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Executives

Richard Lindahl – Chief Financial Officer

Thomas Monahan – Chief Executive Officer

Analysts

Timothy McHugh - William Blair & Company

Vance Edelson - Morgan Stanley

Paul Ginocchio - Deutsche Bank

David Ridley-Lane - BofA Merrill Lynch

Gary Bisbee - Barclays Capital

Daniel Leben - Robert W. Baird & Co., Inc.

Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

The Corporate Executive Board Company (EXBD) Q1 2010 Earnings Call May 4, 2010 9:00 AM ET

Operator

Good morning and welcome to The Corporate Executive Board’s first quarter 2010 conference call. Today’s call is being recorded and will be available for replay beginning today and through May 12 by dialing 719-457-0820. The confirmation code for the replay is 5074225. The replay will also be available beginning later today and through May 12 at the company’s website which is executiveboard.com., and at www.earnings.com. To the extent any non-GAAP financial measures are discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the homepage of the company’s website for yesterday’s news release.

You will also find a PDF for the Slide presentation that the company will use in its prepared remarks this morning by going to Investor Relations on the company’s website and following the link to the first quarter webcast.

Please go to the second page of this presentation which includes 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 effective quarterly and annual 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 are estimates, forecasts, plans, targets, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors among others set forth in The Corporate Executive Board’s filings with the Securities and Exchange Commission and in its first quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

At this time for opening remarks, I’d like to turn the conference over to the company’s Chief Financial Officer, Mr. Richard Lindahl. Please go ahead sir.

Richard Lindahl

Thank you Scott. Good morning. I’m Rich Lindahl, Chief Financial Officer of The Corporate Executive Board. Thank you for calling or logging in to our first quarter 2010 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 2010 guidance. Next, 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.

Please turn to Slide 3 of our presentation for the key messages we’d like you to take away from today’s discussion. We drove solid performance in the first quarter and overall we are pleased with our results. We saw both the expected sequential drop in contract value and the revenue lag effect we talked about during our last earnings call. However, due largely to improvements in program renewals, our revenues and earnings were slightly ahead of our expectations. With the first quarter behind us, we have clearer visibility on this year’s revenue profile and as a result are raising our guidance to reflect improvements in our outlook.

Finally, we continue to focus on our four key operating priorities and are proceeding with planned investments to accelerate our return to growth. Please turn to Slide 4 for an overview of our financial results.

At March 31, 2010 our contract value was $382.1 million, which is a reduction of 11.4% from March 31, 2009. As expected, contract value declined sequentially and ended the first quarter down $11.6 million or 2.9% from December 31. Revenues were $100.2 million in the first quarter of this year. Quarterly revenues were 14.7% lower as compared to the $117.4 million we reported in the first quarter of 2009 and 7.2% less than last quarter’s $108 million. You can see the lag effect in these numbers as the rates of decline in revenue are greater than the rates of decline in contract value.

We experienced a seasonal reduction in expenses in the first quarter, which when combined with the smaller than expected decline in revenue, led to a first quarter adjusted EBITDA margin that was even with the fourth quarter at 24.5%. On a sequential basis, the combined total of cost of services, member relations and marketing, and general and administrative expenses declined by $6.8 million and offset most of the sequential decline in quarterly revenues. The quarterly change can largely be attributed to differing seasonal selling patterns, higher incentive expense driven by last year’s strong finish, timing differences on share compensation expense, and the wrap up of various infrastructure projects.

Other income in the fourth quarter decreased by approximately $0.5 million over the prior year period, primarily due to a foreign currency loss of just under $900,000. Our effective tax rate in the third quarter was 41.3%, an increase from last year, mainly due to the book versus tax treatment of foreign currency losses. Non-GAAP diluted earnings per share was $0.34 in the first quarter, a decline of 15% from both the $0.40 we reported in the prior year period and the $0.40 recorded in the fourth quarter.

During the quarter, membership fees receivable was down 36% to $80.8 million at March 31. DSOs, which we calculate using average receivables, were 93 days for the first quarter of 2010, which is at the higher end of historical ranges due to a lower ratio of revenue relative to bookings than has been typical in the past, another manifestation of the lag effect we have described.

The current portion of deferred revenues increased sequentially by $18.2 million or 8% to $240.3 million at March 31 due to improved year-over-year bookings. Cash flows from operations were $71.8 million during the first quarter, an increase of 65% as compared to the prior year period. After paying $0.3 million for capital expenditures, and $3.8 million on our quarterly dividend, we ended the first quarter with $143.5 million in cash, cash equivalents and marketable securities. As of March 31, we had $22.1 million in remaining share repurchase authorization.

