Corporate Executive Board's (CEB) CEO Thomas Monahan on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: CEB Inc. (CEB)

Corporate Executive Board (NYSE:CEB)

Q2 2014 Earnings Call

July 30, 2014 9:00 am ET

Executives

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

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

Gary E. Bisbee - RBC Capital Markets, LLC, Research Division

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

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

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

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

Ryan Leonard - Barclays Capital, Research Division

Operator

Good morning and welcome to CEB's Second Quarter 2014 Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 8 by dialing (719) 457-0820. The replay passcode is 3612580. The replay will also be available beginning later today and through August 8 at the company's website.

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 company's website and reviewing 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 website and following the link to the second quarter 2014 earnings conference call. Please review the second page of these materials, 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 CEB's expected quarterly and annual financial performance for fiscal 2014 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing discussions of forecast, estimates, targets, plans, beliefs, expectations and the like are intended to identify the forward-looking statements. You're hereby cautioned that these statements may be affected by important factors, among others, set forth in CEB's filings with the Securities and Exchange Commission and in its second quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statement. 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 S. Lindahl

Thank you, Scott, and good morning, everyone. I'm Rich Lindahl, Chief Financial Officer of CEB. Thank you for calling or logging into our second quarter 2014 earnings report. On today's call, I'll review our second quarter financial results and discuss our 2014 guidance. Tom Monahan, our CEO, will then take over to share additional insight on our operations in the quarter and an update on our 2014 priorities. Then we will take your questions.

Please turn to Slide 3 of our presentation where we lay out the key takeaways from today's report. Overall, we were pleased with our second quarter performance, which was consistent with the expectations we set on our last call. The business produced broad-based growth across our primary markets. As a result, we saw sequential improvements in revenue, margin and non-GAAP earnings, as well as strong growth in the year-to-date cash flows from operations.

The quarter also saw us write down our PDRI carrying value based on continued headwinds in the government sector that impact our long-term assumptions for this asset. We continue to follow our capital allocation priorities paying out a healthy dividend and initiating a programmatic approach to stock buybacks.

Finally, for the consolidated company, our second quarter performance keeps us on track to achieve our strategic and financial objectives, and we are reaffirming our full year outlook.

Let's turn to Slide 4 for a summary recap of our results. Revenue was $230.4 million in the second quarter of 2014, an increase of 12.6% on a year-over-year basis. Adjusted EBITDA margin was 23.3% in the second quarter compared to 24.6% in the second quarter of 2013. Second quarter 2014 diluted loss per share was $0.19 compared to diluted earnings per share of $0.40 in the second quarter of 2013. And non-GAAP diluted earnings per share was $0.75 in the quarter versus $0.73 in the comparable prior year quarter.

Diluted loss per share in the quarter reflects the impacts of 2 items that have been adjusted out when calculating non-GAAP earnings per share. First, we recognized a $39.7 million noncash impairment loss associated with the carrying value of our PDRI business. As we have discussed in our 10-Q filings for several quarters, the federal contracting market continues to be difficult, and we have now also seeing an increase number of opportunities become low-margin, time and materials based engagements. The combination of these trends affects our near and longer-term strategy and expectations for the PDRI business and led us to conclude there was an impairment indicator. Accordingly, this charge reflects the impact of our revaluation of the related goodwill and intangible assets. PDRI remains a small part of our portfolio, and our performance across the rest of our business keeps us on track with our plans for the year. Second, we realized a $6.6 million gain on our cost method investment in pay scale. While we continue to maintain both an operating relationship and an ownership stake in that business, we marked up the fair value of our investment based on its recent equity transaction.

Now let's turn to Slide 5 and I'll review our key operating metrics for the quarter. CEB segment Contract Value at June 30 was $641.1 million, which is up 13% year-over-year. For the SHL Talent Measurement segment, adjusted revenue was $55.5 million in the second quarter, an increase of 9.3% compared to the prior year. On a constant currency basis, SHL Talent Management adjusted revenue growth was 7.7%. CEB segment Wallet retention rate was 99% at June 30, 2014, unchanged from a year ago. SHL Talent Measurement segment Wallet retention rate was 104% at June 30 versus 96% in the prior year. Wallet retention in both segments remains in the normal range and continues to provide a solid platform for overall growth in revenue. Total CEB segment member institutions grew 11.9% to 6,780 in the second quarter, reflecting the addition of KnowledgeAdvisors, as well as continued growth in the CEB segment, middle market and large corporate memberships. CEB segment Contract Value per member institution was $94,400 at June 30, which is a 1% year-over-year increase, reflecting the mix impact from middle market members.

To illustrate this affect, CEB segment Contract Value per institution at June 30 was $144,300 for large corporate members and $29,400 in middle market, representing annual increases of 0.9% and 7.5%, respectively.

Please turn to Slide 6 and I'll review key segment highlights for the quarter. CEB segment revenue was $175.4 million in the second quarter, an increase of 11.8% versus the second quarter of 2013. CEB segment revenue is net of a $1.5 million deferred revenue fair value adjustment and includes $4.1 million of inorganic revenue. As compared to the prior year, SHL Talent Measurement segment revenue increased 15.2% to $55.1 million in the second quarter of 2014, and SHL Talent Measurement segment revenue includes a $400,000 reduction to reflect the deferred revenue fair value adjustment.

Consolidated operating expenses were in line with our expectations. Cost of services increased $9.2 million versus the second quarter of 2013. Approximately 30% of this growth is due to acquired companies, with the balance coming from increased headcount, as well as delivery resources and other variable costs associated with the larger customer base. Member relations and marketing expense increased $9.3 million in the second quarter versus the prior year. Talent Neuron and KnowledgeAdvisors represent about 20% of this change. The remaining growth reflects additional sales headcount and variable compensation expense across both the CEB and SHL Talent Measurement segments.

