The Advisory Board Company (NASDAQ:ABCO)
Q4 2008 Earnings Call
May 8, 2008 5:30 pm ET
Frank Williams - Chairman and Chief Executive Officer
Robert Musslewhite - Executive Vice President
Michael Kirschbaum - Chief Financial Officer
Scott Schneeberger - Oppenheimer
Brandon Dobell - William Blair
Brandt Sakakeeny - Deutsche Bank
Good day, ladies and gentlemen. Welcome to the Advisory Board Company's Fourth Quarter Earnings Conference Call. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Chairman and Chief Executive Officer of the Advisory Board Company. This call will be archived and available from 8:00 pm this evening until 8:00 pm on May 15, via webcast on the Company's website in the section entitled 'The Firm' found under the tab Investor Relations.
Also as a reminder, this discussion contains forward-looking statements concerning future results, performance, or expectations within the meanings of the Private Securities Litigation Reform Act of 1995 and other applicable Federal Securities Laws. These statements are based on the Company's current expectations and assumptions that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties include but are not limited to economic and other conditions in the market in which the Company operates, expansion of business offerings, future financial results, and other factors discussed more thoroughly in the Company's filings with the Securities and Exchange Commission. Consequently, actual operations or 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, I will turn the call over to the Company's Chairman and Chief Executive Officer, Mr. Frank Williams. Please proceed.
Frank Williams - Chairman and Chief Executive Officer
Thank you and good evening. I'm Frank Williams, the Chairman and CEO of the Advisory Board and with me today are Robert Musslewhite, who many of you already know and who will move into the CEO position in September and Michael Kirschbaum, our Chief Financial Officer.
We're happy to report another strong quarter today and successful financial results for fiscal year 2008. We got a fair bit to cover this evening, so let me start with an overview of the agenda.
First, I'll provide you with an update on our fourth quarter and fiscal year performance from both the financial and operational perspective. I'll also spend a little time touching on some of the key elements of our long term growth strategy. I will turn the call over to Michael who will go through a more detailed review of our financial performance, the repurchase announcement and other related financial items. I will then outline some of the organizational changes described in the press release including the transition plan for September and our early thoughts on the division of responsibilities between the executive chairman and CEO and then I'll turn it over to Robert for his comments on the transition and our plans for the remainder of 2008. Of course we'll be happy to take questions at the end of the session.
In the quarter ended March 31, 2008, Advisory Board revenues were 57.9 million, 15.2% growth over the comparable quarter of the prior year. This performance was driven by strong renewal rates, consistent growth in our existing programs and the continued success of our new program launches. Net income was 8.5 million in the quarter with EPS for the quarter at $0.47 per diluted share.
For our 2008 fiscal year that ended March 31, our revenue was 219 million, up 15.3% from the prior year's 189.8 million. Net income for the fiscal year was 32.1 million compared to 27.4 million in the prior year with fiscal year EPS up 22% to $1.72 per diluted share compared to $1.41 per diluted share in the prior year.
As of March 31, 2008, we have grown our membership base to 2,761 institutions with average contract value per member increasing to $83,595. On an aggregate basis, our contract value as of March 31, 2008 is 230.8 million, representing growth of 15.3% over the prior year. In addition, we also achieved a member renewal rate of 90%, the second highest member renewal rate in our history. This is one of the most important metrics related to the overall health of our business and illustrates that our programs are consistently addressing our members' most important strategic and operational issues.
As we have discussed in the past, the renewal rate is a leading indicator of product quality and member satisfaction as a critical factor in establishing our platform for future growth. Given the level of uncertainty in the overall economy, I wanted to take a moment to give you a sense of where our business is in terms of healthcare market we serve and our outlook going forward. There are four areas that I wanted to touch on.
First, in terms of the overall environment, we have not seen any notable shift in our members' budget outlook as there has been in other sectors of the economy. Members continue to report that most of their up at night issues center on questions of growth, clinical quality and physicians' strategy rather than on a renewed focus on cost reduction tactics due to increasing budget pressure. Our 90% renewal rates stands as a strong sign of the need for best practices in our target markets in a tangible economic impact of our work.