Turning to Slide 5, as just discussed, contract value was down 2.9% from the fourth quarter. The biggest factor in this decline was $6 million in reductions from the final portion of sunset Programs CV. As we said on our last call, this quarter represents the year’s largest renewal pool, and even though renewals were stronger than we expected the slower new business sales and cross sales typical of the first quarter did not generate sufficient bookings to fully offset the volume of lapsed memberships. Despite the decline in contract value, we saw several positive trends during the quarter. Program renewal rates came back to pre-recession levels, aided by the ongoing maturation of our account management model. Our European team generated very strong results despite the difficult environment and the potential distraction of our imminent commercial transition there. Our middle market team continued to generate sequential growth and we were pleased to see consistent performance across all programs and regions, giving us a solid platform upon which to build throughout the year.

Next I’ll discuss our outlook. The following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time. Please turn to Slide 6, which again shows the lag effect concept we have previously described, and let me remind you that this is simply an illustrative graphic. 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. With renewals now at pre-recession levels, and early signs of cross sale momentum, we continue to believe that sales, cross sales and renewals will improve across the year and that contract value is likely to resume a growth trajectory following the first quarter.

While we are encouraged by the trends we are currently seeing in overall bookings, we still expect that revenues to be recognized from 2010 bookings will not fully compensate for the lower contract value posted in 2009. At the same time, from an expense perspective, while we will continue to seek greater operating efficiencies, we also plan to make selective investments where we see clear opportunities to accelerate our return to growth, such as more service and sales capacity against both our large corporate and middle market businesses, 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 year-over-year revenue trends and expenses that will begin to move higher from here.

Turning to Slide 7, I will review our updated outlook for 2010. Based on our first quarter results, we have improved visibility on the full year, given the nature of our revenue recognition. We expect to see sequential growth in contract value, driven by sustained improvement in renewal rates and increasing new sales throughout the year. We also see places where higher service levels or new program features will enable higher prices and further support CV growth. On the expense side, we expect the first quarter to mark a low point in spending for the year, as we will see seasonal increases in items such as merit pay, travel, and service delivery activities begin to flow through in the second quarter. We also are proceeding with investments in our product portfolio, as well as adding capacity in our sales, advisory and service layers to drive increased member impact and accelerate our return to growth.

On the economic front, we still see various risks to a sustained recovery, but the overall environment continues to improve. However, companies remain focused on controlling expenses, which continues to make new sales challenging. And, while we are encouraged by our European team’s results to date, we still see potential disruption as we roll out our account management model in that region. The degree to which these headwinds and tailwinds combined will influence our financial results, which we currently estimate will fall within the following ranges; annual revenues ranging from $405 to $415 million, adjusted EBITDA margin of between 19.5% and 21%, non-GAAP diluted earnings per share of $1.05 to $1.20, depreciation and amortization expense of $19 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.

Importantly, please note that this guidance does not include the financial impact of the Iconoculture acquisition, which Tom will tell you more about in a few minutes.

That’s it for the financial summary. I’ll now turn the call over to Tom.

Thomas Monahan

Thanks Rich. Good morning everybody. I’ll start with a few framing thoughts on Page 8. We feel pretty good about where we stand. We saw encouraging signs in the quarter which have set us up for a somewhat better outlook for the year, but there’s still a lot we need to accomplish to get the company on to a stronger growth trajectory.

There’s no doubt we have benefited as the economy shows signs of thawing. At the same time, we see a lot of evidence that our performance benefits from our focus on our operating priorities. These priorities will continue to direct our activity and our investment throughout the coming year, so I just want to restate them. First, driving large customer loyalty through high value personal engagement; second, investing globally in our strongest brands; third, improving the member experience through enhanced technology and analytic platforms; and fourth, elevating member performance through great content and innovative products.

Let me tell you where we are on each of these now and what activities and investments we’ll be making over the course of the year. Let’s flip to Page 9. On our first priority, driving large customer loyalty through personal engagement, we are now most of the way through our company wide sales and service model transition. We have been underway in North America for three quarters and are now rolling out a new sales and service model in Europe. A major transition moment took place just this past week, and we look forward to refining the model and accelerating our momentum across the year. We expect a certain amount of disruption as we work through this change, but we are benefiting from experience to make the execution smoother. I must also say that our team in Europe has done a great job maintaining focus ahead of the transition. They delivered a strong quarter despite the fact that the European economy provided no updraft. Given the caliber of leadership and team on the ground, we have every reason to believe that Europe will continue to perform well throughout the transition process.

On a global basis, our renewal rates are back to pre-recession levels, and we see room to improve them from there. Our ability to sell additional products to our existing customers progressed quite nicely in the quarter and looks pretty solid relative to past Q1s, certainly versus last year. While there are pockets of success on the new sales front, there are also some places where we are working hard to get the model right and earn our way into new company budgets.

