Corporate Executive Board's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb. 8.12 | About: CEB Inc. (CEB)

Corporate Executive Board (EXBD) Q4 2011 Earnings Call February 8, 2012 9:00 AM ET

Executives

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

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

David Ridley-Lane - BofA Merrill Lynch, Research Division

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

Toni Kaplan - Morgan Stanley, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

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

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

Operator

Good morning and welcome to the Corporate Executive Board's Fourth Quarter 2011 Conference Call. Today's call is being recorded and will be available for replay beginning today and through February 16 by dialing (719) 457-0820. The confirmation code for the replay is 7053334. The replay will also be available beginning later today and through February 16 at the company's website and at www.earnings.com.

To the extent any non-GAAP financial measure is 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 following the link on the fourth quarter earnings conference call. Please review the second page of these materials, which includes important information about any forward-looking information included in the presentation.

This conference call may 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 2012 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, the 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 fourth quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, for opening remarks, I'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, and good morning, everyone. I'm Rich Lindahl, Chief Financial Officer of the Corporate Executive Board. Thank you for calling or logging into our fourth quarter 2011 earnings call. Here's a quick overview of our time together this morning. I'll start with a summary of highlights from the quarter and discuss our financial outlook for 2012. Then Tom Monahan, our Chief Executive Officer, will provide an update on our key strategic priorities and give some insight on our just completed acquisition of Valtera Corporation. Then we will take your questions.

Please turn to Slide 3 of our presentation, which serves as a roadmap for our conversation this morning. Overall, we were pleased with our results and the solid performance by the team against a backdrop of mixed market conditions. As expected, we saw healthy top line growth drive improved operating leverage off of a stable cost base. We delivered on our guidance and exited the year with an improved platform of continuing operations. We maintained our strong financial profile and are well set-up to sustain our growth and progress in the year ahead. Our efforts remain guided by a focus on our 4 key priorities. And finally, we are excited by the opportunity presented by combining forces with the outstanding people, data and technology of Valtera.

Please turn to Slide 4 for a discussion of our key growth drivers. We continued to improve the top line and experienced double-digit organic gains for the year in total bookings, Contract Value and revenues. On a regional basis, we saw our 3 main geographies all converge toward similar annual growth rates. North America finished the year strong, while EMEA was not immune to the macro background noise and achieved a growth rate a bit lower than the overall corporate average. Asia Pacific put up solid numbers on the year, with annual growth slightly ahead of firm average.

On an industry basis, the business largely extended the trend lines discussed on our last earnings call with no real outliers. Our financial services customers continue to grow overall spend in line with other sectors, and they still represent about 20% of our business. The only sector with a different growth trajectory remains our government business, which continues to face the challenge of constrained federal budgets. As a reminder, while we still see a large, unpenetrated opportunity in government, that part of our business represents less than 5% of our revenues. The year-over-year trends and other growth indicators reflect our seasonal emphasis on new business.

On the left side of the page, you can see we held Wallet retention essentially flat at 100% versus the prior year. 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 driving institutional relationships through effective retention, cross-sell and price improvement efforts. Keeping this metric in the high 90s to low 100s provides a stable platform upon which to drive growth with new business.

In the center of the page, we show that we expanded our customer base by 9% over the prior year as total member institutions increased from 5,271 to 5,738. This improvement reflects our success at reengaging former members, establishing new relationships with large domestic and international companies and further penetrating the middle market opportunity. The net result of all these efforts can be seen in the right-hand side of the page, which shows that Contract Value per member institution grew by approximately 3% from $84,800 in the fourth quarter 2010 to $87,000 in the fourth quarter of 2011.

Please turn to Slide 5, and I'll take a brief detour to ensure there's no confusion on how to compare our 2011 results to our most recent 2011 outlook. As previously announced, we sold our Toolbox.com subsidiary at the end of 2011, and accordingly now show its results as discontinued operations. While this change in presentation reduces our revenues, it also highlights the more favorable profitability of our continuing operations. On Pages 9 and 10 of our earnings press release, we provided schedules that outline these impacts. And on this Slide 5 of our presentation, we show how the key elements of our 2011 guidance compare to our results on a pro forma basis, including Toolbox. As you can see from the slide, for the full year, our pro forma revenues finished right at the midpoint of our guidance, while pro forma adjusted EBITDA margin and pro forma non-GAAP diluted earnings per share both landed at the high end of our ranges.

Please turn to Slide 6 for an overview of our financial results. As just discussed, these outcomes were consistent with our expectations and reflect both our improved continuing operations portfolio and the seasonal impacts on bookings and cash flows that we typically see in the fourth quarter. At December 31, 2011, Contract Value was $499.4 million, which is an increase of 11.7% from December 31, 2010. As we have previously discussed, the fourth quarter typically represents over 30% of our annual bookings and is also the largest quarter for new business. With the healthy new institution growth I discussed a few minutes ago, you can see that seasonality again this year.

Revenues were $132 million in the fourth quarter of 2011, a 14.3% increase compared to $115.5 million in the fourth quarter of 2010. Revenues were $484.7 million for the full year of 2011, which was a 12.1% increase over 2010. Revenue growth was primarily driven by the healthy bookings trends we have just discussed. In addition, as you know, we adopted the FASB's new revenue recognition guidance on January 1, 2011. Through the first 3 quarters of the year, this change resulted in net revenue deferrals of approximately $6.1 million.

As expected, in the fourth quarter, that trend began reversing and we recognized approximately $2.5 million of previously deferred revenue. As a result, we ended the year with about $3.6 million of revenue deferrals under the new guidance. Approximately half of that amount will be recognized in the first quarter. The remaining amount will be recognized throughout 2012, but maybe offset by additional deferrals as the year progresses. Accordingly, the impact on 2012 is not expected to be significant. And so going forward, we do not intend to regularly highlight revenue recognition details.

