Executives
Thomas L. Monahan, III - CEO
Timothy R. Yost - CFO
Analysts
Mark Bacurin - Robert W. Baird & Co.
Gary Bisbee - Lehman Brothers
Brandt Sakakeeny - Deutsche Bank
Scott Schneeberger - Oppenheimer
Brandon Dobell - William Blair & Company
The Corporate Executive Board Company (EXBD) Q4 FY07 Earnings Call February 7, 2008 ET
Operator
Good morning and welcome to The Corporate Executive Board's fourth quarter 2007 conference call. Today's call is being recorded, and will be available for replay beginning today and through February 13th by dialing 719-457-0820. The confirmation code for the replay is 571-8754. The replay will also be available beginning later today and through February 13th at the company's website, which is executiveboard.com 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 or going to the home page of the company's website for yesterday's today's news release. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Including statements are among others regarding The Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2008.
For this purpose, any statements made during this call they're not as same as historical fact, may be deemed to be forward-looking statements without limiting the foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations, and the like are intended to identify forward-looking statements.
You're 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 would like to turn the conference over to the company's Chairman and Chief Executive Officer Mr. Tom Monahan. Please go ahead, sir.
Thomas L. Monahan, III - Chief Executive Officer
Thanks Scott. Good morning, thank you all for calling into or logging in. I'm Tom Monahan, Chairman and CEO and with me here today is Tim Yost, our CFO. Let me give you the roadmap for how we'll divide our time this morning. First I will provide a brief overview of our fourth quarter and full year financial performance, a summary of the financials, as well as a progress report on key operating priorities. Tim, will then take us through a more detailed review of 2007 financials, discuss our key talent management and growth metrics and outline our guidance for 2008. Finally, I'll close with a review of the key elements of our $5 billion organic growth opportunity and we'll move to Q&A.
Financial highlights. For the fourth quarter 2007 revenues were $142.2 million, up 13.3% over the last year, net income was $22.5 million, EPS was $0.63 a share. For the full-year 2007, revenues were $532 million, up 15.7% over last year, net income grew to $80.6 million, EPS was $2.17 per share, up from $1.94 last year. And finally, contract value increased 10.7% to $526 million as of year-end. In summary, CEB delivered against its commitments for 2007 but fell short of what had expected to accomplish in setting up 2008.
Let me spend a moment giving you a progress report on our key operating priorities. 10.7% CV growth is $44 million short of the 20% growth we had targeted early in the year and below what we've forecasted as we entered the fourth quarter. Our shortfall can be traced to two major categories; $27 million is attributable to weak new sales in the North American large corporate market. This is a direct result of delayed impact from the sales recovery plan we discussed last year. As I mentioned last quarter and as you continue to see in our hiring numbers, we've been able to bring on the needed number of new people but we've not yet inflected the rate at which they become productive.
$17 million where the rest of the shortfall came from lower than expected growth in key segments of our customer base driven by lower program level renewal rates with these customers. Certainly challenging budgetary and economic conditions in key sectors affected our performance but there are two specific areas within our control where we have not performed well. The first and greater was that CEB's largest customers where we saw large number of customers than normal choosing to maintain rather than grow their current level of spending with us. As the number of our large customers has grown we have been too slow to adapt our sales and servicing model to drive continued growth with some of these customers.
Second, we have not yet adequately addressed attrition rates in the first year membership. It's clear that our service strategies don't yet properly installed usage of new CEB memberships in the workflows of executives and their teams. We believe that focus here is warranted particularly in a tight budgeting environment where our customers need for ROI becomes even more immediate. Against the backdrop of these challenges we did see success and momentum in other areas of our business. We saw continued strength in our international operations particularly in our fast-growing European presence. Likewise, we remain excited about the growth and potential of our middle market products.
Finally, we continue to demonstrate success at launching products that penetrate new budgets and new executive workflows. I will discuss in one moment our plans to accelerate efforts in these areas. Across 2008, CEB's senior leadership team will focus on four priorities that will directly address the causes of our 2007 shortfall and pave the way for exciting growth in 2008 and beyond.
First, we will remain focused on achieving the highest level of performance from our North American sales operations. This begins with building a great team, to continue rebuilding our North American sales force we need to keep sourcing CEB caliber talent, training these people effectively and retaining and growing the highest performers. I am pleased that we achieve our end of the year sales force headcount target but we have real work to do in helping these people get to the right level of productivity and retaining and engaging the best of them.
We also need to use different approaches and sometimes different talent to drive customer conversations at front-end of the sales pipeline particularly in some resistant segments. As part of driving contact with the customer we will accelerate the move of our sales and service teams to our regional offices, which have the ancillary benefit of helping us to tap new labor pools. This effort at the front-end of the pipeline should yield real results as we continue to see very consistent conversion rates of prospects as they move through the pipeline.
Second, we will focus on driving growth with CEB's largest customers by tightening the integration of sales and service activities of these companies. The issue is clearly not that these customers don't need advise and support on difficult management issues who aren't willing to pay for it. But our model needs to adopt to drive growth of some of these customers. To get after this, we are making additional investments in our strategic accounts organization, better aligning our sales and service organizations in piloting new incentives to drive collaboration. Above all, we need to be focused on ensuring that each CEB product to create significant additional ROI as the department or company grows its relationship with us.
As always, we begin the year by looking and seeing where that's happening, where it's not and making the necessary product and personnel changes. To accomplish all of this, we have reorganized our servicing and product teams under strong practice area general managers and aligned our new sales teams to these groups to ensure there are efforts to serve members also drive opportunities for growth. Third, we will drive increase utilization of CEB's services by a member executive from day one of their membership with us. We'll begin by immediately engaging our newest members and their teams but our larger ambition is to ensure that CEB insights and resources inflect every relevant facet of member work. If we do high returns for members everyday, our renewal rate and cross-sell will take care of themselves even in what's turning out to be challenging budgeting environment.
And fourth, we will continue to accelerate growth from newer markets and from products that target additional executive workflows in budgets and member companies. Europe continues to be an area of success and opportunity for us and we plan to continue investments and sales, research, and service staff. We also see opportunity in other international markets. In the quarter you saw us open a regional sales and service office in Sydney to support our growing membership base there. And we've added sales and service staff to our India office in Gurgaon based on the positive results of early selling pilots there.
