Corporate Executive Board Co. Q3 2009 Earnings Call Transcript

| About: CEB Inc. (CEB)

Corporate Executive Board Co. (EXBD) Q3 2009 Earnings Call November 3, 2009 9:00 AM ET


Tom Monahan – Chairman and Chief Executive Officer

Rich Lindahl – Chief Financial Officer


Tim McHugh - William Blair & Company

David Ridley-Lane – Bank of America Merrill Lynch

Paul Ginocchio – Deutsche Bank Securities

Vance Edelson – Morgan Stanley

Scott Schneeberger – Oppenheimer & Company

Gary Bisbee – Barclays Capital

Daniel Tish – Flatbush Watermill

Daniel Leben – Robert W. Baird & Company

Shlomo Rosenbaum – Stifel Nicolaus & Company


Welcome to the Corporate Executive Board's Third Quarter 2009 conference call. Today's call is being recorded and will be available for replay beginning today and through November 11 by dialing 719-457-0820. The confirmation code for the replay is 3654602. The replay will also be available beginning later today and through November 11 at the company's website which is and at

To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the home page of the company's website for yesterday's news release. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding the Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2009.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecast, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by important factors, among others, set forth in the Corporate Executive Board's filings with the Securities and Exchange Commission and in its third 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 it is the result of new information, future events, or otherwise.

At this time, for opening remarks, I would like to turn the conference over to the company's chief financial officer, Mr. Richard Lindahl.

Rich Lindahl

I am Rich Lindahl, chief financial officer of the Corporate Executive Board. Thank you for calling or logging in to our third quarter 2009 conference call. I'll start by giving you our financial results for the quarter. Then, Tom Monahan, our chief executive officer, will talk about how we are approaching the rest of this year as we pursue a return to growth in our business. Then, we will take your questions.

Here are the financial results. Revenues for the quarter were $106.8 million. Net income for the quarter was $14.2 million. Diluted earnings per share was $0.41. EBITDA for the quarter was $27.5 million or 25.8% of revenue and contract value was $387.2 million.

Our third quarter financial performance reflects the continued stabilization of our business and the incremental progress we are making towards our goal of returning to growth in contract value, revenues, and earnings.

When compared to the third quarter of last year, we experienced declines in all of these measures due to both the economic disruption of the past 12 months and the need to retool our operating model, which we have previously described to you.

Still, on a sequential basis, we are closing the gap on contract value losses as our teams gain confidence and the overall tone of the market begins to improve. Our focus on operational efficiency resulted in solid margin performance in the third quarter despite the decline in revenues.

We are updating our guidance to reflect our expectation for lower quarterly revenues combined with our plans to reinvest in the business and support our efforts to return to contract value growth. Now some details on the quarter.

As we expected, contract value is down sequentially but the rate of decline has narrowed for the second quarter in a row. Contract value decreased by 28% to $387.2 million at September 30, 2009 from $538 million one year ago. On a sequential basis, contract value was down 3.6% in the quarter, which was less than the 6.9% decline in the second quarter and the 11.5% loss in the first quarter.

Of the $14 million sequential quarterly decline in contract value, $5 million was due to programs that were sunset or consolidated, bringing the year-to-date sunset total to $22 million. We made incremental progress on booking activity, but not enough to offset the subscription that expired during quarter.

We are not yet back to pre-recession levels of program renewal rates and while cross-selling continued to improve getting people to take on additional expense is still proving difficult. Also, as you'll remember, teams have been working with their territory only since May, so many of them are still building out a complete pipeline.

Overall, our cross sale rates rose sequentially from 2.78 to 2.8, led by middle market cross sales, which rose from 1.62 to 1.69 while large corporate cross sales stabilized sequentially at 3.23. New sales continue to perform reasonably well in a challenging environment. We are still adding new companies and are pleased to welcome NewAlliance Bank shares, Big Y Foods, and Blue Nile to our membership base.

Here too, we are still building pipelines as people work relatively newer territory. From a market segments perspective, we saw strong continued growth in middle market on both a year-over-year and sequential basis, though, not enough to offset small declines in large company contract value.

Geographically, the going remain tough in Europe, but relative performance improved in Asia Pacific and especially in North America. From a P&L perspective, third quarter revenues decreased 25% to $106.8 million from $142.4 million in the third quarter last year.

Lower overall booking levels during this year continue to apply downward pressure to our quarterly revenues, even though year-over-year booking performance improved versus the second quarter. On the expense side, the third quarter results reflect the benefits of actions taken throughout the year, including work force reductions, real estate subleases, careful cost management and other operational efficiency improvements.

On a sequential basis, the combined total of cost of services, member relations and marketing, and general and administrative expenses declined $7.1 million from the second to the third quarter. Just over 50% of this amount was due to lower personnel expenses due to the initial impact of the voluntary separation program and the finalization of the first restructuring effort announced earlier in the year.

Another 20% of the change is due to reduced facilities expense from sublease income. We also had a reduction in consulting expense due to the completion of the CRM implementation in 2Q and items such as travel, meetings, and production expenses also declined due to seasonality and other variable drivers.

Going forward, this progress on costs puts us in a position to make selective investments to accelerate our growth. Cost of services as a percent of revenue were 32.2%, an increase compared to 31.5% in the third quarter of 2008 as we continue to lose some scale benefits when revenue declined.

Member relations and marketing expense as a percentage of revenues was 27.5% in the third quarter of 2009 as compared to 28.1% in the third quarter of 2008. Third quarter expenses were lower due to reduced booking volumes and staffing levels versus the prior year.