Moving on to operating expenses. Cost of services in the fourth quarter of 2011 increased by $1.2 million versus the fourth quarter 2010, driven by higher personnel costs and increased meeting expense to support a larger member base. Member relations and marketing expense increased by $0.9 million in the fourth quarter versus the prior year period, as a result of increased sales capacity and travel costs, partially offset by reduced advertising and relatively lower commission costs.

General and administrative costs decreased by $0.7 million in the fourth quarter of 2011 versus the fourth quarter of 2010. This decline was driven by reductions in project-related and other professional services costs, as well as smaller incentive accruals. Other expense was $0.5 million in the fourth quarter of 2011 compared to $1.3 million in the fourth quarter of 2010. The biggest driver of the year-over-year change is a $0.5 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 fourth quarter of 2011 was 29.3% versus 20.7% in the fourth quarter of 2010. As we have previously discussed, we deployed operating investments earlier in the year to drive revenue growth, and thus anticipated stronger operating leverage in the fourth quarter. Margins in the fourth quarter were also helped by the $2.5 million of previously deferred revenue recognized in the quarter that I mentioned a few minutes ago. For the full year, adjusted EBITDA margin was 23.2% or about 50 basis points lower than the 23.7% seen in 2010. This decline resulted from our strategy to pursue growth opportunities in 2011 by increasing sales capacity, enhancing our international platform and investing in product development. As a reminder, we do not adjust out stock compensation expense, which was $2 million in the fourth quarter of 2011 when calculating adjusted EBITDA margin.

Depreciation and amortization in the fourth quarter of 2011 was $4.7 million, a decrease of $0.3 million compared to the fourth quarter of 2010, and this reduction is attributed to the completion of depreciation cycles. In the fourth quarter, our effective tax rate was 41.4%. Our effective tax rate for the full year of 2011 for continuing operations came in at 40.4%. Diluted earnings per share for continuing operations in the fourth quarter of 2011 was $0.59 compared to $0.33 in the prior year period. For the full year of 2011, diluted earnings per share for continuing operations was $1.67 as compared to $1.51 in 2010.

Turning to the balance sheet. Membership fees receivable were $154.3 million at December 31, 2011, as compared to $141.3 million at December 31, 2010. Average day sales outstanding were 84 days for the quarter, consistent with historical seasonal ranges and 4 days lower than in the same period last year. Deferred revenues increased seasonally and the current portion was $284.9 million at December 31, 2011. As compared to the prior year, deferred revenues increased by 13.4% due to improved year-over-year bookings. We continue to be encouraged by these trends and the favorable implications they have as a leading indicator of near-term growth. Cash flows from operations were $100.3 million for the full year of 2011, an increase of 17.9% over 2010, driven primarily by year-over-year bookings growth and lower cash taxes.

Please turn to Slide 7, and we'll discuss how we use the favorable cash flow characteristics of our business to support our strategic objectives and maintain a strong financial profile. On the left side of the page, you can see the 18% growth in operating cash flow we just discussed. In the middle, we show how we deployed that cash throughout the year. We started by spending $10 million on capital expenditures and used approximately $10 million to buy Baumgartner and fund the final costs related to the 2010 Iconoculture acquisition.

As you can see, we used the majority of cash generated last year on shareholder distributions, paying out $20 million in regular dividends and allocating $40 million to open market share repurchases. After these uses, we had approximately $20 million left, which raised our balance of cash, cash equivalents and marketable securities to $143.9 million at December 31, 2011. This strong liquidity position sets us up well as we look ahead to 2012. We anticipate payments for Valtera to be $23.5 million before cash balances acquired and subject to other customary working capital adjustments. We also announced today that our board has approved a 17% increase to our quarterly dividend rate, which takes it to $0.175 per share. And we still have $28.1 million remaining under the stock buyback authorization announced in August 2011.

Let me just say a quick word about the buyback. We have stated that our objective here is to opportunistically repurchase shares to offset the historical and future dilution created by our share-based compensation programs. We were able to make great progress against that objective by purchasing shares during the volatile August-September timeframe and feel good about where we stand for now. We will continue to monitor market conditions and act opportunistically as appropriate with our remaining authorization.

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 8. Before I go through the details of our 2012 outlook, I'll just say a bit about Valtera's likely influence. Tom will provide more color on how the acquisition enhances our strategic positioning and asset value, and we are excited about the opportunity Valtera brings to the CEB portfolio.

In terms of economics, the business currently generates annual bookings at a run rate in the area of $15 million. Given the complexity of the data and tools they offer, great client impact often requires more intensive personal service than some our subscription products. And as a result, they have a margin structure that is in the mid- to high single-digit range, which as you know, is below CEB average. We have just closed the transaction and still have work to do to finalize our purchase accounting and typical deferred revenue adjustments. So we're incorporating a fairly wide range of Valtera outcomes into our guidance, including revenues in the area of $10 million to $12 million this year and intangible amortization in the range of $1.5 million to $2 million.

Moving onto the full 2012 outlook, all of which reflects the impact of Valtera. We are anticipating full year revenues of $535 million to $555 million. This range assumes a reasonably stable macroeconomic backdrop and the expectation that we will drive organic revenue growth in the high single- to low double-digit range as we indicated on our last call. We anticipate adjusted EBITDA margin to fall in the range of 23% to 24%.

As discussed in the beginning of the call, our margin structure now benefits from the removal of Toolbox and we expect additional modest scaling as we continue to grow revenues on the existing platform. These benefits will be offset to some degree by the impact of Valtera and continued investments in the sales capacity and product development needed to sustain the multiyear revenue growth profile we are seeking. In 2012, we also anticipate depreciation and amortization to range from $20 million to $22 million; an effective tax rate of 41.5%, not including the effect of foreign currency translation; and capital expenditures of $12 million to $15 million.