We remain pleased with the growth and performance of our new middle market platform. As we get deeper into this market, we now see more than 18,000 companies for immediately addressable prospects for CEB programs. We have continued to make investment to scale the sales, product and leadership structure to attack this new opportunity. Finally, we will continue to target new budget areas that allow us to deepen our support to executives we already served. The Q1 launch of the HR Leadership Academy, our first on trade in the executive developments arena is a great example of this. It leverages our huge installed base of HR executives and deep knowledge of the HR terrain while meeting an unmet need in tapping a new budget area.
Our overall strategic goal continues to be penetrating our $5 billion immediately addressable organic growth opportunity as fast as we can. This year's results indicate that we move more slowly than I would like through that opportunity in 2007. But as a team, we remain very focused on attacking that opportunity and I am very confident that we can position ourselves to achieve it.
Let me turn it over to Tim for a more detailed review of the financials.
Timothy R. Yost - Chief Financial Officer
Thanks Tom. I will organize today's financial and operating review around six categories. First, the income statement where we will review the fourth quarter and full-year 2007 results including the drivers of our revenue growth. Then I will move to the balance sheet, cash flow, an update on our share repurchase program, and our dividend increase, our guidance and outlook for 2008 and finally I’ll close with the full year talent management metrics.
Starting with the income statement, fourth quarter revenues increased 13.3% to $142.2 million from $125.5 million for the fourth quarter last year. This is below our original guidance range as a result of the lower than expected contract value growth in net quarter. Gross profit increased to 68% in the fourth quarter compared 64.3% in the fourth quarter of 2006. The higher gross profit reflects lower share base compensation, printing, staffing, and meetings expenses as a percent of revenue relative to 2006 levels offset by an increase in rent expense. The increase in rent is primarily associated with the timing and transition of our move to Waterview. Member relations and marketing expense increased to 28.3% of revenues in the fourth quarter of 2007 compared to 24.7% in the previous year. The increase was primarily driven by headcount and related expenses as we continue to rebuild the sales team at full staffing and productivity levels as well as rent for Chicago and San Francisco sales offices.
General and administrative expenses increased as a percent of revenues to 13.4% versus a 11.4% in the prior year. The increase is primarily attributable to $2 million recorded in Q4 of 2007 for probable exposure to certain sales and used tax rate regulations for states in which the company's sales or support it’s goods and services. These expenses represent a one-time true-up for past periods. Going forward we will directly collect and remit sales and use tax for those affected states. Therefore we do not expect these taxes to impact our income statement moving forward.
Depreciation and Amortization increased to 3.7% of revenues in Q4 of 2007 compared to 3% in the prior year. The increase is primarily due to the amortization of intangible assets associated with the ITtoolbox acquisition, which closed on July 31, 2007. Income from operations as a percentage of revenues for Q4 2007 declined to 22.5% versus 25.3% for the fourth quarter of 2006. As a result on the changes and expense timings just discussed.
Our income tax rate for the quarter was 33.1%. The change in the tax rate for the quarter was primarily driven by two factors. First, an increase in the estimated amount of DC tax credits that we will be able to utilize prior to our move to Virginia and secondly an increase in the value of our deferred tax assets as a result of our slightly higher state effective rate moving forward. The total impact of these two factors is approximately $1.6 million.
Net income decreased to $22.5 million from $23.2 million last year. Diluted earnings per share for the latest quarter were $0.63 versus $0.58 from the comparable period to prior year. Without the change in our tax rate, diluted EPS for the quarter would have been $0.58. For the year ended December 31, 2007 revenues increased 15.7% to $532.7 million from $460.6 million in 2006. This revenue growth was driven by the following factors; growth from cross-sell came in below our target range or 10% to 14% percentage points of growth for the year, the average cross-sell ratio in our large company market decreased to 4.03 from 4.15 last year, in our middle market products which now has 3 membership programs, the average cross-sell grew to 1.44 from 1.15 in Q4 of 2006.
Growth from new clients landed within our target range of 3 to 5 percentage points of growth coming from the source, our total network now includes senior executives from more than 4,700 companies, 375 companies in our large corporate market, and over 600 middle market company's joined our first CEB programs in 2007.
Growth from the new product class of 2007 landed in its target range for 3 to 5 percentage points of growth from the source. Pricing was in line with our expectations. We saw less impact from the product mix shift in a large company market that we've seen over the past few years. This reflects a stabilization of the mix shift as the product portfolio matures. On average net of our standard 3 to 5 percentage points of same store sales price increase, which we continue to get pricing was flat in the large corporate market. Across our entire portfolio pricing declined 3.9% for subscription driven solely by the impact of a rapidly growing middle market products and their lower price points.
And we saw continued strength in our institutional renewal rate, which came in at 90%. This includes an institutional renewal rate for large corporate members of 92% and 80% for middle market members. Given the low average cross-sell ratio and the higher turnover of middle market executives, we are pleased with this 80% renewal rate and obviously we are doing all we can to improve it so that over time it is more larger than larger company rate.
For the full year, gross margin increased to 65.6% of revenue from 64.4% in 2006. Member relations and marketing expense for the full year increased to 28.2% of revenue from 26.5% the prior year. G&A expenses for the full year increased 13.5% from 12.9% in 2006. Operating margin decreased to 21% of revenue in 2007 from 22.7% the previous year. EBITDA margin showing the performance of the core business without the impact of the amortization of the ITtoolbox acquisition decreased from 24.9% of revenue to 24% in 2007. Net income increased to $80.6 million from $79.2 million in the previous year. Fully diluted EPS increased to $2.17 from $1.94 in 2006.
Contract value increased 10.7% to $526.4 million at December 31, 2007 from $475.7 million at December 31, 2006. We defined contract value as the aggregate annualized revenue attributed to all membership agreements in effect at a given time without regard to the remaining duration of any such agreement. For the small number of contracts of more than 12 months duration, we include only 12 months in contract value.
