The Corporate Executive Board Q4 2009 Earnings Call Transcript

Feb.10.10 | About: CEB Inc. (CEB)

The Corporate Executive Board (EXBD)

Q4 2009 Earnings Call Transcript

February 10, 2010 9:00 am ET

Executives

Rich Lindahl -- CFO

Tom Monahan -- Chairman and CEO

Analysts

Tim McHugh -- William Blair & Company

David Ridley-Lane – Bank of America

Vance Edelson -- Morgan Stanley

Gary Bisbee -- Barclays Capital

Jim Bradshaw -- Bares Capital Management

Dan Leben – Robert W. Baird & Company

Leslie [ph] – Deutsche Bank Securities

Operator

Good morning, and welcome to the Corporate Executive Board's fourth quarter 2009 conference call. Today's call is being recorded and will be available for replay beginning today and through February 18 by dialing 719-457-0820. The confirmation code for the replay is 4005520. The replay will also be available beginning later today and through February 18 at the company's Web site which is www.executiveboard.com and at www.earnings.com.

To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the home page of the company's Web site for yesterday's news release. You will also find a PDF of the supporting materials that the company will use in its prepared remarks this morning by going to the company’s Web site and following the link to Investor Relations and then the link to the webcast. Please turn to the second page of these materials, which include important information about any 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 the Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2010.

For this purpose, any statements made during this call that are not statements of historical 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'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 fourth quarter news release.

Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Rich Lindahl

Thank you and good morning. I am Rich Lindahl, Chief Financial Officer of the Corporate Executive Board. Thank you for calling or logging in to our fourth quarter 2009 conference call.

Let’s start with a quick overview of our time together this morning. I will begin by giving you a financial perspective on the quarter and reviewing our annual 2010 guidance. Then, Tom Monahan, our chief executive officer, will provide an update on our operational progress and the strategic priorities we are following to build long-term shareholder value. Then, we will take your questions.

Let’s start by turning to slide 3 of our presentation for the key messages we’d like you to take away from today’s discussion. We were pleased with our performance in the fourth quarter and we produced a solid year-end finish and financial results that were slightly ahead of our expectation. We continue to make progress operationally as our new commercial model and an improving economic environment, both contributed to better sales. Our team are delivering great outcomes for our members and establishing a foundation for sustained growth and impact.

We anticipate improving sales, cross-sales and renewal activity across the year and into the future; however, as we told you on our last earnings call we expect near-term margin pressure given the lag between contract value and revenue growth and selective growth investments. Therefore, our outlook for 2010 reflects lower year-over-year revenue and earnings when compared to 2009.

At the same time, as Tom will discuss in greater detail, we continue this year to focus on four key priorities to set up for future growth; driving large customer loyalty through high-value personal engagement, investing globally in EXBD’s strongest brands, improving the member experience through enhanced technology and analytics platforms, and elevating member performance through product innovation.

Please turn to slide 4 for an overview of our financial results. At December 31, 2009, our contract value was $393.7 million, which is a reduction of 19.2% from December 31, 2008. This decline of $93.4 million includes the net effect of $29 million of sunset programs, partially offset by the addition of Tower Group. The reduction in contract value is reflected in our year-over-year revenue trends.

Revenues in the fourth quarter were down 21.1% to $108 million versus $136.7 million in the period-year period; full-year 2009 revenue declined by 20.7% to $442.9 million versus $558.4 million in 2008. We worked aggressively to align our cost structure with this lower revenue profile by implementing a range of expense management activities, which we have described for you throughout the year, including the elimination of lower performing programs, workforce reductions, discretionary expense controls and real estate sub-leases.

As you will recall, we said from early 2009 that our objective was to get our restructuring efforts behind us so that we could quickly reach a trough in our cost base and focus on reestablishing a growth profile. One side effect of this approach is that our financials throughout the year benefitted from the revenue recognition of a historically higher contract value against a lower expense base, which had a positive impact on margins.

The lessening of that effect can be seen in our fourth quarter adjusted EBITDA margin which had 24.5% was down 170 basis points from the fourth quarter of 2008; however, the full-year impact is apparent in our adjusted EBITDA margin for 2009, which came in at 25.8%, an increase of 240 basis points as compared to 2008. Non-GAAP diluted earnings per share was $0.40 in the fourth quarter, a decline of 11.1% from the prior-year period. For the full-year 2009, non-GAAP diluted earnings per share was $1.68 or 12.5% lower than in 2008. All of these results were slightly ahead of the revised 2009 outlook we provided following our third quarter.