In accordance with these revenue and margin ranges, we anticipate 2012 non-GAAP diluted earnings per share of $1.75 to $2. A quick note on adjusted EBITDA and non-GAAP diluted earnings per share. Beginning in 2012, we will be adjusting the definitions of both measures to exclude the impact of acquisition-related charges. In order to provide a cleaner view of ongoing operations, we will remove one-time items that are directly related to acquisitions such as severance, contract termination and transaction costs.

Finally, I'll share a few comments on how to think about quarterly trends this year. The dominant influence will continue to be the seasonal factors which we've previously discussed. That is, about 30% of our bookings typically occur in the first quarter of the year, about 20% in each of the second and third quarters and over 30% in the fourth quarter. Moreover, the first quarter presents the year's largest renewal pool and the fourth quarter has the highest percentage of new business. On the top line, these factors typically cause revenue to trend down from the fourth to the first quarter before resuming sequential growth beginning in the second quarter. We anticipate that incremental resource deployment will again happen mostly in the first half of the year, which is also the time that annual cost increase for salaries and benefits occur.

Accordingly, as was the case in 2011, you should expect that our earnings will be more heavily weighted to the second half of the year in 2012. That's it for the financial summary. Please turn to Slide 9, and I'll turn the call over to Tom.

Thomas L. Monahan

Thanks, Rich. Good morning. As Rich made clear, we are pleased to have delivered another solid quarter of performance that sets us up for continued progress in 2012. Let me start by sharing with what we're hearing from our members about the economic climate in our end markets.

We're privileged to work with 5,700 companies across the world. This unique perch gives us a valuable view into corporate sentiments and budget trends. As you may have seen in the media, we've just released our most recent quarterly Business Barometer, which aggregates and benchmarks spending plans across large enterprises globally. We had more than 2,000 responses from C-level executives around the world, so it is a very broad cross-section of corporate outlooks.

This most recent poll shows that corporate expectations have modestly brightened, but are still tinged by real caution, particularly with regard to hiring. For the first time in a while, the overwhelming majority of companies, roughly 2/3, are expecting top line organic revenue growth. As you'd guess, this number is higher in North America and lower in Europe. This optimism about top line growth is offset by concerns about rising energy and commodity costs, with roughly 60% of companies expecting costs on those 2 fronts to rise.

The combination of low organic growth and core cost pressure is shaping corporate spending plans. CapEx and R&D budgets are edging up, as companies seek to carve out growth through innovation and wise deployment of technology. But they are not yet planning on stepping up hiring levels. Even those companies projecting revenue growth predict at this point modest hiring plans. The picture that emerges from our data is one where companies are pushing hard for continued productivity gains to generate the capital and P&L room for growth investments, and all the while remaining highly sensitive to their ability to manage significant risk events. We think that our resources are particularly valuable in an environment where optimizing returns from talents, driving innovation and managing risk are high corporate priorities.

With this opportunity as a backdrop, we continue to focus on 3 levers for growth in our business, which are captured on Slide 9. First, we grow relationships with existing customers. This is our largest and most scalable growth opportunity over time as we work to connect more of our resources to the more than 5,700 companies in our network. Our continued strong Wallet retention reflects our success in maintaining these relationships.

Second, we add new customers. As Rich described, our teams turned in a very strong performance on this front in 2011. Last year, we added 500 new companies globally. While I'm pleased with that progress, more than 15,000 companies across the globe have yet to initiate a relationship with us. We are concentrating our investments in markets with large opportunity, such as middle market and select global markets.

Third, we add new products and services that target uncovered needs in our key buying centers. Developing these products and services requires near-term investment that provides platforms for future growth and helps strengthen relationships with member companies. We put some strong new products in the market last year. I'm particularly pleased with the robust growth of our academies platform, which complements our analytic and best-practice assets by upscaling member teams to take advantage of them.

As I've updated you on for the past several quarters, we have 4 core operating priorities that we use to move these growth levers. You can see them captured on Slide 10. Creating must-have data and insights, building brand strength through member impact, globalizing the business and delivering innovative products and services. Let me spend a minute on each priority.

Please turn to Slide 11, as I discuss our first priority, creating must-have data and insights. Our business begins and ends with relevant and authoritative data and contents. We seek to assemble vast data assets on the drivers of corporate performance and create insights, tools and best practices that help members act on them. In 2011, our team produced outstanding content across all of our practice areas, including insights into the demand on leaders in newly global companies, the technology and people implications of data abundance and how the professionalization of purchasing has changed B2B sales.

I'd like to spend a moment highlighting an insight from our marketing arena. To the right on Page 11, you can see that one pressing challenge for marketers is the emergence of the spindle purchase path. You can see the traditional sales funnel to the top. But as social and mobile media bombard consumers with information and choices, consumers now follow a longer, more complex path to a decision. In fact, our data shows that 80% of consumers delay their brand choice until the point of sale, as they continually revisit and evaluate information and new choices. The result is that consumers are less sticky, often trading off to alternative brands.

Our research findings show that there is a way to win in this environment. Consumers are rewarding the brands that are simplifying purchase decisions for them, the tunnel process we see at the bottom of the page. To help our members, we have identified the drivers of purchase simplicity and profiled member tools and best practices for simplifying purchase paths. This insight and, more importantly, the tools to act on it, helps for very high levels of member usage and fast growth in our marketing products. It also creates new opportunities for follow-on service that we currently exploring.

Please turn to Slide 12, building brand strength through member impact. Our long-term objective here is to leverage effective support of our members to grow relationships. In 2011, we invested in new sales teams, a major upgrade in training and development of our commercial teams and the CEB brand. The result was highest-ever usage levels by our members and a notable uptick in our Tier 1 media coverage.

