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Executives

Richard Lindahl - Chief Financial Officer and Principal Accounting Officer

Thomas Monahan - Chairman and Chief Executive Officer

Analysts

Paul Ginocchio - Deutsche Bank AG

Daniel Leben - Robert W. Baird & Co. Incorporated

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Suzanne Stein - Morgan Stanley

Gary Bisbee - Barclays Capital

Timothy McHugh - William Blair & Company L.L.C.

Corporate Executive Board (EXBD) Q1 2011 Earnings Call May 3, 2011 9:00 AM ET

Operator

Good morning, and welcome to the Corporate Executive Board's First Quarter 2011 Conference Call. Today's call is being recorded and will be available for replay beginning today and through May 9, by dialing 719-457-0820. The confirmation code for the replay is 7826859. The replay will also be available beginning later today and through May 9, at the company's website and at www.earnings.com.

To the extent any non-GAAP financial measures discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company’s website and following the Investors link to 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 following the Investors link to the first quarter webcast. 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 the Corporate Executive Board’s expected quarterly and annual financial performance for fiscal 2011. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements.

You are hereby cautioned that these statements may be affected by important factors, among others, set forth in the Corporate Executive Board’s filings with the Securities and Exchange Commission and in its first quarter's 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, and good morning, everyone. I'm Rich Lindahl, Chief Financial Officer of the Corporate Executive Board and I'd like to thank you for calling or logging in to our first quarter 2011 earnings call. Here's a quick overview of our time together this morning. I'll begin by giving you a financial perspective on the quarter and will also review our updated 2011 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.

First, our performance in the first quarter reflects continued progress on key elements of our growth strategy. Second, the investments we are making in attractive growth opportunities are producing year-over-year gains in key financial metrics, and finally, we are capitalizing on our opportunities and updating our guidance based on improved visibility into potential 2011 outcomes.

Please turn to Slide 4 for an overview of our financial results. At March 31, 2011, Contract Value was $444.6 million, which is an increase of 16.4% from March 31, 2010. This growth was broad based with solid contributions from both large corporate and middle-market members, as well as by our performance analytics and Iconoculture teams.

Our North America and Asia Pacific groups continue to perform very well and our European operations also posted annual growth as the new account management model continued to mature in that region. Revenues were $114.9 million in the first quarter of 2011, a 14.7% increase compared to $100.2 million in the first quarter of 2010.

As we have previously discussed, on January 1, we adopted the FASB's new guidance on revenue recognition. Under these new accounting rules, we deferred recognition of approximately $1.5 million of revenue that would've been recognized in the first quarter under the prior rules. We expect to defer additional amounts in Q2 and Q3 and recognize the bulk of such revenue by the end of 2011 and into 2012.

Moving on to operating expenses. Cost of services in the first quarter of 2011 increased by $6.9 million versus the first quarter of 2010. Personnel and other headcount-related costs were the biggest components of this change driven by the acquisition of Iconoculture, investments in product development and expansion of our advisory staff. Member relations in marketing expense increased by $9.8 million the first quarter versus the prior year period, as a result of higher staffing levels in increased sales commissions due to solid year-over-year growth in bookings. I'd note this line also reflects the bulk of our international staff investment.

General and administrative costs increased by $1.4 million in the first quarter of 2011 versus the first quarter of 2010. In the quarter, we finalized the Iconoculture earnout calculation which resulted in an incremental charge of $0.6 million. The remainder of the annual change is attributable to modest increases in G&A headcount and related costs.

Other income was $1.5 million in the first quarter of this year compared to expense of $0.5 million in the first quarter of 2010. Foreign currency translations swung from a loss to a gain, and thus accounted for the majority of the year-over-year improvement.

Adjusted EBITDA margin in the first quarter of 2011 was 20.2% versus 24.5% in the first quarter of 2010, reflecting the impact of the operating investments we have discussed over the past several quarters. Sequentially, adjusted EBITDA margin improved by 50 basis points from 19.7% in the fourth quarter of 2010. As a reminder, we do not adjust out stock compensation expense, which was $2 million in the first quarter of 2011, when calculating adjusted EBITDA margin.

Depreciation and amortization in the first quarter of 2011 was $4.3 million, a reduction of $0.9 million compared to the first quarter of 2010. This reduction was driven by the completion of equipment depreciation cycles and lower intangible amortization related to Toolbox.