General and administrative cost in the second quarter were up $2.5 million compared to the prior year, and approximately 32% of this increase is from the acquired companies. Acquisition-related costs of $1.1 million in the second quarter were driven primarily by integration costs. Interesting common other was a net expense of $1.4 million in the second quarter of 2014 compared to net expense of $300,000 in the second quarter of 2013. This year-over-year change was primarily due to larger foreign currency remeasurement expense, partially offset by a gain on deferred compensation plan assets.

Interest expense in the second quarter of 2014 was $4.5 million compared to $6.2 million in the second quarter of 2013, reflecting the benefit of our August 2013 credit facility amendment.

Consolidated adjusted EBITDA margin in the second quarter was 23.3% versus 24.6% in the second quarter of 2013. This outcome is consistent with the expectations we discussed at our recent Investor Day, and the year-over-year change was driven primarily by acquisitions, foreign exchange and the other operating expense drivers just discussed.

In the CEB segment, adjusted EBITDA margin in the quarter was 25.3%, reflecting the impact of recent acquisitions and foreign exchange rate differences, including a $1.7 million FX remeasurement loss. Altogether, currency drove about a 140 basis point year-over-year margin headwind in the CEB segment.

Adjusted EBITDA margin for the SHL Talent Measurement segment was 16.9%, which included a net foreign currency remeasurement loss in the quarter of $300,000, or approximately 60 basis points. In addition, the net revenue and operating expense impact of FX rates reduced adjusted EBITDA margin by about 80 basis points.

Depreciation and amortization in the second quarter was $18.4 million, an increase of $3.7 million compared to the second quarter of 2013 driven by higher capital expenditures over the past year as well as increased intangible amortization. We recorded a tax benefit of $2.2 million in the second quarter, reflecting the treatment of the PDRI impairment loss. The goodwill portion of the impairment loss, while recognized as an expense for book purposes, is not deductible for tax purposes. Therefore, it will increase our effective tax rate for the year. While we normalized out part of this impact in adjusted net income this quarter, additional amounts will be added back in each of the third and fourth quarters of this year. Please refer to Footnote 2 on Page 13 of our earnings press release for more information.

Please turn now to Slide 7 for balance sheet and cash flow highlights. We remain in a healthy financial position with $95.2 million of cash at June 30. Accounts receivable was $206.7 million and the current portion of deferred revenue was $428.4 million. As compared to the prior year, CEB segment deferred revenue, excluding PDRI and KnowledgeAdvisors, increased 7.6% to $351.7 million, a positive leading indicator for CEB segment revenue. We ended the quarter with $510.7 million of total debt on the balance sheet, and our ratio of net debt to trailing 12 months adjusted EBITDA was approximately 2x. We also maintained access to additional liquidity via the $193 million of undrawn availability under our revolver.

For the first 6 months of 2014, cash flows from operation were $90.2 million, consistent with typical seasonal patterns and an increase of 16.1% compared to the first 6 months of 2013. During the second quarter, we spent $12.8 million on capital expenditures, as we neared completion of several 2014 technology initiatives, including deployment of new data centers and the new TalentCentral platform for our SHL Talent Measurement business.

We continue to focus primarily on dividends for cash distribution given the attractive margin and cash flow characteristics of our business, and we paid $8.9 million in dividends during the second quarter. We also repurchased 5.2 million of stock during the second quarter. We now have approximately $42 million of authorization remaining under the stock repurchase plan that expires on December 31, 2014.

As Tom will discuss more fully, management has adopted a programmatic approach to purchases for the balance of this year and currently anticipates the full year 2014 buyback amount will be approximately $15 million.

Please turn to Slide 8 and we'll move on to our outlook. The following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions, which are subject to change over time. Based on our second quarter results and current leading indicators, and while contemplating various risks and opportunities, we continue to track toward the midpoint of our outlook ranges. We expect CEB's full year 2014 adjusted revenue to be between $910 million and $935 million, and the reduction in revenue from the deferred revenue fair value adjustment will be approximately $6 million this year. So the GAAP revenue outlook remains between $904 million and $929 million. Our current visibility leads us to expect CEB segment top line to grow in the low double digits for the year, as healthy growth in the legacy CEB business is complemented by the addition of Talent Neuron and KnowledgeAdvisors, while offset to some degree by continued headwinds in government markets. We continue to expect that SHL Talent Measurement will support stronger full year growth in 2014 and 2013 on a constant currency basis. However, it's also important to remember that the year-over-year growth comparisons to 2013 get tougher, especially in the fourth quarter of the year.

We continue to expect full year adjusted EBITDA margin of between 24.5% and 25%. Accordingly, we expect higher consolidated margins in the second half of 2014, driven by typical seasonal improvement in the CEB segment, greater contribution from recent acquisitions and improved operating leverage in the SHL Talent Measurement segment.

Depreciation and amortization in 2014 is expected to be between $70 million and $72 million. This increase over 2013 is driven by amortization of newly acquired intangibles, higher capital expenditures and the completion of several multiyear projects.

Capital expenditures in 2014 are anticipated to be approximately $31 million to $35 million, which is consistent with our target range of 3% to 4% of revenue.

For the full year, we expect acquisition-related cost of approximately $3 million on transaction expenses and other integration costs.

And now an update on taxes. For book purposes, the tax treatment of the goodwill portion of the PDRI impairment loss will drive a higher effective tax rate on a fully reported GAAP basis than previously targeted for this year. As a result, the 2014 tax rate is currently estimated to be approximately 50%, excluding discrete items, such as foreign currency gains or losses that are recognized as incurred. On a non-GAAP basis, as discussed a few minutes ago, we will normalize the goodwill portion of the impairment loss. After factoring in this adjustment, we are now forecasting an effective rate of approximately 40% for the full year, excluding discrete items as previously mentioned.

