380.9 million at June 30, including $54 million from SHL and PDRI.

As compared to the prior year, CEB segment deferred revenue, excluding PDRI, increased by 11.2% to $326.9 million, a positive leading indicator for CEB segment revenue.

We ended the quarter with $514.5 million of total debt on the balance sheet and we are on track to reach a net debt to adjusted EBITDA ratio of approximately 2x by the end of the year. We also maintain access to additional liquidity via the $93 million of undrawn availability under our revolver.

Let me now share a quick update on our financing arrangements. As you were no doubt aware, despite recent volatility, conditions in the debt markets remained generally favorable to issuers. We have been closely monitoring the financing environment and are currently engaged in discussions with our banks to amend, extend and reprice our existing senior secured credit facility. This effort, if successful, would modestly improved our interest costs. We will provide additional disclosure on any debt modification if and when it occurs.

For the quarter, we spent $5.6 million on capital expenditures, largely on application platform enhancements, system infrastructure, office build-out costs and integration items. We made a $7.3 million cost method investment that Tom will discuss in his remarks. We also repaid $3.3 million of debt outstanding.

We continue to return cash to shareholders by paying out $7.6 million of dividends in the quarter. And as we've previously discussed, we plan to use stock buybacks to offset dilution and maintain a constant share count.

During the quarter, we made modest progress against that objective by repurchasing $2.8 million of stock. We now have $47.2 million of availability under the share repurchase program approved by the Board earlier this year. Management will determine the amount and timing of purchases and the authorization will run through December 31, 2014.

Now let's move on to 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.

Please turn to Slide 8, which highlights our outlook for the year ahead. In short, we are reaffirming the guidance we initially provided in February. As we said then, we're planning for continued solid revenue growth, attractive margin production and increased investment to produce several -- to pursue several short- and long-term growth opportunities that we see in our business.

Starting at the top line, we currently expect adjusted revenue of $825 million to $845 million. And as I said, the reduction in revenue from the deferred revenue fair value adjustment will be approximately $13 million. So the implied revenue outlook is $812 million to $832 million. This view reflects continued momentum across our markets globally, offset by some headwinds in the U.S. government sector and the increased exposure of our more global business to currency volatility.

Within this outlook, for the remainder of 2013, we expect sequential revenue growth in the CEB segment, although annual growth will be somewhat constrained by our government business, especially in the fourth quarter.

As to adjusted revenue in the SHL segment, it is important to remember the seasonal influences of the third quarter, which will drive a sequential decline, even as year-over-year growth improves on an easier comparable.

In the fourth quarter, sequential growth should resume at SHL with annual growth likely to be somewhere in between the second and third quarter rates. Tom will elaborate further on regional trends and other factors influencing our second half top line profile.

Net-net, we still see a wide array of potential outcomes and are currently tracking near the midpoint of our consolidated revenue range for the year on a reported U.S. dollar basis, assuming exchange rates remain at about the same place going forward. We are planning for adjusted EBITDA margin between 25% and 26.5%, depending largely on where we land in the revenue range.

Let me give you some color on how we see the remainder of the year playing out in each of our segments. In the CEB segment, we expect third and fourth quarter margins to be slightly higher than seen in the second quarter. While we expect CEB segment revenue to grow sequentially for the rest of this year, operating expenses will also grow on the run rate effects of year-to-date hiring, continued investment in product development and our seasonally higher fourth quarter spending profile.

In the SHL segment, we expect third quarter margins to remain relatively flat to the first half levels before improving in Q4. As we've said previously, we've added sales and delivery capacity in that part of the business and the run rate impact of these new hires was seen in higher second quarter operating expenses. While we expect these costs will remain relatively flat, we also expect SHL segment adjusted revenue to decline seasonally and constrain third quarter margin improvement.

In the fourth quarter, we still expect that SHL segment margins will improve as sequential revenue growth resumes. For 2013, we expect a total of $8 million to $10 million of acquisition-related costs as we continue the next phase of SHL integration. Depreciation and amortization in 2013 is expected to be between $61 million and $63 million, and capital expenditures are expected to be approximately $29 million to $31 million, including $4 million to $5 million on integration projects.

