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Executives

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

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

Paul Ginocchio - Deutsche Bank AG, Research Division

Suzanne E. Stein - Morgan Stanley, Research Division

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

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

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

Gary E. Bisbee - Barclays Capital, Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Corporate Executive Board (EXBD) Q3 2011 Earnings Call November 1, 2011 9:00 AM ET

Operator

Good morning, and welcome to the Corporate Executive Board's Third Quarter 2011 Conference Call. Today's call is being recorded and will be available for replay beginning today and through November 9 by dialing (719) 457-0820. The confirmation code for the replay is 2274635. The replay will also be available beginning later today and through November 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 going to the Investors page and clicking on the link to the third 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 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 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 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 third quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether 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 the Corporate Executive Board. Thank you for calling or logging in to our Third Quarter 2011 Earnings Call. Here's a quick overview of our time together this morning: I will begin by giving you a financial perspective on the quarter and we'll also discuss our 2011 outlook. 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. Overall, we continue to making progress in the third quarter through solid execution that is delivering current results and setting us up for future growth. To illustrate this point, we'll focus our discussion today on the following key themes.

We are sustaining momentum throughout our business. Our third quarter financial results keep us on course to achieve our annual objectives. We continue to balance capital allocation according to our stated priorities. And we currently expect to enter 2012 on strong footing and with a healthy growth profile.

Please turn to Slide 4 for a discussion of our key growth drivers. During the third quarter, we saw a sustained global momentum reflected by double-digit bookings growth. We were pleased to see strong results from our European operations as the team there gained traction in the new commercial model and delivered growth ahead of the firm average. In the year-to-date through the third quarter, all regions are converging on the firm-wide growth averages, with Asia Pacific slightly ahead and North America and Europe right in line with each other.

From an industry perspective, our government team gained some ground in the quarter, although that area remains challenging due to ongoing uncertainty regarding the federal budget. As a reminder, this segment currently represents less than 5% of our total revenue, although we continue to see an attractive opportunity to grow in this space over time.

Our corporate sectors grew at healthy rates, including financial services institutions, which continue to represent about 20% of our total Contract Value despite increased volatility in the financial sector.

We also continue to improve the key indicators of current and future revenue growth. As you can see on the left side of the chart, we had another solid year-over-year increase 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 3 of these drivers gained traction over the past year, and as you can see, Wallet retention grew by 6%, rising from 96% in the third quarter of 2010 to 102% in the third quarter of 2011.

In the center of the page, we show that we grew our customer base by 7% over the past year as total member institutions increased from 5,131 to 5,504. This improvement reflects our success at re-engaging former members, establishing new relationships with large domestic and international corporate companies 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 4% from just over $82,000 in the third quarter of 2010 to nearly $86,000 in the third quarter of 2011.

Please turn to Slide 5 for an overview of our financial results, which keep us on track to achieve our annual objectives. I will also note that, with solid sequential improvements in revenue growth, adjusted EBITDA margin and non-GAAP diluted earnings per share, the third quarter outcomes are very much in line with the commentary we provided to you on our last earnings call.

At September 30, 2011, Contract Value was $472.2 million, which is an increase of 12% from September 30, 2010. This increase was driven by solid bookings growth in the quarter as our teams continue to connect our uniquely valuable services to critical member needs even in the face of increased market volatility. We saw a smoother overall trend in bookings throughout the period, and we also finished the quarter very strong as the contribution from new business, which tends to be more back-end weighted, continued to improve.

Revenues were $122.9 million in the third quarter of 2011, a 9.6% increase compared to $112.1 million in the third quarter of 2010. As we have previously discussed, on January 1, we adopted to FASB's new guidance on revenue recognition. Under these new accounting rules, we deferred recognition of approximately $2.5 million of revenue in the third quarter that would have previously been recognized under the prior rules. This additional amount brings our total year-to-date deferrals to $6.1 million. We will recognize a portion of these year-to-date deferrals in Q4 and the remainder of such revenue in early 2012.

As a result, we currently estimate that the full year net deferral of revenue from 2011 into 2012 will be approximately $4.2 million. This figure is a bit more than our previous forecast and influences the tightening you see at the higher end of our revenue and earnings guidance.

Moving on to operating expenses. Cost of services in the third quarter of 2011 increased by $1.8 million versus the third quarter of 2010. Personnel and other compensation costs were again the biggest component of this change, driven by our investments this year in product development and expansion of our advisory staff.

Member relations and marketing expense increased by $4.4 million in the third quarter versus the prior-year period as a result of higher staffing levels and increased sales commissions due to the cumulative growth in bookings. As a reminder, this line also reflects the bulk of our international staff investment, which has increased as we pursue growth opportunities in Asia and Europe.

General and administrative costs increased by $1.4 million in the third quarter of 2011 versus the third quarter of 2010. This rise was driven by higher headcount as well as transaction costs associated with the acquisition of Baumgartner & Partner.

Other Expense was $2.5 million in the third quarter of 2011 compared to Other Income of $3.1 million in the third quarter of 2010. The biggest driver of the year-over-year change is a $3 million swing from a gain to a loss in the fair value of deferred compensation plan assets.