As we move through the year, we’ll be adding capacity to address two key areas of vulnerability that were magnified by the economic downturn. The first is our global service operating system. When the economy began to falter, it became clear that, while we had great people, they weren’t properly organized and supported to insure adequate member impact. While nothing could have insulated our members or us from all of the losses of the past two years, it’s pretty clear that had we been closer to our members, we would have been able to preserve more relationships. Our recent reorganization directly addressed this, and we see evidence that our new structure paves the way for better member engagement. It’s early in the year, but we are already seeing very high usage and engagement levels as members call us, directly engage our content and data online, and attend meetings. We’ve seen meeting attendance on a per member basis leap by about 17%.

As we move forward, the data also suggests that a higher ongoing level of member support and rigorous management of our engagement with members will translate into a more stable relationship and create a stronger platform for renewal and cross sale.

The second area of focus is sales. Now that we have a good rhythm with the members that know us well, we are putting renewed emphasis on new sales to rebuild momentum there. We did welcome in some terrific new members in the quarter, including Bissell Inc., Distell LTD, [Newmore] International PLC, and Thames Water. We see an opportunity to do even more going forward. Frankly, we ran a little lean last year. It was the right way to operate in the situation we faced, but we see some opportunities and want to be ready to act on them by making refinements and honing our sales operating system, and where we can, add support resources and marketing resources and additional sales capacity in spots to cover the market adequately for the opportunities ahead.

As a final note, you’ll notice in our 8-K that we have signed an agreement to sublet some additional space in our Arlington, Virginia headquarters. This doesn’t take effect until next year, but this agreement helps us balance two important objectives. First, to make sure that we have ample room to grow staff in this building in the foreseeable future. At the same time, it does reflect that not all of our staff growth will take place in the Washington area. This frees up additional resources, some of which can be used to keep building our footprints closer to members on a global basis.

If you could turn to Slide 10, we have also been very active on our second priority, investing globally in our strongest brands. First, we continue to see success in adapting our assets to serve the middle market. Our U.S. team did a great job of continuing to grow this business and we expect to be able to target middle market companies more forcefully on a global basis going forward. In addition to the European rollout, we have opened and begun to staff an office in Singapore. Singapore is the gateway to 700 large corporate members and prospective members throughout southeast and east Asia. It is also a critical hub for many of our U.S. and European members Asia operations. We already enjoy strong memberships with the leading companies in Singapore, and a number of our longest term member partners, including Sing Tel, Standard Chartered and Temasek were personally involved in getting us established.

The office has the benefit of operating from the start with an integrated sales and service model. We expect to be able to build on the relationships we already have established while sustaining a fast pace on new sales and leveraging an increasingly global operating system to support our sales and service organization.

Beyond the relationships and talent that we can leverage from our strong Sydney presence, we also see other benefits that accrue from becoming more global. We also continue to make significant investments in our Delhi research and sales operation. Growing our capabilities in India on the research, sales and service front will continue to be important in supporting our strong growth both in the India market and all the members on a global basis.

We also continue to increase the visibility of our brands and intellectual assets. I hope you all say our cover story in the May issue of the Harvard Business Review. The Corporate Leadership Council shared some highlights from our research on how to keep top talent engaged and productive. This is part of a broader effort to share our authoritative analysis and data with key audiences through select, high end media channels. We can’t correlate press coverage with sales, but we do know building our brands increases both visibility and credibility. It reinforces existing relationships and sustained over time, opens new doors to our sales and service organization. We’ve already seen a fair number of requests from board and CEO level audiences to help them understand and apply our rich data, research and tools to the currently challenging talent environment as a result of the HBR article.

As part of this effort to build our brands, we are also staging a few more large scale events to showcase the power and reach of our networks and contacts. In April we bought the full resources of our financial services practice, now greatly expanded through acquisition of Tower Group to bear in a major conference in Boston. We were very pleased with the turnout. We hosted more than 400 executives from the world’s leading FS institutions, adding dozens of new sales opportunities to our pipelines. The next big event on our calendar will be a Washington summit for our senior finance executives, held this coming September. In addition to our own thought leadership, CFOs and their teams will hear from speakers as varied as prominent jurist Stanley Sporkin and Tony Blair, former Prime Minister of the United Kingdom.

On Page 11, our third priority is enhancing the member experience through enhanced technology and analytic platforms. We continue to evolve the way our members interact with us. Our goal here is twofold; first, technology delivery allows us to serve even more people in the member organization at a very low marginal cost; second, we found that using technology to link our content and data directly to member work increases our impact and the stickiness of our relationships. Through renovations in outreach and navigation, we continue to see solid gains in web usage, with web usage per member up by an average of about 20%.