In the first quarter, our effective tax rate was 41.2%, which reflects our current estimated rate for 2011. Non-GAAP diluted earnings per share in the first quarter of 2011 was $0.33 or $0.01 lower than the $0.34 we reported in the prior year period as the year-over-year growth in revenues was offset by higher operating costs.

Turning to the balance sheet. Membership fees receivable decreased seasonally to $89.4 million at March 31, 2011, as compared to $141.3 million at December 31, 2010. Average days sales outstanding were 90 days for the first quarter, consistent with historical seasonal ranges. Deferred revenues also grew seasonally as the current portion increased sequentially by $30.4 million or 12.1% to $281.6 million at March 31, 2011. As compared to the prior year, deferred revenues increased by 17.2% due to improved year-over-year bookings and the inclusion of Iconoculture. We continue to be encouraged by these trends and the favorable implications they have on our near-term revenue growth.

Cash flows from operations were $85 million in the first quarter of 2011, an increase of 18.4% versus the first quarter of 2010. First quarter 2011 cash flows benefited from seasonally stronger collections on higher year-over-year bookings. During the first quarter, we spent $2.8 million on investing activities and paid out $5.1 million in dividends. We ended the first quarter with $201.4 million in cash, cash equivalents and marketable securities, an increase of 63.1% as compared to December 31, 2010.

Please turn to Slide 5, which provides additional examples of the year-over-year improvements we are seeing in key operating metrics. As we discussed at our investor day in March, you will note that we are presenting new metrics this quarter that we believe align more cleanly with how we manage our business. On the left side of the chart, you'll see the significant growth we experienced in wallet retention. This metric is defined as the total current year contract value from prior year members as a percentage of total prior year contract value. As such, it measures our success at expanding institutional relationships through effective retention, cross sell and price improvement efforts. All three of these drivers gained traction over the past year and as you can see, wallet retention grew by 28%, rising from 81% in the first quarter of 2010 to 104% in the first quarter of 2011.

In the center of the page, we show that we grew our customer base by 10% over the past year as total member institutions increased from 4,797 to 5,275. This improvement reflects our success at re-engaging former members, establishing new relationships with large domestic and international corporate customers and further penetrating the middle market opportunity. The net result of all these efforts can be seen on the right-hand side of the page, which shows that Contract Value per member institution grew by approximately 6% from $79,700 in the first quarter of 2010 to $84,300 in the first quarter of 2011. We are pleased with these financial and operating outcomes, which leave us on track to achieve our 2011 objectives.

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. As we discussed in our last earnings call, we have constructed our 2011 plan with an eye towards balancing profit and cash flow growth with select investments to create long-term value. We continue to pursue sustainable top line growth, attractive profitability and improving cash flow from our existing subscription business, and we are making additional investments in new products and market extensions to further enhance organic growth. With the first quarter behind us, we have improved visibility into potential 2011 outcomes. We are a bit more positive on revenue growth for this year and are therefore raising our guidance for annual revenues.

At the same time, due to better-than-anticipated employee retention and recruiting results, we are currently running ahead of our staffing plan. While incrementally positive for late year productivity, this factor leads us to slightly reduce the upper end of our range of adjusted EBITDA margin. Accordingly, we are raising our expectations at the lower end of guidance for non-GAAP diluted earnings per share while keeping the upper end in place. Our updated 2011 guidance is therefore as follows: Annual revenue ranging from $480 million to $500 million; adjusted EBITDA margin of between 22% and 23%; non-GAAP diluted earnings per share of $1.50 to $1.65; depreciation and amortization expense of $17 million to $18 million; and capital expenditures of $8 million to $10 million.

A few more comments on our guidance. First, I'll remind you again that we experienced certain seasonal impacts related to the patterns of our bookings throughout the year, which drives variability in both quarterly income statement and cash flow results. We saw evidence of this seasonality in the first quarter and would expect to see sequential trends throughout the remainder of 2011 that are similar to those which occurred in 2010.

Second, we still expect that revenue trends will be impacted to some degree by the timing variability associated with the new revenue recognition rules which are now enforced. As previously discussed, first quarter revenues were affected by the new accounting and in some cases, additional revenue recognition may be back-end weighted instead of spread evenly over the life of the member contract.

