Corporate Executive Board Management Discusses Q2 2012 Results - Earnings Call Transcript

Jul.31.12 | About: CEB Inc. (CEB)

Corporate Executive Board (EXBD) Q2 2012 Earnings Call July 31, 2012 9:00 AM ET

Executives

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

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

Paul Ginocchio - Deutsche Bank AG, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

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

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

David Ridley-Lane - BofA Merrill Lynch, Research Division

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

Sam Hoffman

Operator

Good morning, and welcome to the Corporate Executive Board's Second Quarter 2012 Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 9 by dialing (719) 457-0820. The replay passcode is 540-3939. A replay will also be available beginning later today and through August 9 at the company's website and at www.earnings.com.

To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and following the Investors link to yesterday's news release. You will also find a PDF of the supporting materials that the company will use in its prepared remarks this morning by going to the Investors page and following the link to the second quarter earnings conference call. Please review the second page of these materials, which includes important information about any forward-looking information included in the presentation. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2012 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in the Corporate Executive Board's filings with the Securities and Exchange Commission and in its second quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, for opening remarks, I'd like to turn the conference over to the company's Chief Financial Officer, Mr. Richard Lindahl. Please go ahead, sir.

Richard S. Lindahl

Thank you, Scott, and good morning, everyone. I'm Rich Lindahl, Chief Financial Officer of CEB. Thank you for calling or logging into our second quarter 2012 earnings call. Here's a quick overview of our time together this morning. I'll start with a summary of highlights from the quarter and review our revised financial outlook for 2012. Tom Monahan, our Chief Executive Officer, will provide an update on our key strategic priorities, then we'll take your questions.

Please turn to Slide 3 of our presentation, which serves as a roadmap for our conversation this morning. We are pleased with our second quarter results, which reflect ongoing focus on delivering business value to our members. We are entering the second half of the year with strong momentum. We experienced sequential improvements in all of our operating metrics, which led to solid growth in both revenues and earnings. As a result, we are on pace to exceed our prior non-GAAP EPS and adjusted EBITDA guidance and are raising the earnings outlook for CEB standalone. Tom will share additional detail on some important accomplishments in the quarter that keep us on course with our key priorities. And finally, we are poised to complete the SHL acquisition this week and are excited to begin a new chapter in CEB's history.

Please turn to Slide 4 for a discussion of our key growth drivers. As expected, our teams built on the foundation established earlier in the year to deliver solid returns in the second quarter. Consolidated bookings grew at a double-digit rate led by continued strong performance by our North American and Asia Pacific teams. These positive outcomes were slightly offset by tougher results in EMEA where we saw modest year-over-year declines in total bookings. From an industry perspective, we once again saw balanced activity across all vertical markets. These positive booking results were supported by sequential improvements in all of our operating metrics. Wallet retention rate increased to 100% at June 30, 2012, from 99% at March 31, 2012. The second quarter rate declined as compared to the prior year, however, it remains at a healthy level and we are confident that our focus on delivering business value will continue to support favorable renewal, price increases and cross sell outcomes that are reflected in Wallet retention.

Total member institutions increased by 9.9% compared to last year, again driven mostly by growth in middle market, but also due to an increase in the number of large corporate customers. These favorable trends support our long-term growth strategy by reinforcing the strength of our network and laying the foundation for future renewals in cross sell activity.

Once again, because the number of middle market institutions grew faster than large corporate, Contract Value per institution on a blended basis increased 2.1% in the second quarter, even though the growth rates in this metric were stronger at the end market level.

Please turn to Slide 5. As you can see, our second quarter financial results produced solid double-digit gains across all our key financial measures. These positive outcomes put us on pace to exceed the EPS and adjusted EBITDA margin outlook we shared at the beginning of the year and set us up well for continued progress in the second half of the year. At June 30, 2012, Contract Value was $512.7 million, which is an increase of 12.2% from June 30, 2011. This figure includes $6.4 million from Valtera and Baumgartner.

Regarding this inorganic portion, as we have discussed, due to differences in how these entities have historically contracted with customers, you will see a smaller portion of their annual revenues reflected in Contract Value than is typical for our subscription businesses. Thus, these items slightly increase our mix of repeatable non-subscription services, which will continue to influence the relationship of Contract Value to revenue over time.

An and as a result, when combined with other revenue recognition timing benefits, revenues have grown faster than Contract Value these past few quarters. Revenues were $135.7 million in the second quarter, a 15.5% increase compared to $117.5 million in the second quarter of 2011. Revenue growth was mostly a result of the solid bookings trends we just discussed and was further enhanced by approximately $5 million of inorganic revenue.

Moving onto operating expenses. Cost of services in the second quarter increased by $4.2 million versus the second quarter of 2011, largely driven by acquired businesses, as well as increased headcount and related expenses in the product functions. Member relations and marketing expense increased by $3.3 million in the second quarter versus the prior-year period as a result of increased sales and marketing staff, as well as higher commissions due to the growth of bookings over the past year.

The addition of Valtera and Baumgartner also contributed a portion of the increase. General and administrative costs in the second quarter were essentially flat as compared to the prior year. Acquisition-related costs were $2.3 million in the second quarter. These expenses were nearly all due to the work on the SHL acquisition.

As we discussed when we announced the SHL deal on July 2, we currently expect to incur integration costs related to SHL of $10 million to $15 million over the next 18 to 24 months. In addition, we expect to recognize approximately $10 million of related transaction costs in the third quarter of 2012. We will report both transaction and integration expenses under the category of acquisition-related costs.