One area of innovation that has proven particularly valuable to members has been the inclusion of community features within our core memberships. Borrowing some methodologies from our toolbox team, we’ve rolled out a platform entitled Discussions at EXBD that allows members to directly ask a question of people, only at peer companies and only in defined executive positions. We’re finding that, for certain types of executives and for certain types of questions, for example a tax director who has a sensitive reserve issue, they value the peer perspective but equally value the confidentiality and authority of our peer network. We posted more than 1,100 Q&A sessions in Q1 alone and are now finalizing the last bits of the formal high rollout of this platform.

To the right, moving forward across the year, we are planning forward and investing in a system wide upgrade to the core member portals and distribution platforms. Our goal is both to make it easier for members to find and use the most important content data and tools to do their job and to link these assets directly to their own workflows and technology platforms. We’ll also continue to place a significant emphasis on designing applications to bring our data to life and into member workflows. A great example of this is an ongoing upgrade to our performance diagnostics suite. Our CXO programs each have a diagnostic methodology and benchmarks suite that allows the head of that function, says a general counsel, a CIO, head of procurement, to gather and analyze data on their performance. Our data helps them to assess not only the performance on cost metrics, but importantly their quality and capability. This combination of cost and evaluative data is critical to understanding the total cost to the company performing this function.

As an example, one HR department found that it seemed very efficient at workforce planning but ultimately was forcing their partners in sales and manufacturing to spend more money on this activity. So a cost only benchmark for HR actually raised the total cost to the organization. We have this data for more than 1,000 of the world’s leading companies, giving members and potential members an unrivaled asset to assess their own performance.

Page 12, and finally, we never let up on our fourth priority, elevating member performance through great content and product innovation. In our business, all good things proceed from a platform of deep insights about the levers of corporate performance. This is always the cornerstone of our business, and as our renewal rates suggest, our insights and analysis are in particular demand at this challenging juncture to the company’s reserve.

Two interesting areas that are proving very hot for our members right now; first, CFOs are looking for data and insight on cost management. This may not come as a surprise. They are not coming to us with recession style requests for fast cost savings ideas, but rather a longer term view prompted in part by our data on long-term cost management and cost leadership. The challenge they are worried about is a simple one. Most companies struggle to maintain any gains on the cost management front as they emerge from a downturn. And CFOs are leaning on us for help in making sure they make the selective investments in growth without giving back all their hard won cost gains. In a similar vein, our HR heads are turning to us for help in rethinking their organization structures. Rather than being an ever green topic, this has some real urgency right now. The recession forced companies to cut costs at an almost unheard of rate, and has left many of them with unwieldy, un-scalable organizational structures that CHROs are on point to fix quickly.

Beyond creating great content, we are also always looking for ways to better monetize the assets we have through new mixes of technology and service, and to acquire and build new assets. It’s in that vein that I’m pleased to announce our intent to acquire Iconoculture, a leading global consumer research and advisory company, founded in 1992. Iconoculture has pioneered the service offering that supports companies with consumer insights, anchored in proprietary data and analysis. They use a proprietary methodology to link data drawn from multiple quantitative and qualitative sources to develop actionable consumer insights that help marketers make critical product campaign and channel investment decisions. They serve more than 200 leading companies and an elite set of ad agencies through their annual, renewable, subscription based consumer advisory service product. For the single annual fee, clients get access to proprietary online analysis and support portal. They also get ongoing guidance from a team of consumer strategists, experienced marketing and advertising professionals, who help clients contextualize and act on key consumer trends.

You’re probably getting a sense why we were excited about this combination. Iconoculture’s rich data and insight about consumers full a key gap in our strong sales and marketing practice area. Our relationships with CMOs on a global basis will help insure that their great work gets attention at the highest levels across the world. And their focus on building a renewable, scalable platform for their relationships syncs perfectly with our business model.

Gayle Fuguitt, Vice President of Consumer Insights at General Mills, summed up the logic from a customer viewpoint. “As a longtime client of both The Corporate Executive Board and Iconoculture, I’m thrilled to see these two great research and advisory organizations come together. The thought leadership that The Corporate Executive Board has displayed around best practices, combined with Iconoculture’s detailed understanding of consumer trends and insights, will enhance the effectiveness of marketing professionals and brand executives at all levels of the organization.” I couldn’t have said it better myself.

Beyond the obvious business interviews, we’re also very excited about the caliber of the people and their leadership. Iconoculture’s CEO, Dan Frawley, his leadership team and all the great Iconoculture people will be great adds to our sales and marketing platform globally.

Our updated 2010 guidance doesn’t yet fold in the financial details from this transaction. We’ll give you further details after the deal closes. Broadly speaking, Iconoculture is about $15 million in annual sales. We paid a little more than one times revenue up front, with some additional consideration available based on our 2010 performance.