While the collection dynamics and cash flow economics of our contracts remain the same, this change will somewhat dampen revenue and earnings growth in 2011 as we transition to the new rules. That's it for the financial summary. Please turn to Slide 7, and I'll turn the call over to Tom.

Thomas Monahan

Thank you, Rich, and good morning. As Rich made clear, we're pleased with our progress across the first quarter of 2011. We continue to build momentum on the top line with solid year-over-year growth in Contract Value and revenue while continuing to deploy and drive returns from investments that deliver future growth.

As I've said before, we have three levers that we use to grow the business. We've mapped them here on Page 7. To the left. First we, grow our relationships with our existing customers. We estimate that our penetration of our average large client is less than 15% of their capacity to utilize our current products and services. As a result, our largest growth opportunity in any period comes from simply connecting our resources to more of their people and decisions. As you can see at the bottom of the page, our focus here is on those markets, where we already have a strong installed base of great customers, such as North America and select highly penetrated global markets.

Second, we add new customers. Even though we already served more than 5,200 of the world's most progressive companies, there's still more than 12,000 companies of the right scale that have yet to initiate a relationship with us. In our most developed markets, such as the U.S. large corporate market, we've concentrated responsibility for this into the hands of very elite teams that engaged nonmembers. In the middle market and less penetrated international markets, we're making focused investments to build the teams and deepen our penetration. And third, we add products and services that target uncovered needs in our key buying centers. While these require investment in the near term, they provide platforms for future growth and better leverage our great relationships with member companies.

Please turn to Page 8. With the goal of moving these growth levers, we set out four key priorities for the year. Let me remind you what they are and then make some comments updating you on our progress. First, creating uniquely valuable insights into corporate performance. Second, driving loyalty, growth and brand strength through high-value member engagement. Third, investing globally in key markets. Fourth, leveraging technology and service to deliver innovative products. Let me spend a moment on each priority.

Please turn to Page 9. We'll talk about creating uniquely valuable insights into corporate performance. As I've said before, our business begins and ends with great content built from our deep researched data and analysis. Our objective here is to create must-have content that supports member performance and powers our own growth. Our teams are off to a great start in 2011, producing compelling contents and enriching critical data and tools across all of our practice areas. Some recent work in our HR practice is one great example. As economies around the world continue to recover, we are seeing competition for top talents intensify. We built an array of data assets, tools and best practice resources that help companies optimize productivity and performance from their people and, so we're well prepared to help them navigate this challenging environment.

In our recent work entitled, Becoming a Talent Champion, we drilled down on how the most effective executives drive growth, performance and better business outcomes. Our data on corporate performance shows that the difference between the 19% of managers who are true talent champions and the rest can be material. Business units led by the most effective talent champions generate profit growth more than 6% higher than those led by average executives.

So we built a rich set of tools and detailed best practices to help members assess their own capabilities here and take specific action steps to improve. We've also shared some highlights for the broader business community through our first quarterly executive guidance publication. The same data assets we've developed for the talent champion work also help members manage at the market level in key markets. In this day and age, much of our members' focus is on key emerging markets like China and India. As members grow their businesses there, we arm them with the insights and tools to economically staff their operations and grow local leaders. We've been building a distinctive data asset in China for more than 4 years and have noticed a remarkable change in the labor market recently.

While Western multinationals have historically enjoyed a big advantage over domestic importers, the great recession has dealt them and their brands a severe blow. The changing fortune of the global brands has made it far more difficult for Western firms to compete for and win the best talent, driving up recruiting costs and salaries.

Top Chinese workers now find local employers equally if not more attractive places to work. Our team in the corporate leadership council leverage insight drawn from the multi-year data asset of more than 300,000 Chinese professionals and best practices from companies like Cisco Systems, Shell, and Dow Chemical to identify 5 concrete strategies and action maps that Western companies should implement now to win and compete for scarce Chinese talent.

Continuing our efforts in public thought leadership as a brand building activity, a portion of these findings were shared in the featured article in the March 2011 issue of the Harvard Business Review titled, The Battle for China's Talent. These are just two of literally dozens of places where our teams are building uniquely relevant insights into corporate performance and coupling them with actual tools, practices and services streams to help members succeed. Throughout the balance of 2011, our focus will remain on ensuring that our product teams produce authoritative and uniquely valuable insight into corporate performance that we continue to globalize our research asset with continued investments in emerging markets coverage.