One other item of note as we look ahead to the third quarter. You may have seen our announcement last week that we plan to move our global headquarters in 2018 and become the marquee tenant in a new building to be named CEB Tower. As part of our long-term, real estate planning process, we are excited about this opportunity to support our future headcount growth with highly flexible and cost-effective space. While the economic impact of this transaction will not be reflected in our financials for several more years, the accounting treatment related to certain landlord incentives we are receiving requires us to record a noncash expense item in the third quarter. This charge, which we currently anticipate will be approximately $15 million, will become a component of adjusted net income and therefore, will not affect non-GAAP diluted earnings per share or adjusted EBITDA margin. Incorporating all of these factors, our outlook for 2014 non-GAAP diluted earnings per share is in the range of $3.15 to $3.40. This guidance reflects solid revenue growth, improving constant currency adjusted EBITDA margin, modest contribution from KnowledgeAdvisors and lower interest costs, all somewhat offset by a increase in depreciation expense and the impact of foreign exchange. Net-net, with half the year behind us, we are tracking more towards the midpoint of our guidance ranges. And as previously discussed, we expect the largest portion of year-over-year earnings growth to be back end loaded into the fourth quarter.

Finally, we continue to expect strong cash generation in 2014, and at the ratio of cash flows from operations to adjustment net income, we'll remain at a healthy multiple consistent with historical patterns.

While we don't provide quarterly guidance, I'll share a few thoughts on what to expect as we move through the rest of the year. Regarding revenue, we expect typical sequential quarterly increases in the CEB segment. In the SHL Talent Measurement segment, we anticipate a seasonal sequential decline in the third quarter with a return to sequential growth in the fourth quarter. The combination of these 2 factors should mean that third quarter consolidated revenue will be relatively flat to slightly down versus the second quarter. On the expense side, aggregate trends in both segments should remain relatively flat through the rest of the year, with seasonality driving some sequential decline in the third quarter followed by a sequential increase in the fourth quarter. Accordingly, at the consolidated level, we expect sequential improvements in both quarterly consolidated margins and earnings, with a more meaningful lift in the fourth quarter than in the third. And at the segment level, in the third quarter, you should expect a sequential decline in SHL margin, followed by a sequential increase in the fourth quarter, while CEB segment margin should improve sequentially in both quarters. That's it for the financial summary. I'll now turn the call over to Tom, who will share more color on our operations and growth strategy

Thomas L. Monahan

Thank you, Rich. Let me add my welcome to everyone who has joined for today's call. We appreciate the opportunity to keep you updated on the CEB story. I'll use my remarks to provide additional perspective on our first half 2014 performance and to update you on our multiyear priorities for delivering growth and impact. As Rich noted, the headline in the quarter is that our performance keeps us on track to achieve our strategic and financial objectives for the year.

I'll begin on Slide 9 with some additional color on our overall performance to date and highlights within each of our end markets. Our second quarter results reflect healthy organic growth across nearly all of our businesses. Continuing a trend from the first quarter, the results reflect fewer regional variances than we've seen in the past few years. Obviously, we're pleased to see growth coming from many parts of the business.

Let me provide some color on each market. I'll start with our CEB segment. In North America, our largest and oldest market, we saw continued strength in both our large corporate and middle market sectors. With strong teams and offers in place, we see ample opportunity to deepen relationships with existing customers, even as we add more great new names to the CEB client roster.

The clear exception to this story of broad-based growth was our PDRI business. As outlined in the release, we are writing down PDRI carrying value in the face of persistent U.S. government market headwinds. As we said for several quarters now, the federal contracting market continues to be a difficult one. Increasingly, we've seen more and more opportunities become low-margin arm's length contracts. This affects both our near-term margin in the business and our interest in pursuing some of these opportunities. Obviously, this is a smaller overall part of the business, and our performance in the rest of the business puts us in a position to remain strong overall.

Elsewhere in the world, we saw effectively all of our markets grow at a robust organic pace. It appears that our EMEA operations are catching up with our North America and APAC growth rates after lagging for several years. This is a continuation of performance trends we've observed for several quarters now, reflecting the recovery in the broader European economy. We also saw growth in the Asia-Pacific region reaccelerate after a slow start to the year.

Our SHL Talent Measurement segment also delivered solid growth as we continued to see early returns from last year's investment cycle. We saw all regions contributing to growth and are pleased with our progress in putting last year's investments to work. You are already seeing the first step toward normalization of margin in that segment, a process which will continue into and through 2015 with the usual seasonal patterns. We're working hard to tap our significant market opportunity and generate strong returns in the business.

More broadly, sustained growth in revenue and bookings puts us on track to achieve our overall margin and profit goals for the year, along with seasonal progression outlined at our annual Investor Day. In turn, the strong financial performance enabled us to continue executing on our capital management priorities. First and foremost, we continue to pay a healthy dividend, which reinforces the strong consistent cash flows in the business in the recurring revenue model we operate. Second, we also remain committed to a constant share count across time. In the quarter, we initiated a programmatic approach to consistently buying back stock that enable us to repurchase $5.2 million worth in Q2 and puts us on track to repurchase about $15 million in 2014. Our current intent is to continue this programmatic approach in the coming years, consistent with our goal of keeping share count flat across time. Of course, we can and will revisit consistently as market conditions and liquidity dictate. We think this approach underscores both the predictability of our business and our capital management priorities.

Our progress on our 2014 plan was matched by substantial headway on our multiyear strategic objectives. Please turn to Slide 10 for a refresher on our priorities for 2014. We have 4 key areas of focus: First, continuing to reinvent the development and delivery of management insight; second, leading the analytic transformation of talent management; third, expanding the frontier of our brand and impact; and forth, laying the foundation for future growth.