Let me ask you to turn to Page 13 for a couple of wrap up thoughts. As I said at the outset, we’re pleased with the progress we made this year, but see plenty of hard work ahead to realize our full potential. This work and our time and investment dollars will be tightly focused on our four core priorities; driving large customer loyalty through high value personal engagement, investing globally in our strongest brands, improving the member experience through enhanced technology and analytics platforms, elevating member performance through great content and innovative products.

Let me close with a note about our people. As always, I want to express my deep appreciation. They have shown once again their commitment to our members’ success and their willingness to go all out to make our members more valuable to their companies, and their companies more valuable to their owners. We recognize that ours is, first and foremost, a people business. Transcending any and all of these priorities is a shared commitment to attracting, retaining and developing exceptional talent. We anticipate this will get harder as the economy improves, and have worked very hard to make sure CB is a great place to work for great talent.

In closing, I’d like to say that we feel good about the quarter and confident about where things are going. We stayed focused on the priorities we know will drive our growth over time, and we continue to hone in on those priorities throughout this year and for the foreseeable future. We’re going to have to execute at the top of our game every day to lay the foundation for strong growth across the coming years. Our teams have demonstrated that they are up to the work and ready to take it on. I look forward to reporting back to you on our progress. We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Timothy McHugh - William Blair & Company.

Timothy McHugh - William Blair & Company

Can you, given the acquisition of Iconoculture and then Power Group last quarter, talk a little bit about how you already proceeded with Power Group and what your plan is for Iconoculture in terms of integrating these? Are you going to start putting some of their services into existing programs or will you keep these as separate entities for a time being?

Thomas Monahan

I think the way to think about it in both cases, these are companies with terrific intellectual property and great people, and our customer base is a significant multiple of theirs in each case. And what our first priority as we start working with them is going to use a lot of the doors that we’re already walking in and out of to get their great people and content in front of the right executives at member companies. So thing one is getting them access to our terrific customer list. In most cases we’ll do that by parallel activities and finding ways for people to cooperate. The level of close integration right now in both cases is pretty small, but over time I’d expect closer and closer integration. But priority one is getting them out in front of that segment of our 4,800 customers we think their work is valuable for.

Timothy McHugh - William Blair & Company

The increase in the guidance and the revenue guidance in particular, just so I understand, it seems like what was most I guess surprising to you in a good way during the quarter was renewal rates and new sales activity would probably have been relatively in line with what you had expected. Is that a fair characterization of what you’ve seen?

Richard Lindahl

Yes. I think that describes it perfectly, Tim.

Timothy McHugh - William Blair & Company

You gave a rough sense of Iconoculture’s revenue. Two follow up questions to that would be one, will there be an impact on the recognized revenue once that closes because of the recognition of deferred revenue that’s on their balance sheet? And then is it fair to assume profit margins relatively similar to your existing business?

Richard Lindahl

Yes, I think as Tom said we’re going to update our guidance once we actually close the transaction, which we expect to happen during the second quarter here. Clearly there will be some incremental revenue that will flow onto our income statement as a result. And they are profitable, although once you incorporate transaction related expenses and goodwill amortization, that kind of thing, we would expect the impact this year to be very slightly dilutive to 2010.

Operator

Your next question comes from Vance Edelson - Morgan Stanley.

Vance Edelson - Morgan Stanley

Regarding your investment in the Asia Pacific region and your growing presence there, how would you characterize the overall market opportunity and the competitive landscape relative to the U.S.? What are the major differences in your mind?

Thomas Monahan

Sure. We’d estimate at a global level there are roughly call it 5,000 companies that are targets for our large corporate product, of whom about 1,000 are in the Asia Pacific area. And as we said, Singapore’s a real good hub for reaching an awful lot of them. So it’s a large and important market and we’re pretty significantly under penetrated there. As to the competitive environment, we found the same story line there that we see everywhere else, which is there’s nobody who competes with us across the board, there are certain practice areas where we were a new entrant and they’re pretty established players and IT’s the most obvious of those. But we see great opportunity. We see a lot of emerging companies and very strong companies that are competing and driving growth on a global stage and they are anxious and eager for help in performing at their highest level. So early days, we have some real work to do there, but we like the market opportunity and we’ve been very pleased with the relevance of what we can do for companies so far.

Vance Edelson - Morgan Stanley

I may have missed it, but any color on why the cross sale ratio in the core markets would drop at this point in the cycle? And do you see it reversing course and trending higher in the near future?

Richard Lindahl

Yes. I think that’s really more a function of some seasonal factors. I think just to give a little more color on the quarter, it is pretty typical for cross sale to decline in the first quarter, if you look back over the last several years. That’s really given the size of the renewal pool as compared to seasonally lower levels of new business sales. There’s really kind of three factors at work here in both contract value and cross sale trends. First is program renewals, and as we said they were relatively strong, but given the size of the pool there was a fairly large gap to fill. Additional sales to existing customers is the second piece, and those we’re actually encouraged by; they are improving, as Tom said, on a year-over-year basis. And the third is new sales to new companies where we still have some work to do to get better momentum there.