Let me comment for just a moment about our tax rate. As we said last year, we expect an ongoing -- as we said last quarter, we expect an ongoing normalized effective tax rate in the range of 37% to 39%. The effective tax rate is dependent on the distribution of global income and excludes any additional permanent book tax differences that are not determinable at this time, such as future foreign currency translation gains or losses or other discrete items that are not currently recognizable under U.S. GAAP.

Two weeks ago, the United Kingdom formally approved a reduction to its corporate income tax rates beginning in April 2014. While this action does not impact our normalized 2013 tax rate, it does require us to revalue our deferred tax assets and deferred tax liabilities, which will drive a one-time benefit to our effective tax rate in 2013.

Accordingly, we currently estimate that we will realize an approximate $3 million reduction to the provision for income taxes in the third quarter. While this onetime benefit will affect the 2013 effective tax rate, we remain focused on using our global structure to continue our long-term tax planning efforts. We will keep you posted as our visibility increases on factors that will influence the rate in 2014 and beyond. But for now, a normalized tax rate in the range of 37% to 39% remains a good long-term planning assumption.

To recap, through the second quarter, we remain on track with our objectives for the year, solid overall bookings combined with planned growth investments to produce the outcomes we expected in the quarter, including some early returns on our tactical investments in the SHL segment. At the same time, we continue to experience headwinds in our Government business from sequestration, so full year revenue is currently tracking near the midpoint of our range. We are also maintaining our 2013 investment plan, which may push margins below the midpoint of our range.

As an offset, we now expect a more favorable tax rate for the year and see near-term opportunities, to modestly reduce our interest expense. So taking all of these puts and takes into account, we're maintaining our outlook for 2013 non-GAAP diluted earnings per share in the range of $2.85 to $3.15. That's it for the financial summary. I'll Now, turn the call over to Tom, who will share more color on our operations and growth strategy in the year ahead.

Thomas L. Monahan

Thanks, Rich, and welcome to everyone who's dialed and logged in for today's call. We're excited to update you on the CEB story and on our work through the first 6 months of 2013.

Let me start my remarks on Slide 9. As Rich shared, our financial returns continue to validate our strategy of tying uniquely valuable insights and data to the big dollar decisions made by key corporate and functional leaders. We're executing very well against the strategic and financial priorities that we laid out at the beginning of the year and at our annual Investor Day and our results reflect the intensity of this focus. More broadly, our performance reaffirms the strategic investments we've made in the business, the relevance of our products and assets and above all, the inspired efforts of my 3,600 colleagues globally.

The performance of our largest end markets, the CEB segment in North America across both large enterprise and middle-market was obviously critical to achieving this result. We're pleased that these large portions of our business continue to track against targets. We remain very excited about the extensive opportunities to create hundreds and thousands of new relationships and deepen them across time. Continued healthy growth in this business demonstrates that we still have vast opportunity ahead. The performance of our North America teams overall is particularly impressive, given that this part of our business contains our biggest current challenge, the U.S. Federal sector. The story here is a continuation of one we outlined in the first quarter call. The onset of the sequester at the beginning of the year has resulted in a very different budgeting environment for our clients as they confront both smaller budgets and a more complicated decision-making processes.

Even with our strong teams and valuable resources, our efforts to generate new and cross-sales are not immune from all the implications of this environment. Unless we see a rapid change in Q3, we're likely to see this business shrink into double-digit rate rather than growing in line with the rest of the firm.

It's obviously not a huge driver of our overall growth, across CEB government and our PDRI business, our U.S. Federal footprint totals only about 5% of our overall revenue. But it will be a headwind on reaching the upper end of our revenue guidance.

Outside the U.S., we were encouraged to see Europe sustain, even gain momentum in the second quarter. The region still isn't growing at the overall CEB segment average, but in the continuation of the trend that we first highlighted in Q4 2012. Our teams were able to generate solid mid to high single-digit growth for Q2 in most of our markets. We expect that economic conditions will continue to be a challenge, but it's exciting to see our teams link our powerful insights, data and tools, the needs of executives in these challenging markets.