If you turn to Slide 11. I'll share an update on our first priority, continuing to reinvent the development and delivery of management insight. Sharp insights into the drivers of corporate and functional performance are the foundation of our business. By tapping the collected experience and workflows of thousands of companies, we isolate what matters and document what works to help our members create business value and drive performance. These insights ultimately power the advice, assessments, tools and technology that help our members and clients transform their operations. We're off to another great year in each of our primary content areas, and we've shared our newest work with members. One highlight in the quarter was the release of the latest edition in our Executive Guidance series. You've heard us talk about this publication series on several calls. As a reminder, we use this quarterly series to broadly share cross functional perspectives on core topic areas such as management of talent and risk, as well as organizational transformation and corporate performance. Our latest edition comes from our strong technology practice. As a reminder, we serve thousands of technology leaders and have worked with them for several years on the changing landscape for the corporate technology function to our future of corporate IT series. This edition of Executive Guidance focuses on the component of that changing landscape. Entitled Harnessing Business-Led IT, the research focuses on the reality that the division of technology responsibilities within the corporation is blurring. Business leaders are taking a greater role in managing and leveraging information, and CIOs are seeking to expand IT's contribution and impact. As you can see on the chart on the right-hand side of the slide, 75% of spending on technology innovation is actually controlled by business functions, not IT. As you can imagine, with our extensive network of CIOs and deep relationships with their CXO peers, CEB is uniquely positioned to help both technology and business line leaders make sense of this transition. The conventional approach we have observed is for CIOs, and frankly, other corporate leaders such as the Chief Procurement Officer and the Chief Financial Officer, to use processes and policies to reign into this business-led IT spending. But this has little effect as in the era of the cloud, business leaders can and will and now go ahead and procure solutions regardless. But they'll do this without the skills and support they need to get real value from their IT spending. Our research prescribes a variety of practices aimed at embracing business-led IT to create value. In one specific example, leading companies are creating business-facing IT roles within IT to educate business leaders and get closer to frontline employees in order to influence business-led technology spending. By embracing this and other approaches, organizations can avoid wasting technology spend, leverage more opportunities to use technology and importantly, data to build competitive advantage and ultimately, reduce overall risk exposure in their technology portfolio. As you might imagine, our teams are discussing these insights with members and prospective members. And we're pleased with the immediate impact on member outcomes and performance that this work is already creating.

Great [ph] insights aren't our only focus, however. We're also continuing our work on personalizing the member experience and developing upgrade paths for members and clients to have more support in a wider range of our solutions. As an example, we've invested in some exciting new functionality that helps our account managers better map key issues and owners within member accounts and through this, better link our content to key workflows and decisions.

Please turn to Slide 12 for an update in our second priority, leading the analytic transformation of talent management. As we shared at our Annual Investor Day, our research shows that talent is the direct cause or key explanatory variable in the majority of corporate growth stalls. You see that data illustrated in the right hand side of the slide. Simply put, talent matters. Yet companies often manage this vital resource through, at best, intuition and local manager preference and habit. This is why we see such opportunity to apply intelligence to the key talent management workflows by adding tools and solutions that make it easier and more cost effective to bring rigor and analytic depth to this essential aspect of business.

We continue to be working hard to build a suite of offerings to support this opportunity, both by growing our existing lines of business and by developing new tools to improve the most important activities and decisions across the talent management life cycle.

Let me share a few highlights from the quarter. As noted earlier, our SHL Talent Measurement business continues to deliver solid growth as we attack significant market opportunity. We also continue to innovate in this business area, bringing together complete resources of the company to create powerful new solutions, such as our functional talent audits or our hypo management tools. This year, we're also bringing online our new TalentCentral platform to increase the ease and effectiveness of using our assessment offerings. We're also up to a fast start with the newest parts of our business. CEB Talent Neuron remains an early stage of business but is already adding huge value with powerful insights in the key workforce planning decisions members make everyday. For example, we recently sized and diagnosed the supply demand GAAP in hiring IT talent. Our findings revealed that the speed of change and hyper specialization of technology skills is creating competitive disruption in the IT workforce. The winners in this environment will be the companies who use location as a source of unique, comparative talent advantage. We're getting great traction with the findings, and our data was recently featured in the analysis underlying [ph] the White House's new ready to work initiative launch.

KnowledgeAdvisors also performed well in the quarter after we acquired the business in late Q1. The majority of our back office integration work is now complete, and we're fully focused on building this great business. We're also finding new ways to embed the vast KnowledgeAdvisors measurement and metrics inventory into different parts of the CEB business. Together with our existing set of resources and solutions, these acquisitions are further distinguishing CEB as a source of must-have insights and data on key talent management decisions.

Please turn to Slide 13 for an update on our third priority, expanding the frontier of our brand and impact. We continue to focus our efforts here on closing 2 gaps as we mature. First, raising the global visibility and awareness of the CEB brand. Second, penetrating and growing key global markets. We had a particularly busy quarter on the first front, let me share a few highlights of how we raised CEB brand visibility. First, we continue to extend our thought leadership to the public domain to highlight contributions to Tier 1 media publications. These efforts enhanced the CEB brand and exposed more new buyers to our offerings. In the quarter, CEB insights were featured in more than 400 articles in publications such as Forbes, the Harvard Business Review, CFO Magazine, Huffington Post and the Asia Business Report. Second, we also provide thought leadership within the technical communities that support our key offering areas. Visibility and recognition from professional peers advances the business in important ways, most notably, by assuring buyers and users that our analytics are grounded in the most rigorous and authoritative science. As an example, CEB had a strong showing at the Society of Industrial Organization Psychologist Annual Meeting, with CEB staff speaking at more than 50 podiums during the 3-day event. Our staff have also maintained leadership positions within SOIP and 2 of our staff were honored with this year's event for contributions to the industry. We're also pleased to be recognized for our overall corporate performance. Recently, we were honored as 1 of Forbes' 100 most innovative growth companies.