Turning to slide 5; contract value was up 1.7% from the third quarter, reflecting both improving sales performance and the addition of Tower Group. Our middle market business again grew on both the year-over-year and sequential basis and the large corporate base experienced a smaller decline than in the prior quarter. Geographically, we saw some improvement in Europe, although relative performance is still behind that of North America and Asia Pacific.

As expected, adjusted EBITDA margins fell sequential from 28% in the third quarter to 24.5% in the fourth quarter. On a sequential basis, the combined total of cost of services, member relations and marketing, and general and administrative expenses increased by $4.1 million driven by the absorption of Tower Group operating costs, higher commercial activity levels in our busy 4Q selling season, and early investments in key growth opportunities. These increases were partially offset by careful cost management and other operational efficiency improvements; and margins also benefitted from revenues that came in slightly ahead of our forecast due to better-than-expected booking performance.

In the quarter, we recorded net restructuring costs of $1.1 million related to the acquisition of Tower Group. Other income in the fourth quarter increased by $4.4 million over the prior-year period, primarily due to a $2.5 million positive change in fair value of deferred compensation plan assets, and a $1.9 million favorable swing in foreign currency.

Our effective tax rate in the third quarter [ph] was 35.5%. During the quarter, we finalized our annual effective rate analyses and determined that our full-year 2009 effective tax rate was 38%. Membership fees receivable were nearly flat at $126 million on December 31, 2009 versus $127 million on December 31, 2008, reflecting both successful collections and the solid finish in bookings in the fourth quarter.

DSOs, which we calculate using average receivables, were 81 days for the fourth quarter of 2009 in line with historical ranges. The current portion of deferred revenues decreased 16% to $222.1 million at December 31, 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 $28.6 million during 2009, a reduction of $56.7 million from 2008 due primarily to lower 2009 bookings. This decline was offset by lower annual level of both capital expenditures and dividend payments, and as a result our cash, cash equivalents and marketable securities balance at December 31, 2009 totaled $76.2 million, nearly identical to the $76.1 million on hand at year-end 2008. December 31, we had $22.3 million in remaining share repurchase authorization.

Next, I will discuss our outlook. The following comments are indented 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 side 6, which illustrates the lag effect concept we described on our third quarter conference call. As you know the overwhelming majority of our revenue comes from subscription-based services in which we recognize revenues over the term of each contract, which is typically 12 months in duration. As a result, there is a lag between changes in contract value and the time it takes for those changes to be fully reflected in our revenues. While it is likely that contract value will decline in the first quarter due to seasonally lower new sales relative to the size of the first quarter renewal pool, we do anticipate improving sales, cross-sales, and renewal activity across the year, and therefore believe that we are close to the point at which contract value will begin to grow sustainably again.

However, since we do not anticipate a rapid snap back in contract value growth, we do not expect that revenue to be recognized from 2010 bookings will compensate for the lower contract value posted in 2009. At the same time, from an expense perspective, while we will continue to see greater operating efficiencies we also plan to make selective investments where we see clear opportunities to accelerate our return to growth, such as expansion of our government member base, further investment in the Asia-Pacific region and targeted new product launches. As a result, over the near term, we expect our operating margins will be pressured by the combination of lower revenue and flat-to-slight increase in expenses.

Turning to slide 7, I will review our outlook for 2010. Our financial guidance reflects a number of factors that will influence our performance throughout the year. We continue to see risks in the economy as the overall recovery is needed and a range of regulatory proposals remain unresolved. Given this context, many companies are still watching expenses closely, especially with respect to new spending. As we said previously, based on our success in North America, we plan to extend our integrated account management model to our European operations, which we are confident will produce positive long-term results, but is also likely to cause some short-term disruption in our commercial progress there. And as just discussed, we anticipate the revenue lag effect to continue to impact our results in 2010.

On the positive side, we increasingly find that customers are again focusing on improving competitiveness or driving operational efficiency and turning to us to help them achieve these objectives. We also expect to see continuing improvements in renewals and cross sales as more teams build deeper relationships with their customers and find new ways to lift their performance across the year.

As booking growth returns, we would expect to see our typical upfront payment experience positively impact working capital and operating cash flow. The degree to which these headwinds and tailwinds combine will influence our financial results, which we currently estimate will fall within the following ranges; annual revenues ranging from $385 million to $405 million, adjusted EBITDA margin of between 18% and 20%, non-GAAP diluted earnings per share of $0.85 to $1.10, depreciation and amortization expense of $19 million to $21 million, and capital expenditures of approximately $8 million. The above guidance represents our best estimate at this point, and we will update you periodically as appropriate.