Please turn to Slide 10, where I'll discuss our second priority, driving member loyalty, growth and brand strength through high-value member engagement. Our objective here is to leverage effective support of our members to grow Contract Value through renewals, pricing and sale of additional products and services. As Rich mentioned, we are sharing some new metrics that give you a clearer view of how we run the business.

You saw that wallet retention was 104% through Q1, up from 81% in the prior year. This metric provides an integrated view of our effectiveness at maintaining member relationships, realizing price increases and selling additional products and services and it shows that in this quarter, these 3 metrics, together, created a solid outcome. We think that customer-based metrics like this give you the clearest view of our true economics and as we share them, you'll hear us talk less about cross sell and other metrics based on product level outcomes. As you'd guess, though, given the strong wallet retention number, we saw good momentum in sales of additional products and services.

To consistently achieve these outcomes, we need to make sure that we connect the right resource to the right member at the right time. The real work here happens on two fronts: First, great work by our accounts and advisory teams to engage members; second, continued investment in technology that links our content and data assets ever more closely to the ongoing workflow at our member companies. As you know, we've worked hard on both these dimensions over the past 2 years, reorganized our go-to-market teams and rebuilding our member portals and key member dashboard interfaces. We continue to see real returns from both these efforts as users, usage and member feedback continue their upward trajectory.

While everyday excellence is the foundation of support for our members, we also work to support our teams with events and meetings that allow us to engage dozens, if not hundreds, of our members at one time. Across the year and around the globe, we'll host nearly 1,000 sessions that facilitate principles-only dialogue around key topics from our research. And we'll punctuate these with a few larger sessions that galvanize whole segments of our business. One particularly notable recent example was our financial services summit held in Boston this past April. The event was a key milestone of our continued innovation of TowerGroup and showcased the resulting reach and depth and quality of the people that we deploy in this space.

Titled, Sustainable Innovation in Financial Services: Driving Business and Technology to Achieve a Competitive Advantage, the event hosted more than 500 attendees from more than 200 premier financial services institutions and some leading technology providers. We also used the event to debut an interesting new data asset that tracks consumer financial information globally and perspectives across more than 25 markets at the market level. The data set and analytic overlay allow members to highlight key tactical opportunities in markets from Malaysia to Mexico and also gives us a pretty rare look at key drivers across the global economy. We're excited to see this data power decisions already at member companies and look forward to more impact down the road.

Please turn to Page 11, where I'll discuss our third priority, investing globally in key markets. Our objective here is to accelerate new member acquisition and growth through selective market level investments. Achieving penetration levels in these markets not only drives growth, it further strengthens a key competitive barrier as our data, insights and tools become ever more global in scope.

We continue to invest in and see encouraging growth from our middle market platform, our strong India presence, and our growing Singapore hub. As you'd expect, our growth in the government sectors has been challenged by the difficulty getting a federal budget in place but over the long term, we're optimistic that these budget challenges will create demand for higher levels of performance management and as a result, the support we can uniquely provide.

Last quarter, I called out in particular the opportunity to selectively add market base teams in Continental Europe, where we enjoy a marquee base of loyal members that provide a solid foundation for additional investments. Germany presents a particularly rich opportunity for us, as offers for the high concentration of large corporate enterprises and a managerial culture that readily taps external advice.

Those of you who attended our Investor Day in New York this March know that we took a next step in the region in the quarter, as we open a new office in Frankfurt and have made solid progress in building out a great German market team. The small but growing German team is off to a fast start against a huge opportunity. While Europe remains under an economic cloud, we do see stability in the region and expect that our investment there will yield valuable returns. We're working to give the team support with strong marketing investments and version of the product and are excited by the growth ahead.

Please turn to Page 12. We'll discuss our fourth priority, leveraging technology and service to deliver innovative products. Our objective here is to create and grow revenue streams by linking research and content to new member decisions and workflows. Last quarter, I noted that you would see us de-emphasize product count as a metric moving forward. While new products are important to our growth, they aren't the only innovation that drives profit and growth. New features or resources for existing products can drive discontinuous pricing opportunities and pave the way for profitable Contract Value growth per member, which is our real objective.