Please turn to Slide 14 for an update in our fourth priority, laying the foundation for future growth. One of our perennial goals is to continue building a world-class CEB team. We remain very pleased with our performance on this front so far this year. To date, we've seen vacancy rates for key roles at the low-end of historical ranges and retention of our highest performers at the high-end of historical ranges. Key to our success has been our sustained focused on ensuring that CEB is a great place to work. We leverage a healthy dose of our tools and solutions to not only build great compensation and incentive structures, but to provide the work, development and career opportunities that we know drive strong engagement, alignment and retention. A strengthening global economy only sharpens our focus on building great homes for top decile talent.

As we build a great team, we also build an office footprint to give teams the workspace and technology needed to be highly productive. The most recent news on this front is our announcement of a lease for new space for our Virginia offices. As Rich mentioned, we will be the marquee tenant in a new building to be named CEB Tower. Construction hasn't begun on the building, so it will be a few years before we move. We're targeting a 2018 transition from our current space in Rosslyn. The agreement is a result of our continuous multiyear talent business and real estate planning. The CEB Tower opportunity allows us to achieve several objectives simultaneously. You can see them summarized on the right hand side of the slide. First and foremost, it's going to be a great place for current and future employees to work. Second, it keeps us rooted in Rosslyn in the national capital region, which is an ideal place for us to continue to recruit and develop a lot of the right talent for our business. Third, it showcases our brand with a level of promise that is not previously available to us. And lastly, and most importantly, through good market timing and the partnership and support of Commonwealth of Virginia in Arlington County, CEB Tower offers us compelling economic leverage. It allows us to create an outstanding environment for our teams while advancing our strategy for continued growth and margin expansion. We expect this to bring a variety of long-term benefits to the CEB business.

Let me stop there and summarize my remarks on Slide 15. Our first-half performance sets us up well to hit our financial goals for 2014. We have much work ahead, but we have the momentum, opportunity and skilled team to capitalize on the huge opportunities we have across the second half of the year. We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Gary Bisbee from RBC.

Gary E. Bisbee - RBC Capital Markets, LLC, Research Division

I guess, the first question. The deferred revenue for the core CEB businesses slowed a little bit sequentially. Should we read much into that? And any real explanation as to why that happened?

Richard S. Lindahl

No. Gary, this is Rich. I wouldn't read too much into that. I mean, I think we had solid, high single-digit bookings in the quarter. You're going to see deferred revenue kind of move around the booking number, generally speaking. You also saw the Contract Value growth was very solid as well. So on a go-forward basis, we feel good about our trends in the business and the amount of revenue we're going to recognize through the rest of the year.

Gary E. Bisbee - RBC Capital Markets, LLC, Research Division

Okay. And I wonder, was that slight deceleration there -- should we look at that and look at the Contract Value for large member that you gave us, growth being a little slower than the last couple of quarters as sort of one and the same? Or again, is it more just timing of how things are move around?

Richard S. Lindahl

I think there's a fair bit of timing in there, Gary, and there's a little noise around the edges. Yes, I think Contract Value per large customer is a key focus in the business. You've seen that number grow at a very healthy rate. We're feeling good about renewal rates and -- of our existing customer base and cross sells are in a real good place. We do have some work to do in terms of refining the upgrade paths into broader portions of the cut as people take on larger and larger contracts as part of their relationship. We have some work to do in terms of refining those upgrade paths. So, I think you'll see, as we continue to refine that, the number is staying in a very healthy zone.

Gary E. Bisbee - RBC Capital Markets, LLC, Research Division

Okay. And then, I know you no longer give the standalone revenue for the PDRI segment, but if I back out over the last couple of quarters, the acquired revenue or benefit to revenue growth from acquisitions in CEB, it looks like despite the weakness of PDRI, you actually had the fastest revenue growth in the CEB segment in several quarters, like I think a year, more than a year. Is -- what exactly is driving that continued strong growth? I guess, you said Europe's getting a little better. Asia-Pacific accelerated, but anything you'd point out or is it really just broad momentum?

Richard S. Lindahl

Yes. If anything, the story is one of breadth across the business right now. We have, obviously, challenged other parts of the business to step up a little more. Knowing that the PDRI team was going to still be facing some headwinds, other parts of the business have stepped up and leaned in and made sure that we're still on track. But I think that's a very broadly based phenomenon.

Operator

And we'll go next to Tobey Sommer with SunTrust.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

This is Frank in for Tobey. Wanted to ask a little bit more about international demand in EMEA and Asia-Pacific. Can you give us a little bit more color in terms of growth rates or sizes of businesses there, and just what you're seeing from those international customers?

Richard S. Lindahl

Yes. At a micro level, international across the business is about 35%, give or take, in big broad brush strokes. The SHL business overweights international a little bit, but the CEB is obviously very global as well. The news is no news, actually, in many respects, EMEA appears to have caught up in terms of overall growth with APAC and North America, and the entire global business is growing at a very consistent rate now. So there isn't much news regionally, which I guess, is the news. We feel very good about the international market opportunity. I think all our markets globally checked in with a good solid organic growth. And obviously, we -- our business doesn't yet reflect the full opportunity available in the global economy, so we're excited to see the growth in the years ahead in those non-U.S. markets. We're also delighted that the North America market, which is our oldest and largest, is still putting up great growth number. So we're happy that the share stays the same because all the businesses are growing.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

All right. Great, that's helpful. And then looking at Contract Value per member institution, that was up a little bit. I wanted to ask what you see going forward with that metric and kind of trends as you look in the back half of the year.