Other expense was $0.7 million in the second quarter compared to other income of $0.3 million in the second quarter of 2011. This $1 million decrease is primarily due to foreign currency translation losses and a decrease in the fair value of deferred compensation plan assets. Adjusted EBITDA margin in the second quarter was 24.2% versus 19.8% in the second quarter of 2011. The adjusted EBITDA margin in the second quarter benefited from the normalization of revenue recognition deferrals, as well as delays in certain activities as the SHL agreement came into focus.

In addition, we have adjusted out acquisition-related costs, a portion of which would not have been so categorized if we had not executed the SHL purchase agreement. I will also remind you that we do not adjust out stock compensation expense, which was $2.3 million in the second quarter of 2012 when calculating adjusted EBITDA margin.

Depreciation and amortization in the second quarter was $5.9 million, an increase of $1.6 million compared to the second quarter of 2011. Most of this change was from higher amortization due to the year-over-year increase in intangible assets. Our effective tax rate was 40.4% in the second quarter and 40.9% for the first 6 months of 2012. We currently estimate that our full year tax rate will be approximately 41% before the effect of foreign currency translation gains or losses.

Non-GAAP diluted earnings per share in the second quarter was $0.48, an increase of 54.8% compared to $0.31 in the second quarter of 2011. Non-GAAP EPS benefited from strong revenue growth, certain expense timing delays, a lower tax rate and the adjustments for acquisition-related costs.

Turning to the balance sheet. Membership fees receivable were $111.5 million at June 30, 2012, compared to $154.3 million at December 31, 2011. Average days sales outstanding were 69 days for the second quarter, consistent with historical seasonal ranges. Deferred revenues decreased seasonally at June 30, 2012, and the current portion was $293.9 million which includes $3.2 million from Valtera and Baumgartner. As compared to the prior year, deferred revenues increased by 13% due to improved year-over-year bookings. This outcome continues to bode well as a leading indicator of near-term revenue growth.

Year-to-date cash flows from operations were $83.5 million for the first half of 2012, an increase of 53.8% over the first half of 2011, driven largely by improved business performance and cash tax benefits from the sale of toolbox.com.

Next, I'll discuss our outlook. The following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time. Please turn to Slide 6. Based on our progress to date, we remain on track to achieve our prior 2012 revenue outlook and thus, we continue to anticipate full year revenues of $535 million to $555 million. While we expect second half revenues to increase as compared to the prior year, the growth rates may be lower given the revenue recognition benefits realized in the fourth quarter of 2011.

Our second quarter expenses were influenced by all of the factors we anticipated on our last earnings call, including a full quarter of Valtera, increased headcount, the impact of annual merit and payroll tax increases and the seasonal ramp in annual meetings and expenses. As discussed earlier, our commentary in May also allowed for the possibility that a portion of what we have classified as acquisition-related costs would instead have been shown as general and administrative expense had we not signed the SHL purchase agreement.

In addition, as the SHL transaction came into focus, we deferred certain product development activities that we plan to resume in the second half of the year. And given our positive momentum exiting the first half, we now also plan to further increase hiring in our sales channels and accelerate the pace of marketing investments to strengthen our positioning heading into 2013.

Accordingly, having mast our revenue expectations against both our spending to date and our plans for the remainder of the year, we are raising our outlook for adjusted EBITDA margin to 24% to 25% and for non-GAAP diluted earnings per share to a range of $1.90 to $2.05.

In 2012, we now anticipate depreciation and amortization to range from $21 million to $23 million, an effective tax rate of approximately 41%, not including the effect of foreign currency translation, and capital expenditures of $12 million to $15 million.

Before handing the call over to Tom for the strategic update, please turn to Slide 7 and let me take just one more minute to discuss our approach to incorporating SHL acquisition into our 2012 outlook. As we have previously disclosed, we expect to close the SHL acquisition on or about August 2, which of course, is in 2 days. While we will move rapidly to coordinate operations of these 2 entities, this transaction also requires that we complete a number of activities on the accounting side that will take some time. We have highlighted the biggest items in the center of the page, including the reconciliation of U.K. GAAP to U.S. GAAP presentations, the finalization of purchase price accounting, the completion of a detailed effective tax rate analysis and the preparation of pro forma financial statements.

We anticipate that these tasks will not be completed until October and accordingly, we will not be in a position to properly update our 2012 outlook until we report our third quarter results. For now, we continue to refer you to the SHL financial information we presented in connection with our July 2 announcement as it provides a useful perspective on our annualized historical revenue and expense run rates. At the time we update our 2012 outlook to reflect SHL, we will incorporate our most current expectations for the business and include any appropriate adjustments to revenue and expense that results from the analytical activities I have just discussed.

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

Thomas L. Monahan

Thank you, Rich, and good morning. As Rich previously stated, we're pleased with our performance in the second quarter of 2012. Against the backdrop of a tricky economic environment worldwide, we have delivered a solid quarter that sets us up for a strong second half of the year.

In Q2, both revenues and Contract Value enjoyed double-digit growth. In particular, these solid bookings in Q2 were driven primarily by strong performance in North America and the Asia-Pacific regions. However, we were not immune to the challenging economic conditions in EMEA where we experienced a slight decline in bookings relative to last year.

While we are pleased with our performance year-to-date, we see plenty of opportunities to keep raising our impact on member companies and drive great financial outcomes. Reflecting on the quarter, I want to share with you some of the sentiment that we are hearing from our members as we move into the back half of 2012. A quick scan of the headlines over the past few weeks tells you all you need to know about the operating environment. We're seeing weak to negative macro growth in a number of core developed markets coupled with moderating growth in key emerging markets and a fresh new wave of corporate scandals and risk management missteps is calling attention to the dangers inherent in running a large company today.