As a reminder, pursuant to GAAP accounting rules, there are offsetting entries to compensation expense, so there is always a 0 net impact to earnings resulting from gains or losses on deferred compensation plan assets.

Adjusted EBITDA margin in the third quarter of 2011 was 21.1% versus 25.2% in the third quarter of 2010, reflecting the impact of the new revenue recognition rules, the operating investments we have discussed over the past several quarters and the $2.6 million negative year-over-year change in other expense items such as foreign currency translation, other income and net interest income. As a reminder, we do not adjust out stock compensation expense, which was $2 million in the third quarter of 2011, when calculating adjusted EBITDA margin.

Depreciation and amortization in the third quarter of 2011 was $4 million, a decrease of $0.5 million compared to the third quarter of 2010. This reduction is attributed to lower amortization of intangible assets.

In the third quarter, our effective tax rate was 36.7%. During the quarter, we released a tax contingency reserve, which reduced our quarterly tax provision. We estimate that our tax rate will be approximately 40% for the year, excluding the effects of unrealized currency translation gains and losses.

Non-GAAP diluted earnings per share in the third quarter of 2011 was $0.41 or $0.02 lower than the $0.43 we reported in the prior-year period as the year-over-year growth in revenues was offset by the higher operating costs associated with our investment plan for this year.

Turning to the balance sheet, membership fees receivable decreased seasonally to $92 million at September 30, 2011, compared to $141.3 million at December 31. Average day sales outstanding were 67 days for the third quarter, consistent with historical seasonal averages.

Deferred revenues declined seasonally and the current portion was $235.1 million at September 30, 2011, as compared to the prior year, deferred revenues increased by 17.9% from the third quarter of 2010 due to improved year-over-year bookings.

The impact of year-to-date deferrals under the new revenue recognition accounting contributed to the growth in deferred revenues, as did another strong close to the quarter. We continue to be encouraged by these trends and the favorable implications they have on our near-term revenue growth.

Year-to-date cash flows from operations were $58.1 million through September 30, 2011, an increase of 23.2% versus the same period of 2010 driven primarily by the strength of year-over-year bookings growth. Through September 30, we have also spent $7.6 million on capital expenditures, paid $4.2 million related to the Iconoculture earnout and holdback and spent $5.8 million on acquisitions.

Please turn to Slide 6 for a review of our capital allocation priorities and an update on related activities during the quarter. As we have previously discussed, we constructed an economic model focused on renewable, scalable and profitable business opportunities, and we typically generate free cash flow in excess of net income. We have also said that our priorities for allocating capital include maintaining a solid financial position and preserving flexibility for strategic investments. And we seek to return cash to shareholders through regular dividends, which highlight the earnings potential of our business model, and by opportunistically repurchasing our shares to offset the historical and future dilution created by our employee equity compensation programs.

In the third quarter, we executed against all of these priorities. We ended the period in a solid liquidity position with $107.6 million of cash, cash equivalents and marketable securities. We used $5 million to fund the acquisition of Baumgartner & Partner, which Tom will say more about shortly.

For the year-to-date, we have made regular dividend payments totaling $15.4 million. Finally, during the quarter, we opportunistically purchased $40.3 million of our stock in open market purchases, and as of September 30, we had approximately $28.1 million of stock repurchase authorization remaining.

Next, I'll discuss our outlook. The following comments are intended to fall into 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 7.

As we have discussed throughout the year, 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 have made additional investments in new products and market extension to further enhance organic growth.

With one quarter remaining in 2011, we have greater clarity on potential full year outcomes and are tightening our guidance ranges accordingly. We remain on track to deliver within the outlook range we have indicated throughout the year for revenues and non-GAAP diluted earnings per share and we continue to pace to the midpoint of this revised guidance.

Based on our year-to-date outcomes, the influence of revenue recognition deferrals and the impact of some temporary items, including acquisition costs related to Baumgartner & Partner, we now expect slightly lower margins for the year.

Our Contract Value and deferred revenue balances point to continued growth in quarterly revenues. Where we land the full year will be a function of both fourth quarter bookings performance and the degree to which we recognize revenue in the year that has been deferred under the new accounting guidelines.

In the fourth quarter, we also expect a small sequential increase in total quarterly operating expenses on a normalized basis, that is, after adjusting the third quarter run rate for the compensation expense benefit realized on the change in the fair value of deferred compensation plan assets due to both seasonal selling factors and the addition of some expenses related to Baumgartner.

Accordingly, in the fourth quarter, we again expect sequential improvements in quarterly revenues, adjusted EBITDA margin and non-GAAP diluted earnings per share.

Our updated 2011 outlook is therefore as follows: Annual revenues ranging from $485 million to $495 million; adjusted EBITDA margin of between 21.5% and 22.5%; non-GAAP diluted earnings per share of $1.50 to $1.60; depreciation and amortization of $17 million to $18 million; and capital expenditures of approximately $11 million.

Finally, a word about 2012. As always, we'll have much better visibility into next year once we tally our fourth quarter bookings. However, given the positive bookings growth we've generated so far this year and assuming additional progress in Q4, we expect that we'll see continued top line growth consistent with the long-term revenue guidance we shared with you at our Investor Day in March.