We are also hearing a tremendous amount of buzz and excitement over this year's research agendas and program services. We will continue to monitor the situation as the year progresses, but for now the healthcare market has been relatively stable.
Second, we continue to see consistent execution of our long term growth strategy through price increases, adding new member institutions, cross-selling and new program launches. You can see the power of having multiple sources of growth and our performance over the last several years. In March of 2000, we had 1,988 members and average contract value of $29,200. Today we have grown the membership base to 2,761 institutions and almost triple the average contract value per member to $83,595. This still leaves us only a little over 11% penetrated in the context of our current $2 billion cross-sell opportunity and still a very small portion of our member spending on related professional services, a long way of saying that the strategy of pursuing multiple avenues of growth has worked and continues to have a lot of running room.
Third, in terms of forward metrics, our contract value growth of 15.3% and deferred revenue growth net of long term, deferred, and pre-pays of 18% are consistent with our 15% revenue guidance for the year. A slight deceleration in contract value growth from the 16% range can be mostly attributed to the fact that we are increasingly entering into multiple-year contracts and our programs anchored by analytical tools. This change in the contracting approach, which establish as a long term relationship upfront, also causes the setup component of the membership fee to be spread across multiple years rather than just across the first year of membership.
If you adjusted for the effect of multiple year contracts, contract value growth as well as revenue growth would be approximately 16%. Overall, despite its effect on current contract value, multiple year contracting is obviously great for the business because it enhances renewability with no impact on the cash characteristics of the business.
Fourth, we are seeing heavy demand for our program anchored by analytical tools, which is creating a huge market opportunity as well as some pre-increased operational complexity. In some of our newer programs, nursing and bad debt in particular, demand has been higher than initially anticipated. This is causing us to stagger start dates and in some cases extend the term of the first year of membership to ensure that members are getting full value from program services. The net effect has been the delay revenue from the first half of 2008 into the second half of the year, which is reflected in our revenue guidance for the remainder of the calendar year.
Again, we have very good visibility regarding the revenue stream, but it's also more back weighted as a result. Improving our effective capacity to meet member expectations has been one of our top operational priorities over the last quarter and I am confident that we will return to more standard pacing over the coming months.
From an organization perspective, the talent base and labor market is strong and operationally we need to continue to prepare the organization for growth and scale as we have over the last several years. So that’s the state of the union as I now see it and I will keep you updated if any of these factors change moving forward.
Building on that quick snapshot of the business, I thought I'd also touch on the key elements of our long term growth strategy.
If you think about where we sit today, we are in an outstanding position for future growth and I see four major areas of opportunity before us. Our first opportunity lies in expanding our services to what is currently our largest customer base, the US hospital sector. Given the market forces acting on this sector, there has never been a greater need for what we do. Employers, managed care organizations and the government are all demanding improved performance and greater transparency from hospitals on key cost, quality, and operational metrics, and we offer a unique shared research model that provides very high value at a much lower cost than traditional professional service alternatives. Our average member still only spends on average $83,595 across a handful of our 37 programs. So there is a significant opportunity to expand member relationships through the addition of new programs. It's striking to consider that if we were to triple the average contract value per member to $250,000 over the next several years, we would still be less than half the cost of one consulting engagement in one terrain from a strategy or healthcare consulting firm.
One area worth noting in our core hospital market is our programs anchored with robust analytics. These programs, which represent nine of our 37 memberships, have proven to be incredibly powerful in driving value to the member because they deliver insight right to the desktop and assist in hardwiring best practices across large, diffuse, and highly complex organizations. Critical to our ability to develop analytical tools of such value is our larger research asset, which provides us a unique understanding of the right answers to our members' most important questions.
Further, as our members use the tools, they are reporting back high impact intangible ROI. If the number of users of each tool increases, each individual member derives great value from the data contributed as the benchmarking cohort becomes increasingly robust. This cycle also creates an extraordinary data asset for us, which feeds back into our research and significantly expands our available market. So when I think about our growth opportunities, I still have a lot of excitement about those before us in the core US Hospital market.