It's important to note that these short-term difficulties don't change the long-term trends that shape corporate performance nor do they reduce members need for help. If anything, as evidenced in our performance, this is an economy that demands microsurgery daily as companies work to optimize the performance of their people, bring profit and growth from challenging markets and manage of a widening array of complex risks. In short, it's just the sort of environment where we can be of the greatest help to our members.

It's is now clear that the changes we made over the past several years have helped our teams more effectively engage members wrestling with a difficult economic outlook.

As we have discussed in past quarters, our primary growth opportunities come from 3 sources. The first is expanding relationships with our now 5,900 existing customers; our second growth driver is adding new customers from a pool of more than 14,000 identified target companies; and our third growth driver is introducing highly relevant, high impact new product and services that link great content directly to key member decisions and work.

In order to drive growth in these 3 areas, we have established 4 strategic long-term priorities, which are listed on Slide 8: Creating must-have data and insights; building brand strength through member impact; globalizing the business; and delivering innovative products and services.

I'll spend a few minutes providing highlights on our second quarter accomplishments in each of these areas. Please turn to Slide 9 and we'll start with the first of these 4 priorities.

Creating must-have data and insights. A perpetual goal for us is to provide uniquely valuable insight into corporate performance. This insight built upon exhaustive research, compelling data and thoughtful analysis becomes the fuel for great products and high impact conversations. Ultimately, we enable members to make critical decisions with confidence in a timely, well-informed manner. I'd like to share one recent example of a key insight highlighted by our legal and governance practice. Rapid and frequent change is an inherent fact of corporate life but we've seen the pace of corporate reorganizations accelerate radically over the past couple of years. And now we are seeing the effects on the compliance and the control environment at large companies.

Frequent organization, compensation or role changes result in declining employee engagements, increasing business misconduct and over the long term, diminishing shareholder returns. On the left of Slide 9, you can see data from our compliance and ethics leadership council showing the link between frequent organizational change and higher levels of misconduct. Given the cost of misconduct, the payoff for intervening effectively is significant. In fact, companies that craft effective reorg strategies can improve employee perceptions of integrity by 40% and reduce observed misconduct by almost 2/3. To the right, you can see strategies that the team documented for reducing risk levels, ultimately creating a rich repository of best practices and tools under each of these strategies. These insights powered tools that help our members manage organizational change more effectively and drive quickly to great business outcomes.

Please turn to Slide 10 for our next priority. As we've discussed in the past, we expand brand awareness through the delivery of compelling content and outstanding service, not frequency promotion. The growing network of members benefiting from the valuable insights, rich data and powerful tools provides the greatest opportunity to drive loyalty and subsequently, brand strength. Our continued ability to stake out compelling thought leadership on topics of critical concern to member executives has driven continued media coverage in key high-end publications.

As you can see to the left on Slide 10, our work anchors the current HPR cover section on sales performance. Placements like this showcase the value and authority of CEB's insight and drive recognition of our brand and demand for our products. Along with the core promise of creating uniquely valuable resources and ensuring that they are tightly linked to high-value decisions, we see an opportunity to grow our business faster by continuing to raise our profile and effectively articulate the impact of what we do.

We are making a series of investments this year to galvanize the company around the core CEB brand and ensure the prospects and members around the world are aware of the full breadth of what we do and the track record of impact that our teams have generated.

In the months ahead, we will introduce a new description and positioning that will more fully represent the expanding capabilities of our company. To the right on this page, you see a snapshot of our new logo which will be rolled out as part of this larger branding process in the months to come. The most visible change from your vantage point will be on August 13 when we are scheduled to officially change our NYSE ticker symbol to CEB. We are excited to have our financial brand tightly linked to what our customers already call us.

Next, please turn to Slide 11 to discuss our third priority. Globalizing the business. Deeper penetration of global markets is vital to our business for 2 reasons. First, and most obviously, it powers growth. Of the 1,500 or so large companies that have yet to source a single product or solution from us, more than 1/2 are outside North America, and each one represents a near-term revenue opportunity and a long-term attractive platform for cross sell. We've continued to invest in strong teams on the ground in key markets and to complement these with investments in local events and media strategies. Second, and equally important, being global ensures that we bring ideas and data that reflect the global reality of our members who hire, source and sell globally. Senior executives from Cincinnati to Chongqing see our operations and opportunities as global and expect that we engage their peers globally to support them.

Let me give you 2 quick examples of great work made better by our powerful, truly global network. First, to the left, as you'd expect, the senior finance teams we support are looking for insights on how to manage the panoply of potentional outcomes from the Eurozone crisis. The team and our flagship finance leadership council product worked to understand our deepest -- worked to combine our deep expertise in scenario planning and continued management with perspectives from member executives close to policy makers in the EU. The result was a set of insights and contingency planning tools that armed finance teams to safeguard their enterprise no matter how the next several years play out.

Let me share a second example. If you browse the business section in an airport bookstore or on Amazon, you've probably seen the tremendous reception that our book, The Challenger Sale, has received. The book summarized our vast data sets on the performance of sales organizations and salespeople and is a literal roadmap to growth in difficult markets. As you might expect, our member and prospect base has been particularly eager to understand how these findings apply to the complex and growing markets of China and southeast Asia.