Asia-Pacific continue to generate strong growth, but did slow a bit in the quarter. Although the majority of the economies in the region are still very healthy, we've seen executives get a bit more wary of any new spending as they confront slower growth in China and India. Obviously, markets across this region represent a small portion of our total business, but are strategically important as we build out our global business.

Our SHL business also gained momentum in the first half across all market regions. It was great to see this segment back in the 8-13% organic growth rate range that we target, but we know that our best work is still ahead of us. This performance is particularly impressive given that the performance reflects, at this point, only very minimal cross-selling and referral activity. I'll comment more on what we're doing to get that engine moving later in my presentation.

The basic headlines on this business haven't changed. We have a great team and world class assets lined up against a vast and growing market opportunity. As we shared in our Investor Day, 95% of large companies are planning to increase spend on analytics related to talent decisions over the next 2 years. And assessment technologies alone are already a $4.6 billion market growing at 9% a year.

With an opportunity like this, we made some early investments to get the business growing at our target 8% to 13% growth rate. We have more of what we need to do here, but this quarter with solid revenue growth and double-digit bookings growth gives us confidence that we have our business moving in the right direction. We also know that we're just scratching the surface on demand in this market and realizing only the first few synergy opportunities that we've laid out.

In summary, I'm pleased with what our teams delivered in the first half of the year, in a world defined by the need to manage talent, information and risk effectively. CEB's insights and tools are vital to strong corporate performance.

As you know, our goal is not just to achieve our in-year financial goals, but set ourselves up for continued impact in the coming years. We continue to deliver not only against our short-term priorities for building the business, but laying the groundwork for future growth and impact on our markets.

I want to share briefly some of the highlights on our progress on these priorities. Please turn to Slide 10 for an update of our first priority, delivering surplus business value. Our goal is not simply to provide our members and clients with a fair return on their investment with us, but to help them produce transformative outcomes for their team, function or company. Everything we do, our insights, tools and advice aims to help a member grow revenue, reduce cost, reduce risk and ultimately, transform their organization. We're pleased that our core metrics demonstrate continued success in generating value for our members and clients. We saw Wallet retention in both the CEB segment and the SHL segment continuing in a solid zone, and saw CEB Contract Value per member rise by 4.6%. And in the past year, we added 280 great new logos to the member roster.

The foundation of these great results is must-have research and insight on the most important elements of our members' jobs and on the performance of their people and teams. These insights power advice, assessments, tools and technology in every area of the business. And this is shaping up to be a banner year. Our research teams are well into their major work for the year and we've uncovered some exciting new findings.

Let me briefly call attention to some of these recent efforts. Our flagship HR practice examined the issue of succession management in the face of a changing work environment. This is a critical issue for the board, CHROs and their CXO peers. In fact, 61% of CHROs reported that a succession planning is the top talent priority for boards. This is a great example of a recurring high-stakes workflow where we want our thinking and tools sitting right at the center.

CEB has offered market-leading support on succession planning for well over a decade, but we continue to push the boundaries of insight as company's faced new challenges. For example, companies are increasingly building leadership pipelines to nowhere as leaders are being prepared for roles that simply will not exist in the future. Look on the right side of Slide 10, you can see 2 dimensions of this issue. Last year, 13% of legacy leadership positions were eliminated, and at the same time, 31% of rising leaders were placed on roles that hadn't existed before. Hitting this moving target requires a new approach to succession management. By taking a portfolio management view grounded in sensing future leadership demands, companies can radically improve their leadership bench strength. We've built best practice roadmaps that help companies embed demand-based talent planning into existing talent management processes.

This work is a great example of our producing must-have insight that not only immediately helps our members, but establishes CEB as the global thought leader on a topic that links to a variety of our product areas, from assessments to leadership, academies to leadership councils.

One more note about delivering surplus value, long-time followers of CEB will remember that one of the major investments we made in our business coming out of the downturn was to elevate and grow our advisory capabilities. The strength and reach of our advisory team is one of the hidden secrets of our success. Obviously, digital channels, such as portals, tools, et cetera, represent the overwhelming volume of users and usage. And we continue to see rising per member use. But no matter how rich the content and interfaces are, there are certain decisions that a CXO needs to talk through with a high-end intellect who is armed with the world's most valuable insights and the perspectives of their global peers.