We also continue to fine tune the new account management model, which led to some timing delays in filling planned positions. General and administrative expense as a percentage of revenues was 12.8% in the third quarter, an increase from the 11.8% level seen in the third quarter of 2008, but also a decrease from the 13.5% level in the second quarter. We will continue to manage our G&A spend carefully.

Depreciation and amortization as a percentage of revenues increased to 4.8% from 3.5% in the third quarter of 2008. The increase was primarily due to lower revenue as the absolute level of depreciation remained relatively constant versus the third quarter of last year. In the quarter, we recorded net restructuring costs of $2.3 million primarily related to the voluntary separation program we announced in July, as well as final cost true ups related to the 2008 plan.

Other income in the third quarter increased by $4.7 million over the prior year period, primarily due to a $2.8 million increase in the fair value of deferred compensation plan assets and the prior year write down of a cost method investment.

Our effective tax rate in the third quarter was 37.7%. During the quarter we updated our annual effective rate analyses and determined that our full year 2009 effective tax rate is expected to be 39%. The third quarter rate reflects the year-to-date true up to the revised full year rate. The annual rate may fluctuate based on changes and estimates that occur in Q4.

Third quarter EBITDA was $27.5 million or 25.8% of revenues. Adjusted EBITDA, which excludes restructuring costs, was $29.9 million for the quarter or 28% of revenues compared to 25.3% in Q3 of 2008. Diluted earnings per share was $0.41 compared to $0.59 in the third quarter of last year. Non-GAAP diluted earnings per share, which adjust for restructuring costs was $0.45, a 23.7% decline from the prior year.

Now turning to the balance sheet and cash flows, membership fees receivable declined 45.9% to $68.8 million at September 30, 2009 from $127 million on December 31, 2008, reflecting both successful collections and weak bookings volume during the first nine months of the year.

DSOs, which we calculate using average receivables, were 57 days for the third quarter 2009 in line with historical ranges. Deferred revenues decreased 31.7% to $180.4 million at September 30, 2009 from $264.3 million at December 31, 2008 due primarily to the performance of bookings relative to expiring contracts.

Cash flows from operations were $11.5 million during the first nine months of 2009 versus $66.8 million in the first nine months of 2008. This decrease is primarily driven by lower collections as a result of softer booking volumes.

Capital expenditures were $1 million for the quarter. We paid a $0.10 per share dividend in the quarter for a total of $3.4 million and we had $22.3 million in remaining share repurchase authorization as of September 30. On September 30, 2009 our cash, cash equivalents and marketable securities balance totaled $60.7 million, which is down approximately $12.6 million from June 30. Consistent with our seasonal patterns, we expect our cash balance to increase by year-end.

And now an update on our outlook, the following comments are intended to fall under the safe harbor provisions outlined at the beginning of the call and our based on preliminary assumptions, which are subject to change over time.

Although, things are moving slowly and cautiously in the right direction, there are two critical assumptions that are guiding our forward-planning. First, we assume that both contract value and revenues will decline for another quarter or two. Second, we expect margins to compress as we make selective investments to full forward growth. We anticipate that these two trends will influence our financials into next year.

These factors are apparent in the expectations for Q4 implied by our new guidance, which also reflects continued caution in light of the still uncertain economic climate. Our guidance for the full year of 2009 is updated as follows, annual revenues ranging from $430 to $440 million.

Non-GAAP diluted earnings per share of $1.40 to $1.50. Depreciation and amortization expense of $22.5 million to $23.5 million, an adjusted EBITDA margin of between 23% and 24%. The above guidance represents our best estimate at this point based on the considerations I have just described. That's it for the financial summary. I'll now turn the call over to Tom.

Tom Monahan

I'm really proud of the way our teams have been executing. A number of teams and products have already returned to growth and I see additional opportunity for more of them to pick up momentum as confidence in their roles and take advantages intended [of using] we see in the external environments.

Looking forward we see both continuing challenges and renewed opportunity. Our immediate imperative is to deliver a solid fourth quarter to set up improved performance in 2010. We will focus on opportunities that are already yielding results and on leveraging our relationship management model, both in North America and other key markets, such as Europe and Asia Pac.

As Rich said, we anticipate that contract value could decline for another quarter or two. There are several factors influencing this assumption. First, we expect another $13 million of contract value reduction due to sunsetted programs. More than half of this will be in Q4. The rest largely washes out in Q1 2010.

Second, while our reorganization is working, it is not yet fully implemented across the whole organization. Where we have the right people working on the right things in the right way, we see significantly better and more consistent results. But it will take us a few more quarters to have the entire sales and service organization firing on all cylinders, and until we do we're not going to be delivering at the levels needed to produce strong growth.

Third, we lost some productivity during the reorganization. We expected that and built it into our planning, but it does mean that even where our teams are strongest, we're still making up the distance. It will take a while to completely rebuild the sales pipeline even for our best performers.

And finally, while both the economy and our ability to engage our members are both gradually improving, the purchase decision cycle is still taking longer than we've experienced historically. All that said we do see many places in the business where we have returned to growth or where we have been able to maintain a growth profile across this period.

All of our teams now have that objective in their gun sights and more are approaching that stage every day. However, in the near-term, we think the balance is likely to tilt more towards continued contract value and revenue loss, even as the rate of decline continues to abate. At the same time, we believe we are now operating at the right level to begin accelerating our return to growth.