Just this week, we've staged working sessions in the region with dozens of sales leaders that help them work to roll out the findings across cultures and markets. The insights gained not only helped companies headquartered in Singapore and Shenzhen, but also their peers running global sales organizations in Charlotte or Hamburg.

Please turn to Slide 12 for our final operating priority. Delivering innovative products and services. Before discussing our recent announcement on SHL, let me briefly comment on the great results we're seeing from 2 of our recent product launches. The 2 lunches we have discussed so far this year have ramped nicely, generating both solid growth and real member impact.

The IT Roadmap Builder product, which we demoed as part of Investor Day, is the first formal product launch on our visualization technology platform. This product is rapidly becoming the repository for the key planning choices of an increasing share of the world's largest IT organizations, and we're seeing great growth in customer feedback. The growth of this platform is not only good news from a revenue standpoint, but also gives us a robust new data set to help our members plan and benchmark.

Likewise, we are continuing to see strong results from the CEB Valtera line of business, which blends the employee engagement analysis capabilities from our CELC Genesee business with a great team and capabilities from Valtera. Beyond giving us the ability to help companies identify and act on key productivity and cultural issues across the enterprise, we are also working to leverage Valtera's great resources and tools around leadership, assessment and development into a shared vision and platform that can be leveraged across the business.

The largest step we've taken to bring powerful new capabilities to market is to our pending acquisition of SHL, which will result in our being the global leader in supplying the data, tools and insights necessary to measure and manage talent. As we look at Slide 12, let me spend a minute updating you on the process and then share a bit more about the huge opportunity we see from combining our capabilities.

As you may have seen, we were granted early termination of the Hart-Scott-Rodino Antitrust review process. We've also received ratings on the company on our new credit facility from S&P and Moody's, facilitating the creation of a strong bank group. We've had a joint team from both companies working to identify key leverage points in the integration process so we can get off to a fast start right after our targeted close date of August 2.

Finally, I've had the chance to visit live or by phone with the SHL team around the world. As we have gotten even deeper into the SHL business, our excitement about the potential of this combination has only increased. We see 2 major categories of opportunity, which we have illustrated on Slide 13. Across the top, you see our 5 target end markets inside the large company, from HR to IT. The first and most obvious focus of opportunity is to the left of HR highlighted in orange. HR was the home of our first large corporate product and as a result, is our biggest end market. We have a large loyal network of CHROs, heads of LND, talent management and recruiting. Many of these HR teams are already active users of SHL assessments and talent analytics, but many are also not yet customers or don't use the solutions as broadly as they should. The biggest opportunity is to ensure that we leverage our install base, particularly in North America to broaden the penetration of SHL services.

Likewise, outside of North America and particularly in key emerging growth markets, we see the inverse opportunity. SHL's strong relationships can be a platform for more rapid expansion of our strongest products.

The less obvious but equally powerful opportunity for impact as illustrated by the blue horizontal stripe, as you all know, talent is not an issue for the CHRO exclusively. In fact, each of our key buying centers has a range of important talent issues that they wrestle with. We see an equally exciting opportunity to link SHL tools to the specific outcomes that matter for each of these executives, an objective greatly enabled by our deep processing outcomes data in each domain. In doing this, we can create both richer data sets for our existing products and whole new solutions to be sold into other end markets. Imagine how powerful a talent management or assessment tool built specifically around the needs of a sales executive, head of apps development or an R&D head like me.

Given the huge success of our Leadership Academies business, we see that executives outside of HR are eager to purchase and use solutions that help them manage people and productivity. Let me make the last 2 points about integration priority. The first reflects the fact that even prior to the combination, both of these businesses have solid growth and profitability profiles. And you can see the momentum that we are enjoying in CEB's 1H results. An important priority for the integration will be to ensure that we seize new opportunities in ways that complement rather than distract from the great work that our teams are already doing globally.

Job one of the integration is to maintain the momentum that both businesses currently enjoy. Secondly, one insight from our pre-closed integration planning activities is that SHL will bring nearly 1,000 highly motivated and superbly capable employees to our organization.

As I've mentioned in our previous announcement, we had known key members of their leadership team for a while and had always been impressed by their vision and accomplishments. With a fuller view of the organization, we now have a more complete view of the quality and energy of the SHL employees globally. We're excited to close the transaction and delighted to welcome them to CEB. On that topic, let me close with a note about my colleagues globally. As our results indicate, we made great progress against both our operating and strategic objectives in the first half of 2012. All of this against the backdrop of a less than perfect global operating environment, our progress is a powerful testament to the energy and impact of our teams all over the world. I'm grateful for their efforts, pleased with the progress we've made and even more excited by the opportunities ahead most importantly, I'm proud to have such great colleagues.

Thanks for dialing in and we'll take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Just one housekeeping one. First, what was the revenue recognition benefit in the second quarter?

Richard S. Lindahl

It was basically a push, so there was a net neutral impact.

Paul Ginocchio - Deutsche Bank AG, Research Division

Okay. And then just talk maybe -- can you talk about how Europe progressed through the quarter, or how it is today versus maybe 3 months ago? And then is there any differences in your -- in the growth of the functional areas, of the 5 functional areas you sell into? Is there any differences in growth between the 2? I would guess that technology right now is one of your better growth areas.