Our CEB segment advisory team, along with their SHL professional -- SHL segment professional services peers plays a vital role in making sure that member companies can take action using our resources, tools and insights. And this has been a bellwether year as these teams have touched more members at more senior levels and created more outcomes than ever before. And we're excited to see their impact scale as we continue to arm them with solutions that drive both individual and team productivity.

All in all, our financial results reflect an unstinting focus on excellence at the core elements of our business, generating must-have contents on big dollar corporate problems and people decisions linking this content to great member work and powerful tools and technology and catalyzing member action with inspired sales, service and advice.

Please turn to Slide 11 for an update on our second priority, leading analytic transformation of talent management. We've been outspoken and are excited about the opportunity to help senior executives manage talent with increasing rigor and analytic depth. You see why on the right-hand side of the slide. Executives are increasing spend on HR data and analytics, and CEB has only begun to tap the current spend at most organizations on talent support. You see that 95% of senior HR leaders agree that they're going to spend more money on HR data and analytics in just the next 2 years. And at of the bottom of the page, if someone bought everything they could in our current talent suite, we'd still be only scratching the surface of their total HR advisory spend.

Building a world class set of assets in this area has been a focus of our internal product development for years and recently has included some notable acquisitions, including Baumgartner, Valtera and SHL. We're coming up on the 1-year anniversary of the SHL acquisition, and I'm really pleased with the way our business in this sector is now shaping up. Our ability to help executives make decisions about talent with the rigor and predictive insight is unparalleled. And our ability to link those talent decisions to outcomes that drive their business is a unique differentiator.

We're moving well pass the "integration phase" with SHL. Our efforts in this space have now settled into everyday efforts to marry capabilities from across our firm into high impact products that help members transform their companies. As Paul Levett shared at the Investor Day, we now have 3 products in the market that blend our deep knowledge of business processes and outcomes with our unmatched talent assessment and prediction capabilities. These target the needs of sales, IT and finance executives, areas of rapid change that make routine, big dollar talent choices. We've also used data from SHL in our talent platform more broadly to add value to our other core membership subscriptions through resource centers on talent in high talent areas like R&D.

I think we're only scratching the surface of the opportunity we were addressing. We have only begun to generate a solid flow of high-quality referrals across the business. So from this point forward, we're focused on giving our team the resources to tap these opportunities. Building out our integrated -- our leading integrated talent management platform is not the only part of product development however. We continue to drive powerful innovation across the business. Most of this develops organically through our own individual teams, but where it makes sense, we also look at acquisitions and partnerships to accelerate innovation.

I thought I'd highlight a couple of these recent developments. As part of organic product development, we sometimes partner with companies that have a unique capability or technology to bring a new solution to market. Sometimes, the opportunity is interesting enough to warrant a more strategic relationship with the company. You saw us do that twice across the past couple of quarters. The first was with a company called, CorpU, which develops very high-end corporate learning and leadership development solutions, which blend great immersive technology and social learning into a uniquely valuable platform used by some of the world's most sophisticated companies.

A key element of our Leadership Academies roadmap was blending new types of online and social learning into our offers, and this partnership offered a great chance to accelerate this. We've already codeveloped several modules and are really excited at the pace that this is progressing.

The second was The TAS Group, a leading sales process automation company, with whom we developed a new sales process automation tool called, Challenger Dealmaker. The tool operates within the salesforce.com environment and uses our research and data to help reps navigate complex selling processes. We've just brought a beta to market as part of our growing sales solution suite and have been very gratified by the early response. We don't expect these types of partnerships to dominate our focus, but cementing relations with important emerging partners can help us to continually tighten the links between our insights, data and tools and daily member work. This is a vital part of our strategy for getting ever deeper in our 5 core domains.

Please turn to Slide 12 for an update on our third priority, achieving brand recognition that matches our global impact. We know that a strong CEB brand is vital to having impact on member companies and achieving real financial returns. A strong brand helps us acquire new members and deepen relationships. And importantly, it helps our members leverage our work to drive change. We're investing to build a clear, compelling story about CEB in all of our markets.