So while we are continuing to fine-tune operations and manage the business efficiently, we're not currently planning to make any significant new reductions in expense. In fact, as the business continues to stabilize, we plan to reinvest a portion of our recent operational efficiency gains in areas where we see clear opportunities to accelerate our return to growth such as additional support for key performers in our sales and service organization, further investment in Europe as we transition the account management model there, further investment in the Asia Pacific region in selective new product launches.

As we've said, our focus is on four key themes for creating value for our members, our employees, and our shareholders. First, relevant and compelling content, second, timely, seamless delivery systems, third, customer intimacy, fourth efficiency and cost management.

Let me highlight progress on a few initiatives against these imperatives. First, relevant and compelling content that links directly to the problems on executive's desks is the lifeblood of our business, and our teams continue to put a huge emphasis on leading edge content that delivers rapid return to our members.

This begins with creating great streams of content in our existing program areas. A great example of the compelling content that our teams are producing include some very powerful work aimed at helping companies reengage their employee population in the aftermath of the downturn and the intended downsizings.

Our teams in HR and corporate communications have documented there warring facets of this problem and developed the data, tools, and research necessary to help member companies avoid the most challenging elements of them.

First, our data would indicate that most companies are combating at least a 7% drop in employee level productivity due to cynicism, a sense of loss, and skepticism about their employer. Second, and perhaps even more worrying, those employees tagged as highest potential by their employers are 30% more likely to leave in the next 12 months as the job market returns.

Finally, our data points to one more troubling finding. Even engaged employees are likely to be working on the wrong things due to weakened communications and management structures. Our teams have produced some great data assets that enable companies to size and pinpoint their own areas of potential loss productivity and have built compelling tools and best practices that help members in targeting, re-recruiting, and properly deploying their top talent.

The third quarter also saw the return of our Executive Guidance series, which provides a summary drawn from all our domains of key issues that face member companies as they finalize 2010 budgets. This annual effort has proven a great means of engaging our customer base and allows us to showcase three assets unique to our business.

First, our unmatched access to C-level executives at the world's largest companies, second, our pan functional view that allows our member executives not only to understand what their peer executives are seeing and doing but also what other key colleagues and other functions are focused on.

You can imagine how valuable insights on CFO priorities would be for a CMO or CIO preparing a budget proposal for next year. Finally, it showcases the strength of our research teams and their capabilities at producing the terrific data and research that drive member performance by using the world's most powerful executive network.

Finally, I know that many of you have interest in what our customer base sees happening in their own businesses. Given our more than 5,000 customers and strong franchises in finance, sales and marketing, and HR, we can gain a unique perspective about what our members are actually planning from an investment, sales, and people perspective in the coming year.

This data can be particularly helpful at this time of year since executives are eager to see what assumptions underpin planning and budgeting decisions at peer companies globally. Our business barometer work feeds executive planning activities by allowing them to peek directly into their peer's business plans.

A few interesting themes have emerged in the most recent round of benchmarking operating plans for 2010. First, our member plans suggest a lukewarm economy at best with only about 38% planning for improved performance in the developed world. There are also dollar barriers in the year ahead, budgeting for a dollar that stays the same or weakens.

Finally, we see people worried about inflation which is worrisome given low growth projections. In fact, the operating plans at many large companies are now beginning to include talent and operating decisions that reflect a warning outlook on inflation.

Obviously, we're not a macro-shop, so our job is not to outline broad trends but to arm members to respond to them. But having a sense of what people see on the horizon helps us to make them more productive as they move toward it.

Great content also means developing new valuable assets to support important member work. We're also today announcing the formal launch of an important new product, which targets the sales force productivity challenges facing sales executives.

We call the product area SEC Solutions and it builds on the great work of our Sales Executive Counsel program to provide an additional level of analytics and performance support to the world's leading sales forces.

Each member relationship tends to include three major elements, detailed analysis of their own sales performance, intensive benchmarking of their own opportunities for improvement by comparing their data against our dataset of more than 200 different sales forces and targeted support for improvement, which often involves sales rep skill development and support for sales managers.

This product has been in beta for a while and as always, we've benefited from the work of the stellar group of members who have worked with us to set up, refine the product, and build the dataset. Key early users have included Nokia, Merck, and Proctor & Gamble.

Finally you say us acquire Tower Group in the quarter. As you all know, we have a strong suite of financial service products that target and support executives in our key domain areas such as sales and marketing and product management targeted exclusively at the retail and commercial financial institution sector.

With Tower, we add a strong content asset and an outstanding cadre of people that provide a great compliment to our business. Tower focuses on product management and technology strategy decisions for the same categories of clients and as a result, links very closely to their own product set.

This great complimentary paves the way for some very attractive synergies. One obvious example is EXBD has more than twice as many financial institutions clients as Tower and we see great promise from introducing the great Tower resources to our existing customer base.

Our second priority is to insure that we link our delivery of this content to our members work in ways that make it easier to use. Last time, I talked about the finance division's daily news feeds, which now target nearly 100,000 daily subscribers in the upper echelons of corporate finance organizations.

A recent example comes from our IT practice where the team has built a powerful interactive tool that lets heads of infrastructure and CIOs benchmark and plan technology investments across multiple time horizons.

The team began by building a tremendous data platform that compiles about 7,000 data points from about 100 of the worlds' largest companies and largest technology consumers. They pulled data that included technology road maps, capital budgets, and operating budgets indicating which technologies they plan to deploy or enhance across the next five years.

It then puts in an analytic overlay that then evaluates expected ROI based on similar deployments. All of this information then links to a data manipulation tool that lets our members quickly compare and visualize their own plan and spend levels with other companies in their size bracket.