We'll continue to keep you updated on what's new, though. To do this, I'll share one example of how we add new features to existing products and one example of a recently launched new product. The first is a great example of how innovation can add value to an existing product area. Across the last year and a half, we fully integrated data and technology tools from the JM Lafferty company into our core CFO program desktop and in the process, fully absorbed the great Lafferty team. This proprietary data set and suite of analytics tool called ForecastWorks [ph] helps members better formulate, analyze and assess the valuation implications of alternative financial forecasts and transactions. This is obviously heart of the plate for CFOs and as a result, member response to the additions to our CFO suite has been very positive.

A powerful example of how innovation can help us develop new services that target new needs has been our Leadership Academy's platform. This area has shown particular strength across the last several quarters. You'll recall that our Leadership Academy team has created a set of standardized modules and a great faculty, which companies use to develop the leadership, business, analytic and managerial skills of high potential employees in our target functions. This not only targets a real member pain point, it ensures that we develop relationships with emerging generations of talent in our core functions and that these folks use CEB data tools and best practices to do their jobs.

We've been working to extend and deepen the Leadership Academy's platform across the past several quarters by extending it to the finance teams [ph] into Finance Leadership Academy. Similar to our Leadership Academy offerings for HR and Legal teams, the Finance Leadership Academy gives high potential finance executives the tools they need to engage the business lines through strategic partner.

Focused on developing skills identified as most important to line leaders and CFOs through our own research, the program has driven ROI for companies as diverse as Lockheed Martin, Navistar and Seagate. One member commented, " We are getting an ROI from the Financial Leadership Academy on the acceleration of our business projects alone in addition to the increased rate of promotion from the people who go through this program."

These two efforts, integration of the forecast works tools into our core CFO platform and the addition of the Finance Leadership Academy suite to our Finance product line, both illustrate how new combinations, great content, technology and service can open up new opportunities for growth, either by increasing impact, usage and pricing of our existing product lines or by allowing us to target new buyers and needs in our core domain.

Let me close with a brief note about the people who have powered our progress against our core priorities. None of these achievements would be possible without the insight, generosity of spirit, and passion for member impact that our people display on a daily basis. I'm proud to call them my colleagues, and I'm equally proud they represent our brand and values so consistently around the world.

Given the importance of talent to our business, we invest heavily in ensuring that we were able to grow and retain the top people we've got and that we attract key talent globally. We've rolled out several new training and development programs across the past several quarters that have built an enriched career paths and development opportunities and had immediate impact on our performance. As Rich discussed, we've also turned great career opportunities and rich development programs into strong platforms for recruiting in key markets. We believe that our team is equal to the rich opportunity in front of us. As a leadership team, our job is to put people in positions and give them the tools to realize this opportunity. To sum up the quarter before we take questions, I'm pleased with the progress we are making and see much work ahead to realize the full opportunity from the company. We'll now take your questions.[Operator Instructions] We'll go first to Shlomo Rosenbaum with Stifel, Nicolaus.

Question-and-Answer Session

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Can you just give us some kind of an estimate as the impact to revenue this year for the total year from the new revenue recognition rules? Do you have some kind of estimate for that?

Richard Lindahl

As I said, there was a $1.5 million impact in the first quarter. I would expect there could be similar types of impacts over the next couple of quarters but we should recover a large portion of that before the end of the year with the final portion coming in, in the first quarter of next year. So relatively, it should be a relatively small impact for the full year, but over the next couple of quarters, it will be similar type of impact.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Could you just talk a little bit about some of the timing differences or anything else that might have cost the Contract Value to dip sequentially?

Richard Lindahl

Sure. As we've told you before there is seasonality in our business in terms of the bookings flow with roughly 30% of our bookings in the first quarter, 20% in each of the second and third quarters and 30% in the fourth quarter. In the first quarter, bookings are more heavily weighted towards renewals, and those renewals tend to be more concentrated in the early part of the quarter and to the degree that we make those up through new sales those tend to come a little bit later in the quarter.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

So how does that impact Contract Value, though? Because Contract Value is just a snapshot, why would it make a difference what time in the quarter that those things are booked?

Richard Lindahl

Well, as I said, the new sales in the first quarter are -- that's kind of the smallest quarter for new sales overall. So to the degree that you're having to make up any gap that's created by non-renewals, there isn't as much momentum on a relative basis in the first quarter to do that.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Great. Can you just -- I know you haven't given out cross-sell metrics but can you talk a little bit, did the cross-sell go up in both middle market and large corporate?