Richard S. Lindahl

I think what we've said is it to be about our 8% to 13% annual organic growth target breaks into 3 buckets: Growing our existing customer footprint, making sure our existing customers grow Contract Value, adding great new customers to the CEB roster and adding great new products. Across that 8% to 13%, great new products, while hugely important, contribute in any are about 1% of revenue growth in that year. So the bulk of that 8% to 13% comes from the 2 categories of adding new customers and growing the existing customer base. And historically, what we've seen is they tend to break out pretty evenly in the year. They tend to contribute equally to growth. So in a 8% to 13% year, you'd see those be in the sort of 3.5% to 6% range annually. That's kind of where they been, they've been at the higher end of that range. Each of those metrics with Contract Value per customer consistently in the 5% to 6% range over the past several years and new customer adds consistently in that. Any given quarter, they'll swing around a little bit, but we expect them to be the big drivers in that 8% to 13% annual revenue growth.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And one quick numbers question. Do have an assumption for stock-based comp for the year?

Richard S. Lindahl

Yes, that's about $17 million for the year.

Operator

And we'll go next with Tim McHugh with William Blair.

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

Can you give us a sense for the customer growth in the large market? I guess, just to what extent is the slower, I guess, CV per large member any reflection of the customer growth? I'm just trying to get a sense of, I guess, exactly how much of the growth in the legacy business is really being driven by middle market, if that's the CV per member growth rate you saw.

Thomas L. Monahan

Yes. In terms of if you think of customer growth, break in 2 things. New logos, obviously, middle market creates the bulk of the new logos. But in terms of dollars from new customers, we still get good contribution from large enterprise, new members coming on board and obviously, in a quarter, we're happier where international's performing. Net-net, those businesses contribute a little bit more in terms of net large new customers coming into the business. You're not wrong, that obviously that produced a little bit dampening effect on average CV per large customer because we -- one problem we had not figured out a way to solve in the business is customers still tend to buy one thing when they come on board. So the average size of the customer relationship in its first year is lower. But I think, in terms of logos, absolutely. In terms of dollars, large enterprise still contributes real dollars to new customers.

Richard S. Lindahl

Yes. And then in terms of just the institution's accounts themselves, I mean, you're seeing a little faster growth in middle market institutions but still very solid growth in the large corporate institutions as well. So a few hundred basis points on either end of that overall average in those 2 areas.

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

Okay, great. And then, I guess, SHL. Can you -- you talked about seeing, I guess, leverage. You hope you're on this path towards seeing better leverage of the margin structure there and the sales force investments you've made. I guess without giving -- I guess, asking you for guidance for next year but what pace of growth do you need to really start to get more meaningful leverage out of those investments as we go forward the next 12 to 24 months? I guess, are you seeing enough growth out of SHL right now that we can really start to see leverage of that? Or do you need to see a more material, I guess, pick up in the top line to get that leverage back?

Thomas L. Monahan

Our goal for the SHL business is for it to consistently and comfortably be in that 8% to 13% organic growth range. And obviously, as with any of our businesses, the higher in that range, the better. And we're seeing already returns from the investments we're starting to make, so we expect as that business gets -- is in that range and stays in that range and pushes toward the higher end, we'll be in a position where we really do get toward our original margin structure for the business. It won't be sudden but we've said -- and you expect to see progress this year, expect to see progress in 2015 and returning to our historical patterns beyond that.

Richard S. Lindahl

Getting into the low 20s by 2016.

Thomas L. Monahan

Yes.

Operator

And we'll go next to Shlomo Rosenbaum with Stifel.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Just comparing the SHL unit's organic growth with the CEB unit, were you guys surprised that the CEB unit outperformed on an organic basis just given the what I think is just a better cross sell opportunity in terms of underpenetration from taking SHL to the existing base? And how should we think about that?

Thomas L. Monahan

I think both businesses are on track for the goals we set this year. And I think any individual quarter, there'll be some noise as our customers start something sooner or starts it later, et cetera. But I think we're feeling very good about both businesses being on track for the year. I would say, I think we talked about this at Investor Day, we've had early success at cross-selling the SHL products set into the CEB customer base and vice versa, but we have a lot of work to do in terms of realizing the full potential of that opportunity. I think we're seeing progress every quarter. The challenge is, of course, both businesses are good businesses, and we don't want to completely distract either team with cross-selling and new things. They've got a great opportunity ahead of them, but we're trying to balance that and get after it. But we've got of opportunity, a lot of work to do. We're seeing progress, but I don't think we've nearly fully tapped that opportunity. But we're very pleased with where both businesses are. You see strong organic growth, good deferred revenue growth in the businesses, and we're setting up near where we expect to.

Richard S. Lindahl

I would just add, Shlomo, that the outcomes that we saw in the second quarter were what we have planned for what we have anticipated and very much keeping us on track for what we expect the full year outcomes to be.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

So if I think about how the growth should be from both segments of the business on organic basis, where -- would you think that they're going to be comparable? Or you'd think that SHL coming ahead? Just -- I mean, how are you guys thinking about it?

Thomas L. Monahan

We'd expect both businesses to be in that 8% to 13% organic growth range. This year, we've set it [ph] on a full year basis, we'd expect the SHL business to improve over last year, which, in the CEB business, obviously, pushes within that 8% to 13% organic growth range across time. Combination of both of those and expanding margins in both businesses we think creates a set of really good financial outcomes. So we're -- obviously, there's no -- every unit, every person in the company tries to stretch the higher end of that range, but we build the business to deliver organic growth in that range along with margin expansion.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And I understand there's a lumpiness to the business and I think there's -- some of the questions have been asked beforehand, and what I'm asking, probably, just the fact of, instead of being an analyst, if you're managing a business, you see on the ground, a business is not -- is a lumpy thing when you're trying to close deals. To that -- in that vein, can you talk a little bit about the services component of SHL? What percentage of that unit right now is services revenue? And how that kind of changes some of the -- what might be bookings or revenue in the volatility of that around SHL?