The second area of long term growth opportunity for us is the international market. Currently a convergence of events is making healthcare best practices very relevant in other areas around the world including Europe, the far East, Australia, and the Middle East. To take the US as just one example, the recent trends there towards increased transparency, freedom of patient choice, and consumerism along with a movement towards pay for performance program erratically changing the landscape for the administrators of the government run NHS Trust. In the phase of this disorienting change, these executives are seeking expertise on these topics and our deep knowledge base and current research agendas are right on point. Interesting changes like these are happening around the globe creating a huge opportunity to use our existing research to drive value to a target market of 1 to 2,000 large and progressive international institutions.
Third area of opportunity is leveraging our deep knowledge of providers and physicians along with our expanding data asset to reach other sectors within healthcare. We have a growing business serving healthcare related businesses ranging from medical technology and pharmaceutical companies to nursing home companies and architecture firms. These desperate organizations are joining our memberships because no one else can offer them our depth of expertise and network of relationships with over 60,000 healthcare executives that can really impact their businesses.
Our fourth main area of opportunity is expanding our presence within our new vertical and education. Education is a large and important sector of the US and worldwide economy. In fact, in the US alone, post-secondary education is a $320 billion industry with more than 6,000 institutions and 18 million students. These organizations share many characteristics with our core healthcare market and because of these similarities, we are in a great position to apply our experience and existing knowledge base in this new segment. Our launches in this terrain, the student affairs program and the University Provost Program have gotten great traction in the marketplace and we are already demonstrating an ability to serve this sector at a very high standard. As we look ahead, we see a number of additional program opportunities within this vertical especially on the academic side of these organizations and our team is quite excited about our work in this terrain.
So that gives you a good sense of the opportunity in front of us and provides a framework for our growth plan over the next several years. In that context, I'd like to comment on our acquisition of Crimson and our new program launch. We are excited to announce the acquisition of Crimson, a boutique provider of data, analytics and business intelligence software to health systems and physician organizations. Crimson's product aggregates data and applies sophisticated proprietary algorithms to help providers elevate performance on quality and cost of care outcomes. Crimson's strong base of satisfied customers including Memorial Hermann Healthcare, Baylor Health Care System, Scott & White, Singing River Hospital System and Mission Hospitals have renewed at a rate of 100% over the last three years and report outstanding results. From The Advisory Board's perspective, I'm excited about the acquisition for four reasons. First, Crimson has the best and brief product in analytics platform that we'll be able to introduce immediately through our membership.
Given the current importance of clinical quality issues to our member executives, acquiring Crimson's Proprietary Tool allows us to make a timely entry into our high priority area for the membership. Further, because of the tools position orientation, it provides a new opportunity to expand our addressable market into the physician practice setting with IPAs and large medical groups where Crimson already has had some success
Second, the Crimson business has an incredible strategic fit with our existing analytical tools platform in our growth strategy. Not only does Crimson share the renewability and scalability characteristics of our membership model, we also anticipate that its proprietary algorithms and technologies will inform some of our new analytics tools going forward.
In addition, Crimson's platform creates a powerful national dataset so we can benchmark member's performance on key healthcare value metrics as well as feed key data into our own research process. Third, the acquisition gives us a strong management team that will deepen our expertise with technology and provide strong operational capabilities.
Finally, we anticipate strong long-term financial returns as we are able to take Crimson's analytical capabilities in combination with The Advisory Board's best practices to our current membership of 2700 organizations and establish a leading product offering in a very large market segment.
Turning now to our new program launch activities, I am pleased today to announce the launch of our new program for the emergency department, a highly complex department that accounts for over 40% of inpatient admissions and a significant of direct hospital contribution profit. We did a research feedback from Emergency Department Directors the program offers a comprehensive approach to improving the operational and financial performance of the emergency department.
Through best practice research and a robust web-based analytical tool, emergency department performance program aims to hardwire optimum performance in emergency department management by improving the ability of the ED Medical Directors to surface problems and making more strategic and informed decisions of the front-line.