Finally, a word about our dividend; based on our current strong liquidity position, our expectation for positive free cash flow in 2010 and our increasing confidence in the operational progress of the business, our board of directors have approved a 10% increase in our quarterly dividend rate and thus declared $0.11 quarterly dividend payable on March 31, 2010 to shareholders of record as of the close of business on March 15, 2010.

That’s it for the financial summary. I will now ask you to turn the slide 8, where Tom will begin his remarks. Tom?

Tom Monahan

Thanks, Rich. Good morning. Before I layout our priorities for 2010 and beyond, I wanted to add some more color about the final quarter of 2009. The quarter reflects our intensive focus on the priorities we laid out for the year, and these priorities will remain our chief areas of attention for 2010.

This last quarter, we saw signs that the business is moving definitively in the right direction. The characteristics of our business are renewable revenue stream, fast cash conversions cycle, scalable cost structure and low-capital intensity remain intact and make for very attractive economics as our revenues regained momentum.

The rise in contract value came cheaply from our large corporate market where renewals, cross-sales and win back, all showed solid gains resulting from our reorganization and focused on the largest companies in this bracket. This focus did likely come at the cost of our overall institutional renewal rate which trended down both due to the economy and the loss of some smaller companies in the large corporate segment. We also saw a continued strength in our middle market platform which had the additional implication of causing average selling price to shift down slightly for the year. We saw promising early returns from our focus on the government market sector, but these of course remained small.

We saw a good Q4 progress across all geographic areas, particularly in North America. While European team confronted continued challenging conditions in some markets. They also drove performance improvement across the quarter. Finally, we took advantage of an opportunity to extend the impact of our financial services practice by adding the uniquely valuable people and content to Tower Group. This acquisition rounds out our ability to support FS, marketing, technology, strategy and product management executives.

Entering 2010, we see very real returns from continued focus on many of the same priorities that characterize our focus in 2009. Accordingly, we will concentrate on the same ones across the next 12 months and beyond.

Please turn to slide 9, where we will see these priorities. First, driving large customer loyalty through high-value personal engagement; second, investing globally in our strongest brands; third, improving the member experience to enhance technology and analytic platforms; and fourth, elevating member performance through product innovation.

Let me give you some highlights on what we did last year with the results then, and what we’re trying to do this year.

So turn to slide 10, you’ll see our first priority, driving large customer loyalty through high-value personal engagement. Last year, as you know, we rolled out a service-led growth strategy in organization in North America. We restructured our sales and service model to establish integrated account teams focused on serving our largest member companies. We also added executive advisor capacity to ensure that we deliver direct member impact, focusing our lead sales talent on those Fortune 500 companies that were not yet members we aimed at increasing our already high penetration of these top-tier companies.

The results tell us that we are on the right track. Our large corporate cross-sell rates increased from 3.23 to 3.30 in Q4. Our penetration of the Fortune 500 grows from over 80% to over 85% in the quarter. Revenue from our largest 200 members grew 4% in the fourth quarter of 2009.

And by year end, we had won back 10% of lost contracts from early 2009. This win back rate is especially gratifying. It is a tribute to the great work of our teams as well as an important indicator of the strength and value of our franchise. We stayed close to our lapsed members and as their budgets opened up they chose to return to us.

These are positive early signals but we don’t yet believe that we are achieving our full potential with regard to the strength, size, and growth of the relationships with our largest customers. In 2010, we will continue to support our North American and Asia Pacific market teams as they move to full productivity in the new operating model. We have seen positive results as our teams grow more experienced, and we will also bring the entire account management operations up to the level of our best performers.

We will also make win back a very high priority. While we have seen cross-sell start to move in the right direction, we still have a number of supportive former members who we have yet to reengage. We will also begin rolling out the new operating model to EMEA organizations. Although there is always some productivity lost during these kinds of reorganizations, we believe that our experience in North America will make this transition go more smoothly. And we have a high degree of confidence that involve relationship-oriented approach will create great outcomes in this key growth market for our company.

Please turn to slide 11. Our second key priority is to invest globally in our strongest brands. In 2009, we restructured our product portfolio to focus on the strongest product in the five core functions we serve. This move did allow us to cut costs, but our real purpose was to redirect our resources toward strengthening our remaining products and focusing on selling products with the greatest member impact and long-term value. Those choices were distinctive intellectual capital and research and data has a greatest impact on member performance. We targeted government markets with dedicated sales service and product teams allowing us to extend the reach of our core assets into valuable new market where we can make a very strong impact on member performance.