We also anticipate that this additional revenue will position us not only to pursue additional growth opportunities but also to seek modest improvements in our margin profile in 2012 and across the coming years.

We look forward to sharing a more detailed perspective with you on our full year earnings call in February.

That's it for the financial summary. Please turn to Slide 8. And I'll turn the call over to Tom.

Thomas L. Monahan

Thank you, Rich. Good morning. As Rich shared, we are pleased that our year is shaping up as expected and that we remain on track to deliver our commitments for 2011.

Let me start with a look at what we are seeing and hearing from our members. As you know, we have a pretty unique perch. We now support more than 5,500 companies headquartered in more than 50 countries. We work closely with them across a range of their operating priorities, and in particular, we help them size budgets and prioritize investments as they set themselves up for 2012.

We're not all macroeconomic forecasters, but this breadth of outlook does give us unique insight into how corporate leaders are thinking about the economy and their own budgets. And on balance, they still have a very conservative outlook, with a little more than 1/3 of executives globally expecting meaningful hiring or CapEx growth across the next 12 months.

While they're cautious, they're also purposeful. The largest companies generally expect to generate low single-digit growth in the developed world and free up capital to invest in faster-growing emerging markets. It's an environment that rewards clear prioritization, sharp execution and consistent productivity gains.

We think that we are well-positioned to support members in this environment. They face a welter of challenges that create demand for our data, insight, tools and advice. Most of their needs for help cluster against 3 major challengers where we bring unique capabilities to bear: driving productivity by attracting developing and managing great talent globally, creating growth through innovations and sales, marketing and technology; and protecting the company for reputational and financial loss through strong finance and risk processes and ethical cultures.

By using our rich data insights and tools on these topics, we continue to push on the 3 levers to grow the business that we captured on Slide 8.

First, we grow relationships with existing customers. With more than 5,500 companies in our global network, this represents our largest and most scalable growth opportunity as we work to connect more of our resources to customer decisions and workflows.

Second, we add new customers. More than 15,000 companies across the globe have yet to initiate a relationship with CEB, including expansive opportunity with mid-sized companies. We make targeted investments to bring more of these companies to CEB for the first time.

Third, we add new products and services. We invest and develop products that will become platforms of future growth and that strengthen relationships with customers in our key buying centers.

We move these levers to focus on our 4 core priorities, which I've updated you on across 2011. You can see them captured on Slide 9.

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.

We made solid progress in each during the first 9 months of this year, so let me once again share highlights as we prepare for a strong close to 2011 and a strong start to 2012. Please turn to Slide 10 where I'll discuss our first priority: creating uniquely valuable insights into corporate performance.

As a reminder, our objective is to create must-have research and content that ties to important member decisions, engages members and accelerates growth. We believe that great content built from deep research, powerful data and unique analysis powers all of our businesses. Our teams have produced outstanding work in 2011 across our practice areas, and I've been pleased to share highlights on previous calls.

One common theme of these highlights from building talent strategies in China to extracting economic value, from management to the integrity and ethics, is that our most powerful content also often comes from multiyear efforts to build rich data and unique best practices geared to the most important issues on members' desks. These assets represent both platforms for member engagement and a strong competitive barrier.

As you know, we have outstanding resources to help companies optimize the performance of their sales forces. Sales force performance blends our historical strengths in understanding the levers of managing human capital and in understanding the needs and interests of changing customer basis. Attendees at our Investor Day in March will recall that we shared some findings from our work, asserting that sales reps who teach customers are far more likely to be successful than traditional relationship builders. This insight, and all the implications underneath it, were built from a rich set of data on the drivers of customer loyalty, drivers of sales rep productivity and drivers of sales rep effectiveness.

Great content assets like the Challenger Rep profile provide multiyear benefit for our business. In addition to strong member engagement in our core programs, we can build platforms for new products. For example, we've used this data to create an offering in beta that helps member companies identify, create and evaluate what we call Challenger talent.

Of course, great content also helps us build our brand with executives around the world. This happens both through the impact we make with members and with targeted marketing and PR strategies. This month, we are publishing a new book through Penguin's portfolio imprint, entitled The Challenger Sale, featuring insights from the Challenger Work. Reaction from the executive committee has already been strong. As a blog series on HBR's website, it was the most read and discussed story this month.

Please turn to Slide 11 where I'll talk about our second priority: driving member loyalty, growth and brand strength through high-value engagement. Our objective is to leverage effective support of our customers to grow our business through renewals, pricing power and the sale of additional products and services. In the customer -- sorry, in the quarter, we continue to achieve success in translating that support into expanding relationships with our customers. Wallet retention was once again at the high end of our historical range at 102% compared to 96% in Q3 of 2010, Contract Value per institution also rose over last year even as we added nearly 400 new customers across the past 12 months. We're certainly pleased with this solid outcome.

That strong new member institution growth is also a signal of our progress in selectively adding new sales capacity in both the large corporate and middle markets. We successfully hired and on-boarded high-caliber talent in the first half of the year, and I'm pleased that we're seeing returns on that investment as the teams are now up to speed in the market.