Thomas L. Monahan

Let me do the second one first, which is -- actually the 5 functional areas are all moving along at the same rate, they're all seeing good results in end market. So all the teams were on top of the key issues that matter and frankly, all the executives are sitting on a pretty robust pile of challenges for us to get after. So they're all very tightly aligned in terms of their growth rate. In EMEA, I think our story is pretty consistent with what you've been hearing, will be hearing from other companies. On balance, companies are more conservative with budgets as they work to navigate the macro uncertainty. We saw a huge change across the quarter, the story was pretty broadly similar from Q1. In our business, that tends to be reflected more in new sales and cross-sells than in renewals. On balance, we find it harder to earn our way into new companies and budgets than to remain connected to budgets and work that we're already supporting. So the net-net of reasonably consistent renewals and lower cross-sells in new sales result in a book of business that is slightly down in bookings for the quarter. Yes, we still think this environment bodes well for our long-term opportunity that we even slightly expanded our team with an eye on competing for more budget dollars as people trade into effective low-cost solutions. And we know that's an important market for us over the long term, so I have every confidence that our team over there will find ways to grow and thrive as the year unfolds.

Paul Ginocchio - Deutsche Bank AG, Research Division

If I could just sneak one more. So if Europe slowed a little bit from the last quarter, then obviously, the U.S. accelerated in a more uncertain economic environment. Can you pick out any reasons that would be? It seems a little -- I'm a little surprised you'd accelerate in an uncertain economy in the U.S.

Thomas L. Monahan

I think, we're pleased with the performance in the U.S. and Asia Pacific. And we think in this environment, our resources match up very well against the challenges people have and our teams are doing a great job finding ways to make sure we're connecting in conversations and through technology with those problems they've got and giving them real immediate returns on their investments with us. And I have every confidence the Europe team, as it works its way through this environment, will find similar opportunities to connect with member problems and drive great outcomes.

Operator

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

Gary E. Bisbee - Barclays Capital, Research Division

Just looking at your commentary from a quarter ago, you indicated margins would likely be down. I think you even used the word sharply, but maybe I just wrote that down in my notes a quarter ago relative to Q1 and that really didn't happen. What was better from the cost side this quarter? Or was it just that the revenue was better and the cost were closer in line with your target?

Richard S. Lindahl

Yes, I'd say there was certainly an impact on both sides. I think we definitely saw, although it's in line with our expectations on the margin, we saw revenue come in a little stronger than we were anticipating as we came into the second quarter. On the expense side, most of the things we anticipated did actually come through and there is a pretty significant sequential increase in expenses from the first and second quarter. I would say, the 2 things that did turn out a little differently one was in our thought pattern, we knew that we would be working on the acquisition with SHL but we did not know whether or not it would be successful. And so we built in a little bit of buffer to record some expenses in case that didn't actually come through and then be something we could adjust out. And then the second is, as the acquisition came into a clear focus, we put some activities on the product development side on hold temporarily to both complete the acquisition and then also resume them with a clear focus on where we were going to head post acquisition.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And in terms of the year-over-year reacceleration in a bunch of the metrics, whether it's Contract Value or the wallet retention getting better, deferred revenue getting better, should we think of that, that the business actually gains some momentum? Or is there -- was there -- it looks like there was somewhat easier comp. Is that also part of it, or is it fair to say that you feel like the business did gain momentum despite the macro?

Richard S. Lindahl

Yes, I mean, I'd say it's all of the above. I mean, clearly, the comp was a little easier this year. I mean, we were pretty upfront last year about how we got off to a slow start in the second quarter of 2011, that did not occur this year. We had great solid performance all the way through the quarter. But I think we did see some improvement in momentum, especially as we've talked about in North America and Asia-Pacific.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then just -- well, I guess, 2 more. The first one, how do we think about the pipeline of opportunities for incremental revenue streams like the IT Roadmap or some of the things that are going on with Valtera in some of these other areas? Are these still so early stage that they're not likely to have a big impact over the next 12 to 24 months? Or are we at a place where you're starting to have a bunch of real opportunities to charge incrementally on top of what you're charging for the base subscription? And how do we think about that trending?

Thomas L. Monahan

I think, it's safe to say some of the momentum that Rich just pointed to reflects the fact that not only are we doing a great job with our existing product set, but we're introducing good new products on a consistent basis. We've seen real success in a few different areas, IT Roadmap Builder is one. We've mentioned challenger sale and the resulting resources in our sales area where we've got tremendous market traction right now as people are competing in tough markets and looking for any advantage they can to shift share. Again, as I said, that's a roadmap to growth in an environment where there are very few roadmaps to growth. So we're seeing great traction there. But across the board, I think we believe new products are a vital part of the company's future and we're very excited both about the existing pipeline and about how much richer that pipeline looks with the combined opportunities of CEB, the addition of Valtera and now the addition of SHL. Pretty rich set of resources for us to package up and bring to market in a variety of compelling new ways.

Gary E. Bisbee - Barclays Capital, Research Division

And then that just leads to my last question, which is on SHL, I realize that it's early in your store consider the numbers. Anything you can give us in terms of a better estimate on amortization or what the tax rate would be or even just the sense of what the seasonality of the revenue and cost in margins are relative to your core business?

Richard S. Lindahl

Yes, Gary, unfortunately, there's not much we are prepared to say at this point in terms of kind of model building guidance other than what we've provided in the July 2 call. On seasonality, I will say that they are a less seasonal business than we are. They tend to be -- their business tends to be more evenly distributed through the year.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. And then maybe let me take one more. It seems to me like the transaction would likely be quite a bit more accretive to free cash flow than earnings. And it seems like it should have, maybe not as strong as yours, but a somewhat negative working capital cycle, 2/3 of it is subscription, relatively low CapEx. Is all of that a fair statement?