We continue to invest in middle market growth by expanding sales and service capacities in those markets. We laid the groundwork for expansion in Asia by growing Sydney office. As a result, we were able to reduce our product portfolio by about 20% and still protect strong institutional relationships. Our strong middle market growth rate supported by our successful renewal effort along with steady results in the government markets give us confident that we put our energies to get the right opportunities.

In 2010 we will continue to invest globally in these strongest brands. First, we will be making targeted investments in key EMEA markets to increase penetration. We will establish our presence in Singapore to widen our footprint in Asia Pac. We will sustain our efforts against the middle market and government markets. And we will make selective marketing efforts to reinforce the power and value of our core content brands and bring our best intellectual capital into fuller public view.

Moving to slide 12, our next priority has been to improve the member experience through enhance technology and analytics platforms. We know from experience that the number and quality of the member in our actions correlate strongly with renewals and ultimately cross-sells. This past year, we took a number of steps to integrate technology of personal service, to improve delivery, increase functionality, and create new reasons to interact with us and make it easier for members to access and work with the vast wealth of data tools and insights that we provide.

These improvements increase member satisfaction even as they support our economics and the ability to scale the business. Here are some of the key experience enhancements we launched this past year. We implemented a new member information system to greatly increase our ability to engage members around their organization's own priorities, and to allow deeper and more relevant relationship management. We integrated all employee analytics growth into the platform and we upgraded the toolbox platform to support new functionality and extend the platform into human resources and finance communities. We significantly upgraded our news and data feed platforms.

These enhancements have lead to significantly higher interaction levels and we have been pleased to see increases in critical indicators. Most importantly a 21% increase in member usage and a 46% increase in content downloads. We added nearly 300,000 new registered users to the toolbox communities, we have more than 170,000 total subscribers to our regular news and data feeds. In 2010, we'll focus on further driving personalization and usage through a Web interface overhaul and on scaling up key analytic tools that link ever more tightly to member work flow which are critical to improving member performance.

Please turn to slide 13. Our fourth priority has been to elevate member performance through product innovation. This past year, we were deeply focused on making sure we recruited, retained, and renewed members for the products we already have. But nonetheless, we introduced some high potential link products that leverage existing assets and capabilities to extend our presence in existing markets and tap in to new opportunities. We launched SEC Solutions which connects sales performance data directly to key sales deployment decisions. We introduced the Government Finance Roundtable which packages finance, research and data sets for finance executives in government markets, and we merged CEB’s financial services practice with Tower Group to fill it up with FS product management, technology and strategy domains.

These are still fairly new to their markets, but early response has been very positive. As just one example of the impact that these products were having, let me share the details of the impact that our SEC Solutions product had on our major technology equipment manufacturer. Across 2009, our team married that company’s internal performance data with our own deep data base and sales performance to identify opportunities to improve their global accounts process. We then used our own best practice model to help them setup a common process for managing global accounts and partnered with them to supply the components of a global training program.

Not did we allow this client to move to a global standard of best practice quickly, they estimate that our work allowed them to add literally millions of units of sales to their 2009 totals. We expect to pick up the pace of new product introductions in 2010, although the rate will remain measured as our teams continue to learn new goals. We will be very rigorous in deciding where to put our efforts. So you will see us only introducing new products that meet the following criteria. They must leverage existing relationships expertise and assets; targeting our core domains, they must create more leverage best-in-class data research and analytics; they will target high-dollar problems and recurring roles; and they must enjoy EXBD caliber attractive economic characteristics such as scalability, attractive cash generation and high margins.

Please turn to slide 14. This year, we have to drive contract value growth that will drive our revenue growth later this year and into the future. As Rich said at the outset, our solid year-end finish was driven by continued progress of core operations. Our teams continue to deliver great outcomes for our customers. As a result, we have come to a difficult time with the world’s best networks, the executive networks still in place. This provides us with an unmatched repository of data and insight and a huge platform for future cross-sell.

We remain committed to rehearse less cost management and had proven that we can make smart decisions about how to control expenses and still protect critical relationships. By continued focus on our four key priorities, we will pave the way for great outcomes both for members and for our own organization.

Finally, we remain committed to attracting, engaging and mobilizing the exceptional talent necessary for our and our members continued success. In fact, before closing I will emphasize that the most important element of our business is the quality and energy of our people. We have been making a lot of change at once in the company, and I have been extremely impressed with the energy and enthusiasm everyone has displayed in embracing their new roles.