We also remain focused on leveraging member impact to grow awareness of the CEB brand. Beyond the thousands of pure networking events that we host for small groups of members, we also stage a few large-scale events that allow us to engage hundreds of members and potential customers at one time. This quarter, for example, we hosted our 2011 Finance and Strategy Summits with sessions in Washington, D.C. and London. Titled The Agile Enterprise, the event combined CEB insight with leading external perspectives and focused on helping executives increase the agility of their enterprise to take advantage of economic uncertainty. More than 500 senior finance and strategy executives gathered for this very timely discussion, providing an excellent platform to showcase our work on a variety of critical topics. Sessions explored issues such as how to build a customer-centric corporate center, managing risk by evaluating corporate culture and establishing long-term market relevance in emerging markets.

Please turn to Slide 12 where I'll discuss our third priority: investing globally in key markets.

Our objective is to accelerate new customer acquisition and growth of existing customers through select market-level investment. We have a rich opportunity here to drive growth and strengthen our competitive barriers by achieving higher levels of penetration in our key markets. This does require investment to lay an in-market foundation and we've been successful across the last 9 months in putting resources to work in London, Frankfurt, Singapore and Sydney to drive growth.

As Rich mentioned, we're obviously pleased to see such strong growth in the EMEA region and continued success in Asia Pacific. As you'll recall, our EMEA region was the last to go through our channel overhaul, finishing up in Q2 2010. As we discussed on prior calls, we were carefully monitoring our European team's productivity ramp to make sure it matched our experience in North America, and we saw their gains continue in this quarter.

One accelerant to these efforts is our acquisition of Baumgartner & Partner, a leading German provider of HR and finance data and benchmarking services as well as HR advisory services, which I'll discuss in more detail later in my remarks. Beyond the great asset and people, it strengthens our presence in a key market. Germany remains one of Europe's largest and healthiest economies, is a strong consumer professional advice and a historically underpenetrated market for CEB. We have invested in 2011 to tap the opportunity of the market as we open an office in Frankfurt, built a German commercial and support team and began cultivating local data and insight. With the addition of Baumgartner, we further accelerated these targeted efforts and grew our foothold with Germany's largest companies. It's now comparable with our foothold with other large markets globally.

Please turn to Slide 13 where I'll discuss our fourth priority: leveraging technology and service to deliver innovative products. As a reminder, our objective is to create and grow revenue streams by linking research and content and new customer decisions and workflows. Last quarter, I highlighted several examples of how we innovate in some of our most established products to drive customer engagement and, ultimately, pricing power. At the same time, we continue to invest in the creation of new-to-world products and services.

Earlier this year, I announced the launch of the Finance Leadership Academy. As a reminder, leadership academies offer a standardized set of modules, which companies use to develop the leadership, business, analytic and managerial skills of high-potential employees. The Leadership Academy's platform has shown particular strength across the past year, and we have been working to extend and deepen the platform into our key functional areas. The Leadership Academy's platform is a great example of 2 priorities we have for new product development.

First, it's a wonderful example of how we co-create new product with our existing member network. The curricula for these sessions are developed by working with members CXOs to identify skill gaps in their emerging leaders. They then designate high-potential future executives to participate.

Second, leadership academies not only target a real member paying point but ensure that we develop relationships with the emerging generations of talent in our core functions and that this talent uses CEB data, tools and best practices to do their jobs. Today, more than 7,000 rising executives in our target HR, finance, legal and now IT functions across more than 1,000 companies have participated in our programs, creating a deep and growing base of users and future customers.

This quarter, I'm pleased to announce the launch of the IT Business Leadership Academy. Similar to our other offerings, the IT Business Leadership Academy gives the next generation of IT leadership the skills and tools they need to engage business lines as a more strategic partner.

Focused on developing skills identified as most important to line leaders and CIOs, the program has driven ROI for companies as diverse as Target, Coca-Cola, Juniper, Novartis and Bristol-Myers Squibb to improve project selection and cross-functional project delivery.

The offering draws out our depth in the IT space, but it also leverages our unique cross-functional perspective, giving rising IT leaders insight into what finance or procurement or sales executives care most about. And it also leverages our historical strength and data on leadership development strategies.

A recent IT business partner credits the presentation, communication and stakeholder skills she learned in the academy with accelerating and mission-critical initiative. Another said, "I highly recommend this course for aspiring senior IT leaders in the business-facing world." We're thrilled to hear great feedback.

And as I mentioned before, we were delighted to announce the acquisition of Baumgartner & Partner at the very end of the quarter. While we expect the bulk of our growth to come from organic efforts, we do keep our eyes open for assets to bring unique capabilities to our firm, which we in turn can bring to our broader member base. Baumgartner is a great example of how we think about what assets we choose to acquire.

First, the team has developed uniquely valuable data in IP that is highly relevant to our core customers. They have a series of proprietary benchmarking methods and rich data sets that analyze and support HR performance along with key finance benchmarks. This deepens our view of these processes and, in turn, globalizes our data assets.