On previous calls, we've discussed work on 3 dimensions: rebranding our SHL business as part of an integrated set of talent management solutions; raising the visibility of the CEB brand through simple and consistent articulations of our capabilities and impact; and finally, continuing to build an elite talent brand that attracts the people we need to power the business for years to come.

Our focus this year is making sure that the vast market understands the reach and range of our integrated talent management offers. While we have an unmatched track record of impact, many executives in the CHRO's office and beyond don't yet realize the full power of what we can do for them. Or for that matter, the full power of what they can do with our help. The nearest-term objective is to transition the SHL brand firmly into the CEB brand family. And we've targeted several major milestones in Q3. The goal is not only to link the brands, but to loudly broadcast our full suite of capabilities to the market. We're seeking to arm our teams with the tools to better refer and collaborate on business around the world.

The foundation of these changes is a refreshed view of our end-to-end talent offer. On the right side of the slide, you can see that we've organized our offerings into a set of integrated talent management solutions for talent selection, engagement, development and organizational developments, anchored in proven best practices, research and database insights. Our SHL talent measurement solutions, workforce surveys and analytics and leaning development offerings bring together to enable better performance results through better talents, insights, decisions and actions.

We're looking forward to a broader rollout of this updated position in Q3, keeping the market well aware of what we're now capable of helping them accomplish. And we'll keep you all updated on our progress.

So to sum up my remarks on Page 13. We're executing well against the strategic and financial priorities that we laid out at the beginning of the year and at our Annual Investor Day. More broadly, our performance reaffirms the strategic investments that we've made in the business, the must-have nature of our resources and tools, and above all, the inspired efforts of my world-class colleagues.

Of course, with a few more words about my colleagues. Rich, myself and the rest of the leadership team, have the pleasure of building a great company, together with the world's most talented and driven professionals. Our growth opportunities come to life through their efforts, and without them, we wouldn't create great outcomes for the world's great companies. I'm energized by what we're accomplishing together, grateful for the opportunity to learn from them and inspired by the privilege of representing them everyday. Together, we have more work to do in the second half to deliver on our commitments, but I continue to believe we have an unmatched set of people and resources to help member companies achieve great things. We'll now your take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Paul Ginocchio at Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Rich, just want to be clear. It sounds like you've got a $0.09 EPS tax benefit in the third quarter. And that is going to be offset by a little bit of headwind from the government and some extra investments, is that correct?

Richard S. Lindahl

Yes, I think the revenue line, as we said, we're tracking towards the midpoint. Certainly, the government is a big part of that. Margins coming in at or probably below the midpoint driven by the investments that we continue to make. And then kind of below the EBITDA line, there will be some benefit from tax rate, the biggest one being that onetime benefit we talked about earlier.

Paul Ginocchio - Deutsche Bank AG, Research Division

Great. And then just 2 more. Have you accelerated any investments this year relative to maybe the original plan? And then I'll leave it at that.

Richard S. Lindahl

Not meaningfully, no. I would say that particularly, on the SHL side, some of our planned headcount additions have come in a little bit faster than we had anticipated. So we've done a good job on the recruiting side there.

Operator

Next we'll move to Tobey Sommer at SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Within the progress that you're seeing in SHL, could you describe kind of geographically the mix in -- I'm most interested in, I guess, in what success you're having in the U.S.

Thomas L. Monahan

The business has returned to solid growth. We've actually seen all regions contribute to both revenue in the quarter, and as I said, double-digit sales and bookings growth, which sets us up well for future quarters. We -- across what's been largely a good news story and a momentum story, we've seen continued great success from the Continental European team and teams on the ground in several key emerging markets like South Africa and the Middle East. But the largest story is just one of global progress. The investments in North America really only hit the ground in Q2. We're still continuing to make them. So the real benefit of the North America scale up, I think, is in the out quarters. The existing team in North America did a great job, but the benefits the investment aren't likely to accrue until future quarters.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

And then my follow-up has to do with the small government piece, and we've seen sequestration. Tactically, are there things you can implement to offset that, or is this just a case of riding out the change in market and spending by that customer set?