Richard Lindahl

As Tom said we are de-emphasizing the cross-sell metrics and really any metrics related to product counts because we're not managing growth purely on the basis of stand-alone product introduction, so we've replaced them with wallet retention and also giving you the institution counts on a quarterly basis going forward. And we think those provide a better overall measure of business health and how we're managing going forward. Having said that, cross-sell metrics were fine in the quarter. They displayed a similar -- actually slightly more favorable seasonal pattern than you had in first quarter 2010 and both middle market and large corporate businesses performed well during the first quarter.

Operator

And next we'll move to Tim McHugh with William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C.

I wondered if you could talk a little bit. You mentioned that the headcount's a little bit ahead of your expectations. I want to just ask you to talk a little bit more about a few factors impacting that. One is, talk about turnover and secondly, talk about maybe the timing of sales, hiring across the rest of the year, have you done most of what you will do at this point? And then lastly, lowest contribution from the headcount being higher than you expected is more to label -- is it fair to think it will impact later this year more so than earlier this year or what we saw in the first quarter?

Richard Lindahl

Sure. As I said, the biggest driver of the staffing factor that I highlighted was we've experienced somewhat more favorable retention this year than we had come into the year planning for and also, we've gotten our recruiting engine fired up and has been more effective in the early part of the year. So as a result, we ended the quarter with staffing a little bit higher than we would've expected coming into the year. Net-net, we do that as a positive thing and certainly has positive implications for later in the year because it gives staff more time to ramp up to productivity and impact results for the first part of the year. And I'm sorry, I forgot the second part of your question.

Timothy McHugh - William Blair & Company L.L.C.

That's fair. I guess that was just the timing of sales, hiring now, are you pretty much done and part of why I was asking that is how we can look at member relations in marketing across the rest of the year.

Richard Lindahl

No, I would say we're not done. We certainly have made a lot of progress and we're a little bit of ahead but we're not quite yet at our full year cost level, cost plan, so we certainly are going to continue to add incremental staffing in parts of our business and certainly the sales functions is just one of those areas.

Timothy McHugh - William Blair & Company L.L.C.

And then you mentioned Europe return to growth as the new sales model was kicking in there. Can you give a little more color? And is this the first time you've seen positive year-over-year growth out of Europe in the last -- or at least this cycle, if you will?

Thomas Monahan

Tim, I think what we're seeing in Europe is very broadly consistent with what we saw in North America in the first 12 months after the shift in account management model. As you'll recall, we did the cut over in North America in 2Q 2009 and throughout that year, we found teams getting stronger and stronger and stronger at all aspects of their business, re-introducing themselves and engaging their new customers, learning to balance service, renewal and cross-sell across that full year afterwards, and we're finding the European team tracking right along on a very similar path. So we're pleased with the progress the European team is making at this point in their transition. And we're very excited because if the pattern holds, it means they're going to be performing at the same high level that we've seen North America and APAC performing at now.

Timothy McHugh - William Blair & Company L.L.C.

Is this the first time you've seen growth there? Just trying to get a sense, it seems like all the growth before was U.S. and Asia. I just want to get a sense of how much of an improvement you've seen in Europe.

Richard Lindahl

We saw pretty close to breakeven slight growth in the fourth quarter. So a little bit better this quarter.

Thomas Monahan

They're starting to pick up momentum, but I think year-on-year through Q4, there was slight growth. Now it's a good contributor.

Operator

We'll move next to Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG

You said at the Investor Day, you were looking for a medium term revenue guidance or revenue growth, look of 8% to 13%, it looks like you're already at the top end of that range now, should we expect you to push above that? Or how are you thinking about the 8% to 13% as it looks like you're at the top already?

Thomas Monahan

Hey, Paul. It's Tom. I think -- we put those numbers out there as a good long-term multi-year look at how we expect the business to grow. And I think they're still very valid for multiple periods. In the near term, remember we're bouncing back off an easy comp from last year at this time. So that does make the numbers look good. And we'll always going to push to get to the upper end of that range and beyond. It was late in the quarter it was clear that we were ahead of that range we gave you. I wasn't running around saying stop, stop. So we will always look for opportunities to do that. But I think over the long term, on an organic basis, that range gives you some sense of how we're building the business to perform. And the dimensions of the growth, we're broadly in line with the dimensions of the growth we outlined at the Investor Day but we'll always look for ways to push to the top and beyond if we can if the market's allowing it but we want to make sure we're building the company for that repeatable range that we showed you.