Second, they have recurring relationships with top companies. Their proprietary benchmarking methodologies have attracted many members of the DAX 30 including Bayer AG, Daimler AG and ThyssenKurp.

Third, the talented Baumgartner team shares our passion for working collaboratively to create member impact through uniquely valuable data and insight. We're delighted to welcome them to the firm.

In the near term, the financial impact will be modest. The business currently generates about $5 million in revenue at historical margins in the high teens just beneath CEB's historical standards. Given the historical relationships and contracts, the business will not immediately appear in Contract Value but will flow in as these relationships are renewed and expanded. And unlike much of our business, Q4 is a historically light quarter for them so the immediate impact will be modest.

Let me close with a note about our people. I'm very pleased with our efforts to attract, retain and develop great talent in all parts of our business. We've added great new talents in the first half of the year, and they joined an engaged, seasoned team in bringing energy to executing our strategy and hitting our goals for this year and beyond. I look forward to moving our business forward together.

To summarize our outlook as we enter the final weeks of the year, we are pleased that our year is shaping up as expected and that we remain on track to deliver our commitments for 2011. And of course, we are looking forward to making a solid start to 2012.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

I guess the first question, on the Wallet retention metric, and I'll explain to you how I'm thinking about this and tell me if this is right or if this is wrong, but the 102%, does this -- if you're getting 3% to 5% pricing on renewal business, does 102% mean that volumes in the existing customers is actually down 1% to 2% year-over-year? Or what's wrong with thinking about it that way?

Richard S. Lindahl

Gary, it's Rich. I think the -- as we've talked about before how the 3% to 5% pricing increase, when you match that up against program renewal rate, it actually gets diluted to a number that's below that. So that's certainly -- price increase is certainly helping us. We're also getting contribution from sustained program renewal rates and also cross-sell activity. But net-net overall, we're growing the amount of business we're doing with customers on a -- at that 102% rate.

Thomas L. Monahan

Gary, for your math to be true, every customer would have to renew every product and then layering price increase on top of that. And even in our very best moments, every customer doesn't renew every single product. There are certain customers who don't renew and there are customers who renew a healthy bunch of products and pick and choose and take some new ones and may let an old one slide off. So the price increase gets netted out in all of that.

Gary E. Bisbee - Barclays Capital, Research Division

Yes, okay. That makes sense. And should we be concerned that its been sliding modestly the last couple of quarters? Or is this within the sort of normal range of expectations that hit the revenue growth targets over the long term you've laid out?

Richard S. Lindahl

Yes, no, I mean, we're certainly not concerned. I think, as you know, this is a relatively new metric for us and I think there's an element of seasoning going on in terms of our understanding how it's going to trend over time in the new commercial model. I would say we're very pleased with 102%. It certainly is at the higher end of historical experience. And as we said, it reflects well on our ability to expand institutional relationships. I wouldn't read too much into the sequential trends right now.

Gary E. Bisbee - Barclays Capital, Research Division

Okay, all right. And then I guess the last question on the commentary around 2012, and I realize it's early there, but the -- how should we think about the places that you're likely to invest and the level of investment or growth in costs over the next few years? Is it -- are there any major new areas you're thinking of investing? Any sense of what we should expect? I guess what I'm getting at is, it sounded like the comment that there would be more -- modest margin gains, might be sort of a leading comment to get all of us to take a look at our numbers and see if maybe we're being a little aggressive there. But just any comment on how we should think about cost trends over the medium term.

Richard S. Lindahl

Sure. I mean, I think, first of all, I'd say we certainly feel like we've gotten positive reinforcement in terms of the returns that we're getting on the investments that we've made this year. And we still see opportunities to drive additional growth both by improving the customer experience and getting additional business out of existing customers as well as further penetrating the very attractive opportunity of the universe of customers who haven't bought from us yet and also developing new products and services. So I would expect that we'll identify and pursue investments similar to what we've done this year. I would say we do see, at the same time, given the increased scale, an opportunity to balance some of that reinvestment with some modest margin improvement. But I think we still are committed to driving revenue growth as the primary goal of improving shareholder value over time.

Operator

And from Stifel, Nicolaus, we'll go next to Shlomo Rosenbaum.

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

Rich, you talked about ending the fourth quarter with a lot of strength in your bookings. I was just wondering -- you don't usually talk about inter-quarter trends. I was wondering, just given a lot of the market volatility, whether you could comment at all on whether you saw that continue into the fourth quarter.

Richard S. Lindahl

Yes. I think what I -- what we're saying there is we certainly feel good about how we left the third quarter. It's kept us on pace and on trajectory to execute against our plan for the year. And as a result, that sets us up well, assuming we follow through it on that for 2012. Obviously, Q4 is still very much in front of us, but we feel like we're heading in the right direction there.

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

Okay. And then the increase -- the sequential increase in Contract Value per member, it's just interesting because of -- I would expect the middle market sales would drive this metric down. And can you kind of drill down a little bit to us and explain how, if you're getting faster growth theoretically in middle market, which are lower price points with newer clients, how is this number going up?