Richard S. Lindahl

I think, one of the reasons that we found the acquisition attractive was that it shared a lot of the same economic characteristics of our business. So yes, I think that's a fair statement.

Operator

And we'll take our next question from Tim McHugh with William Blair.

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

I guess, just one more question on SHL. Can you talk about -- you mentioned Europe was weaker for you and they, obviously, have a lot more exposure to Europe. I know you can't give us a lot of details, but has the slowdown you've seen in Europe impacted the numbers for SHL such that we should keep that in mind relative to kind of the trailing numbers you gave us before?

Thomas L. Monahan

Tim, we are -- we don't have anything new on that from when we said when we announced the acquisition has been growing slightly higher rate than us. And that, as a look back, that reflected both the European performance and they're also more broadly exposed in Asia than we are. So I think netting out those factors and just the urgency of the resources they have, give a great platform for growing the business going forward. And obviously, we've got a footprint in North America that can help them accelerate here. So on balance, they're strong in a number of important markets where we're not strong. And their exposure -- the combined companies exposure to Europe is -- skews north, it skews to markets that are considerably less affected by some of the unfolding dramas you see in key sovereign nations.

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

But it hasn't slowed or changed significantly because of what you've just seen even in the last 3 to 6 months. That's fair, right?

Richard S. Lindahl

Yes. I mean, Tim, look, I think, we're not giving any kind of forward guidance or incremental financial information on SHL at this point.

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

Okay. In the pricing, you talked last quarter about pricing this year being towards the lower end of the ranges. Is that -- of your historical ranges, is that still the case or have you seen any movement in that?

Richard S. Lindahl

Yes, it's still the same story from where we were in the first quarter.

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

Okay. And then you mentioned accelerating some of the sales force or sales and marketing investments into the second half of this year. Can you talk about -- give us a rough sense of maybe what your sales force is growing at and what you -- what that acceleration might mean in terms of sales force growth rate.

Richard S. Lindahl

Yes, I mean, I think, the sales force continues to grow roughly in line with revenue, maybe a little bit lighter year-to-date. I think, that we do see an opportunity in pockets to provide some incremental resources to help set up both helpful performance in Q4 as well as more importantly, get off to a fast start in 2013.

Thomas L. Monahan

I can generally assure you that it's availability of great talent that drives our growth of the sales force more than someone sitting in Rich's office saying, please, please, there's one more great sales person I'd love to hire. Then Rich saying, no. We're active acquirers of great sales talent. As a Rich said, that tends to be in line with revenue but we're also opportunistic to add talent when we see it.

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

Okay. Then one more if I could slip in. It's just currently, you changed the way you price your contracts this year as currency rates have moved. Did that have an impact on the numbers for this year or it's more a factor we'll have to keep in mind for next year?

Richard S. Lindahl

Yes, I think, it's still early days there. There's not a lot of Contract Value that's multicurrency at this point. So that wasn't a big influencer of foreign currency translation cost.

Operator

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

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

First, Rich, I know you don't want to get into detail but if you could just, at a high-level, kind of directionally walk us through the differences between U.K. and U.S. GAAP and some impact that would have on the numbers when we're looking at the acquisition on a trailing basis.

Richard S. Lindahl

Yes. It's not appropriate for me to go into any level of detail at this stage because we're still working through the analysis. Clearly, among the things that we're looking at are revenue recognition policies and how those could change. We're also looking at how certain expenses get recognized and the timing of those. So there are various elements, there could be some puts, some takes. There's clearly as we always do with purchase price accounting, there are important outcomes that need to be determined in terms of how much deferred revenue gets brought forward onto the new balance sheet and also how you allocate intangibles versus goodwill, which obviously influences amortization. So I'm just not in a position at this point to provide any meaningful commentary beyond that.

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

Okay. And then when we look forward to the third quarter call, the impact on the metrics, Contract Value, Wallet retention, et cetera. Are those going to be fully baked in for SHL and if so, any kind of the differences in Wallet retention metrics at SHL versus CEB?

Richard S. Lindahl

Yes, I mean, I think we're still looking at that and there's still some kind of policy definition to be finalized. Suffice it to say that we'll provide transparency to help you understand what the impact of any SHL calculations are on those metrics.

Thomas L. Monahan

And broadly speaking, Dan, we've done look backs at their business there and in -- for a Wallet retention rate, there's still work to do. When we inferred it, it's pretty attractive. It compares favorably with ours and we think that's a good signal of the recurring nature of their revenue, but also the fact that they're tethered pretty tightly to the member work that they support.

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

Great. And then one last for me. Just the uptick in Wallet retention, more favorable for retention or cross sell? Which was the bigger driver in that?

Thomas L. Monahan

I think it's safe to say that the larger story was actually by region where in North America and APAC, they all look pretty good. And in EMEA, as we said on balance, it's easier to renew a contract as to go work your way into a new budget or new company. So the storyline tended to be more a regional story than a drivers of growth story.

Operator

[Operator Instructions] We'll go next to David Ridley-Lane with Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

The net new member additions were pretty strong this quarter. I know you said mid-market is stronger than traditional. I'm just wondering, given the bad economic backdrop, how are you continuing to add new logos and is there anything to cull out there?