It's a great example of how our teams our putting powerful analytics in the hands of members who are making key set of ongoing budget decisions. Our Toolbox team continues to generate new technology capabilities and service to community member needs as well.

In particular, several innovations that allows members to rate, tag, and direct content. They've helped the fast-growing communities in IT, finance, and HR benefit from the power of this model. Our third priority is to leverage our technology and go-to-market footprint to directly engage our customers through frequent personal and highly relevant content.

We continue to track well ahead of last year's totals of in-person service visits, and our teams continue to gain more comfort in their new roles. We know that great things happen when we get our best people in front of our customers and when you're placing an ever higher emphasis on this. We continue to see evidence of this approach is leading to great outcomes.

More than two-thirds of our largest 200 customers have grown their relationships with us since the end of the first quarter and we are pushing very hard to restore growth with the rest. We saw continued success on win backs, restarting another 5% of previously lost contracts in the third quarter. We also continue to see solid outcomes from organizing around the needs of particular end customer segments.

I mentioned that we had organized our sales service and product people around the particular needs of functional executives in the government at all levels. This team continues to do a very solid job in understanding the particular needs of these executives, shaping our product and service strategies and delivering great outcomes.

We still have additional work to do to keep driving deeper with regard to customer engagement. We've begun to put additional resources in place to leverage our best relationship managers. And as you know, we are planning to roll out our integrated account and relationship management model and adapt it for the European market next year.

Given the strategic importance of this market and the opportunities that we see in that market moving forward, this will be an important move for the firm. Finally, as you can see from the outcomes, we continue to be careful on costs. Our goal was to get to the baseline run-rate for the business early, which allows us to selectively add investments in key areas to accelerate our return to growth.

So to recap, we believe that intensive focus on these four priorities, creating compelling content, delivering it to the most important points of the member workflow, directly engaging the customer base and careful management of our cost investment profile will lead to great outcomes for our customers and for our owners and we see convincing early evidence that we are making important progress.

I want to close by expressing appreciation for our people. We've implemented a lot of change all at once. We had to. Establishing an integrated customer focused operating model meant that all the parts had to work together from the beginning. We couldn't change one piece at a time.

No change of this magnitude is without its glitches and hiccups but all things considered, our people moved through a difficult transition period against the backdrop of the difficult economy and into their new roles and new relationships with energy and enthusiasm.

They are making our company successful by making our customers successful and they continue to make it work better every day. How quickly we begin to grow depends on in no small part on large economic factors that we can't control and we still have a long road ahead of us.

But I believe that we have now set ourselves on a clear path toward growth and that we are moving well along that path and are getting better as we go. I look forward to reporting on our progress and we'll now open the floor to you questions.

Question-and-Answer Session


(Operator Instructions) Your first question is from Tim McHugh - William Blair & Company

Timothy McHugh - William Blair & Company

Yes, on the last call you gave kind of an update on how the quarter progressed. I think you said towards the end of the quarter was the best kind of new sales activity you had seen given that the sales force reorganization. Can you give a similar type update for how Q3 and perhaps even here October played out for you guys?

Rich Lindahl

Sure, thanks, Tim. We're obviously not going to comment on October. It's never been our practice to make end quarter commentary, but I will say as it relates to the third quarter, we did make slow but steady progress across the quarter and I would say that our results were probably a little bit better than we had expected.

There were a couple things at play here. One was the economy improved somewhat or maybe said differently was less volatile than it had been previously. And as Tom has talked about, our teams continued to gain traction as we went through the quarter, so I would say we saw - I would characterize it as more steady improvement month to month rather than a big shift off as we got to the end of the quarter.

Timothy McHugh - William Blair & Company

And you mentioned that renewal rates aren't back to pre-recession levels yet, but underlying the commentary that new sales have been improving sequentially, at least over the last two quarters. Is that inclusive of what you might be seeing in terms of renewal rates from companies?

Tom Monahan

Tim, there are three different things that happened at the customer interface. One is we add a new to the membership customer. We have that great asset of 5,000 customers and as you know, getting a new customer in the front door creates two great outcomes. It adds revenue in the next 12 months but it also sets up a platform for future cross sells.

The second thing we do is then we cross sell and third we start to renew the memberships we create. I think it's safe to say that none of the three is actually performing at the level we'd seen in historical patterns. Renewal rates are tracking back to pre-recession levels but not all the way there.

And on balance, it's a little harder to get people to do something completely new than it is to build a business case for something they've used for the last 12 months. All three are moving in the right direction but nothing is yet firing at pre-recession levels.

Timothy McHugh - William Blair & Company

Okay and then lastly can you give us an update on the financial services vertical, which I know it's been - it was an area of weakness earlier in the year but I think has started to improve a little bit.

Tom Monahan

Yes certainly there are segments of the sector that are still challenged. We see bank failures continue to mount and there are companies whose difficulties are still getting them pretty reliably onto the front page of the paper.

Now that said, we're no longer seeing large 10 year customer relationships disappear from the face of the earth, and those companies that remain really do confront a pretty radically changed competitive landscape and radically changed set of consumer preferences and needs.

In the quarter we saw our performance in that sector continue to stabilize and pockets continue grow. Going forward we think our products are really well positioned to help them succeed and the addition of the team at Tower gives us even more coverage of their critical issues.


The next question is from David Ridley- Lane – Bank of America Merrill Lynch

David Ridley-Lane – Bank of America Merrill Lynch

Sure, just a couple of quick ones, about how many product launches are you thinking in 2010? Is this like one or two or is this more like four or five or more or just sort of a range on that.