Turning to the balance sheet and cash flow. Membership fees receivable increased to $161.3 million at December 31, 2007 from $153.1 million at December 31, 2006. DSOs which we calculate using average receivables were 78 days for the fourth quarter of 2007 versus 81 days for Q4 of 2006 and in line with our guidance of 60 days to 100 days for Q4. Installment invoicing is also in line with our historical experience at 14.1% of contract value through year-end versus 16% for the same period in 2006.
Deferred revenues were $326.8 million at December 31, 2007, including $3.4 million in other long-term liabilities. Deferred revenues increased from $308.7 million at the end of Q4 2006. For lower deferred revenue growth versus contract value growth as a result to the timing of our overall book of business relative to 2006. With the shortfall in Q4, the effect on our overall book of business was to reduce some of the Q4 concentration less of our overall book of business is from Q4 relative to 2006. With this change our average start day on our 2007 book of business was ten days earlier in the year and as a result more of that book of business is earned out at year-end and will come up for renewal earlier next year. This difference accounts for approximately $17 million in lower deferred revenue at year-end 2007.
Moving to cash flow. Cash flows from operations decreased to $110 million or 1.4 times net income during 2007 from $136.3 million in 2006. This lower cash flow versus our guidance is primarily result of two factors. First, as we've been discussing over the past few years, the payment of $60.8 million in cash taxes in 2007 versus $9 million across the same period in 2006. The second factor is fewer members paying us in Q4 in advance of the start date than last year. This accounted for a $17.5 million exchange and flows through the AP and other payables line item. Finally lower contract value growth and the resulting lower deferred revenue growth relative to 2006.
Capital expenditures were $67.3 million through year-end 2007 principally consisting a cost related to the build out of our new office facility and computer hardware and software purchases. Of that amount, $32.8 million was funded directly through lease incentives and therefore is a non-cash investing activity, which is excluded from the cash flow statement. Only the net CapEx of $34.5 million is shown on the cash flow statement. We are still on time and on budget with the move to our new office facility and expect the total amount of this spend to be $60 million, of which $25.5 million was paid in 2007. We expect the remaining $34.5 million to be paid across the first half of 2008 as we complete the move.
Repurchase update. Across 2007, we repurchased approximately 4.3 million shares for $303 million. At year-end, we have $64.2 million in remaining repurchase authorizations.
Outlook for 2008, the following comments are intended to fall under the Safe Harbor provision outlined at the beginning of the call and are based on preliminary assumptions, which are subject to change overtime. Based upon our year-end contract value growth, our guidance for revenue growth approx is 5% to 10% or $559 million to $586 million with a quarterly distribution approximately as follows; Q1, $133 million to $137 million; Q2, $134 million to $141 million; Q3, $139 million to $152 million; Q4, $150 million to $165 million for a total of $559 million to $586 million. We expect this revenue to be driven by contract value growth for the full year of 10% to 15%.
Net of adding change in the average subscription price, we expect the compensation of this contract value growth to look as follows; 4 to 8 percentage points of revenue growth coming from cross-sell; 2% to 4% coming from the new clients joining the first CEB programs, and 3 to 5 percentage points from new products in our first year.
Our guidance for GAAP, annual diluted earnings per share for 2008 is $2.06 to $2.22. On a quarterly basis our guidance for GAAP earnings per diluted share is as follows; Q1, $0.33 to $0.37; Q2, $0.44 to $0.48; Q3, $0.55 to $0.64; Q4, $0.71 to $0.78 for a total of $2.06 to $2.22.
For 2007, we expect depreciation and amortization expense of $21.5 million to $22.5 million and an interest income of approximately $8 million to $9 million. We anticipate an increase in our effective income tax rate to approximate 40% as we loose the impact of D.C. tax credits with our move to Virginia. Finally, we expect diluted weighted shares outstanding of approximately $35 million to $36 million.
Please note that these interest income and share count estimates reflect only repurchases made to date. Our guidance is for a flat EBITDA margin in 2008, we expect to achieve this flat EBITDA margin through an additional 50 to 100 basis points of leverage on the G&A line which we anticipate will offset similar increases in marketing and member services as a percentage of revenue. These higher marketing and member services expenses will be the result of our investments to accelerate the growth rate of our North American new sales operation.
We expect cost of service to be relatively flat as a percentage of revenue. Also included in this guidance is about $6 million of cost related to our move in Virginia, which will not repeat in 2009. These costs are also concentrated in the first quarter, which is why the year-over-year comparisons for Q1 look different from the rest of the year.
For the full-year 2007, we expect cash flow from operations to run roughly 1.5 to 1.7 times net income. This continues to be driven by our topline growth and negative working capital with over 80% of our members paying us at the start of their membership while we recognized the revenue radically over the term of the membership.
Capital expenditures for 2008, as we previously discussed we are finalizing the build out of our new office facility that will enable to us consolidate our employees into one building in Roslyn, Virginia versus five buildings in Washington at lower rental rates. We estimate the remaining $34.5 million of the $60 million in capital expenditures related to this project to occur across the first half of 2008. In addition, to support growth of our headcount and infrastructure, we anticipate an additional $8 million to $10 million in CapEx for 2008.
Finally, Talent Metrics. CEB total headcount reached 2,439 in the quarter, up from 2,264 at this time last year. The headcount growth in the quarter reflects our continued efforts on the recruiting front particularly on the sales side. Our offer to acceptance ratio was very strong in the high 80s towards the high-end of our historical patterns. At quarter end our total sales force consisted of 325 sales teams, up from 293 in Q3 and 270 teams this time last year and our research staff is over 900 strong. Our career staff retention rate remains very high around 80% and is tracking in line with our historical experience.
For 2008, we anticipate that overall sales headcount will grow about 15% and that overall headcount growth will come in a few percentage points lower than our full year revenue growth rate.
This concludes the financial summary. I will now turn the call back over to Tom.
Thomas L. Monahan, III - Chief Executive Officer
Thanks, Tim. I've spoken a bit about what CEB management is focused on right now. Let me now spend a moment outlining why we have such continued conviction in the long-term growth opportunity of the company and why we have such collective results that our plans can reaccelerate the rate at which we move through our $5 billion organic opportunity. Let me revisit each key element of that $5 billion opportunity through the lens of our 2007 outcomes.