Thomas L. Monahan

I think, our business begins and ends with having great resources that people need to make decisions on problems they see sitting on their desks right then and they're not looking -- in this environment, people aren't looking for something they hope to use next year to solve a problem that's going to arrive in 3 years. So it begins with really compelling resources that hit challengers they're looking at right now and I think in all of our domains, we put together a really solid set of capabilities that support people. And then we need great people to help prospects understand how fast the payback will be on an investment with us. So we've made investments to build out great teams in both large corp and middle market, great teams of people focused on not only enriching the relationships we've got but going and securing great new logos in both markets. And you're seeing those investments and the great leadership of teams pay off there. So both sides of that equation look pretty good to us right now and we're pleased to see the investments we've made paying off.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Great. And then just to clarify on an earlier comment, with Contract Value down in Europe inclusive of Baumgartner on a year-over-year basis?

Richard S. Lindahl

What we said was that bookings was down modestly on a year-over-year basis.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay, all right. And then any thoughts as to dividend growth versus the debt repayment last year? I think you increased annualized dividend by $0.10, but now you have another potential use of cash and how you're thinking about the trade off?

Richard S. Lindahl

Sure. No, I think we've articulated that we're going to stay true to the financial priorities that we've been -- that we've laid out there for some time. We were very firm in our commitment to maintain our dividend growth policy, and you should expect us to continue down that path.

Operator

And we'll take our next question from Shlomo Rosenbaum with Stifel, Nicolaus.

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

I apologize, I had to jump off in the middle if you've addressed this beforehand. But the bookings look to me to be up 23.6% year-over-year and using the calculation, the change in deferred revenue on the balance sheet, can you give us a view as to how much of the lift in bookings came from acquisitions and how much was organic?

Richard S. Lindahl

Well, what we've given you was Contract Value for the quarter, the ending Contract Value about $6.4 million of that is from Valtera and Baumgartner. So you can use that as a proxy for relative contribution. But it was primarily organic.

Thomas L. Monahan

It's largely an organic story, obviously. But going forward, we like those platforms and as we continue to integrate them, I think you'll see their impact. But the quarter was organic.

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

Okay. And then when you talk about the margin lift from some of the delayed costs and you talked about investing in some of the products in the second half, can you just give us a little bit more detail on things that you're thinking about and how that -- quantify how much that impacted this quarter and how much of it is really going to shift into next quarter? In other words, is this just strictly a timing item?

Thomas L. Monahan

Yes. If you look at it, several of our planned launches for the year featured either an employee analysis component or an assessment feature or something that helped executives around the executive suite choose and deploy talent. So as you can imagine, as the SHL deal got closer, we thought it wise to hold off, so we didn't actually duplicate the investments with things they might already have underway. So with the close imminent and a much clearer view of the 2 organizations' resources, you can expect to see us push ahead in Q3 and catch up on a fair bit of that planned investment. I think our guidance for the year anticipates that not all of it will be squeezed into this year, but we'll catch up on a fair bit and we'll pull forward some resources. So we've got some great capacity in market to keep the momentum going.

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

I guess, another way to ask this question is if absent the timing of those investments, and then you guys actually removing the expenses, the M&A expenses from the SHL deal that, obviously, you guys would not have done had the deal not closed, would your guidance have been going up for the margins or not?

Richard S. Lindahl

I would say it might have gone up a little bit or at a minimum, we would have been towards the higher end of our range.

Thomas L. Monahan

Some portion of it was just to beat on revenue, so that obviously -- you get that and you keep it.

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

Right. Okay, so absent some of that stuff, you guys would have been at the higher end of the range or maybe a beat a little bit.

Richard S. Lindahl

I think that's fair.

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

On a go-forward basis, like when you guys think about year-over-year, when we come to next year and you're normally thinking about a 25 basis point on average improvement, are we going to start thinking about that maybe we should think about a decline because you had an usually high year or how should we think about that?

Thomas L. Monahan

I think we'll have to incorporate the fact that SHL is also a higher-margin business than ours historically into a broader view of margin structure. So I think as a matter of strategy, these are businesses that inherently have some scalability built in. And so that balancing act between reaping the returns of scaling as we grow and making the right investments for the future still tends to be there. There's nothing new in the overall economic profile of the business that allows us to scale across time and we're committed to that. But I think, we'll have to remodel out how the company looks as the 2 margin structures come together. But there's no inherent change to the economic leverage in the model.

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

So absent SHL, given what happened this year because you're giving guidance. But without SHL, would I normally expect the margins to follow what you're expecting that they would trend up? Or would I just say, hey, you had some stuff that went on and, therefore, they would be flat?

Richard S. Lindahl

I would say we were still comfortable with our 25 basis point on average long-term margin guidance. So with the contacts, obviously, we have to reevaluate that every year based on the specifics of what we're seeing in that year to come.

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

Okay. And just in terms of how you guys are thinking about Europe internally, are you expecting some kind of improvement? Obviously, you saw some shrinkage and again, I apologize if this was asked before, but are you expecting any lift whatsoever from Europe? Or is it really expected to be a continued drag through the end of the year?

Thomas L. Monahan

I think it's hard to believe that Europe at this point will contribute to the overall growth rate. If you look at our bookings growth, that was exclusively a North America and APAC story. That said, I have a lot of confidence that the team on the ground, which made some investments, is going to step up their growth rate across the year and contribute to a good overall corporate outcome. But I think on balance, they'll be under the corporate average rather than driving it up.

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

So are you continued shrinkage in Europe or are you expecting more flattish year-over-year in the second half of the year?

Thomas L. Monahan

I don't think anybody at the company running anything anywhere expects shrinkage in their business. We see opportunities to grow, we see -- we think we've resourced the company well. And we think there's some evidence that in this environment even the U.S. and APAC, which are markets with their own sets of challenges, we're enable to connect what we do to real problems on members' desks. And I think the team in Europe feels exactly the same way.