As always this program has benefitted from the advice and guidance of a stellar group of charter members including Spectrum Health Hospitals, Providence Hospitals, O'Connor Hospitals, Medical Center of Central Georgia, and Western Jefferson Medical Center. We are very excited about its potential.
Let me now turn it over to Michael to review our financial results in more detail.
Michael Kirschbaum – Chief Financial Officer
Thanks Frank. I've organized today's financial review around six categories. Income statement, balance sheet, cash flow, contract value, overview of the Crimson acquisition, and outlook for the remainder of calendar year 2008.
First, the income statement; a quick reminder that we're on a March 31, fiscal year end which means we just finished the fourth quarter of fiscal year 2008. For the quarter just ended, our revenue increased 15.2% to 57.9 million, up from 50.3 million in the same period last year. Income from operations increased 23.8% to 11.4 million, compared to 9.2 million in the same period last year.
Net income was 8.5 million, an increase of 18.9% over 7.2 million in the prior year. Earnings per diluted share increased 23.7% to $0.47 per diluted share, up from $0.38 per diluted share in the same quarter last year. Cost of services for the quarter decreased to 47.5% of revenue compared to 48.3% of revenue in the same quarter the prior year due to shifting timing of budgeted personnel and partner expenses within the calendar year as compared to calendar year 2007.
Member relations and marketing expense was 21.1% of revenue compared to 20.7% of revenue in the same quarter of the prior year. Increase in total expenses attributable to our headcount growth mainly in sales teams as we currently have 109 sales teams employees compared to 95 in March 2007 as well as our investment in our sales force management infrastructure.
G&A expense in the quarter decreased to 10% of revenue compared to 11.5% of revenue same for the prior year due to scaling our administrative cost over a larger revenue base. Depreciation expense in the quarter increased to 1.7% of revenue compared to 1.2% of revenue in the same quarter last year. The increase in depreciation is from the amortization of capitalized cost related to the development of analytic tools for some of our newer programs as well as costs associated with last years build up of additional expansion space in our DC Headquarters.
And moving on to our fiscal year end income statement results. For the 12 months ending March 31, 2008, revenues increased 15.3% to 290 million, up from 189.8 million last year. Income from operations in 12 months ending March 31, 2008 increased 21.1% to 41.9 million compared to 34.6 million last year. Net income was 32.1 million, an increase of 17% over 27.4 million last year and earnings per diluted share increased 22% to $1.72 per diluted share, up from $1.41 per diluted share last year.
Turning to the balance sheet. Membership fees receivable, which excludes long term receivables, increased to 81.5 million as of March 31, 2008 versus 57.7 million as of March 31, 2007. DSOs, which we calculate using average receivables, were 137 days in the quarter ended March 2008, up from 133 days last quarter and 116 days in March 2007. Excluding receivables associated with revenue from multiyear contracts that will be recognized beyond 12 months, DSOs were 122 days in the quarter ended March 31 of 2008 compared to 121 days last quarter and 113 days in the quarter ended March 31, 2007. The increase in DSOs is due to continued strong performance in some of our higher price point programs, which include more product sellings as well as the increase in multi year contracts described above.
Deferred revenue, net of amounts that we built after 12 months, increased 23.2% to 144.1 million as of March 31, 2008, up from 117 million as of March 31, 2007. Excluding pre-paid contracts and long term deferred, deferred revenue balances as of March 31, 2008 was 131.7 million, up 17.9% over the prior year.
Looking at cash flow. During the three months ended March 31, 2008, we generated 21.7 million in cash from operating activities compared to 21 million generated in the same quarter last year. For the fiscal year ended March 31, 2008, cash flow generated from operations was 60.3 million, an increase of 20% over 50.2 million generated last year. Cash flow from operations is 1.9 times net income for fiscal year 2008 compared to 1.8 times net income for fiscal 2007. For fiscal year 2009, we continue to expect cash flow from operations to be approximately one-and-half to two times net income.