Richard S. Lindahl

Sure. Shlomo, this is Rich. The -- what you would see is somewhere in that order of about 30% of the business is more services oriented. Now those services tend to be repeatable over time and definitely, linked to usage of the online and product platforms. And so -- but you're right. There is some lumpiness both in terms of how those get booked and then how the revenue gets recognized because they tend to be tied to delivery milestones and project plans as opposed to being recognized in a straight-line basis like a subscription would.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

So how would you say that impacted this quarter? Where -- do you have deliverables that you think -- you're going to see more things being pulled into next quarter? Is there any way to parse that? Or just trying to isolate the business model difference here from -- as SHL become a bigger part of your business.

Richard S. Lindahl

Yes. I mean, I think you're definitely seeing -- you definitely have seasonality from quarter-to-quarter in that business, which we've talked about as first and third quarters being lower revenues, second and fourth quarters as being higher revenue, with the biggest component of those differences being the amount of services that are recognized in those periods. I guess the one thing I'd point out, you did see a pretty significant growth relative to where the first quarter had been in 2013 and second quarter of 2013. So we probably had a little bit more pulled into the second quarter on a relative basis last year than we did this year. But this is all within a normal range of expectations. I wouldn't read too much into some of this variation.

Thomas L. Monahan

And while we manage the business aggressively, we do also manage it to an annual plan because there are -- as much as we want to pull all customer activity forward as far as we can, we also have to be careful and be responsive to what they want to do. If they want to start something on July 3 versus June 22, it's our need to be responsive to that.

Operator

And we'll go next to David Ridley-Lane from Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Sure. I wanted to ask a little bit about the sales force productivity that you're getting from the new additions in the SHL sales force. Can you remind me about the timing of when those new sales were added? And then, maybe some color on sort of [ph] march up the productivity curve that you're seeing on those newer sales additions?

Richard S. Lindahl

Sure. David, this is Rich. We're basically at the anniversary now of when the bulk of resources were added. So it was a large portion in the second quarter of 2013 and then, some more in the third quarter of 2013. But think of us at second quarter this year as essentially lapping the majority of those costs -- those cost increases. And as far as productivity, I mean what we've said is that it takes kind of 2 years to get -- for a new sales person to get average productivity across the sales force, so we're about halfway along that curve right now with those new folks. And we're tracking according to that trend. And obviously, it was a large addition of incremental resources all at one time. You're going to have someone washouts, you're going to have some stars. And we're seeing the normal mix of what we would have seen.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And then, can you talk about the timing of the margin improvements that you expect from the newly acquired KnowledgeAdvisors and Talent Neuron acquisitions?

Richard S. Lindahl

The margin impact in the second quarter, that's what you're asking?

David Ridley-Lane - BofA Merrill Lynch, Research Division

We're thinking about -- I know you expect KnowledgeAdvisors to reach sort of a single-digit adjusted EBITDA margin in 2015. But I was wondering, is it building up? Do you expect it to be a positive contributor to the fourth quarter?

Richard S. Lindahl

We might some contribution. I think for the full year, it's -- we're expecting it to be relatively breakeven. It was essentially breakeven in the second quarter. And so that was a bit of a drag on margins. But we're not expecting a lot of contribution to EBITDA from that unit this year.

David Ridley-Lane - BofA Merrill Lynch, Research Division

And then, in 2015 year [ph] , that's correct to your expectations through the single-digit?

Richard S. Lindahl

Yes. I think at this stage, that's reasonable. Obviously, we're not providing guidance for next year at this stage. But that's a reasonable expectation as we sit here today.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And just one more for me. I'm a little bit curious here. You're kind of 7 months into the year. You have strong visibility on the contract value. Was there anything that -- potential swing factor that caused you not to tighten up the revenue guidance range a little bit? Just kind of curious on your thinking around that.

Richard S. Lindahl

I think the biggest thing is just, obviously, FX can swing things one way or the other. And so we felt that this stage, it made sense that we -- the wider range is in place. Although we do -- based on where we sit today, we expect the midpoints are the most likely outcomes.

David Ridley-Lane - BofA Merrill Lynch, Research Division

The midpoints of both revenue and EPS?

Richard S. Lindahl

Yes.

Operator

And we'll go next to Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

I missed some of beginning, did you specifically break out the impact on PRDI on the growth?

Richard S. Lindahl

The -- again, we're not breaking out PDRI separately. The quarterly revenue has been relatively flat for several quarters now. And so that's -- if that's helpful to you.

Paul Ginocchio - Deutsche Bank AG, Research Division

Was it down year-on-year in the second quarter?

Richard S. Lindahl

Yes.

Paul Ginocchio - Deutsche Bank AG, Research Division

Okay. And then just -- typically, in the fourth quarter, there's a pretty significant Q-on-Q ramp in costs, somewhere of the order of magnitude over the last couple of years of 2% to 10%. I'm just wondering if you're -- based on what seems to be a little more front end loading of cost this year, and the acquisitions which should be a little bit more accretive to margins or a bit less of a drag on margins, if you're still expecting that kind of level of cost growth in the fourth quarter.