Let me start with cross-sell. Here the story was mixed in 2007 and on balance points to a place where we have some real work to do. As I mentioned growth from cross-cells came in at the low-end…. below the low-end of our target range for the year and we did see slower growth in spending among some of our largest customers.
Embedded within this disappointment there is great evidence however of our models power. It's clear that we can deliver great product and service that creates real ROI for our members. Let me give you a couple examples. Even in difficult budgeting environment we were able to maintain our 3% to 5% same store sales price increase and our 90% institutional renewal rate. This is powerful evidence that even in a challenging economy our teams can draw an unparalleled network of 16,000 executives at progressive companies around the world to develop leading edge insights data and tools that help company's make their most important decisions and drive outstanding performance.
Similarly the continued strength of our institutional renewal rate means that we're able to sustain relationships with an unparalleled range of leading companies. So while we may not be growing all of these relationships as fast as I'd like, we have an existing relationship at 4,700 great companies that provides us with a tremendous platform for future cross-sell.
Finally while our progress in driving growth at the largest companies has slowed at some of these companies, we have pushed out the boundary of possibility at the high-end. Our largest customers now subscribe to more than 30 programs and pay us more than $1.25 million. These customers do give me confidence that we can build a blueprint for similar growth in the rest of our large customer base.
Second key part of the $5 billion opportunity is addressable market. With our continued success in middle markets in Europe we now believe CEB has an addressable market of more than 23,000 companies on a global basis. We saw that in 2007, we continue to add exciting new companies to the membership roster at a healthy clip at the large corporate and middle market segments. We have also benefited from successful early market forays into India made possible by our long-standing research presence in that market. We do need to do a better job installing these new memberships so that they become a stronger platform for future growth. But I have a high degree of confidence that we can keep adding great names to the customer roster for a long time to come.
Likewise I remain opportunistic about another key element of the $5 billion opportunity, the depth and quality of our new business opportunities. Achieving the $5 billion opportunity requires that we be able to launch about 10 to 15 more programs off our list of 19 new programs ideas. Today I am pleased to announce two new launches that illustrate the depth and quality of these opportunities.
In the fourth quarter of 2007, we launched The Inside Sales Roundtable, the eighth program in our strong sales and marketing practice and the sixth program of the six to seven we committed to in 2007. As you have probably guessed, ISR serves the executives responsible for telesales and direct sales at our member companies, executives with substantial responsibilities, real problems and big budgets. As usual the early research agenda and service mix are driven by a topnotch group of charter members including Avaya, DuPont, Canada Post Corporation, and Office Depot, Inc.
As I mentioned, I am also excited to announce the first of our launches for 2008, the HR Leadership Academy. HRLA represents CEB's first foray into the executive development space, which is a $14 billion industry globally. Our decision to enter this market was guided by consistent member concerned about capability gaps in their organizations which current providers were ill equipped to help them to close. Our first product HRLA targets just such a gap. Increasingly, we heard from Chief Human Resource Officers that HR generalists lacked some of the analytic skill set necessary to support and drive strategic change.
In response we put together a program that brings together emerging HR leaders from a wide variety of companies for a 12-month program that blends classroom training, project-based activities, and online resource portal, and ongoing peer support interaction.
Beyond the fact that this represents a great growth opportunity for CEB, it also strengthens our core business by allowing us to develop a relationship with the next generation of senior executives who will be the primary sponsors of our programs in years to come. It also allows us to further monetize our existing member relationships by tapping a budget we don't currently access right now.
Given the solid performance of the class in 2007, the exciting start to the class of 2008 are now demonstrated the ability to tap new markets and new executive workflows. We have a high degree of confidence in our ability to keep building products, which deliver the CBE's standard of impact and leverage the installed base of now more than 47,00 leading companies.
Finally, to accomplish all of the above we must maintain our ability to attract, retain and grow top talent. As an example, we saw in the press release that Susane Berger had joined us as Executive Director of Strategic Channels and Markets. Also we have begun to see updraft from our ongoing consolidation of the substantial majority of our North American staff into our new Waterview location. As Tim said, the move is on time and on budget and will be complete by later this month.
So while our leadership team and I in particular are disappointed by the rate at which we made progress in some of the core objectives in 2007, we have a high degree of confidence in the opportunities ahead and high degree of clarity about what we need to do to accomplish them.
Let me wrap-up with the recap of our areas for focus for 2008 and beyond. First, we will remain focused on achieving the highest level of performance from our North American sales operations. Second, we will focus on driving growth of CEB's largest customers by tightening the integration of sales and service activities at these companies. Third, we will drive increased utilization of CEB service… for services by our member executives from day one of their membership with us.
And fourth, we will continue to accelerate growth from newer markets and from products that target additional executive workflows and budgets at member companies. We have real work to do to be sure and the challenging budget and economic environment doesn't make our job any easier but I am encouraged by the assets we bring to the task. 2,500 committed and creative associates, track record of customer impact and unmatched network of member executives and companies. I look forward to keeping you up-to-date on each of these initiatives as we continue to grow CEB in the years ahead.
We will now take questions.
Question and Answer
Operator
Thank you sir. [Operator Instructions] And we will hear first from Mark Bacurin with Robert Baird.
Mark Bacurin - Robert W. Baird & Co., Inc.
Good morning Tim and Tom. A couple of questions, I guess first on the you talked about some of the issues at the root of the contract value underperformance and I wanted first of all from a macro level, could you just sort of quantify what you think is more macro economic versus company specific issues? And then with delving into the company's specific issues, could you maybe comment on some of the roots of the productivity issues that you are seeing whether it’s training, lack of experience among the kind of newer sales teams, is the headquarters move having an impact. Just looking for some more color in terms of the roots of some of the causes in the self-productivity issue?
Thomas L. Monahan, III - Chief Executive Officer
Hi Mark. It’s Tom. As I mentioned in my remarks, we did encounter budgetary and economic headwinds in the fourth quarter at the highest… the way to think about this is at the highest level we saw more sectors than usual facing economic challenges. It's hard to know exactly how much of our shortfall can be traced to this, but it certainly magnified challenges we were facing elsewhere in the business. That said, the beauty of our products is that they can change quickly to address urgent needs on executive desks, so it's our responsibility to make sure that every CEB product generates substantial immediate ROI on a member's investment. While that's always true, I think it's particularly true in a tight budgeting environment so tough to quantify it. But we saw it in more sectors than normal.