And then when you layer out the impact of the sunset programs, you can see why these key booking metrics were under pressure in the first quarter. As far as going forward from here, we would expect improvement in both contract value and cross sell as we go through the rest of the year.

Vance Edelson - Morgan Stanley

Lastly if I may, in terms of M&A are there additional holes you’d like to fill, either in terms of product or geographic presence that might lend itself to additional acquisitions?

Thomas Monahan

Vance, yes, our strategy here remains very consistent. We plan to grow first and foremost by driving renewals, cross sales and new sales into our five target domains with our existing product set. You know beyond that we’re always looking to launch products and services that meet recurring unmet needs of our member executives and their teams. In assessing some of those opportunities, we often find that somebody’s made important headway in building an asset that meets that need. I think Iconoculture is a great example. We saw our members asking us for more help on consumer insight. We asked the classic make, buy decision and came to the conclusion that the Iconoculture team had done a great job of building up terrific content, good relationships and a great organization and we saw an opportunity to accelerate our ability to meet that need.

Going forward though I think you’ll see that our balance of new products will be, as always, skewed more toward organic development as opposed to acquisition. We’ll look for the opportunistic acquisitions to fill those gaps, but most of the time, we come down on the side of need and build it ourselves and hence some of the cost pressure that Rich mentioned across the year as we proceed in some of our planned launches to fill identified gaps.

Operator

Your next question comes from Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Looking at your revenue guidance and your EPS guidance it looks like, and again, stick with me on the calculation, it looks like you’re looking for about a 10% increase in your cash cost run rate from the first quarter or about $7 million a quarter up from what you just reported. That seems like a pretty big investment. Could you talk about maybe where some of that money is going to go? It sounds like it’s going to be mainly into sales and marketing, but maybe how much of it goes into new program development as well?

Richard Lindahl

Sure. Yes, I think the place you need to start there is to realize that first quarter there were some seasonal declines when we went from fourth to first quarter in the spending level. So you know that really becomes a low point for the year. And as we move into the second quarter, we’d expect to see some seasonal lifts in things like merit salary increases, payroll tax, share compensation expense, travel and other activities associated with delivering our services, and that starts beginning in the second quarter. As we go through the year, to the extent that you see bookings increase, you’ll see costs from variable items such as commissions, travel and other selling related activities come in.

As we said, we are planning to add capacity to our sales, advisory and service staff to take advantage of both the improving economic environment and some growth opportunities, international markets. We plan to increase our spend on marketing and brand development, to drive both short and long-term growth opportunities. And then we are as we said proceeding with planned investments in our product portfolio, which would be more back end loaded, throughout the year. So I think it’s really the combination of seasonal lift in spending and additional investments that we had planned and those will be more weighted towards the second half of the year, but there will also be some lumpiness in how that comes through across the year.

Paul Ginocchio - Deutsche Bank

And could you just remind us what your revenue split between or percentage of revenues from Asia Pac versus Europe roughly?

Richard Lindahl

Well, our total international is about 30% of our revenues and a clear majority of that is in Europe.

Operator

Your next question comes from David Ridley-Lane - BofA Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch

The middle markets client trends are very strong, membership was up, cross sale rates are up. What’s driving the new sales growth? What’s driving that momentum there?

Thomas Monahan

I think the team’s just done a great job executing, continuing to execute on the opportunity in that space. That’s a big green field for us. The team has organized themselves very well to make sure that they’re positioning the assets appropriately that we have and getting out and engaging that market very effectively. So I’d say just great execution on the part of the team that’s attacking that market.

David Ridley-Lane - BofA Merrill Lynch

I heard you talk about higher prices on selected items and I’m just sort of wondering if I could get a little bit more specifics around that initiative.

Thomas Monahan

Yes, I wouldn’t actually call it an initiative per se. We just think in this environment there are places where we now can add features or new assets to existing products and realize a price increase. That would have been more difficult to do in the extremely constrained economic circumstances a year ago. So I wouldn’t describe it as a company wide initiative, but certainly being smart where members are asking for and need new resources, if we can add them in and command a higher price point we’ll be glad to do so.

Operator

Your next question comes from Gary Bisbee - Barclays Capital.

Gary Bisbee - Barclays Capital

I guess first question, excluding the sunset programs which I guess we’re now basically through, the total contract sign in the quarter including renewals up or down on a year-over-year basis?

Thomas Monahan

They were roughly flat on a year-over-year basis.

Gary Bisbee - Barclays Capital

And so in other words, I know you break it down three ways, the renewals, cross sell and new customers, so if renewals are getting better and cross sell, I guess, couldn’t have gotten a lot better given that the ratio is down for the big customers and new sales to new customers remained somewhat weak, how do you get there? Is it just the improvement in renewals offset by weakness in the other two or can you give us any more color on how to think about those three components?