One of the really exciting highlights of 2011 was the publishing of The Challenger Sale, authored by Brent Adamson and Matt Dixon, through Penguin's Portfolio imprint. Based on insights drawn from our rich data on the drivers of customer loyalty and sales rep effectiveness, the book helped extend our work and brand to the broader business community. We also positioned this book at the center of a major multichannel communications effort that drove unprecedented engagement with our content across earned and social media platforms, and for the first time ever, substantive directly flow to our sales organization. Expect more great member service and public discussion of our impact in 2012 as we refine, simplify and amplify our message to the market.

Please turn to Slide 13, globalizing the business. Here we focus our energy on the largest corporate markets. While there are more than 200 members of the United Nations, there are only 15 markets with more than 200 large-cap companies and only 7 with more than 500. As you'd guess, these are the markets we intensively target and cultivate. We focused our investments in several key markets in 2011, most notably Germany, as we opened a Frankfurt office and acquired the great team at Baumgartner & Partner. Our Asia Pacific operations also continue to scale, as we work to broaden our product portfolio there. We supported this market-level insight -- sorry, market-level investments with uniquely relevant insights from our vast data assets.

One particularly compelling example was an analysis of an emerging leadership gap throughout fast-growing Asian markets. Our data shows that just 26% of Asia's existing leadership level, think here of senior and middle management, believe that their successors are ready to move to executive roles. This compares to 43% in the rest of the world and indicates that traditional management systems that take for granted an expansive, well-prepared leadership team are likely to fail in this vital environment for corporate growth. This insight opened doors for our sales and service teams throughout the region and paved the way for fast growth of our human capital resources.

Please turn to Slide 14, delivering innovative products and services. The biggest news here is our recent acquisition of Valtera Corporation. Valtera is one of the world's most respected and influential providers of insight, tools and solutions that help the world's largest companies drive productivity through great management of human capital. By adding their business to ours, we gained 4 fertile sources of value. First, as always, uniquely valuable data and insight. With deep grounding in the science of work, Valtera's team has built up powerful tools and rich data sets that help leadership teams engage and motivate employees, select and assess talent and drive overall business outcomes. They conduct the annual employee survey and follow-on analytics for many of the world's most progressive and complex companies, and through this process, have assembled an impressive data set, which includes global benchmarks featuring data from more than 30 countries and validated a set of powerful analytic tools. Together, these resources help companies decide how best to organize, compensate and manage their employee base, the single largest cost item for most companies. By combining these assets with the powerful analytics and robust management tools in our own CLC Genesee platform, we now possess the industry's most valuable data, analytics and resources on driving employee productivity and employee engagement.

Valtera has also built highly valuable insights and data to help companies select and evaluate talent. Beyond offering unique data on recurring work, these resources will help us to address member needs that we currently don't support. We see an opportunity here not only to expand our support for our core HR and recruiting customers, but also to meet demands that we get from other executives on talent issues. Most obviously, sales executives are always looking for better tools to evaluate and select better sales talent, a request which has increased fivefold as we have worked to redefine what great salespeople actually look like based on real sales performance. If you think about Valtera, we not only acquired a great existing business, but some new assessment capabilities we expect to grow over the coming years within our much broader member footprint.

Second, Valtera brings us a tremendous customer list. Valtera's analytic strength has allowed them to build a following among a uniquely elite array of progressive companies. And their customers are not only impressive, they are loyal. Valtera has earned one of the most strongest reputations and highest renewal rates in our industry.

Third, Valtera has developed leading technology. Valtera's analytic and interface technologies are powerful compliments to our GenView platform. Together, we'll give the world's most progressive companies a wide and deep suite of tools to generate, interpret and act on data about employees, productivity and company populations.

Fourth and most importantly with Valtera, we get a remarkable team. We first learned of Valtera through our customers' eyes. We have always been impressed with the high levels of respect they command from some very sophisticated customers. As we have worked with them over the past few months, we've been really impressed not only by their insight, but by their energy, integrity and commitment to using science and analysis to drive corporate performance. We're excited to have them as colleagues.

The Valtera acquisition illustrates several core areas of focus for our new product development efforts and acquisition strategies. None of them should be surprising to those who follow us. First, it targets one of our most important buying centers, heads of HR and their teams at large operating companies. Second, it targets and improves large-dollar decisions in work, places where people spend real money and need real help. Third, it has built up unique analysis and content. And fourth, it uses strong technology to link to member work.

One way in which the Valtera business is different than many of our businesses is that customers often demand more help in implementing their solutions or in interpreting their data. And as a result, there can be heavier mix of high-end service along with a scalable IP platform. In this end, some of their revenues more came to our CLC Genesee business, our Leadership Academies platforms than to our core subscription memberships. All of these platforms are highly profitable on their own and members who use them end up even more deeply engaged in our membership platforms, so we're happy to see them thrive. Our overall corporate margin will always reflect a blend between our high-margin subscription businesses and some businesses that, while slightly lower than the corporate average, defend and extend our core assets.

All that said, we see real synergy from bringing these businesses together. The first and most obvious opportunity is to use our strong sales and service organization to introduce their products and solutions to a broader array of our huge member network. This will accelerate Valtera's growth and expand our margins in this business. We also see the ability to leverage their very strong relationships to expand our footprint at some key Fortune 100 customers. Overall, we are very excited to welcome the team to CEB and to introduce their people and their capabilities to our strong member network.

To sum up, please turn to Slide 15. We accomplished some important objectives in 2011. We achieved a healthy top line growth while delivering on our commitments in maintaining a strong financial profile. Entering 2012, we are well positioned to continue the pursuit of healthy, sustainable growth.