I’ve been equally impressed with the powerful talent we have been able to attract to CEB over this past year. It is a statement about their assessment of where our business can go and we already feeling that positive impact of their presence. As I get around to the different parts and locations in the organization, I can feel clear sense of confidence, confidence in our mission and confidence that we are moving in the right direction. I have been excited and gratified to see our people’s commitment to helping our members use our insight and guidance to make themselves better at what they do and more valuable to their companies. This year we will be building the foundation for the new growth throughout the coming year. I am looking forward to the work ahead.

Rich and I will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions) We will go to Tim McHugh of William Blair.

Tim McHugh -- William Blair & Company

Yes, first I want ask you Rich about your comment that you would expect contract value to be down in Q1, other than 2009 as we look back over the last 10 years or before that, it had never been down sequentially Q4 to Q1. I understand the seasonality in terms of the puts and takes there but just -- and also probably that – you probably want to remain conservative given the environment we are in, but was there anything that you have seen coming out of the year that would make you – make that statement, any additional color there would be helpful.

Rich Lindahl

Sure. Really Tim it comes under a couple of factors. First is that as you know both Q4 and Q1 are biggest renewal pools for the year and so Q1 is a big pool and as we commented previously that the renewal rates have gotten better and they have improved, but they are not quite back to pre-recession levels. So there is still more work to be done there. Seasonally, the first quarter is not as strong for new business typically as you find in the fourth quarter. So to make up that gap in renewal activity it is a push from the new business front. And then you’ve also got the other factor, we still have another $6 million of sunsets coming through in the first quarter. So when you net all those together it becomes an expectation that the most likely outcome is for a tick down in contract value in the first quarter.

Tim McHugh -- William Blair & Company

Would you expect it to improve after that as your outlook across the year?

Rich Lindahl

Yes. We are certainly. Everyone in the organization is certainly driving towards growth this year and trying to pull that forward as quickly as we can. I do think that our expectations would be that we should see improvements after the first quarter.

Tim McHugh -- William Blair & Company

Okay and then can you touch on the European shift in the sales model, anymore timing or details on the timing of that when that is going through? And just when you expect that to be completed?

Tom Monahan

Sure Tim, it is Tom. We are very, very deep in the planning. The good news is that there are going third after Asia Pac and North America. So that team is doing a great job, learning lessons and benefitting from some of the opportunities for improvement we identified in the other two regions. We are planning right now, we have already started the change process, we will start to implement and be done with the implementation by mid to end of Q2, which is as you know relatively seasonally slow season. So we target these change efforts for places where both the market and our traditional booking pattern give us the opportunity to do so.

Tim McHugh - William Blair & Company

Okay thank you.

Operator

We will go next to David Ridley-Lane of Bank of America.

David Ridley-Lane – Bank of America

Sure, I might focus on the difference here between the net loss of members which is about 300 year over year, and then sort of think about that on a gross basis, because you have been kind enough to give us the member renewal rate. So on a gross basis, you have lost about a little over a 1,000 members basically going from 5,000 with a 78% renewal rate. You have seen 10% win back, and I am assuming that you have got sales people focused on each one of those lost members and non-renewed members, I am just sort of wondering with that sort of experience with the 10% win back rate in 2009, don’t you think that you will have a great deal of success, I think you have said previously that non-renewing members are some of your best prospects.

Tom Monahan

David that’s right. As I said, we are very, very focused on it. So there is two opportunities there; one is to win back our customer whom we lost completely, we did lose -- our usual renewal rate did tick down in 2009, some of that was due to our very intensive focus on our largest customers. So we’ve reorganized and focused on our largest customers. I think in the mix there was a little less focus on some of our smaller and large corporate customers, and that’s an opportunity for us to go recapture. And certainly that win back is also just adding contracts back into relationships that stayed stable. You saw some of that reflect in the uptick in cross-sell sequentially across the quarter. So absolutely we see this is a big priority and a huge opportunity and we are very focused on executing. The question for us is how fast we can pull that back into the organization and obviously the more we do quicker the more shows up in our 2010 revenue versus setting up a break of the business down road. So our focus is not only in getting it done, we are getting it done, we are getting it done as quickly as we can. That said, I think Rich said, our guidance for the year reflects our best sense of the rate at which that will happen right now.

David Ridley-Lane – Bank of America

Okay. And just if I could squeeze in another one; on the sequential change in contract value in the fourth quarter, in addition to – it was up sequentially, but it also had a I think about a $6.5 million drag form the sunsetting programs. So if you sort of take that of both quarters, this was a 4% sequential increase, is that about right?