Tom Monahan

Dave, I think the past can be prologue here. As we return to a normal operating environment and as our teams mature in their support and service to the customer base, they'll become a great platform to launch new products.

Our bias though has always been to make sure we carefully balance putting new products into the market that support future growth with a desire to make sure the business stays attractive and profitable. So I think you'll see us maintain that the business stays attractive and profitable, so I think you'll see us maintain that balance going forward. And that argues for sort of a regular pace of new product launches, fitting comfortably with wherever the P&L gives it.


The next question is from Paul Ginocchio – Deutsche Bank Securities

Paul Ginocchio – Deutsche Bank Securities

Can you give us any idea how much revenues are in the fourth quarter from Towers? And then second, it does look like your implied guidance, a pretty significant Q on Q increase in costs. Am I reading that right and if so is that the start of the investment program?

And finally, is there a way to maybe fine tune, I think last quarter you talked about contract value being down Q on Q but not as much as the previous quarters, is that still what you're calling for over the next one or two quarters or is there any other kind of finer color you can put on that CV growth guidance?

Richard Lindahl

Let me take the first one. In terms of Tower, we're not being specific about how much revenue we expect there. I would say that it's not a material amount but it is baked into our guidance. The net impact of Tower from both a revenue and expense side is expected to be mildly dilutive for the next couple quarters.

But obviously we intend to leverage that resource against our other products that Tom talked about and have that be accretive over time. In terms of costs more generally going into the fourth quarter, we are anticipating that costs will increase sequentially. There are a number of factors at play here and as we discussed, we're taking the opportunity to deploy some of these efficiency gains that we've realized year-to-date back into the business, selectively, so that we can pursue growth opportunities.

I guess the first category I'd highlight is that we're going to put more sales and service staff in areas where we see additional market opportunity that would be not only in North America and Europe but also in Asia.

We're also providing and planning to provide some additional support for some of our highest performers to enable them to be even more productive as they pursue some of these opportunities. Secondly as Tom talked about, we're continuing to invest in new products targeting urgent member need.

And as you know as we introduce new products and provide additional support, some of those efforts are – will lose some money as they move into the market but they are the lifeblood of future growth. So you'll see us continue to put – begin to put more resources against those opportunities and I'd expect that to continue as well. There are some other seasonal factors that are going to influence cost as we move into the fourth quarter.

In the summer months there tends to be less travel. There tends to be less meeting activity as well. As some of those items pick up in the fourth quarter that drives more expense. And then as I talked about initially there's also an impact from integrating the Tower acquisition.

As far as contract value is concerned, without being overly specific we do expect that rate of decline to continue to abate but we do expect continued losses for at least one and ten and perhaps two more quarters.


Our next question comes from Vance Edelson – Morgan Stanley.

Vance Edelson – Morgan Stanley

With the cost containment and the reduction in overall operating expenses over the past year, how much should we view as permanent beyond whether the savings are reinvested or not. Is it safe to say you've actually found some improved efficiencies through this downturn that are going to yield a permanent benefit?

Rich Lindahl

I would say that certainly our cost structure we've adjusted in line with our revenue run-rate and gotten to a good base line. As we've indicated, there are some permanent cost reductions from the fact that we've sunset a number of programs throughout the year so the research associated with supporting those programs is not needed anymore on a go-forward basis.

Certainly as revenue grows again there will be variable costs that will come along with that but it will also be our objective to continue to scale the business as we move forward. Having said that the trend in our guidance and our expectations over the near-term is for lower sequential revenue. We are not planning significant additional cost reductions and so I think you'll see some of that impact on margin certainly in the fourth quarter and beyond.

Vance Edelson – Morgan Stanley

And second, with the teams having worked only in limited time with their current territories, based on prior experience how should we think about the time it takes to become fully ramped up by, I think, you mentioned a few more quarters, but what does the learning curve normally look like. Can you provide any more detailed thoughts there?

Tom Monahan

Vance it's Tom. There's really two questions underneath that. One is, when do we expect the segments in the business that we've already changed to arrive at full productivity, and second, as you know there's still a couple of pieces of the business we want to convert it into a different model.

On the first we continue to see great progress from teams in the field, but we expect it will take a couple more quarters, several more quarters before everyone is firing on all cylinders. They're building relationships, sales pipelines, et cetera and they are doing a terrific job.

On the second, we mentioned that Europe still needs to go through a model shift and we're targeting that for Q2 next year. Europe's a key strategic priority for the business. We think a different go to market model is going to enable us to achieve the next level of growth and impact in the market.

I think we're all very excited and the team's done a great job getting ready for it. But at that point the bulk of the change work will have been completed and our only objective will be to keep driving productivity and impact from this new model.


Our next comes from Scott Schneeberger – Oppenheimer.

Scott Schneeberger – Oppenheimer & Company

I just want to qualify real quick, on the contract value are you saying that the sequential decline will diminish 4Q from 3Q? Is that how we're supposed to read that?

Rich Lindahl

I mean I think it's a close call at this point. I'd rather not be more specific at this point. Under value as you know Scott is a leading indicator itself, so trying to give a leading indicator on a leading indicator is always hard but, assume that, as I said in my remarks, a number of pockets in the business have already returned to growth and assume that anyone who isn't there is working really hard to get there fast. But we don't think the whole firm will get there in the very near-term.

Scott Schneeberger – Oppenheimer & Company

Okay, thanks, I appreciate that. Could you guys mention the – as we come into fourth quarter and obviously important for setting the tone for the upcoming year, have you increase sales staff sequentially from the third quarter and how are those levels looking right now?