Thomas L. Monahan

Sure, yes. Job 1, as always, is creating great value. We're very focused on creating hugely valuable resources for the executives we support, and we've pioneered a range of innovative data and content plays in the sector. Our challenge in this period is actually navigating the right balance between maintaining our strategic commitment to this huge opportunity and not having some of our most talented people be underutilized. We do have particular expertise in the PDRI and gov teams, we also have skills elsewhere in demand. As you can see, the rest of the business is growing at a really healthy rate. So we're trying to figure out planfully how to both maintain commitment to the sector, so we capture the opportunities that are there and when we can, redeploy people to capture the vast commercial markets. So that's a name-by-name, case-by-case, week-by-week exercise here. The commercial markets are sufficiently strong that we know we can deploy people if they're going to be underutilized in the government sector. We think in the long term, even the medium term, we think our work is a vital enabler of lean-effective government. We want to be in a position to drive that opportunity, and you've seen us be very effective when budget opportunities open up and other markets are quickly recapturing or advancing quickly on any stalled projects or dollars. We're very good at capturing opportunities as they show up. We just want to be in a position to do that without sacrificing any near-term commercial opportunities.

Operator

Next we'll move to Tim McHugh at William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Yes, I guess I was just going to ask you to elaborate a little bit more on what -- how you were -- I guess, SHL was able to grow at double digits in Europe right now against, I assume, is still kind of a tough environment, or did the environment get better? Or do you feel like you just were able to, I guess, outsell the tough environment there?

Richard S. Lindahl

I don't think the storyline in the business more broadly has changed it all. We have a great team and world-class assets lined up against what, even in difficult markets is a huge market opportunity. That nugget about what percentage of companies are increasing spend on HR analytics is a global number and companies in Europe, which are trying to make very smart decisions on the margin about every dollar they spend are finding that these tools and resources can really help them. They can't afford to make a bad hire, they can't afford to make a bad promotion, they can't afford to make a bad choice about an individual. And our teams are terrific about squaring up against that opportunity and going and capturing and driving the growth of the market. So nothing other than great teams and hugely valuable resources in the midst of a market that's rewarding a lot of precision in decision making right now.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And you haven't seen much of an impact, it sounds like from, I guess, certainly sales force investments in the U.S. When would you expect to start to see that contribute to the growth?

Thomas L. Monahan

Yes, I think it's early days, both in terms of sales force investments in the U.S. because those resources really became activated only in Q2. And if you think about the combination of ramped-up productivity for new sales person and sales cycles, it's going to be Q3, Q4 and beyond before you see the full value of those investments. So we're glad we had such good recruiting success. We're glad that people are ramping quickly. But the momentum we saw in the quarter came from the existing team that was in place at the start of the year.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay, and then I guess, lastly, in Asia, is it concentrated in, I guess, China and India, I guess if we look beyond that, Australia and the other markets, are they still growing well, or is it a broader trend you're seeing?

Thomas L. Monahan

I'd say the entire Asia Pac region is growing well. I don't want to -- but you are just seeing on the margin a touch more caution as people worry about, is China going to slow? Is India going to slow? We can -- as I said, if we can compete effectively in Europe, where the question is, is anyone ever going to grow again? We can certainly compete effectively in markets that are trying to differentiate between 8% growth and 7% growth. So we're able to grow effectively there. There's just been a slight change in the tone. I think you're seeing that in a lot of companies, but our teams did a good job growing the business. It is a little concentrated in what I'd call the most dynamic emerging markets rather than kind of the more mature markets like Australia and New Zealand.

Operator

We'll go next to Joseph Foresi at Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I think my first question here is just, excluding kind of government work and emerging markets stuff and Europe, maybe you could just talk about what you think the core business is doing and how you feel the demand environment is progressing there as we hit sort of the midpoint here?

Richard S. Lindahl

If you look at CEB's overall growth rate for the strong organic growth rates for the quarter, you can assume that the core North American market, both in large enterprise and middle market is growing at a very healthy clip. I think that reflects executives seeing huge value from the tools they already buy from us. And it reflects the fact that people, even if they're not confronting wonderful economic growth they feel the markets are stable. They've got to find a way to grow their own businesses, grow profit and grow productivity. And our teams are doing a great job being out in front of that and driving the growth. So the core of the business large enterprise and middle-market North America is, feels very strong, and the market environment feels very strong.