Operator

We'll go next to David Ridley-Lane with Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

I just had a quick follow-up to make sure I get these numbers right. Organic revenue growth last quarter was 11% and this quarter, you had $5 million which makes it 11%. So steady organic revenue growth in both first and second quarters. Are those the right numbers?

Richard S. Lindahl

Yes, we had $5 million of inorganic revenue in the second quarter.

Operator

And we'll go next to Sam Hoffman with Nomura.

Sam Hoffman

I just have a question about -- if you could give a little bit color on what's going on in the ground in Europe in terms of are you generating pent-up demands for the products which because the second quarter there was particularly [indiscernible] at some point, could release into sales when the market environment improves. And then also in other regions, even though they did exceptionally well in the quarter, might there be even some clients who are hesitant to buy, who might then decide to kind of move into revenue over the course of the rest of the year and going forward?

Thomas L. Monahan

I think it's probably -- I think the #1 reason our sales teams don't get a sale is they tend to hear, not now, and that not now can have a variety of reasons. It can be, I'm new in my job, I'm retiring, we're reorganizing. And so at any given point in time, we usually have a very healthy set of conversations that even if they haven't closed, we're still an active cultivation mode on. I think that's true for Europe and some of those will certainly break across the rest of the year and some may not break until second quarter next year. And I think the team feels a lot of energy around pulling those decisions forward and creating a reason for someone to buy right now. I think outside of Europe, the economy cuts 2 ways. On one side, it is a difficult operating environment and some people probably defer some budget decisions. On the other hand, our product is pretty cheap and if it's a difficult operating environment and you're looking around for things to help you get your job done, we're a lot cheaper than an FTE, we're a lot cheaper than a lot of the professional services alternatives. So people may be -- as people trade at the bottom of the pipeline, people may be trading it for more expensive solutions. So it's hard to make that call base on the results we've seen, that we're not monetizing enough of pent-up demand elsewhere. Europe, we certainly think we're building a good solid pipeline of conversation that if we work hard, we think we can monetize some this year and we think some may spill over into next year and the years to go. But it's all a great asset for the company.

Sam Hoffman

Terrific. And then just also can you help us on currency. I think you had said in the past that you're changing your billing to be in foreign currency at some point or maybe it's already happened. And if that's the case, than if the billing is in euros and the euro is down, does that mean that you raise price more to kind of compensate for that? Or how should we think about the effect of currency on revenue going forward in the core business as well as in SHL? And I guess, the effect on revenue and expenses as long as we're talking about it.

Richard S. Lindahl

Sure. As far as I'm -- I'm not just going to comment on the CEB piece only at this stage. As far as the multicurrency billing, as I mentioned before, that's still a relatively new capability and we haven't really ramped up to a material level in terms of overall take-up on that. We would expect that will grow through this year and into next year and become more of a factor. As far as the -- how the impact on pricing, I mean, I think part of the notion here with operating multicurrency billing is that we can remove some of the volatility that customers would otherwise have experienced in their pricing from year-to-year. And as a result, we think that will help with customer satisfaction retention and selling efforts over time. So we think -- that's really our philosophy, is to try to maintain the same discipline in that currency that we maintain here in the U.S.

Sam Hoffman

So in the event that the euro continues to decline, would you be able to kind of make up for that somehow by maybe cutting into the middle, maybe raising price somewhat more? Because you've kind of been doing that all along. So is there any way that you can make up for that if the euro declines?

Richard S. Lindahl

Well, I mean, certainly there are hedging approaches that could be implemented over time. If we get more of our cost base in euro-denominated locations, that would provide a partial offset as well. And then of course, if there are dramatic changes in currencies, then we would have to revisit our pricing approach if conditions warrant.

Thomas L. Monahan

Yes. In fact, with modest declines in the currency move you to a different place in the demand curve, too. So you'd expect one way you might make up some of the volume is just -- might make up some of the opportunity is just higher volumes off that price base. So one of the things we're going to do is have more stable end market pricing and that gives us opportunities to grow the business in more ways.

Sam Hoffman

Okay. And then just one clarification, I'm not sure I have it right in my notes. But you had guided for $5 million in expenses. I just wasn't clear if that was intended to be kind of actually reported in 2013 or I could achieve across 2013. So you'd kind of be at the full run rate of the $5 million like in 2014. What did you mean by when you said $5 million of expenses in terms of when it actually hits the bottom line?

Thomas L. Monahan

As we talked about, when we talk about the SHL integration, both businesses are performing at a very healthy level, both in terms of revenue growth and margin right now. So we're going to be very careful not to do anything that takes apart the well-performing watch to see what's inside. So we expect getting to the full run rate of cost savings will probably be a full year activity by the time we carefully integrate the right activities and find the purchasing synergies. And we don't want to disrupt the good momentum that both businesses have because the leverage of our revenue synergy here is substantial relative to the cost synergy.

Sam Hoffman

Okay, so the $5 million will be kind of the run rate of that by like the fourth quarter of next year?

Thomas L. Monahan

Yes. Yes, I think fourth quarter next year is a relatively accurate estimate of what it will take to make sure we do it without disrupting any other important work.

Operator

That's all the time we have for questions today. I'd like to turn the conference back to Mr. Monahan for any closing remarks.

Thomas L. Monahan

Thanks, everyone, for calling in or logging in this morning. Rich and I will be out on the road across August and September and we look forward to checking in with you as we hit various cities around the world. Thanks so much.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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