Let me close with a message about my CEB colleagues around the world. We made strong progress in 2011 on building a great team to take on the opportunities we've discussed today. We were successful in attracting new staff to the firm with good recruiting performance, and also sustained high levels of retention among our top performers. We continued making investments to bring our employment value proposition to life, including the buildout of comprehensive training and development support for all of our staff around the globe. It's a privilege to work with an incredibly talented team that is relentlessly focused on getting even better. By treating the milestones we achieved in 2011 not as an end point but as a platform for continued improvement, together we'll drive the firm's growth and impact. I'm proud of what we've achieved and look forward to seeing what heights we'll reach in 2012.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from David Ridley-Lane with Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Wondering about if you could give any color on what you're planning for headcount additions in the sales force for the upcoming year?

Richard S. Lindahl

David, it's Rich. I think you should assume that we'll be growing headcount there roughly in line with sales for the year.

David Ridley-Lane - BofA Merrill Lynch, Research Division

And how is productivity ramping for the people you added in 2011?

Thomas L. Monahan

David, sales force performance is always a tenure mix game. And I think we saw, first and foremost, great retention of our top performers. And so that overall helps overall sales performance. We've invested heavily in some new training firms to get our newer commercial staff down the learning curve, and we're quite pleased with the results of those investments so far.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. And then on the gross profit, sort of thinking about how that will develop, I'm assuming Valtera has a bit lower gross profit, but you continue to add members to the existing membership base. So I was just sort of thinking about that mix. What would be kind of the underlying improvement in gross margin minus the mix effect? If you could help quantify those in any way.

Richard S. Lindahl

Yes, I mean, I think as you see from our overall margins, the range implies overall an expectation of improvement on the existing platform, offset by some impact from Valtera. I think if you work through the numbers based on the guidance we gave you, you'd see that, that probably holds back margins by roughly 30 to 40 basis points. And so the bulk of the improvement in the existing platform is going to come from scaling in G&A, then some scaling in cost of services, and probably member relations and marketing will remain the most variable component of our cost structure.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay, great. And then just one last one if I may. So we should expect Contract Value for the first quarter to then include about plus or minus $15 million from Valtera? Is that the right way to think about it?

Richard S. Lindahl

I mean, it could be in that range. We -- like I said, we literally just closed the transaction, and so we're doing our detailed analysis of all the contracts right now. And how much goes to Contract Value, the impact on deferred revenues, et cetera, is still to be determined.

Operator

We will go to Tim McHugh with William Blair.

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

Just first one, it's about Europe. You gave the comment that it grew slightly slower because of the macro issues. Can you just talk about the -- I guess, I know you don't give a lot of color about interquarter trends. But given how the issues in Europe have seemed to kind of intensify over the last 4 to 5 months, have you seen a change, I guess, as we progressed from last fall into early this year? Or has it been pretty steady?

Thomas L. Monahan

I think the framing thought is that we saw healthy growth across EMEA in 2011, but it was beneath the corporate average. In general, what we saw is executives were anxious to keep the support they were getting. But as the debt concerns mounted, they were less willing to commit to new sources of spending. As a result, our teams had to work hard to earn that growth, I think particularly in the fourth quarter. We don't expect this to change radically in the near-term. Our data on executive plans suggests that execs across the EMEA will maintain this cautious posture. But the short -- it's important also that the short-term cloud doesn't diminish our longer-term enthusiasm for these markets. They were about 20% of our overall business. We are underpenetrated and we still plan to make careful investments to sustain our growth and increase our market position across time.

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

Okay, great. And then the margins for Valtera, can you talk about -- you said what they are today. I guess, are things that you hope to do or expect to do that would make the margins different in 2 to 3 years as you see this acquisition playing out?

Thomas L. Monahan

Sure. Yes, we do think that as the business scales up, and we'll get some leverage out of our existing cost platform, it can reach margins that over time approach the CEB average. But I think that some of the secret sauce in the business is the intensive work they do from time to time helping customers interpret and take action on the resources they have developed. And that suggests that even as margins expand, they'll be lower than our corporate average. Given that this business extends our core assets, defends our core assets, deepens our relationships, we're happy to have that happen and we do think accelerating their growth through our really broad distribution footprint will automatically create some nice leverage in their P&L.

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

So there's nothing significant you'd change in the way they do business. You're just approaching it with your view is, as it grows, you should get scale benefits.

Thomas L. Monahan

Yes. As it grows and benefits from some of our broader platform.

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

Okay. And then my last question would just be the Wallet retention rate. It's relatively flattish year-over-year, but it has slided down a little bit sequentially. There's a bunch of different factors that go into that between cross-sell and retention, and we don't see all those. So I guess, can you give us some color on what maybe is driving it down a little sequentially the last couple of quarters?

Thomas L. Monahan

I think we're still letting that metric burn in. And the most important point is that it's pretty much flat to last year Q4. We always talk about Q4 as being our seasonal focus on new business. And I expect over time, you're going to see that reflected in Wallet retention. You've seen the numbers settle into a pretty nice range, in the high 90s, low 100s. That plus strength in new member acquisition and solid Contract Value growth per member set us up very well for healthy growth. Given the size of our member network, engaging and growing these relationships is always job one. So I don't expect you're going to see us take our energy and focus off that. You've heard a lot about the investments we've done in our channel, our digital platform, advisory capabilities, et cetera. And you should expect we'll continue to be very focused on great and industry-leading outcomes here.

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

Okay. I mean, but is retention and cross-sell weakening at all? Or are those holding consistent with? You mentioned you still track those internally.

Thomas L. Monahan

Yes. No, these numbers are very consistent with the seasonal patterns we saw last year. And all the numbers underneath that, all the key drivers are very consistent with historical patterns.

Operator

We'll go to Suzi Stein with Morgan Stanley next.

Toni Kaplan - Morgan Stanley, Research Division

It's Toni on for Suzi. Can you talk about the pricing environment? Are you able to implement the 3% to 5% price increases that you had laid out? And if you compare it sort of this quarter to last quarter, was there a noticeable change in the environment? And finally, do you expect a similar 3% to 5% increase in pricing for the contracts in 2012 as they renew?