Operator

[Operator Instructions] We'll go next to Steven Shui with Stifel.

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

You guys had solid growth in SHL, but it sounds like the opportunity is really still ahead of you guys there, since the cross-sell has been pretty minimal. Can you just kind of talk about the initial reaction and feedback-- from clients in the U.S.? Have you started ramping up sales in that market?

Thomas L. Monahan

We're excited about this opportunity because we work pretty closely with heads of HR to begin with. And they've been very clear they need and want more help making decisions about people. It's the biggest expense item in most businesses, and it's one that's made with certainly insufficient rigor and often little or no predictive capability. So that continues to be a core theme in everyone of our conversations. People looking for more help to make their biggest dollar, highest-bated [ph] decisions, which in an operating company are about people. So our members are very excited about the opportunity here and you can see, just the growth of the businesses continue to validate that thesis. I would say that we still have much more work to do in terms of enabling our teams to do a great job referring and cross-selling and moving opportunities back and forth across the elements of our business. A big focus of the branding effort isn't just to amplify our store in the marketplace, but to give our teams good clear messages and tools to really lubricate that referral process. But when we've gone out and validated our thesis with customers and when I've sat in front of customers to talk with them, this is a huge pain point that they're very excited to see us come to market with some solutions in.

Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division

And can you comment on how many sales guys you added in the quarter for SHL?

Thomas L. Monahan

Yes, we don't really comment specifically on that. Safe to say that we're adding resources ahead of the rate of revenue growth at this point in time, as we're investing for future growth.

Operator

And we'll go back to Joseph Foresi at Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

So I just, I wanted to ask maybe 2 follow-ups. First, on the SHL acquisition, I think you had expected to start to return to sort of a normalized historical growth rate in that business in the beginning of 2014. Are we still on that general trajectory?

Thomas L. Monahan

I think as you look at it over the -- on a full year basis, obviously, we made some good progress in the second quarter. I think if you go back to the beginning of the year, we had said we could see ourselves potentially getting into the lower end of that range on a full year basis. That looks a little bit more achievable now than it did probably at the very beginning of the year. But the investments we're making right now, we're doing with the purpose of trying to get better growth in 2014.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay, and then just on the margin front, is it safe to say that after this year, I'm just wondering what your investment schedule is? Is it safe to say that after this year, your front-end investing in the North American sales force in SHL and some of the other investing that you'll do, will modify a little bit in 2014?

Thomas L. Monahan

I mean we'll certainly be going through our planning cycle and looking at the opportunities in front of us. Given the sizable investment we're making this year, we would hope that, that allows us to capitalize on that momentum next year and potentially have less need for incremental investment. Having said that, our priority remains healthy sustainable top line growth. And the benefits of our business with the high incremental margins we generate on our platform gives us the flexibility to balance both margin expansion and investments to continue to grow revenue.

Operator

We'll move next to David Ridley-Lane at Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Where do we stand on the $5 million in run rate cost synergies from the SHL acquisition?

Thomas L. Monahan

We are very much on track to realize those synergies coming -- on a run-rate basis, coming out of the year. So that is -- that's been a good news story.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay, and then what roughly would be the amount coming in 2013 versus the incremental amount that we would see in 2014?

Thomas L. Monahan

I think you would -- you should expect us to be roughly at that $5 million range for 2014.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Yes, but I mean how much money would we be saving in 2013 actuals, not on a run rate basis. But I mean would we get like $2.5 million in 2013 and then see the other remaining $2.5 million incremental benefit in 2014, for example?

Thomas L. Monahan

Yes, it's closer to the $2 million area for 2013.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And then with that, I guess, $3 million that you'd be incremental in 2014, would that be in addition to your long-term margin guidance of about 25 basis points a year? Or would that be sort of baked in and part of your planning process?