Operator

And next we'll go to Gary Bisbee of Barclays Capital.

Gary Bisbee - Barclays Capital

Thanks again for the new metrics. I think they're a nice improvement. I guess a couple of questions on that. We've not seen a total member count, obviously, historically, on a quarterly basis so, and it was only up a couple from the year end. So should we think anything into that, or is there some seasonality of that metric or bumpiness that we should just expect, or you want to explain?

Richard Lindahl

Yes, hey, Gary. It's Rich. Yes, I mean there is some seasonality just as I was talking before about new sales and how they flow through the year and they're going to tend to be lighter in the early part of the year and build up as we go through the year with more of an impact in the fourth quarter. I think it's reasonable to assume that institution counts while there will be any number of factors that will influence quarter-to-quarter variability, throughout the course of the year, you should see them follow a similar trend.

Gary Bisbee - Barclays Capital

With the wallet retention metric, I realize it's based on Contract Value but should we think of that, that's sort of 104%, so 4% of the growth coming from existing customers and the remainder of the nearly 15% revenue growth or I guess the 16.4% Contract Value growth would be new customer sales in M&A, are the numbers that straightforward? Is that how we should get build up to that reported number?

Richard Lindahl

Yes. I mean, I think the wallet retention is a good proxy for that kind of existing customer growth. I mean that's what it's intended to portray and then remember the 8% to 13% is an organic growth rate only. In the quarter we certainly had a contribution of the overall revenue growth from Iconoculture still. We acquired them in the second quarter of last year and it was roughly about the same as what it was last quarter. So that implies that certainly the contribution from new customers was a little bit higher in the second quarter, I mean -- sorry, in the first quarter in those indicated ranges but as Tom said, there's some variability quarter-to-quarter and we're coming off of an easier compare from last year but longer term, we still feel good about that multi-year revenue growth guidance we gave you in March.

Gary Bisbee - Barclays Capital

And so just trying to dig it out a little further, is it right to assume then that new customer wins and new sales was quite a bit larger contribution to the total Contract Value or revenue growth than the existing customer?

Richard Lindahl

On a relative basis in this quarter, yes.

Gary Bisbee - Barclays Capital

You mentioned the 12,000 customers not using any of the company's services. I'm sure you don't want to get into this on a regular basis but as a starting off point, any willingness to give us a sense of sort of how that breaks down whether it's U.S. versus international, mid-market versus large customers, any color there?

Thomas Monahan

Sure, Gary. It's Tom. The easy way to think about it is there's about 12,000 companies that would be in our power alleys globally that don't yet have their first CEB membership, that number's probably a little higher, sum up every market globally gets you closer to 15,000. The overwhelming majority of those are going to be middle market companies, what we define as companies between $100 million in sales and $1 billion in sales. They're pretty sizable companies. These aren't mom and pops, they're not small- and medium-sized businesses, They're a significant size operating companies, but probably a better fit for the middle market products suite. Beyond that, you'd see international companies where we are still under-penetrated in most major markets. We've got a healthy list of great companies in pretty much every market we operate in but we don't go as deep or reaches broadly as we do in North America. And then third, there are still a decent size chunk of large North American companies that don't have their first CEB membership with us. Now 85% of the Fortune 500 have at least one membership with us, so that says the number's pretty small as you get to the upper end of the market, but there are still some companies beneath that level that don't have that first relationship. Our penetration rate dips a little bit as you get even smaller large corporate companies, if you will. So if you think about it from share of that large number, it's mostly middle market followed by international, followed by large corporate.

Gary Bisbee - Barclays Capital

Just one last question from me. As we think about the trend, I think, Rich, you said seasonality of things would look similar to last year. Should we think about then -- that seems to imply costs jumping quite a bit again sequentially into the second quarter. Should we think about the operating or EBITDA margin falling sequentially like it did last quarter? Or are there anything you want to say about sort of trends and costs?