Richard S. Lindahl

Yes, Toni, this is Rich. The short answer is we've seen the same trends in fourth quarter that we saw throughout the year. We were very pleased by our ability to maintain price increases in that 3% to 5% range. And that is our expectation going forward in 2012. We haven't seen any notable change in the environment or the patterns with our customers. I think it remains, the primary basis for the purchase decision remains the overall value we're delivering to our customer. And it's not a price-focused discussion.

Toni Kaplan - Morgan Stanley, Research Division

Okay. And then in the opening remarks, I think you mentioned former members resubscribing. Was that a bigger factor this quarter than usual? Or is that sort of a consistent theme that you have?

Richard S. Lindahl

I'd say it's more consistent. I mean, we do have people who rejoin us. I wouldn't say it contributed any more or less than it has in prior quarters. It's just one of the factors that contributes to the growth.

Toni Kaplan - Morgan Stanley, Research Division

Okay, great. And lastly, regarding M&A, you've made a couple acquisitions recently, with Valtera this quarter and one last quarter. Are valuations looking more attractive right now than previously? Or if you could just comment on that.

Thomas L. Monahan

Yes. We always see M&A as a subset of new product development, so we start with identified member need in one of our key buying centers. Then we ask the question: Is it better for us to build the product ourselves for somebody that has already done the hard work of creating unique intellectual property, valuable data-grade technology? That most of the time, as you know, the answer is build it ourselves. So we'd be hard-pressed to call this an M&A spree. But for a couple of the needs that we have identified, we happen to have encountered very uniquely valuable assets over the past couple of quarters. And I don't think it was driven so much by valuation as the confluence of an identified member need, a uniquely valuable resource and an opportunity to build a shared vision of a business together with those management teams. We haven't seen valuations move around all that much.

Operator

We'll take our next question from Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

I guess, a couple of questions. I want to go back to the Wallet retention for a bit. Given the number of products you have in the broad sort of set of products, I guess, I struggle to understand why the reasonable goal for that metric is, especially given 3% to 5% price, is to be high 90s to low 100s. Basically flat is what you're saying. It would seem to me there should be an opportunity, particularly with price, to continue to grow that. I guess, what are the gating factors to doing so? Do you think in a much more robust economy that, that will be an expectation that would make more sense for that to grow at some healthy rate? Or how do we -- just give me some context on how to think about that number.

Thomas L. Monahan

Sure. Gary, as we've said, that number is pretty consistent from last year at this time. So we're happy with where it is. And at the same time, we think that is a huge opportunity in the business to continue focusing on growing our existing relationships with our installed base. So if you ask me the question: How many of your 5,700 member companies do as much business as you'd like to see with you? The answer is none. We've had a huge opportunity to grow these relationships across time. And the math at the end of the day is a factor of none of our products have a renewal rate of 100%. So you automatically at any membership are losing some relationships. They're having to rebuild through new sales and pricing power. And you do -- we don't have 100% member renewal rate either. So you've got 2 headwinds, if you will, that we then go off and build a book of business against. But the overall frame that we wake up every morning and say, "How do we excel at, first and foremost, engaging and retaining and supporting the members we have, and then delivering such value they feel comfortable taking on a modest price increase, and then finding new opportunities for us to serve and support?" That is breakfast, lunch and dinner for us here every day. So no argument from me on that front. And I think we have opportunities to continue to build there through great execution. And we're pleased with the outcomes thus far. We think they benchmark very favorably against what you see elsewhere in nature. But that doesn't take our edge off at all for pursuing it more aggressively across time.

Gary E. Bisbee - Barclays Capital, Research Division

How should it -- can you give us any more sort of concrete data points or anecdotal points on the new business development and sales model with a single relationship at a customer within one of the broadly defined vertical areas? I think you've said in the past that, that had helped with retention or you'd seen some benefit there. But is that a gating factor to growing this fast? That these people just have too much going on? Because it seems pretty obvious with a new customer, you put more feet on the street. You go meet with new customers and you're growing that very well. But again, maybe some more color on how that's impacting it or whether you have good data points on how that's going.

Thomas L. Monahan

I think we're happy with the account management structure we've put in place over the past couple of years. And I think every one of those people is deeply incented to grow their book of business. And I think the business they're likely to generate and that they are generating is pretty healthy because it begins, first and foremost, with great impact on what a chief HR officer cares about or what a CFO cares about. And through that impact, we create opportunities to serve and meet new needs. So I'm very pleased with the progress thus far. We certainly see opportunities to improve. We see opportunities to improve every facet of the business every year. So I don't think anybody here is resting on their laurels, but it's not a gating factor. In fact, if anything, it's a pathway to great success on that front.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then just a question on the guidance. The year-to-year growth of cost this quarter, as you told us it would, decelerated and was pretty modest. The guidance for the year seems to imply a pretty significant -- maybe a moderate reacceleration of cost growth. Given the wide range of guidance -- and I realize part of it is probably driven by the wide range of top line guidance. But where are the factors that could lead to less spending growth and higher earnings versus more spending growth? How good a handle do you have on it today? And what factors would lead you to make those decisions to scale it up or scale it down?

Richard S. Lindahl

Yes, I mean, obviously, one of the factors that is going to influence expense growth is the acquisition. That comes along with the cost structure so that's going to be part of it. I think we are -- as we did last year, we are planning to hire more salespeople, to put more capacity out there and also hire the support staff that goes along with those folks. We're going to be deploying some more money in product development efforts. That's an area that we could potentially scale up or down depending on how the year is playing out and how the -- what the revenue trajectory looks like. And I'd say those -- and there are other kind of -- some variable costs that come along with revenue and the size of the membership base as well that are going to influence it. So broadly speaking, those would be the key drivers that I'd highlight.