Rich Lindahl

I think I am sure you’ve done the math correctly; I think it is obviously there was a contribution within the sequential increase from the additional of Tower Group.

David Ridley-Lane – Bank of America

Could you help us to just to touch in and say was that like 1% or was it 2%, was it more or less than the loss from the sunsetting.

Rich Lindahl

I would say it was slightly more than the loss from sunsetting.

David Ridley-Lane – Bank of America

Okay, that is very helpful thank you.

Operator

We will go next to Vance Edelson of Morgan Stanley.

Vance Edelson -- Morgan Stanley

Hi thanks a lot. With appreciation of the lag, the uptick in revenues that’s expected in fourth quarter, you were able to grow revenues just a bit, is there any reason to think that some modest sequential growth won’t continue into this year? Or do you think for whatever reason that was a bit of an aberration and we should truly look for more flat revenues for at least another few quarters?

Rich Lindahl

Yes, I mean I think we would not expect revenues to increase in the first quarter, I think it would be much more expectations for revenues to come down in the first quarter relative where they were in the fourth quarter. I think maybe another thing to kind of remind you that might be helpful when thinking about the revenue for 2010 is that as you know a good chunk of our 2010 revenue is really already baked. If you look at the relationship between deferred revenues at the end of any given year and the revenue that comes in the year following that, it is typically in a range of from 55% to 60%, and so again, a lot of 2010 is kind of already in the books in a revenue perspective. So the biggest determination for this year is really going to be the timing and magnitude bookings, as Tom said, and really -- especially as that occurs in the first half of the year. So, when you look at contract value coming down in the first quarter, after a very strong and rapid snap back following the first quarter it would be difficult for that 2010 revenue to be meaningfully higher in 2010 versus 2009, again we are driving the organization and focused on getting those bookings in as fast and as strong as we can but the range we put out there is our best estimate in terms of most likelihood of outcomes.

Vance Edelson -- Morgan Stanley

Okay. And given your experience in past economic rebounds, could you give us some insight into the likely pattern of top line acceleration, given the specific plans that you have to invest in growth, or are we looking at early 2011? Is there usually most precisely a one-year lag following the investments you are making?

Rich Lindahl

There is not a lot of prior economic downturn experienced to kind of calibrate to as it relates to our company given the age of the age of the company and the nature of the last downturn in the early part of 2000 was really different from the nature of this one. So I think we are more focused on just what we are seeing right now which is not only the economy but just as importantly the actions we have taken internally to reorganize our selling model to add additional advisory capacity and functionality, and obviously to keep our products as relevant as they can be to folks. I would say, along with improvements in overall growth through the second half of the year, it is reasonable to expect that we should see an improvement in revenue as we through the second half of the year and then better performance in 2011.

Tom Monahan

One other things we did see from our prior downturn was you will see some productivity gains on the marketing member services line as those teams – even with the success we saw in the latter half of 2009, it’s still an environment where something that in a good environment takes a visit and two phone calls. Now it takes probably a visit and five phone calls just to make sure it happens to make sure we earn our way into those budgets. So as those teams get more comfortable in their job and as members feel more comfortable in making spending decisions, we will see a little bit of leverage from the great team we have in the field.

Vance Edelson -- Morgan Stanley

Okay, and then lastly you mentioned real estate savings through sub-leases and so forth. Given the state of commercial real estate markets globally, are there more opportunities over time to reduce expense there?

Rich Lindahl

I think that there is potentially some opportunities. You are right that the market is not certainly as strong as it has been. We talked about getting our staff closer to our members and that created some capacity for us in our headquarter space earlier in the year, and whether or not that create some more opportunity down the road remains to be seen.

Vance Edelson -- Morgan Stanley

Okay, great. Thanks guys.

Operator

We will go to Gary Bisbee of Barclays Capital.

Gary Bisbee -- Barclays Capital

Hi, guys, good morning. Can you give us a sense where we are at the end of the year in terms of the percentage mix of the contract value between international large company, the midmarket, and the core US large company parts of the business?

Rich Lindahl

The mix on international versus US is really about the same as it’s been. It’s over 70% US-based revenue. On the middle market, it’s still under 10%; obviously given the experience we had in 2009, it’s pretty safe to say that it’s closer to 10% than 0% at this point. But it’s still under 10%.

Gary Bisbee -- Barclays Capital

Can you give us any sense how each of those three areas grew or shrank in 2009?

Rich Lindahl

Well, I think we said that middle market certainly had overall a better performance in 2009, and it did grow in 2009, we did see the large corporate base decline overall in 2009.