Richard Lindahl

Yes. I mean I think what I said before was that we're not fully at our full cost plan for the year. I wouldn't necessarily -- again, we don't provide quarterly guidance. So I wouldn't expect necessarily the same relative percent increase on expenses that you saw last year, but in terms of whether margins are going to go down, I wouldn't necessarily expect that either. I guess what I would say is that we would expect to see more improvement in margins in the second half of the year than in the first half of the year.

Gary Bisbee - Barclays Capital

In that last comment just to be clear, down year-over-year you're talking about, not sequentially versus what you just reported for the first quarter?

Richard Lindahl

Yes, I mean, certainly, down year-over-year.

Operator

[Operator Instructions] We'll go next to Dan Leben at Robert W. Baird.

Daniel Leben - Robert W. Baird & Co. Incorporated

First, you talked about the retention side on the member relations in marketing. Could you talk about the kind of magnitude of retention running ahead of plan on the cost of services side on the research part?

Richard Lindahl

I mean, I think broadly speaking, our employee retention is better than we had expected. And so that applies really across the board. It wasn't just limited to the sales organization.

Thomas Monahan

And Dan as we talked about, we put programs in place to make sure we're giving people great training, great development paths and we can not only compete for great new employees but give people robust career paths and so far, that's paying off in the margin in terms of our ability to keep the best people we want and give them exciting career runs that's important to us.

Daniel Leben - Robert W. Baird & Co. Incorporated

And then second question thinking about the seasonality on Contract Value. If we look back historically prior to the recession, year-over-year the first quarter was higher than the fourth quarter in terms of Contract Values. Is there something that's changed in the seasonality of the business over the last 2 years in terms of just with the change in membership base, moving to the mid-market, the timing of the quarters, anything there that's kind of changed the seasonality to where we should kind of permanently expect the first quarter to dip?

Thomas Monahan

No. I think what I would remind you of is that certainly overall, the Contract Value was growing at a much higher rate in that historical time period. But if you do look at the transition from fourth to first quarter, you did see, even though it didn't go down, you saw a smaller rate of growth from fourth to first. So I would say the same seasonality factor was there. It's just as we apply it on a lower relative overall rate of growth that's leading to a slight decline this year and last year.

Operator

And next we move to Suzy Stein with Morgan Stanley.

Suzanne Stein - Morgan Stanley

I was just wondering if you could provide any more detail on International. Are you seeing any change in the competitor response as you ramp up and are there any markets that stand out as getting increasingly more competitive?

Thomas Monahan

At a very macro level, we still see not from a competitive dynamic standpoint but from a underlying health of the economy standpoint, I still think we're living in a 3-speed world where APAC economies feel very strong, maybe in some cases you can worry about the rate at which they're growing, creating some overheating. You've got North America, which feels very solid and Europe which feels mixed. There are some very solid markets where we're pleased with our performance, there are some markets where the team is making great progress but the underlying economies are still a little bit challenged. So I'd say more driven by macroeconomic circumstances, less driven by unique competitive dimensions. Our story and when we were sitting across from the executive, anywhere in the world, any of 50-plus markets we sell into, is never that we're the best source of local market insight, whether that's in Philadelphia or in Jakarta. I mean, it's just we bring global perspective and global resources to bear, which we then version down to make useful for them. So local competitors tend not to vary so much and there's no particular news on the global competitive set front.

Suzanne Stein - Morgan Stanley

And then just separately, can you address your priorities for capital deployment now just between share buybacks, increasing dividends and acquisitions?

Richard Lindahl

Sue, it's Rich again. I would say our priorities really haven't changed since how we articulated them at the Investor Day and earlier. First priority, maintain a strong financial position, which we're certainly in today. Second, maintain a profile of returning cash to shareholders and we view the dividend as the primary vehicle for that at this stage. And then finally, maintain flexibility to pursue opportunistic investments as they present themselves.

Operator

And at this time, we have no further questions. Mr. Monahan, I'll turn the conference back over to you.

Thomas Monahan

Thanks very much. Thanks, everyone, for calling and logging in this morning, allowing us to update you on the EXBD story. We look forward to seeing you out on the road over the coming months. As a quick reminder, Rich and Barry will be at the Barclays Capital event in Boston next week. Rich and I will be at the BofA Merrill event later this month in New York and we'll be at the Blair event in Chicago next month. We look forward to using these opportunities to catch up with people live and keep you up to date on our story. Thanks very much.

Operator

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

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