Richard S. Lindahl

We'll -- at this stage, we're probably expecting a smaller increase in cost in the fourth quarter than we've typically seen. Part of that is the fact that we did front load a number of expenses, as you observed. And -- but at this stage, overall, we're looking for relatively flat operating expenses from here, maybe a little bit down in the third quarter and then a little bit up in the fourth quarter.

Operator

And we'll go next to Joe Foresi with Janney Montgomery Scott.

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

Can you remind us why the seasonality impacts SHL in 3Q? And maybe give us some color on the order of magnitude there?

Richard S. Lindahl

Sure. The simple answer is just given the summer months, there is just generally less business activity, particularly in some of the international markets where you have extended vacations and such. And so that impacts the services piece. It also frankly, it impacts the usage piece as well. And since a portion of it is not on subscriptions but rather recognized as usages is incurred, that has an impact. So overall, I think if you look at the pattern from last year, it's a reasonable kind of proxy for this year in terms of the shape of what that would look like. But beyond that, we wouldn't guide specifically what the magnitude would be.

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

Okay. And then, sticking with SHL, in North America, you've done the sales force ramp. Are there any statistics or numbers or even quality of commentary that you could give us regarding your ability to penetrate that market from a new logo perspective or even the productivity of that sales force?

Thomas L. Monahan

I mean, I think the -- we're making good progress. The sales force is ramping. We think the opportunity is -- the SHL business right now is give or take in big brushstrokes, about 1/4 North American. And obviously, relative to the penetration in other markets, that's quite small. The U.S. is the biggest and richest and deepest business services market. It's one of the most dynamic labor markets. So we'd expect even as the business grows to a healthy rate, that still signals there's a vast opportunity in front of us here. And if you look at the CEB business, the overwhelming majority of our businesses is in North America. So when I talk about connecting those 2 things, that's our goal is to get the SHL products more broadly introduced into the CEB customer base. And as I've said, we have made some good progress. We have a lot of work to do still.

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

Okay. And then, just finally for me on the margin profile. Guidance seems to call for a pretty reasonable ramp on margins in both SHL and CEB, particularly in the fourth quarter. How should we think about that? I know you commented a little bit about what the costs were as opposed to other years in 4Q. But is this revenue driven? Is this productivity driven? Is this acquisition related because the margin profile would be -- of those 2 businesses would be pretty good exiting this year given the present guidance.

Richard S. Lindahl

Yes, I think there's a few factors, Joe. I mean, one is certainly normal seasonality, which we would expect to see ramping revenues in the fourth quarter in both segments. Second is some additional contribution from some of the acquisitions. And a third is assuming that FX stays relatively stable with where it is right now, you should see some normalization on margins in terms of the impact that FX has had. And so you should, hopefully, have -- again, assuming rates stay where they are right now, you'd actually have some help from FX in the fourth quarter versus the headwind we've had so far this year.

Operator

And we'll take our final question from Manav Patnaik with Barclays.

Ryan Leonard - Barclays Capital, Research Division

This is actually Ryan filling in for Manav. Just had a question on M&A strategy post the 2 deals this year. We're obviously moving to the TalentCentral platform. Just want to know in terms of the offering itself, are there any gaps that you see today that may be needed to be filled through M&A or internal development?

Thomas L. Monahan

We look at the entire talent management life cycle and see many, many places where you can add additional intelligence or insight to help people make better decisions. In most cases, we think we've got the premier asset. We see opportunities on a couple of fronts. There's definitely an opportunity to better link our resources across the continuum. You've heard us talk about the high potential management tools that we're building using the SHL assessment technology and some of CEB's economic models and some of our development resources. So there's some great opportunities just even better link and package products we already have. There's new product development we've got to keep doing. And -- those will always be our first 2 tools in the toolkit, but if there's a talent management workflow that someone's made great progress in instrumenting and putting great resources around and it would take us years to catch up, we're not against doing additional small acquisitions to fill in our portfolio. We think right now the suite of tools we've got is about as powerful as you could find in the marketplace, but there are definite ways for us to continue to develop new linkages, continue to develop new products and continue to add some new capabilities across time.

Ryan Leonard - Barclays Capital, Research Division

Great. And just one more, if I could probe on the share repurchase program. I'm just trying to get a sense of strategy. We saw some weakness in the share price during the quarter. So I was curious with opportunistic buying versus kind of a slow and steady just to maintain share count flat going forward.

Thomas L. Monahan

I think our philosophy hasn't changed at all that our expectations we want to keep share count flat across time. That's one of our major capital management priorities, along with paying a healthy dividend and maintaining a strong financial position, so we can take action if we need to. The -- over time, what we've -- you've seen us be opportunistic, but we wanted to put in place something programmatic that insured we could act when the market was open, we could take advantage of close market windows and be consistent. Because we think consistency really underscores our -- the nature of our business model, high recurring revenue, high visibility, et cetera. Our expectation is we'd continue that programmatic approach, certainly, through 2014. And we expect that, all else being equal, that's how we'll approach the market in '15 and beyond. We will, of course, revisit based on liquidity needs, market conditions, et cetera. If that's not the right strategy based on market conditions, we'll come back and raise that. But right now we think that's a -- our approach very much underscores some great aspects of our business model.

Operator

And this concludes our question-and-answer session. And I would now like to turn the conference back over to Tom Monahan for any additional or closing remarks.

Thomas L. Monahan

All right. Thanks, everyone, for calling in or logging in to today's event. Let me just close the call by summarizing our remarks and conversation. Our performance keeps us on track to achieve some important strategic and financial objectives in the year. We're pleased with the healthy broad-based organic growth that we're seeing from nearly all of our end markets, and we're grateful to the work of our teams for putting us there. Rich and I look forward to seeing many of you on our travels over the next few months. Thanks for calling in. We look forward to keeping you up to date in the CEB story.

Operator

And this concludes today's conference. Thank you for your participation.

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