Richard S. Lindahl

Yes. It's -- I think what you're seeing is that we're seeing certainly still good growth in middle market. We are also seeing higher Contract Value per institution in both the large corporate space as well as in middle market space as we're executing against not only price increase opportunities but also selling more of what we offer to existing customers.

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

So are you basically just increasing the cross-sell effectiveness on the lower -- large corporate and that's just overshadowing what's going on in the middle market?

Richard S. Lindahl

I wouldn't say.

[Audio Gap]

Richard S. Lindahl

Let's they're both improving, so that's helping.

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

Okay. And then in terms of the bookings growth, it looked like it was particularly strong. Can you talk about how much of the bookings came from existing clients versus new clients? I know you're using like a Wallet retention metric, but is it kind of 60-40 from existing versus new? Is there some kind of thoughts you can share with us on that?

Richard S. Lindahl

I think the Wallet retention is the best way to look at kind of year-over-year growth in business from existing customers, and obviously, the differential would be the contribution from new customers. I think what you're seeing is we have seen, at this point in the cycle, continuing improvement in our ability to attract new customers. And you're seeing some of that come through the bookings as well.

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

Okay. And then in terms of the revenue recognition policies, how much of the change in the accounting policies, how much did that impact the deferred revenue in the quarter, I guess, on a year-over-year basis? I usually calculate my bookings based on that. I want to know how much the accounting rule change impacts that.

Richard S. Lindahl

Sure. We said earlier in the call, on a year-to-date basis, we've delayed recognition of about $6.1 million of revenue and so that certainly has contributed to the growth in deferred revenues. If you want to kind of compare Contract Value growth to deferred revenue growth, you've got the difference there, about 1/2 of it would be explained -- roughly 1/2, by this revenue recognition impact, and the other 1/2 is relative to the strong close we had in bookings on the quarter.

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

Okay, all right. And then in terms of the guidance getting lowered between EBITDA and EPS, can you comment to how much of that was from some of the non-operational items versus lowered expectations?

Richard S. Lindahl

Yes. I wouldn't say we have lowered expectations. I mean, I think we still are very much tracking along the path that we were tracking to when we left the -- when we talked about the third quarter and fourth quarter on the last call. We've got -- certainly, with one -- with only one quarter to go, we've got better visibility on the range of possible outcomes, which certainly influences our view. The main factors that are changing the revenue margin guidance are updated expectations about the impact of deferred revenue, the timing there, which I'll remind you, we will recapture all of those deferrals next year, so it's really a timing issue; there is an impact from the Baumgartner acquisition in terms of the transaction costs; and there's an impact on where we are year-to-date on the foreign currency translation costs as well, as well as just kind of updating our view for the rest of the year based on year-to-date progress. So on balance, we're very much on track on the same trajectory, but we're just refining our guidance to reflect what we know at this stage to expect through the rest of the year.

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

So just to ask the question in a different way: The midpoint of the guidance is down a bit on EPS, right, by, like, $0.02 to $0.025. Is the bulk of that due to the items that you specified?

Richard S. Lindahl

Yes.

Operator

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

Paul Ginocchio - Deutsche Bank AG, Research Division

Just on Contract Value and bookings. Is there anyway that -- could you say there's nothing in from Baumgartner in this quarter, so it's a clean number organic?

Richard S. Lindahl

Yes, it is an organic number. We closed the Baumgartner transaction on September 30 so we have not incorporated any financial results in the quarter from Baumgartner. Oh, let me just clarify: We -- the purchase accounting is on the balance sheet, so you see the asset on the balance sheet, but there's no income statement impact or in Contract Value.

Paul Ginocchio - Deutsche Bank AG, Research Division

Great. And then on just -- could you give us where you ended the quarter on basic shares outstanding?

Richard S. Lindahl

Well, our weighted average shares were 34,381 on a diluted basis.

Paul Ginocchio - Deutsche Bank AG, Research Division

I was just thank trying to -- when you -- did you purchase quarters early in the quarter or late in the quarter?

Richard S. Lindahl

When you see the -- when the Q comes out when we file it, you'll see that our purchase activity was pretty evenly split between August and September.

Operator

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

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

Yes, just I wanted to follow up on some of these questions about margins and your comments for 2012. I guess, if you can just help me kind of think about, as I think to 2012, you'll get the reversal of some of these accounting issues that have depressed margins a little this year. You'll get hopefully some leverage on the investments and you won't have these acquisition costs, so to have only, I guess -- I know we can cut hairs on what you mean by modest margin expansion, but it sounds like you expect to be pretty aggressive again next year with investing. Is that just giving yourselves room for that? Or are there specific things you've already identified for next year, I guess? If you can just kind of respond to that.