Thomas Monahan

Yes. The first and most important point, Gary, is there is seasonality here. It’s our biggest renewals quarter and as a result, even if you renew at a very strong level, the dollar value of what slipped out of your hands in the quarter is pretty significant. And seasonally, it’s always a pretty low cross sells and new sells quarter. So in terms of additional sales to our existing members, we were pretty happy with that on a relative to Q1 basis, but given that its seasonally pretty low its hard to make up for that shortfall. As we said, in some places new sales are going great but not everywhere. That’s a place we clearly have some work to do.

Richard Lindahl

Yes, Gary, just let me jump in there. I want to correct that last statement. Actually bookings were up on a year-over-year basis even after adjusting for sunsets.

Gary Bisbee - Barclays Capital

And then I guess given the contract value is the annualized revenue, why would that be down so much if it’s just that the base over the last few quarters has been dropping, so renewal might be better now but it was worse year-over-year the last couple of quarters? Is that the right way to think about it?

Richard Lindahl

Yes. And the renewal pool again is so large in the first quarter that it really dominates the activity absence, you know, an abnormally high new sales trend.

Thomas Monahan

CV numbers all four quarters, so yes, you’re going to have effects from the previous quarters in the total CV number and the quarter, even if you have a good bookings quarter.

Gary Bisbee - Barclays Capital

And understanding that there’s seasonality to your selling, is there any way to give us a sense as to how much better bookings have gotten? I mean, I guess I’m trying to understand how much growth we could have in contract value sequentially over the next couple of quarters. As you said, it’s the last four quarters impact so is it likely to be very modest? Or have we sort of turned the corner here where things should look to get sort of noticeably better in the next couple quarters?

Thomas Monahan

Well I mean I think I’d point you to the rise in deferred revenue sequentially as an indicator of some positive momentum. I do think that, as we go through the rest of the year, obviously the impact is going to be largely on the basis of how the new sales play out and we are, as we talked about, adding some more capacity in there to try to drive better new sales. But the trajectory and momentum will dictate where we land at the end of the year.

Gary Bisbee - Barclays Capital

I heard you a couple of times on talking about cost mention option expense was down. First of all, can you tell us what that was or the stock comp expense? And then, since I didn’t see it in the press release, is it right to assume that you’re not going to disclose which of the line items that was in like you’ve done in the past?

Richard Lindahl

There will be some additional detail in the 10-Q when that comes out. Share based compensation in the first quarter was $1.4 million, which is down about $2.4 million from the first quarter of 2009. It’s important to know that that reflects a temporary timing difference between the final vesting of the 2006 grants and the grant dates on the 2010 grants. And also part of that influences the lower grant prices that we have in more recent periods than in that 2006 timeframe.

Gary Bisbee - Barclays Capital

So would using a number more like what it’s been over the last three or four quarters be a reasonable assumption for the rest of this year?

Richard Lindahl

I would say a little bit higher than first quarter for annualized is a better assumption.

Operator

Your next question comes from Daniel Leben - Robert W. Baird & Co., Inc.

Daniel Leben - Robert W. Baird & Co., Inc.

Just on the Iconoculture acquisition, could you give us a sense of what the competitive environment looks like there? Is it primarily just Nielsen as the largest competitor?

Thomas Monahan

You find most of the competitors in that area of corporate spend tend to work more from a project basis. So one of the things that really appealed to us about Iconoculture is it’s an annual, renewable subscription where clients have access to insights on demand. So you have a decision sitting on your desk, you call them up, you go directly to the website and get the data you need, you call them up and you have a great strategist come and advise you on how to think about that decision using their data asset. So in that sense, there’s no direct competitor for the sort of service they provide. There are certainly lots of market research competitors, but when we talked to our customers who use that service it fills a pretty unique gap and fits in very well with what we do.

Daniel Leben - Robert W. Baird & Co., Inc.

And then as you’re rolling this out, can you help us understand any sale incentives you’re going to provide to help take the product to a broader range of your customer base?

Thomas Monahan

Sure. I think our goal with this thing as with all things is crawl, walk, run. They have 200 corporate customers and we have close to 5,000 so I don’t think day one we’re going to say okay, Iconoculture team, have at it. Because I think that’s just too big an elephant to try to attack. We’ll find places where we obviously want to leverage the opportunity and broker those introductions as fast as we can because we don’t want to overwhelm the organization. So we’ll proceed segment by segment and we’ll be very thoughtful as to how we do it.

Plus I don’t want to distract the team. The team at Iconoculture is off to a very solid start this year and the last thing we want them doing is sitting in planning meetings. We want them engaging the marketplace with their terrific content, so we’ll be very selective and over time build out that opportunity together.