If you peel apart to get to the sales question, as I talked about the difference between CEB growth of 20% and 10.7% was about $44 million. $17 million of this was from the Q4 program level renewal shortfalls in the two customer pockets I talked about. Larger customers in our membership base growing membership, growing their relationship with us a little more slowly than would like was the larger of those two. Weakness in North American new sales accounted for about $27 million of the shortfall, about $18 million of this was due to our failure to make enough activities happen at the front end of the sales pipeline. The remaining $9 million was due to our not converting the activities we did have into sales at all points. About half of this, it’s a little more than half of it was concentrated in those challenging sectors I talked about. So, that's the reason why when we talk about continued focus now that we've got rebuilt our staffing foundation, continued focus on helping those people become productive and get to great outcomes across 2008.
Mark Bacurin - Robert W. Baird & Co., Inc.
Thanks. That's helpful. I guess what I am trying to figure out is where you think the nature of the problem lies with regard to converting some of these customers or upselling or cross selling? Is it the need for better training? Is it just lack of experience thus far? Is it higher than expected headcount turnover? I'm just trying to delve in and understand more of the challenges that you are facing as you try to improve the productivity?
Thomas L. Monahan, III - Chief Executive Officer
I think across 2007 it began with our not having enough CEB caliber feet on the street and we put numbers out there and we are very aggressive against recruiting to them and we are very pleased with our end of year sales force headcount number of 325 sales team. So we have the people in place, we'll remain vigilant there both at continuing to source great people and in making through that those new people get productive as fast as we can by supporting them. And as we said as I just said, about two thirds of the short fall was in activities at the front end of the pipeline. So are not helping those people get productive and generate enough customer calls, customer visits etcetera at the front-end of the pipeline and about a third of it was in not working all the opportunities through the pipeline as fast as we can.
So I think we are focused very much both on driving productivity activity at the front-end of the pipeline and using some new approaches in places to drive more customer contact at that front-end of the sales pipeline. So priority number one for us this year is continuing to build on some of the hiring success we had to drive some of the productivity levels with that now larger sales force.
Mark Bacurin - Robert W. Baird & Co., Inc.
And then given your... you kind of exited '07 with a number of sales team you had hope for trying to I guess compare that against the reduced contract value growth expectation for '08 presumably if you do your job and get these people up and running and more productive. I would assume the contract value growth, your expectation for contract value growth would have been stronger, so I'm trying to understand is that conservatism on your part or is that also starting to reflect some of the budgetary and economic constraints as well?
Timothy R. Yost - Chief Financial Officer
Mark it is Tim. When we built the guidance for the contract value number and we are basing that off of a level that we are operating at today. So we will obviously continue to keep folks updated across the year but at this point given the operations the way... the way we are performing today that is the guidance with which we are comfortable at this point.
Mark Bacurin - Robert W. Baird & Co., Inc.
Okay one final and I will give it to someone else. Given the stock pull back today you have a balance sheet that's obviously very under leveraged, any thought towards may be taking on some debt and using that to fund a more aggressive share repurchase campaign?
Timothy R. Yost - Chief Financial Officer
Mark it's Tim. At this point we've got about $64.2 million in remaining repurchase authorizations. So we remain committed to working against that, obviously, anything beyond that would be a Board level decision but with continued financial performance, I think the Board and management team has shown our willingness to return excess cash to shareholders but we don't have anything else to announce today.
Mark Bacurin - Robert W. Baird & Co., Inc.
Okay, thank you.
Operator
And next we'll hear from Gary Bisbee with Lehman Brothers.
Gary Bisbee - Lehman Brothers
It sounds like the front-end activity from the sales force continues to be an issue. Do you have any sense or can you give us a sense of what percent of the executives that your sales people are reaching out to in the North American market. I've heard from an executive board sales person in the past, I have heard from a few people in the sales force that they are banging their head against the wall because they are calling people who have been pitched the same program three, four or five times in the past and I wonder if that may be one of the reasons the yield on the meetings are getting lower?
Thomas L. Monahan, III - Chief Executive Officer
Hi Gary it is Tom, absolutely our job is to make sure we are calling on executives and our target universe every year. That is no different in 2007 or 2008 than it was in 2006 or 2005. So that's our job to get... we know who the target executives for a particular program are and our job is to get in front of them and create excitement about that year's agenda and the problems that we've addressed. Every year we have a new story to tell these guys in terms of our new research agenda, a larger member network, new problems that were on top of and we are encouraged by the fact that when we spend time with customers what we tend to hear is you don’t tend to hear getting the best ideas from 16,000 of my peers at large companies globally is something I am not interested in. What we tend to hear is not now, the time isn't right for me right now.
So absolutely our job is to make sure we get back in front of that executive as often as we can to find the right time to enlist them in membership. And as I said on the call, first priority this year is making sure we have enough people that we are getting them out in front the right executives and where we are seeing resistance to try new approaches for getting in front of people. The encouraging news is that when we do get people into that front-end of the pipeline, conversion rates remain very consistent as we move through that pipeline, so its our job to put first people and then creativity and energy into driving the front-end of that pipeline.
Gary Bisbee - Lehman Brothers
Okay, you talked about the institutional renewal rate. Can you give us any sense, I know you don't give us the number but how the program level renewal rate has trended. Has that... has that weakened or is that number been, and I am talking about the large customer ignoring that the mid-market is lower?
Timothy R. Yost - Chief Financial Officer
Sure Gary, it is Tim. If you go back to Tom’s breakdown of the contract value short fall, about $17 million of that contract short fall was attributable to renewal performance and if you think about that in terms of what last year's year-end contract value, that would be about 3% decline in kind of our program renewal rate levels on a year-over-year basis, so that gives you a pretty good idea of the change there and obviously that's one of our main priorities in 2008 is improving that rate.
Gary Bisbee - Lehman Brothers
Is this a number that's fluctuated a lot in the past and do you have any sense or feedback from a client as to exactly why that is happening beyond just the economy, for example changes in the research product or anything you can pin point there?