Capital expenditures for the three months ended March 31, 2008 were approximately $2.9 million, of which 2.5 million was related to the capitalized development and hardware associated with analytic tools included in some of our newer programs.
For the three months ended March 31, 2008, we repurchased $46.7 million of stock or approximately 822,000 shares. This brings our total share repurchases to-date to $242.5 million or approximately 5.1 million shares. We remain committed to returning capital to shareholders and our Board of Directors has recently authorized an additional $100 million under the share repurchase plan.
As of March 31, 2008, our cash, cash equivalent and marketable securities balances were approximately $150.1 million. Contract value increased to 230.8 million as of March 31, 2008, up 15.3% from 200.1 million as of March 31, 2007. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at any given point in time without regard to initial term or remaining duration of any such agreements. If the contract is more than 12 months durations, we include only 12 months in contract value.
Now turning to Crimson. The company has also announced that we have entered into an agreement to purchase all outstanding shares of Crimson, a provider of data and analytic tools to hospitals, health systems and physician clinics. The purchase price, net of acquired cash, will be approximately 23 million broken down as roughly 18 million in cash and 5 million in stock. There is also a small earn out that will be added to purchase price if certain business performance conditions are met. We expect the Crimson acquisition to be approximately $0.10 dilutive to earnings for calendar year 2008 and break-even to slightly accretive to earnings in calendar 2009.
On a cash basis, we expect the acquisition to be break-even in fiscal 2009 and accretive next fiscal year. Crimson currently has existing contracts that provide annual revenue of approximately $309 million. Given that these are multi year service contracts, the deferred revenue from these contracts will be written down to fair value and the incremental revenue from existing Crimson contracts will be minimal in calendar year 2008. This write-down will obviously have no impact on cash flow. We expect to close the transaction within 30 days.
With respect to the remainder of calendar year 2008, the following comments are intended to fall into the Safe Harbor provision outlined at the beginning of the call and are based on preliminary assumptions, which are subjected to change over time.
For calendar year 2008, we are reiterating our full year revenue guidance for approximately 243 million and for the June quarter we expect revenue in the range of approximately 56.7 million to $57.7 million. We expect our revenues to be more back weighted to the back half of calendar 2008 compared to calendar year 2007 due to two factors which is Frank touched on earlier. First we've been increasingly entering into multi-year contracts in analytic tools program. Well this has a very positive effect of locking in renewals and pricing for a longer period of time and causes a short-term shift in the timing of accrual revenue as we spread the set up fee over the life of the contract instead of just the first year.
This has no impact on our cash flow as we still collect the set up fee up front. Since we moved more aggressively to this practice in the second half of calendar year 2007 the impact has been to shift the accrual revenue out of the first half of calendar year 2008 and into the second half of the calendar year.
The second factor is the high demand of two of our analytic tools programs that Frank mentioned earlier. As a result of this demand in some instances we have decided to stagger membership starts and offer longer membership terms to ensure that our members have enough time to get the most benefit possible from the tool.
As mentioned above we expect this to cause revenue to be back weighted in calendar 2008. Most of these factors contribute to our increasing deferred revenue growth which is up 23% over the prior year on a gross basis and up 18% net of long term deferred, on top of strong comparables from the prior year.
Adjusted earnings per diluted share for calendar year 2008 excluding the impact from the Crimson acquisition, we are increasing our guidance from $1.86 to $1.87 due to the strong performance in the first calendar quarter. As mentioned earlier, we expect Crimson acquisition to be approximately $0.10 dilutive to earnings, therefore our earnings per diluted share guidance for calendar year including the dilutive effect of the acquisition is $1.77.
Included in this calendar year 2008 earnings per diluted share estimate is approximately $0.45 to $0.48 per share based compensation related expense for the year as we have slightly changed the mix between equity and cash and cash incentive compensation.
We expect income from operations for calendar year 2008 to be approximately $43.4 million. Given the large portion of the dilution from the Crimson acquisition due to the amortization of intangible assets and lost interest income, we expect EBITDA margins for calendar year 2008 including the effect of the acquisition to be roughly the same as they were in calendar 2007 of approximately 20.3% of revenue.