Gary E. Bisbee - Barclays Capital, Research Division

Okay, great. And then just one last question. I appreciate the dividend increase. It looks to me like it's only an incremental $4 million though. You've got $144 million of cash and you're generating cash at a really high level. Why -- I understand your commentary on buybacks. But why not be more aggressive there? Should we read into this that there is likely to be a continuing string of these acquisitions? Or is there some other reason, maybe the board decided not to be more aggressive on the dividend?

Thomas L. Monahan

Gary, it's a good problem to have. The business generates a lot of cash and we have a lot of cash. As Rich showed you on the slide, we've shown a real commitment to deploying that cash effectively in a number of different dimensions by getting it back to shareholders through both buyback and the dividend, deploying it in the business through CapEx and very selective and, I'll note to-date, pretty small acquisitions, and maintaining a very strong financial position so that we can be opportunistic on any of those fronts as scenarios unfold. So I don't think you've seen a sea change from us. I wouldn't interpret any huge signal in any dimension. If anything, the signal is that we're committed to, wise deployment of the asset the business generates. And you saw us do that in 2011. I don't think you'll see any sea change in how we think about it in 2012. It's a nice feature of the business, and it's something the board pays a lot of attention to.

Operator

We'll go to Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Just another Wallet retention question, maybe from a different angle. Has there been any change in focus in the organization about growing new members? And then obviously, new member growth was great in 2011. Is that more of the focus in Wallet retention? Can you talk to that? And was member growth greater internationally? I'm sure it was than in the U.S. But can you maybe talk about how big the dispersion was? Then I've got a couple of housekeeping follow-ups.

Thomas L. Monahan

Sure. At the very top line, Paul, some of it is just seasonal. As we've said, fourth quarter is the time when I'd say corporate executives are more open and have more visibility into new budgetary commitments and new operational commitments they've got to go get after. And as a result, they're more open to a conversation, what sort of help they need to go get them done. So unlike renewals, where people have a sense of how they use you, how they're going to use you, the value they get, that window is a little more open in Q4 as corporate budgets settle out and people gain perspective on the next year's priorities. So there is a seasonal effect that I wouldn't ignore there. That said, new member growth was strong. We were pleased with it. And it does reflect investments we've made both in international markets and continue to grow middle markets. And we also put more resources into our North American large corporate sales organization last year. And that group did a great job. So it was a deliberate focus of investment strategy, and we're very pleased not only with their success last year, but the fact that these members are now all set up to get on to the growth path of cross-sell and retention and price increase across time. But it was a deliberate effect. I don't think there's any tremendous news internationally because we made investments both in North America in large corporate sales and internationally. So it was a pretty even outcome globally.

Paul Ginocchio - Deutsche Bank AG, Research Division

And Baumgartner was immaterial to client growth?

Thomas L. Monahan

Largely, yes. They do have some members that we didn't have and we have some members they don't have. And in Germany, that just gives us a much nicer, richer, broader immediate footprint. But remember, Baumgartner is pretty small. So the number of new logos they brought to us was pretty small. We're excited about the people. We're excited about asset. But the number of new logos, I don't think it was material against the overall backdrop.

Paul Ginocchio - Deutsche Bank AG, Research Division

Great. Then just the housekeeping questions. Was there any Contract Value related to IT Toolbox? I don't think there probably was. But if there was, what was it? And what was the impact to the fourth quarter? And then will we get revenue by quarter for IT Toolbox and EBITDA losses? Or will we get that in the pro formas as you report the next year?

Richard S. Lindahl

Yes, Paul. On the first question, no, there wasn't any Contract Value that had been associated with IT Toolbox. The nature of its revenues were different and didn't lend themselves to the Contract Value definition. Our plan -- we did provide these pro forma schedules this quarter to provide additional insight for you to help interpret the results. We don't plan on providing those same schedules going forward. What we do have, though, if you look at the appendix of our earnings presentation, you can see we've laid out on an annual basis what the business looks like excluding Toolbox, or basically consistent with the presentation going forward. So hopefully, you find that helpful.

Paul Ginocchio - Deutsche Bank AG, Research Division

Was there -- do you think there was any -- looking back, was there any major EBITDA loss variations between the first 3 quarters of 2011?

Richard S. Lindahl

No, I mean, I think it was fairly consistent.

Operator

And we'll take our next question from Dan Leben with Robert W. Baird.

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

Just to kind of follow up on this path we're working down on Wallet retention. So with Wallet retention 100%, looking at the Contract Value per institution moving higher, obviously bringing in some very large new customers and new customer growth, could you talk about some of the reasons for success there? Is it simply a focus? Is it recapturing some lost Contract Value? Help us understand the dynamics there.

Thomas L. Monahan

Sure. At a very macro level, it reflects our investment in large corporate sales both internationally and domestically. We put money to work. We talked about that early last year, and you saw that reflected in the P&L over the last year. And those teams came through within the calendar year, which is always great, so that it reflects a deliberate investment we made. And at the same time, continued strength in middle market growth, so new members sales was strong across-the-board.

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

Help us understand what's going on in the middle market. If that average Contract Value for institution, meaning multiple memberships in the new base, how -- doesn't that reflects some just numerical, there has to be some weakness in middle market? Or help us understand that dynamic there.

Thomas L. Monahan

You're not wrong that it's an average of middle market and large corporate. It gives you some sense of strength in large corporate.

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

Okay. And then last one for me. Have you gone back and looked at kind of late '09, the Contract Value had at that point. Kind of what was lost in the great recession? Kind of what percentages of that have you now gone back and recaptured?