Timothy R. Yost - Chief Financial Officer
It has been a relatively stable rate across time, historically what you have seen is kind of if you look back a couple of years ago when we reported a separate program renewal rate you saw, kind of 82%-ish renewal rates at the program level and a bad economy in the kind of 84%, 85% in a more favorable economic environment. So it tends to be relatively stable across time and as you heard us say this is big focus for us and in 2008 is making sure that those figure of those large customer continue to grow at rates that we have seen in the past.
Gary Bisbee - Lehman Brothers
Okay, can you give us an update on the new field sales offices, what... maybe what percent of the sales teams are there now or is the performance there any different from the overall performance you've talked about?
Timothy R. Yost - Chief Financial Officer
Sure, Gary it’s Tim. At this point the total number of field sales folks that are working out of those office as a percentage of our total number is probably in the 30% to 40% range. Over time it probably gets a little bit higher as more of the business is concentrated relative to Washington on those [inaudible]. From a performance perspective, I think it is little bit too early to tell, there is lots of anecdotal evidence that the offices are creating a tremendous amount of energy and obviously having them closer to the customer base increases the amount of time they can spend with their customers. So the early evidence, well anecdotal is positive but we are obviously continuing to watch to make sure that we see the returns from those offices that we expect.
Gary Bisbee - Lehman Brothers
Okay and then just one last one. Tom you mentioned at the end, a high degree of confidence in the ability to get these issues under control and get back on track during 2008, I guess other than a strong product and good feedback from customers in general about the product, is there anything that we can and I guess also the sales force headcount growth you had in the fourth quarter. Any other intangible things we can grab on to, to understand how you got this high degree of confidence? Thanks a lot.
Thomas L. Monahan, III - Chief Executive Officer
As always contract value is the leading indicator of the business and the activities we are driving are ought to be driving that number in the right direction across 2008. So, we will keep our eye on that contributes to that and drive the across the year and we'll be updating each quarter on each of the four priorities so, we've talked about sales force headcount, we've talked about how quick we are making people productive, we plan on being very active in discussing those four priorities where we are seeing progress and where we've got more work to do.
Gary Bisbee - Lehman Brothers
Okay. Thank you.
Operator
And next we'll hear from Brandt Sakakeeny with Deutsche Bank.
Brandt Sakakeeny - Deutsche Bank
Thanks. Hi, guys. Question for you, I guess first on the middle market renewal rate that 80% figure actually surprised me a little bit obviously among other things. Can you just talk a little bit more about the issues there and I think Tim you've excited [ph] turnover, but anything more specific about why those numbers are coming in where they were?
Timothy R. Yost - Chief Financial Officer
Sure. The client renewal rate for the middle market is lower than large company renewal rate. It is in line with what our expectation was for at this point in its maturity curve. As I've said in my prepared remarks there are two big factors that affect the renewal rate. The first is the average cross-sell of 1.44. So if we loose one relationship of the company we often lose the entire relationship where that's not true in a larger company market. Second, as we see in a larger company market, executive turnover is the primary cause on non-renewal and this executive turnover does tend to be a little bit higher at smaller middle-market companies.
So, net, net we are confident that over time as the average cross-sell increases we'll see improvement in the client renewal rate, but given the dynamics of the market it will probably not reach the same levels of our larger company market, which is okay from our perspective. Even with a lower client renewal rate, the economics of this business are very attractive and look much like our core program economics. So, we are pleased with the results we've got in so far.
Brandt Sakakeeny - Deutsche Bank
Okay. And then looking at the relationship between new client adds and cross-sell at year-end it definitely seems that softer economy has historically affected the new client adds, it didn't this time affect your cross-sell and I would estimate and think that there is something in the program research issues that wasn't really resonating with your clients. Is that a fair conclusion or did you just not transition those agendas in time?
Thomas L. Monahan, III - Chief Executive Officer
Hi, Brandt, it is Tom. We... you'd never hear me say that we shouldn't be going back in each and every program at each and every point during the year and asking whether we have a value proposition and agenda that delivers immediate tangible ROI for a member and we are absolutely doing that right now to make sure we are on point for what is a difficult budgetary environment in some sectors. And there are certainly places where the research agendas didn't ring the bell and that's true every year.
When you look at the 2007 outcome, you do see that while there was some variation performance across practice and program areas the shortfalls were pretty evenly spread across North America, but larger story is clear when you view it to a customer rather than a product lens. Here as I mentioned we did see slower growth than I would like at some of our largest customers due to a decline in their program level renewal rate and that ended up resulting their maintaining rather than growing their spent with us.
Job one there is to keep growing those customers and that's going to require some changes to our sales and service approach to better integrate them and it absolutely begins with a great program by program ROI. So, our program is certainly part of the story. As I mentioned, we are encouraged by the strong institutional renewal rate, 92% in the large corporate market and the increasing spent levels I mentioned to our largest customers. So, together those two things give us a great foundation, and a solid blueprint for driving growth, but we got to make it happen at more customers.
Brandt Sakakeeny - Deutsche Bank
Okay, and you also cited that, that your largest clients are subscribed into 30 plus programs. I mean is there a characteristics or some other sort of aspects that your largest clients have that is not transferable to the bulk of your client universe?
Thomas L. Monahan, III - Chief Executive Officer
Brandt, it’s Tom. No I wouldn't say that, by and large they tend to be with the people who tend to be with our people, who have been with us for the longest periods of time, age tends to correlate very strongly with the size of the relationship but there is as we look across those large customers, we don't see anything about them that makes them pretty well [ph] receptive to need for advice or having positions, we are deconstructing what we've done to make sure we get there, to make sure we replicate those outcomes at other companies.
Brandt Sakakeeny - Deutsche Bank
Okay and just terms of, in terms of just fears around a repeat of 1Q ‘07 where you ended, obviously '06 on a disappointing note, and then had to come back to The Street, with reduced guidance. What gives you the confidence now, that you sort of got your arms around the issues, or at least can stabilize the business, you may be not just getting any progress?