Thomas L. Monahan

Tim, I think -- as you know, our margin, overall margin is actually a mix of 2 things. As we grow the subscription businesses, we see healthy margin growth because we get leverage from this fixed cost we have at the center of a lot of our -- all of our businesses. It isn't infinite, of course, because we had variable servicing and advisory expenses, those memberships grow, but it's above the firm average. That's offset by selective investments, which we choose to make to accelerate both short- and long-term growth. Those tend to come in 2 basic flavors. One is opening up new markets. We're getting deeper into important markets for us like middle market or country-level markets or putting new products and services into the market as those take a couple of years to reach CEB margins. It's worth remembering, we do see -- there's nothing that's changed about the first dynamic. So the first dynamic creates a pool of operating expense that we can then balance 2 objectives with: One is to keep putting investments to work; and secondly is to make sure we're delivering returns back to shareholders. I don't think there's anything different we've got planned for next year. It is worth remembering that some of the investments we have in place this year, let's say, some of our regional level investments, are still ramping to full productivity. They're certainly more economic than they were last quarter and they'll -- we'll keep ramping them to full productivity. But there's a scale curve that doesn't immediately reverse itself on Jan 1. And I think that's the reason we are using the term modest, in that we're seeing good returns from those investments, we don't want to shut them off. And there may be selective small ones, we want to place in addition to them. But that's just normal ramping of costs that, over time, will look fixed but right now are probably a little subscale in a couple of markets.

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

Okay. And then you talked about Europe performing better partly because of the sales model and partly because some of the investments. Can you talk to maybe across Europe, are there any particular countries or investments in areas that are performing better than others right now? Or is it fairly evenly?

Thomas L. Monahan

Yes. Less news than you'd expect. As you know, we're a bunch of washed-out ex-management consultants so we analyze every number a hundred ways to Sunday. But the performance was -- even across regions, even across industry sectors, et cetera, you'd expect, some of the places we've put resources to work are showing good growth, which is nice. But overall, it was a very solid, consistent performance by the team on the ground there. And as I said, we've been watching them ramp their productivity across the past year. We've kept you all up to date as to whether they were tracking with the North American experience, not -- they've stayed right in line. And they delivered a great quarter along the lines of what we thought that they could do when we went through the transition.

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

Were there any areas in bookings that were underperforming relative to what you had hoped for?

Thomas L. Monahan

We've talked about the government sector being more challenged than other sectors. So that was -- that's been the one consistent across this year. It's -- given the external environment, it's performing pretty well, but it's certainly not at the firm level growth rate. The good news is it's small for us. Over the long term, we do see the potential to grow there. And we do think the shifts in public dialogue toward productivity and accountability are ones that blow in our favor. So long term, we think this will become a better rather than worse CEB market. But in the near term, the team there is fighting some uphill battles budget-wise.

Operator

And we'll go next to David Ridley-Lane with Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Sure. I know you've moved away from the sales team metrics, but just roughly, do you have any indication you could give us on what sales headcount was up for the -- from the prior year?

Richard S. Lindahl

I think the -- if you look at our member relations and marketing as a percentage of revenue, that gives you -- that change will give you a good proxy for how the sales organization has grown over the course of the year.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay, all right. And then you've been in a period of over-investing in sales and marketing: Is 2012 a year of leverage? Or does is kind of continue on in '12?

Richard S. Lindahl

Again, we'll lay out more specifically our investment plans for 2012 once we get to February. But certainly, we hope to see continued product -- progress and productivity improvement on the investments we have made. I think that we also are likely to see opportunities to extend further to take advantage of other untapped opportunities and potential out there. But beyond that, we don't have any more specific details to share at this stage.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And just ballpark, what was the onetime transaction cost from M&A in the quarter?

Richard S. Lindahl

It was about $800,000, so it was a little more than $0.01, maybe almost $0.015.

Operator

And with Morgan Stanley, our next question comes from Suzi Stein.

Suzanne E. Stein - Morgan Stanley, Research Division

I'm just curious, is the acquisition of Baumgartner something you can leverage into other European countries? Or is this Germany-specific?

Thomas L. Monahan

Suzy, as we look at this, I laid out the 3 things we think we'd get, and I would put uniquely valuable data and IP at the top of that list. So yes, we do think there's an opportunity to leverage this more broadly. They've got great assets and a great team. Those are the great customers, which happens to be German-centric, which isn't a bad thing either. But as you know, we've put a huge premium on the quality of the team and the quality of the intellectual property, and we think we've got both here.

Suzanne E. Stein - Morgan Stanley, Research Division

Okay. And just related to this, where are you focusing your M&A strategy? Should be expect it to be more international going forward?

Thomas L. Monahan

No, I would not say that. Our M&A strategy hasn't changed at all. We see it as a subset, as a -- of our core growth strategy. Our job is to, first and foremost, grow the core organically and make sure that we're doing a great job on cross-sells, new sales and really penetrating our existing product set into our core domains. Beyond that, as we think about new products, we do look within those 5 domains, looking for uncovered needs or places we can support a recurring member decision. And as we go down the process of meeting that member need, we do take a look outside to say, "Hey, is there an asset that's already been developed or a team that's been working on this for a while and built a marquee customer group?" More often than not, the answer is no, and we have to go build it ourselves. But we see it very much as a subset of our new product development effort, and I think Baumgartner illustrates how we think about M&A within the context of our business strategy. So no, it's not necessarily an international focus. It's very much a decisions within our core domain product development strategy.

Suzanne E. Stein - Morgan Stanley, Research Division

And then just one more. You addressed your capital deployment strategy, but I guess it wasn't totally clear on how you're thinking about stock repurchases going forward.