Daniel Leben - Robert W. Baird & Co., Inc.

I guess I was thinking more in terms of the current Corporate Executive Board sales force, just giving them more products and more opportunities for cross selling.

Thomas Monahan

That’s definitely the theory of over time for these adds to the product set is that we broaden the number of conversations our salespeople can have with our customer base. And at the same time, we give these organizations a new set of companies they can go talk to. So we’re very excited by that. But we also recognize a methodical plan is the right way to attack it. So we don’t want to change anything on the incentive comp front day one, but I expect over time we’ll find lots of ways to create collaboration opportunities between the two organizations.

Operator

Your next question comes from Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

I just want to dig into some questions that were actually asked before but just get a little more detail. You guys have done a great job of containing operating expenses and sequentially they’re down like $7.3 million. I understand there’s some seasonality but I was wondering if you could just break out some buckets for us so we have just a basic understanding of what happened from 4Q to 1Q that made the expenses go down that much.

Richard Lindahl

Yes, I mean there’s really a combination of a few different things, Shlomo. Some of it as we said is seasonality where you have kind of a different level of activity pattern, particularly as it relates to selling in the quarter. We also had a particularly strong close of the year last year, which drove some higher incentive accruals than where we came out in the first quarter. There are a variety of projects that we’ve been working on through the year that came to fruition and we closed out and some spending there. We had a couple of one time items coming into play in the first quarter that were benefits, just contract clean up kind of things. But really it’s more a story about seasonality and the relative trend in performance from fourth quarter to first quarter on the incentive side.

Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

I understand the seasonality on the sales and marketing side of it. I’m just having a harder time, it’s largely the fixed cost type of cost structure where the cost of goods sold goes down so much quarter over quarter.

Thomas Monahan

There’s a fair bit of variable delivery cost that tends to be kind of light in Q1. An easy example to point to is all the member meetings we’ll host in the year. So give or take 1,000 member meetings plus major large scale conferences. Q1 is far and away the seasonally lightest of the four quarters on that front, so just if you think of lunches and cookies and hotel ballrooms we’re not renting in the quarter, Q1 is easily the lightest by order of magnitude, largely because people want to access the content, get smart, be very smart around their corporate budgeting cycles. So there’s a lot of reasons why from their calendars it makes a lot of sense for these things to be in Q2, Q3 and Q4. So on the COGS line you’d find that there’s a lot of delivery cost that starts to swing in in Q2, Q3 and Q4, even travel to member sites where we’re engaging in much more often face-to-face, toe-to-toe. Even the COGS line has some seasonality in it, driven by member need that we’ve refined across time.

We manage our COGS budgets to an annual number, not to a quarterly number, so the product teams are at liberty to make sure they locate those service moments and those events when it makes the most sense for the member, because that ultimately makes the most sense for us. But there is, on account of that, the portion of the product expense that is variable has some real seasonality to it.

Richard Lindahl

The only other thing I’d add, Shlomo, is we talked about the share comp expense and the difference on a year-over-year basis. There was also a lot of those same factors came into play as went from fourth quarter to first quarter, so there’s a good portion of that, roughly $1 million, is coming from the share comp expense quarter-to-quarter.

Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

And then, just to dig in a little bit more, according to my calculations using deferred revenue, bookings were up 7% year-over-year. And I’m just trying to reconcile that. I understand the conversation that you guys have had on the call but this kind of bookings strength, particularly with renewals, together with the large corporate cross sell going down, it just seems to me that if your renewals are picking up, shouldn’t your cross sell be going up as well? And can you give me a little more detail on that?

Thomas Monahan

Yes, I mean again it’s really the seasonal factor, driven largely by the size of the renewal pool. And even though renewals were stronger and they’re still not obviously 100% yet. And so that creates a gap to fill and again I’d point you back. If you look back to the turn from fourth to first quarter and going back at least five years, you typically see that decline in cross sell occur at different magnitudes but you’ll see it.

Shlomo Rosenbaum - Stifel Nicolaus & Co., Inc.

Putting in over there the deferred revenue strength versus the lower contract value sequentially, could you just address that again?

Thomas Monahan

Well, the deferred revenue is really driven by the year on year bookings which as we said were up year-over-year. The contract value, remember, is the annualized figure so it’s more the point in time metric.

Operator

And there are no other questions at this time. I’d like to turn the conference back to Mr. Tom Monahan for any closing remarks.

Thomas Monahan

Terrific. Thank you all for calling in or logging in. We look forward to seeing many of you out on the road and we’re going to be presenting at the B of A conference later this month. So we look forward to catching people up on the EXB story then. Bye now.

Operator

Thank you everyone. That does conclude today’s conference. We thank you for your participation.

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Source: The Corporate Executive Board Company Q1 2010 Earnings Call Transcript
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