Timothy R. Yost - Chief Financial Officer
Brandt it is Tim. I think the topline revenue guidance that we've given of 5% to 10% is reflective of where we ended the year and we obviously have higher expectations for contract value growth across the year and to the extent that we are able to get contract value growth, growing faster that would obviously impact our guidance but at this point we are comfortable with the guidance we've provided and we’ll continue to update folks across the year but we feel pretty good about the guidance we've given out.
Brandt Sakakeeny - Deutsche Bank
All right great thank you.
Operator
We'll now hear from, Scott Schneeberger with Oppenheimer.
Scott Schneeberger - Oppenheimer & Co.
Hi, thanks. Just following up on that last question, obviously you hired a lot of new, net new sales folks in the quarter. Could you just speak a little bit to how long before we view them as productive as we know the net new sales hires in 3Q wasn't that strong, just kind of when each will come of age, so to speak?
Timothy R. Yost - Chief Financial Officer
Sure. Scott it is Tim. As you've heard us talk about before from that kind of base line level of productivity we tend to see a new sales person ramp up across one to two quarters and that will obviously continue to ramp considerably beyond that our average tenure as a sales person is about 3 years. So, you can do the math in terms of how long it takes the ramp up to kind average productivity of the... of the sales force but obviously this is particularly in North America, a huge priority for us this year. So across the year, we'd expect those folks to positively contribute and obviously being in a much better position from the start of the year from an overall headcount perspective this year than we were last year, it's a pretty good foundation beneath us.
Scott Schneeberger - Oppenheimer & Co.
Okay. Yet, you have said I think one or two quarters in the past, but you still from what you are seeing over '07 that continues to be the case, it's not sliding at all?
Timothy R. Yost - Chief Financial Officer
It's pretty close to the same range, we're obviously not getting them to the same absolute productivity levels and we are continuing to work on that but in terms of how the group moves through the pack it’s about 1 to 2 quarters.
Scott Schneeberger - Oppenheimer & Co.
Okay thanks. And then, within the sales force, could you speak to retention of I guess your more tenured folks as opposed to your less tenured folks. I guess may be drying 3 years or 2 years is a cutoff of tenure, wherever you see fit?
Timothy R. Yost - Chief Financial Officer
Sure, when we talked about our retention rates, we talked about career staff retention rates which are... you can generally define that as folks after they've moved been promoted one time so beyond their initial job, at CEB serves a good parameter from a 10-year perspective on the new sales folks and from that perspective our retention rate of those more tenured sales folks within the low to mid 80% range last year, very much in line with our historical experience. So, the turnover challenges that we faced across the year weren't with us more tenured folks that turnover challenges were with the lesser tenure parts of the sales force. And we think that getting those new sales folks on board and productive will obviously go a long way to helping the retention levels of that group as well.
Scott Schneeberger - Oppenheimer & Co.
Okay. Thanks. And, I believe you still have obviously with Ms. Berger you are filling a senior level role, but I believe you still have some other senior role that are open. Could you just speak to what remains open, what the update... kind of the strategic update is there?
Thomas L. Monahan, III - Chief Executive Officer
Yeah, I think the... I'm very comfortable with the organization and leadership we have for 2008. The sales leadership team is now organized under strong geographic leaders and then aligned by product and practice area with strong general managers who are on the hope to drive renewal and cross-sell in our major practice areas. We've also made a great addition of Susane Berger who brings us some capabilities and perspectives that are varied to remain to some of the key problems we are facing. We think she will be a great addition to our leadership team.
Beyond this leadership layer, we certainly are hungry to acquire great emerging leadership talents for the sales and product organizations. We are certainly in the market looking for talent. But I don't plan to given new order structure higher global head of sales and marketing instead rely on our regional sales leadership teams in our close alignment with the product area general managers to drive outcomes and cross-sells.
Scott Schneeberger - Oppenheimer & Co.
Okay. Thanks. And shifting gears a little bit, and Tom this is something you said earlier, and I missed a piece. But, I think you said that still there is a pipeline of about 90 new programs and you said something about launching 10 to 15. I assume you are still looking to launch six or seven per year, I just missed what that 10 to 15 was.
Thomas L. Monahan, III - Chief Executive Officer
The 10 to 15 is what you have to believe...to believe we can penetrate all of our $5 billion opportunity. We've always talked about needing to launch roughly, 60 to 70 programs to get to a large enough program set to drive the right level of cross-sells. So 10 to 15 is roughly, roughly the number you have to believe there. We have not given exclusive guidance as to the number of programs we are going to launch this year. Tim did outline the contract value growth we expect from new programs this year and we'll launch the right number to make sure we set up that number of... that amount of cross... excuse me, contract value growth and over time continue to grow.
Scott Schneeberger - Oppenheimer & Co.
Okay. Thanks. Any color into, may be more international this year, more middle market oriented, anything that's more interactive and higher price point with the customer... advisory board, of what you might bring out this year?
Thomas L. Monahan, III - Chief Executive Officer
Yeah, certainly we said we are going to continue to accelerate our international opportunity, international as a whole grew at about 25% last year, paced by our strong performance in Europe and we see opportunities to keep growing that very quickly. Middle market remains a huge opportunity you know that we are in that market. We see more than 18,000 companies that are targets for CEB. Products, and right now we only got three products, so you will certainly see us both continue to attack the market for those three products and launch some new products as we go forward.
And we are very exited about our entree that I announced... our Q1 launch of the HR Leadership Academy, which is our first entree into the executive development space. That's a big budget that sits within the domain of executives we already serve, the needs recur and we see the opportunity for scalable attractive economics over the longer-term there so absolutely, lots of opportunities on all three fronts.
Scott Schneeberger - Oppenheimer & Co.
Okay thanks.
Operator
[inaudible] has our next question.
Unidentified Analyst
Hi, guys. This cross-sell ratio, is that for the year or for the quarter?
Timothy R. Yost - Chief Financial Officer
Cost-sell ratio is a snap shot of the average at the end of the quarter.
Unidentified Analyst
Okay, all right. It was worded, it sounded like it was for the year. So it looks like the middle market is becoming a larger part of the revenue mix?
Timothy R. Yost - Chief Financial Officer
That's just a math given that it's growing faster than the overall business.