For the June quarter of calendar year 2008, we expect earnings per diluted share of $0.34 inclusive of the impact of the Crimson acquisition. This concludes the Financial Summary. I'll now turn things back over to Frank.
Frank Williams – Chairman and Chief Executive Officer
Thanks, Michael, now a few words on our executive promotions. As you all read in our Press Release we announced effective September 1st, Robert Musslewhite will step into the CEO role and David Felsenthal will become President. I will remain as Executive Chairman.
The timing of the decision was related to three factors. First is Robert's strong performance and steep trajectory, his energy, focus on innovation and unique leadership style give me great confidence in his ability to lead the firm. Second, I've increasingly wanted to direct my focus primarily to the growth strategy, business development with our most progressive members and relationship building with key industry players. Third and important as well, I have a need to be based out of San Francisco for personal family related reasons.
I will remain intensely focussed on the business and look forward to a very productive partnership with Robert and David. For those of you who do not already know Robert, he joined us almost five years ago from McKenzie and ran our growth strategy and new product development group before broadening his responsibility to run program operations, member services, and sales and marketing for a significant portfolio of the company's membership programs.
Robert's leadership in these roles has highlighted his exceptional strategic thinking, his innovation, his deep understanding of our business, his dedication to our mission, and his appreciation for our employees' talent and hard work. I'm very pleased that he will move into the CEO role in the coming months and I'm also excited about David Felsenthal's promotion to President.
David's contribution as CFO and COO has been extraordinary, and he will be an incredible partner for Robert in driving continued strong performance across all aspects of the business. Given the strength of the entire leadership team, our unique combination of assets, and the large growth opportunity in front of us, I remain very confident in our ability on what is already an exceptional track record of performance.
With that, it's my pleasure to turn the call over to Robert.
Robert Musslewhite – Executive Vice President
Frank, I'm very excited by the opportunity to assume day to day leadership of The Advisory Board later this year and I look forward to continuing in building on our great partnership. It is an honor to have the support from you, the board, and our close to 1000 employees, who are all focussed on delivering exceptional value to our base of over 2700 members.
I also feel that the transition plan has been well thought out and allows for great deal of continuity and leadership at a time when we are executing well against our long-term growth strategy. As a result, I am confident that the entire team will remain focused on the four strategic priorities we have established for 2008 and into the future. First, to continue to provide relevant, timely and actionable research data and tools to our members. One recent example of our strong execution on this priority is our clinical operations programs 2008 national meeting series, which launched earlier this month.
The agenda for the series focuses on the joint optimization challenge of balancing investments in both quality and efficiency and helps to bolstering hospital performance over the long term. This strong 3.86 TPA the sessions received at the opening meeting is a testament to the quality of the research and timeliness of the topic. This type of work is going on across all of our programs and we are continually investing to ensure that all of our research is on point and provides proven best practices to address members' most important strategic and operational issues.
Second, to continue to focus on driving our research deeper into each organization to support our members' critical operational and strategic decision making. Our ability to make our research immediately relevant to a large number of executives at each member institution increases the value members derive from the programs and ultimately impact their decision to renew with us. One exciting current project in pursuit of this goal is our exploration of new ways to work with our expanding data asset.
We are testing ways of using this data that will engage more individuals at each member institution and embed our research even more deeply into the members' daily workflows. This type of creativity is evident throughout the organization and makes me very confident that we will continue to execute well against this priority.
Third, to continue to execute on our new program development strategy. Having focused much of my time in this area personally over the last five years, I am deeply engaged with this aspect of our business. We have an outstanding team working on this strategy and an unparalleled foundation to build upon. I am very excited about our current pipeline of new program possibilities and given our prudent launch process, I am confident that we will continue our track record of bringing successful new programs to market.
Finally, to build a scalable organization with top talent. This is an ongoing priority for our Board, our executive team, and managers throughout our ranks. As always, this past quarter we continued to scale our direct sales force inline with our plans for the year with a 109 teams currently in place, up from 95 at this time last year. Total Advisory Board headcount now stands at 910 people and our research staff is now over 530. We continue to invest heavily in developing and training our staff and now offer an extensive curriculum of learning opportunities through our Advisory Board University.