Gary Bisbee -- Barclays Capital

Okay. Some of these changes you are making in trying to improve the client experience, some of the more hands-on stuff, and I guess maybe to a certain extent more technology investment. What is this new model mean for the long-term profitability of the business? Should we think that there is going to be in terms of headcount to serve a customer higher level than there has been in the past, or are there going to be other investments we should think about or when you get back to at least moderate revenue growth at some point does the model look not that different potentially than it did a few years ago from a profit perspective?

Tom Monahan

Hi, Gary, it’s Tom here. As we’ve been indicating in the near term, we do expect margins to trend down due to revenue lag effect that we talked about and some selective investments we’ve put in place and probably some lower marketing and member services productivity across the board as they face a not perfect economic environment. And that said nothing has changed fundamentally in the scalable nature of our products. We still have a research team at the center of these product areas that ought to be producing great intellectual capital data, research insights that are highly valuable to people whom they support on a global basis. And that leverage hasn’t disappeared through this cycle, and that’s a big source of leverage going forward. With all the puts and takes of the new operating model we have more in-service, etcetera, but the fundamental scalability of the model is still intact coming through and out of this downturn.

Gary Bisbee -- Barclays Capital

Okay. Then since it sounds like at some point over the next year we are likely to return to some level of revenue growth. How do you think about what a reasonable 3-year to 5-year growth targets for the business is? It used to be 25% plus and 20% plus and I would assume that now you’d probably be targeting a lower level than that. But how do we think about how you are going to invest to try to grow the business?

Tom Monahan

We haven’t explicitly established a long-term growth rate target for the company. With the moves we’ve made across the past year, we believe that we’ve established a very stable foundation for a very sustainable, very profitable long-term growth. And after the likely downtick in Q1 that Rich mentioned due to the seasonality of the business, we're all targeting solid CD growth for the year. The way we think about it is we got a rich opportunity right in front of us. We have a cross-sell rate of 2.88, an installed base of 4,700 companies. Simply cross-selling our existing products to our existing customers paves the way to double-digit growth, and as always, you will see us balance our drive for growth with a focus on great customer outcomes and solid profitability. Beyond that we don’t have an explicit multi-year target, but we know we don’t lack for opportunity and we feel great about the sustained scalability and impact that our new operating model gives us.

Gary Bisbee -- Barclays Capital

Okay. And then just one last one. If we think about the number of subscription sold I guess in the fourth quarter, within the core business, forgetting the midmarket, is that still trending lower year-over-year and can you give us any commentary on how that progressed throughout 2009 so the decline in the number of new subscription sale has that moderated through the year, is it close to turning positive?

Rich Lindahl

Yes, this is Rich. It is clearly down on a year-over-basis. We did see the biggest impact earlier in the year, especially in the first quarter, and as we came through the second half of the year and into the fourth quarter we definitely saw an increase in that activity.

Gary Bisbee -- Barclays Capital

Thank you.

Tom Monahan

By end of the year, we are definitely approaching our historically program level renewal rates pretty much across the firm. We weren't all the way there, but we’re certainly trending back towards them and new sales were tracking back towards historical levels but not all the way there. It’s still not a perfect market and our team still are not fully seasoned in their new jobs. But we are getting back into zones that feel pretty familiar to us.

Gary Bisbee -- Barclays Capital

Okay, thank you.

Operator

We will go next to Jim Bradshaw of Bares Capital Management.

Jim Bradshaw -- Bares Capital Management

Thanks, good morning guys. As you go into 2010, have you noticed anything – any of your core functions that seem to be maybe of more interest right now or something – that kind of thing than any of your other core functions, any one in particular stands out?

Tom Monahan

The short answer is no. I think as we closed out 2009 we saw very consistent performance across the board both on regional basis and on functional area basis. Each practice area has its own focus right now, CFOs I think and the finance teams are still a little worried about the intrinsic health of the economy, sales and marketing guys are stabilization in their end markets, so they are starting to make some investments to be ready to grow as the market allows them. So group by group you see different issues popping, but the net result is they have all got some big urgent difficult problems sitting on their desk and we're very well positioned to help them solve those problems and move forward in their own markets. So there is no particular news at the functional level.

Jim Bradshaw -- Bares Capital Management

Okay. I appreciate it. Thanks a lot.

Operator

We will go next to Dan Leben of Robert W. Baird.

Dan Leben – Robert W. Baird & Company

Great, thank you. Help us understand in relation to the Tower Group acquisition, what percentage of their revenues shows up in contract value versus being non-subscription type business?