Unidentified Analyst
Sure, do you guys see like a.. I guess a ratio where it stabilizes, it’s right now, say it maybe 80, 20 and can we expect 50, 50 or...?
Timothy R. Yost - Chief Financial Officer
There’s not a range it's... middle market is not 20% of the overall business at this point. I think the easiest way to think about it, if you think about in terms of $5 billion market opportunity, middle market makes up about 20% of that opportunity, so over time you could see about 20% of the business is how we see it right now.
Unidentified Analyst
And where do you guys have it right now?
Timothy R. Yost - Chief Financial Officer
In terms of the overall size?
Unidentified Analyst
Yeah.
Timothy R. Yost - Chief Financial Officer
That is about $12 million to our overall contract value for the year or so and right now it is only about 3% of the total contract value.
Unidentified Analyst
I meant for revenue?
Timothy R. Yost - Chief Financial Officer
Contract values is how we disclose it, it’s about 3% of contract value so contract values is a forward looking indicator and revenues it will be about 3% of next year’s revenue.
Unidentified Analyst
Okay, all right, thanks.
Operator
And we’ll hear from Brandon Dobell with William Blair.
Brandon Dobell - William Blair & Company
Hi, guys. I was hoping to kind of frame out a couple of things. One would be, to a better understand, I guess, I’m hearing a lots of things like international and new programs, the middle market could be slower productivity. It seems like there is more headwinds to structural margin or structural operating leverage than we've seen historically. I guess I would like to gauge your confidence on... kind of over to the next period of time, shall we see margins kind of at the same level we saw historically when things were running smoothly or is there enough structural headwind that this is just going to be a kind of lower operating leverage business because may be core productivity on these dollar of revenue or each percent [ph] is going to be a little bit lower?
Timothy R. Yost - Chief Financial Officer
Brandon it is Tim. I wouldn't say that there is any structural change to our... to the operating leverage at the core of our leverage is the scalability of our research program and nothing is changed there. Under a normal operating scenario we would expect to see kind of a modest EBITDA margin expansion on a year-over-year basis given the scalability there has been... this had no change there. What is a little bit different for 2008 is that we are focused on improving that growth rate on the North America sales of fiscal results and higher expenses as sales headcount has grown at least today faster than our topline growth over the past year. The net effect of this change as I said in my guidance is that we expect marketing and member services expenses as a percent of revenue to increase about 50 to 100 basis points, offsetting some of the scalability from other parts of the business netting us down to a flat EBITDA margin for the year but across the coming years I'd expect to return to a more normal pattern, where more of that scalability flows through the to EBITDA level.
Brandon Dobell - William Blair & Company
Okay, thanks. And then as you look at the kind of the pace of renewals through the year, obviously Q4 is where you see good chunk of it but I guess I'm trying to gauge what kind of renewal assumptions or kind of frame works you built into your contract value guidance and revenue guidance as we look at how much is up for grabs here Q1, Q2, Q3 of '08?
Timothy R. Yost - Chief Financial Officer
Outside of Q4, Brandon quarters are relatively even in terms of their concentration. So it’s roughly 20% in each of the other... in the other three quarters to the extent that there is any variation and Q1is a little bit higher but it's couple of percentage points and the margin it’s something like that Q4 concentration.
Brandon Dobell - William Blair & Company
Okay, then, I guess from different perspective. Are you assuming that kind of the behavior of renewals in Q4 continues into the first part of the year or that we see kind of return to more normal both I guess institutional renewal rates, but also kind of book of business renewal rates. How we frame it, kind of what the trajectory on those might be coming out of Q4?
Timothy R. Yost - Chief Financial Officer
Sure. I think it is safe to assume that we're not assuming that all of the patterns that we saw in Q4 all of a sudden reverse in Q1. We are obviously working very hard to reverse and improve the trend on those metrics across the year.
Brandon Dobell - William Blair & Company
Okay.
Timothy R. Yost - Chief Financial Officer
We are not assuming that everything is fixed on January 1.
Brandon Dobell - William Blair & Company
Okay. Great thanks guys.
Operator
And we will take our final question from Gary Bisbee.
Gary Bisbee - Lehman Brothers
Yeah. Just one follow up. You mentioned bringing down G&A to offset the higher sales expense. Can you give us a sense what is happening there? Is option expense going to continue more like this trend in the fourth quarter? In what other areas are you able to cut back on G&A expenses? Thanks.
Timothy R. Yost - Chief Financial Officer
Gary it is Tim. Options expense will continue the trend down that we've seen across the years. On the G&A expense side, I think the pattern you've seen is relatively consistent with the pattern in prior years where a lot of the investments in G&A kind of tend to be step function investments, you're rebuilding the recruiting function much like we did this year and then you're able to get leverage of that investment across the ensuing years. So, I think that pattern that we have guided to for 2008 is very consistent with the pattern you have seen from us in the past and that's what you're seeing.
Gary Bisbee - Lehman Brothers
Okay and then just lastly. You mentioned the $6 million of sort of one-time costs largely in Q1 from moving into the new building, what line item are those likely to fall in?
Timothy R. Yost - Chief Financial Officer
There's a couple of different line up. About $4.5 million of that will be spread across the line items and that's the additional carryover rent. We are essentially paying rent in two places for much of the first quarter and the remaining $1.5 million would be G&A costs directly associated to moving all the people getting the supplies and that kind of stuff in place in the new facilities. So, about $1.5 million in the G&A line and $4.5 million spread across the other buckets.
Gary Bisbee - Lehman Brothers
Okay. Thanks a lot.
Operator
And Mr. Monahan, I will turn things back to you for any additional or closing remarks.
Thomas L. Monahan, III - Chief Executive Officer
Thanks everyone for calling and dialing in. In terms of upcoming investor events, Tim and I will be at the Deutsche Bank event next week in Naples, the CS Conference later this month in Phoenix, and up at the Baird Conference in Boston right after that. We look forward to using these events as well as our regular quarterly calls to keep you up-to-date on CEB performance and the priorities I outlined in this call across 2008. Thanks everybody for calling in or logging in.
Operator
And again, that does concludes today's conference call. Thank you for your participation. Have a wonderful day.
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