Rich Lindahl

In terms of where we are in the fourth quarter right now?

Scott Schneeberger – Oppenheimer & Company

Yes or where you might end fourth quarter with regard to how sales staff 4Q over 3Q.

Tom Monahan

Yes, now's the time of year Scott, as you know, where we go off and we start building out the sales organization for next year, so we're obviously in active recruiting mode. Adding a salesperson today doesn't have much impact on the Q4 outcome necessarily.

So as Rich said, our investments in late Q3 and early Q4 were more about getting the sales staff we had in the field additional support to make them more effective. They're doing a terrific job and we want to feed that fire. We are doing some recruiting right now to make sure we have the right amount of feet on the street for next year, but that's more about setting up a great field force for '10.

Scott Schneeberger – Oppenheimer & Company

Okay thanks, and then asking an earlier question a little differently. With regard to new program launches, the question earlier was asked specifically on 2010 but kind of higher level, what type of run rate do you envision on a go-forward basis and I think where are we in the low 40s right now for number of programs, just kind of a high level discussion to that, thanks.

Tom Monahan

Yes, I think our philosophy has always been to balance the future growth of the business by adding new products that our members needing can use and at the same time protecting profitability. New programs certainly lose money in their first year on an accrual basis. At best they break even their second year and don't rent to attractive margins until their third year.

So we try to make sure we've got plenty of room in the P&L to launch some programs but at the same time to protect the bottom line as well. Now I think that will mean slow and steady and regular launches of new product areas. Our goal will be to do fewer, bigger ones, make sure we have real hits out in the marketplace.

But here we've taken a little bit of a pause for a couple of quarters earlier this year as, first and foremost, the economy made it difficult to put new products in the market. And then secondly, we had teams learning new jobs and giving them new products to learn at the same time they had new jobs was going to make life a little bit too complicated for them. But as those teams season and mature, we see a wonderful platform for introducing new categories of support for members.

Scott Schneeberger – Oppenheimer & Company

Right now what is the exact number of programs?

Tom Monahan



Our next question comes from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

Can you give us a sense where the total number of subscription sales in the quarter up year over year excluding the programs that have been sunsetted and also can you give us a sense how much maybe they were up versus Q2 or Q1?

Rich Lindahl

The total numbers of subscriptions were not up year-over-year excluding the sun set programs. And in terms of additional color we'll stick with the total contract value on that.

Gary Bisbee – Barclays Capital

What I'm trying to understand is the difference between the renewal rate being down and the number of new sales excluding renewals. Can you give any, even just a little bit of color how we should think about it?

I mean, ultimately, to return to sustainable revenue growth you've got to have the number of new sales growing, right and presumably hopefully you could also get retention at the same level or maybe even better.

But contract value's not a great number when renewals are dropping and when sales are dropping and so I think we're all trying to get a sense as to how quickly we could return to revenue growth, so any commentary on new sales activity forgetting about renewals would be helpful.

Tom Monahan

Gary it's Tom. Let me break it into three different buckets because I think there are three different dynamics rather than just two. One is renewal rate. What is – what did a member have last year and what of that bunch did they choose to renew? Second is cross sell, when we're sitting in a buying center, getting a CFO to take an additional program into his stack.

And third is new sell, getting a totally new company that's never bought anything from the corporate executive board to buy something from us. I think if we were to handicap all three right now we'd say our renewal rates are tracking back toward, but not all the way at historical pre-recession levels. Our cross sales on balance are starting to track back towards historic levels.

And newer sales, especially outside of the middle market, are proving more challenging. Getting in front of a totally new customer who's never bought anything from us, getting them excited about adding a new category of expense is the most difficult of the three.

That said when you look at our install base of 5,000 customers, renewal rate and cross sell are the name of the game. We've got 44 things to sell companies. We have 5,000 relationships and average cross sale is 3.2, so if we didn't launch another new product of add another new customer, we could grow the enterprise for quite some time.

So a lot of the energy we put in place this year has been about those first two categories. And then the hierarchy I think those are the two places we've seen to date the relative most progress, again excluding middle market which is still adding lots of new customers. Does that give you enough color to see how we're seeing it?

Gary Bisbee – Barclays Capital

Yes, definitely, on the cross-sell excluding, maybe renewals being down. Are you seeing real progress, selling more into customers maybe who have been on hold for six or nine months or are you – how broad is the encouraging early indicator there?

Tom Monahan

Yes, I mean the number I pointed to on the call, I think, is the one that gives us confidence in what our teams are getting done, and that is since Q1 two-thirds of our largest 200 customers have grown their relationship with us.

So those big customers were vitally important to us and whose spend categories we really actively target are the ones we've rebuilt the model around and we are – the teams are slowly and steadily working our way back to prominence in their budgets and we're certainly gratified.

I found out in a lot of cases they couldn't actually do without us, which is good, so that's the real priority for us right now. Obviously we're not going to be happy until 100% of those customers are grown and 100% of every customer beyond that is growing, but that's the thing that we put our focus on and that's what we see, real promising business.

Gary Bisbee – Barclays Capital

Okay and then just moving on to another question. Historically the fourth quarter's been a renewal period and I know you've over the years flattened that out a little bit, so it's maybe not as critical as it was five years ago. But can you give us any – what are you hearing from customers, any sense of how we should think about that?