Rich Lindahl

I would say that certainly the vast majority of their revenue is contract value type revenue.

Dan Leben – Robert W. Baird & Company

Okay. So is the right ballpark to think about if they were, say, $25 million to $30 million revenue business, there is probably $20 million to $25 million in incremental contract value in the quarter, is that the right ballpark?

Rich Lindahl

We're really not breaking out Tower Group separately just like we don’t break out any of the other components of our business. I will tell you that that number is too high though for Tower Group.

Dan Leben – Robert W. Baird & Company

Okay. Then on the other metrics, was there any impact on the cross-sell ratios from bringing Tower in?

Rich Lindahl

There was not a material impact just given the overall size of the business.

Dan Leben – Robert W. Baird & Company

Okay, great. Then going back to the slide presentation which was very helpful. Just looking at the slide that shows how contract value, revenue and expenses flow over time, maybe just reading too much into it, but there is a pretty significant margin compression there that even at the back end of the slide when contract value is growing, revenues are growing, the gap doesn't start opening up again for margin expansion. Am I reading too much into the presentation of that or is it fundamentally just continuing to invest to grow the business, and we don't lap that for several more years.

Tom Monahan

Hi, Dan, its Tom. I think I chopped that up on Rich (inaudible) artistic skills. There is no intent to signal anything there. There is nothing that’s changed about the foundational scalability of this business. So as we add contract value that drops to the revenue line, we’d expect to see margin expansion over time. You will offset that with some selective investments in new programs, new products, new markets, etcetera; but nothing has changed about the fundamental scalability of the business. And as always, we will keep our eye on both taking advantage of that scale and making sure we lay the right foundation for future growth. But don’t hold this to our drawing skills.

Dan Leben – Robert W. Baird & Company

Fair enough. Then last question from me is as we think about the expenses with the initiatives you talked about earlier in the call how should those flow into the P&L as we look through the quarters of the year? Is it more backend weighted weighing toward 2011 or does it start at the beginning and pretty equally spread?

Rich Lindahl

Yes, what I would tell you is on a full-year basis, I think our fourth quarter run rate is a pretty good place to start in terms of thinking about what we’re going to look like for the full year. I would think that there is going to be a slightly lower rate in the first quarter and probably a slightly higher rate in the fourth quarter, as some of that relates to just seasonal patterns of expenses, and then that could kick up or down just based on how they year unfolds and the opportunities we see to invest in new products and those kinds of things.

Dan Leben – Robert W. Baird & Company

Great. Thanks guys.

Operator

We will take our final question Paul Ginocchio of Deutsche Bank.

Leslie – Deutsche Bank Securities

Hi, this is Leslie [ph] sitting in for Paul. I think most of my questions are already touched on, but if you could still -- you spoke about some early success in selling to the government sector. If maybe you could comment on how the sales cycle and pricing differ there? And also if you could just refresh our memory how many product, new programs launches you are planning for this year? Thanks.

Tom Monahan

Let me start with the second question first. We haven't explicitly guided to a new product, new program target for the year. We did say likely more than last year. Last year, our focus was very much on change in our organization and selling and renewing the products we already had. This year, I’d expect to see some acceleration off of last year’s number, which was just a handful, and as always there will be EXBD style products with really attractive economic characteristics, but there will be some margin drag in the near term as we get them out of gate. Our view here is we are at very early days of being able to penetrate this sector. The good news for us is that work-charts [ph] within most government entities of the federal, state, local, and even international governments have many of the same key executive roles that we serve in the corporate sector, and many of the challenges and questions that sit on executive desks in a Fortune 500 company sit there in a major federal agency as well.

So we have always sold into the sector but we are seeing that by putting dedicated people against it who can position the right resources, the right data, the right analysis, the right best practices against particular needs of that sector we see an opportunity for growth. We haven’t seen any wild differences between selling cycles or potential pricing structures in that market. We're building some new products for that market, so as time unfolds we may see some different dynamics. But right now we found the needs, interests and buying behaviors of that sector compared very favorably with those of our traditional large corporate sector.

Operator

At this time, I will turn the conference back to Mr. Monahan for any additional remarks.

Tom Monahan

Thank you all for calling in or logging in this morning. Rich and I will be on the road a little bit toward the end of this month. We will be down at the Credit Suisse conference here in Phoenix and then up at the Baird conference in Boston, both toward the end of February. We look forward to keeping you all up to date on EXBD story as the year unfolds and seeing you live out on the road or talking to you as your questions, deck at a time. Thank you.

Operator

That concludes today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!