Richard S. Lindahl

We said it's a minimum 25%, so we'll take a look at those -- first and foremost, the biggest drivers will be leveraging the existing business platform, so that should dwarf even the cost synergies we're talking about, so that plus cost synergies. And then we'll look at the investment opportunities in the context of our commitment to expand margins. And we'll figure out where that nets out. But it's definitely good to have some extra investment capital either to play with or return in the form of margins. And I've been -- the teams that have been working on this have gotten out and executed a variety of ways that give us great confidence that, that $5 million is going to be easily achieved.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Got it. And then can you just maybe give a little more explanation. So I heard the SHL revenue growth is going to likely accelerate in the third quarter, but then will decelerate in the fourth quarter. And that's just a little bit confusing because I would have expected, starting to see some benefit from the U.S. headcount additions in the fourth quarter that maybe the comps are just that much more difficult on the fourth quarter?

Thomas L. Monahan

It's less about the comp being more difficult in the fourth quarter than it being extremely easy in the third quarter. And combined with the fact that there is also a seasonal decline that occurs in the third quarter. You'll remember that the third quarter last year was, obviously, when we closed the merger that was sort of the peak of the merger distraction factors. And so we started making progress beginning in the fourth quarter of last year, but it's really as a result of those factors.

David Ridley-Lane - BofA Merrill Lynch, Research Division

So what's kind of a typical seasonal decline for SHL in the third quarter?

Thomas L. Monahan

Well, I mean I think if you look at what happened last year, that's not a bad marker for the general trend, but obviously, we expect that to be shallower this year.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay, all right. And then on the debt repricing, is that expected to be about 100 basis points more or less? Or what are you kind of hoping for on the debt repricing?

Thomas L. Monahan

Yes, I really can't comment on that right now, David, because we have not yet consummated a transaction. So we'll certainly provide additional disclosure at the appropriate time.

Operator

We'll go next to Tobey Sommer at SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

A question for you about your services to C-sweep level people within your customer set. You highlighted succession planning as an area where there's kind of an opportunity. Is there a broader intention to expand services to that top echelon within your silos?

Thomas L. Monahan

Tobey, that's -- we think of those as the cornerstone of most of our businesses. Our first and most important businesses in each of our domain areas are the leadership councils that serve that top layer, both the CXO and their key deputies. And those businesses performed very, very well. Succession planning is one of those great topics that not only is it the 24 by 7 worry of the Head of HR and the CEO, but every one of those functional leads worries about their leadership pipelines underneath them. They worry about having the right leaders in the right place to deploy against current business needs and to replace themselves when the time comes. So succession planning is one of many things we do that's uniquely valuable to those top-level executives. But the focus on those CXOs is constant for us. They are -- those Leadership Council products that stay with them. We worry about their agendas on their behalf and support their teams in executing them, are a critical part of the business. And they're a critical part of the healthy growth story this quarter.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

I guess I meant more of a focus outside of the data and tools, but more on the personal interaction that you described as kind of being of particular value with a firm. Is there a plan to focus resources on hiring more of that?

Thomas L. Monahan

We found the advisory and professional services layers. If you think of our businesses having parts that are closer to fix and parts that are closer to variable, the advisor and professional services layers tend to be closer to the variable cost end of the spectrum. So like sales, as the business grows, we need to hire those people in to make sure we can have impact. Our goal is never to be an arms and legs consulting firm, but merely to make sure members can use the great shared cost resources, tools, technology, insights, best practices that we create. And those advisor and professional services people are critical to making that happen. So I'd expect over time to see it grow more or less in line with revenue. We made sort of a onetime step-up coming out of the downturn. I think from this point forward, it grows more or less in line with revenue.

Operator

And at this time, we have no further questions. I would like to turn the conference back over to Mr. Monahan for any closing remarks.

Thomas L. Monahan

Thanks very much. To close, let me just summarize my early remarks. We're obviously executing well against the strategic and financial priorities that we've laid out for the business. Our performance reaffirms the strategic investments we've made, the must-have nature of our resources and tools, and above all, the inspired efforts of my world-class colleagues. Thanks, everyone, for calling and logging in. Rich and I look forward to seeing many of you in our travels over the next couple of months. We'll be at the Investment Conference of Minnesota later this week and at the Deutsche Bank and Credit Suisse events in September. We look forward to keeping you up to date on the CEB story.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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