The depth of our talent is truly one of our differentiators and one of the reasons I am most excited is step into the CEO role. With the outstanding leadership and the potential I see at all levels of the organization, I know we have in place the building blocks for ongoing growth and success.
With that, let me turn it back to Frank.
Frank Williams - Chairman and Chief Executive Officer
Thanks Robert. Robert, Michael and I plan to be on the road, meeting with investors over a number of days across May and early June and look forward to giving an update on the business and our priorities for the coming year.
With that, why don’t we take time now to answer your questions.
(Operator Instructions). And our first question comes from the line of Scott Schneeberger with Oppenheimer. Please go ahead.
Thanks. Good evening.
Good evening Scott.
Hi. I guess a first question, and Frank you addressed this a good bit, but right at the beginning in discussing what the hospital customers, what they are looking at, what keeps them up at night, and you mentioned it's not cost control, as you mentioned a few other items. But could you give us an idea for obviously very strong renewal of membership number for the year, but could you give us the reasons provided to you by members who did not renew kind of the top two, three, four of what was driving that?
Sure. I mean, I think the reasons, which obviously we've had over the years are very consistent this year versus prior years. First reason is main contact turnover, so many a times, I hope that is pretty fluid from a job respective and you might have a chief nursing officer who goes to a new organization, someone new comes into the role and we don’t know as well and as a result we will lose the renewal, sometimes it will take us a year to 18 months to build back up that relationship, so that would be the primary reason. Second, you might have a case sometimes when an organization is going through intense budget pressure and in that case they decide that they are cutting all discretionary expenses, you tend not to see a lot of that, but it does happen occasionally.
And then third, you might have a case where someone join the membership and for all of our efforts to get them involved in utilizing the services, we just weren't able to get them add our member meetings, using the tools, using the website, et cetera and so they end the year saying, "Look, I didn’t get the value that I planned for," again very small cases, a number of cases there and we do a lot in the first year to make sure that doesn’t happen, but occasionally you will have some people who drop for that reason. I mean, overall renewal rates have been incredibly strong, the 90% rate is second in our -- highest in our history and I feel like we are executing in a very high standard in terms of our research, program, services, the agendas, utilization, I mean everything you would want to be happening in those programs is happening and again feel very good about where we are.
Great, thanks. I guess along the lines of 4Q is new member, institutions, price increases, cross-selling, new program launches, anything significantly above or below plan or right in the middle point of the range, if you could just address each of those within those parameters? Thanks.
I think if you look at our four sources, I think all of them came within our expected ranges. Our new programs I would say were at the high end of the expected range with the others being at the midpoint cross-sell, maybe at sort of the midpoint or slightly below the midpoint, but again very consistent with our expectations.
Thanks. And then turning to Crimson, are these guys -- did you have a relationship with them before or you just find them out going looking for business development or was there something existing between the two before?
Yeah, I think what happened is what normally happens in the case is we do a very deep research study for the membership on an important topic area and in that research we discover an innovative approach or idea and that’s exactly what happened here. The physician management topic and, for those of you who cover healthcare and all of the investments that are going on in sort of managing clinical utilization and quality outcomes, a tremendous amount of spending, a lot of frustration that people aren’t getting the benefit from the technology, a lot of focus on transparency and we found I think a very unique solution, which combined with our best practices and analytical capability open up, I think a great market opportunity and again one that is best practice that came directly out of the research.
Okay, thanks. And then just real quick finally. The earn outs or are those, a) do you care to quantify, b) is it staggered or is it all I think it was March 31, 2010, would it all come at that point? Thanks.
The earn out is relatively small. It's obviously we are totally depending on where we end up with it. The max would be probably in the $3 million, $3.5 million range and we expect to pay that about in the 12 to 24 months period.
Thank you very much.
Our next question comes from the line of Brandon Dobell with William Blair. Go ahead.