And one thing that I've heard from an awful lot of other companies is that companies are saying, "Listen, our budget for this year is fixed and we can't do anything but we might see the purse strings loosen a little bit as we move into Jan. 2010." Are you hearing that? Is there any sense that that could be a helpful factor and do you have any way to have an early read on a fourth quarter renewal?

Tom Monahan

My general experience is that you don't actually know until you ask someone for money, so we certainly would say that the tone vis-à-vis Q4 last year, Q1 this year is better and feels much more stable.

That said, our own benchmarking, we're in the business of helping CFO's do their budgets and we probably looked at more large corporate budgets and plans for 2010 than any other company on earth.

And as I said in our business barometer and our other key indices here aren't incredibly promising. We actually know it's going to be a challenging quarter and we need to be out there with immediate ROI solutions to problems that people have so certainly more stable. We do, as always, see a big difference between what CFOs say they're actually going to spend and what the other categories of executives we serve believe they're going to spend, which is always a fun mix-and-match to play.

But no, I don't think anybody in our membership base is planning for an incredibly robust 2010. But that's, I think, we're all relieved, our members and us included that the economic environment has stabilized and heck, at least this year people are actually doing budgets. You go back to last year the concept of a budget was one that people had just lost all interest in.

Gary Bisbee – Barclays Capital

Okay, great and then just the last question. Looking at the implied fourth quarter guidance from the annual earnings guidance, it would seem to indicate that expenses could be up $10 million to $15 million. That's like 12-20% sequentially. And I can appreciate all the reasons you'd want to be conservative, but given the costs categories you mentioned, it just doesn't seem to me that that's in the realm of possibility that you'd spend that much more sequentially.

So I guess can you help me understand how it could be, how your costs could be up so much? Maybe give us some color on some of the areas you mentioned and how much? Are we talking multimillion investments in Europe relative to this quarter, just any color there would be helpful.

Tom Monahan

Yes. I mean, obviously there are two elements to the equation. There's the revenue as well as the expense side. I think and we did provide a range on revenue. I think if we hit the lower end of that range that obviously has an impact relative to the guidance as well.

I think to your point on the expense I think the categories we're talking about of additional costs, obviously Tower is going to be a portion of that. I think the investments in new product rollouts, can be fairly sizable. Some of the additional resources we're adding as well can be fairly sizable.

But I think it's really - you really need to focus on the possibility at either end of the guidance in terms of combinations of both the revenue and the expense side.


Your next question comes from Daniel Tish – Flatbush Watermill.

Daniel Tish – Flatbush Watermill

Most of my questions have been answered already but I'm just curious. Do you guys give out quarterly numbers on number of member institutions, number of subscriptions and average contract value for subscription?

Rich Lindahl

No, Dan. We typically release that on an annual basis only.

Daniel Tish – Flatbush Watermill

Is there any way to get a sense about what moved around there, because I'm trying to kind of back into your contract value and I'm just trying to get a sense of, you disclosed the cross sell ratio in the press release, I think, of 2.8 overall. But then to kind of back into your number there, something needs to have changed on either contract value per membership subscription or on the number of member institutions. Any color on how some of those might have moved around?

Rich Lindahl

Yes. Well first of all, the 2.8 is the blended cross sell rate for both middle market and large corporate, so just wanted to make sure we're clear on that. As we said we did grow in middle market both in terms of memberships as well as contract value. We held the contract value losses were really led then by the core side. So that's really as fine a point as we can put on it at this point until we get to the annual disclosure.

Daniel Tish – Flatbush Watermill

Okay, but you wouldn't – I think, earlier you mentioned a number of 5,000 member institutions. I know that like last year in December you had 5114. So if that's at about that level or maybe at least 5,000, then is it safe to assume that the number of subscriptions was the area that showed a greater sequential decline?

Rich Lindahl

They're both, the memberships are in that roughly $5,000, I mean the institutions are in that roughly 5000 number area and if you use the – obviously the big cross sell ratio is down on a year-to-date basis even though it stabilized sequentially.

Daniel Tish – Flatbush Watermill


Tom Monahan

Then the 5000 was the CEO giving a rough size not actually giving inter-quarter. But it's safe to say that you've seen a retention rate, even if you go back to Q4 2008, of our customers has always been at a pretty high level. It did tick down from 2007 to 2008. The issue we're very focused on is how much does each and every one of those customers buy from us, so that continues to be our focus area, particularly in the large corporate market.

Daniel Tish – Flatbush Watermill

Okay, last question on this. The average contract value per membership subscription in December was about 31,000. Is that roughly about the same or was there any more material movement in that?

Rich Lindahl

I think you see that going down given the relative growth of middle market. That ASP across the enterprise is going to go down because on balance we price by size of middle market companies. The price range there is $12,000 to $15,000.

So if that's growing a little bit faster than large corporate, you're going to see some downward pressure on average selling price. I don't think our general policy on pricing has changed at all. We operate a network business and over time we like to see price increases slightly ahead of inflation.

I think this year that's been a little bit harder to pull off and we've been careful with pricing but I don't think you'll see any widespread discounting in our philosophy at all. When you serve CFOs and Chief Procurement Officers, one thing you learn is they will compare price when you bring them together for lunch and you're better off having good clear pricing strategies where you don't have a lot of discounting in play.


Your next question comes from Dan Leben – Robert W. Baird.

Daniel Leben – Robert W. Baird & Company

Could you guys talk a little about which teams have returned to growth the areas that you're seeing some strength?

Tom Monahan

Sure, it's pockets across the business. I think what we talked about first and foremost middle market has returned to growth by never actually slowing down and it continued to add in, I think, at a lower rate than they would like over time. But boy they've done a nice job powering through this and the fact that we had when we entered that market we had 15,000 companies that we hadn't talked to, gave us a tremendous opportunity.