Thomas L. Monahan

You can imagine we look at it pretty carefully and try to understand it. I think at a very macro level, we feel good about our ability to reinitiate relationships that we may have lost. And generally, the pattern that happened across the great recession was we kept our customer base, they spent less with us, and they've reexpanded that spend, which feels good. At an operational level, it tends to be a little more complicated in that executives turnover. And even if XYZ company was a member and had to drop, you're often sitting across the table from a new executive with a new set of problems. So it's not as simple as an on-off switch. The team getting in there often with a new team, often with a new set of challenges, sometimes with a totally new corporate profile and building a new relationship. So we feel very good about the progress we've made. Some of it is reinitiation of lapsed relationships, some is a complete new sale. But overall, it looks quite healthy.

Operator

We'll go to Shlomo Rosenbaum with Stifel.

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

I have a couple of just kind of housekeeping stuff. If I calculate the bookings, they look like they were only 7.6% year-over-year. Should I be adjusting for the $2.5 million for the accounting change, which brings them up to a little bit over 9%, in order to look at the bookings year-over-year?

Richard S. Lindahl

I mean, that certainly is a factor that plays into when you do that calculation. Yes.

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

Is that a fair calculation in terms of how much the bookings actually did grow year-over-year?

Richard S. Lindahl

I think it's a reasonable approximation. Yes.

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

So when I think of the revenue guidance, should I be thinking of the midpoint minus, say, $13 million, $14 million from acquisition growth? And if you kind of take that number, which would be like $532 million or something, that approximates kind of the bookings growth in the fourth quarter of about 9% on an organic basis?

Thomas L. Monahan

I think what Rich said was we would guess that -- well, again at this point, we're days into the integration with Valtera. We have not had the chance to go through every contract and figure out how much flows through into revenue this year. Our best estimate at this point is $10 million to $12 million, not $13 million to $14 million, so it's a slightly lower amount. We'll update you as we get -- adapt those contracts to our methods of accounting and our contract format. So there's probably some more news to come, but that $13 million to $14 million sounds a little higher than our initial estimate would be.

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

Okay. Then in terms of the EPS mix over the year, in this last year, you basically had like 62% plus of EPS coming in the second half so it's much more back end-loaded, should we think of the pattern in 2012 just basically as a repeat?

Richard S. Lindahl

Yes, I think that we would expect it to be broadly similar. Yes.

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

Okay. And then when I look at large corporate memberships versus middle market memberships, you had a very large overall membership growth. Is there a significant weighting towards middle market? Or did you guys do particularly well in the large corporate? Just going back to one of the questions that was asked beforehand, you wouldn't expect to see the average Contract Value per member go up that much with what I would assume is a very large middle market additions as a percentage of the total.

Thomas L. Monahan

No, it's safe to say we feel good about new member acquisition both in large corporate and middle market. And the relative size of the 2 businesses, a a good year in large corporate is going to make that number look attractive.

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

Okay. And when you think of Valtera, we don't have that much familiarity with it, how much of the business is really sort of a consulting model?

Thomas L. Monahan

The core of the business is an annual set of activities they go through to help large companies understand what is motivating, engaging, attracting and driving productivity for their employee base. So it's got a nice, healthy annual book of business. On top of that, there are a variety of things they do at different points in time to help a company make best use of a particular finding or drive a particular outcome. So it's a mix of great scalable IP, which we like, recurring business, which we like, and some bespoke work that they do to help people make great use of those capabilities. So it's all of the above. As I said in the call, it's got more of the third category than most of our businesses, but we're very comfortable that, that's important that they're delivering the outcomes they need. And it's a very sticky product. So I don't have any intention of getting into that laboratory and trying to remix the formula.

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

Okay. That's what I'm trying to get at. So it really is kind of a niche-y thing that fits on to their business and it's not really any broader foray into any consulting.

Thomas L. Monahan

No, there are definitely one-off services they provide to their customer base through their longer-term relationships, no question about it. And there are things they do that are more service-intensive than some of our core membership businesses. But it fits very nicely with our focus on core buying centers, key workflows, recurring activity sets and high-dollar decisions. So we're very pleased to have them on board.

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

Okay. Then one last question, just on the IT Toolbox sale. I want to make sure I'm understanding correctly. It was $0.07 of losses generated from the loss on sale, and then roughly $0.07 of operational losses that are spread fairly evenly over the year.

Richard S. Lindahl

That's correct.

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

Okay. So when I'm comping, we're basically taking out of $0.07 of operational losses when I go forward to next year?

Richard S. Lindahl

Yes, correct, at least as it relates to 2011.

Operator

Our last question will be a follow-up from Tim McHugh with William Blair.

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

I just had a quick one on the depreciation and amortization guidance. I think you said $1.5 million to $2 million for Valtera. So if you back that out, the D&A still, I guess, at the midpoint in the range, projected to be up a couple million dollars. And that's kind of a reversal of the last few years, as you've seen that line decline, I guess, as the CapEx has been much lower than that D&A level. What's -- why, I guess, the change in that trend this year?

Thomas L. Monahan

Yes. As you pointed out, certainly the amortization is a chunk of that, not only from the Valtera but from the other acquisitions we've done previously. The other thing is obviously the CapEx is going to be the big driver in terms of where that lands in overall spend for the year. We do have a chunk of that, that's going to come in as we integrate these businesses, and that will influence it. So those would be the main factors.

Operator

And I'll turn the conference back over to Mr. Tom Monahan for any additional or closing remarks.

Thomas L. Monahan

Thanks, everybody, for calling in or logging in this morning. Rich and I will be out on the road over the next couple weeks, and we'll also be at the Deutsche Bank and Baird conferences both in February. As you should have seen in the press release, we'll host an investor day for institutional investors and sell-side analysts at our offices in Washington, D.C. -- I'm sorry, in Arlington, Virginia on May 17. And we look forward to seeing a good number of you there. Thanks for dialing in today. We look forward to using these opportunities to keep you all up to date on CEB's continued progress.

Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.

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