Hi guys, thanks. Frank, as both of you are talking about kind of the shift to the multiyear contract, I have a couple of questions there. One, any sense of kind of how much of the new business is starting to show up with longer term contract i.e. not renewals or if you already knowing what kind of with the longer terms, but I guess more importantly new deals that are showing up on the multiyear contracts? And then second kind of related to that. We saw the big deferred revenue increase. If you include that, you talked about staggered start, closing things in the back half of the year. Maybe if you can relate those things back to the contract value number for us? Do the staggered starts or the change in how the setup fees are recognized or those kind of things, how those impact contract value and should we have expected to see anything in this quarter in CV or is it more about the next couple of quarters where we may see an increase in contract value growth?
Brandon, it's Michael. On the first part of your question, we are entering into multiyear contracts in both renewals and in new sales. Obviously with renewals, it doesn’t have any financial impact in the current year because there's no setup fee to spread over the current period. But it obviously does have an effect on annual renewal rates, so we do think it's a big positive for the business. In terms of new contracts, we are doing that with a larger percentage of our analytic tools programs. It's probably 50% plus when we are multiple year contracts and in that case they are between two and three year contracts depending on what the member really wants and it takes that setup fee and spreads it into future periods. Now does tie into the second part of your question that does show up in contract value and in deferred. Obviously, in contract value, as you have a setup fee that gets spread over two or three years versus one year, it's recorded as a lower amount in current contract value, I guess in two years it would be there where it wouldn't be there normally so it does affect contract value and out periods but for the current period it does reduce contract value as Frank mentioned earlier, directionally moving 15% range or the 16% range, if we were to not do the multi-year contracts and obviously that sits in deferred revenue as well as it sits there a longer per idea of time so a larger portion has been deferred and a smaller portion has been earned.
Okay. And then I guess another contract value question; looks like average contract value for customer up about 11% year on year. I'm assuming that we should build in kind of maybe four or five of that the is price, the remainder would be kind of core, same customer growth and if you thought about that 6% same customer growth is it fair to assume that that's maybe evenly split between kind of new program adoption and cross-sell or is it skewed one way or the other?
Well, I think if you look at the 11% that's consistent with what our expectations would be and if you think about average contract value per member that's including cross-sell, that's accruing – including new program roll outs. And so you have those actually in that amount. If you then look at new institution growth, remember the number of institutions, so if it grows 4 or 5%, doesn't necessarily reflect the impact on the growth number. So, if you look at the points of growth that came from new member institutions it is about 1.5 point, again within our expected range of 1 to 2 points.
Brandon, what you also see in there is a little bit of the math due to the fact that we have new education institutions which we haven't had before so a large portion of our new institution growth is education institutions which generally have one or two programs so smaller on the overall cross-sell range right now just because we don't have as many program offerings for them.
And then if you look at pricing, pricing would probably be in about the 3% range. Again, remember our expected range is 3 to 4 points on the pricing so about 3% on pricing.
Okay and Michael then from a modeling perspective we're thinking about the dilution from the Crimson deal, I'd imagine given the timing on closing that the June dilution would be pretty minimal. It would be a couple of pennies and you would see most of it in the September and December quarter, is that a fair way to characterize the trajectory?
Yeah, it's probably relatively even throughout the year. So, we close sometime in the next 30 days, yeah we have mid-quarter close, and then a little bit more in the second quarter and the third quarter.
Okay so by March of '09 there should be pretty minimal impact from the dilution element.
Yes, that's our expectation.
Okay. Great, thanks guys.
(Operator Instructions). And our next question comes from the line of Brandt Sakakeeny with Deutsche Bank. Go ahead.
Hi thanks, but all my questions are already answered.
Thank you ladies and gentlemen. (Operator Instructions). And I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Please proceed gentlemen.
Great well I appreciate all of you taking the time to sit on the call this evening. As I mentioned we will be out on the road a fair bit over the coming weeks and look forward to meeting with a number of you individually and again look forward to seeing you and thanks again for participating in the call.
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful evening.
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