Richard S. Lindahl

Yes, well, I mean, I think the way we're thinking about it is, as we've articulated, we view it primarily as a tool for offsetting dilution from employee stock compensation programs, both historical and prospectively. And we feel good about the purchases that we've made opportunistically in the third quarter. And we'll continue to keep the doors open for more opportunistic purchases up to the $28 million that we have available right now.

Operator

And with Robert W. Baird, our next question comes from Dan Leben.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

First, can you talk a little bit more about Baumgartner's both the scale of the business as well as the margin profile before the acquisition?

Thomas L. Monahan

Sure. At the top line, I think, as I said, what we're excited about here is the great intellectual property, the strong recurring customer list in a key market and a great team. In the near term, the financial impact will be modest. I think the revenue number is going to be about $5 million. Their margins -- they have a little bit more variable delivery costs, so their margins are going to be lower than our historical average, think high teens. And they won't show up in Contract Value because of the historical structure of the contracts. As we renew and expand those contracts, you'll see it start to flow into Contract Value. So it will be a relatively small impact for us in the near term, but over the long term, we see huge potential to grow with this team and this asset.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then with the Wallet retention at 102%, 12% growth in Contract Value, that other 10% of growth presumably from new customers, but only a 7% growth of the number. Is that indicative of your ability to sign kind of more -- both larger customers as well was getting initial commitments that are much larger than you've seen in the past?

Richard S. Lindahl

We're certainly pleased with the progress we're making there. We are seeing aggregate sign-up slightly ahead of historical averages.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then last one, can you talk a little bit about program-level renewal rate? You talked about how that impacted Wallet retention. Just want to get a better sense of the magnitude of where that number is. Is it in the low- to mid-90s? Is that the right way to think about it?

Thomas L. Monahan

No. Dan, as you know, we don't disclose program-level renewal rates. But even if you go way back when we did, it was always beneath institutional-level renewal rate, which was high 80s, low 90s, so assume the program number is lower than that but not tremendously lower. It's in a good zone, historically. And with the strength our teams are showing at gathering price increases and executing out the cross-sell plan, all of that combines to bring some nice Wallet retention number.

Operator

And for our final question, we'll take a follow-up from Shlomo Rosenbaum.

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

Can you talk about the sequential decline in cost to goods sold? I mean, the sublease of real estate doesn't explain that much of it. And if you can just talk about what else would be in there.

Richard S. Lindahl

Yes. Shlomo, the -- as I kind of referenced in my script, the accounting on -- when you have the -- a fair value change in the deferred compensation plan assets, it impacts the operating expense lines, and then there's an offsetting entry in the other income or expense line. So the magnitude was about $1.9 million total across all 3 and that actually benefited those operating expenses in the quarter. So some of that reduction you're seeing is due to that, as well as there's some impact from the delayed sublease as well.

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

Okay. How much of your international revenue is denominated in local currencies versus dollars? I was under the impression that most of the revenue is in dollars.

Richard S. Lindahl

Yes, I mean, substantially, all of it is in U.S. dollars. That really is a gain-loss translation on the monetary -- net monetary assets from our foreign subsidiaries.

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

So it's the change in value of the cash balances?

Richard S. Lindahl

Yes, predominantly. And most of it is related to the exchange rate of the pound to the U.S. dollar.

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

Okay. And then what tax rate should we assume for the fourth quarter?

Richard S. Lindahl

I think you'll see our year-to-date, we're at about 40% and that's our best estimate right now as to where we'll end the year. That number will fluctuate based on various things, including where we end up on unrealized foreign currency gains and losses.

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

Okay. And then the last question I've got is in terms of the growth in bookings in the quarter. Were there any particular programs that kind of stood out in the quarter? Or is it any -- were there any newer programs that seem to gain more traction that drove it? Or is it just kind of execution in the basket of programs that you guys have been working with for a while?

Thomas L. Monahan

Yes. Overwhelmingly, it was just solid execution across the products. There didn't seem to be much of a -- this program was hot, this program was cold store, I think, across the board. Teams are getting out and doing a great job of bringing our assets to bear on member problems, and lord knows our members have problems right now. So in this environment, we're finding we can find immediate needs to connect to. I did say we that launched 2 leadership academies this year. That feels like we're having a good solid performance there, but the bulk really came from the continued solid execution against the core resource portfolio.

Operator

And ladies and gentlemen, that does conclude today's question-and-answer session. Mr. Monahan, I'll turn the call back to you for any additional or closing remarks.

Thomas L. Monahan

Okay. Rich and I would like to thank everyone for calling and/or logging in this morning to allow us to continue to brief you on our progress on our core priorities. We'll be out on the road a bit across the remainder of the quarter. We're at the SunTrust Robinson Humphrey Unconference in New York. And in December, we're at the William Blair Global Services Growth Stock Conference in Scottsdale and the UBS Global Media and Communications Conference in New York. And I know we also have some folks coming to visit in some days out in the road. So we look forward to keeping everyone up-to-date on the EXPD story across the Q4 period and beyond. Thanks very much.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your presentation.

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