And there are different places throughout the business. It's not completely in one product area or one region although we had seen North America be the source of strength. Europe, which is a key long-term priority for us, I think it's safe to say the economies there are lagging a quarter or two behind.

But the team has done a great job keeping us in position in that marketplace, but it's been a real push for them to work across the ocean.

North America tends to be the real popular strength in the business now. Asia Pac also a real popular strength and we expect Europe to be pushing forward as their economies normalize and the great team there begins to make hay in the marketplace.

Daniel Leben – Robert W. Baird & Company

Great and can you talk a little bit more about the progress you've made in terms of selling subscriptions based on the cost savings of doing that and kind of immediate impact on ROI and some of the tools you've put in place.

Tom Monahan

Sure and I'll tell you a little bit more the tone has changed a bit. If you go back to Q1 and Q2 our selling proposition was we'll help you save money right now. Now what we are tending to talk about is two things. Number one, we'll help you defer adding additional expense and we'll help you maintain the cost position you've got. History here is an incredibly compelling, we built about a 40-year database of large corporate cost performance coming out of recessions and the rate at which costs come back into business systems is both swift and reliable.

So there's a lot of companies out there talking about this time it's going to be different. Our job is to help them make it different but we see some pretty compelling data that they better get on it fast if they want to maintain – and this informs our own thinking. If we want to maintain gains we've made on the cost front we need to be thinking ahead as to how we keep them and how we stay productive and efficient.

So a lot of the conversation is now changed to be more about how do we help you keep the cost gains you've attained rather than go achieve new cost savings. Different categories have different problems there, you can imagine in procurements about how do I lock in longer term supplier contracts to help me be successful. How do I ensure that my suppliers don't go out of business?

It's funny but bankruptcies tend to spike four quarters after a recession, so if you're running a supply chain you want to be pushing for additional cost savings even as portions of your supply base are still going out of business, and that's a real tough balancing act to follow. CFO's are thinking through budgets and where they can push harder in the last round of cost savings, and we're helping them do that.

You can imagine HR people are thinking hard about what categories of after a year of downsizing and after a year of pay cuts, and bonus cuts, and cuts in every conceivable portion. We're the right places to add a little cost back in and that yield the biggest return. And we're seeing some real evidence there that there are pockets of investment HR teams can make that don't necessarily hit the P&L but have big impact on employee productivity and engagement.

So category by category we're working hard on these issues as people shape and massage their 2010 plans. Again, I outlined the larger backdrop that we saw there but there were real opportunities for us to help people be successful. These are still not easy times if you're running a large corporate budget, and our teams are very focused on how we help people be successful against them.

Daniel Leben – Robert W. Baird & Company

Then just thinking directionally and not getting into too much specifics, when we're looking towards our 2010 models and thinking about earnings with the comments about contract value bottoming out in the next quarter or two, and then making some of these additional investments as well as bringing in tower, is it safe to assume directionally that earnings should probably be down in 2010 versus 2009?

Rich Lindahl

We're really not prepared to provide 2010 guidance right now. I think what we would say is that we are expecting the trends that you see in fourth quarter to continue into next year. I also would point out that how we end out the fourth quarter is going to be a very important determinant of what we would expect for the full year of next year. And we'll obviously provide you with guidance when we do our fourth quarter call in the early part of next year.


Your final question comes from Shlomo Rosenbaum – Stifel Nicolaus & Company.

Shlomo Rosenbaum – Stifel Nicolaus & Company

I just want to understand the $6 billion that's going to be coming out from sunsetting programs in the fourth quarter, is that the direct revenue reduction? In other words sequentially quarter-over-quarter that sort of puts you to the mid-point of the guidance range, which would be around $100 million?

Rich Lindahl

As you know, contract value is not purely a backlog metric. It's much more annualizing at a point in time the value of the contracts in place, so I don't think you can draw that direct comparison. It's obviously going to be one of the things that's influencing our revenue trend in the fourth quarter.

Shlomo Rosenbaum – Stifel Nicolaus & Company

So what the comment was, just to make sure I understand it correctly, is that you're expected decline 4Q contract value versus 3Q to be about $6 million from sunsetting programs? That was the way we should understand it?

Rich Lindahl

Yes, well it's about – Tom said we have $13 million left to go, a little more than half of that is in the fourth quarter. So roughly $7 million in the fourth quarter of contract value declined from sunsets. And then the rest will just depend on bookings performance relative to the other contracts that expire and come up for renewal.

Tom Monahan

I'd also say, Shlomo, we bake this in to our view on the quarter so this was stuff – even as we're working like crazy across the quarter that's one thing we knew for sure was going to happen. So as we looked ahead in the year we put in our view of the quarter.

Shlomo Rosenbaum – Stifel Nicolaus & Company

I'm just trying to understand the sequential decline let's say the bottom end of the guidance range implication from where you guys had the third quarter it's about somewhere around $11 million. And I'm just trying to see the step down over there. I can assume that some of it is going come from contract value coming out, but the rest of it sounds like that just new sales not necessarily overtaking what you guys are seeing in renewals?

Rich Lindahl

That's right.

Tom Monahan

Thank you all for calling in or logging in this morning. We will be at the Oppenheimer Conference in December and we look forward to keeping you up to date both out on the road and here in Washington as to what we're doing as we continue to move ahead and make great progress in the business. Thank you.


That does conclude today's conference call. Thank you for your participation.

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